Davies v H&R Ecroyd Ltd

Termination of farming partnership — Arbitration — Application on preliminary points — Farm belonging to defendant company — Plaintiff entering into partnership with company — Agreement providing that neither the farm itself, nor any legal or equitable interest in the farm would become partnership asset — Farm had been dairy unit — Farm allocated milk quota — Whether milk quota was partnership asset — Court holding that milk quota not a partnership assetThe parties to the proceedings, D and H&R Ecroyd Ltd, formerly EWP Ltd (“EWP”), entered into a partnership agreement in 1983 to farm Lower Newton Farm, near Haverfordwest, Wales. The partnership agreement recited that EWP were the owners of the farm and that, inter alia, it would make the farm available to the partnership together with the milking plant and equipment but that “neither the farm itself or any part … thereof nor any legal or equitable interest therein …” would become assets of the partnership. The partnership agreement provided for D to purchase from EWP a half-share in the value of the 80 dairy cows then on the farm. At the date of dissolution, the farm would be returned to EWP, and a balance sheet would be drawn up with detailed provisions relating to the disposal of the dairy herd, crops, etc. The assets were then to be valued and provision made for unpaid profits. The farm had been farmed as a dairy unit from 1969 and, in 1984, the Ministry of Agriculture allocated to the farm a milk quota, subsequently reduced to 313,418 litres. The milk quota attached to the farm was registered in the name of partners. At the date of the dissolution of the partnership in 1988 the milk quota was worth £94,000. Although the farm was farmed as a dairy unit throughout the period of the partnership, there was never any reference in the partnership accounts to milk quota as a separate asset. The court was asked to decide whether the quota allocated to the farm in 1984 was a partnership asset and, if so, how it was to be valued. Further, it had to decide whether the farm had acquired an enhanced value as a result of the dairy enterprise. The application was brought in the course of an arbitration. Held The milk quota was not a partnership asset. 1. In Faulks v Faulks [1992] 1 EGLR 9, it was held that there was nothing in the introduction of milk quota in 1984, allocated to the partnership in that case under the relevant Community legislation and the UK regulations, which altered the court’s view that it was not to be taken into account as an asset of the partnership. 2. So far as the first question was concerned (supra), Faulks was indistinguishable in any material respect from the instant case. Indeed, in contrast to Faulks, the farm had not at any stage constituted a partnership asset and the partnership deed provided that neither the farm nor any legal or equitable interest in it should become a partnership asset. 3. The court had been asked to accept that the milk quota was capable of forming an asset separate from the land on which the relevant dairy undertaking was carried on. While in certain circumstances, milk quota could become severed from the land with which it would otherwise run, the fundamental principle was that it attached to and passed with the land to which it related. No intention could be attributed to the partners in the present case other than that milk quota should be treated in the same way as the farm. 4. The court could not accept the submission that an allowance be made to reflect an enhancement in value acquired as a result of the quota. Nigel Thomas (instructed by Williams & Bourne, of Lampeter) appeared for D; Joanne Moss (instructed by GF Lodder, of Ellesmere) appeared for the respondent company.