M Young Legal Associates Ltd v Zahid (a firm) & Ors [2006] EWCA Civ 613

Case No A2/2005/2024[2006] EWCA Civ 613
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue MANCHESTER DISTRICT REGISTRY
HIS HONOUR JUDGE HOWARTH
[Lower Court No. 4MA90205]
Venue Royal Courts of JusticeDate Tuesday, 16 th May 2006
Strand
London, WC2
B E F O R E:
LORD JUSTICE TUCKEY
LORD JUSTICE WILSON
LORD JUSTICE HUGHES
M. YOUNG LEGAL ASSOCIATES LTD (CLAIMANT/FIRST RESPONDENT)
- v -
ZAHID (A Firm)(FIRST DEFENDANT/SECOND RESPONDENT)
SAMEERA SHARIF (SECOND DEFENDANT/THIRD RESPONDENT)
JAMAIL AKHTAR SHARIF (THIRD DEFENDANT/FOURTH RESPONDENT)
ZAHID BASHIR (FOURTH DEFENDANT/FIFTH RESPONDENT)
ROBERT HEYWOOD OGDEN LEES (FIFTH DEFENDANT/APPELLANT)
(DAR Transcript of
Smith Bernal Wordwave Limited
190 Fleet Street, London EC4A 2AG
Tel No: 020 7404 1400 Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Venue MR M BLACKETT-ORD (instructed by Messrs Wacks Caller, Steam Packet House, 76 Cross Street, Manchester, M2 4JU) appeared for the Appellant.
MR A MCGEE (instructed by Messrs Pearson Hinchcliffe, Albion House, 31 Queen Street, Oldham, OL1 1RD) appeared for the First Respondent.
The Second Respondent did not appear.
The Third and Fourth Respondents appeared in person by the Fourth Respondent.
The Fifth Respondent appeared in person.
Between
M Young Legal Associates LtdAppellantZahid (a firm) & OrsRespondent

J U D G M E N T (

LORD JUSTICE WILSON:

Is

[1]it possible for a person to be a partner in a firm, and thus liable jointly with the other partners to creditors of the firm, if his agreement with them is not that he should be entitled to participate in its profits but that he should be paid by the firm a specified sum, irrespective of profits, for work to be done by him on its behalf? Such is the question raised by this appeal.[2]The appeal is against a declaration made by HHJ Howarth, sitting as a judge of the High Court, Chancery Division, Manchester District Registry, on 26 August 2005. The declaration was made by way of determination of a preliminary issue in an action brought by M. Young Legal Associates Ltd (“the claimant”) against five defendants.[3]The claimant acts as an intermediary between commercial institutions and prospective litigants who need funding for their claims and/or insurance in the event that they incur liabilities for costs whether to their own solicitors or to the prospective defendants. The claimant alleges that in February 2003 it entered into a contract with a firm of solicitors, namely Zahid, in practice in Rochdale, under which it was to arrange funding and/or insurance for a large number of prospective clients of the firm who were proposing to sue their landlords for the disrepair of their homes and under which, in prescribed circumstances, the firm agreed to make payments to the claimant. The allegation in the action is that sums became payable by the firm thereunder and have not been paid.[4]There are five defendants to the action:(a) the firm Zahid itself; but in February 2004 it was dissolved and so it takes no part in the action;(b) Mrs Sharif; she was a partner in the firm from 1 November 2002 until its dissolution;(c) her husband, Mr Sharif; in that he was at no time other than a legal executive in the firm, there is an issue, as yet unresolved, as to whether the claimant has any cause of action against him;(d) Mr Bashir; he was a partner in the firm from the date when it began to practise, namely 4 March 2002, until 1 September 2003; and(e) Mr Lees; it is in relation to his status in the firm that the preliminary issue arose.[5]It is the contention of the claimant that Mr Lees was a partner in the firm from the date when it began to practise, namely 4 March 2002, until 31 October 2003 and that accordingly, pursuant to section 9 of the Partnership Act 1890 (“the Act of 1890”), he is liable to it, jointly with the other partners, under the contract entered into between the claimant and the firm in February 2003. Mr Lees however included in his defence a denial that he had ever been a partner in the firm so the court directed the trial of the preliminary issue thus raised. It is agreed that, if he ever was a partner, Mr Lees was indeed a partner between 4 March 2002 and 31 October 2003.[6]In the event the judge declared that Mr Lees was a partner in the firm. Against that declaration Mr Lees appeals; in opposition to the appeal stands the claimant. At yesterday’s hearing Mr Bashir, who appeared in person before the judge, again appeared in person: in relation to the preliminary issue he made and makes no submission one way or the other. The stance of Mr and Mrs Sharif is confusing. Before the judge they were represented by counsel and actively supported the claimant’s argument that Mr Lees had been a partner. Indeed, by a skeleton argument drafted by counsel and filed in this court, it seemed clear that they were supporting the claimant’s opposition to this appeal. But, days prior to this hearing, they ceased to be legally represented. At yesterday’s hearing Mr Sharif appeared in person, presumably with authority to speak also on behalf of Mrs Sharif; and in a few words he told us that in his view Mr Lees had not “really” been a partner. Such is, so it would appear, Mr Sharif’s analysis of the evidence and, presumably, of the law. We have to decide whether we agree with it.[7]The primary proposition of Mr Blackett-Ord on behalf of Mr Lees is that, unless he is entitled to participate in the profits of the firm (including being entitled to a fixed payment directly linked to and dependent upon its profits), a person cannot in law be a partner of it. Thus he commends a negative answer to the question set out at [1] above. But he has two alternative, subsidiary propositions, each scarcely pressed. The first is that, unless he is either entitled to participate in the profits of the firm or entitled to an interest in its capital, a person cannot in law be a partner of it. The second is that, unless he is either entitled to participate in the profits of the firm or entitled to an interest in its capital or is intended to assume a dominant role in its management, a person cannot in law be a partner of it. A person’s entitlement to an interest in a firm’s capital and his dominant role in its management may each be a strong indication of his status as a partner in it; but, in that, with respect, Mr Blackett-Ord has failed to make any arguable case, whether by reference to principle or to authority, that the law will always refuse to recognise that person as a partner in the absence of those features, I consider it unnecessary further to address the subsidiary propositions.[8]Section 14 of the Act of 1890 can render an issue of this character academic. For it provides that:
“1. Everyone who … represents himself, or who knowingly suffers himself to be represented, as a partner in a particular firm, is liable as a partner to anyone who has on the faith of any such representation given credit to the firm …”
The claimant presented to the judge an alternative argument that, even were he not to have been a partner in the firm, Mr Lees had held himself out as being a partner of it within the meaning of section 14 and so was liable to the claimant for the indebtedness of the firm incurred under the contract. But the judge rejected the alternative argument: he held that the claimant had failed to establish that its giving credit to the firm had been on the faith of the representations which had on any view been made by Mr Lees to the effect that he was a partner. The claimant does not cross-appeal against that conclusion; thus there is no escape from the need to consider whether the judge was both correct in law and entitled on the facts to conclude that Mr Lees was a partner in the firm.[9]In considering the history it is helpful to have in mind the following definition of partnership in section 1(1) of the Act of 1890:
“Partnership is the relationship which subsists between persons carrying on a business in common with a view of profit.”
Section 2, supplementary to section 1, provides as follows:
“In determining whether a partnership does or does not exist, regard shall be had to the following rules: … (3) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but receipt of such a share, or of a payment contingent on or varying with the profits of a business, does not of itself make him a partner in the business; …”
[10]In November 2001 Mr Bashir, who had been admitted as a solicitor and obtained a practising certificate in November 1999, wanted to set up in practice in Rochdale. The idea was that Mr Sharif would act as his legal executive and office manager and that Mrs Sharif, who was in the course of qualifying as a solicitor, would join him as a partner once she had done so. There was, however, a problem. It was set by rule 13 of the Solicitors’ Practice Rules 1990. By paragraph (2) of the rule:
“Every practice must have at least one principal who is a solicitor qualified tosupervise.”
The words “qualified to supervise” are italicised in the paragraph because they are defined in one of the notes to the rule, namely note (d), as follows:
“A solicitor is qualified to supervise if he or she: (i). has held practising certificates for at least 36 months within the last ten years; …”
Mr Bashir had held practising certificates only for about 24 months. (i). has held practising certificates for at least 36 months within the last ten years; …”[11]In November 2001 Mr Bashir thus approached Mr Lees, who had been admitted as a solicitor in 1968 and who had recently retired after many years in partnership in a firm in Oldham. In his witness statement Mr Lees said:
“[Mr Bashir and Mrs Sharif] asked whether I would be prepared to join the practice so that they could satisfy the Law Society Regulations. Following a number of meetings and discussions between myself, [Mr] Bashir and [Mr] Sharif, I agreed to do so.”
(emphasis supplied) In his oral evidence Mr Lees’ words were that Mr Bashir approached him:
“to satisfy the Law Society’s requirement for somebody to be a partner until he had satisfied the three years post-qualification time.”
(emphasis supplied) So the initial arrangement was that, when in about November 2002 Mr Bashir would become qualified to supervise, the association of Mr Lees with the proposed firm would cease.[12]There was no document by which the nature of the association of Mr Lees with the proposed firm was recorded.[13]In November 2001 Mr Bashir and Mr Lees orally agreed upon the level of payments to Mr Lees out of the proposed firm, namely at the rate of £18,000 per annum, payable gross monthly, on the basis that Mr Lees would himself provide for payment of tax and National Insurance contribution referable thereto.[14]They also orally agreed that Mr Lees would not contribute any capital to the proposed firm. Furthermore Mr Lees told Mr Bashir that he would be prepared to become associated with it only if Mr Bashir was to extract a letter from the firm’s proposed bankers, The Royal Bank of Scotland, confirming that, he, Mr Lees, would not be liable for its debts to the bank; Mr Bashir procured such a letter from the bank and forwarded it to Mr Lees under cover of a letter in which he pointed out that the effect was that Mr Lees was not liable to the bank for the debts of the “partnership”. Oral discussion between the two men also extended to the indebtedness of the proposed firm to other creditors. In the course of cross-examination by Mr McGee, counsel for the claimant, Mr Lees said:
“I wanted an indemnity from any bank overdraft and an assurance that I would get an indemnity from the people running the practice for any debts. I didn’t get it in writing. I wish I had done now otherwise I would have been able to show you. But I can assure you I was told that I would not be responsible for any of the firm’s debts.”
In a later answer to Mr McGee Mr Lees repeated that Mr Bashir had assured him that he would not be “responsible for” the debts and that he would be “indemnified against” the debts; and he added that in his view both phrases had the same meaning.[15]In his judgment

the judge summarised the agreement as follows:

“There is no suggestion in any of the evidence that either of these gentlemen was seeking in any way to deceive the Law Society. … It seems to me that what at that time Mr Bashir and Mr Lees were agreeing was … to come together in such a relationship as would entitle the firm to practise, in other words to practise in accordance with [rule 13 of the Rules of 1990]. Mr Lees says, and I think on the whole I accept, that he said to Mr Bashir that he was not going to be liable for the debts of the practice and that he should, whatever the situation was, clear matters with the Law Society so that they could practise properly as solicitors. Neither of them desired to circumvent what the Law Society required.”
Thus on 4 March 2002 the firm was set up and began to practise. As Mr Lees was well aware, the firm’s writing-paper initially indicated that there were two partners, namely Mr Bashir and Mr Lees.[16]It was the evidence of Mr Lees that, pursuant to the arrangement with Mr Bashir, and reflective of the low level of payments which had been agreed, his position in the firm should be little more than a figurehead. He said that in the early months he went into the firm’s offices for two or three hours a day on two or three days a week; that his role was to help Mr Bashir and Mr and Mrs Sharif, if requested; but that he found himself seldom requested to do so; that he helped to draft odd letters and a couple of wills; and that he surveyed various files in order to assess their suitability for conditional fee arrangements. It was suggested to him on behalf of Mr and Mrs Sharif that he had adopted a much more active supervisory role in the firm; but the judge rejected that suggestion.[17]On 1 November 2002, having qualified as a solicitor, Mrs Sharif became a partner of the firm. Notwithstanding that at the same time Mr Bashir became qualified to supervise the practice under rule 13, he and Mrs Sharif asked Mr Lees to continue for the time being to play his role in the firm. Pointing out, however, that he was proposing to travel to New Zealand for a substantial part of the summer 2003, Mr Lees agreed to continue. The firm’s writing-paper was reprinted so as to recite the partners as Mr Bashir, Mr Lees and Mrs Sharif. The evidence of Mr Lees was that, after November 2002, his attendance at the offices of the firm decreased and that he indeed was away in New Zealand for a substantial part of the summer 2003.[18]When in July 2003 Mr Lees signed his tax return for the year 2002/03 he included his payments from the firm under the heading “Consultancies” in the extra pages of the return referable to “Self-Employment”. But he also completed the extra pages referable to “Partnership”. Therein he described the partnership as “Solicitors”, which was a reference to the firm “Zahid”; and he stated that his share of the partnership’s profit for the year was nil.[19]In the late summer 2003 the firm began to implode. On 1 September 2003 Mr Bashir, who had been unwell, resigned from the partnership, although he remained a consultant to it for a few weeks. In his place another solicitor joined the firm. On 14 October 2003 the Office for the Supervision of Solicitors (“the OSS”) appointed an officer to inspect the firm’s books; and a cash shortage of £108,000 was discovered. On 31 October 2003 Mr Lees ceased his association with the firm.[20]Under cover of a letter to the OSS dated 8 December 2003, Mr Lees enclosed comments upon its interim report dated 17 November 2003. He wrote:
“The background to my involvement with the Firm is that I was approached by Mr Bashir and Mr Sharif, whose wife was in the process of qualifying as a Solicitor, to be a Partner in a new firm they intended to start named “Zahid”
. I was not to have an active role in the firm but to help and advise as to the running of the firm and to be there on a regular basis in order to satisfy the Law Society’s requirements as Mr Bashir had not been qualified for 3 yrs.” (emphasis supplied) Apparently in answer to a letter, Mr Lees added:
“10. In view of my earlier remarks I would not say the Partnership was a Sham up to Nov 2003.”
[21]I now set out the core paragraphs of the judge’s judgment, his first reference being to the written comments of Mr Lees set out immediately above:
“13. Those remarks are remarks which he made far more contemporaneously than anything that has been said in relation to these proceedings. It seems to me that they have a considerable significance. I take the view that what was entered into and agreed between Mr. Bashir and Mr. Lees was that they would enter into such a relationship as they then understood was required by the Law Society under rule [13] involving perhaps less supervision than the Law Society would ideally want from Mr. Lees but, nonetheless, entering into what was a true partnership. In that regard there is only Mr. Lees’ evidence and the documents I have before me as to what the nature of that initial agreement was. I accept that the evidence as set out in Mr. Lees’ witness statement skirts round the question of whether there was a partnership or no. 14. Whether there was a partnership or no may, in fact, depend to a considerable extent on the provisions of the Partnership Act 1890, and on the question of whether or no this was a relationship between two people carrying on business in common with a view of profit. That is section 1(1) of the Partnership Act 1890. A simple test, factually not necessarily simple at all. I accept also that whatever label the parties chose to describe themselves by on their own notepaper is not determinative. You look at the reality, you do not look at the form or the window dressing. …. 16. At the end of the day a firm was set up and, in my judgment, it was set up as a firm between Mr. Bashir and Mr. Lees on the basis that they would do what they understood was required of them to set up such a firm by the Law Society, i.e. that Mr. Lees would be a partner in accordance with rule [13]. It seems to me that I can derive comfort from Mr. Lees’ response to the forensic investigation report where he says that he was approached by Mr. Bashir and Mr Sharif to be a partner in a new firm, and he accepted that approach, that offer, and that is what happened. … 22. If that was the agreement between Mr. Bashir and Mr. Lees, when Mrs. Sharif came in as partner, as she undoubtedly did towards the end of 2002, she came in and joined a firm as it was then set up. In other words, it seems to me that the people who were partners in the two man firm became two of the partners in a three person firm … Thus, the answer to the question I am asked to answer is: yes, there was a partnership.”
[22]In his submissions in support of this appeal Mr Blackett-Ord seeks to conduct us upon an interesting excursion into legal history. With an infectious enthusiasm he seeks to establish, as a preliminary argument, that, prior to the Act of 1890, a provision to participate in profits was an essential component of a contract of partnership. Thus in Burnell v Hunt (1841) 5 Jur 650, Coleridge J observed (at 651):
“There is no partnership, unless there is an agreement that the party shall have immediate participation in the profits.”
Then, in Pooley v Driver (1876) 5 Ch. D 458, Jessel MR referred (at 472) to “a business bringing profit and dividing the profit in some shape or other between the partners”; and with emphasis he added “That certainly partnership is”. Later, in Walker v Hirsch (1884) 27 Ch. D 460, this court held that an agreement for participation in profits, although prima facie evidence of partnership, was not conclusive and that other features of the agreement demonstrated that instead it created a relationship of master and servant.[23]Mr McGee complains with some force that these authorities do not clearly establish Mr Blackett-Ord’s preliminary argument. Although it would be disproportionate to descend into the detail of them, I broadly accept Mr McGee’s complaint that, although in Burnell’s case and in Pooley’s case, there are dicta helpful to Mr Blackett-Ord, neither was a case in which a discrete issue arose as to whether partnership could exist in the absence of participation in profits. Moreover on any view Walker’s case carries the argument no further: for to say that participation is not determinative is not to say that it is necessary.[24]Nevertheless I for my part accept Mr Blackett-Ord’s preliminary argument. I do so largely by reference to emphatic statements in support of it in the fifth edition of Lindley’s Treatise on the Law of Partnership, published in 1888. In his introductory chapter Lord Lindley, as he was to become, wrote (at 1 and 2) that:
“An agreement that something shall be attempted with a view to gain, and that the gain shall be shared by the parties to the agreement, is the grand characteristic of every partnership…”
Then he cited 18 definitions of a partnership, taken from what he called “works of celebrity” including (at 3) that of Sir Frederick Pollock in his Digest of the Law of Partnership that:
“Partnership is the relation which subsists between persons who have agreed to share the profits of a business carried on by all or any of them on behalf of all them.”
[25]The Act of 1890 was, however, entitled “An Act to declare and amend the Law of Partnership”. And it was soon noticed not only that the effect of section 2(3) of the Act, set out in [9] above, was to re-iterate that an agreement to share profits was not conclusive that it created a partnership but also that the core definition in section 1(1) of the Act, also set out in [9] above, provided only that, in order to be partners, it was necessary for persons to carry on a business in common with a view to profit and not that they should also share it. Was therefore the effect of section 1(1) so to amend the law as to render the sharing of profits no longer a necessary condition of partnership? In 1891 Lord Lindley wrote a supplement to his book in which he set out the terms of the Act of 1890 with annotations. In his note on the words “with a view of profit” in section 1(1), he wrote (at 14):
“Hitherto, it has been considered essential for a partnership to have for its object not only the acquisition, but also the division, in some way or another, of profit and consequently mutual insurance societies have not hitherto been treated as partnerships. Such societies are, however, associations “which have for their object gain” … It may therefore be that societies of this nature … will be held to be partnerships under this Act.”
Later editions of Lord Lindley’s book adhered to this suggestion and expanded upon it.[26]Thus arose a protracted debate. In 1920, in writing the 11th edition of his Digest, Sir Frederick Pollock, the great draftsman of the bill which became the Act of 1890, wrote (at 8):
“But the Act, while it speaks of “a view of profit”, says nothing about the profits being shared between the partners at all; and it has accordingly been suggested that under the Act persons who jointly carry on a business resulting in profit, though without any intention of dividing that profit among themselves, or giving any one of them the right to claim a share, are partners, and even that this was always the law, and the division of profits, notwithstanding the uniform language of judges and text-writers, is “rather an accident than of the essence of the partnership relation”
. This opinion is certainly novel, and I am unable, with great respect for the present learned editors of Lindley on Partnership, to see any sufficient reason for accepting it.” But in the 15th and last edition of Pollock’s Digest, published in 1952 and edited by Professor Gower, Sir Frederick’s protest was watered down. The opinion in Lindley was said only to be open to objection. And then, almost inconsistently, the following was insinuated into the text (at 11):
“On the other hand, it is thought that a salaried partner is a true partner notwithstanding that he is paid a fixed salary irrespective of profits and that as between himself and his co-partner he is not liable for the partnership debts.”
Whether the authorities cited for that proposition truly supported it is a hare which I will not attempt to chase.[27]The debate continues. In Lindley and Banks on Partnership, 18th edition, 2002, the submission of the inheriting editor, at the end of rather an opaque paragraph, namely [2 – 10], is “that the division of profits is no more than a common incident of the partnership relation, rather than of its very essence”. But in The Law of Partnership in Australia and New Zealand by Higgins and Fletcher, 8th edition (2002), the debate is analysed in part by reference to the provision in section 46 of the Act of 1890, reflected by analogous sections of the Acts of Australia and New Zealand, that:
“The rules of equity and of common law applicable to partnership shall continue in force except so far as they are inconsistent with the express provisions of this Act .”
The editor concludes (at 34) that:
“The wording of the statutory definition does not seem to be sufficiently unambiguous to make it clearly inconsistent with the common law and therefore it seems it is still essential for a partner to participate to some extent in the profits.”
[28]But what, more importantly, are the authorities upon which Mr Blackett-Ord relies for his main argument that provision for participation in profits still remains necessary to the existence of a contract of partnership? He relies upon three: (a) First, Blackpool Marton Rotary Club v Martin [1988] STC 823. The inspector issued an assessment to tax against the Rotary Club which was invalid if, as it contended on appeal to Hoffmann J as he then was, the club was a partnership. Among its other activities the club organised modest fund-raising events. In dismissing the club’s appeal

the judge said (at 830 j):

“[The argument of the club] seems to me to involve a misconception about what the Partnership Act means when it speaks of “carrying on a business … with a view of profit”
. It means, in my judgment, with a view to a profit to which the partners will in some proportion or other each be individually entitled … In the case of a club the position is quite different.” But I agree with Mr McGee that it is impossible to consider that, in pursuing their fund-raising activities, the Rotarians were even “carrying on a business” within the statutory definition. (b) Second, Dollar Land (Cumbernauld) Ltd v CIN Properties Ltd (1996) SLT 186. A sublessee alleged that the nature of the arrangement between it and the headlessee referable to development land in Cumbernauld was such as to make them partners in relation to its proposed development. The Act of 1890 applies in Scotland. The Lord Ordinary, Lord Coulsfield, rejected the allegation. He said (at 195 F – J):
“… it is undoubtedly true that there is no one provision or feature which can be said to be absolutely necessary to the existence of a partnership, so that the absence of that feature inevitably negates the existence of a partnership … Nevertheless it seems to me that … a sharing of profits and losses and mutual agency are typical of partnerships, and delectus personae [viz., the limited rights of assignees] may be said to be a further such feature. The absence of one or even more than one of these features might be reconcilable with the existence of a partnership. In the present case, however, it seems to me that none of them are present. That is a situation which I find irreconcilable with the existence of a partnership …”
It is obvious that such words are a wholly insufficient foundation for Mr Blackett-Ord’s submission. I am not even persuaded that the Lord Ordinary was suggesting that absence of the three features would always negative partnership (for why should that be?) rather than that such was its effect in that case. (c) Third, Memec plc v. Inland Revenue Commissioners [1998] STC 754. This court had to analyse for tax purposes the nature of a so-called silent partnership between a company and its subsidiary. Peter Gibson LJ set out (at 764 e–f) five “relevant characteristics of an … English partnership”. The fifth was that “the partners own the business, having a beneficial interest, in the form of an undivided share in the partnership assets … including any profits of the business.” The proposition is uncontroversial for on any view participation in profits is a characteristic of a partnership. The question, not raised in the Memec case, is whether it is a pre-requisite.[29]I trust that I do not obscure my profound respect for the judges responsible for them if I say that the remarks in the above three cases represent a thin collection of authority in support of Mr Blackett-Ord’s main argument, particularly in the light of the passage of a century during which, were it valid, one might expect a court clearly so to have stated.[30]The case of Stekel v Ellice [1973] 1 WLR 191 runs counter to Mr Blackett-Ord’s submissions; and in effect he accepts that, if we are to uphold his submissions, we need to hold that it was wrongly decided. The dispute, which was between two chartered accountants, was whether, as the claimant alleged, they had been in partnership or whether, as the defendant alleged, the claimant had been his employee. The written agreement between them had provided that the claimant should be “a salaried partner at £2000 per annum”; that, apart from the claimant’s furniture, the “capital of the partnership” should be provided by, and solely belong to, the defendant; and that the defendant should be entitled to all the profits and bear all the losses. So the agreement required Megarry J to grapple not only with the point of principle, namely whether provision for fixed payment rather than for a share of profits precluded the existence of a partnership, but with the significance of the phrase “a salaried partner”. Having observed (at 198E) that the phrase was not a term of art and to some extent might be said to be a contradiction in terms, he continued as follows (at 199G – 200C):
“It seems to me impossible to say that as a matter of law a salaried partner is or is not necessarily a partner in the true sense. He may or may not be a partner, depending on the facts. What must be done, I think, is to look at the substance of the relationship between the parties; and there is ample authority for saying that the question whether or not there is a partnership depends on what the true relationship is, and not on any mere label attached to that relationship. A relationship that is plainly not a partnership is no more made into a partnership by calling it one than a relationship which is plainly a partnership is prevented from being one by a clause negativing partnership: see, for example, Lindley on Partnership, 13th ed. (1971), p. 66. If, then, there is a plain contract of master and servant, and the only qualification of that relationship is that the servant is being held out as being a partner, the name "salaried partner" seems perfectly apt for him; and yet he will be no partner in relation to the members of the firm. At the other extreme, there may be a full partnership deed under which all the partners save one take a share of the profits, with that one being paid a fixed salary not dependent on profits. Again, "salaried partner" seems to me an apt description of that one: yet I do not see why he should not be a true partner, at all events if he is entitled to share in the profits on a winding up, thereby satisfying the point made on section 39 by Lindley at p. 13. However, I do not think it could be said it would be impossible to exclude or vary section 39 by the terms of the partnership agreement, or even by subsequent variation (see section 19), and so I think that there could well be cases in which a salaried partner will be a true partner even though he would not benefit from section 39. It may be that most salaried partners are persons whose only title to partnership is that they are held out as being partners; but even if "salaried partners" who are true partners, though at a salary, are in a minority, that does not mean that they are non-existent.”

The judge proceeded to hold that the parties had been in partnership.

[31]It is largely by reference to the case of Stekel that, in his excellent book on Partnership, 2nd edition (2002), Mr Blackett-Ord himself writes as follows (at 11.15): “The phrase ‘salaried partner’ should be avoided because it has no single meaning and its use creates confusion. … The expression ‘salaried partner’ is used loosely to describe a person who is less than a full profit-sharing or ‘equity’ partner because he is one or other of the following:(a) An employee who is not a partner but who is described as a partner to enhance his own status or that of the firm …(b) A true partner who receives all or most of his remuneration in the form of a salary rather than a simple share of profits. Whether he is a true partner will be decided according to whether his agreement with the firm leans … towards an agreement for partnership rather than an employment agreement, and whether his relationship with the firm satisfies the other requirements of partnership … The mere fact that he is called an ‘equity’ partner or ‘salaried’ partner is not of itself decisive, although the usual modern meaning of the latter term is in the first of the two senses given above.” (a) An employee who is not a partner but who is described as a partner to enhance his own status or that of the firm … (b) A true partner who receives all or most of his remuneration in the form of a salary rather than a simple share of profits.[32]I agree with the decision in the case of Stekel and with the propositions in the books on Partnership by Lindley and Banks and by Mr Blackett-Ord himself to the effect that an agreement for a person to be paid a specified sum for work to be done by him on behalf of a firm does not preclude his thereby becoming a partner of it. No authority for the contrary proposition can be derived from the Act of 1890 even though it would have been simple to provide for it either in the core definition in section 1(1) or, in particular, in section 2(3) in which the significance of receipt of a share of profits in determining whether a partnership exists is expressly addressed. On the contrary, the words of the core definition are wide enough to render the recipient of payments in a fixed sum a partner provided that there is a business, that it is carried on with a view to profit and, crucially for present purposes, that he is carrying it on in common with another or others. Indeed, in that a definition is a precise statement of a thing’s essential nature, I would regard it as inconsistent with section 1(1) – and so not permitted by section 46 – to graft on to its words the previous requirement at common law for participation in profits. Nor do I see any logic behind a situation in which(a) an agreement that a person should receive a share of profits, however nominal that share might be, could make him a partner and indeed was prima facie evidence thereof (section 2(3)); and(b) an agreement that a person should receive a share of profits limited to payments in a fixed sum could make him a partner (In Re Hill [1934] 1 Ch 623); but(c) an agreement that a person should receive payments in a fixed sum, irrespective of profits, precluded his being a partner.[33]It is idle to deny that, indirectly, an employee has an interest in the profitability of the firm for the continuation of his job may well depend on it. Nevertheless the absence of a direct link between the level of payments and the profits of the firm is in most cases a strongly negative pointer towards the crucial conclusion as to whether the recipient is among those who are carrying on its business. But the conclusion must be informed by reference to all the features of the agreement. Thus, for example, provision or otherwise for a contribution on his part to the working capital of the firm will be relevant. And it will be important to discern whether, expressly or impliedly, the agreement provides not only that acts within his authority should bind the acknowledged partners but also that their such acts should bind him; for such is provided by section 5 of the Act to be a necessary incident of partnership but would, of course, be inconsistent with his status as an employee.[34]In the present case, partly because Mr Bashir chose not to give evidence, there was limited exploration before the judge as to whether the agreement between him and Mr Lees was for the latter to be paid £18,000 per annum by way of quantification of his share of the profits and thus only if the profits proved to be at least of that size. The result of a fuller exploration might have been interesting; but we have to proceed, as did the judge, on the basis that the agreement was for payment to Mr Lees irrespective of whether the firm generated profits of that size or indeed proved to be profitable at all. As I have indicated, the provisions for payments to Mr Lees of a fixed sum and for him not to be required to contribute capital to the firm each point to the absence of partnership.[35]In my view, however, the judge’s conclusion was correct. There was one feature of the context to the agreement between the two men which was determinative, namely the need for a solicitor’s practice to comply with rule 13 of the Rules of 1990. Its effect was that the firm could lawfully practise between March 2002 and November 2002 only if Mr Lees was a partner in it. The evidence of both men was that it was in order to comply with rule 13 that they entered into the agreement and indeed that Mr Lees became associated with the firm at all.[36]Let me hasten to accept that, in the absence of one crucial though uncontroversial finding, the presence of rule 13 in the context of the agreement would not have been determinative. It would be perfectly possible for two men in the position of Mr Bashir and Mr Lees to decide that they would only pretend to comply with rule 13 and that in fact they would not enter into partnership together. Had such been the facts then, subject only to a difficult argument raised on behalf of Mr and Mrs Sharif by their former lawyers in a Respondent’s Notice that any assertion of such facts should be subject to an estoppel, there would indeed have been no partnership. But it was never asserted, whether by Mr Lees or otherwise, that the agreement was reached in order only to pretend to comply with rule 13. On the contrary Mr Lees asserted to the OSS that the partnership had not been a sham; and in his evidence in the proceedings he never sought to withdraw or to qualify that assertion. Thus it was inevitable that the judge should make the crucial finding that neither of the men intended to circumvent what rule 13 required.[37]In that the two men intended to comply with rule 13, they must have intended to enter into a contract of partnership. I believe that the judge was entitled to infer, indeed correct to infer, that, notwithstanding the nature of the provisions for the firm’s payment to Mr Lees and for the absence of a contribution on his part to its capital, they succeeded in implementing their intention.[38]The answer to the question set out at [1] above is yes. I would dismiss the appeal.

LORD JUSTICE HUGHES: I agree.

[40]For my part I prefer to leave open the question whether prior to the Act of 1890 it was a necessary condition of partnership that there be an agreement to share profits. I do not for a moment doubt the great weight to be accorded to the opinion of Lord Lindley in the fifth edition of his celebrated work, which my Lord has cited at paragraph 24. So far, however, as the researches of Counsel have been able to discover, his proposition on this topic was never submitted to the test of a case in which the question with which we are now faced arose for necessary decision. That the sharing of profits is a characteristic of partnership, as distinct from an essential ingredient of it, was and is uncontroversial.[41]However that may be, the words of section 1 of the Act of 1890 seem to me to put the matter beyond doubt. They refer to the making of profit as an aim, but studiously abstain from reference to any necessity that it be shared. On principle it seems to me that if there is an essential element of partnership it is the carrying on of business in common, that is to say in such manner as to make each the agent of the other for all acts done in the course of the business. Having thus constituted themselves, the partners are free under the Act to arrange for the remuneration of themselves in any manner they choose, including by agreement that one or more shall receive specific sums, or that one or more receive nothing, in either case irrespective of profits.[42]For the reasons set out by my Lord I too would dismiss this appeal.

LORD JUSTICE TUCKEY: I agree for the reasons given in both judgments that this appeal should be dismissed. There is a difference between them as to what the law was before 1890 which does not I think matter for the purpose of our decision in this case. If in any future case it does, like Hughes LJ, I would prefer to leave the matter open.

Order

Appeal dismissed.

Cited in 22 later judgments

and 13 more of the most senior