Judgments - Hurst v. Bryk and Others

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    In the latter connection it is to be observed that, both under the general law and under Clause 3.3 of the partnership deed, the lessees of King Street are trustees for the firm and are entitled to be indemnified by the firm, that is to say the partners jointly, and not by the individual partners. As Hobhouse L.J. pointed out [1999] Ch. 1, 26B, Mr. Hurst's personal liability for the rent is indirect. Like any other liability of the firm it is a joint liability of the partners and, if paid by his fellow partners, is recoverable by them from him in the course of taking the dissolution account. The lessees' right as trustees to be indemnified by their beneficiaries for liabilities undertaken by them in the course of their trust establishes the firm's liability but says nothing about Mr. Hurst's obligation to his fellow partners to contribute towards its discharge.

    Partners are jointly and not severally liable for the debts of the firm incurred while they were partners (section 9 of the Act), and they are beneficially entitled to the assets of the firm remaining after the liabilities have been discharged. The winding up of a partnership involves the realisation of the firm's assets, the ascertainment and discharge of its liabilities, and the adjustment of accounts between the partners so that the profits can be distributed to them or the losses borne by them in the appropriate shares.

    Section 44 of the Act sets out the rules which govern the final settlement of the partnership accounts. It is in the following terms:

    "44. In settling accounts between the partners after a dissolution of partnership, the following rules shall, subject to any agreement, be observed:

      (a) Losses, including losses and deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits:

      (b) The assets of the firm including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, shall be applied in the following manner and order:

        1. In paying the debts and liabilities of the firm to persons who are not partners therein:

        2. In paying to each partner rateably what is due from the firm to him for advances as distinguished from capital:

        3. In paying to each partner rateably what is due from the firm to him in respect of capital:

        4. The ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible."

The application of the section may be varied by agreement, but it is quite general in its terms. It applies to the winding up of every partnership after a dissolution whatever the ground of dissolution and regardless of the conduct of the parties. It applies where the partnership is ordered to be dissolved under section 35(d) of the Act in the same manner as it applies in any other case, and no distinction is drawn between the rights and obligations of the partner or partners whose wrongful conduct led to the dissolution and the other partners or partner who are innocent of any wrongdoing. It would lead to an impossible situation if section 44 applied where the partnership was dissolved by the court under section 35(d) but not where the partnership was automatically dissolved following a repudiatory breach of the partnership agreement.

    It would, in any event, be wrong in principle to have regard to the parties' conduct when taking the dissolution account. This is clearly the case where the account is taken in order to determine their respective entitlements to the surplus assets. These are in the nature of rights of property, and no matter how badly a partner may have behaved towards his partners he is not to be deprived of his accrued property rights. But the same must apply where there is a net deficit. It would take very clear words in the partnership agreement to require liabilities to be taken into account in ascertaining a partner's entitlement to the partnership assets to the extent of reducing his entitlement to nil but no further. The injustice of exonerating the innocent partner from his share of the firm's liabilities and throwing it upon the wrongdoers may not be apparent in the present case where there are 19 wrongdoers and only one innocent partner. But it would be very obvious in the converse (and probably more usual) case where there were 19 innocent partners and only one wrongdoer.

    Mr. Hurst contends that, by accepting his partners' repudiatory breach of contract, he was automatically discharged from his contractual obligation to contribute to the deficit, which must be borne exclusively by his fellow partners. One difficulty with this argument is that, when properly understood, Mr. Hurst's obligation is not contractual but equitable. It is, I think, important to understand the part which section 44 plays in the winding up. The partners are jointly liable for all the debts of the firm. The firm's creditors are not concerned to enquire whose conduct has brought about the dissolution of the firm. However much an individual partner may have been wronged by his fellow partners, he remains jointly liable with them for the debts of the firm. Judgment may be taken against the firm and executed not only against partnership property but also against any individual partner. Section 44 is designed to ensure that, as between the partners themselves, any surplus is shared and any deficit is ultimately borne by the partners in the appropriate proportions. If a partner is obliged to pay more than his proper share of the firm's liabilities, section 44 entitles him to be reimbursed the excess through the taking of the dissolution account. In relation to the firm's liabilities it thus reflects the same equitable doctrine of contribution which applies between co-sureties and other co-obligors. That is a doctrine which is:

    "bottomed and fixed on general principles of justice, and does not spring from contract; though contract may qualify it:"

per Eyre C.J. in Dering v. Earl of Winchelsea (1787)1 Cox Eq. 318, 321.

    Mr. Hurst does not, as I understand his argument, dispute any of this. He contends that the contractual doctrine of repudiation operates at an earlier stage before section 44 or the equitable principles to which it gives effect come into play. He recognises that the contractual doctrine cannot affect his liability to third parties, but he claims that, as between himself and his fellow-partners, he is discharged from all further performance of those obligations which he undertook by becoming a partner, and these include the obligation to contribute to the firm's losses.

    The difficulty with this argument is that it does not accurately reflect the contractual doctrine. As Hobhouse L.J. recognised, the acceptance by one party of a repudiatory breach of contract by the other operates to discharge both parties from further performance of their contractual obligations. If Mr. Hurst is discharged from the obligation he owes his fellow partners to contribute to the assets available to the creditors, then his fellow partners are likewise discharged from the corresponding obligation they owe him. Since the creditors are unaffected, they can still recover judgment against the firm and execute against any of the partners separately. Mr. Hurst's argument does not lead to the conclusion that he can walk away from the firm's liabilities and thereby reduce the security available to the creditors, but to the conclusion that the liability for the firm's debts must rest wherever the creditors choose to let it fall. The fact is that it is not enough for Mr. Hurst to avoid his liability to contribute to the firm's assets to make up any shortfall; he needs an indemnity against his liability for the firm's debts. This can only be obtained by agreement or by rescinding the partnership contract ab initio. The contractual doctrine of repudiation is not sufficient.

    It is no answer to say that, as the wronged party, Mr. Hurst is entitled, as his fellow partners are not, to damages for the breach of contract which brought about the dissolution of the partnership. If he can show that he was thereby deprived of income which he has been unable to earn elsewhere, he is entitled to be compensated for his loss. But this cannot be measured by the contribution he must make to the accrued and continuing liabilities of the firm pending the completion of the winding up. His liability to contribute to these had accrued before any breach of the partnership agreement occurred and has in no sense been caused by his partners' breach of contract. He would have continued to be liable for the King Street rent if his partners had committed no breach of contract and the partnership had not been dissolved. To recover this head of damages he would have to show that the acquisition of King Street was a breach of the partnership deed, and he has not alleged this.

    This is only another way of saying that, although both parties are discharged from further performance of their obligations, rights are not divested which have already been unconditionally acquired. Rights and obligations which arise by the partial execution of the contract continue unaffected. Mr. Hurst's liability to contribute to the accrued and accruing liabilities of the firm, and his partners' rights of contribution, arise from the fact that the liabilities were incurred (or in the case of King Street assumed) by the firm when Mr. Hurst was a partner. Once the firm had undertaken or assumed liability for the rent, each partner in the firm was entitled to have the liability taken into account in ascertaining his share of the firm's profits or losses both before and after dissolution, and that right was not lost merely because Mr. Hurst's partners afterwards repudiated the contract and Mr. Hurst accepted it.

    Mr. Hurst argues that the liability for rent is not unconditional, since it is consideration for the right to remain in possession. A tenant's liability for future rent is not a simple debt; its existence depends on counter-performance by the landlord: see In re Park Air Services Ltd. [1999] 2 W.L.R. 396. The short answer to this is that Mr. Hurst does not claim to be discharged from his liability to the landlord. He claims to be discharged from his liability to his fellow partners, and this is not conditional upon any future counter-performance by them.

    This analysis can be tested by reference to the law of agency. Where an agent is in serious breach of his duty to his principal, the principal can refuse to pay commission and the agent loses his right to be indemnified in respect of the transaction as to which the agent is in breach. But the agent does not normally lose his rights to commission already earned and indemnity in respect of past transactions which were completed before the breach: see Bowstead & Reynolds on Agency, 16th ed. (1996), Article 62 and the cases there cited. It may be otherwise where the agent has been guilty of fraud or breach of fiduciary duty (but see Nitedals Taendstikfabrik v. Bruster [1906] 2 Ch. 671 for an example where commission on some transactions was allowed); but there is no suggestion of either in the present case. The difference between the two cases is that in one the agency contract is discharged by breach and in the other it is set aside or rescinded ab initio.

    In the course of argument a distinction was drawn between pre-cessation and post-cessation losses. This terminology can be misleading. Mr. Hurst is not, of course, liable for the losses incurred by any other person or firm. He is not liable for the post-cessation rent of Inigo House, because this property has been disposed of and the rent is a liability of the firm which acquired it. It will be taken into account in ascertaining the profits or losses of that firm. But King Street has not been disposed of, and pending its disposal the rent is a continuing liability of Malkin Janners. Like the costs and expenses of the winding up, it falls to be taken into account in ascertaining the losses of that firm incurred during the winding up for which the former partners remain jointly liable. Section 38 of the Act continues the rights and obligations of the partners notwithstanding the dissolution as far as may be necessary to wind up the firm. Mr. Hurst's liability to contribute his share of the rent continues unaffected by the dissolution unless he can demonstrate that it was unnecessary to retain King Street, a proposition which is contradicted by the evidence.

    My Lords, Mr. Hurst has been wronged and is entitled to damages if he can show that the dissolution of the firm has occasioned him loss which he would not otherwise have sustained. But he can neither avoid his joint liability to creditors of the firm arising from past transactions entered into while he was a partner nor, without rescinding the contract of partnership ab initio, throw his proportionate share of that liability onto his partners.

Mr. Trepass

    After the conclusion of the trial and while Mr. Hurst's appeal to the Court of Appeal was pending Mr. Trepass applied for a stay of the appeal against him on the ground that Mr. Hurst had failed to comply with an earlier order for costs. That order has not been complied with to this day. Mr. Hurst consented to the stay and an order was made staying the appeal against Mr. Trepass and ordering Mr. Hurst to pay the costs of the stay application.

    Accordingly, when the appeal came on for hearing it was not effective against Mr. Trepass, who had appeared in person at the trial but took no part in the appeal. The Court of Appeal dismissed the appeal but made no order in respect of Mr. Trepass. Wishing to have his costs of the stay application taxed, and requiring a final order for this purpose, Mr. Trepass wrote to the Court of Appeal and asked the court to include his name in the order. In his letter he stated that he understood that Mr. Hurst's counsel had consented to the dismissal of the appeal against him. In the event the court merely amended the order to include an order for payment of Mr. Trepass' costs, but it did not lift the stay on the proceedings against him and made no reference to him (or any of the other respondents) in the order dismissing the appeal.

    In the respondents' case it is submitted that, as there has never been an effective appeal to the Court of Appeal as against Mr. Trepass, Mr. Hurst's appeal to your Lordships' House as against him is incompetent and should be struck out. This seems to be correct. Mr. Trepass has never waived his right to be heard on the appeal to the Court of Appeal and the court did not lift the stay on the proceedings against him or in terms dismiss the appeal against him, which could only be done by consent. It merely granted him an order for the payment of his costs so that they could be taxed. Although the order of the court dismissed the appeal without distinguishing between Mr. Trepass and the other respondents, this must refer to the appeal which was before the court, and this did not include the appeal against Mr. Trespass which had been stayed.

    

 
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