Retired lawyer wins dispute with former partners for share of whole firm assets

A judge has ruled that the partnership agreement made no provision for division of the firm’s assets on the retirement of a partner due to age, and therefore the matter would be governed by the rules of the general law.

Lord Doherty in the Court of Session heard that David Eason, a former partner in Inverness-based firm Munro & Noble, raised an action against the other partners in the firm to determine his rights under the partnership agreement.

Under the terms of the agreement Mr Eason was compelled to retire from the partnership in 2012 after reaching the age of 65, but following his retiral a dispute arose between him and the remaining partners as to the sum due to him in respect of his share of the partnership assets.

He argued that the clauses dealing with the continuation of the firm and the sharing of its assets following retiral of a partner specifically only referred to the clause dealing with voluntary retiral and that in the absence of other provision, his rights fell to be determined by the general law.

It was submitted that the pursuer’s construction of the agreement was “perfectly understandable”, and in accordance with “commercial common sense”, that the contracting parties might wish to treat a partner who worked until the compulsory retirement age more favourably than a partner who ceased to be a partner before then.

The pursuer maintained that since the agreement made no provision for the valuation of his interest, his interest ought to be valued on the basis that the partnership was dissolved when he retired, which would result in each of he and the three remaining partners being entitled to a one-quarter share of the net value of the whole assets of the partnership at the date of his retirement.

He sought declarator that the partnership was dissolved on 31 March 2012; that he was entitled to payment by the defenders (a) of a 25 per cent share of the whole assets of the firm valued as at that date, and (b) to such share of the profits made by the defenders since 31 March 2012 as is attributable to the use of his share, or to interest on that share at the rate of 5 per cent per annum from that date.

The remaining partners maintained that on a proper construction of the agreement, it provided what was to happen in the circumstances of the pursuer’s retirement, and how his share in the partnership was to be valued.

They argued that it was clear that the agreement intended that the partnership should continue notwithstanding a retirement, that the obligation to retire at age 65 fell to be implemented by serving notice to retire as provided in the voluntary retirement provision, failing which a deeming provision applied.

It was submitted that the court ought to prefer the construction which was “more consistent with commercial common sense” and which better reflected the fact that the agreement was intended to encapsulate a “co-operative enterprise”.

In a related action brought against the pursuer by the partnership of Munro & Noble and the current partners of the firm, the partnership sought declarator that the whole assets of the firm were the “exclusive property” of the current partners of the firm

However, Lord Doherty said it was common ground that the partnership was not a partnership at will and clearly correct that on retirement there was at least a “technical dissolution” of a partnership.

He continued: “Commonly, a partnership agreement provides that the partnership is to continue notwithstanding the retirement of a partner, and it makes provision for the continuing partners to acquire the retiring partner’s share at a valuation or in some other manner. In that sense ‘retirement’ from a partnership usually connotes a continuation of the firm.

“But if a partnership agreement does not provide what the retiring partner’s entitlement is to be on retirement the matter is governed by the general law. Under the general law a retiring partner is entitled to obtain an equal share of the whole net assets of the partnership.”

As to whether the agreement made provision specifying the rights of a retiring partner and of the remaining partners to the partnership assets, the judge was of the view that the reasonable reader of the relevant clause would understand it as providing that the partner will cease to be a partner on the date specified.

He agreed with the pursuer that the consequence that the entitlement of a partner who retired under the relevant clause should be determined by the general law “does not flout commercial common sense”.

In a written opinion, Lord Doherty said: “The construction the defenders contend for is not the natural and ordinary meaning of the clause. At best, it is a strained and convoluted construction. It involves inserting words into the clause which are not there. In my view, if the court acceded to the defenders’ construction it would be rewriting the contract under the guise of interpreting it.

“Examination of the other provisions of the agreement tends to support the conclusion that clause (EIGHT) ought to be read as having the natural and ordinary meaning already discussed. The parties were at pains to specify the circumstances in which the agreement regulated an outgoing partner’s entitlement; and those circumstances were that cessation was by death or by operation of clauses (ELEVEN) or (TWELVE). If the parties had intended retirement under clause (EIGHT) to be dealt with in the same way it would have been very easy to have said so.”

He concluded: “The pursuer’s retirement… was a technical dissolution of the partnership as constituted between the pursuer and his co-partners, albeit that a firm comprising the remaining partners was immediately reconstituted. The agreement did not incorporate an agreed basis for the pursuer to obtain a share of the net partnership assets in the circumstances which he ceased to be a partner. Accordingly, his entitlement falls to be determined by the general law.”