Solicitor successfully sues former firm for share of ‘net profits’ following dispute over partnership agreement

Sheriff Principal Craig Scott QC
Sheriff Principal Craig Scott QC

A solicitor has successfully sued his former firm for his share of “net profits” after a sheriff principal refused an appeal by his ex-partners following a dispute over the terms of the partnership agreement.

John Tait raised an action of accounting and payment against RGM Solicitors, but the firm counterclaimed for the balance allegedly due by the pursuer on his capital account and separately for the balance of a liability incurred by the firm which it was claimed he had agreed to meet.

The sheriff found that upon a proper construction, the relevant clause of the partnership agreement provided for the pursuer to receive payment of a fixed annual sum of £36,000 irrespective of profits, and that the agreement did not provide for the pursuer to bear any of the losses of the firm.

Sheriff Principal Craig Scott QC  at Glasgow Sheriff Court upheld the sheriff’s decision and refused the firm’s appeal, meaning the counterclaim also failed.

The main thrust of the appellants’ argument was to the effect that the construction of the clause 7.1 favoured by the sheriff was “wrong” either because the sheriff ought to have found that the only natural and ordinary meaning of the clause was to the effect that payment to the pursuer was dependent upon the firm as a whole making “net profits” or because the sheriff had erred in his conclusion regarding what amounted to the most “commercially sensible” construction of the clause.

In the defenders’ submission, there was “only one ordinary and natural meaning” of clause 7.1, which was to the effect that each of the four partners’ entitlement was to a share of the “net profits” of the firm.

It was contended on behalf of the defenders that, properly construed, clause 7.1 had the effect whereby the pursuer was only entitled to payment of his “fixed and variable shares in the event of the firm making “net profits”.

For the year 2008/2009, the firm made a net loss and the pursuer was not, therefore, entitled to any payment in terms of clause 7.1. His claims for the unpaid balance of his fixed share and his 20% share of the court department profits should accordingly have failed, it was submitted.

Furthermore, in terms of clause 18.3 of the partnership agreement it was argued that the pursuer was obliged to repay a debit balance on his capital account of £19,747.

In reply, the pursuer maintained that the sheriff’s decision had been correct and that his application of the law had been correct.

It was contended on behalf of the pursuer that the sum of £36,000 per annum referred to within clause 7.1 properly fell to be regarded as a “fixed payment” to be made to the pursuer irrespective of the firm’s position regarding profits.

The court was reminded that prior to the partnership agreement being entered into, the pursuer benefited from a salary of £34,000 per annum and also benefited from a motor car provided by the firm.

The agreement in effect brought about minimal change to the pursuer’s circumstances, as the increase to £36,000 per annum could be accounted for by the withdrawal of the motor car arrangement, while the variable allocation of 20% of the net profit from the court department could not be said to have greatly enhanced the pursuer’s circumstances either.

Refusing the appeal, the sheriff principal said he was “unable to fault the sheriff’s approach”.

In a written judgment, Sheriff Principal Scott said: “Whatever one makes of the preamble to clause 7.1, its interaction with the wording which follows falls far short of creating a clause whose terms can be said to be clear and unambiguous…However, for reasons alluded to within the sheriff’s note and in the course of submissions on appeal, attempts to legitimise the construction supported by the defenders simply give rise to more questions than answers.

“Applying the natural and ordinary meaning of the language of clause 7.1 and reading it as a whole, the placing of £36,000 against the pursuer’s name cannot be understood as the allocation of a share in either the profits or losses of the firm. Moreover, the commitment to pay 20% of the net profits of the court department does not, to my mind, involve any obligation to bear court department losses or those of the firm generally.”

He added that in terms of the contextual background relied upon by the sheriff, the pursuer’s pre-existing capacity as an employee on a salary of £34,000 per annum plus motor vehicle plus bonus, based on turnover of the court department, taken along with the lack of any contribution to capital and any due diligence procedure, were matters of “material significance”.

The sheriff principal explained: “When it comes to the most commercial construction of the agreement, once again, I concur with the sheriff’s approach. For the reasons set out by the sheriff…,it would, indeed, have made no sense for the pursuer to have taken on the liabilities of partnership as well as the risk of unprofitability where his reward for doing so was so limited and, in reality, constituted little or no improvement upon his remuneration as an employee with the firm.”

In advancing the grounds of appeal, the defenders also endeavoured to persuade the court, on the hypothesis that their construction of clause 7.1 was correct, that the pursuer was under an obligation to repay the debit balance on his capital account, but standing the sheriff’s decision and the sheriff principal’s confirmation of that decision, the defenders’ counterclaim for £19,747 failed.

Other judgments by Sheriff Principal Craig Scott QC