Partner's liability under repudiated contract continued

LAW REPORT v 7 February 1997

Hurst v Bryk and others; Court of Appeal (Lord Justice Simon Brown, Lord Justice Peter Gibson, Lord Justice Hobhouse) 4 February 1997

The principle that the innocent party to a contract terminated by rescission was only liable to perform outstanding contractual obligations which had crystallised into particular debts owed to particular creditors did not apply to a partner's obligation to contribute in a given proportion to his firm's losses following the dissolution of the partnership.

The Court of Appeal by a majority (Lord Justice Hobhouse dissenting in part) dismissed an appeal by the plaintiff, Robert Alfred Hurst, against the decision of Mr Justice Carnwath on 11 April 1995, dismissing the plaintiff's action against Raymond Alexander Bryk and 18 other defendants.

The action arose out of the dissolution of the partnership in a firm of solicitors, Malkin Jenners, of which the plaintiff and all the defendants were members. The decision to dissolve the partnership was made by the defendants without the plaintiff's concurrence. He told the defendants he was treating the dissolution agreement as a repudiatory breach of the partnership deed, which repudiation he accepted. He sued for damages, accounts and inquiries and a declaration that he was discharged from contributing towards partnership liabilities accruing after 31 October 1990, the date on which the partnership ceased practice.

The judge held, inter alia, that the defendants were guilty of repudiatory breach of the partnership deed and that the plaintiff had accepted such repudiation; but that the plaintiff remained liable to pay his share of debts, liabilities and losses of Malkin Jenners, including ongoing liabilities and losses yet to be realised and the rent and other outgoings relating to the firm's former premises.

Ian Leeming QC and Gerard Van Tonder (Penningtons) for the plaintiff; Philip Hoser (Rabin Leacock Lipman) for the first to fourth and 11th to 13th defendants; the 10th, 15th, 18th and 19th defendants appeared in person.

Lord Justice Peter Gibson said that in Bank of Boston v European Grain Ltd [1989] AC 1056 at 1089-1099, Lord Brandon approved the statement of Dixon J in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476-477, that:

When a party to a simple contract, upon a breach by the other contracting party . . . elects to treat the contract as no longer binding on him, the contract is not rescinded as from the beginning. Both parties are discharged from further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired.

His Lordship accepted that a purely contractual obligation of the innocent partner could not, consistently with the Bank of Boston principle, be enforced. What occasioned more difficulty was the treatment of liabilities which had already been incurred by the partners before the termination of the partnership but which had an element of contingency about them so that the creditor did not unconditionally acquire rights before the dissolution of the partnership.

The major issue related to the rents of the firm's former premises. If that issue turned solely on the question whether the plaintiff could be required to perform his contractual obligation, under the partnership deed, to indemnify the trustees in whose name the lease was held, his Lordship would be forced to conclude that he could not.

But the position was not so simple. The lease was an asset of the partnership, albeit one with a negative value. The plaintiff, on becoming a partner, acquired an interest in it; he took the benefit, together with all the other partners, of the property being held by trustees for the partnership. His interest was an absolute interest and the termination of the partnership did not divest him of that interest.

The equitable obligation on each partner subsisted because his property interest subsisted and was in no way dependent on the subsistence of the partnership, nor was it affected by the manner in which the partnership was terminated.

The Bank of Boston principle had no application to an accrued property right and its concomitant obligation to indemnify the trustees.