John Ronald Ham v Ronald William Ham & Lorna Jean Ham
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lewison,Lord Justice Briggs,Lord Justice Rimer |
| Judgment Date | 30 October 2013 |
| Neutral Citation | [2013] EWCA Civ 1301 |
| Date | 30 October 2013 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2013/0735 |
[2013] EWCA civ 1301
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM BRISTOL DISTRICT REGISTRY
HIS HONOUR JUDGE MCCAHILL QC
1BS30953
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Rimer
Lord Justice Lewison
and
Lord Justice Briggs
Case No: A3/2013/0735
Mr Ian Partridge (instructed by Stokes Partners LLP) for the Appellant
Mr Nathaniel Duckworth (instructed by Michelmores LLP) for the Respondent
Introduction
In 1997 Mr and Mrs Ham, who were then established dairy farmers, took their son John, then aged 19, into partnership. At that time Mr and Mrs Ham were the owners of some 440 acres of land and a sizeable dairy herd together with farm machinery and other assets. The partnership began on 1 October 1997; and the partners' respective rights and obligations were reduced to writing in a partnership deed dated 15 December 1997. Clause 4.1 entitled any of the partners to terminate the partnership by three months written notice. In that event the other partners were entitled to buy out the partner who gave the notice. John Ham gave such notice on 27 February 2009. The unfortunate dispute between him and his parents concerns the basis on which that buy-out is to take place.
HHJ McCahill QC decided that, as a matter of interpretation of the partnership deed, John's share was to be determined on the same basis as annual accounts were drawn during the continuation of the partnership, rather than on the basis of an up to date market valuation of the partnership assets. With the judge's permission John appeals.
Mr Ian Partridge presented John's case; and Mr Nathaniel Duckworth presented that of his parents.
At the conclusion of the hearing of the appeal my provisional view was that the judge was correct. However, upon further reflection, and with the inestimable benefit of having read the judgments of Rimer and Briggs LJJ in draft, I have reluctantly come to the conclusion that the appeal must be allowed. My reasons follow.
The approach
John's entitlement is a contractual entitlement. What it is therefore depends on the correct interpretation of the partnership deed. There are no special rules applicable to interpreting deeds of partnership in this respect. In particular there are no presumptions or default rules which point towards one basis of valuation of an outgoing partner's share rather than another: Re White (deceased) [2001] Ch 393; Drake v Harvey [2011] EWCA Civ 838 [2012] 1 All ER (Comm) 617. As in the case of any other contract the interpreter must take into account any relevant and admissible background which would help an informed reader in understanding what the contract means. One of the important background facts is that this was a family partnership. Another is that it was a dairy farming partnership and that, in the nature of things, a farming partnership is likely to be asset rich but cash poor. In addition as Lord Hailsham explained in Johnson v Moreton [1980] AC 37, 59 in a very different context:
"… to build up a herd of dairy cattle, between whose conception and first lactation at least three years must elapse, takes time and planning, whilst to disperse the work of a lifetime of careful breeding is but the task of an afternoon by a qualified auctioneer."
The partnership deed
A number of clauses in the partnership deed bear on this dispute:
"3.1 The capital of the partnership shall consist of the following items:
(a) Such assets as are specified in a statement of affairs to be prepared by Messrs Hucker & Booker Chartered Accountants … which assets shall be credited to the Partners as therein specified
(b) Any further sums or assets which any Partner may with the consent of the others from time to time contribute for capital purposes which shall be credited to his or her capital account
3.2 The Partners shall keep books of account and such other records as are usual in a business of the same type as the partnership business and such accounts shall in addition show the account of each Partner in respect of his or her share of the capital and the profits of the partnership
…
3.5 The financial year of the partnership shall end on 28 th February each year and an annual balance sheet and profit and loss account shall be prepared as at that date and as soon as possible afterwards showing what is due to all Partners in respect of the capital and profits of the partnership. Such balance sheet shall forthwith be signed by all Partners who shall be bound by the contents of the balance sheet and the profit and loss account unless some manifest error is found within 6 months after he or she has signed in which case such error shall be rectified
3.6 All Partners shall be entitled to draw out of the partnership bank account on account of his or her share of the profits such monthly sum as shall be agreed between the Partners. As soon as the Partners have signed the balance sheet they shall agree to make such further drawings (or repayments as the case may be) in respect of profits or capital or both as are prudent in the circumstances having regard to the requirements of the partnership business."
"4.1 The partnership may be terminated by any of the Partners giving to the others not less than three months' notice in writing at any time
4.2 If the partnership is terminated in any way then the partners to whom notice is given or the surviving or solvent Partner or Partners on whose application an order for the dissolution of the partnership was made may within twenty-one days after the notice was given or the event occurred which gave rise to the termination give notice to the other Partner or Partners or his or her personal representatives trustee or receiver as the case may be electing either to have the partnership wound up under the Partnership Act 1890 or to purchase the share of the other Partner or Partners [at] the net value of such share
4.3 The net value for the purpose of clause 4.2 shall be agreed between the Partners or their respective successors (as the case may be) or in default of such agreement shall be determined by the partnership accountants. In so determining the accountants shall act as experts and not as arbitrators and their professional charges shall be borne by the Partners in equal shares"
The statement of affairs that was referred to in clause 3.1 (a) of the partnership deed was either not prepared as envisaged; or, if it was, it has not survived. But Hucker & Booker prepared accounts both before and after the inception of the partnership.
Clause 3.7 originally provided for the division of profits, but the division was changed by a supplemental agreement made in 2001. Under that agreement Mr and Mrs Ham were each to receive 30 per cent and John the remaining 40 per cent. Clause 3.7 (b) said that the Partners would bear "all losses including losses of capital" in the same proportions.
Most regrettably clause 4.3 does not contain clear instructions about the basis on which the "net value" is to be assessed. It is that omission which has given rise to this dispute.
Some more relevant facts
Before they took John into partnership Mr and Mrs Ham had themselves been business partners. Between them they owned the land on which the farming business was carried on, the buildings, all the live and dead stock and the farm machinery. John, understandably, had no capital of his own.
Hucker & Booker prepared accounts for Mr and Mrs Ham's own partnership as at 28 February 1997 (that is some eight months before John became a partner). Those accounts showed:
i) Fixed assets consisting of freehold property, plant & machinery, motor vehicles, agricultural buildings and milk quota;
ii) Current assets and current liabilities;
iii) Long term liabilities.
After deducting the liabilities from the assets, the balance came to just over £1 million. The accounts recorded that that was financed by Mr and Mrs Ham's capital account, which recorded the same balance standing to their credit. The land was recorded at book value. It had clearly not been revalued, because the same figure was simply carried forward from the accounts for the previous year.
The accounts for the following year (being the first year after John joined the partnership) were also prepared by Hucker & Booker. These accounts are as close as we come to the statement of affairs to which clause 3.1 (a) referred. They follow much the same format as the previous year's accounts. In other words having struck the balance between assets and liabilities, the net balance is shown. But this time, instead of simply being ascribed to Mr and Ham, part of the capital was ascribed to John. By reference to the notes to the accounts we can see that John's capital contribution was his share of profits after allowing for modest drawings. The bulk of the profits went towards increasing Mr and Mrs Ham's capital account. The land was, again, shown at book value. The same value was again carried forward from the previous two years' accounts. Clearly it had not been revalued.
This pattern continued for subsequent years. From time to time milk quota was revalued, and the partner's capital accounts adjusted in accordance with the revaluation. In some years additional land was acquired and entered into the partnership accounts at book value. But the land has never been revalued in the annual accounts. However, in 2004, following a discussion with accountants, the bulk of the land farmed by the partners was removed from the partnership accounts, and the capital...
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