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Beware Of Your Continuing Liabilities

by Luke Patel, Blacks Solicitors

In the case of the Northampton Regional Livestock Centre Company Limited v Cowling & Another, the Court of Appeal found that a partner who had been unaware of the wrongful conduct of one of his partners was still jointly and severally liable for that partner’s liability to a third party.

In that case, Mr Cowling and Mr Lawrence operated a partnership called MCL Property Consultants (“MCL”) which provided services for marketing property sales and searching for suitable purchasers. In 2002, MCL was instructed to sell a site (a livestock market) owned by the Northampton Regional Livestock Centre Company Limited (“NRLC”). On 4th July 2005, Lawrence resigned from the partnership and the partnership was eventually dissolved on 13th September 2005. However, Lawrence continued to act in relation to the sale of the property and introduced a buyer, Earlplace, to NRLC in August 2005 and contracts were exchanged on 23rd September 2005. Unbeknown to Cowling or to NLRC, Earlplace had agreed to pay Lawrence commission equivalent to 1/3 of any uplift above the purchase price that Earlplace achieved for the property on any subsequent sale. The property was sold by NRLC to Earlplace for £2.25m and it was then sold by Earlplace on the same day for £5m. Therefore Earlplace made an instant profit of £2.75m and Lawrence received commission from Earlplace of £744,035.02.

NRLC brought proceedings against Cowling and Lawrence on the basis that the property had been sold at an undervalue.

At first instance, the High Court found that Lawrence was liable to account to NRLC for the commission which he had received through the abuse of his fiduciary relationship. The Court found that Lawrence had placed himself in a position where there was a conflict of interests by acting for both buyer and seller and that he had breached his fiduciary duties to NRLC. However, the Judge found that MCL had not been negligent on the basis of MCL’s “defined a limited role” pursuant to the instructions they were given by NRLC. The Judge concluded that Cowling’s conduct on the marketing and the sale of the property had been reasonable and that he had not been negligent either in his capacity as a director of the company or as a partner in MCL. In addition, the Judge rejected claims that Cowling was vicariously liable for his partner’s breach of fiduciary duty. He concluded that Lawrence’s conduct was sufficiently divorced from the ordinary business of MCL and that his actions were separate from the course of the partnership business. NRLC appealed against the decision.  

The Court of Appeal unanimously held that Cowling and Lawrence were jointly and severally liable in respect of Lawrence’s breach of fiduciary duty, namely, accepting commission from the buyer on the resale of the property, even though he had left the partnership. The Court therefore allowed NRLC’s appeal on that issue. However, it dismissed NRLC’s appeal in relation to the negligence claim. The Court of Appeal found that the property had been sold for the best price reasonably obtainable in the circumstances and that there had been no negligence on the part of Cowling or MCL and that they were not at fault simply because the property had been resold for an enormous profit. MCL had merely carried out its instructions.

Although the Court of Appeal sympathised with Cowling who was the innocent partner in this case and it understood why the Trial Judge might wish to exonerate him from all joint liability for the “sharp practice” of his former partner, applying the provisions of the Partnership Act 1890 and established case law meant that the Court had no alternative but to find that he was jointly and severally liable for the actions of his partner even though Lawrence had resigned from the partnership before committing the breach of fiduciary duty.

This case provides useful guidance on the liability of partners in a partnership. It illustrates that the fiduciary duties owed by a partner to other parties do not end simply because that partner has left the partnership. If that partner is still perceived to be acting on behalf of the partnership by the outside world then that duty continues to exist. Further, a partner will be held vicariously liable for losses caused by other partners if the wrongful act committed was within the ordinary course of the partnership business.

At Blacks, we can assist you with the preparation of partnership agreements or help if you are ever involved in a partnership dispute. Please contact Luke Patel on 0113 227 9316 or by email at “LPatel@LawBlacks.com”.

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