Court of Appeal rules on liability of partner unaware of fiduciary breach of another partner
Court of Appeal reverses decision of lower Court to find that a partner who had been unaware of the wrongful conduct of the second partner in a business was nonetheless jointly and severally liable for the defaulting partner's liability to a third party for breach of fiduciary duty.
This was the case notwithstanding the fact that the defaulting partner had purported to resign from the partnership before the breach took place.
The case concerned the marketing and sale of a property in 2002. MCL, a firm in which the two Defendants (Mr Cowling ("First Defendant") and Mr Lawrence ("Second Defendant")) were partners, was instructed to deal with the sale. The First Defendant was chairman of the instructing company ("the Company") throughout the time in question, and also its most significant shareholder.
The First Defendant formally instructed MCL to market the property of behalf of the Company, in return for a percentage of the final sale price. MCL was given very specific instructions in that it was to market the property only on the basis of its existing use, and to indicate that the Company was not interested in receiving offers conditional on change of use.
The Second Defendant purportedly resigned from MCL on 4 July 2005. He subsequently introduced a prospective purchaser, Earlplace, to the Company. The Second Defendant had also agreed to act for Earlplace in relation to the property, in return for payment of a third of any uplift in value between the price Earlplace paid to the Company, and the value that Earlplace might realise on subsequent disposal of the site.
Earlplace subsequently bought the property for £2.25 million, and on the day of completion simultaneously sold it to a third party for £5 million. The Second Defendant became entitled to commission of over £744,000.
First Instance Decision
At first instance, the Court found that the Second Defendant had placed himself in an obvious position of conflict and so was liable to account to the Company for the commission received through the breach of his fiduciary duties. Accordingly, the commission of about £740,000 was held on trust and the Claimant, as assignee of the Company's causes of action, was entitled to pursue a proprietary remedy.
However, the Court rejected claims that the First Defendant was vicariously liable for the Second Defendant's breach of fiduciary duty. The Court considered that the circumstances of this case were "closer to the “frolic of own” cases and to cases of dishonesty or malpractice where case law suggests that vicarious liability may not be imposed". The Court concluded that the conduct of the Second Defendant was "sufficiently divorced from the ordinary business of MCL" to allow the Court to conclude that it was not in the ordinary course of the partnership business and so the First Defendant was not liable for the breach of fiduciary duties by the Second Defendant.
The Court also found that MCL had not been negligent. This was on the basis of MCL's "defined and limited role" under the Company's letter of instruction. Further, the Court considered that the First Defendant's conduct of the marketing and sale had been reasonable; accordingly the First Defendant had not been negligent either in his capacity as director of the company or qua agent as a partner in MCL.
The first instance decision was appealed on two main grounds, namely:
- The Court should have found that the Defendants were negligent in the way they conducted the marketing of the property; and
- The Court should have found the First Defendant to be jointly and severally liable with the Second Defendant on account of the latter's breach of fiduciary duty.
Decision on Appeal
Whist the appeal in relation to alleged negligence was roundly dismissed by the Court, the appeal in relation to liability of the First Defendant was allowed. In doing so the Court reversed the decision the lower Court and, in a unanimous decision, found that the First Defendant was jointly and severally liable for the Second Defendant's breach.
Whilst the Court agreed with the finding in the first instance decision that the First Defendant had not authorised the Second Defendant's wrongful acts, authority was not the touchstone for partnership liability. Rather, the touchstone was the connection between the wrongful conduct and the acts the partner was authorised to do, and in particular whether the connection was such that the wrongful conduct might fairly and properly be regarded as done by the partner while acting in the ordinary course of the business of the partnership.
The lower Court's conclusion that the Second Defendant's unauthorised conduct was sufficiently divorced from the ordinary business of MCL for it not to be in the ordinary course of business was based on the fact that;
- the business of the Company had only continued in a "limited sense" after 4 July 2005 (when the Second Defendant purported to resign) such that there was no ordinary course to it;
- the Second Defendant's expected payment from Earlplace related to future work in relating to the property and not the sale to Earlplace; and
- this future work was far removed from the ordinary course of the Company so as to be divorced from the ordinary course of its business.
On appeal that Court found this characterisation to be incorrect in parts, and further, held that such interpretation was subversive of the legal policy underlying vicarious liability; the Second Defendant was at all material times furthering both his own interest and that of MCL.
In this regard the appeal judgment referred to the comments of Lord Nicholls in Dubai Aluminium Co:
"21. Whether an act or omission was done in the ordinary course of a firm's business cannot be decided simply by considering whether the partner was authorised by his co-partners to do the very act he did. The reason for this lies in the legal policy underlying vicarious liability. The underlying legal policy is based on the recognition that carrying on a business enterprise necessarily involves risks to others. It involves the risk that others will be harmed by wrongful acts committed by the agents through whom the business is carried on. When those risks ripen into loss, it is just that the business should be responsible for compensating the person who has been wronged.
22. This policy reason dictates that liability for agents should not be strictly confined to acts done with the employer's authority. Negligence can be expected to occur from time to time. Everyone makes mistakes at times. Additionally, it is a fact of life, and therefore to be expected by those who carry on businesses, that sometimes their agents may exceed the bounds of their authority or even defy express instructions. It is fair to allocate risk of losses thus arising to the businesses rather than leave those wronged with the sole remedy, of doubtful value, against the individual employee who committed the wrong. To this end, the law has given the concept of ‘ordinary course of employment’ an extended scope.”
The Court went on to consider further authorities on the subject including Hamlyn, where the Court of Appeal held that a firm was liable for the loss suffered as, if it was within the scope of a partner's authority to obtain information by legitimate means, then for the purpose of vicarious liability, it was within the scope of his authority to obtain it by illegitimate means and the firm was liable accordingly. In coming to this conclusion the Court of Appeal relied on the broad ‘risk’ principle: where the principal has selected the agent, and is the person who will have the benefit of his efforts if successful, it is not unjust he should bear the risk of the agent "exceeding his authority in matters incidental to the doing of the acts the performance of which has been delegated to him".
The Court considered that if the partners in Dubai Aluminium Co and Hamlyn were vicariously liable, then so a fortiori the First Defendant must have been. The Court reasoned that neither Dubai Aluminium Co nor Hamlyn were cases where the partnership had assumed a responsibility to the wronged person. In contrast, MCL had agreed a retainer with the Company for the purpose of selling the property. MCL was to be rewarded for so doing. MCL authorised the Second Defendant to perform the task of selling the Company's property as agent for the partnership. MCL thus introduced the risk of the Second Defendant “exceeding his authority in matters incidental to the doing of the acts the performance of which had been delegated to him.” In light of this the Court considered that the first instance decision incorrectly concentrated on the wrongful aspect of what the Second Defendant did without focusing on the context in which he did it, or identifying the entirety of the task upon which he was embarked.
The Court considered that Mr Lawrence was at all material times furthering both his own interest and that of MCL, for whom he hoped to secure the agreed fee for successfully disposing of the property for the Company. In introducing Earlplace to the Company, the Second Defendant performed the very task which MCL had been engaged to perform. Contrary to the implications of the first instance decision the Second Defendant was therefore not moonlighting; he was carrying out MCL's business. Accordingly, this case fell well within the bounds of those circumstances that, on principle and on authority, attract a finding of vicarious liability.
The Court therefore held that the First Defendant was jointly and severally liable to account both for the sum of the commission earned through the Second Defendant's breach, although it was the case that the Claimant would have a proprietary remedy against the Second Defendant.
Whilst the Court of Appeal could appreciate the 'human' basis on which the lower Court wished to exonerate the innocent partner for the "sharp practice" of his partner, both statutory law and previous authorities compelled the Court to overturn the first instance decision and find the innocent partner to be jointly and severally liable. This decision provides useful guidance as to the application of authorities in this area. It also emphasises the fact that a finding of vicarious liability will not depend upon the authority to do the particular act which constitutes the wrong and that the concept of 'ordinary course of employment' might be construed widely.
 The Claimant was not the instructing company at the time of the events in question. Rather it had the benefit of an assignment of causes of action from the instructing company.
  EWHC 30 (QB)
 The judge had held that C had discharged his duties owed to X as director in a proper and careful manner. It was plain that the sale to Earlplace at £2.25 million represented a sale at the best price reasonably achievable by X in the circumstances in which it found itself.
 The Court referred to s10 Partnership Act 1980 and the comments of Birkenhead J (paragraph 23) in Dubai Aluminium Co Limited v Salaam & Ors  UKHL 48,  2 A.C. 366
 Hamlyn v John Houston & Co  1 KB 81
 Per Hamlyn
 Dubai Aluminium Co Ltd v Salaam  UKHL 48,  2 A.C. 366 and Hamlyn v John Houston & Co  1 K.B. 81 applied (paras 89-96).