Drake v Harvey & ors [2011] EWCA Civ 838

WTLR Issue: November 2011 #114

FRANCESCA DRAKE

V

(1) JACK HARVEY (deceased)

(2) MARY ELIZABETH MAY HARVEY (a protected party by Jacqueline Harvey, her litigation friend)

(3) CLARE HARVEY (as co-executrix of the estate of Aidan Harvey)

(4) RICHARD JENKINS (as co-executrix of the estate of Aidan Harvey)

Analysis

Mr and Mrs H, their son A and their daughter F were partners in a partnership engaged in farming. The partnership was governed by a partnership deed dated 14 February 1989. One of the assets of the farming partnership was farmland worth approximately £5.5m. Mr and Mrs H ceased to be partners as a result of their loss of mental capacity. They have since died. A ceased to be a partner on his death and therefore F was the only surviving partner.

The partnership capital was originally divided into A and B capital and additional capital. By clause 6 of the partnership deed, A capital had originally been £150,000 but had been increased to £360,000 and was held as to 12.5% by each of Mr and Mrs H, 48% by A and 27% by F. Clause 6 also provided that A capital was long-term capital for use in the partnership, that any change in A capital had to be agreed unanimously and that no interest should be paid on it. There was no issue as regards the B capital. Clause 9 provided for partnership profits to be divided between the partners in proportion to the percentage of A capital held by them, subject to F’s profit share not being less than her agreed salary and also a subordination of Mr and Mrs H’s profit shares to the partners’ salaries by clause 10. Clause 11 provided that capital profits and losses were to belong exclusively to the holders of A capital to be shared in the same percentage as they held A capital. The partnership had assets other than the farmland but the only assets ever revalued in the accounts were livestock. The profits arising on revaluation were taken to the current accounts of partners and were not capitalised and were therefore not reflected in holdings of A capital. Clause 13 provided for accounts to be drawn up each year to 31 March. The accounts when signed were conclusive and final between the partners unless an error was found within three months. The partnership could be determined by notice and under clause 18 Mr and Mrs H could require A or F to leave. Clause 19, which was the key clause to the case, set out the amount that would be paid to a partner on his leaving the partnership by reason of death, bankruptcy, incapacity or retirement (either voluntary or otherwise). It provided that there would be three elements to that payment: (1) an amount representing his share in the capital and his undrawn profits as at the date of the last general accounts, (2) an amount representing further capital advanced by him to the partnership after the last accounts and (3) an amount representing profits for the period since the date of the last accounts.

At first instance Mann J decided, following Cruikshank v Sutherland, that the amount of capital to be paid to A’s executors was to be decided in accordance with the fair (actual) value of the capital (particularly the farmland) at the date of A’s death, rather than the book value of the land which was the value that had been previously used in the general accounts of the partnership signed by the partners. There was nothing in the partnership deed to suggest otherwise. The last relevant accounts were taken to be the 31 March 2006 accounts, although those had not actually been signed by all the partners (there was no appeal on this last point).

F appealed, arguing that the payment to A’s executors should, under the partnership deed, be based on the book (ie cost) value. A’s executors argued that they should be entitled to a revaluation of the farmland so that its true value was reflected in the final accounts or that the partnership deed had been varied under s19 of the Partnership Act 1980 so that the accounts following the variation should be based on the true cost of farmland and not its acquisition cost.

Held (allowing the appeal)

  1. (1) Mann J had fallen into error in deciding the case on the basis that there was a presumption in favour of the payment of the fair value (ie actual value) of capital when a partner leaves the partnership unless the partnership deed shows a contrary intention. There was no default rule. The parties to a partnership deed have full freedom of contract and the effect of the words used in the deed must be interpreted in the usual way, Cruikshank v Sutherland (1923) 93 LJ CH 126 distinguished and Re White [2001] Ch 393 followed.
  2. (2) Under clause 19 of the partnership deed it was necessary to value the farmland on the basis of the last general accounts of the partnership rather than on the basis of a fair value. The last general accounts (and the other previous accounts) showed the valuation of the farmland at cost.
  3. (3) A’s executors were not permitted to insist on a revaluation of the farmland after the last general accounts as a result of clause 13 of the partnership deed which stipulated that accounts have to set out the assets at their valuation shown in ‘proper’ books of accounts. That was because the cost value was the appropriate value in cases where books of accounts use the historic cost convention. The provisions of clause 13 were entirely different from those founding the partnership deed in Re White which required a just valuation in the taking of an annual account.
  4. (4) The partners had not subsequently to the execution of the partnership deed agreed that the basis of valuing the share of a partner on death should be the fair value because F had not signed the deed which had been proposed. Section 19 of the Partnership Act 1890 did not therefore apply.
Judgment Lady Justice Arden [1] This appeal turns on the effect of clause 19 of a partnership deed dated 14 February 1989 with respect to the ascertainment of the amount to be paid to the personal representatives of a deceased partner for his partnership share. As commonly happens, the partnership deed provides for the deceased …
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Counsel Details

Mr Alan Steinfeld QC and Mrs Helen Galley (XXIV Old Buildings, Lincoln’s Inn, London WC2A 3UP, tel 020 7691 2424, e-mail clerks@xxiv.co.uk), instructed by Burges Salmon LLP (One Glass Wharf, Bristol BS2 0ZX, tel 0117 939 2000) for the appellant.

Mrs Elspeth Talbot Rice QC (XXIV Old Buildings, Lincoln’s Inn, London WC2A 3UP, tel 020 7691 2424, e-mail clerks@xxiv.co.uk), instructed by Charles Russell LLP (5 Fleet Place, London EC4M 7RD, tel 020 7203 5000, e-mail enquiries@charlesrussell.co.uk) for the third and fourth respondents.
The other respondents were not represented and did not appear.

Cases Referenced

Legislation Referenced

  • Mental Health Act
  • Partnership Act 1890, s19