Law firm succeeds in judicial review challenge against arbiter’s award to former partner

A judge in the Court of Session ruled that the arbiter acted “ultra vires” and “contrary to natural justice” in reaching her decision.

Lord Philip heard that the petitioners, the partners of Glasgow-based firmDallas McMillan, sought reduction of a decision of Adrianne Airlie CA, as arbiter in the arbitration between them and Colin McLeod, a former partner of the firm. They also sought interdict and interdict ad interim against Mr McLeod from taking any steps to enforce the arbiter’s decision

The court was told that petitioners and Mr McLeod entered into a contract of partnership on 11 April 2000, which continued until 8 February 2008 when Mr McLeod resigned.

After his resignation he claimed payment of certain sums which he contended were due to him by the continuing partners in terms of the contract.

In August 2009 he raised an action against the petitioners in Glasgow Sheriff Court seeking payment of £500,000, which he contended was the true balance at credit of his capital account at the date of his resignation.

He also sought interim decree for £201,569 which was the sum at credit of his capital account as brought out in draft partnership accounts prepared in February 2008, claiming that the discrepancy between the two figures was explained by the “undervaluation” of work in progress.

The action was sisted to allow the dispute to be referred to arbitration, which commenced in August 2009, before the coming into force of the Arbitration (Scotland) Act 2010.

The issues between the parties were the value of work in progress as at 8 February 2008, Mr McLeod contending that work in progress had been undervalued; and the status of payments amounting to £200,000 made by Picsel Technologies Limited (Picsel), a client company of the firm, to Mr McLeod as an individual.

The petitioners contended that that sum fell to be paid to the partnership while Mr McLeod contended that he was entitled to it “absolutely”.

Miss Airlie issued her decision in a report dated 22 October 2013, in which, under the heading “Specific Findings”, she fixed the balance at credit of Mr McLeod’s capital account as at February 2008 at £262,207, with interest.

In addition, she decided that the remaining partners should each execute a “personal guarantee” for that sum in his favour and valued work in progress at £356,824.

On the “Picsel Payment” she found that the £200,000 paid to Mr McLeod should have been a capital receipt of the partnership, meaning it would have been for the equity partners to decide how it should have been distributed.

However, the petitioners challenged her report and the judge ruled that the award should be reduced.

Clause Fourteenth of the agreement provided that on the retirement of a partner a balance sheet was to be prepared and that the outgoing partner was entitled to require any asset of the partnership to be valued for the purpose of the balance sheet by a valuer mutually chosen or, failing agreement, to be nominated by the arbiter.

But an appendix to the arbiter’s report stated that work in progress was valued by the arbiter’s firm, and she gave no indication that the partners of Dallas McMillan had been given the opportunity to make a mutual choice of valuer.

“Accordingly the work in progress was not valued according to the provisions of Clause Fourteenth and the arbiter must be held to have acted ultra vires in this regard,” Lord Philip said.

However, the judge rejected the petitioners’ argument that the arbiter had acted “contrary to natural justice” by obtaining data from the Law Society of England and Wales, as the data was not actually used in the valuation of work in progress and therefore there was “no possibility of injustice arising” from its consideration by the arbiter.

But he took a different view irelation to the obtaining of legal advice and the advice of an expert in valuation.

In a written opinion, Lord Philip said: “There was no indication in the arbiter’s letter of 8 September 2009 during the cause of the arbitration that she intended to take legal advice. Nor was there an indication of the subject matter on which, or the identity of the person from whom, advice was to be sought.

“In these circumstances…if she did take legal advice she required to give the parties an opportunity to comment on the advice given and the basis of fact on which it was sought. Accordingly I take the view on the arguments presented to me, that the arbiter acted contrary to natural justice in obtaining legal advice and advice from an expert in valuation without informing the parties.”

The arbiter also ordered that the petitioners should each grant a “personal guarantee” for the sum which she determined should stand at credit of Mr McLeod’s capital account, but the petitioners argued that in doing so she acted ultra vires - a submission the judge considered was “well founded”, as the contract made “no provision” for the granting of personal guarantees.

In relation to the arbiter’s treatment of the Picsel payment the dispute remitted to her was whether the payment was due to the partnership or to Mr McLeod alone, but she went on to decide that the fair outcome was to divide the £200,000 equally between the petitioners on the one hand and Mr McLeod on the other, by invoking Clause Tenth of the agreement - the purpose of which was to lay down the decision making process which was to operate among the partners during the partnership.

“That clause had no application to the arbiter’s function and accordingly the decision that she purported to base upon on it was not one that was open to her to make. It was therefore ultra vires,” Lord Philip ruled.

The petitioners’ final argument was that the arbiter had developed a “financial interest” in the outcome of the dispute, but the judge rejected that claim.