Scots lawyer fails in dispute with former firm over payments due under partnership agreement

Judges in the Inner House of the Court of Session allowed an appeal by RGM Solicitors against former partner John Fraser Tait, after ruling that Mr Tait was only entitled to the sum specified in the partnership agreement if the firm made a net profit in the year in question.

Lord Menzies, Lord Brodie and Lady Clark of Calton heard that Mr Tait entered into a partnership agreement with RGM Solicitors in July 2007, but tendered his resignation less than 18 months later following dispute about payments said to be due to him in terms of the agreement.

Thereafter, as pursuer, he raised an action for an account and payment in the sheriff court against the partnership RGM Solicitors and two of the partners,Robert Gordon Marshall and Samuel Harvey Waddell as defenders, who counterclaimed for sums due as a result of the abandonment of a litigation allegedly negligently conducted by the pursuer and for payment by the pursuer of the deficit in his capital account.

However, the sheriff found that Mr Tait was entitled to receive payment of a fixed sum irrespective of profits and the sheriff principal upheld that decision, prompting the defenders to appeal to the Court of Session on the grounds that both the sheriff and sheriff principal had erred in their construction and conclusions about the interpretation and effect of the disputed clause in the partnership agreement.

Clause 7.1 of the agreement stated that “Net profits or net losses (other than profits and losses of a capital nature) shall belong to and be borne by the partners in the following shares”.

Mr Marshall and Mr Waddell were entitled to certain percentages, while Mr Tait was entitled £36,000 per annum plus 20% of the net profit of the court department he operated.

Net profits were defined in clause 1 as “The profits of the firm (other than profits of a capital nature) in respect of any accounting period before charging taxation but after charging all expenses and outgoings of the firm”, and the expression “net losses” were to be construed accordingly.

Senior counsel for the defenders submitted that clause 7.1 was not ambiguous; there was “only one ordinary and natural meaning” to be given to the words agreed by the parties and that meaning favoured the construction relied on by the defenders.

It was argued that where there were no net profits of the firm, as in the present case, the pursuer was not entitled to the specified share.

Further, as the pursuer had been credited with payments in a situation where there were no net profits to share, it was submitted that the defenders were entitled to repayment in terms of their counterclaim, as said payments were only due if there were net profits to share.

But the pursuer contended that the correct construction was that the fixed sum payment of £36,000 and 20% of the court department profits were due to be paid by the defenders regardless of whether there were net profits or net losses of the firm in the relevant period.

It was argued that there were “two possible constructions” of clause 7.1 and that the construction put forward by the pursuer was “consistent with business common sense”.

Allowing the appeal, the appeal judges observed that there was no dispute that the “legal entitlement of a partner would depend upon the wording used by the partners in any particular agreement”.

Delivering the opinion of the court, Lady Clark of Calton, said: “We consider that the opening words of clause 7.1 could not be clearer. It is the net profits which shall belong to the partners and thereafter there are specified the following shares.

“There may be ambiguity and difficulty in ascertaining what the shares are, but in our opinion there is no ambiguity in determining that whatever is meant, they are shares of the net profits of the firm as defined in the agreement.

“In oral submission, the solicitor advocate for the pursuer sought to persuade us that the reference to £36,000 should be considered as an outlay to be deducted before the profits and losses were to be determined. It was a ‘salary’ to which the pursuer was entitled regardless of profits in terms of his share. We do not accept that.

“Net profits as defined in the agreement include deduction of outgoings which are widely defined. In any event regardless of how one categorises the £36,000, a partner share in terms of clause 7.1 is a share of net profits and only net profits.

“In our opinion this is a case in which the meaning is clear about the critical issue. There is no ambiguity and there can only be one potential meaning. There is no need therefore to explore commercial common sense and the surrounding circumstances. The meaning is plain from the language of the provision used in the context of the agreement.”

The judges added that since the pursuer’s construction of the clause was “wrong” and he was not entitled to his share, the defenders were therefore entitled to repayment of any payments made to the pursuer as “drawings” for the period 1 May 2008 to 30 April 2009.