At the start of a new series, Peter Garry advises on the benefits of clearly written agreements between business parties when dividing partnership assets
Ownership of a firm's property and business
It is remarkable how many reported cases involve issues as to whether one party is entitled to an interest in business assets, or indeed an entire business, on the basis of an alleged partnership or other agreement or understanding, which the other party rigorously denies.
Two recent Chancery Division cases, both decided at the end of May 2005, illustrate this.
James Hay Pension Trustees & ors v Kean Hird & ors [2005] EWHC 1093, was a complex case in which various property development, management and investment projects, owned individually by a number of the parties, had been intricately intertwined over a period of time, pursuant to an informal understanding between them.
An issue arose, which was dealt with summarily, as to whether a particular asset was an asset of a partnership between two of the parties, established by deed; or an alleged overarching partnership between multiple parties, encompassing all of their respective property projects, with profits and losses being spread across the entities making up the alleged partnership - and whether the partnership deed should be rectified accordingly.
On the particular facts of the case, the court upheld the partnership deed in its original form, and the claim that there was an overarching partnership was rejected. There was a restatement of the position that rectification will only be granted in the clearest of cases, citing T&N Ltd v Royal & Sun Alliance plc [2003] 2 All ER (Comm) 939, 964-5. A plea of estoppel, based on the alleged conduct and mutual intention of the parties, was rejected as not being supported by particulars or evidence.
In James Hay Pension Trustees, it appears that no reliance was placed on any equitable remedy other than rectification and a passing reference to estoppel.
In Rajendra Patel v Euro Investments Ltd, Gami & anr [2005] EWHC 1075, the claimant sought a declaration that he was entitled to a 25% share in a property development venture, by virtue of a partnership or agreement or understanding between the parties, or on the basis of a constructive trust or unjust enrichment.
In the alternative, he reclaimed the monies that he had put into the project (which was not opposed, since it was accepted that the claimant had made loans to the project). With regard to the equitable part of the claim, the claimant relied on his unpaid work and other contributions, such as:
He allegedly believed that, by virtue of these contributions, he would be entitled to a 25% share in the profits from the project.
The court had to decide, on the balance of probabilities, whether a particular meeting had occurred and, if so, whether the agreement or understanding alleged to have been reached at that meeting was in fact arrived at. The court found that such a meeting had not taken place at all. In consequence, not only did the partnership claim fail but the claimant's equitable claims also failed (since they were based on an alleged expectation arising out of the alleged meeting).
The court was assisted in this conclusion by the virtual absence of documentation supporting the alleged agreement or understanding, or supporting evidence from the third parties who became involved in the project (such as bankers and a solicitor).
This case can be contrasted with Chahal v Mahal (unreported, 2004 WL 2213202) in which the defendants characterised the claimant's long-term investment as a loan, but he was found (after more than 20 years of minimal participation) to have been a partner entitled to an equal share (since the parties had not agreed otherwise - see section 24(1) of the Partnership Act 1890).
As recognised by the judge in Patel, in the right circumstances an individual or company who has no contractual interest in a business asset can nonetheless claim to be entitled to a share in it. Banner Homes v Luff Developments [2000] Ch 372, though not a partnership case, is equally applicable to situations in which the parties may have discussed partnership but failed to reach agreement on sufficient terms to enable a partnership to be declared.
The case involved a proposed property development joint venture. Draft terms between the parties were drawn up but, while there was agreement in principle to share the benefits of the venture on a 50:50 basis, no final, binding contract was concluded. The defendant put in a successful bid for the site, but refused to share the benefit of the site with the claimant, who had refrained from bidding against the defendant because of the agreement in principle.
On the basis of what is known as the Pallant v Morgan equity ([1953] Ch 43), the claimant was awarded a 50% interest in the project. The Court of Appeal reviewed what is required in order for the Pallant v Morgan equity to apply, namely:
Banner Homes should be viewed in the light of London & Regional Investments Ltd v TBI [2002] EWCA Civ 355, in which a claim based on Pallant v Morgan failed, as the negotiations were carried out expressly on the basis that they were subject to contract.
The lessons to be learned from these cases are clear. Parties who believe they are in partnership or have some other right to share in the benefit of an asset should secure the clearest possible written confirmation of the intention of the other party (though this is often neglected by virtue of the very trust that it is later asserted has been abused).
Parties who wish to negotiate, without the risk of raising an expectation that may lead to equitable entitlement, should do so subject to contract. Parties who have raised an expectation of shared benefits, and who want to call off or change the arrangement, should do so well before they acquire the asset in question, and in clear terms.
Peter Garry is head of partnerships and professional practices group at Kent-based law firm Cripps Harries Hall
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