Partner’s Liability

Personal Liability

Each partner is liable personally for the debts and obligations of the partnership. Irrespective of the partners’ profit and liabilities sharing ratios, each is ultimately liable to third parties for all partnership debts and obligations. Ultimately, each partner has potentially unlimited liability for the firm’s obligations.

Partnership liabilities are payable primarily, from partnership assets. The partnership assets are available to meet partnership liabilities and obligations (and not personal liabilities) in the first instance. If there are insufficient partnership assets, the partners must ultimately pay the partnership debts and obligations from their own resources.

Each partner is jointly liable for the partnership debts. A partner who pays disproportionately relative to his fellow partners may claim a contribution from his fellow partners. If his fellow partners have insufficient assets available (ultimately on bankruptcy, that partner may have to carry a disproportionate or total liability for the partnership debts and obligations.

The unlimited liability of a partner is in contrast to the position in respect of a shareholder in a company. He is limited in liability, to the nominal value and premium on his shares, which is commonly minimal and is paid up in full on their original issue. A limited liability partner is similarly limited in his liability to the amount is his initial capital contribution.


Extent of Liability

Each partner is jointly liable for the debts and liabilities of the firm which are incurred, while he is a partner. The partners are jointly and severally liable for the wrongful acts and omission of the firm and for the misapplication of property in the custody of the firm during this time.

The partners are subject to a single joint obligation to third parties on partnership contracts. Each has authority to bind the others in the ordinary course of business.  Partners may sue and be sued collectively, as a firm. The court rules permit partners to sue and be sued in the firm’s name.

An incoming partner is not usually liable for transactions and debts incurred prior to his admission. A partner becomes liable for the obligations of the firm which arise after he becomes a partner. An incoming partner may become liable for prior debts under the terms of an agreement with the partners or with the relevant third party.

An incoming partner may become liable for pre-entry debts by way of novation. Novation involves the substitution of the new partner and the discharge of an outgoing partner, by the express or implied agreement of the both and the creditor / third party. It may occur where the new partners are substituted by express or implied agreement on the existing account. It may be implied in some cases, where the existing creditors continue to deal with the newly constituted firm.


Retiring Partner

A partner remains liable for debts and obligations incurred while he was a partner, after retirement. Obligations include torts, uncompleted contracts and other civil liability. He may be indemnified by the remaining partners, but his ultimate liability to third parties.

If the new partners pay a debt of the old partnership, they may be able to recover the sum or a contribution from the old partners. This arises from basic principles of subrogation and contribution, which apply generally when one party discharges the obligation of another.

Where a creditor has incurred debts with the old and new partnership, it may appropriate payments received in satisfaction of debts as it sees fit. A contract or direction may provide otherwise.


Release and Novation

A retiring partner may be released from liability on a contract in the context in the renegotiation of its terms, where the varied contract is made with the new partners. The partner may be discharged by express or implied novation of the contract with the substituted partners.

A novation of obligations with the new or continuing partners with a release the outgoing partner requires some element of assent by the creditors of the old firm.   There must be a contractual basis for the variation. There must offer, acceptance and consideration. The assumption of liability by the incoming partners will usually suffice as consideration.

The Partnership Act requires some express or implied adoption of the obligation on the part of the creditors. It provides that a retiring partner may be discharged from any existing liabilities, by an agreement to that effect between himself and the members of the firm as newly constituted and the creditors, and this agreement. It provides that the agreement may be either express or inferred as a fact from the course of dealing between the creditors and the firm as newly constituted.


Notice of Retirement

Where a third-party deals with the partnership after a change in membership, he is entitled to treat the members of the partnership as previously constituted, as continuing until he has notice of the change. For this reason, it is prudent for the outgoing partner to advertise changes in the constitution of a partnership or otherwise bring it to the notice of creditors. If for example, an order for supplies is made on an old headed paper, the creditor is entitled to assume that retired partners mentioned, are still partners.

The Partnership Act provides that an advertisement of a change to a partnership in Iris Oifigiul is deemed notice of the same to persons who have had no prior dealings with the firm before that change. This does not affect the position in relation to pre-existing customers/ creditors who do not actually see the advertisement or who are not otherwise aware of the departure.

It may be enough for the outgoing partner to give constructive or deemed notice to existing creditors. He may do so by sufficient advertising and circulation of notice in the relevant trade or business.


Ex-Partner Held Out

An outgoing partner is not usually liable for liabilities and obligations which arise after he leaves the firm. However, a retiring or departing partner remains liable on contracts and obligations with persons with whom he has dealt while a partner until the third party has notice of his departure or the change in composition.

If a person who has retired, holds himself out as a partner or allows himself to be represented as such, he may be liable as if he was still a partner. He must know or have reason to believe that he is being represented by the other partners as if he was a still partner. This may occur, for example, where old headed notepaper is used or where his name continues on the website.

Where the departing partner is held out by the firm or where the firm allows the former partner to hold himself out as a partner, the firm is liable to customers for actions of a departed partner whom it holds out. In this case, he binds the partners, notwithstanding his departure.

An unknown, sleeping or dormant partner will not be liable for post-retirement/departure obligations. By definition, he is not and has not been held out as a partner.


Discontinuing Liability

A departing partner should take some practical steps to notify third parties that he is no longer a partner if he wishes to avoid continuing liability.  This may include the publication of a notice in Iris Oifigiul, registration of an amended registered business names, deletion of his name from the partnership name, a change in the firm’s notepaper and sending a circular to notice to customers and creditors.

The departing partner may require other partners to concur in making notification to third parties.  There may be an advertisement or circular. The above steps are not necessarily required but may be desirable to ensure that there is no acquiescence in holding out.

Where a partner leaves, he commonly receives an indemnity from the remaining partners.  An indemnity may be capable of being implied, where the outgoing partner assigns his equity or relinquishes it.  This would not, however, affect his existing liability to third parties.


Deceased Partner

A partner (and the estate of a deceased partner) are jointly and separately liable for the debts and liabilities of the partnership incurred while he was a partner. A creditor may claim from and sue both the partners and the personal representative of the deceased partner.

The deceased partner’s personal creditors have priority in respect of the deceased’s non-partnership assets. The deceased partner’s personal representatives are severally liable  (with the other partners) in the course of administration of his estate for partnership debts and obligations insofar as they remain unsatisfied, subject to the prior payment of his separate (non-partnership) debts.

Upon death or bankruptcy, the partnership no longer has authority to bind the deceased or bankrupt partner.  This is the case even if the deceased’s name continues to be used. Death or bankruptcy, which terminate the agency of the partner is deemed to be known to the world, irrespective of whether or not they are in fact known.


Civil Wrongs

Each partner is liable for this own wrongs and torts and those of his fellow partners, done within the scope of the partnership business. He may be liable under principles of agency or vicarious liability.

Partners are liable for the civil wrongs of their fellow partners, committed in the ordinary course of the business or undertaken with the authority of his fellow partners. The partners are each jointly and severally liable with their fellow partners for civil wrongs for which the partnership is held liable.

A partner can be liable for the intentional act of his fellow partners, undertaken in the ordinary course of business. He will not usually be liable for their fraudulent acts unless he has knowledge of them.

Where a partner misappropriates or misapplies the money or property of a third party in the course of his apparent authority, the partners are jointly and severally liable to make good the loss.


Joint and Several Liability

The partners are presumed to be jointly liable on partnership contracts. The estate of a deceased partner is severally liable with the surviving partners. The partners could enter a contract which provides or implies that they are to be jointly and severally liable.

The partners are presumptively jointly and severally liable for tort / civil wrongs and breaches of trust. In theory, the position could be agreed to be otherwise by express or implied contract.Partners may be sued individually or collectively.   In the case of several liabilities, each partner can be sued successively. Partners are usually sued collectively in the firm name.

Before the Civil Liability Act, a suit against one partner barred suit against other partners in the case of joint (but not several) liabilities.  The position was reversed by the Civil Liability Act.  Separate legal proceedings can be taken against the firm and against each individual partner.

Under the Act partner who has paid more than his share of the partnership liability to a third-party may obtain contribution from his fellow partners.  The partner will usually have a contractual right to an indemnity under the partnership agreement or by implication.

An admission or something said by a partner in the course of partnership business will bind all partners. If for example, if a debt is acknowledged or if a particular fact is admitted, this will be binding on all partners in relation to matters within the scope of the partnership. Similarly, where notices are given to a partner, this is usually deemed noticed to all partners. This is relevant where are deemed legally have or obtain knowledge of certain matters.


Partnership Litigation I

The partners may be sued in the name of the firm under Court Rules.  The proceedings against the firm constitute an action against all the partners for the time being. This procedural possibility does not affect the personal liability of the partners.

A claim arises against the persons who were the partners on the date the action arose, rather than on the date of the commencement of the proceedings.A claim against partners is not defeated by the incorrect joining or naming in the proceedings of one or more partners or parties.

The Court Rules provide that a claimant may apply to the court for a statement of the names of those who were, at the relevant time, the partners in the firm. The Court may direct that the information be furnished and verified as it sees fit.  A short form application is made to the Master of the High Court.


Partnership Litigation II

Where the firm has been dissolved to the claimant’s knowledge, he must proceed against the former partners in their individual names. He must serve each separately.

Legal proceedings may be served on one or more partners on behalf of all partners at the principal place of business of the partnership within the State on the person having control or management of the partnership business there.

Partners enter an appearance in litigation in their individual names. They do not so so in the firm name. The litigation may continue in the firm name.

A person who enters an appearance without denying that he is a partner may be held to admit that he is a partner. A person who has been served as if he was a partner, may enter an appearance on the basis that he denies that he is a partner.


Judgment Against Firm

A judgement against the firm will bind persons who are partners at the time the relevant legal claim arose. This is so even if it was made against the firm name. It has the same effect as a judgment against each, individually.

A court order against a firm may be enforced against

  • partnership property,
  • persons who enter an appearance,
  • persons deemed to be or admitting they are partners,
  • persons served as partners, but who did not appear.

A judgment can be enforced against individual partners without first having to enforce against partnership property first.

Set off will apply to partnership debts owed to and by the partnership.  However, debts owed by individual partners will be outside the scope of set off.


Taxation of Partners

Partners share the profits and losses of the partnership business directly. They are therefore directly assessed to tax on their proportionate part of the profits or losses, as the case may be.  This applies to partnerships and limited liability partnerships.

Where a partnership has employees, it will need to register for PAYE and collect and pay income tax and National Insurance contributions on their behalf.  A partnership must appoint one of its officers to make the partnership tax return. Each partner must complete his own partnership statement and personal tax returns, including in it full partnership income, capital gains and losses.


References and Sources

 

Irish Sources

Partnership Act, 1890

Partnership Law 2000 Twomey M. Butterworths

 

UK Sources

Lindley & Banks on Partnership: (19th Revised edition) 2016  Banks, Roderick I’Anson

Partnership & Llp Law (8th edition) 2015  Morse, G.

Partnership Law (5th Revised edition) 2015  Blackett-Ord, Mark; Haren, Sarah;


Partnership Act

Power of partner to bind the firm.

5. Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority, or does not know or believe him to be a partner.


Partners bound by acts on behalf of firm.

6. An act or instrument relating to the business of the firm done or executed in the firm-name, or in any other manner showing an intention to bind the firm, by any person thereto authorised, whether a partner or not, is binding on the firm and all the partners.

Provided that this section shall not affect any general rule of law relating to the execution of deeds or negotiable instruments.


Partner using credit of firm for private purposes.

7. Where one partner pledges the credit of the firm for a purpose apparently not connected with the firm’s ordinary course of business, the firm is not bound, unless he is in fact specially authorised by the other partners; but this section does not affect any personal liability incurred by an individual partner.


Effect of notice that firm will not be bound by acts of partner.

8. If it has been agreed between the partners that any restriction shall be placed on the power of any one or more of them to bind the firm, no act done in contravention of the agreement is binding on the firm with respect to persons having notice of the agreement.


Liability of partners.

9. Every partner in a firm is liable jointly with the other partners, and in Scotland severally also, for all debts and obligations of the firm incurred while he is a partner; and after his death his estate is also severally liable in a due course of administration for such debts and obligations, so far as they remain unsatisfied, but subject in England or Ireland to the prior payment of his separate debts.


Liability of the firm for wrongs.

10. Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm, or with the authority of his co-partners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefor to the same extent as the partner so acting or omitting to act.


Misapplication of money or property received for or in custody of the firm.

11. In the following cases; namely—

(a) Where one partner acting within the scope of his apparent authority receives the money or property of a third person and misapplies it; and

(b) Where a firm in the course of its business receives money or property of a third person, and the money or property so received is misapplied by one or more of the partners while it is in the custody of the firm;

the firm is liable to make good the loss.


Liability for wrongs joint and several.

12. Every partner is liable jointly with his co-partners and also severally for everything for which the firm while he is a partner therein becomes liable under either of the two last preceding sections.


Improper employment of trust-property for partnership purposes.

13. If a partner, being a trustee, improperly employs trust-property in the business or on the account of the partnership, no other partner is liable for the trust property to the persons beneficially interested therein:

Provided as follows:—

(1) This section shall not affect any liability incurred by any partner by reason of his having notice of a breach of trust; and

(2) Nothing in this section shall prevent trust money from being followed and recovered from the firm if still in its possession or under its control.


Persons liable by “holding out.”

14.—(1) Every one who by words spoken or written or by conduct represents himself, or who knowingly suffers himself to be represented, as a partner in a particular firm, is liable as a partner to any one who has on the faith of any such representation given credit to the firm, whether the representation has or has not been made or communicated to the person so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made.

(2) Provided that where after a partner’s death the partnership business is continued in the old firm’s name, the continued use of that name or of the deceased partner’s name as part thereof shall not of itself make his executors or administrators estate or effects liable for any partnership debts contracted after his death.


Admissions and representations of partners.

15. An admission or representation made by any partner concerning the partnership affairs, and in the ordinary course of its business, is evidence against the firm.


Notice to acting partner to be notice to the firm.

16. Notice to any partner who habitually acts in the partnership business of any matter relating to partnership affairs operates as notice to the firm, except in the case of a fraud on the firm committed by or with the consent of that partner.


Liabilities of incoming and outgoing partners.

17.—(1) A person who is admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything done before he became a partner.

(2) A partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations incurred before his retirement.

(3) A retiring partner may be discharged from any existing liabilities, by an agreement to that effect between himself and the members of the firm as newly constituted and the creditors, and this agreement may be either express or inferred as a fact from the course of dealing between the creditors and the firm as newly constituted.


Revocation of continuing guaranty by change in firm.

18. A continuing guaranty or cautionary obligation given either to a firm or to a third person in respect of the transactions of a firm is, in the absence of agreement to the contrary, revoked as to future transactions by any change in the constitution of the firm to which, or of the firm in respect of the transactions of which, the guaranty or obligation was given.


Rights of persons dealing with firm against apparent members of firm.

36.—(1) Where a person deals with a firm after a change in its constitution he is entitled to treat all apparent members of the old firm as still being members of the firm until he has notice of the change.

(2) An advertisement in the London Gazette as to a firm whose principal place of business is in England or Wales, in the Edinburgh Gazette as to a firm whose principal place of business is in Scotland, and in the Dublin Gazette as to a firm whose principal place of business is in Ireland, shall be notice as to persons who had not dealings with the firm before the date of the dissolution or change so advertised.

(3) The estate of a partner who dies, or who becomes bankrupt, or of a partner who, not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable for partnership debts contracted after the date of the death, bankruptcy, or retirement respectively.


Cases

Allied Pharmaceutical Distributors v. Walsh

[1990] IEHC 1

Barron J.

1. The affairs of Thorndene were worse than was originally thought and the total of the sums placed on deposit by the plaintiff have been lost. The plaintiff now seeks to recover these monies and the interest which should have been paid thereon from the partnership. The claim as formulated by the plaintiff against the defendant partnership is essentially based upon the provisions of ss. 5 and 10 of the Partnership Act, 1890, which are as follows:-

“5.        Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority, or does not know or believe him to be a partner.

10.       Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm, or with the authority of his co-partners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefore to the same extent as the partner so acting or omitting to act.”

12. These two sections are very similar in effect. The act, default or transaction Covered by the sections must be ones involving the partnership in the circumstances indicated. There must be some form of authority emanating from the partnership sufficient to impose obligations or confer rights on the partnership as the result of the dealing by the partner. It cannot be said here that the partnership was intended by either the plaintiff or Mr. Walsh to acquire rights or to incur obligations founded in contract. The claim therefore so far as it is founded in contract fails. Under s. 10 the partnership is liable for a wrongful act of a partner if it expressly authorises it or if it is something done in the ordinary course of the business of the partnership.

13. The fact that the wrongful act is carried out by a partner does not necessarily make the partnership liable even if what he does is within the ordinary course of the partnership business. In British Homes Assurance Corporation Ltd. v. Paterson [1902] 2 Ch. 404 the plaintiff dealt with his solicitor in his firm name. In the course of its dealings with him, he entered into partnership with the defendant and the name of the firm was changed. The plaintiff, when notified of the change, continued to deal with the original solicitor alone. That solicitor defaulted owing the plaintiff money. It was held that the defendant was not liable for the default. In the course of his judgment referring to ss. 10 and 11 of the Partnership Act, 1890, Farwell J. said at p.411:-

“But the words of the Act do not refer to the rights and liabilities of the partners inter se in the abstract, but only in relation to contracts made with or acts done to the detriment of third persons, and those third persons must be persons who are dealing with the partner as such, or who are in a position to elect to deal with the partner as such, or to treat his wrongful act as the act of a partner. In my opinion, the defendant does not come within the words of the Act, because I do not think that it is open to a third person to assert that the individual with whom he has intentionally contracted as an individual on his several contract, or with whom he has elected to continue a contract as with an individual, was acting in the ordinary course of the business of the firm, or was acting within the scope of his apparent authority. He knew that he was not acting, or appearing to act, for the firm at all, and he preferred to have it so.”

14. It is not open however to the remaining partners in a firm to assert that a third party dealt with the partner as an individual rather than as a partner because the nature of the work was such that it could not have been performed by the partnership. In Kirkintilloch Equitable Co-operative Society Ltd. v. Livingstone [1972] SC 111 there was a claim for damages against inter alia the auditor of the plaintiff society for professional negligence. He was a partner in a firm of accountants and they were also made defendants. They sought to be dismissed from the proceedings. The basis of their submissions was that since the partnership could not in law have been appointed to audit the books of the plaintiff company, the audit was not carried out in the ordinary course of the partnership business and so it could not have authorised the individual partner to carry out such work. Although the individual partner was the auditor of the company nevertheless the audit fee was paid to the partnership and the employees of the partnership assisted the individual partner in the audit. The submissions were rejected. It was held that the ordinary business of the partnership included audit work. In rejecting the second part of the submissions Lord Cameron said at p. 122:-

“‘Authority,’ as the word is used in section 10, appears to me to be used in the sense of control, direction, or knowing approval of the action or actions in question and the test is factual and objective. I see nothing in the Act which implies that co-partners cannot give authority to one of their number to perform, as a partner, acts which they themselves may not be legally qualified to perform.”

15. Here there is no evidence to show that the defendants expressly authorised Mr. Walsh to require or direct the deposits which are the subject matter of these proceedings. It is necessary therefore for the plaintiff to establish an ostensible authority. This does not depend upon the belief of the person dealing with the partner, but requires evidence to establish some form of representation by the partnership to such person from which it is reasonable for that person to infer the existence of the authority. In Kett v. Shannon [1987] ILRM 364 a customer of a garage with which he had left his car for repair found that it was not ready when he called for it. The mechanic on duty said that he could take another car until his own was ready. He took this car and was involved in an accident while driving it. The question arose as to whether or not he was driving it with the consent of the garage owner. There was no evidence that the owner had ever indicated to the customer that he could borrow a car in such circumstances. The mechanic had no authority from the owner to allow customers to borrow cars. It was held that before an ostensible authority could be established it was necessary that there should have been a representation of some kind by the garage owner to the customer that the mechanic had authority to lend cars. Since the evidence did not disclose any such representation the claim failed. In the course of his judgment Henchy J. cited with approval a passage from the judgment of Robert Goff L.J. in Armagas Ltd. v. Mundogas S.A. [1986] AC 717, 731, part of which was as follows:-

“The representation which creates ostensible authority may take a variety of forms; but the most common is a representation by conduct, by permitting the agent to act in some way in the conduct of the principal’s business with other persons, and thereby representing that the agent has the authority which an agent so acting in the conduct of his principal’s business usually has.”

16. Before considering directly whether or not Mr. Walsh had an ostensible authority from his partners to direct the plaintiff to make deposits with Thorndene it is necessary to determine the status of Mr. Walsh and then to determine the nature of the acts which led to the plaintiff’s loss. Mr. Walsh was employed by the plaintiff as a financial adviser. He became through Thorndene a shareholder in the plaintiff. He was also appointed a director. His expertise lay in financial matters. He was in no sense an executive of the plaintiff so far as the day to day business affairs of the plaintiff was concerned. When decisions had to be made in relation to financial matters whether day to day or long term, it was he who made the executive decision. His work in relation to the plaintiff was carried out in his office in the offices of the defendants. He made the decisions and these were carried out by a senior manager on the staff of the defendants in co-operation with Mr. Slattery. He was not paid a salary by the company. The remuneration for his services including his attendance at board meetings was calculated on a time basis and charged to the plaintiff by the defendants who received it. In my view, Mr. Walsh was at all times concerned with the affairs of the plaintiff as a partner in the defendant firm. Nevertheless his position was not solely that of a professional adviser. It was substantially that of an executive. He did not give his professional opinion as to courses to be adopted by the plaintiff. He actually made the decisions. So far as his relationship with Mr. Slattery was concerned, the latter was under instructions from Mr. Landers to carry out his directions. Mr. Walsh was well aware of this.

17. It was this relationship and Mr. Walsh’s position within the plaintiff which made it possible for him to procure the deposits which have been lost. Had he been purely a professional offering his opinion, Mr. Slattery and indeed Mr. Landers also would have had to consider his advice in relation to making such deposits. No doubt had they done so, they would not have made them. But he did not offer advice to the plaintiff, he told Mr. Slattery what to do. As Mr. Tempany said, the calls to Mr. Slattery to send on the cheques were acts done in an executive capacity.

18. I have no doubt that if Mr. Walsh’s position had been as an accountant solely then Mr. Slattery would have seen the requests for deposits for what they really were, private transactions made for his own purposes. But because of the manner in which he was involved in the plaintiff he succeeded in disguising them as transactions made in the interests of the plaintiff.

19. What had occurred was that Mr. Walsh had placed himself in a position where his interest and his duty were in conflict. His duty was to offer advice only so long as he was being remunerated as a partner in an accountancy firm. The interests of the client were paramount. He allowed himself to depart from this role by becoming a shareholder, a director and an executive. Having built up a position of trust within the company, he abused that trust. Not surprisingly the ethical code of his profession advised against members of that profession having shareholdings and directorships with client companies. It advised also against making loans to or taking loans from clients. This advice was given to protect its members from the very conflict between interest and duty which enmeshed Mr. Walsh.

20. The deposits were obtained by Mr. Walsh while a partner in the defendant firm. The defendants submit that the ordinary business of the firm did not include giving investment advice. I accept the defendants’ submission that the firm does not give investment advice and that if a client wanted such advice it would introduce him or her to a stockbroker or merchant banker. The question does not depend for its answer on whether or not the firm gave investment advice. The question to be answered is whether in doing what he did Mr. Walsh was carrying out the ordinary business of the partnership. It was clearly the ordinary business of the partnership to allow one of its number to be a director and even a chairman of a board of directors of a client company. It was the ordinary business of the partnership to allow an individual partner in such a position to take deposits from client companies for his own private company. It was equally the ordinary business of the partnership that such partner having such positions in client companies should make decisions directing client companies how to apply their monies. Taking these factors into account it seems to me that what Mr. Walsh was doing when deciding to direct the making of the deposits with Thorndene was something done within the ordinary business of the partnership.

21. Nevertheless it is essential that there should have been a representation by the partnership to the plaintiff that such conduct had its approval. The representation does not have to be made in writing or even orally. It is sufficient if it is made by conduct which is the normal way in which an ostensible authority is established. Here the defendant firm was also the auditor of the plaintiff. As such it would have had to have been aware of the transactions with Thorndene. At no time did it suggest to the plaintiff that there was anything unusual or improper in making the deposits. There was nothing to suggest to the plaintiff that it should not effect similar transactions in future. In my view, the absence of any comment from the defendant firm was a sufficient representation by conduct that Mr. Walsh had the authority of the defendants to direct the making of such deposits.

Kett v. Shannon [1987] ILRM 364 is a case of principal and agent. In my view the position is stronger when the alleged agency arises between partners. The basis of partnership is mutual trust between the partners. When one partner is put into a position of trust with a client in my view that alone is a representation that the partnership trusts that partner and will stand over whatever he does.

22. I have already dealt with the knowledge of the defendants of the conduct of Mr. Walsh in relation to the taking of deposits by Thorndene. Once they were aware that he was taking or likely to take such deposits then their failure to take any steps to prevent him from so acting imposes a liability upon them. In Mercantile Credit Co. Ltd. v. Garrod [1962] 3 All E.R. 1103, there was a claim by a hire purchase finance company against the owners of a garage for breach of warranty of title of a motor car sold to the finance company in the course of a hire purchase transaction between the finance company and a customer of the garage. There were two partners one of whom was a sleeping partner. It was a term of the partnership agreement that cars should not be bought and sold. The sleeping partner became aware that his partner was in fact making sales of cars. It was held on this ground as well as on other grounds that the sleeping partner was liable in damages to the finance company. At p. 1107 Mocatta J. held:-

“…the defendant had known since April, 1960, that Mr. Parkin had been selling cars in the firm’s name and that he intended to continue doing so, and following Rapp v. Latham (1819) 2 B. & Ald. 795, that the defendant, having taken no steps to prevent such sales, was liable for his partner’s actions.”

23. The defendants have submitted that the taking of the deposits was clearly an independent transaction and one having no connection with his position as financial adviser to the plaintiff. I cannot accept that submission. What he did, he did in his position as a financial adviser to the plaintiff. In so doing he owed the plaintiff a duty of care. Having regard to the financial state of Thorndene at the material times, he ought not to have directed such deposits and in so doing was in breach of his duty of care to the plaintiff. This case has been put forward by the plaintiff as one in which an honest adviser directed the plaintiff to make the particular deposit. This has not been contested. As I pointed out during the course of the hearing no suggestion was being made by either party that the actions of Mr. Walsh were dishonest in any way. I should add that neither Mr. Walsh nor his secretary gave evidence and that therefore a decision of the court as to the involvement of the partnership has had to be made in the absence of what is in effect the most relevant evidence. I am satisfied that the defendant partnership is liable for this breach of duty on the part of Mr. Walsh for the reasons and also on the bases which I have indicated. “


Dubai Aluminium Company Ltd v. Salaam

[2002] UKHL 48

HOUSE OF LORDS

LORD NICHOLLS OF BIRKENHEAD

    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.

    23. If, then, authority is not the touchstone, what is? Lord Denning MR once said that on this question the cases are baffling: see Morris v C W Martin & Sons Ltd [1966] 1 QB 716, 724. Perhaps the best general answer is that the wrongful conduct must be so closely connected with acts the partner or employee was authorised to do that, for the purpose of the liability of the firm or the employer to third parties, the wrongful conduct may fairly and properly be regarded as done by the partner while acting in the ordinary course of the firm’s business or the employee’s employment. Lord Millett said as much in Lister v Hesley Hall Ltd [2002] 1 AC 215, 245. So did Lord Steyn, at pp 223-224 and 230. McLachlin J said, in Bazley v Curry (1999) 174 DLR (4th) 45, 62:

‘the policy purposes underlying the imposition of vicarious liability on employers are served only where the wrong is so connected with the employment that it can be said that the employer has introduced the risk of the wrong (and is thereby fairly and usefully charged with its management and minimization).’ (Emphasis added)

To the same effect is Professor Atiyah’s monograph Vicarious Liability in the Law of Torts, (1967) p 171:

‘The master ought to be liable for all those torts which can fairly be regarded as reasonably incidental risks to the type of business he carried on’. (Emphasis added)

    24. In these formulations the phrases ‘may fairly and properly be regarded’, ‘can be said’, and ‘can fairly be regarded’ betoken a value judgment by the court. The conclusion is a conclusion of law, based on primary facts, rather than a simple question of fact.

    25. This ‘close connection’ test focuses attention in the right direction. But it affords no guidance on the type or degree of connection which will normally be regarded as sufficiently close to prompt the legal conclusion that the risk of the wrongful act occurring, and any loss flowing from the wrongful act, should fall on the firm or employer rather than the third party who was wronged. It provides no clear assistance on when, to use Professor Fleming’s phraseology, an incident is to be regarded as sufficiently work-related, as distinct from personal: see Fleming, The Law of Torts, 9th ed (1998), p 427. Again, the well-known dictum of Lord Dunedin in Plumb vCobden Flour Mills Co Ltd [1914] AC 62, 67, draws a distinction between prohibitions which limit the sphere of employment and those which only deal with conduct within the sphere of employment. This leaves open how to recognise the one from the other.

    26. This lack of precision is inevitable, given the infinite range of circumstances where the issue arises. The crucial feature or features, either producing or negativing vicarious liability, vary widely from one case or type of case to the next. Essentially the court makes an evaluative judgment in each case, having regard to all the circumstances and, importantly, having regard also to the assistance provided by previous court decisions. In this field the latter form of assistance is particularly valuable.

    31. In Hamlyn v John Houston & Co [1903] 1 KB 81, 85, one aspect of the business of the defendant firm of grain merchants was to obtain, by lawful means, information about its competitors’ activities. Houston, a partner in the firm, obtained confidential information on the plaintiff Hamlyn’s business by bribing one of Hamlyn’s employees. The Court of Appeal held the firm was liable for the loss suffered by Hamlyn. Collins MR said that if it was within the scope of Houston’s authority to obtain the 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. Collins MR rested his decision on the broad ‘risk’ principle: the principal having selected the agent, and being 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 case of Mara v Browne

    40. I must also mention a passing dictum of Lord Herschell sitting in the Court of Appeal in Mara v Browne [1896] 1 Ch 199, 208, to the effect that it is not within the scope of the implied authority of a partner in a firm of solicitors that he should so act to make himself a constructive trustee, and thereby subject his partner to the same liability: see also A L Smith LJ at page 212, and Rigby LJ at page 214.

    41. These dicta do not assist the respondents in the present case. The claim against Mr Amhurst is that he dishonestly procured or assisted Mr Livingstone to commit a breach of the fiduciary duty he owed Dubai Aluminium. Such misconduct by Mr Amhurst gives rise to a liability in equity to make good resulting loss: see : Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, 392. The liability of a firms of solicitors in respect of acts of a partner which render him liable in this way depends upon an application of the ordinary principles relating to vicarious liability. There is no special rule of law applicable to this head of equitable liability.

    42. I do not think Lord Herschell or the other members of the Court of Appeal can be taken as suggesting otherwise. Their statements in Mara v Browne should not be so read. In so far as Vinelott J did so read these statements, or did so decide, in In re Bell’s Indenture [1980] 1 WLR 1217, 1230, I respectfully consider he fell into error. The statements in Mara v Browne were directed at a different question : whether acting as a trustee, although not having been so appointed, can be regarded as conduct within the scope of the business of a solicitor. Whether the views expressed by the Court of Appeal on this question are still good law, having regard to later developments in the principles relating to vicarious liability, is a matter I prefer to leave for another occasion.


Allied Pharmaceutical Distributors Ltd. v. Walsh

 [1991] 2 I.R. 14

Barron J.             

“The affairs of Thorndene were worse than was originally thought and the total of the sums placed on deposit by the plaintiff have been lost. The plaintiff now seeks to recover these monies and the interest which should have been paid thereon from the partnership. The claim as formulated by the plaintiff against the defendant partnership is essentially based upon the provisions of ss. 5 and 10 of the Partnership Act, 1890, which are as follows:

 “5. Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority, or does not know or believe him to be a partner.

 10. Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm, or with the authority of his co-partners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefor to the same extent as the partner so acting or omitting to act.”

 These two sections are very similar in effect. The act, default or transaction covered by the sections must be ones involving the partnership in the circumstances indicated. There must be some form of authority emanating from the partnership sufficient to impose obligations or confer rights on the partnership as the result of the dealing by the partner. It cannot be said here that the partnership was intended by either the plaintiff or Mr. Walsh to acquire rights or to incur obligations founded in contract. The claim therefore so far as it is founded in contract fails. Under s. 10 the partnership is liable for a wrongful act of a partner if it expressly authorises it or if it is something done in the ordinary course of the business of the partnership.

 The fact that the wrongful act is carried out by a partner does not necessarily make the partnership liable even if what he does is within the ordinary course of the partnership business. In  British Homes Assurance Corporation Ltd. v. Paterson [1902] 2 Ch. 404 the plaintiff dealt with his solicitor in his firm name. In the course of its dealings with him, he entered into partnership with the defendant and the name of the firm was changed. The plaintiff, when notified of the change, continued to deal with the original solicitor alone. That solicitor defaulted owing the plaintiff money. It was held that the defendant was not liable for the default. In the course of his judgment referring to ss. 10 and 11 of the Partnership Act, 1890, Farwell J. said at p. 411:

 “But the words of the Act do not refer to the rights and liabilities of the partners inter se in the abstract, but only in relation to contracts made with or acts done to the detriment of third persons, and those third persons must be persons who are dealing with the partner as such, or who are in a position to elect to deal with the partner as such, or to treat his wrongful act as the act of a partner. In my opinion, the defendant does not come within the words of the Act, because I do not think that it is open to a third person to assert that the individual with whom he has intentionally contracted as an individual on his several contract, or with whom he has elected to continue a contract as with an individual, was acting in the ordinary course of the business of the firm, or was acting within the scope of his apparent authority. He knew that he was not acting, or appearing to act, for the firm at all, and he preferred to have it so.”

 It is not open however to the remaining partners in a firm to assert that a third party dealt with the partner as an individual rather than as a partner because the nature of the work was such that it could not have been performed by the partnership. In  Kirkintilloch Equitable Co-operative Society Ltd. v. Livingstone  [1972] S.C. 111 there was a claim for damages against inter alia the auditor of the plaintiff society for professional negligence. He was a partner in a firm of accountants and they were also made defendants. They sought to be dismissed from the proceedings. The basis of their submissions was that since the partnership could not in law have been appointed to audit the books of the plaintiff company, the audit was not carried out in the ordinary course of the partnership business and so it could not have authorised the individual partner to carry out such work. Although the individual partner was the auditor of the company nevertheless the audit fee was paid to the partnership and the employees of the partnership assisted the individual partner in the audit. The submissions were rejected. It was held that the ordinary business of the partnership included audit work. In rejecting the second part of the submissions Lord Cameron said at p. 122:

 “‘Authority,’ as the word is used in section 10, appears to me to be used in the sense of control, direction, or knowing approval of the action or actions in question and the test is factual and objective. I see nothing in the Act which implies that co-partners cannot give authority to one of their number to perform, as a partner, acts which they themselves may not be legally qualified to perform.”

 Here there is no evidence to show that the defendants expressly authorised Mr. Walsh to require or direct the deposits which are the subject matter of these proceedings. It is necessary therefore for the plaintiff to establish an ostensible authority. This does not depend upon the belief of the person dealing with the partner, but requires evidence to establish some form of representation by the partnership to such person from which it is reasonable for that person to infer the existence of the authority. In  Kett v. Shannon  [1987] I.L.R.M. 364 a customer of a garage with which he had left his car for repair found that it was not ready when he called for it. The mechanic on duty said that he could take another car until his own was ready. He took this car and was involved in an accident while driving it. The question arose as to whether or not he was driving it with the consent of the garage owner. There was no evidence that the owner had ever indicated to the customer that he could borrow a car in such circumstances. The mechanic had no authority from the owner to allow customers to borrow cars. It was held that before an ostensible authority could be established it was necessary that there should have been a representation of some kind by the garage owner to the customer that the mechanic had authority to lend cars. Since the evidence did not disclose any such representation the claim failed. In the course of his judgment Henchy J. cited with approval a passage from the judgment of Robert Goff L.J. in Armagas Ltd. v. Mundogas S.A.  [1986] A.C. 717, 731, part of which was as follows:

 “The representation which creates ostensible authority may take a variety of forms; but the most common is a representation by conduct, by permitting the agent to act in some way in the conduct of the principal’s business with other persons, and thereby representing that the agent has the authority which an agent so acting in the conduct of his principal’s business usually has.”

 Before considering directly whether or not Mr. Walsh had an ostensible authority from his partners to direct the plaintiff to make deposits with Thorndene it is necessary to determine the status of Mr. Walsh and then to determine the nature of the acts which led to the plaintiff’s loss. Mr. Walsh was employed by the plaintiff as a financial adviser. He became through Thorndene a shareholder in the plaintiff. He was also appointed a director. His expertise lay in financial matters. He was in no sense an executive of the plaintiff so far as the day to day business affairs of the plaintiff was concerned. When decisions had to be made in relation to financial matters whether day to day or long term, it was he who made the executive decision. His work in relation to the plaintiff was carried out in his office in the offices of the defendants. He made the decisions and these were carried out by a senior manager on the staff of the defendants in co-operation with Mr. Slattery. He was not paid a salary by the company. The remuneration for his services including his attendance at board meetings was calculated on a time basis and charged to the plaintiff by the defendants who received it. In my view, Mr. Walsh was at all times concerned with the affairs of the plaintiff as a partner in the defendant firm. Nevertheless his position was not solely that of a professional adviser. It was substantially that of an executive. He did not give his professional opinion as to courses to be adopted by the plaintiff. He actually made the decisions. So far as his relationship with Mr. Slattery was concerned, the latter was under instructions from Mr. Landers to carry out his directions. Mr. Walsh was well aware of this.

 It was this relationship and Mr. Walsh’s position within the plaintiff which made it possible for him to procure the deposits which have been lost. Had he been purely a professional offering his opinion, Mr. Slattery and indeed Mr. Landers also would have had to consider his advice in relation to making such deposits. No doubt had they done so, they would not have made them. But he did not offer advice to the plaintiff, he told Mr. Slattery what to do. As Mr. Tempany said, the calls to Mr. Slattery to send on the cheques were acts done in an executive capacity.

 I have no doubt that if Mr. Walsh’s position had been as an accountant solely then Mr. Slattery would have seen the requests for deposits for what they really were, private transactions made for his own purposes. But because of the manner in which he was involved in the plaintiff he succeeded in disguising them as transactions made in the interests of the plaintiff.

 What had occurred was that Mr. Walsh had placed himself in a position where his interest and his duty were in conflict. His duty was to offer advice only so long as he was being remunerated as a partner in an accountancy firm. The interests of the client were paramount. He allowed himself to depart from this role by becoming a shareholder, a director and an executive. Having built up a position of trust within the company, he abused that trust. Not surprisingly the ethical code of his profession advised against members of that profession having share holdings and directorships with client companies. It advised also against making loans to or taking loans from clients. This advice was given to protect its members from the very conflict between interest and duty which enmeshed Mr. Walsh.

 The deposits were obtained by Mr. Walsh while a partner in the defendant firm. The defendants submit that the ordinary business of the firm did not include giving investment advice. I accept the defendants’ submission that the firm does not give investment advice and that if a client wanted such advice it would introduce him or her to a stockbroker or merchant banker. The question does not depend for its answer on whether or not the firm gave investment advice. The question to be answered is whether in doing what he did Mr. Walsh was carrying out the ordinary business of the partnership. It was clearly the ordinary business of the partnership to allow one of its number to be a director and even a chairman of a board of directors of a client company. It was the ordinary business of the partnership to allow an individual partner in such a position to take deposits from client companies for his own private company. It was equally the ordinary business of the partnership that such partner having such positions in client companies should make decisions directing client companies how to apply their monies. Taking these factors into account it seems to me that what Mr. Walsh was doing when deciding to direct the making of the deposits with Thorndene was something done within the ordinary business of the partnership.

 Nevertheless it is essential that there should have been a representation by the partnership to the plaintiff that such conduct had its approval. The representation does not have to be made in writing or even orally. It is sufficient if it is made by conduct which is the normal way in which an ostensible authority is established. Here the defendant firm was also the auditor of the plaintiff. As such it would have had to have been aware of the transactions with Thorndene. At no time did it suggest to the plaintiff that there was anything unusual or improper in making the deposits. There was nothing to suggest to the plaintiff that it should not effect similar transactions in future. In my view, the absence of any comment from the defendant firm was a sufficient representation by conduct that Mr. Walsh had the authority of the defendants to direct the making of such deposits.

Kett v. Shannon  [1987] I.L.R.M. 364 is a case of principal and agent. In my view the position is stronger when the alleged agency arises between partners. The basis of partnership is mutual trust between the partners. When one partner is put into a position of trust with a client in my view that alone is a representation that the partnership trusts that partner and will stand over whatever he does.

 I have already dealt with the knowledge of the defendants of the conduct of Mr. Walsh in relation to the taking of deposits by Thorndene. Once they were aware that he was taking or likely to take such deposits then their failure to take any steps to prevent him from so acting imposes a liability upon them. In Mercantile Credit Co. Ltd. v. Garrod  [1962] 3 All E.R. 1103, there was a claim by a hire purchase finance company against the owners of a garage for breach of warranty of title of a motor car sold to the finance company in the course of a hire purchase transaction between the finance company and a customer of the garage. There were two partners one of whom was a sleeping partner. It was a term of the partnership agreement that cars should not be bought and sold. The sleeping partner became aware that his partner was in fact making sales of cars. It was held on this ground as well as on other grounds that the sleeping partner was liable in damages to the finance company. At p. 1107 Mocatta J. held:

 “. . . the defendant had known since April, 1960, that Mr. Parkin had been selling cars in the firm’s name and that he intended to continue doing so, and following  Rapp v. Latham  (1819) 2 B. & Ald. 795, that the defendant, having taken no steps to prevent such sales, was liable for his partner’s actions.”

 The defendants have submitted that the taking of the deposits was clearly an independent transaction and one having no connection with his position as financial adviser to the plaintiff. I cannot accept that submission. What he did, he did in his position as a financial adviser to the plaintiff. In so doing he owed the plaintiff a duty of care. Having regard to the financial state of Thorndene at the material times, he ought not to have directed such deposits and in so doing was in breach of his duty of care to the plaintiff. This case has been put forward by the plaintiff as one in which an honest adviser directed the plaintiff to make the particular deposit. This has not been contested. As I pointed out during the course of the hearing no suggestion was being made by either party that the  actions of Mr. Walsh were dishonest in any way. I should add that neither Mr. Walsh nor his secretary gave evidence and that therefore a decision of the court as to the involvement of the partnership has had to be made in the absence of what is in effect the most relevant evidence. I am satisfied that the defendant partnership is liable for this breach of duty on the part of Mr. Walsh for the reasons and also on the bases which I have indicated.”