The case of Campbell v Campbell  serves as a prime example of the need for business partners trading through any type of business vehicle to record the precise terms of their business relationship with one another at the outset. It is also a good illustration of a WATNA (worst alternative to a negotiated agreement).
Two brothers had been in partnership in an international jewellery business for 26 years, but then fell out as to the respective shares of the business that each owned, and the extent of the business assets, in particular whether one of the brothers had an interest only in assets in England, and thus had no interest in assets (a number of trading companies) in Thailand, the British Virgin Islands, Jersey and New York, or whether those foreign assets were all assets of the partnership.
In addition, one of the partners accused the other of extensive breaches of his duties as a partner, resulting in substantial losses to the partnership.
It was further asserted by one of the partners that dealings alleged to have caused loss within the companies should be explored as separate actions brought by each such company, rather than being dealt with in these partnership dissolution proceedings. This assertion was based on what is known as the “no reflective loss” principle, the effect of which is that where a company suffers loss caused by a breach of duty owed to it, only the company (not its shareholders) may sue in respect of that loss.
By virtue of the numerous issues of fact and law, at trial it was necessary for the long history of the partnership to be explored in detail through the cross-examination of not only the brothers but also other witnesses, including foreign lawyers. In consequence the trial extended over seven hearing days (remarkably brief in the circumstances), and no doubt the preparation for the trial was extensive. This would all have involved considerable expense.
The court’s powers
In his judgment the judge reviewed the wide powers and discretions of the court in partnership dissolution proceedings. These include, for example, the powers to distribute assets between partners rather than ordering that they should be sold, to divide up interests in land, and to permit (or in an appropriate case require) one partner to buy out the interest of another.
The court can also order a partner to pay to the other partner an amount determined by the court in respect of a particular asset or assets appropriated by him as his own.
When ordering a sale of assets, the court has power to determine the method of marketing and who should have conduct of the sale.
The court can also, as part of the wider account between the partners, determine sub-issues concerning claims for damages or an account of profits brought by one or more partners against one or more other partners in connection with breaches of duty by those other partners, bringing all of the pluses and minuses into account in the overall accounting between the partners, so as to arrive at overall net figures that each partner either must pay or is entitled to receive.
As part of the process of winding up the court can also order the winding up of corporations which are part of the partnership structure.
Other claims and remedies
It is a feature of partnership dissolution that (subject to certain exceptions) in the taking of an account between partners the court is not limited as to how far back in time the account can reach. Potentially, therefore, in this case the account might have stretched back for the entire 26 years of the partnership relationship. In the event the court took a pragmatic view and limited the account to 10 years (no doubt a massive undertaking nonetheless).
In relation to the “no reflective loss” arguments, the court took the view that that principle had no application in this particular case. It reached that conclusion on the basis that the remedies that it would impose would be firstly for accounting between the parties under the personal duties that they owed to each other, and secondly for a division of the partnership and the assets which took into account the valuations of the companies, and did not therefore interfere with or otherwise seek to resolve any claims which each company might have against the partner concerned.
While the “no reflective loss” principle was deftly side-stepped in this way in this case, it is clear that the principle may well have to be taken into account in other cases involving partnerships which own trading companies.
The court also had to analyse a number of scenarios in which one of the partners had incurred legal costs which he was claiming as damages.
Legal costs can in principle be recovered as damages in a claim provided that they have not been incurred by reason of the prosecution of the claim itself, but rather have been incurred by reason of the breaches of duty being complained of. Thus, costs that have been incurred in foreign proceedings, even if irrecoverable in the foreign court, can be claimed as damages in separate proceedings in England, and costs incurred in previous proceedings between the person now claiming and a third party can also be claimed as damages.
We cannot know the precise nature of the final order for an account that was made by the court in this case, since the court sent the parties away to consider between themselves after judgment what proposals they wished to make to the court as to the precise terms that that order should contain.
However what is apparent from the judgment is that the court was minded to to divide up assets between the partners rather than requiring them all to be sold.
In the absence of any contrary agreement, however, it is apparent that following numerous findings of fact by the court at the trial and decisions as to the nature of the remedies that would be granted, this case will go on to a second round in which the appropriate accounts will be taken between the parties, in order to determine what sums should be paid from one to the other to compensate for breaches of duty. This is potentially a long, tortuous and very expensive process.
Lessons to be learned
All or at least much of this could have been avoided had the partners ensured at the outset that they wrote down the terms on which they were in business together and kept full and accurate accounts and made full disclosure of all dealings throughout, or failing the cooperation of one or other of the partners in doing that, brought their relationship to an end much earlier than 26 years in. Clearly, a problem nipped in the bud at an early stage is much easier to resolve.
The judge’s closing words could not be more apposite:
“Whilst I am grateful to counsel and solicitors for their presentation and assistance in this matter, the legal battles raging between these two brothers are unedifying, unpleasant and exceptionally wasteful. They must obviously be inflicting pain and harm on others, as well as themselves. I urge them on both sides, with the assistance of their lawyers, to give peace (of some sort) a chance; and whatever the feelings and obstacles, to make supreme efforts to resolve or at least reduce their remaining differences, before it is too late.”
Related postsInterim payment awarded against a partner prior to the taking of a partnership dissolution account
Court-ordered transfer of farm partnership interest following repeated promises
Relief from sanctions in a partnership account
Recovering debts owed by partners or LLP members
Comments on the Chancellor's Autumn Statement 2016
Please subscribe to receive my email bulletins
I would like to email you occasional business partnership law news and updates, including articles on:
- New case law
- New legislation and regulatory provisions
- Business partnership dispute law and practice
- Drafting of partnership and LLP agreements
To subscribe, please complete the form on the right and click the subscribe button.