Pickard & Anor (t/a Jacksons) v Orpwood

Where a partnership deed defines the basis for calculating a retiring partner’s entitlement, the calculation must follow the contractual formula and the partnership accounts identified by it. Evidence that one business later assumed another business’s debts does not, without agreement or formal variation, permit historic profit-and-loss accounts to be reconstructed as including losses they did not contain. The treatment of liabilities and the modification of the contractual basis for valuing a retiring partner’s share are distinct matters.

The respondents and the appellant were partners in an estate agency and surveying business conducted principally at Hove. The appellant retired in 1992. The partnership deed provided for the purchase of an outgoing partner’s share, including a goodwill element calculated by reference to average annual net profits.

A related Worthing business had incurred losses and had been financially supported by the Hove partnership. The trial judge concluded that the Worthing losses had become part of the overall partnership trading and ordered that they be included in calculating the appellant’s entitlement. The appeal, brought with partial permission from Brighton County Court, concerned whether that conclusion was consistent with the deed and the relevant Hove accounts.

1. Appeal allowed. Lord Justice Laws gave the leading judgment, and Lord Justice Mance agreed with his reasoning and conclusions. The appeal concerned the orders requiring Worthing’s net losses to be included in the calculation of average annual net profits and the consequential payment order.
2. Paragraph 4 of the schedule to the deed calculated the purchase price of a retiring partner’s share partly by reference to goodwill. Under paragraph 5(2), annual net profits meant the annual net revenue profits shown in the partnership’s profit-and-loss account, after specified charges, provisions and credits, including depreciation, but excluding income tax.
3. The relevant Hove profit-and-loss accounts did not include losses of the Worthing practice. The evidence showed that Hove had supported Worthing financially and that Worthing liabilities were later treated as Hove liabilities. That evidence could justify accounting for the debts and liabilities, but it did not establish that the historic Hove trading accounts included Worthing’s losses.
4. The respondents’ argument required the court to go behind the plain contractual wording and treat the parties’ conduct as producing the effect of a formal amalgamation or contractual variation. No amendment to the 1982 deed or formal amalgamation had been made. Treating Worthing debts as Hove debts was materially different from altering the agreed basis for calculating the retiring partner’s purchase price.
5. The trial judge had therefore confused the treatment of Worthing liabilities with a modified arrangement governing the retirement valuation. The inclusion of Worthing’s losses under paragraph 5(2) was not legitimate. Appeal allowed; a minute of order was to be lodged.

1. Court of Appeal (Civil Division) — On appeal with partial permission, the court allowed the appeal against the relevant orders made after trial, holding that the Worthing losses could not be included in the contractual calculation of annual net profits. [2002] EWCA Civ 1968
2. Brighton County Court — His Honour Judge Kennedy ordered that the Worthing losses be included in calculating average annual net profits and made a consequential payment order. The Court of Appeal disagreed with that construction of the partnership deed.