J. J. Coughlan Ltd. v Ruparelia & Ors

For partnership liability under sections 5 and 10 of the Partnership Act 1890, it is not enough to label an act as belonging to a solicitor’s general business. The court must examine the substance, details and characteristics of the transaction. The partner’s motive remains irrelevant, but an extraordinary transaction may fall outside the ordinary course. A third party must also rely on ostensible authority and must not know or believe that the partner lacks it.

A ground-work contractor paid US$500,000 into a solicitors’ firm’s account under an alleged investment arrangement promising US$2.5 million in one month. The claimant sued the partner in deceit and claimed breach of an Escrow Agreement against the partnership. Mackay J found the partner liable but dismissed the claims against the firm, holding that the acts were outside the ordinary course of its business. The claimant appealed on the proper approach to sections 5 and 10 and the significance of the transaction’s abnormal features.

Dyson LJ gave the leading judgment. Longmore LJ and Peter Gibson LJ agreed, and the appeal was unanimously dismissed.

1. Applicable inquiry. Under sections 5 and 10 of the Partnership Act 1890, the central question is whether the acts are of the kind or class carried out by solicitors in the ordinary course of their business. A general classification is necessary but may not be sufficient. The court must examine the substance, details, nature and characteristics of the transaction. The objective question is how the transaction reasonably appeared to the third party.
2. Motive and reliance. A solicitor’s dishonest motive does not remove an act from the ordinary course, just as an honest motive cannot bring a non-solicitorial act within it. The policy favouring a liberal approach to vicarious liability does not require the court to disregard the true nature of the acts. A principal is not liable where the third party knew or believed that the agent lacked the relevant authority.
3. Close connection. For section 10, the court also applied the broader test stated in Dubai Aluminium: whether, having regard to all the circumstances, the wrongful acts were sufficiently closely connected with authorised acts to be fairly and properly regarded as done in the ordinary course of the firm’s business. See [2002] 2 WLR 1913, including paras 23 and 124.
4. Sham agreements. The agreements were not shams in the strict sense. A sham requires a common intention that the document should not create the legal relations and obligations it purports to create, applying Snook v London and West Riding Investments Ltd [1967] 2 QB 786. False recitals and statements were nevertheless relevant because they showed willingness to participate in false statements, although they would not alone have avoided liability if the scheme were otherwise unremarkable.
5. Application. The promised risk-free return of US$2.5 million on a US$500,000 payment within one month, annualised at 6,000 per cent, made the transaction preposterous and outside the ordinary business of solicitors. The Escrow Agreement was therefore not binding on the firm under section 5, and the firm was not liable for the partner’s torts under section 10. The appeal was dismissed.

1. Court of Appeal (Civil Division) — unanimously dismissed the claimant’s appeal: the Escrow Agreement did not bind the firm and the firm was not liable for the partner’s torts. [2003] EWCA Civ 1057.
2. Queen’s Bench Division (Mackay J) — found against Mr Ruparelia personally in deceit and contract, but dismissed the claims against the partnership.