M Young Legal Associates Ltd v Zahid (a firm) & Ors

A person may be a partner although entitled only to fixed remuneration that is independent of the business’s profits. Under Partnership Act 1890, section 1(1), the decisive inquiry is whether persons carry on a business in common with a view to profit. Profit-sharing, capital contribution and the label used by the parties are relevant but not conclusive.

The court must assess the substance of the whole agreement, including whether the parties have mutual agency. A genuine agreement intended to meet a regulatory requirement that a person be a partner may establish a partnership despite features that commonly point towards employment.

The claimant alleged that a solicitors’ firm owed it money under a contract concerning litigation funding and insurance. It contended that Mr Lees was a partner in the firm and was therefore jointly liable. Mr Lees received a fixed annual sum, contributed no capital and had a limited practical role. He denied that he had ever been a partner.

On a preliminary issue, HHJ Howarth declared that Mr Lees had been a partner. Mr Lees appealed. The firm could lawfully practise at its outset only if it had a principal solicitor qualified to supervise under rule 13 of the Solicitors’ Practice Rules 1990. The central question was whether fixed remuneration, irrespective of profit, precluded partnership.

Appeal dismissed. Lords Justices Wilson, Hughes and Tuckey agreed that Mr Lees was a partner.

1. Section 1(1) of the Partnership Act 1890 defines partnership as persons carrying on a business in common with a view to profit. It does not require an agreement that each partner share the profits. To add that requirement would be inconsistent with the statutory definition and thus impermissible under section 46.
2. Fixed remuneration irrespective of profits does not prevent partnership. It is usually a strong indicator against partnership, as is the absence of a capital contribution, but neither is decisive. The court must examine the substance of the parties’ agreement and all its features, including whether each was to be bound by acts of the others within their authority, an incident of partnership reflected in section 5. The court approved the analysis in Stekel v Ellice [1973] 1 WLR 191: “salaried partner” is not a legal category that resolves the question.
3. The judge was entitled to find that the parties genuinely intended to comply with rule 13 of the Solicitors’ Practice Rules 1990, rather than merely pretend to do so. At the material time the practice could lawfully operate only if Mr Lees was a partner. That regulatory context, together with the finding that the arrangement was not a sham, was determinative despite the fixed payment and lack of capital contribution.

Lord Justice Hughes, with whom Lord Justice Tuckey agreed on this point, considered it unnecessary to decide whether profit-sharing had been essential before the 1890 Act. That historical issue did not affect the statutory conclusion.

• Court of Appeal (Civil Division): dismissed Mr Lees’s appeal in [2006] EWCA Civ 613 and upheld the declaration that he was a partner.
• High Court of Justice, Chancery Division, Manchester District Registry: HHJ Howarth determined a preliminary issue on 26 August 2005 and declared that Mr Lees was a partner in the firm.