Rowlands v Hodson

A partnership exists where two or more persons carry on a business in common with a view of profit. Receipt of a share of profits is neither conclusive evidence nor a prerequisite of partnership.

Partnership is a contractual relationship carrying benefits, burdens and joint and several responsibility for the firm’s liabilities. A partner’s inactivity, illness, modest contribution or failure to collect an agreed profit share does not by itself dissolve the partnership. Where a partnership agreement governs the relationship, dissolution requires an effective contractual basis or an express or implied agreement.

A solicitor entered into a three-year partnership deed under which she retained a 1% interest in a practice acquired by another solicitor. The arrangement initially enabled her to provide the professional supervision required by the Solicitors’ Practice Rules 1990. After the Law Society dispensed with supervision, she remained named as a partner and continued limited work, use of the firm’s bank account and enjoyment of its insurance cover, but received no share of its profits.

Following an earlier professional-negligence judgment against the firm, the claimant added her as a defendant so that he could enforce part of that judgment against her. Arnold J determined the preliminary issue by declaring that she had remained a partner throughout the deed’s three-year term: [2009] EWHC 430 (Ch). The central issue on appeal was whether the parties’ conduct had prevented the deed from creating a true partnership or had impliedly dissolved that partnership before the relevant liability arose.

1. Appeal dismissed. Rimer LJ, with whom Arden and Sedley LJJ agreed, held that the appellant was a true partner from 1 August 2000 until 31 July 2003. The partnership deed genuinely created that relationship and was not a sham. The parties acted under it throughout its stated term.

2. The three requirements in section 1 of the Partnership Act 1890 were satisfied. There was a business carried on by two persons in common with a view of profit. The appellant performed little fee-earning work, but her intended and actual supervisory role had initially enabled the practice to operate. She also undertook occasional work, used the firm’s bank account, assumed overdraft liability and received insurance protection.

3. Receipt of profits was not a prerequisite of partnership. Section 2(3) made receipt of a profit share only prima facie evidence and provided that receipt did not, by itself, make a person a partner. M. Young Legal Associates Ltd v Zahid Solicitors (a firm) and Others [2006] EWCA Civ 613 confirmed that a retired solicitor appointed solely to satisfy professional supervision requirements could be a true partner despite receiving no share of the business or profits.

4. The evidence did not support an agreement by which the appellant released her contractual 1% interest. Her failure to claim the profits amounted at most to a waiver of collection for the relevant accounting periods. It did not establish a variation or implied dissolution of the partnership.

5. The Law Society’s dispensation from further supervision did not itself dissolve the partnership. Partnership is contractual and carries both benefits and burdens, including joint and several responsibility for the firm’s liabilities. A partner does not automatically cease to be a partner merely because illness, idleness or another cause brings active participation to an end. No termination mechanism in the deed was invoked, and there was no express or implied agreement to dissolve the partnership.

1. Court of Appeal (Civil Division): The court unanimously dismissed the appeal and affirmed the declaration that the appellant was a partner throughout the relevant three-year period: [2009] EWCA Civ 1042.
2. High Court, Chancery Division: Arnold J determined a preliminary issue by declaring that the appellant had been a partner from 1 August 2000 to 31 July 2003 and made consequential payment and costs orders: [2009] EWHC 430 (Ch).
3. High Court procedural stage: Master Teverson had permitted the claimant to add the appellant as the sixth defendant and directed trial of the preliminary partnership issue.