Hammonds (A Firm) v Jones

A partnership deed may use a defined term in a different sense where the context necessarily requires it. In a mechanism intended to make annual accounts binding on all persons whose rights and liabilities are affected, Partners includes persons who were partners during the relevant accounting period, including outgoing partners. The final Partners’ Meeting, however, comprises those who are partners when the meeting is held. An outgoing partner may be limited to written objections and procedural consideration. The continuing duty of good faith may require further protection in a particular case, but it does not confer a right to vote on the decisive resolution.

Hammonds sought to recover sums from David Jones which it alleged he had drawn in excess of his partnership entitlement. Jones had retired from the firm and become a consultant on 30 April 2005. The parties agreed a preliminary issue concerning whether the partnership deed made the accounts for the relevant years binding on him as a retiring partner.

Warren J decided the issue in Hammonds’ favour, holding that the accounts were contractually binding, although he rejected a contention about the constitution of the Partners’ Meeting. Jones appealed to the Court of Appeal. The central issue was the proper construction and operation of clause 16.2 of the Partnership Deed.

Appeal dismissed. Lord Justice Lloyd gave the leading judgment. Lord Justices Sullivan and Sedley agreed.

1. Purpose and effect of clause 16.2. The clause provided a mechanism for annual partnership accounts to become binding without requiring an ad hoc agreement among every person affected. Its purpose required the accounts to bind all persons whose rights and liabilities were affected by them, namely persons who had been members of the partnership during the relevant accounting period. That included outgoing partners and, strictly speaking, excluded new partners, who took the partnership as they found it and had no right to query the opening accounts.
2. Defined terms. The deed defined Partner and Partners by reference to persons who remained partners. The definition applied unless the context otherwise required. The context had to make departure from the definition necessary, rather than merely sensible or reasonable. Clause 16.2 required that departure in relation to most references to Partners, so that the relevant class was persons who had been partners during the year to which the accounts related.
3. Partners’ Meeting. The reference to the Partners’ Meeting had a different contextual meaning. It meant a meeting of persons who were partners when the meeting was held, rather than persons who had been partners during the earlier accounting period. An outgoing partner therefore had a right to receive the accounts and make written objections, but no right under clause 16.2 to attend, speak or vote at the decisive meeting, subject to any additional protection required by the continuing duty of good faith.
4. Good faith. In an individual case, the duty of good faith might require the partnership to give a former partner more than the opportunity to submit written objections. It could not, however, extend to requiring that former partner to vote on the resolution. The Court of Appeal construed the UK Partnership Deed itself; the Overriding World-wide Deed did not determine the result.

• Court of Appeal (Civil Division): dismissed Jones’s appeal and upheld the construction of clause 16.2.
• High Court of Justice, Chancery Division: Warren J determined the preliminary issue in Hammonds’ favour. Judgment was given on 13 February 2009 and the order was made on 30 March 2009: [2009] EWHC 216 (Ch).