Cobbetts LLP & Anor v Hodge

An employed partner is not necessarily a partner in law. The relationship depends on substance, including whether the parties carried on business in common with a view of profit.

An employee may owe fiduciary duties in relation to particular duties undertaken within the employment. A fiduciary must not make a secret profit from those duties without informed consent. The rule is strict: it is no answer that the opportunity was preparatory to future employment, that the benefit might prove worthless, or that the employer would not itself have taken the benefit.

An equitable allowance for work and skill remains discretionary and may be refused where the fiduciary’s conduct involved misleading or surreptitious dealing.

Cobbetts LLP and Lee Crowder sought recovery of shares in Envirotreat Ltd acquired by Mark Hodge while he was employed by Lee Crowder. They alleged that the acquisition breached duties owed to the firm and that the shares were held on trust for them.

The principal issues were whether Hodge was a partner or employee, whether his work in raising investment and negotiating the shareholders’ agreement gave rise to fiduciary duties, whether he obtained informed consent, and whether he was entitled to an equitable allowance for the cost of the shares and his work.

1. Status. Hodge was not a partner in law. The partnership deed was powerful evidence that the firm intended to distinguish partners from employees. His autonomy, taxation treatment, remuneration arrangements and the reference to relevant provisions of the deed did not alter that conclusion. The applicable statutory question was whether the parties were carrying on business in common with a view of profit under section 1 of the Partnership Act 1890.
2. Fiduciary duties. Although employment is not inherently fiduciary, fiduciary duties may arise from the surrounding circumstances. Hodge’s duties included assisting with investors and advising on the shareholders’ agreement. Those activities were within the scope and course of his employment and within the firm’s retainer.
3. Breach. The opportunity to acquire the shares came to Hodge because he was acting for the firm in connection with the issue of the same shares. He therefore owed a strict duty not to make a profit from those activities without informed consent. His negotiation of shares amounting to 5% of the issued capital, subject to a ratchet, was a secret profit. It was no answer that the arrangement concerned future work, that the shares might be worthless, or that the firm would not itself have accepted shares.
4. Consent. The burden of proving informed consent lay on Hodge. Disclosure to a consultant and discussion with a partner about a commission payment did not amount to informed consent. The information disclosed was incomplete and materially misstated the actual arrangement. No estoppel therefore arose.
5. Remedy. The shares were subject to a trust in favour of the claimants. Hodge was entitled to an allowance of £7,180 for the cost of acquiring them, but no allowance for his work and skill. Such an allowance was discretionary and would undermine the fiduciary rule in circumstances involving a misleading account and conduct which encouraged putting personal interests before duty.