Drake v Harvey & Ors (Rev 1)

The basis for valuing an outgoing or deceased partner’s share is determined by construing the partnership deed according to ordinary contractual principles, together with any consensual variation. There is no default presumption that assets must be valued at fair or market value.

Where the deed makes payment depend on the last annual general accounts, it incorporates the valuation basis properly used in those accounts. A historic-cost or book-value basis may therefore govern even though it produces less than current market value. A revaluation cannot be introduced through ancillary accounts where that would conflict with the deed’s allocation of capital, profits and consent requirements.

Aidan Harvey died while holding a 48% share of the A capital in a family farming partnership. Clause 19 of the partnership deed required payment to an outgoing partner or personal representatives by reference to capital and undrawn profits in the last annual general account, together with specified later amounts.

The farmland had consistently been carried in the annual accounts at historic cost. Mann J held that the accounts required under clause 19 should instead include the farmland at fair value: [2010] EWHC 1446 (Ch). Francesca Drake, the surviving partner, appealed. The central issue was whether clause 19 required book value or a revaluation to fair value when calculating the payment due to Aidan’s estate.

Appeal allowed; respondent’s notice dismissed. Arden LJ gave the principal judgment. Aikens and Patten LJJ each agreed and gave concurring reasons.

1. The court rejected the judge’s starting point that a partnership deed silent as to valuation triggers a default rule requiring fair value. Cruikshank v Sutherland did not create such a presumption. Both that decision and Re White required ordinary construction of the particular deed, taking account of any agreed variation under Partnership Act 1890.

2. Clause 19(a)(i) expressly linked the payment to the last annual general account. That link adopted the accounting basis properly used for that account. The land had consistently been carried at historic cost, so its book value was decisive. The deed did not permit the court to restrict that agreement to ordinary accounts while applying fair value to an account used on death or retirement.

3. The deed did not entitle a single partner, or a deceased partner’s executors, to require a revaluation of the farmland. The unanimity requirement for any increase in A capital, the treatment of capital profits, and the commercial purpose of retaining the farm indicated that no such unilateral right existed. Further, “undrawn profits” and broken-period profits did not include an unrealised appreciation produced by revaluing the land.

4. The court rejected the proposed later variation. Although the partners discussed a new deed providing for market value, Francesca did not sign it. There was therefore no consent varying clause 19 under section 19 of the Act. The amount due to Aidan’s estate had to be calculated using the land’s book value.

• Court of Appeal (Civil Division): Allowed Francesca Drake’s appeal and dismissed the respondents’ notice: [2011] EWCA Civ 838.
• High Court (Chancery Division, Mann J): Held that the accounts required by clause 19 should value the farmland at fair value: [2010] EWHC 1446 (Ch). Reversed.