Boghani v Nathoo

Section 38 of the Partnership Act 1890 preserves partners’ authority and obligations only so far as necessary to wind up a dissolved partnership or complete transactions already begun. It does not authorise surviving partners to enter new bargains binding former partners, except where a new contract is an inevitable part of performing an existing obligation. Existing contractual obligations continue after dissolution, but they need not be performed if release, novation, compromise or damages can complete the winding up. Where development agreements permit assignment and novation, completion of the developments is not necessarily required. Former partners cannot be compelled to complete them together under section 38 where the partnership was at will; consensual completion remains possible, with each partner free to bid against the other.

The claimant and defendant had carried on hotel development as partners at will in the name Splendid Hotel Group. The partnership was dissolved by notice on 8 April 2011. Its assets included two incomplete hotel developments, the ICH Development and the Hilton Development, subject to management, construction, finance and consultancy arrangements.

The claimant sought orders for their sale in incomplete condition. The defendant sought an order requiring the parties to enter further obligations and contracts, complete the developments, and sell them afterwards. The central issues were whether the developments were unfinished transactions under section 38 of the Partnership Act 1890, whether completion was necessary to wind up the partnership, and whether the court should order sale before completion.

1. Applications. The defendant’s application was dismissed. The claimant’s proposed declaration was refused because it would misleadingly suggest that the partnership’s contractual obligations had ended on dissolution. Orders were instead made for an independent sale process, with further directions and costs to be addressed.

2. Section 38. The section preserves obligations to third parties after dissolution. In England, those obligations will usually be dealt with under the general law by performance, release, novation or damages. Section 38 does not authorise new bargains or contracts binding former partners. It may extend to contracts or transactions already in progress, and to new contracts that are an inevitable part of satisfying pre-existing obligations. The section confers a power; it does not impose an additional duty.

3. Necessity. The relevant necessity is necessity for winding up the partnership’s affairs, not merely commercial desirability or the possibility of achieving a higher value by completion. Full performance may be unnecessary where an existing agreement permits assignment or novation to another developer. New finance agreements required to complete the developments would be new conditions enabling completion, rather than inevitable consequences of the pre-dissolution development agreements.

4. Application to the developments. The ICH and Hilton agreements were unfinished transactions to the extent that existing contractual obligations remained. However, completion of the developments had not been shown to be necessary. Both principal agreements contemplated assignment and novation, and suitable partners or third-party purchasers might take over the developments. The court therefore had no need to consider the discretionary power under section 39.

5. The parties could complete the developments together only consensually. Since the partnership was at will and was not constituted for a fixed period or the completion of particular ventures, neither partner could compel the other to assume further obligations. Each could bid against the other and outside purchasers. Sale proceeds were to be held and the sale conducted by solicitors agreed by both parties or nominated by the Master.

This was a first-instance decision. On 24 June 2011, Henderson J directed the parties to obtain expert evidence on the value and marketing of the developments in incomplete and completed conditions.