Ham v Ham & Anor

The valuation of an outgoing partner’s entitlement depends on the proper construction of the partnership agreement. No special presumption favours either book-value accounts or an up-to-date valuation.

Where a termination clause makes a buy-out an alternative to winding up and requires payment of the net value of the departing partner’s share, the agreement may require valuation of the share in the whole partnership property, including unrealised gains. Annual accounts prepared while the firm continued did not, on this deed, confine that entitlement to recorded capital and profits. The designation of the partnership accountants as experts supplied valuation machinery; it did not alter the substantive buy-out formula.

John Ham entered a dairy-farming partnership with his parents in 1997. The parents introduced land, livestock, machinery and other farming assets. The annual partnership accounts did not revalue the land, although some other assets were revalued.

John gave notice under clause 4.1 of the partnership deed to terminate the partnership. His parents elected under clause 4.2 to buy his share. HHJ McCahill QC, sitting at the Bristol District Registry, held that the price was limited to the basis on which the annual accounts had been prepared rather than an up-to-date valuation of the partnership assets.

The central issue on appeal was whether the phrase net value of such share meant a share of recorded capital and profits, or a share in the whole partnership property, including unrealised gains.

1. Appeal allowed unanimously. The judge’s construction of the buy-out provision was wrong. The court held that the deed entitled the outgoing partner to the net value of his share in the whole partnership property, including unrealised gains in assets such as land.

2. The entitlement was contractual. Its scope depended on construing the deed as a whole, against admissible background facts. There was no special rule or presumption governing the valuation of a partner’s share which displaced that exercise.

3. Clauses 3 and 4 served different purposes. Clause 3 regulated annual accounts while the partnership continued. Clause 4 regulated rights after dissolution. The use in clause 3.2 of the phrase share of the capital and profits did not fix the meaning of share in clause 4.2. The annual accounts omitted unrealised land gains, but those gains remained part of the partnership property on dissolution.

4. The buy-out election was the alternative to winding up under the Partnership Act 1890. A winding up would realise the whole partnership property and distribute the resulting surplus. It followed that the buy-out should, so far as reasonably possible, produce the monetary equivalent of the departing partner’s entitlement on a winding up. A contrary construction would make the election and the right to dissolve commercially illusory, because the recipients of notice could appropriate unrealised gains merely by electing to buy out.

5. The words net value called for valuation, not simply the preparation of termination accounts. Clause 4.3 made the partnership accountants experts to resolve disagreement about that valuation. It was procedural machinery and did not narrow the property to be valued. The accountants could obtain appropriate specialist valuation assistance if required.

6. Briggs LJ added, obiter, that partnership agreements, especially farming agreements involving land, should expressly address the valuation basis on termination.

• Court of Appeal (Civil Division): Allowed John Ham’s appeal and reversed the construction of the buy-out provision: [2013] EWCA Civ 1301.

• Bristol District Registry (HHJ McCahill QC): Held that the outgoing partner’s share was to be assessed on the basis used for the annual partnership accounts rather than by an up-to-date valuation of the partnership assets.