Ulrich Rued v Lloyd Dormer & Anor

A partner’s fiduciary duty of good faith requires honesty and the absence of an improper motive. Mere negligence is insufficient, although deliberate recklessness may amount to bad faith. A partner who proves that agreed work was performed may draw the agreed remuneration, even if the drawings reduce the partnership’s ultimate profitability. The court must distinguish irrational decision-making from an unfavourable or inefficient outcome assessed with hindsight. A partner managing the business must exercise relevant discretion rationally, in good faith and for the firm’s interests. In an account, claimed expenditure and post-completion work must be proved by reliable evidence. Issues requiring expert valuation evidence, such as occupational rent, will not ordinarily be determined outside the scope of the account hearing.

The claimant and first defendant entered into a land-development partnership. The claimant supplied funding, while the first defendant managed the business and carried out development work. Following an earlier liability judgment, the court was required to take the partnership account.

The issues included the first defendant’s entitlement to wages, overtime, commission and post-2016 expenditure; whether adjustments were required to the expert accounts; the build cost and value of Plot 9, which had been transferred into the defendants’ names; and the treatment of undeveloped land. The court also considered whether the first defendant’s conduct breached the duties of good faith and rational decision-making owed to a partner.

1. The account was directed to be adjusted in accordance with the judgment. The first defendant was entitled to agreed wages for work proved to have been carried out, subject to unpaid leave, unsupported periods and private expenditure. He was entitled to the agreed commission on qualifying materials, but not on labour or associated costs.

2. Partners owe fiduciary duties of good faith and must provide true accounts and full information under section 28 of the Partnership Act 1890. Good faith requires honesty or an improper motive to be absent. Mere negligence does not establish breach, although deliberate recklessness may be equivalent to intent. The principles in Medforth v Blake [2000] Ch 86 were applied.

3. A partner’s management discretion must be exercised rationally and in good faith. The fact that a decision proves inefficient, costly or disadvantageous with hindsight does not make it irrational or a breach of good faith. The court accepted that the first defendant’s decision to carry out substantial work himself was directed towards reducing costs and maximising revenue. The contractual good-faith principles discussed in Gold Group Properties Ltd v BDW Trading Ltd [2010] EWHC 1632 were not inconsistent with the partnership obligations.

4. The court accepted that Plot 9 was completed on 12 October 2018 and allowed recovery for 262.5 days’ work up to that date, but rejected the claim for a further 136 days of post-completion work as insufficiently proved. The business had borne the build costs of Plot 9, and its value and internal features had to be brought back into the accounts.

5. An occupation-rent issue was outside the scope of the hearing and could not properly be determined without expert evidence. Updated accounts were to be prepared by the single joint expert. The court proposed a retention of £50,000 and indicated that, if possible, the first defendant should buy out the claimant’s interest in Plot 9.