Analysis
The respondents, who had been in a partnership together, were the owners of the land on which their farming business was carried on, together with buildings, live and dead stock, farm machinery and other assets. The accounts recorded that the business was financed by the balance standing to the credit of their capital account with the land recorded year after year at book value. The appellant was bought into the partnership by the respondents on 1 October 1997 and their respective rights and obligations were set out in a partnership deed dated 15 December 1997 (the agreement). The accounts thereafter showed the appellant’s capital contribution as his share of profits after drawings. The land was never revalued and continued to be shown at book value.
Each of the partners were entitled to terminate the partnership by giving three months’ written notice to the others, in which event clause 4.2 of the agreement entitled the other partners to give the outgoing partner notice ‘electing either to have the partnership wound up under the Partnership Act 1890 or to purchase the share of the [outgoing partner at] the net value of such share’. For this purpose, the net value fell to be determined, in default of agreement, by the partnership accountants acting as experts and not as arbitrators. The appellant gave notice terminating the partnership on 27 February 2009. As a result of a dispute between the parties concerning the basis upon which a buy-out of the outgoing partner’s share should take place, proceedings ensued and, at first instance, the judge decided that the appellant’s share was to be determined on the same basis as the annual accounts drawn during the continuance of the partnership, rather than on the basis of an up-to-date market valuation of the partnership assets. The appellant appealed.
Held (allowing the appeal)
The appellant’s entitlement was contractual, depending on the correct interpretation of the agreement. There were no presumptions or default rules pointing towards one or another basis of valuation of an outgoing partner’s share. The reference in clause 4.2 to the words ‘net value of such share’ was to be interpreted, in the context of the agreement read as a whole, with due regard to admissible background facts, to determine the question whether any payment was to be made in respect of the unrealised profit or gain attributable to any increase in the value of partnership property beyond the book value recorded in the accounts. The central question was not as to the basis of valuation, although the words ‘net value of such share’ did raise a subsidiary question of interpretation, but simply ‘share of what?’ Did it mean share in the whole of the partnership property (including unrealised profits or gains) or share of that part of the partnership property comprised within the capital and profits shown in each partner’s account drawn up during the continuance of the partnership? As clause 4 was not concerned with a partner leaving a continuing partnership (whether by death, retirement or expulsion) but only with the consequences of a termination of the partnership, the basis on which accounts were prepared during the continuance of the partnership could give no indication of how the partners were to share in the assets once the partnership had been terminated. In this context, there was no question of leaving unrealised profits and gains, unrecorded in the partnership accounts, to be realised at some future date – they must either be realised in a buy-out election or by sale in a winding up of the partnership.
The reasons were partly structural and partly textual. Since there was a winding up option which necessarily included the entirety of the partnership property (including unrealised profits or gains), it was natural that the alternative buy-out election was intended to address the same property. The obvious purpose of the buy-out election was to enable the electing partners to choose whether to take the partnership assets in specie or to take a monetary share of the net proceeds of the sale on a winding up. This was reinforced by the use of the word ‘net’ (ie net of costs of the sale of the partnership assets on a notional winding up). The judge’s interpretation would make the election illusory as the partners with the benefit of that election would inevitably elect for a buy-out, even if they had no intention to continue the business but rather to sell the partnership property thereafter. Accordingly, the answer to the question ‘share of what?’ was a share in the whole of the partnership property (including unrealised profits and gains). The basis of valuation for the outgoing partner’s share in the partnership property, having regard to the significance of the word ‘net’ in the phrase ‘net value of such share’, required a fair ascertainment as the nearest reasonable approximation to what he would have received on sale as a result of a winding up.
JUDGMENT LEWISON LJ: Introduction [1] In 1997 Mr and Mrs Ham, who were then established dairy farmers, took their son John, then aged 19, into partnership. At that time Mr and Mrs Ham were the owners of some 440 acres of land and a sizeable dairy herd together with farm machinery and other assets. The …Continue reading "Ham v Ham & ors [2013] EWCA Civ 1301"