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Monday, September 18th, 2017

Steven Worbey and Kevin Farrell v Sharon Laughland Campbell; Wapo & Wapa Limited; and Matthew Chadwick, as Trustee in Bankruptcy of Steven Elliot [2017] CSIH 49

Andrew Smith QC and Grant Markie of Compass Chambers appeared for the pursuer/reclaimer in this Reclaiming Motion heard by the Extra Division of the Inner House.

 

Background

The reclaimers argued that they entered into a partnership with an IT expert, the third respondent, with a view to creating gay social network applications for profit.

The partnership was averred by the reclaimers to have subsisted between themselves and the respondents with the objects of “development, promotion, preparation, marketing and exploitation of gay dating apps known as Bender and Brenda, for purposes of profit”, but the respondents denied that any such partnership ever existed.

 

Facts

The Court was told that one evening in October 2009, a previously discussed topic of developing a gay dating app re-emerged between the reclaimers and the third respondent. The reclaimers came up with the names of the dating apps and other matters as to the function and facilities of the apps were discussed, including what charges could be made for use of the app.

The third respondent expressed a willingness to spend time on the creation of such an app and the reclaimers agreed to fund his acquisition of a MacBook laptop computer to work on the project. After the discussion, in an email the third respondent set out what had been discussed, describing himself as the developer with a controlling interest of 51 per cent in a future company and the role of the reclaimers as “a mixture of investors/marketing gurus etc” with a 49 per cent stake.

Over the next 18 months the reclaimers made cash payments as and when they could and submitted the application for registration of a trade mark, while the third respondent continued to work on the app and created a business plan, which envisaged the registration of a company called Bender Social Networking Limited, with 80 per cent of the shares in the company to be held by him and the reclaimers investing £200 per month to cover running costs.

Two options for the future structure of the business relationship were discussed: the first was that the reclaimers would become shareholders in the company; the second was a royalty agreement under which they would receive a share of profits. Parties expressed a preference for the second of these options which suited the reclaimers’ position as “initial investors/co-founders”.

After the reclaimers failed to make the £200 payment for April 2011, the third respondent wrote to the reclaimers, enclosing a cheque for the total amount paid by them towards the project, and stating that the money was being returned “after you were unable to fulfil your obligations as per our agreement, rendering the agreement null and void”.

 

Decision at first instance

A proof before answer was required to determine (a) whether there was a partnership between the parties; and (b) if so, certain questions which would follow.

The Lord Ordinary held that the parties had a “common intention” to enter into a business relationship, but whatever the nature of that relationship it did not amount to the carrying on of a business in common; and that no relation of partnership subsisted among them with regard to the development and exploitation of the Bender/Brenda apps from the relevant date in October 2009 or at any subsequent time. 

The Lord Ordinary said “I bear in mind the strictures in the authorities against elevating incidents of partnership into spurious prerequisites for the existence of a partnership. The problem for the pursuers in the present case, however, is that beyond the initial proposal of a 51/49 split, there was no evidence that any of the key incidents of a partnership relationship were a matter of express or even implied agreement.”

The Lord Ordinary went on to make two comments about the nature of the relationship between the parties which were of some importance for the reclaiming motion. Firstly, that the evidence supported the third respondent’s description of the reclaimers’ role as that of “investors/ marketing gurus etc” who expected, in return for contributions of a financial and non-financial nature which would enhance its value, to receive a return from the development of the app.  That was consistent with their decision to choose an entitlement to royalties rather than an equity share in the proposed company. Secondly, that the parties’ negotiations as to the pursuers’ (reclaimers’) rights and duties never reached the stage of a concluded contract

 

Submissions for the reclaimers

The Lord Ordinary had elevated incidents of partnership into prerequisites for the existence of a partnership.  Reliance had been placed upon the absence of agreement as to the sharing of liabilities and losses, the absence of any relationship of agency, the absence of any firm agreement on sharing of capital such as to point in the direction of partnership as opposed to some other arrangement, and the absence of any agreement express or implied as to whether the pursuer’s entitlement was to be a share of gross or net profits.  These were not decisive.  Having held that the parties had entered into a business relationship with a view to profit, the Lord Ordinary ought to have held that other possible analyses were eliminated.  No other type of business relationship was contended for; the choice was therefore binary: partnership or nothing; and partnership was the correct and only analysis.

 

Decision

The reclaiming motion was refused. There were two main reasons:

Firstly, even if the Lord Ordinary’s findings were to be understood as meaning that the parties had entered into a business relationship with a view to profit, it would not follow that, as a matter of law, that relationship was necessarily one of partnership.  It required to be proved there was a carrying on of the business “in common”.  That is not a pure question of law but depends upon further fact findings and the making of an evaluation of all the facts.

Secondly, the Lord Ordinary made no finding that the parties had at any material time entered into a business relationship with a view to profit; it was found that although they envisaged entering into some kind of business relationship in the future, they had not actually reached the stage of a concluded contract; and therefore the question whether their relationship amounted to a partnership did not arise. 

The Court’s reasoning on each of these points is explained in greater detail in the judgement but they can be summarised below.

 

Summary

Firstly, there must be significance to the use of the word common in the definition of partnership otherwise almost every relationship between parties pursuant to which they carried on business with a view to profit would be classified as a partnership.

When deciding whether parties who are carrying on business with a view to profit are carrying on that business in common, the Court is evaluating the facts found to be established so as to assess the characteristics of the relationship in question against what might be regarded as the normal incidents or characteristics of partnership.  It is to this evaluative exercise that the guidance given by the 1890 Act (Partnership Act 1890) itself is of particular relevance.  The factors mentioned in s.2 to the 1890 Act, although not to be elevated into pre-requisites of such a relationship are factors which may be of greater or lesser importance in any particular case. What s.2 makes clear is that the carrying on of business by a number of individuals with a view to making a profit and sharing such profits between them does not necessarily mean that there is a partnership.  The matter is pre-eminently one for the first instance judge hearing all the evidence and submissions pertaining to the business relationship between the parties. 

The Lord Ordinary on the facts as he found them was entitled to conclude there was no partnership between the parties. He considered all of the relevant factors.

Secondly, a partnership is, or at least results from, a contract.  On any view, before a partnership can be found to exist, it must be established that the parties entered into a contractual relationship.  That may be established by conduct, but, as in the case of any contract, there must be consensus ad idem, certainty of terms and an intention to create legal relations. In the present case, the parties were working together in anticipation of concluding an agreement in the future on terms which were yet to be finalised. The Court was unable to accept the submission that the intention of the parties was irrelevant, as any objective assessment of whether or not there is a partnership must include an assessment of the logically prior question of whether there is a contract between the parties at all.  

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