Forster v Messrs Ferguson & Forster, Macfie & Alexander and others

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25 June 2010

If you are a partner, your duty of good-faith to your other partners continues even after the partnership terminates.  If you fail in this duty, your ex-partners may use this to defend outstanding claims you bring against them.

This is known as the “concept of mutuality” and a recent case in the Scottish Court of Session confirmed that such mutuality survives the termination of a partnership agreement.

The Facts

Mr Forster was a partner in a firm of solicitors called Ferguson & Forster, Macfie & Alexander (“FFMA”)).

In 2003, Mr Forster was found guilty of 35 acts of embezzling clients funds and 6 breaches of the Bankruptcy (Scotland) Act 1985 for which he was serving a prison sentence. 23 of his crimes took place whilst he was a partner in FFMA.

Despite being in prison, Mr Forster sought to enforce a provision of FFMA’s partnership agreement which entitled him to a pension and a lump sum on his retirement, rather than receive the capital due to him from the partnership.

FFMA refused to pay the pension on the basis that Mr Forster had breached his material obligation of good faith under the Agreement and therefore was not entitled to sue upon it – the so called 'concept of mutuality'.

FFMA’s partnership agreement also contained a 'deemed retiree' clause, whereby an expelled partner could be deemed to have retired. On his interpretation of this clause, Mr Forster argued that it revealed a clear intention on the parties to displace the principle of mutuality.

The Decision

Lord Clarke clearly confirmed that the concept of mutuality can be used as a defence by an innocent party to a contract, even where the contract had since terminated. Referring to Lord Cowie in the Laurie case, Lord Clarke agreed that no distinction could be made between a continuing contract and a terminated contract. The key fact was that Mr Forster had lost the trust and confidence of his fellow partners in a material breach of the Agreement and therefore he was not entitled to sue upon it.

The concept of mutuality had not been displaced. The nature and extent of Mr Forster's conduct was such a serious breach, 'striking at the very heart' of the Agreement, that to displace the concept would require clear wording to that effect. Lord Clarke thought that no such wording appeared in this Agreement. He concluded that it would be stretching the wording of the 'deemed retiree' clause to suggest that its effect was to displace the concept of mutuality.

Although the arguments were never fully developed before the court, the question was raised as to whether FFMAs had excused Mr Forster's material breach in acquiring Mr Forster's interest in the partnership prior to his conviction. Although there were two versions of events as to how the partnership came to an end, Lord Clarke stressed that neither version would amount to affirmation of its continuance.

Despite concluding that Mr Forster had lost the right to elect to have a pension, Lord Clarke went on to say that Mr Forster was not deprived from seeking to recover his share of the goodwill and the work in progress, as these rights amount to 'real rights in property'.

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