Fraud does not taint innocent partners

In the recent Court of Appeal case of Dixon Coles & Gill (A Former Firm) v Baines, Bishop of Leeds and another [2021] EWCA Civ 1097, it has been held that, unlike their fraudulent partner, the innocent partners of a firm who were jointly liable for client losses were not “party or privy” to the fraudulent activity giving rise to the claim. Accordingly, they could rely on a defence of limitation.

Background

As a matter of English law, those in partnership find themselves, in many ways, in an unenviable position. Whilst it is true that, if all is going well with the partnership, partners can enjoy sharing profits and prosper together, when things go wrong, the position can be very different. Partners are jointly and severally liable for all debts of the partnership — so if business takes a turn for the worse, each individual partner can be pursued for the entirety of the debt due. Further, that liability is unlimited. That’s the nature of the beast - all partners bind themselves to the acts of the others and the consequences that flow from those acts.

The Court of Appeal recently considered the limits of that principle in the case of Dixon Coles & Gill (A Former Firm) v Baines, Bishop of Leeds and another [2021] EWCA Civ 1097.

Proceedings in this case were brought by a client against their solicitors in relation to losses arising out of fraudulent conduct and misappropriation of client funds by one of the firm’s former equity partners (P1). The other two partners (“the Innocent Partners”) were not implicated in the frauds and were found to be completely innocent.

Some of the claimant’s losses arose from transactions more than six years before proceedings were issued and were subject to a six-year time limit, reflecting the standard limitation period within which such claims must be brought in order not to be time-barred. However, that six-year limitation period was moderated by the effect of fraud. Claims may be made beyond the standard limitation periods where there has been dishonesty.

In the first instance, the court found that that sections 11 and 12 of the Partnership Act 1890 (“the Partnership Act”) made the Innocent Partners jointly and severally liable for P1’s fraudulent acts, as well as making them “party or privy” to those acts for the purposes of section 21(1) of the Limitation Act 1980 (“the Limitation Act”). The firm appealed, on the basis that the Innocent Partners were not party or privy to P1’s breaches of trust.  Further, their innocence had been acknowledged by the claimant. The Innocent Partners argued that, accordingly, they should be allowed to rely on the limitation defence available in accordance with section 21 of the Limitation Act.

The Court of Appeal’s findings

The Court of Appeal unanimously allowed the appeal, citing case law which drew a clear distinction between (a) being liable for another’s wrongdoing, and (b) being “party or privy” to that wrongdoing. The court stated that it would be surprising if an innocent trustee or partner was unable to rely on a limitation defence merely because they are liable for fraud committed by a fellow partner. The Innocent Partners, having had their innocence acknowledged, were therefore able to rely on a six-year limitation period as a defence.

This case is significant in that it is the first which finds that the Partnership Act does not cause an innocent partner to be party or privy to the fraudulent acts of another partner. The court also highlighted that innocent parties should benefit from the limitation time frames and should not be at risk of being sued forever; conversely, a claim will still have the benefit of the partners being jointly and severally liable for those losses, but the claim must be brought in time - in this instance within six years.

Points to note

Typically, there is little prospect of avoiding liability for a partner’s misappropriation of money or property but, if a claim is brought against a partnership out of time and it can be shown that some of the partners were not involved in the fraudulent conduct of their partners, which gave rise to the claim, a partner may be able to rely on limitation as a defence.

This case highlights not only the importance of the law being applied to those with “clean hands”, in a way which is as fair as possible, but also of solicitors personally maintaining the highest standards of practice when a case of this kind arises, to permit them to demonstrate their innocence and integrity.