Shiraz Boghani v Bashir Nathoo (2011)
An order obliging partners to complete unfinished property developments after the dissolution of their partnership was not necessary to wind-up the affairs of the partnership for the purposes of the Partnership Act 1890 s.38.
The claimant (B) sought a declaration that he and the defendant (N) were not subject to any continuing obligation under the Partnership Act 1890 s.38 to complete two unfinished hotel developments following the dissolution of their partnership. B and N had been partners at will in a firm which carried on the business of hotel development. At the time of the dissolution, two developments remained unfinished. A dispute arose as to the proper course of action in relation to those developments. It was B's case that before dissolution, the firm had been under no unconditional obligation to complete the developments and that it was not necessary that the firm should do so for the purposes of winding-up its affairs. He consequently sought an order that the developments could be sold unfinished, the sale to be handled by his solicitor. It was N's case that s.38 obliged the firm to continue the developments unless and until the court in its discretion determined otherwise under s.39. He sought an order that he and B had to do all things necessary to facilitate the completion of the developments before they could be sold. The court had to determine whether (i) the developments were unfinished transactions for the purposes of s.38; (ii) if so, it was necessary to complete those developments in order to wind-up the affairs of the firm.
(1) The existing contractual commitments of the firm to third parties were "transactions begun but unfinished at the time of dissolution" for the purposes of s.38. The firm was contractually bound to third parties by various agreements and, to that extent, the obligations of the firm continued notwithstanding its dissolution. However, the ability of surviving partners to bind former partners did not extend to new contracts, except to the extent to which they were an inevitable part of satisfying the pre-existing contractual obligations of the firm. The issue, therefore, was whether it was necessary to complete the unfinished transactions (see paras 28-29 of judgment). (2) The question of whether it was necessary to complete the developments depended on what was meant by "necessary" and "complete" in the context of s.38. The necessity had to arise from the need to wind-up the affairs of the partnership. It was not necessary for that purpose that the obligations arising from outstanding transactions had to be satisfied by performance of the unfinished transactions. If completion was equivalent to full performance then in many cases it was both impossible, because the partnership did not have the money, and unnecessary, because the third party was prepared to novate the obligation or to compromise the issue. If completion did require full performance of the pre-dissolution obligation, it had not been demonstrated in the instant case that any such completion was necessary in order to wind-up the affairs of the partnership. Both of the principal contracts governing the developments contemplated that the firm could assign the benefit of the agreements and novate its obligations if it could find another developer to take its place. Evidence showed the distinct possibility that suitable outside parties would be interested in taking over the developments. It followed that in order to wind-up the affairs of the firm, it was unnecessary that the dissolved firm should complete the developments, even in the unlikely circumstances that it could do so without the need to make new contracts for new banking facilities to enable it to do so (paras 31-33). However, the declaration sought by B would be at worst incorrect and at best misleading. The contractual obligations of the firm to third parties continued notwithstanding the dissolution of the firm. That was so both under the general law and as confirmed by the opening words of s.38. Further, s.38 only applied to the extent to which it was necessary to complete the developments for the purpose of winding-up the affairs of the firm; such necessity had not been shown (para.35). (3) It would not be appropriate for the sale to be handled by B's solicitors. In disputed matters such as the instant case, it was better to preserve complete independence from either party. Accordingly, the conduct of the sale and retention of the proceeds would be the duty of the solicitors both parties agreed on or, in default of agreement, as were nominated by the Master (para.36).