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Commercial Law – Partnership Dispute – Reliance on Previous Findings as Evidence

The case of Conlon and Another v Simms [2006], was heard in the Court of Appeal and concerned a dispute between two partners at a firm of solicitors. The first claimant was a partner and the defendant was the senior partner in a solicitors firm, BC, which consisted of a total of eight partners. Six of the BC partners decided to join another firm. All the partners of BC executed a deed of dissolution, confirming that BC would be dissolved and that on 1 May 2000 the first claimant and the defendant would enter into partnership and practise as the BC Partnership (“the Partnership”).

In September 2000, the second claimant joined the partnership. Business was going well until February 2002, when the Law Society intervened in the defendant's practice on the ground of suspected dishonesty. Disciplinary proceedings were commenced and the Solicitors Disciplinary Tribunal (“SDT”) concluded that the defendant should be struck off.

The defendant appealed, however, the Divisional Court also concluded that the defendant was dishonest and subsequently dismissed his appeal. In May 2002, the parties entered into an agreement to deal with the position of the defendant's suspension from practice. The claimants brought proceedings against the defendant claiming damages for negligence and misrepresentation. They submitted the following:

§   That the defendant had owed them a duty to make positive disclosure of anything which might affect his status as a solicitor and therefore his ability to enter into the partnership agreement;

§   That he had failed to disclose that he had been actively involved in making and promoting or facilitating bogus transactions; and

§   That they would not have entered into the partnership agreement if the defendant had made those disclosures.

The defendant argued that there was no duty of disclosure and no dishonesty on his part. He also argued that the claimants were fully aware of the underlying facts which had resulted in the disciplinary proceedings, and had apparently believed in his innocence. He therefore contended that the findings in the SDT proceedings were inadmissible in principle.

The judge found for the claimants. He held that in the context of negotiations for a partnership, a party to those negotiations was under a duty to make a disclosure of matters affecting (or likely to affect) his status as a partner, and that failure to make such disclosure gave rise in law to a claim for damages. The judge also held that the principle of abuse of process would prevent collateral attack on an earlier decision of a court of competent jurisdiction (for example the SDT) if re-litigation of the same issues would be manifestly unfair or would bring the administration of justice into disrepute. He found that in seeking to contest those findings in the present action, the defendant was abusing the process of the court. This effectively meant that the defendant was bound by the findings of the SDT proceedings, even though those findings were inadmissible as evidence.

The defendant appealed this decision to the Court of Appeal, and the appeal would be allowed for the following reasons:

§             There could be no doubt that the principle of caveat emptor did not apply to the making of a partnership agreement, and that in negotiating such an agreement a party owed a duty to the other negotiating parties to disclose all material facts of which he had knowledge and of which the other negotiating parties might not be aware. It therefore followed that prospective partners had a duty to disclose such material matters.

§             Although breach of the duty of disclosure would, as a general rule, give rise merely to a right of rescission where the breach of the duty of disclosure was fraudulent, a party to whom the duty was owed who suffered loss might recover damages for that loss in the tort of deceit.

§             The findings of the SDT and the Divisional Court were inadmissible as evidence of the facts found. The court should be slower in preventing a party from continuing to deny serious charges of which another court had previously found him guilty than in preventing that party from initiating proceedings for the purpose of re-litigating the question of whether he was guilty of those charges.

§             When determining whether a party (claimant or defendant) is abusing the process of the court by mounting a collateral attack on a previous court decision, the practical effect of finding him guilty of such an abuse is to prevent him denying the allegations against him. The exception to this being in circumstances where he is in a position to adduce additional evidence which could not have been with reasonable diligence adduced in the earlier proceedings, and which, if admitted, would have changed the whole aspect of the case.

§             To that extent, the party guilty of abuse of process would be placed in a worse position with regard to the adducing of evidence than he would have been in, had the previous decision been admissible as evidence of the facts found.

§             In this case, it would have not been unfair to the claimants if the dishonesty issues had had to be re-litigated. There was no good reason why the claimants could not have proved specific examples of the defendant's dishonest conduct, rather than seeking to rely on the entirety of the SDT's findings as determinative of the issue of dishonesty. Permitting such re-litigation would not bring the administration of justice into disrepute.

§             Right-thinking people would consider it unfair to the defendant that, faced with a pleading which sought to import the entirety of the SDT findings, he should be prevented from requiring the claimants to prove their case. Considering that the SDT findings and the judgment of the Divisional Court were inadmissible as evidence of the facts found, there had not been sufficient evidence before the judge to justify his findings of dishonesty in relation to the defendant's conduct. The judge's order was therefore set aside and a retrial was ordered.

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© RT COOPERS, 2007. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.