Business partnership: be careful who you get into bed with!

Year Published: 2015

The recent Court of Appeal decision in The Northampton Regional Livestock Centre Company Ltd v Cowling and another [2015] case is a sad tail (certainly from Mr Cowling’s point of view) where a rogue business partner can land you in the sticky stuff!

In brief, the case involved a business partnership (between Mr Cowling and Mr Lawrence) who were instructed by a seller to market and sell a property.

Although Mr Lawrence resigned from the business partnership he continued to act for the seller. Unbeknown to Mr Cowling, Mr Lawrence reached a very lucrative deal with the buyer of the property where Mr Lawrence would receive around one third of any uplift in value the buyer received from any subsequent sale.

This was a clear conflict of interest which Mr Lawrence had neither disclosed to his partner (Mr Cowling) nor the seller. He was accordingly in breach of his fiduciary duty to the seller.

The property was sold to the buyer for £2.25m and then on the same day the buyer immediately completed a sale to a third party for £5m making a profit of £2.7m.

Accordingly Mr Lawrence received a commission of about £740,000.

A claim was brought by the seller against Mr Cowling and Mr Lawrence in negligence and breach of fiduciary duty.

The negligence claim failed (as the seller was unable to establish that the property had been sold at an undervalue). However, the claim for breach of fiduciary duty succeeded against Mr Lawrence but not against Mr Cowling.

The seller appealed, failing again in relation to the negligence claim but importantly (certainly as far as Mr Cowling is concerned) succeeded in appealing the decision that Mr Cowling was not jointly and severally liable with his business partner, Mr Lawrence.

Whilst the Court of Appeal had sympathy for Mr Cowling and indeed why the first instance Court ruled that he was not liable, it was clear that Mr Lawrence was still carrying out business which was connected to the business partnership. Accordingly it was ordered that Mr Cowling was jointly and severally liable with Mr Lawrence to account for the commission received from the buyer (although the Claimant had no proprietary claim against Mr Cowling).

In addition, Mr Cowling and Mr Lawrence were ordered to (jointly and severally) pay 50% of the seller’s legal costs, this being on the basis that the negligence claim had failed.

So a harsh decision on Mr Cowling you may say. What could he have done differently?

It is unlikely that Mr Cowling could have prevented Mr Lawrence’s actions (unless he watched his every move). However he would be better placed in any subsequent action against Mr Lawrence for breach of his fiduciary duty to Mr Cowling if there was a partnership deed in place.

He may also have been able to protect himself if the business was either a company or limited liability partnership. The primary claim would then be against that corporate vehicle, although the seller may still have been able to go after Mr Lawrence for breach of his fiduciary duty.

Above all, be careful in choosing your business partners.

For advise on business partnership disputes or any other dispute resolution matters, please contact our Dispute Resolution team on 0161 475 7676.

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