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You are here: BAILII >> Databases >> The Law Commission >> Partnership Law (Report) [2003] EWLC 283(7) (15 November 2003) URL: http://www.bailii.org/ew/other/EWLC/2003/283(7).html Cite as: [2003] EWLC 283(7)

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PART VII

LITIGATION AND ENFORCING JUDGMENTS

Introduction

7.1     This Part deals with the methods by which a partnership sues and is sued and the means by which judgments may be enforced against a partnership and its partners.
7.2     The recommended introduction of separate personality in English law will not have a major impact on litigation and enforcement of judgments as the existing rules already adopt an approach to partnership litigation which is similar to an entity approach. In Scots law there is a need to modernise the rules relating to litigation as, oddly, they are less oriented towards an entity approach.
7.3     We also consider the impact of the Human Rights Act 1998 on litigation and the enforcement of judgments and make recommendations for the protection of the interests of partners and former partners which are designed to meet the requirements of Article 6 of the European Convention on Human Rights and Fundamental Freedoms (ECHR).

Litigation

Existing law

English law

7.4     In English law proceedings by or against two or more partners who carry on business within the jurisdiction may be commenced in the name under which they carried on business when the cause of action accrued.^[1] A person suing or being sued by a partnership can require the partners to disclose the names and places of residence of all persons who were partners at the time the cause of action accrued.^[2]
7.5     In the absence of any provision to the contrary in a partnership agreement, a partner has implied authority to commence proceedings in the name of the partnership, subject to providing any non-consenting partners with an indemnity for costs.^[3] In the absence of a provision in the partnership agreement, a majority of partners can resolve any difference in relation to the legal proceedings.^[4] But if the majority act in bad faith in preventing an action by the partnership against a third party, the wronged partners may apply to the court to have the partnership dissolved.
7.6     The partnership name can still be used after the partnership has ceased to carry on business or has been dissolved. Provided the partners were carrying on business within the jurisdiction when the cause of action accrued, the nationality, domicile or residence of the partners is not relevant. If the partnership is not carrying on business within the jurisdiction, the proceedings should be in the names of the individual partners, unless the partnership is a legal entity under the law of its constitution.^[5]

Scots law

7.7     The rules of Scots law which govern actions in the name of the partnership are archaic. If the partnership has a social name, which is composed of the names of real people (even though they are no longer partners) it can sue and be sued in its name alone. If the partnership has a descriptive name, such as "Fresh Bread Bakers", that name can be used in litigation in the Sheriff Court but not in the Court of Session.^[6] In the latter court, the names of three partners, or two if there are only two, must be added to the partnership name.
7.8     In the absence of any provision of the partnership agreement regulating the matter, a majority of partners normally decides whether or not the partnership should bring or defend an action.^[7]
7.9     After a partnership is dissolved, Scots law requires that all of the former partners must sue or be sued in its place. To pursue a claim against a dissolved partnership it is necessary to sue all of the former partners who are within the court's jurisdiction. Otherwise the partners can raise a plea of all parties not called; that is that there are other defenders liable for the debt who have not been cited.^[8]

Our provisional proposals

7.10     In the Joint Consultation Paper we invited views on two principal issues, namely how a partnership with separate personality could sue and be sued and how to reform the outdated Scots law rules.

A partnership can sue and be sued

7.11     We provisionally proposed that a partnership with separate personality should be able to sue and be sued in its own name so long as the partnership exists and that a creditor of a partnership should be able to sue partners in the same proceedings as the partnership.^[9]

Litigation after dissolution of a partnership

7.12     We also proposed that where a partnership has been dissolved, litigation in relation to partnership rights, debts and obligations should be by or against one or more of the former partners, as former partners of the dissolved partnership.^[10] As a result, however, of our recommendations in relation to the break up of partnerships and their winding up^[11] there will be no need for litigation by or against a dissolved partnership.

Disclosure of the identity of partners

7.13     In order to prevent partners from hiding behind a partnership name we proposed that a new Partnerships Act should provide that any partner or former partner who is sued should have the obligation, if called upon, to furnish information as to the names and addresses of other partners or former partners who may be liable and as to any changes in the constitution of the partnership which might affect liability.^[12] We also proposed that other procedural matters relating to litigation by or against partnerships or former partners should be regulated by subordinate legislation.

Whether an account is needed

7.14     On the separate issue of English law only, we invited views on whether there should be an express provision that a partner has a right to pursue a claim for damages against co-partners without first taking an account.^[13]

Consultation

A partnership can sue and be sued

7.15     There was general support in both jurisdictions for the proposals that a partnership with separate legal personality should be able to sue and be sued in its own name and that partners can be sued in the same proceedings as the partnership. Those consultees who opposed the introduction of separate legal personality into the English law of partnership did not support the proposals, arguing that the present law was satisfactory. One consultee suggested that a creditor should be able to choose whether to sue the partnership, the partners or both. Another consultee suggested that it was essential that a claim against the partnership should also have effect as a claim against the partners.^[14]

Litigation after dissolution of a partnership

7.16     There was also general support for the proposal that when a partnership had been dissolved,^[15] litigation in relation to partnership rights, debts and obligations should be by or against one or more of the former partners, as former partners of the dissolved partnership. However, several consultees qualified their support or voiced concerns over the proposal and urged that the personality of the partnership should continue until the winding up was complete so that it could continue to sue and be sued. It was suggested that a creditor of a partnership would often not know whether a partnership was dissolved and that it should be possible to pursue an action in the partnership name even after dissolution.

Disclosure of the identity of partners

7.17     A large majority of the consultees who addressed the issue whether a partner or former partner should have the obligation, if called upon, to furnish information as to the names and addresses of other partners and former partners who may be liable for partnership debts supported our proposal. One consultee suggested that the address in question should be the last known address of the partners or former partners. Two consultees opposed the proposal. One suggested that the proposal was impractical as a claim in tort might arise decades after the event and the partners in question could not be expected to know about their predecessors. It asked what was the policy reason for requiring present partners to incur expense in assisting claimants against previous partners.

Scots law

7.18     Scottish consultees gave unanimous support for the proposals to alter the rules of Scots law.^[16]

Whether an account is needed

7.19     English consultees were divided on the question whether there should be an express provision for English law that a partner has the right to pursue a claim for damages against co-partners without first taking an account. There was support for the proposition from a number of consultees. But an equal number of consultees questioned the need for such a provision.

Reform recommendations

A partnership can sue and be sued

7.20     We recommend that a partnership should be able to sue and be sued in the partnership name. Where there is continuity of partnership the firm-name refers to the continuing entity which is the partnership. As we discussed in Part VI of this report the partnership's assets are available to meet a claim. Therefore the capital invested by a partner joining the partnership after the date on which the obligation was incurred would be available to meet the claim as the money would be partnership property.^[17] However the private assets of the partner joining the partnership after the relevant date would not be available to the creditor unless the partner had entered into an obligation to the creditor to pay him.^[18]
7.21     The partners with secondary liability to meet the creditor's claim are the partners or former partners who were members of the partnership when the obligation was incurred if the claim is in contract or when the relevant act or omission occurred if the obligation results from breach of duty in tort, or delict (including quasi-delict), or breach of trust or fiduciary duty.^[19] We recommend that a creditor of a partnership may bring an action against the partnership and all or any of such partners with secondary liability in the same or separate proceedings. We do not favour actions being raised and claims enforced against partners alone. In order to achieve conceptual clarity, we recommend that a creditor may pursue a claim against a partner or former partner only (a) in the same action as he pursues his claim against the partnership or (b) in a separate action after he has established his claim against the partnership by obtaining a judgment against it. The creditor may establish that liability either in judicial proceedings or by arbitration. Liability may also be established by a court order for interim payment. It is the essence of a partner's or former partner's liability that it is a liability to meet an obligation of the partnership. The claim must therefore be constituted against the partnership^[20] before it can be enforced against the partner or former partner.^[21]
7.22     We therefore recommend:

(1) That a partnership may sue or be sued in its own name; (Draft Bill, cl 7(2))

(2) That a creditor of a partnership may pursue claims against a partner or former partner in respect of a partnership obligation only (a) after he has established the amount (or the existence and the amount) of the liability of the partnership for the obligation by obtaining a judgment or decree or arbitral award against it in the same or earlier proceedings; (b) where the court has ordered the partnership to make a payment including an interim payment in respect of the partnership obligation; or (c) in Scotland, when the partnership obligation has been constituted in a document registered for execution in the Books of Council and Session or the sheriff court books. (Draft Bill, cl 24)

Method of service on a partnership

7.23     We think that the appropriate method of service of legal proceedings on a partnership is service at a place of business of the partnership, if the partnership is a general partnership.^[22] Rules of court should provide for such service and for service on the individual partners of the firm.^[23]
7.24     We therefore recommend that rules of court should provide for service of claims and other court documents on a partnership and on the partners of the firm.

Establishing the liability of a partner for a partnership obligation

7.25     In our discussion on enforcement of judgments below^[24] we recommend that a judgment or arbitral award against a partnership should not be capable of being enforced directly against the assets of a partner or former partner. We recommend that a creditor wishing to enforce a partnership obligation against a partner or former partner must obtain a judgment or arbitral award against the partner or former partner. We recognise, however, that there may be cases where the creditor proceeds against the partnership (and perhaps some of the partners) and obtains judgment against them, in ignorance of the existence of another partner or in the belief that that partner does not have assets. It may be unfair on the creditor to require him again to prove the partnership's liability in proceedings against the other partner if that partner had had an opportunity to participate in the earlier proceedings and did not take it. The court should have a discretion to exclude or restrict the defences which a partner may advance in those circumstances. We think that this is a matter which can be left to rules of court and that the draft Bill should empower the rule making authorities to make such rules.
7.26     We therefore recommend that rules of court may make provision to prevent a partner from defending or to restrict the extent to which, or the way in which, a partner may defend proceedings in respect of his personal liability for a partnership obligation if he has had an opportunity to participate in earlier proceedings in which there has been a judgment or decree against the partnership establishing the existence or amount of the partnership's obligation. (Draft Bill, cl 25(1) and (2))

Disclosure of the identity of partners

7.27     We proposed in the Joint Consultation Paper that a partnership which is suing or being sued and its partners should be under a duty to provide to the other party to the litigation the names and addresses of those partners who have secondary liability for the costs/expenses of the litigation or (as the case may be) for meeting the claim against the partnership if it is successful. Under the existing English rules of court the partners of a partnership are required to furnish the other party with a written statement of the names and places of residence of all the persons who were partners at the time when the cause of action accrued.^[25] The obligation rests on the partners who were partners at the relevant time because the use of the partnership name is a matter of convenience rather than substance.^[26] It is prudent therefore for such partners who continue in a partnership to keep a record of the last known addresses of former partners. What we proposed in the Joint Consultation Paper was not substantially different from the existing English rule. In Scotland the court may order a partnership to disclose documents which reveal who the relevant partners are or were.^[27] We do not agree with the suggestion that our proposal is impractical or materially more burdensome than the existing rules in both jurisdictions. It should not be unduly burdensome on the partnership or the partners in question especially as the latter will wish to share any liability established against them with those partners or former partners who also have secondary liability to meet the claim. However we see force in the suggestion that the obligation should be to disclose the last known address of the partner or former partner or an address for service on him.
7.28     We therefore think that a partnership which is suing or being sued and its partners should be under a duty to provide to the other party to the litigation on request the names and last known addresses, or addresses for service, of those partners who have secondary liability for the costs/expenses of the litigation or (as the case may be) for meeting the claim against the partnership if it is successful. We also recommend that where a creditor of a partnership also pursues his claim against a former partner, the former partner will be under the same duty to disclose. This regime would substantially reflect existing English procedural rules^[28] and would be less formal than the commission and diligence procedure of Scots law. We propose that the duty should be imposed by rules of court in both jurisdictions.
7.29     We therefore recommend that rules of court should provide that a partnership which is suing or being sued and its partners should be under a duty to provide to the other party to the litigation, at his request by notice, the names and last known addresses, or addresses for service, of those partners who have secondary liability for the costs or expenses of the litigation or (as the case may be) for meeting the claim against the partnership if it is successful. Former partners who are involved in litigation relating to a partnership should be under a similar obligation.
7.30     Since the consultation, we have received further representations on the difficulties which consumers face in identifying the names and addresses of partners in a present or former partnership. It has been suggested that the problem is wider than simply the identification of the relevant persons once litigation has commenced.^[29] We think that there is scope to assist people who deal with partnerships in a way which is complementary to the Business Names Act 1985 and which is not unreasonably burdensome on partners and former partners.^[30] The obligations on the partnership and the partners or former partners will not be subject to a statutory sanction but we propose that the court should have power to make appropriate orders. Thus, if the partnership, partners or former partners failed to disclose relevant information within their knowledge on request from a person entitled to make the request, that person could seek the costs or expenses of his application to the court from the persons in default and disobedience to an order of the court could be punished as a contempt.
7.31     We therefore recommend that:

(1) A person who deals with a partnership should be entitled, on making a request to the partnership or to any partner, to be told the full names and an address or addresses for service of all the partners; (Draft Bill, cl 74(1))

(2) A person who has a complaint against a partnership arising out of a previous dealing with the firm should be entitled, on making a request to the partnership or to any present or former partner, to be given such information as the partnership or the present or former partner is able to provide, after due inquiry, as to the names of every partner at the relevant time and an address for every partner which is either an address for service or his last known address; (Draft Bill, cl 74(2))

(3) Rules of court should be able to make provision enabling a person having a prospective claim against a partnership, or against a present or former partner after he has obtained judgment against the firm, to apply to the court before bringing proceedings in respect of the claim for an order for the supply of the information in paragraph (2) above. (Draft Bill, cl 74(3))

Litigation after a partnership is dissolved

7.32     In Part XII we discuss our recommendations on the break up of a partnership and on its winding up. We recommend that the personality of a partnership should continue after the break up until all of the assets of the partnership have been distributed and all the liabilities of the partnership discharged or extinguished. We think that this is a much simpler way of providing for the full winding up of a partnership. We have departed from our earlier proposal to have the winding up completed when all of the assets were distributed and to transfer any existing and future liabilities to those partners who, if the partnership had continued in existence, would have had secondary liability therefor. Thus once the partners (or a third party such as the partnership liquidator) have wound up the partnership and distributed all of the assets, the partnership will continue to exist as an entity so long as any liability (including a liability which only emerges in the future)^[31] remains undischarged or has not been extinguished by the passage of time.
7.33     We recognise that it is necessary to provide for service on the partnership when a partnership has ceased as a going concern and no longer has a place of business. In such circumstances the rule which we propose in paragraph 7.23 above will not operate. We think that where a third party is not able to ascertain a partnership's place of business, a claim or other court document should be validly served on a partnership if it is served on a partner of that partnership. Again this can be provided for in rules of court. We do not think that this will be problematic. As a claimant against a partnership which has ceased as a going concern will often wish to pursue his remedy against the individual partners as well as any residual assets of the firm, it is likely that he will serve the claim on several if not all of the partners.
7.34     This approach should avoid the practical difficulties about which consultees expressed concern. This also has the effect of superseding the Scots law rules about suing partners after a dissolution in accordance with the views expressed by Scottish consultees.^[32]

Whether an account is needed

7.35     The rule of English law that a debt owed by a partner to the partnership and vice versa is normally recoverable only by a partnership account is well established.^[33] Nevertheless a different rule may apply in relation to damages: it is thought that English law allows a partner to recover damages from another partner for breach of the partnership agreement without taking an account. We agree with the view of several consultees who suggested that an express provision in the draft Bill to allow a partner to pursue a claim for damages against a co-partner without first taking an account is not necessary. We have therefore not included a provision to this effect in the draft Bill.

Enforcement

Existing law

English law

7.36     In English law if a partnership is sued in its name and judgment is obtained against it, the judgment may be enforced against partnership property within the jurisdiction.^[34] The judgment may be enforced against anyone:

(1) who acknowledged service of the claim form as a partner;

(2) who having been served as a partner with the claim form, failed to acknowledge service of it;

(3) who admitted in his statement of case that he is a partner; or

(4) who was adjudged to be a partner.^[35]

7.37     A judgment cannot be enforced against a partner who was out of the jurisdiction when the claim form was issued, unless the partner was served, or acknowledged service, as a partner.
7.38     Where a party has obtained a judgment against a partnership and seeks to enforce it against a person whom he claims is a partner, the party must obtain leave of the court to issue execution against that person unless under the rules set out above it is already established that the person is a partner.^[36]
7.39     The judgment need not be enforced against the partnership before it is enforced against the partners as the firm does not have separate personality. Enforcement against an individual partner is not restricted to the extent of his pro rata liability for the obligations of the partnership. But the position is modified where the partnership is insolvent and its partners are bankrupt. In an insolvency involving a partnership or a partner it is necessary to distinguish joint (or partnership) estate from separate estate and joint (or partnership) debts from separate debts in order to regulate the competition between creditors of the firm and creditors of the individual partners. The partnership creditors are paid first out of the partnership estate but where the partnership estate is insufficient they may prove their debts against the partners' separate estates in competition with their separate creditors.^[37]
7.40     A judgment obtained against a partner, whether in respect of a partnership debt or in respect of a personal debt, cannot be executed against partnership property but can be executed against the partner's share in the partnership by means of a charging order. A charging order does not give the judgment creditor any greater right than that enjoyed by an assignee. The partners may at any time redeem the judgment debtor's share.^[38]

Scots law

7.41     In Scots law a decree obtained against a partnership can be enforced against the assets of the partnership. The decree can also be enforced against the assets of a partner. Section 4(2) of the 1890 Act provides:

An individual partner may be charged on a decree or diligence directed against the firm, and on payment of the debts is entitled to relief pro rata from the firm and its other members.

7.42     The ability of a partnership creditor to enforce against the assets of a partner a decree obtained against the partnership is problematic. A person may find that his assets are subjected to diligence without having been given the opportunity to deny that he was a partner or to contest the validity of the claim against the partnership.^[39]
7.43     Where a creditor obtains a decree against a partner, Scots law allows the creditor to arrest the partner's share in the hands of the partnership. It is not clear however whether the creditor can raise an action of furthcoming to obtain the transfer of the partner's share before the dissolution of the partnership. In English law a creditor of a partner can obtain a court order for the sale of the partner's share in the partnership. An arrester in Scotland cannot obtain such an order.

Our provisional proposals

The need for a judgment against the partnership

7.44     In the Joint Consultation Paper we provisionally proposed that creditors of a partnership should normally be required to obtain a judgment against the partnership before using execution or diligence to enforce their claim against either the assets of the partnership or the assets of a partner but should be able to obtain satisfaction out of a partner's own assets without having to litigate twice.^[40]

Enforcement against a partner's assets

7.45     We also provisionally proposed that a creditor should be permitted to enforce a judgment obtained against a partnership directly against the assets of a partner without it being necessary to obtain a judgment against that partner.^[41]

No need to exhaust the partnership's assets

7.46     Thirdly we asked consultees if they agreed that, on the assumption that the creditor had obtained an appropriate judgment, the creditor should not need to exhaust enforcement remedies against the assets of the partnership before enforcing judgment against the assets of a partner.^[42]

English law

7.47     If partnerships were to have legal personality in accordance with our provisional proposals, we saw no difficulty in a judgment against the partnership being executed against the assets of the partnership. We also suggested that the scheme of section 23 of the 1890 Act (which provides for a charging order against a partner's interest in partnership property for the partner's separate judgment debt) was already well adapted to the situation where a judgment had been obtained against a partner. We suggested that procedural rules would be needed to regulate such matters as service on the partnership but that it would not be necessary to alter primary legislation.^[43]

Scots law

7.48     We also made provisional proposals in relation to Scots law. We proposed that it should be made clear that a decree of furthcoming could be obtained after the arrestment of a partner's share in the partnership and that its effect would be to enable the arrester to obtain payment of any sums due to the partner from the partnership, or on the dissolution of the partnership, as and when they fell due. We also asked whether the creditor of a partner should be able to apply to the court for an order for the sale of the partner's share and whether the other partners should have a right to purchase the share if the court ordered such a sale.^[44]

Consultation

The need for a judgment against the partnership

7.49     There was general support among consultees for our proposition that creditors of a partnership should normally be required to obtain a judgment against a partnership before enforcing their claims against the assets of the partnership or the assets of a partner but that the creditors should not normally have to litigate twice.

Informing partners of claims and enforcement against a partner's assets

7.50     Some consultees expressed concerns that former partners should be made aware of legal proceedings against the partnership and given an opportunity to participate in them. Others were concerned that third parties should be allowed to pursue parallel proceedings against the partnership and the partners to avoid suing the wrong person if there was an unknown discontinuity of legal personality. They emphasised the need for a requirement that a partnership when sued should name its partners in its acknowledgement of service.^[45] The Chancery Bar Association was concerned that the third party would be prejudiced by having to look to the partnership, which might not have significant assets, before pursuing the partners. Another consultee thought that creditors should sue both the partnership and the partners and that all persons – partners and former partners – who could incur liability as a result of the litigation should have a right to know of the legal proceedings.
7.51     There was also general support for our proposals (a) that a creditor should be permitted to enforce a judgment obtained against a partnership against the assets of a partner without it being necessary to obtain a judgment against that partner and (b) that a creditor with a judgment against a partnership need not exhaust enforcement remedies against the assets of a partnership before enforcing the judgment against the assets of a partner. Concerns were expressed about the need to protect partners and former partners by ensuring that they had an opportunity to participate in legal proceedings before they were held liable for a partnership debt. The APP disagreed with proposition (a) and suggested that creditors should have the right to have judgment entered against the relevant partners and that entry of that judgment should always precede enforcement against any partner.
7.52     In Scotland both the Faculty of Advocates and Professor Gretton expressed similar concerns about the need to protect partners and former partners. Professor Gretton urged that a decree against a partnership should not be deemed to be a decree against each partner. The proposition might be incompatible with Article 6 of the European Convention on Human Rights and Fundamental Freedoms, and even if it were not, he considered it unacceptable.
7.53     Several consultees disagreed with proposition (b), namely that a creditor need not exhaust enforcement remedies against the assets of the partnership before enforcing a judgment against the assets of a partner. Some thought that the proposition diluted the concept of separate personality and preferred the approach of RUPA, which requires as a norm the exhaustion of partnership assets.^[46]

Scots law: the effect of an arrestment

7.54     Among Scottish consultees there was widespread support for our proposal to provide that it was competent after an arrestment to obtain a decree of furthcoming of a partner's share in a partnership. However several consultees had misgivings about the proposal that the court should grant an order for the sale of the partner's share. Why, it was asked, should a creditor have a right which the partner did not have? The Law Society of Scotland also argued that any provision for partnerships should be consistent with the wider law of arrestment and suggested that complex rules were not required as the creditor could sequestrate the estate of the debtor partner. If a power to order a sale were to be introduced, most consultees supported the proposal that the other partners should have a right to purchase the debtor partner's share.

Reform recommendations

7.55     There is a need to strike a balance between the interests of creditors of a partnership and the interests of the partners and former partners who are liable for the partnership's debts and obligations. As we recommended above, a claim against a partner for a partnership debt should be pursued either in the same action as a claim against the partnership or in separate proceedings after the creditor has established his claim by obtaining judgment or an arbitral award against the partnership.^[47] We do not favour the option of allowing actions to proceed against either the partnership or the partners. A creditor can avoid the danger of suing the wrong entity by suing the relevant partners as well as the entity in the same action and using the powers to obtain information which we recommend. Armed with that information the creditor can direct his claim against the correct entity and the correct partners.^[48] At the same time, we agree with the Chancery Bar Association that it would put a creditor in a worse position than he enjoys under the existing law if he had to attempt to exhaust the assets of the partnership before enforcing his claim against the assets of the partners. We see no need to follow RUPA by requiring enforcement against partnership assets as a precondition of recovery from the assets of the partners. We do not see the introduction of separate legal personality as altering in any practical way the liability which partners have to meet the debts and obligations of the partnership.
7.56     We think that it is important that a creditor of a partnership should not have to litigate twice to enforce his claim, once against the partnership and then against the partners. At the same time we recognise that there is force in the observations of consultees who were concerned to protect the interests of partners and former partners where a creditor of a partnership seeks to enforce a claim against them. It would not be appropriate, and arguably might be a breach of Article 6(1) of the ECHR, if the courts were to enforce against the assets of a person a claim established against a partnership without having given that person the opportunity to defend the claim on its merits or contest the assertion that he was a partner with secondary liability for the particular debt.
7.57     We recognise that it may often be easier for a claimant against a partnership if he does not have to join the individual partners in the action. The claimant may sue the partnership alone. If he does so, we propose that he will be able to enforce his judgment only against the assets of the partnership. In many cases, for example where the claim against the partnership is covered by insurance, it may be sufficient to sue only the partnership. In other cases, the claimant may want to have the right to enforce his claim against the assets of the individual partners.
7.58     In such cases, a person against whom the claimant seeks to enforce a debt due by the partnership must have the opportunity to contest the assertion that he is a partner who has secondary liability for that debt. The person in question may have no such liability, for example where he had retired from the partnership before the debt or obligation was incurred. Where the person against whom the claimant seeks to enforce his claim is a partner (or former partner), we think that that person should also have the right to contest the merits of the claim. Otherwise a partner, who had been given no opportunity to defend the claim, could be liable for the claim where another partner failed to advance a valid defence.
7.59     Under our proposals, the creditor of the partnership will have the option of suing both the partnership and some or all of the partners in the same action. In many cases, especially where the partnership does not have many partners, a creditor will protect himself by suing the partnership and all of the partners whom he believes have secondary liability for the claim. If the creditor sues only the partnership or the partnership and certain of the partners he will not be allowed to enforce the court order against partners not named in the judgment. To enforce his claim against such partners he will require to initiate fresh proceedings. We recognise that a creditor may not know the identity or the addresses of all of the relevant partners when the action is raised. To avoid having to raise separate proceedings the creditor may use the powers which we recommend to require disclosure of the names and last known addresses of the partners with secondary liability for the relevant claim and include them in the legal proceedings.^[49]
7.60     We recommend that a creditor of a partnership should have to obtain judgment against a partner before he can enforce a partnership obligation against the partner's assets. This is both fairer and more consistent with the requirements of the ECHR than the Scottish common law rule which allows the enforcement of a decree for a partnership debt against the assets of a partner without giving the partner the opportunity to dispute the claim.^[50]
7.61     In this regard we are generally adopting the approach which the English courts have adopted in their procedural rules.^[51] However, we are departing from current English practice which uses service of the claim form or similar actions as sufficient to allow a judgment against a partnership to be enforced against the partner. We do not think that the imposition of a requirement to obtain a judgment against the partner will be problematic for the partnership creditor. There would be a potential for injustice if a partner who was not formally a party to the action against the partnership, but was aware of the proceedings and could have taken part in them if he had wished to do so, were then to seek to challenge findings made in the first action. It may well be that the courts would have an inherent jurisdiction to prevent this from happening, but we think that it would be desirable for the matter to be governed by procedural rules.^[52]
7.62     We envisage that the necessary procedural rules should be established by rules of court, supported, where appropriate, by practice directions. We understand that the Rules Committee and the Department for Constitutional Affairs (formerly the Lord Chancellor's Department) may wish to review the relevant English rule of court in RSC Order 81 in the light of our report. The Scottish Law Commission will prepare suggested rules of court for submission to the Rules Council in Scotland.
7.63     We also propose the abolition of the rule in Scotland which allows diligence against partners on a decree against the partnership. As the rule is a matter of substantive law, it cannot be abolished by rules of court. We do so by stating as a rule throughout Britain that a judgment against a partnership is not enforceable against the property of a partner.
7.64     We therefore recommend:

(1) That a creditor of a partnership may enforce a claim in respect of a partnership obligation against a partner or former partner by including the partner as a defendant/defender in the action against the partnership or by suing the partner or former partner in a separate action;^[53]

(2) That the creditor of a partnership may enforce his claim against the assets of the partners who have secondary liability for that claim without first exhausting enforcement remedies against the assets of the partnership. ^[54]

(3) That a judgment, decree or arbitral award against a partnership should not be enforceable, by way of execution, diligence or otherwise, against the property of a partner. (Draft Bill, cl 25(4))

Limitation and prescription

7.65     In striking a fair balance between the interests of creditors of the partnership and those of partners and former partners it is necessary also to address the rules of limitation of actions in English law and in Scots law the rules of prescription. It is important that partners should not be able to avoid liability for partnership debts by hiding their status as partners until a claim becomes unenforceable by limitation or is extinguished by prescription. Were this to happen the benefits of informality and privacy, for which partnership is valued, would result in injustice.
7.66     It is therefore our policy that an undisclosed partner should not benefit from the privacy of his membership of a partnership and the effluxion of time to avoid liability where a judgment has been obtained against the partnership. At the same time we would not wish to preserve stale claims. Accordingly a limitation period is required to extinguish the liability of a partner (or former partner) after judgment has been obtained against the partnership. The law of limitation in England and Wales differs from the law of prescription in Scotland. As a result different rules will apply in each jurisdiction.

England & Wales

7.67     We have recommended above^[55] that a creditor may pursue claims against a partner who has secondary liability for a partnership debt or obligation either in the same proceedings as he pursues his claim against the partnership or after he has obtained judgment or an arbitral award against the partnership but not otherwise. In many circumstances it would be fair if the limitation period in relation to the secondary liability of a partner were the same as the limitation period in respect of the partnership. In some circumstances however, the creditor may know of the liability of the firm but be unable to ascertain the identity or address of an undisclosed partner. What is required is a short time after the creditor has obtained a judgment against the partnership in which he may discover a hitherto undisclosed partner and institute proceedings against him.
7.68     We think that the Limitation Act 1980 should be amended to introduce a special time limit for the secondary liability of a partner. We propose that that time limit should be (a) the date of the expiration of the period of limitation (if any) applicable to an action against the partnership in respect of the obligation in question or (b) if later, the expiration of two years from the date of judgment against the partnership in relation to that obligation. We think that this regime may readily be adapted to the Law Commission's wider recommendation for the reform of the law on limitation.^[56]

Scotland

7.69     We think that it is possible to achieve a satisfactory result, which is consistent with the general law,^[57] along lines similar to our recommendations for English law. We are aware of an authority which suggests that a claim against a partner in relation to his secondary liability for a partnership obligation prescribes five years after the date on which decree is obtained against the partnership.^[58] We are not satisfied that this is good law. It is inconsistent with the established practice that a creditor of a partnership can sue both the firm and the partners in the same action.
7.70     We think that the prescriptive period in relation to a partner's secondary liability for a partnership obligation should be a period which begins with the date when decree is awarded against the partnership in respect of the relevant partnership obligation and which expires on the later of (a) the date when the partnership's obligation would have prescribed but for the relevant claim against the firm and (b) two years after the date of the decree against the partnership.
7.71     The creditors of the partnership would thus be able to pursue a claim against a partnership within the time scale allowed by the law of prescription in relation to the obligation in question. Once proceedings against the partnership have been raised the creditor would have the duration of the proceedings against the firm and also two years after obtaining decree to identify and raise an action against any partners with secondary liability whom he had not sued individually in the initial proceedings against the partnership. In our view this gives third parties sufficient time to identify a latent partner and initiate proceedings against him. We propose to amend the Prescription and Limitation (Scotland) Act 1973 to achieve this result.^[59]
7.72     We therefore recommend:

(1) That in English law, a claim against a partner in respect of his secondary liability for a partnership obligation should be subject to a special limitation period. That limitation period should end on the date of the expiration of the period of limitation (if any) applicable to an action against the partnership in respect of the relevant partnership obligation or, if later, the expiration of two years from the date of judgment against the partnership establishing the amount of the partnership's liability for the obligation; (Draft Bill, cl 25(3) and Schedule 2 paras 1-3)

(2) That in Scots law, the obligation of a partner in relation to his secondary liability for a partnership obligation should prescribe in accordance with the following special rule. The prescriptive period should begin on the date on which decree (or arbitral award) is awarded against the partnership in respect of the relevant partnership obligation and expire on whichever is the later of the following dates: (a) the date on which the prescriptive period applicable to the partnership obligation would have prescribed but for the relevant claim against the partnership which resulted in the decree (or award) and (b) the second anniversary of the date of that decree (or award). (Draft Bill, cl 25(3) and Schedule 2 paras 4 –10)

Scots law: the effect of arrestment in execution

7.73     Finally, we require to address the issue, which is one of Scots law, of the methods by which a creditor who has arrested a partner's share in the partnership can realise that share. There was no consensus among consultees in favour of adapting section 23 of the 1890 Act to allow an arresting creditor to apply to the court for an order for sale of the partner's share. It would be very difficult to introduce such a right in the context of the existing law of diligence.
7.74     We think that the existing law of arrestment and furthcoming should be clarified and developed as follows. First, following the arrestment in execution of a partner's share in a partnership, it should be possible to obtain a decree of furthcoming at any time during the subsistence of the partnership whether or not the partner's share or any part of it is then payable to him. Secondly, the arrested debt due by the partnership to the partner may be realised by the arresting creditor only when the partner's share or any part of it which is subject to the arrestment becomes payable. Thus where a share of profits has been arrested, a decree of furthcoming would entitle the creditor to payment when the partner would have been entitled to withdraw his share of the profits. Similarly, where the partner's share has been arrested and a decree of furthcoming obtained, the furthcoming will entitle the creditor to receive the value of the partner's share when the partner withdraws from the partnership and becomes entitled to the financial value of his share.^[60] Alternatively, where the partnership breaks up and is wound up, the arresting creditor with a decree of furthcoming may realise the debt in the winding up of the partnership by obtaining payment of the share when the other partners obtain payment of their shares. The arrestment and furthcoming should not entitle the creditor to take part in the management of the partnership business.
7.75     We therefore recommend that in Scotland the law of arrestment and furthcoming of a partner's share in a partnership should be reformed to the following effect:

(1) A creditor of a partner who has arrested in execution a partner's share in the partnership should be entitled to obtain a decree of furthcoming at any time before the dissolution of the partnership;

(2) A decree of furthcoming should transfer the partner's share to the creditor;

(3) The creditor with a decree of furthcoming should be entitled to obtain payment of that share or part of it only when the share or the relevant part of it would otherwise have become payable to the partner;

(4) In particular the creditor with a decree of furthcoming should be entitled to receive the partner's share of the partnership's profits when that share of profits would otherwise have been payable to the partner; and

(5) The creditor with a decree of furthcoming may realise the share either when the partner in question withdraws from the partnership or when the partnership is wound up, by obtaining payment of the share when otherwise it would have been paid to the partner; and

(6) The arresting creditor who obtains a decree of furthcoming is not thereby entitled to take part in the management or administration of the partnership business. (Draft Bill, cl 37)

Note 1    CPR, Sched 1, RSC O 81, r 1. This is a procedural rule for convenience only. SeeLindley & Banks, para 14-03.    [Back]

Note 2    CPR, Sched 1, RSC O 81, r 2. The party to the action serves written notice requiring such disclosure and if the notice is not complied with the court may order the partners to produce the written statement.    [Back]

Note 3    Whitehead v Hughes (1834) 2 C & M 318; 149 ER 782.    [Back]

Note 4    1890 Act, s 24(8).    [Back]

Note 5    See Dreyfus v IRC (1929) 14 TC 560 and Oxnard Financing SA v Rahn and Others [1998] 1 WLR 1465.    [Back]

Note 6    See Antermony Coal Company v Wingate & Co (1866) 4 M 1017.    [Back]

Note 7    1890 Act, s 24(8), Hutcheon and Partners v Hutcheon and Another 1979 SLT (Sh Ct) 61.    [Back]

Note 8    Muir v Collett (1862) 24 D 1119.    [Back]

Note 9    Joint Consultation Paper, para 17.17 (1) and (2).    [Back]

Note 10    Joint Consultation Paper, para 17.17(3). This would remove the rule of Scots law requiring all of the partners within the jurisdiction to be called and would make it clear that the Scots law rule that a partnership debt must first be constituted against the partnership would not apply to a dissolved partnership. See Joint Consultation Paper, para 17.17(5) and (6).    [Back]

Note 11    See paras 12.13 – 12.23 below.    [Back]

Note 12    Joint Consultation Paper, para 17.17(4).    [Back]

Note 13    Joint Consultation Paper, paras 17.18 – 17.27.    [Back]

Note 14    We address the issue of limitation of actions, or in Scotland prescription, in paras 7.65 – 7.72 below.    [Back]

Note 15    In this context dissolution refers to the start of the winding up process: see 1890 Act, s 38.    [Back]

Note 16    Joint Consultation Paper, para 17.17 (5) and (6).    [Back]

Note 17    See paras 6.73 – 6.80 above.    [Back]

Note 18    If the incoming partner or partners had granted (expressly or impliedly) an indemnity to the former partner or partners, the incomers’ assets would indirectly be available to pay the creditor if the former partners enforced the indemnity against them.    [Back]

Note 19    See para 6.80 above.    [Back]

Note 20    In Scotland a claim can be constituted against a person, including a partnership, by registering a contract for execution in the Books of Council and Session, thus avoiding the need for a court order before enforcing the claim against the contracting party’s assets.    [Back]

Note 21    This is, of course, without prejudice to any personal liability which a partner may have assumed in relation to a third party independently of his status as partner. Thus if the individual partner were himself guilty of negligence in the provision of services to a third party, the third party could sue him directly without relying on the vicarious liability of the partnership or in addition to suing the partnership. See, by way of analogy, Merrett v Babb [2001] QB 1174.    [Back]

Note 22    If the partnership is a limited partnership service should be at the limited partnership’s registered office. See paras 15.30 - 15.34 and 15.52 below.    [Back]

Note 23    See para 7.33 below.    [Back]

Note 24    See paras 7.55 – 7.64 below.    [Back]

Note 25    CPR, Sched 1, RSC O 81, r 2.    [Back]

Note 26    See para 7.4, footnote 1 above.    [Back]

Note 27    Mitchell v Grangemouth Coal Co (1894) 2 SLT 104.    [Back]

Note 28    CPR, Sched 1, RSC O 81, r 2 provides: “Disclosure of partners’ names: (1) Any defendant to a claim brought by partners in the name of a firm may serve on the claimants or their solicitor a notice requiring them or him forthwith to furnish the defendant with a written statement of the names and places of residence of all the persons who were partners in the firm at the time the cause of action accrued; and if the notice is not complied with the court may order the claimants or their solicitor to furnish the defendant with such a statement and to verify it on oath or otherwise as may be specified in the order, or may order that further proceedings in the claim be stayed on such terms as the court may direct. (2) When the names of the partners have been declared in compliance with a notice or order given or made under paragraph (1) the proceedings shall continue in the name of the firm but with the same consequences as would have ensued if the persons whose names have been so declared had been named as claimants in the claim form. (3) Paragraph (1) shall have effect in relation to a claim brought against partners in the name of a firm as it has effect in relation to a claim brought by partners in the name of a firm but with the substitution, for references to the defendant and the claimants, of references to the claimant and the defendants respectively, and with the omission of the words “or may order” to the end.”    [Back]

Note 29    In the Joint Consultation Paper (para 20.02), we suggested that the introduction of a registered partnership would assist persons dealing with partnerships by establishing a register which would be both a contemporary and historical record of the identity of the partners in a partnership. In paras 13.27 – 13.29 below we explain why we have not taken forward the proposal for a registered partnership. In its absence we think that we can do more to help the person who deals with a partnership.    [Back]

Note 30    We also propose certain amendments to the Business Names Act 1985. See paras 13.23 – 13.24 below.    [Back]

Note 31    For example a claim against a firm of solicitors by a disappointed would-be beneficiary (White v Jones [1995] 2 AC 207), where the testator is alive when the firm breaks up and when all the assets of the firm are distributed but dies thereafter.    [Back]

Note 32    See the Joint Consultation Paper, para 17.17 (5) and (6) and paras 7.9 and 7.18 above.    [Back]

Note 33    SeeMarshall v Bullock, (unreported) 27 March 1998, Court of Appeal.    [Back]

Note 34    CPR, Sched 1, RSC O 81, r 5(1).    [Back]

Note 35    CPR, Sched 1, RSC O 81, r 5(2).    [Back]

Note 36    CPR, Sched 1, RSC O 81, r 5(4).    [Back]

Note 37    SeeLindley & Banks, para 27-89 ff.    [Back]

Note 38    1890 Act, s 23.    [Back]

Note 39    See Ewing v McClelland (1860) 22 D 1347.    [Back]

Note 40    Joint Consultation Paper, para 10.20(3).     [Back]

Note 41    Joint Consultation Paper, para 10.20(5).    [Back]

Note 42    Joint Consultation Paper, para 10.20(6).    [Back]

Note 43    Joint Consultation Paper, para 18.7.    [Back]

Note 44    Joint Consultation Paper, para 18.18.    [Back]

Note 45    See our recommendation in para 7.29 above.    [Back]

Note 46    RUPA, s 307(d).    [Back]

Note 47    See para 7.22 above.    [Back]

Note 48    Our recommendations for continuity of personality of a partnership on changes of membership and the continuation of that personality in a winding up should make discontinuity of personality in a continuing partnership business an unusual occurrence.    [Back]

Note 49    See para 7.29 above.    [Back]

Note 50    See paras 7.41 – 7.43 above.    [Back]

Note 51    CPR, Sched 1, RSC O 81, rr 5(2) and 5(4).    [Back]

Note 52    See our recommendation in para 7.26 above.    [Back]

Note 53    See para 7.22 above.    [Back]

Note 54    Clauses 23(1) and 24(1) of the draft Bill achieve this result by providing that a partner is personally liable for the whole amount of a partnership obligation and by making the only precondition of a judgment against the partner that the partnership’s liability has been established. The draft Bill imposes no restriction on the enforcement of the judgment which the creditor obtains against the partner.    [Back]

Note 55    See para 7.22 above.    [Back]

Note 56    See Limitation of Actions (2001) Law Com No 270 in which the Law Commission recommended a core limitation period which would apply to most claims for a remedy for a wrong, for the enforcement of a right and for restitution. In summary the recommended regime involves (a) a primary limitation period of three years starting from the date when the claimant had or ought reasonably to have had the requisite knowledge to bring a claim against the defendant and (b) a long-stop limitation period of ten years starting from the date of the accrual of the cause of action or (for claims in tort where loss is an essential element of a cause of action or breach of statutory duty) from the date of the act or omission which gives rise to the cause of action. It should be noted that a partner or former partner will not be able to rely on being clear of any liability after ten years from the starting date in relation to the cause of action: a partner’s action for contribution from another partner will have its own limitation period, starting from the date at which the claimant for contribution became liable. The Law Commission also recommended a modified regime for personal injury claims in which the court would have a discretion to disapply the primary limitation period and there would be no long-stop limitation period (see (2001) Law Com No 270, paras 3.101 and 3.169).     [Back]

Note 57    We draw on (a) the prescriptive period in relation to the partnership’s obligations and (b) the prescriptive period in relation to obligations to make contributions between wrongdoers in section 8A of the Prescription and Limitation (Scotland) Act 1973.     [Back]

Note 58    Highland Engineering Ltd v Anderson 1979 SLT 122.    [Back]

Note 59    We have not provided a separate rule for claims, such as personal injury claims, which are subject to a limitation period under Part II of the Prescription and Limitation (Scotland) Act 1973. Such a claim against the partnership must be pursued within the limitation period unless the court exercises its discretion under section 19A of the 1973 Act to over-ride the time limits. Claims under Part II of the 1973 Act are not subject to the five-year or twenty-year prescriptive periods (1973 Act, s 7(2) and Sched 1, para 2). Accordingly, the prescriptive period for a claim against a partner in respect of this sort of partnership obligation will be two years from the date of the decree or award against the partnership. We see no need to provide an alternative long-stop of the expiry of the period of limitation of the action against the partnership as we think that it will be very rare that a claimant obtains decree against a partnership within one year of the commencement of the limitation period.     [Back]

Note 60    See para 8.75 below.    [Back]