Placing the blame
Partners in a firm have a duty to act in good faith to other partners, but when are they personally liable for their own negligence and when is it the firm's responsiblity, asks Mark Blackett-Ord
What is the duty of one partner in a firm to the other partners? A duty to be honest, obviously, and a duty to act in good faith. But is he liable for his own simple negligence in relation to the firm's affairs? This liability may take the form of a claim by the firm against him, or a claim by himself for an indemnity or contribution from the other partners (s.24(2)(a) of the Partnership Act 1890), but the question is the same: should he or the firm bear the ultimate cost?
It can be argued that the duties of partners to one another, which are essentially duties of honesty rather than care, impliedly exclude liability for simple negligence within the firm. In Medforth v Blake [2000] Ch 86, CA, Sir R Scott V-C said that 'the concepts of negligence on the one hand and fraud or bad faith on the other ought in my view to be kept strictly apart'. Millett LJ said in Armitage v Nurse [1998] Ch 241 (at 253-4) that the duty of trustees is not one of skill and care; and Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295 shows similarly that a mortgagee owes no general duty of care to the mortgagor but only a duty to exercise his powers in good faith.
It is not the practice in England for a solicitors' firm to charge the cost of the excess on the firm's insurance to the partner where that partner's negligence has been the cause of the claim. But a partner owes some duty of care to his partners because as their agent he has assumed responsibility for their affairs to the extent of the partnership relationship (see Thomas v Atherton (1877) 10 Ch D 185, CA; Re Webb (1818) 8 Taunt 443; McIlreath v Margetson (1785) 4 Doug KB 278 per Lord Mansfield; Bury v Allen (1845) 1 Coll 589. A partner was held not liable for loss on an injudicious sale of assets on winding up in Cragg v Ford (1842) 1 Y & C Ch Cas 280, probably because it did not amount to negligence.)
The meaning of 'gross' or 'culpable' negligence
So a partner is liable to his partners whenever his own 'gross' or 'culpable' negligence caused loss to the firm. What is the meaning of 'gross' or 'culpable' negligence? Possibly it means no more than 'negligence'. Rolfe B said in Wilson v Brett (1843) 11 M & W 113 (not a partnership case) that he 'could see no difference between negligence and gross negligence '“ that it was the same thing, with the addition of a vituperative epithet'.
Romer J in Re City Equitable Fire Insurance Ltd [1925] Ch 407 said at 427 that he found difficulty in understanding the difference; and Millett LJ in Armitage v Nurse expressed a 'healthy disrespect' for the distinction. The English and Scottish authorities are discussed in Blackwood v Robertson 1984 SLT (Sh Ct) 68 and the Commonwealth ones in Lane v Bushby (2000) 50 NSWLR 404, NSW SC.
It could also mean that the partner should not act 'below the standards of a reasonable businessman' (Woolf J in Winsor v Schroeder (1979) 129 NLJ 1266; Gallagher v Schul (1988) NZBLC 103; Mirco Bros Pty v Palermo Nominees (2005) WASC 190).
But the better view is that it means something different. So trustees' 'gross negligence' is recognised as something qualitatively different from the default of trustees 'who have bona fide abstained from closely superintending the administration of a trust, or who have committed mere errors of judgement'¦' (Lord Watson in Knox v Mackinnon (1888) 13 App Cas 753, followed in Robertson v Howden (1892) 10 NZLR 609, as discussed in Midland Bank Trustee (Jersey) Ltd v Federated Pension Services (1996) PLR 179 (Jersey CA), itself approved by Millett LJ in Armitage v Nurse).
Carnwath J at first instance in Hurst v Bryk (11 April 1995, unreported), (citing Caparo plc v Dickman [1990] 2 AC 605 and White v Jones [1995] 2 AC 207. See also Lane v Bushby (2000) 50 NSWLR 404; Wiscum & Cash v Cash 837 P 2d 692 (1992); Johnson v Weber 803 P 2d 939 (1990); Northern v Tatum 51 So 17 (1909); Snell v De Lane 27 NE 183 (1891); Thomas v Milfelt 222 SW 2d 359 (1949)) considered a claim by a partner against the firm's management committee and said: 'I have serious doubts as to the nature of the duty of care'¦ There is no doubt, of course, that partners owe each other duties of good faith... In addition, no doubt, a partner may put himself in a position where he owes a higher duty of care... However...a partnership is a co-operative venture, whose success depends on a pooling of effort and responsibility. The mere fact that individual partners undertake particular tasks in the interest of the firm does not mean that they accept legal responsibility going beyond that which is expressed or implicit in the deed.'
An 'accepted fact of life'
In the Scottish striking-out case of Ross Harper & Murphy v Banks [2000] SLT 699 (followed in Mirco Bros Pty v Palermo Nominees (2005) WASC 190), Lord Hamilton expressed the view that a partner might be liable to the other partners for the excess on the professional insurance policy which was suffered as a result of his negligence, the issue being described as one of 'reasonable care in all circumstances'. But his view was not warmly received at the hearing of the appeal and the case was settled. Nor was the same view taken on similar facts in Lane v Bushby (2000) 50 NSWLR 404, NSW SC decided in the New South Wales Supreme Court the same year (followed in the Supreme Court of New Zealand by Macalister Todd Phillip Bodkins v AMP General Insurance Ltd [2007] 1 NZLR 485, where the firm's practice on this was evidenced by its arrangements with its insurers), nor by the Supreme Court of New Zealand in Macalister Todd Phillips Bodkins v AMP General Assurance Ltd (2006) NZSC105, where the court remarked that 'partner negligence leading to a claim by a client is regarded as an unfortunate but accepted fact of life'.
Two cases have recently given the question detailed analysis to the question of whether or not a partner must pick up the whole cost of his own negligence. In Gallagher v Schulz (1988) 2 NZBLC pp 103,208-9, Williamson J analysed the authorities and some Roman law and observed: 'If the partner who causes loss has done so merely because of the lack of skill and experience, he is not answerable to the co-partner by reason of that lack alone... [but]... the duties of good faith and honesty'¦ may be sufficient in themselves to impose upon a partner the duty to use his or her own skill in a reasonable manner.'
Partner entrusted with responsibility
He held that the standard to be applied should be no more than the standard that the particular partner at fault might employ in the conduct of his own affairs, unless he had been taken into partnership because of some special trust or particular confidence in him, in which case the level of duty would be set at that level.
In Tann v Herrington [2009] EWHC 445 (Ch), Bernard Livesey QC (sitting as a judge of the Chancery Division) considered a two-partner firm in which the insurance claims were dealt with by the defendant partner. A claim against the firm was made by a client which the defendant did not refer to the insurers, and consequently when the claim matured the insurers declined to meet it and the partner had to meet it personally. He sought a contribution against the claimant. The judge followed much of the reasoning in Macalister Todd (supra) but refused the claim, saying:
'Where the default is by a partner entrusted with the responsibility of protecting the firm by complying with the insuring provisions... the firm entrusts such a partner with a responsibility... and expects him to perform the duty with all reasonable care and skill.'
This set an objective test which seems to be similar to that in an ordinary case of negligence. But the judge accepted the possibility of alternative analysis 'that the firm would expect each partner to do his best... or to act to the standard he would apply in looking after his affairs'.
That would be a subjective test. The judge held that the defendant failed in the circumstances to meet either test.
So, it appears that there are two strands of thought in the authorities. One is that the partner in default does not have a duty of care as such but only a duty of good faith which involves his obligation to do his best, like 'a servant who loyally does his incompetent best for his master' (Millett LJ in Bristol & West Building Society v Mothew (1998) 1 Ch 1 at 18) which will vary with his particular personal qualities. The other is that he is liable in negligence under ordinary principles but only at the level where it can be said that his default is 'gross'; the difference being not qualitative but one of degree. In either case, it seems that the partner will not be liable to his partners for what might be termed his own 'simple' negligence.