Out-Law News 4 min. read
28 Jul 2017, 7:56 pm
Steven Worbey and Kevin Farrell were unable to show that their business relationship with Steven Elliott met the legal test for a partnership. The two men were unable to prove that they were carrying on a business "in common" with Elliott, or that they had "actually reached the stage of a concluded contract" about the nature of their future business relationship, the Inner House of the Court of Session ruled.
"Even if the Lord Ordinary [at first instance] had found as a fact that the parties had entered into a business relationship with a view to profit, it would not follow as a matter of law that they were carrying on such business 'in common' and therefore in partnership," said Lord Glennie, giving the judgment of the court. "Were that to be the case, the words 'in common' [in the 1890 Partnership Act] would add nothing."
"A partnership is, or at least results from, a contract. On any view, before a partnership can be found to exist, it must be established that the parties entered into a contractual relationship. That may, of course, be established by conduct, but, as in the case of any contract, there must be 'consensus ad idem', certainty of terms and an intention to create legal relations," he said.
On the facts of the case, there was "insufficient consensus among the parties to create a contractual relationship", the appeal judge said.
"There was no consensus as to the nature or extent of [Worbey and Farrell's] obligations," he said. "Nor was there any consensus as to the nature or extent of [their] entitlement to a return on their investment … Put shortly, the parties were working together in anticipation of concluding an agreement in the future on terms which were yet to be finalised," he said.
Commercial litigation expert Craig Connal QC said that the case was "a salutary reminder of how what may sound a simple legal concept becomes much more treacherous and nuanced in real life".
"Finding that there is a partnership has major consequences – joint and several liability for debt, for example - and the case is a real red flag to parties in discussions to be careful and clear as to what they are about," he said. "The judge described the case as 'fact-specific', which is just another way of saying that on another day and before another judge a different result might have arisen."
"The case is also a reminder of how narrow the distinction between what is and isn't a partnership can be. The pursuers argued, in effect, that when parties conducted business 'together' with a view to profit then they became partners as a matter of law. The court rejected that as over simplistic and something more was needed. Overall, the case is a lesson in the value of legal advice: parties must be clear on what they intend to do, and when they reach a finalised deal," he said.
Worbey and Farrell met up with Elliott in Vienna in October 2009 while traveling for work. One evening, during a discussion in a bar, the conversation turned to the idea of developing a location-based gay dating app, something which they had discussed previously. Elliott followed up the conversation with an email on his return to his home in Brighton, purchasing a laptop computer which Worbey and Farrell agreed to fund. Worbey came up with the name 'Bender' for the app, while Farrell later proposed the name 'Brenda' for a lesbian version of the app.
As work progressed on the app, Elliott attempted to obtain a regular funding commitment from Worbey and Farrell, whose role at the time was described as "a mixture of investors/marketing gurus etc". He gave them the option of becoming shareholders in a company, or receiving a share of the profits under a royalty agreement. Worbey indicated his preference for "the royalties option", which would be paid from net profits. However, no formal arrangement was ever agreed.
In May 2011, after Worbey and Farrell failed to make their regular payment for April, Elliott wrote to them terminating the business relationship. He enclosed with his letter a cheque reflecting the amount that the pair had contributed to the project "plus an additional 4% interest". Worbey and Farrell did not cash the cheque. Elliott continued to develop the apps, now known as Wapo and Wapa, until his bankruptcy in January 2015. Worbey and Farrell claimed that they were entitled to a share of the profits in these apps, as partners in the business.
In his judgment, Lord Glennie looked to the Partnership Act itself for guidance as to when a partnership may or may not be established. It provided that common property did not of itself create a partnership as to anything owned, even if the owners share the profits from its use; while sharing of gross returns does not of itself create a partnership either. The Act further provides that each partner is an agent of the firm, whose acts are binding on all the other partners; while every partner in the firm is liable jointly and severally with the other partners for all debts and obligations of the firm. These points were all relevant to the facts of the present case, he said.
The trial judge had found that Worbey and Farrell assumed "no obligations whatsoever" with regard to the liabilities of the business; and that there was no evidence of agency or anticipation of future profits. For all these reasons, the judge was entitled to conclude, as he did, that there was no partnership, the appeal judge said.
"[The judge's] ultimate conclusion … was that [their] role was aptly characterised, in their own terms, as 'investors/marketing gurus etc'," said Lord Glennie. "They were, in short, investors in the intended business as opposed to members of a partnership."
"This was an assessment which the Lord Ordinary was fully entitled to make. We see no grounds for interfering with that assessment," he said.