A recent Court of Appeal decision (Clark v Libra Developments Ltd  NZCA 493), provides a useful guide to the general principles which apply to partners who do not have a formal agreement in place governing the dissolution of their partnership. In particular, the decision discusses the extent of the duty on former partners to complete partnership opportunities which exist at the time of dissolution under the Partnership Act 1908 and under their fiduciary obligations to each other.
Mr Clark and Mr Hyslop (through a company owned by a trust controlled by Mr Hyslop) had been found to be in a partnership as property developers from 1997 to 2002. At the time the partnership was terminated by Mr Clark in October 2002 (in acrimonious circumstances) there were a number of property developments which the partnership was engaged or which were in prospect, including a possible contract to refurbish a building as a hotel (the hotel project). The appeal arose from a High Court judgment which determined a range of issues relating to the manner of calculation of the partnership's assets.
One of the principal issues on appeal was whether the High Court had been correct in its finding that Mr Clark was obliged to complete (for the benefit of the partnership) the hotel project, and the consequential effects these findings had on the damages and other relief which Mr Hyslop was entitled to in respect of the project.
Mr Clark argued that there was no basis for the High Court's finding. He argued that his only obligation in respect of the hotel project was the obligation not to profit, for his benefit alone, from the opportunity the partnership had possessed at the time of dissolution.
The Court of Appeal's decision
The Court of Appeal noted that, in the absence of any relevant provisions in a partnership agreement or under a contractual obligation assumed by the partnership to a third party, any such obligation on Mr Clark (as a former partner) to complete the hotel project could only arise under section 41 of the Partnership Act or from any fiduciary duty on the part of Mr Clark.
Section 41 of the Partnership Act (Continuing authority of partners for purposes of winding up)
Section 41 of the Partnership Act provides authority for each partner to bind the firm "so far as may be necessary to wind up the affairs of the partnership and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise...".
The court referred to previous decisions which have established that:
- the power or obligation to continue the firm's business after dissolution under section 41 is limited and extends only so far as is necessary to wind up its affairs and to complete "transactions" begun but unfinished at the time of dissolution;
- section 41 does not oblige partners to enter into new bargains or contracts, particularly if that would require incurring substantial expenditure or liabilities which did not exist at the date of dissolution; and
- section 41 does not require a partner to undertake fresh liabilities in order to preserve an asset of the partnership.
The Court of Appeal concluded that there was no obligation on the part of Mr Clark under section 41 to complete the hotel project for the benefit of the partnership for these reasons:
- Even though, as the High Court judge had found, the opportunity to undertake the refurbishment of the hotel building may have come to fruition if the partnership had not been dissolved, this opportunity was not an "asset" of the partnership to which section 41 was intended to apply as part of the winding up of the affairs of the partnership. It was only an opportunity.
- In this case no work had commenced on the hotel project and no contract to do so had been completed. A partner in a dissolved partnership is not obliged to undertake fresh and substantial liabilities in order to preserve partnership opportunities.
The duty of good faith
Having concluded that there were no obligations on the part of Mr Clark under the Partnership Act to proceed with the hotel project for the benefit of the partnership, the court went on to consider the nature of Mr Clark's fiduciary obligations as a partner.
The court noted that "it is fundamental that partners owe a duty of good faith to each other and that this duty extends beyond dissolution of the partnership until the completion of the winding up". The duty precludes a partner taking advantage of information, business connections or opportunities belonging to the partnership in order to secure private advantage or profit to the exclusion of the other partner or partners without their consent.
The duty of good faith also requires that former partners continue to act equitably towards each other in the winding up of the affairs of the partnership in a way which is fair to all concerned. However, the court did not believe that this duty extended to an obligation on Mr Clark to obtain and complete a contract to refurbish the hotel building for the benefit of the partnership. This, it said, would be inconsistent with the obligations of former partners under section 41 of the Partnership Act and, while acknowledging that equity and the general law may supplement the rights and duties imposed under that Act, the court considered it would be inappropriate to extend the operation of section 41 beyond its terms and intended purpose.
The appropriate remedy
The court concluded that although Mr Clark had not been in breach of his fiduciary obligations for not pursuing the partnership's entitlement to the project, he could not take over for his sole benefit the opportunities and business connections the partnership possessed. As such, the appropriate remedy was to order Mr Clark to account to his former partner for any profit achieved by him which was properly attributable to his breach of fiduciary duty in appropriating the business opportunity of the partnership to himself.