Summary

A partner who had been entrusted with the responsibility of protecting the firm by complying with the insuring provisions in a professional indemnity insurance was required to perform his duty with reasonable care and skill judged by an objective standard.

Facts

The court was required to determine issues in a claim by the claimant architect (T) against the defendant surveyor (H) arising out of a dispute about the final account following the end of their business partnership. H had been responsible for dealing with the partnership's professional indemnity insurance and accepted that he knew he had a duty to give notice to the partnership's insurers of any claim made against the partnership as soon as was possible otherwise the partnership might have to pay the claim and its own costs. Two of the partnership's former clients (C) had complained to H about the partnership's work. H later received a letter of claim from C alleging professional negligence and breach of contract but only contacted the partnership's professional indemnity insurer over two years later when he was informed of the value of the claim. The insurer refused to extend the indemnity to cover the claim. In the meantime T had given written notice that he intended to leave the partnership, with H's agreement. H responded that the partnership would be dissolved the following month. The partnership agreement specified that money owed to a partner retiring by agreement would be paid within six months. However, over four years passed from the specified dissolution date and a property owned by the partnership increased in value but T was not paid for his interest in it. T later received a letter informing him that the partnership was required to pay damages and legal costs following settlement with C. The court was required to determine (i) whether the partnership had been dissolved on the date specified or whether T had retired on that date and if so on what terms as to the division of partnership assets; (ii) whether the liability in damages and costs to C was a liability of the partnership or whether H should bear the liability personally. T argued that the outgoing partner terms of the agreement had been varied after he had sent his notice of intention to leave and that it had been agreed that the partnership would be dissolved, with the effect that under the Partnership Act 1890 the current value of the property would be used to prepare the final account. H submitted that a partner owed a duty of care towards his fellow partners to take such a level of care as he would take in relation to his own affairs and as he had a 55 per cent share in the partnership the decision he made about reporting C's claim to the insurers was his affair and so he had demonstrated that level of care.

Held

(1) The partnership was a two-partner firm and the departure of one partner amounted to dissolution. As a retirement caused dissolution, the issue could not appropriately be answered by a ruling whether retirement or dissolution had occurred. The only appropriate question was whether the outgoing partner terms applied to T's departure or whether there was a variation of the agreement to provide some other consequence. Neither T nor H had thought that there was the slightest difference whether they called their parting a retirement by agreement or dissolution. It had therefore become unrealistic to argue that they had the necessary intention to vary the terms and substitute an agreement to dissolve the partnership in accordance with the Act. T had retired from the partnership pursuant to the outgoing partner terms of the agreement so that the value of the property at the time of retirement would be brought into account. (2) A partner who had been entrusted with the responsibility of protecting the firm by complying with the insuring provisions in a professional indemnity insurance was required to perform his duty to exercise reasonable care and skill and that duty required compliance to an objective standard, Winsor v Schroeder Unreported and Wilson v Brett 152 ER 737 Ex Ct applied and Gallagher v Schulz Unreported considered. H had breached such a duty of care. T had not known about the claim until the letter concerning the settlement had arrived. H had been the senior partner in years and experience and had been content to take responsibility for the handling of the partnership's business matters in general and professional indemnity matters in particular. He had acquired such knowledge and skill as was necessary over the 10 years or so he had handled insurance matters. He had decided not to notify because he had believed the claim was spurious and his view was that if he ignored it, it might go away and not be pursued. Even if the standard of care was to do his best or to act to the standard he would apply in looking after his affairs, H had been in breach of even those standards. His failure to report the claim to insurers had been culpable or gross negligence. The loss sustained by the partnership in relation to its liability to C and for the costs of defending the partnership against the claim were losses and costs a share of which H was not entitled to recover from T.

Issues determined