A former partner in a solicitors' firm has lost his claim for payments from the firm after the Inner House ruled that under the partnership agreement, his claim depended on the firm making net profit in the year in question.

The court allowed an appeal by central Scotland firm RGM against decisions of the sheriff and sheriff principal that John Fraser Tait, a partner between 2007 and 2009, was entitled to certain payments under the agreement.

Clause 7.1 of the agreement stated that "Net profits or net losses (other than profits and losses of a capital nature) shall belong to and be borne by the partners in the following shares". Two partners were entitled to certain percentages; two others including Mr Tait were entitled to a specified sum plus a percentage, in Mr Tait's case £36,000 plus 20% of the net profit of the court department he operated. "Net profits" were defined in clause 1 as profits before tax but after charging all expenses and outgoings, and "net losses" were to be construed accordingly; "outgoings" included, among other things, the remuneration of all employees of and agents for the firm.

In support of the decisions below, it was argued for Mr Tait that the clause was capable of two possible constructions and that it was consistent with principles of construction and with business common sense that the fixed sum payment and percentage of the court department profits were due to be paid regardless of whether there were net profits or net losses of the firm in the relevant period.

Delivering the opinion of the court, Lady Clark of Calton, who sat with Lord Menzies and Lord Brodie, said it was accepted that the legal entitlement of a partner depended on the wording used by the partners in any particular agreement.

The starting point was clause 7.1, read with the definition of "net profits", wbhich were to belong to the partners "in the following shares". "Before we ask the question what are the respective shares of each partner and in particular the share of the pursuer," she said, "the logically prior question which we consider to be important is to identify what is to be shared. We consider that there is only one answer to that question. It is the net profits (or net losses) and the net profits are to be identified by reference to the specified definition in the agreement. It is the net profits of the firm so defined which shall belong to a partner in a specified share in terms of clause 7."

She added: "The solicitor advocate for the pursuer sought to persuade us that the reference to £36,000 should be considered as an outlay to be deducted before the profits and losses were to be determined. It was a 'salary' to which the pursuer was entitled regardless of profits in terms of his share. We do not accept that. Net profits as defined in the agreement include deduction of outgoings which are widely defined. In any event, regardless of how one categorises the £36,000, a partner share in terms of clause 7.1 is a share of net profits and only net profits."

Although the sheriff and sheriff principal had identified potential difficulties with the operation of the agreement, "In our opinion this is a case in which the meaning is clear about the critical issue. There is no ambiguity and there can only be one potential meaning. There is no need therefore to explore commercial common sense and the surrounding circumstances. The meaning is plain from the language of the provision used in the context of the agreement."

The defenders were therefore entitled to repayment of any payments made to the pursuer as “drawings” for the period 1 May 2008 to 30 April 2009.

Click here to view the opinion of the court.