Innocent Law Firm Partners Not ‘Privy’ to Colleague’s Dishonest Acts

25th August 2021 by

If a partner in a professional firm defrauds a client, should his or her fellow partners be treated as privy to the fraud even if they are entirely innocent? In a ruling that broke new legal ground, the Court of Appeal answered that question decisively in the negative.

The case concerned a well-regarded law firm with three partners. Unbeknown to two of them, the other misappropriated millions of pounds from the firm’s client account over a number of years. After being expelled from the partnership, she pleaded guilty to offences of dishonesty and was sentenced to a term of imprisonment. She was also struck off as a solicitor and the firm was subsequently obliged to close.

A Church of England diocese for which the dishonest partner had acted for many years launched proceedings against the firm with a view to recovering its losses. The firm was alleged to be liable for the dishonest partner’s wrongs under the Partnership Act 1890, those wrongs having been committed in the ordinary course of the firm’s business and with the firm’s apparent authority. Although the innocent partners had no inkling of their colleague’s dishonesty, the firm was said to be liable for her fraudulent breaches of trust.

Following a hearing, a judge ordered the firm to give an account of all its dealings with money, investments and assets possessed or received by the firm or the dishonest partner as trustees of the diocese. The order embraced four property transactions that pre-dated the issue of the diocese’s claim form by more than six years.

The judge disapplied the six-year time limit that normally applies to breach of trust claims by virtue of Section 21 of the Limitation Act 1980. He did so on the basis that the Partnership Act not only made the innocent partners liable for the fraudulent partner’s acts but also made them privy to those acts.

Allowing the firm’s appeal against that ruling, the Court noted that the case raised an issue on which there was no apparent previous authority. There was nothing in the wording of the Partnership Act that had the surprising effect of rendering the innocent partners privy to the dishonest partner’s acts merely by reason of the partnership relationship. In respect of the four transactions, the firm was thus entitled to rely on the six-year limitation period as a defence to the diocese’s claim.

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