The Court of Appeal (CoA) upheld the High Court judgement that profit-sharing is not a prerequisite for a partnership. The Court assessed whether the management of investments by four separate managers was an ordinary partnership or a set of independent businesses.
Background:
Alexander Hamilton claimed the Currency Club was a partnership between the “Club Leaders". Mr. and Mrs. Barrow were found liable to pay £566,053.54 plus interest for fraudulent misrepresentation of the third partner – Martin Welsh – and appealed the decision.
Mr. and Mrs. Barrow were introduced to Mr. Arkian when they were in Malaysia to invest in foreign exchange (FOREX) trading. Others based in Cyprus invested on Mr. Barrow's recommendation, and what became known as the Currency Club grew fast. Members were not aware of the vulnerability of their investment and were under the false impression that the funds would remain under the control of the Barrows.
Over time, the original participants began to pay commissions to other people who introduced investors. The introducers included Mr. Welsh.
The venture was split into five “sections”. The Barrows managed one group of investors while the other sections were “loosely geographically organised” and managed by close associates. Mr. Welsh managed the "Paphos" section. The Barrows' case was that each section operated independently, with its own website, commission arrangements and account with Mr. Arkian. However, they collected commission and the money was transited via an account they controlled.
Mr. Hamilton invested in the Paphos section. Mr. Hamilton was not told that his funds might never be sent to Mr. Arkian for investment and that it was highly likely that all or most of what he invested went straight out to other investors or as commissions. Instead, Mr. Hamilton understood that trading was through a FxPro "PAMM" account over which Mr. Welsh had sole control. There was a cap on new members’ deposits which Mr. Welsh attempted to circumvent unsuccessfully. Mr. Hamilton eventually invested a total of $US698,888 over an 18-month period. However, in March of 2017 Mr. Arkian vanished.
Mr. Hamilton brought claims against the Barrows and Mr. Welsh as a consequence of their partnership. The High Court concluded that the arrangement was indeed a partnership.
Decision:
The appeal was dismissed and the CoA upheld the High Court’s decision. The arrangement was deemed to be an ordinary partnership for various reasons. First, the absence of paperwork meant that whether a partnership existed or not had to be inferred from conduct. The Court also found that the Judge did not err in finding that there was one business rather than separate businesses, as all the Club Leaders were conducting exactly the same kind of business and, in reality, were not doing so independently. Their dealings went beyond close collaboration in their mutual interests.
For the Judge, it was clear that the reason the different sections were created was because the venture became too big for the Barrows to handle themselves. Another aspect that demonstrates it was a partnership was the frequency of the meetings and emails. The decisions were taken by majority vote. All funds were channelled through a single account. They also used ‘near-identical’ marketing and communication materials.
The Court also clarified that profit-sharing was not an essential prerequisite of partnership. The only prerequisite is that the partnership carried on a business with a view to making a profit.
Implications:
This decision makes it clear that new business ventures should be carefully planned. It might be the case that the parties did not intend for a partnership to be formed but in fact, a partnership can be inferred to exist from conduct. In this situation, it resulted in the parties being personally liable for a misrepresentation made by someone else.
It is a good reminder that if partnership is the right structure, parties should seek legal advice as early as possible to ensure a partnership deed is put in place and avoid the default statutory provisions being applicable.