Miles v. Clarke (1953)

Two people go into business together. One brings the premises, the equipment and the fittings; the other brings his skill and his clients. They agree to share profits equally and agree nothing else. Two years later they quarrel. Whose is the lease? Whose is the equipment? Whose is the goodwill?

Section 14 opens with the words subject to contract between the partners, and then describes firm property as what was originally brought into the stock of the firm, or acquired by or for the firm or for the purposes and in the course of its business. When the partners have made no contract, the court has to decide what they must be taken to have agreed. Miles v. Clarke supplies the method, and it is a deliberately narrow one: assume no more agreement between the parties than is absolutely necessary to give business efficacy to what has happened.

The defendant, a man of some means, wished to start a business in commercial and fashion photography. In June 1948 he took a lease of premises at Shepherd Street, Shepherd's Market — two squash racquets courts with dressing rooms — for seven years from midsummer 1948 at a rent of £400 a year, an advantageous lease, squash courts being easily adaptable as photographic studios because of their overhead light. He converted one court into a large studio and divided the other into dark rooms, offices and a smaller studio. He carried on the business by employing others to do the photographic work, and at the beginning made a very considerable loss.

In January 1950 he approached the plaintiff, a photographer of long experience with a good and well-known connection, who was then working for others as a free-lance and making a considerable income. From about the beginning of April 1950 the plaintiff attended full time and brought his own considerable connection with him. His faithful clients followed him. The upshot was a very successful business.

The two were too busy to settle terms. All that was agreed was that profits, and by implication losses, should be shared equally, and that the plaintiff should draw £125 a month on account of his share. The parties had contemplated a formal legal connection — the plaintiff's solicitors wrote as early as January 1950 on the footing of a limited company whose assets would consist of the plaintiff's goodwill, the defendant's goodwill and the lease, with shares in proportion — but nothing was ever concluded.

The partnership was treated as a partnership at will beginning 1 April 1950 and dissolved on 29 May 1952. The defendant conceded, rightly, that a partnership had existed. What remained was the second question: what were the partnership assets? The judge ordered an inquiry into six items as at 1 April 1950: the lease; the furniture and fittings in the studio; the equipment of the studio; the plaintiff's and the defendant's photographic negatives and prints brought in at the outset; the defendant's goodwill or reputation; and the plaintiff's goodwill or reputation.

An additional feature of the accounts told against treating everything as pooled. The so-called accounts began by showing, as a liability of the business, a bank overdraft of about £1,000 which was in fact the defendant's private overdraft and which neither party had ever contemplated as a business liability. Since the chief liability shown was not a business liability, the judge held that one was not entitled to assume that what appeared on the other side as an asset was in truth an asset of the business.

Where partners have agreed only to share profits, which of the assets used in the business became partnership property?

On what terms were these people partners? The only answer is that they were partners on the terms that they shared the profits between them. From that, the judge said, no more agreement between the parties should be supposed than is absolutely necessary to give business efficacy to that which has happened, and that is the only safe way to proceed.

Applying that method:

Stock in trade and consumable chattels are partnership property. It is absolutely necessary to assume that things which are consumed by their very use — the stock in trade, such as stocks of film — were brought into the partnership. They had all been brought in by the defendant, and their value must be ascertained by inquiry. Everything that changed its existence during the currency of the partnership must be a partnership asset.

The lease, the furniture and fittings and the studio equipment were not. It was pressed on the judge that these had been put forward throughout as being brought in as assets of the intended association, and that the plaintiff having come into the business on that footing it would be inequitable to deny him a share. The judge held otherwise: the parties failed to agree, and it was not for the court to say that the defendant must be assumed to have thrown the lease and the plant into the pool. The partnership could get on quite well if he gave his partner a licence to go on the leasehold property for the purposes of the business and to use the cameras to make the joint profit. Nothing changed hands except the things actually used and used up in carrying on the business.

The negatives brought in remained the property of the person bringing them in; the stock of negatives of photographs taken during the partnership was a partnership asset.

Neither party's goodwill or reputation was a partnership asset. Some scheme for quantifying and valuing the plaintiff's connection had been envisaged but was never agreed, and it would be idle to treat as having happened what the parties had not agreed. The plaintiff came because, having his connection, and with the studio and equipment to hand, he could make a good profit; it was worth his while to take half that profit in return for the benefit of the studio and the equipment. His connection and skill were useful in making profits, but there was no reason to treat them as capital assets. The only remaining partnership assets were the studio name, or the goodwill attaching to it, and the photographs accumulated during the two years of the partnership.

The consequence for the accounts. Since the lease and the plant remained the defendant's, it followed that no sum should be charged against profit by way of depreciation on them. It would not be right to assume that he leased or licensed the leasehold property or the plant to the partnership at any price, because he did not. The result of there being no agreement therefore worked in the plaintiff's favour: he did not have to contribute to wear and tear on those assets.

Where partners have agreed only to share profits, the court will imply no more than is absolutely necessary to give business efficacy to the arrangement. Only assets which are consumed in the business, or which come into existence during it, become partnership property; premises, plant and equipment brought in by one partner remain his separate property, the other partner having at most a licence to use them for the purposes of the business, and each party's personal goodwill or professional connection remains his own.

Section 14 identifies three routes into firm property: property originally brought into the stock of the firm; property acquired by purchase or otherwise, by or for the firm, or for the purposes and in the course of business of the firm; and the goodwill of the business. Miles v. Clarke is authority on the first and third.

On the first, the case shows that using an asset in the business is not the same as bringing it into the stock of the firm. The question is one of intention, and where there is no agreement the court implies the minimum. On the third, note the distinction the judge drew: the goodwill of the business — the studio name — is a firm asset within s. 14, while the personal reputation or professional connection of an individual partner is not.

The case also shows the practical importance of the opening words of s. 14, subject to contract between the partners. A single clause in the deed listing what is brought in, and on what terms, would have removed the entire dispute.