Partners: small firms told to be careful when holding out people as partners following a recent High Court ruling

Smaller law firms need to be careful about holding out people as partners, a leading partnership expert warned this week in the wake of a recent High Court ruling.


The unreported decision highlighted by Richard Linsell, a partner at Mayer Brown Rowe & Maw, was on a preliminary issue as to whether the second defendant in the case (B) was liable in negligence proceedings on the basis that he was either a partner in the defendant firm of solicitors or that he was held out as such.


It was alleged that B and another defendant, A, had held themselves out as partners of a law firm which had given advice in respect of a fraudulent mortgage scheme. The claimant (C) was the victim of a fraud engineered by a mortgage broker, who had engaged the firm to act as solicitors for C in respect of a loan which the broker failed to repay. As a result, C claimed that A and B had negligently failed to protect her interests.


It was common ground that in law, A and B were not in partnership together. However, there was an agreement between A and B that was entitled ‘partnership agreement’, in which A was described as ‘principal’ and B as ‘partner’, and which provided that B was entitled to a percentage of fees payable to the firm in respect of another client. B’s name was put on the firm’s letterheads.


In fact, B was a partner in another firm and never had any personal involvement with the firm. B did not share in the firm’s profits.


C claimed that B was estopped from denying that he was a partner in the firm, relying on section 14 of the Partnership Act 1890, which deals with holding out. It was conceded by B that he had held himself out as a partner but he argued that C had not relied on it.


Mr Justice Etherton held, on the evidence, that the fraudulent broker had induced C to retain the firm as her solicitors on the basis that it was a two-partner firm rather than a sole practitioner. Therefore, B was estopped from denying that he was at the material time a partner in the firm.


Mr Linsell said: ‘The issue of “holding out” is one which is often overlooked by smaller firms and which should always be appreciated particularly by those who are salaried employees of partnerships but who operate with the title partner. This decision is a timely reminder of the risks such individuals take.’