Dubai Aluminium Company Ltd v Salaam [2002] UKHL 48 (5 December 2002)

Dubai Aluminium was defrauded of $50 million through a bogus consultancy agreement. A solicitor allegedly drafted fraudulent agreements while acting in his firm's ordinary business. The House of Lords held that a partnership can be vicariously liable for a partner's dishonest assistance in breach of trust under section 10 of the Partnership Act 1890.

Facts

Dubai Aluminium Co Ltd (‘Dubal’) was defrauded of approximately $50 million over six years through a bogus consultancy agreement with Marc Rich & Co AG. The proceeds were distributed among the principal participants in the fraud, including Mr Salaam, Mr Al-Tajir, and Mr Livingstone (Dubal’s chief executive). Mr Amhurst, a solicitor and senior partner at Amhursts, allegedly drafted the fraudulent consultancy agreement and subsidiary agreements, thereby dishonestly assisting Mr Livingstone’s breach of fiduciary duty to Dubal. Amhursts’ other partners were personally innocent of any wrongdoing.

Settlement of Claims

During trial, Mr Amhurst and Amhursts settled with Dubal by paying $10 million. Mr Salaam and Mr Al-Tajir also settled their claims. The remaining issues concerned contribution claims between the parties. Amhursts sought contribution from Mr Salaam and Mr Al-Tajir in respect of their $10 million payment.

Issues

The main issues were:

(1) Whether section 10 of the Partnership Act 1890 applies to equitable wrongs such as dishonest assistance in breach of trust, or is limited to common law torts;

(2) Whether Mr Amhurst was acting in the ordinary course of the firm’s business when drafting the fraudulent agreements;

(3) Whether innocent partners vicariously liable for a partner’s dishonesty can rely on their personal innocence in contribution proceedings;

(4) Whether undisgorged profits from the fraud could be taken into account when assessing contribution.

Judgment

Scope of Section 10 of the Partnership Act 1890

The House of Lords unanimously held that section 10 of the Partnership Act 1890 is not confined to common law torts. The phrase ‘any wrongful act or omission’ is broad enough to encompass equitable wrongs, including dishonest assistance in a breach of trust. Lord Nicholls stated that there was nothing in the language of section 10 to suggest it was intended to be confined to common law torts, and the reference to penalties pointed away from such a narrow interpretation.

Acting in the Ordinary Course of Business

The House of Lords reversed the Court of Appeal’s decision that Amhursts were not vicariously liable. The test for vicarious liability requires that the wrongful conduct be so closely connected with acts the partner was authorised to do that it may fairly and properly be regarded as done while acting in the ordinary course of the firm’s business. Drafting commercial agreements was within the ordinary course of Amhursts’ business; drafting them for a dishonest purpose did not take the conduct outside that scope. Lord Millett explained that it was no answer to say the employee was guilty of intentional wrongdoing or acting for his own benefit.

Vicarious Liability and Contribution

The House held that in contribution proceedings, a party vicariously liable stands in the shoes of the wrongdoer whose conduct gave rise to liability. The personal innocence of the other partners was not a relevant factor in assessing contribution. Lord Nicholls explained that vicarious liability involves the notion that the employer stands in the shoes of the wrongdoing employee for all relevant purposes, including contribution proceedings.

Undisgorged Profits

The House confirmed that undisgorged profits retained by wrongdoers may properly be taken into account when determining what contribution is just and equitable. Mr Salaam and Mr Al-Tajir had retained substantial sums from the fraud even after their settlements with Dubal. Lord Nicholls held it would not be just and equitable to require one party to contribute while leaving others in possession of their spoils.

Implications

This case is of significant importance in several areas of law:

(1) It confirmed that section 10 of the Partnership Act 1890 extends to equitable wrongs, not merely common law torts, establishing that partnerships can be vicariously liable for a partner’s dishonest assistance in breach of trust;

(2) It clarified the ‘close connection’ test for vicarious liability in cases of intentional wrongdoing, following the approach in Lister v Hesley Hall Ltd;

(3) It overruled In re Bell’s Indenture and disapproved the broader reading of Mara v Browne;

(4) It established that in contribution proceedings, parties vicariously liable cannot rely on their personal innocence to reduce their share of responsibility;

(5) It confirmed that courts may take account of undisgorged profits when making contribution orders under the Civil Liability (Contribution) Act 1978.

Verdict: The House of Lords allowed Amhursts' appeal, set aside the order of the Court of Appeal, and restored the order of Rix J directing that Mr Salaam and Mr Al-Tajir should indemnify Amhursts in respect of the $10 million settlement payment. The cross-appeals of Mr Al-Tajir and Mr Salaam were dismissed.

Source: Dubai Aluminium Company Ltd v Salaam [2002] UKHL 48 (5 December 2002)