Judgment
Background
1The basic facts of this case are straightforward. Bacchus Restaurant was founded by the Second Plaintiff ("Mr Ventura") in about 2006 and is a fine dining restaurant that also caters for weddings and events and has a "small plates" or tapas menu.
2On 1 July 2008, the First Plaintiff, Barescape Pty Limited as trustee for the V's Family Trust ("Barescape") sold 75% of its interest in Bacchus Restaurant to the First Defendant and Cross-Claimant, Bacchus Holdings Pty Limited as trustee for the Bacchus Holdings Trust ("Bacchus") for $1 million pursuant to a Sale of Business Agreement ("Sale Agreement"). The Sale Agreement relevantly provided that Bacchus and Barescape would form a partnership ("Bacchus Partnership") for the conduct of the Bacchus Restaurant business under the terms of a partnership deed between Barescape and Bacchus as partners and Mr Ventura and the Second Defendant ("Mr Higgins") as guarantors ("Partnership Deed") (Ex Ventura 26.10.09 Ex AV (Ex P6) Tab C; Higgins 28.5.10 Annexure "B") which was annexed to the Sale Agreement (Ventura 26.10.09 Ex AV (Ex P6) Tab B, Special Conditions, cl 3) and that Mr Ventura would be employed as the General Manager of the business (Ventura 26.10.09 Ex AV (Ex P6), Tab B, Special Conditions, cl 9). The sale of that business was completed on the same day. Bacchus Restaurant was subsequently owned and operated by the Bacchus Partnership and Mr Ventura was employed by the Bacchus Partnership as General Manager of the Bacchus Restaurant.
3In late 2008, Mr Ventura and his wife became associated (to use a neutral term) with a proposal to purchase other premises in Newcastle, the Longworth Institute (subsequently renamed Longworth House) ("Longworth House"), in relatively close proximity to Bacchus Restaurant. A function centre was subsequently operated from those premises by a partnership between the Third Defendant, Midfielder Pty Limited ("Midfielder") as trustee for the Ace's Family Trust, an entity associated with Mr Ventura, and Samnite Pty Limited ("Samnite") as trustee for the EM Family Trust, an entity associated with Mr Michael Pelosi ("Mr Pelosi"). Samnite and Mr Pelosi are not party to the proceedings.
4The issues raised by the Plaintiffs' claim and the Defence include the manner in which the Bacchus Partnership was brought to an end; whether a discount is to be applied to goodwill on the acquisition by Bacchus of Barescape's interest in the Bacchus Partnership, on the proper construction of the Partnership Deed; whether a valuation of the business prepared by the accountants for the Bacchus Partnership, SiDCOR Chartered Accountants ("SiDCOR") under the Partnership Deed is binding on the parties; and whether the appointment of another accountant, Mr Carpenter of Cutcher & Neale, by Barescape and Mr Ventura to prepare an alternative valuation complied with the Partnership Deed and whether the Cutcher & Neale valuation is binding on the parties. A further issue arises as to whether the Court has jurisdiction to determine the proper valuation of Barescape's interest in the Bacchus Partnership if each of the SiDCOR and Cutcher & Neale valuations are not binding on the parties under the Partnership Deed.
5The issues raised by the Amended Cross-Claim and the Defence to it include the extent, nature and duration of any fiduciary duties owed by Barescape and Mr Ventura to Bacchus; the nature of the alleged breaches of those duties; the extent and impact of any consent by Bacchus or Mr Higgins to Mr Ventura's association with Longworth House; whether a restraint of trade under the Partnership Deed has been validly invoked and whether that restraint has been (or would have been) breached by the relevant conduct; and a claim for knowing assistance against Midfielder. Bacchus and Mr Higgins approached their written submissions on the basis that both had brought cross-claims against Barescape, Mr Ventura and Midfielder. However, it was accepted in oral submissions that only Bacchus had brought such a cross-claim.
6A matter that has troubled me, and which I raised with Counsel on several occasions during the proceedings, was the possibility that the range and complexity of issues raised in the proceedings was disproportionate to the amount of the likely recovery by either party to the proceedings. The parties provided voluminous written submissions which addressed a wide range of issues, including some issues which were not pleaded and other issues that ultimately did not need to be determined in order to decide the proceedings. I have had close regard to those submissions and to the parties' oral submissions.
The witnesses
7I should make some general observations as to my assessment of key witnesses.
8Mr Ventura was cross-examined at some length. Mr Ventura had previously practiced as a barrister, was alert to the issues in the case and, in my view, generally aware of the implications of matters that were being put to him. Mr Ventura approached giving evidence in a manner that suggested that he was very conscious of the structure of Barescape's and his case. He made concessions where they were unavoidable, but I formed the view that he would not have made concessions against Barescape's or his interests if he could avoid doing so. There were also inconsistencies in Mr Ventura's evidence where he was prepared to concede matters at one point and later reject them - an example concerned the question whether he had told Mr Higgins that Longworth House would hold larger functions and would not compete with Bacchus Restaurant. There was also a dispute between Mr Ventura and Mr Vella, the expert accountant retained by Barescape, as to whether Mr Ventura had informed Mr Vella of the sale of a one third interest in the Longworth House business to a third party in June 2011 (Ex D13; Ventura T1847; Vella T1953). There is no reason that Mr Vella would be mistaken as to this matter and I do not accept Mr Ventura's evidence in that regard. I have reservations as to Mr Ventura's evidence of disputed conversations which should be approached with caution.
9Mr Pelosi, who has an interest in and manages the Longworth House business, gave evidence. Mr Pelosi was also a lawyer by training and has been a friend of Mr Ventura for a considerable period. It did not appear that Mr Pelosi had spent a substantial amount of time in preparing to give evidence and I did not form any impression that his evidence was affected by his friendship and business relationship with Mr Ventura. I found Mr Pelosi to be straightforward in giving evidence and to have given a generally honest account of his recollection of events and I generally accept his evidence. Bacchus vigorously criticised the process which was adopted to prepare Mr Pelosi's affidavit which involved Mr Pelosi preparing what he described as a "bare bones" document and then meeting with Barescape's then solicitor to expand that document into an affidavit. I see nothing inappropriate with that process.
10Mr Higgins, the principal of Bacchus, plainly felt strongly as to the merits of Bacchus' claims. The weight of his evidence was weakened by the fact that his affidavit evidence was slanted to advance Bacchus' case, a feature which it shared with affidavit evidence of other witnesses in Bacchus' case. That evidence contained significant inaccuracies in some areas, including Mr Higgins' evidence as to the Nicholas Trust Ball and the position as to payments to suppliers when Mr Ventura was dismissed. For example, Mr Higgins gave evidence that, after the accountant to the Bacchus Partnership, Mr Paul Siderovski ("Mr Siderovski"), had told him that the Nicholas Trust Ball had been held at Longworth House, Mr Higgins had said that he was sure that that function was traditionally "a function which is held at Bacchus" (Higgins 28.5.10 [37]); he gave evidence, by reference to his "knowledge of the functions held previously at Bacchus", that the "particular function" (the Nicholas Trust Ball) "had most definitely been held the year before"; and he elaborated on the advantages which the function had delivered to Bacchus Restaurant (Higgins 28.5.10 [38]). The Nicholas Trust Ball had in fact been held at Newcastle Town Hall in the previous year (Ventura 22.7.10 [89], Chen 21.7.10 [3]), had never been held at Bacchus Restaurant and was too large a function to be held at the Bacchus Restaurant. While I accept that Mr Higgins was genuinely mistaken as to the question whether the Nicholas Trust Ball had been held at Bacchus Restaurant in the previous year, his evidence is undermined by his elaboration of the advantages that that function had delivered in circumstances in which it had never been held at Bacchus Restaurant.
11Mr Higgins also gave evidence as to the process by which the valuation of Barescape's interest in the Bacchus Partnership business had been prepared by the Partnership Accountants, SiDCOR, but omitted significant matters relating to his business relationship with SiDCOR's principal, Mr Siderovski, that were relevant to the issues before the Court. Mr Higgins also gave evidence about handing over a cheque at the meeting at which Mr Ventura was given the SiDCOR valuation (Higgins 28.5.10 [55]) and of having said the words "I provide you with this cheque". When a record of that cheque could not be produced when called for, Mr Higgins significantly qualified his earlier evidence, suggesting that, rather than having provided Mr Ventura with a cheque, he had been reaching for his cheque book when Mr Ventura left the meeting (T1007-T1009).
12In my view, Mr Higgins' evidence needs to be treated with caution because of the errors as to significant matters in his affidavit evidence, each of which involved the shaping of evidence to advance Bacchus' case, and I also consider that his recollection of events has been influenced by his belief in the rightness of his cause and his evidence needs to be approached with that in mind. For these reasons, I also have reservations as to Mr Higgins' evidence of disputed conversations which should also be approached with caution.
13Several restaurant staff gave evidence in Bacchus' case. There were also difficulties with the affidavit evidence of those witnesses which tended to overstate their evidence. For example, Ms Moore, who was previously the Events Co-ordinator and is now the Restaurant Manager of Bacchus Restaurant, gave evidence in her affidavit, in direct speech, of Dr Joseph, the organiser of the Nicholas Trust Ball, advising that he "would again like to hold our annual function at Bacchus". That evidence was consistent with the case put by Bacchus, namely that the Nicholas Trust Ball had been held at the Bacchus Restaurant in the previous year and diverted to Longworth House. However, as I noted above, the Nicholas Trust Ball was in fact not held at Bacchus Restaurant in the previous year. It is highly unlikely that Dr Joseph, the organiser of the function, could have been mistaken as to that matter and it follows that Ms Moore's account of the conversation was significantly incorrect. Ms Moore conceded in cross-examination that all that had been held at Bacchus was a small daytime gathering of potential sponsors and accepted that the position had been misrepresented in her affidavit (T579; T583-T584). That error raised a significant issue as to the reliability of Ms Moore's affidavit evidence, even if it arose from overstatement in the drafting of her affidavit which she failed to correct.
14Barescape and Mr Ventura contend that the Court should be slow to accept the affidavit evidence of several restaurant staff since they had been offered a share in the restaurant profits at about the time their evidence was being taken. The evidence indicates that offer was made in the context of promoting staff commitment and that it was a possibility depending on profits that have largely not yet been realised and I do not consider that it impugns the evidence of those staff. Barescape and Mr Ventura also contend that a Jones v Dunkel [[1959] HCA 8; (1959) 101 CLR 298] inference should be drawn against the Defendants in respect of their failure to call several former restaurant employees, Mr Bradshaw, Ms Johnson and Mr Simms. Bacchus responds that none of those persons are still employed by Bacchus. I would not draw that inference both for that reason and in circumstances that these proceedings were already lengthy, and of a length already likely to be disproportionate to the amounts in issue, and all parties could and should have made assessments as to the witnesses who needed to be called to make good their claims.
15The expert accounting evidence led in these proceedings was complex and has been through several iterations. Mr Jugmans, the accounting expert retained by Bacchus, prepared a first report dated 6 July 2011 (Ex D83). Mr Jugmans prepared a second report dated 5 August 2011 (Ex D84) and also prepared an affidavit dated 8 August 2011 that dealt with various matters, including MYOB data that had been provided to him in respect of Bacchus Restaurant. Mr Jugmans also prepared a supplementary report dated 5 January 2012 (Ex D85).
16Mr Vella, the expert accountant retained by Barescape and Mr Ventura, prepared a first report dated 5 July 2011 (Ex P65). Barescape and Mr Ventura tendered parts of that report relating to specific issues, namely the status of MYOB records, interest paid on a loan made by the Commonwealth Bank of Australia to the Higgins Family Trust to acquire its interest in the Bacchus Restaurant, capital reinvestment in respect of improvements up to 15 September 2009 and stock levels maintained at the Bacchus Restaurant. Bacchus tendered the balance of that report. In particular, Bacchus relied on a summary of takings at Bacchus Restaurant for Friday and Saturday nights from 1 July 2008 to date prepared by Mr Vella which in turn relied on a summary of daily takings shown in the point of sale ("POS") Journal Report of the restaurant for the period 17 November 2009 to 26 June 2010 for which POS records were available.
17Barescape and Mr Ventura tendered Mr Vella's 14 July and 31 July 2011 reports identifying issues as to the reliability of financial data concerning the Bacchus Restaurants. Those issues have been addressed at length in evidence and cross-examination. In my view, the issues is respect of that data have been addressed by the further evidence given in respect of the manner in which the various records were prepared and Mr Jugmans' analysis of the differences between them. Barescape and Mr Ventura also tendered Mr Vella's report dated 15 August 2011 in full (Ex P66).
18A joint report dated 15 August 2011 of Messrs Jugmans and Vella ("Second Joint Report") was also tendered in the proceedings (Ex D87A).
Chronology of events
19I should now turn to the evidence of, and my findings as to, critical events. I deal here with the circumstances in which Barescape, Mr Ventura and/or Midfielder acquired an "interest" (using that term broadly) in Longworth House and the nature of that interest and the extent of disclosure of that interest to Bacchus and Mr Higgins.
20Mr and Mrs Ventura inspected the Longworth House building on 3 September 2008 and made a verbal offer to purchase the property for $1 million to the selling agent on 5 September 2008 which was not accepted by the building's owner (T156-T157). It was put to Mr Ventura in cross-examination that he told the agent he was looking to conduct a similar business as the Bacchus Restaurant at that site; he did not recall that statement but indicated he would have told the agent that he was interested in the potential for the site to accommodate the Bacchus Restaurant at some stage or be developed in some other way (T157).
21In late October or early November 2008, Mr Pelosi separately inspected the Longworth House building and subsequently discussed the property with Mr Ventura including that it was suitable for a function centre (T311-T312). Mr Pelosi subsequently advised Mr Ventura that he would be interested in opening a function centre at the Longworth House building if Mr Ventura was interested in buying the building and Mr Ventura advised that he was still interested in doing so (T314). Mr Pelosi rejected the suggestion that he was engaged in these dealings with the intention that he and Mr Ventura would jointly operate the Longworth House function centre and his evidence was that he sought to operate that function centre himself (T316). Mr Pelosi's explanation was that the intent was that Mr Ventura's interests would purchase the building, Mr Pelosi would sign a lease for the building and that Mr Ventura would provide assistance to Mr Pelosi to set up the function centre, on the basis that Mr Pelosi would operate the function centre (T326). Mr Pelosi also rejected any suggestion that it was contemplated that the lease over the property would be a lease on behalf of a partnership between his family trust and Mr Ventura's family trust and his evidence was that the lease was entered into by his company, Samnite (T328). I accept Mr Pelosi's evidence in respect of these matters.
22Samnite was incorporated on 9 December 2008 (Ex D27). On 17 December 2008, Samnite entered a lease with Scotts Road Pty Limited, the vendor of the Longworth House property, for six months commencing 17 December 2008 (Ex D15). The primary purpose of that lease was to establish that the property was occupied by a business operating as a going concern at the time that Mrs Ventura acquired it.
23Midfielder was incorporated on Mr Ventura's instructions on 19 December 2008 (Ex D30). Mr Ventura is the sole director and secretary of Midfielder. Midfielder has issued one ordinary share which is owned by Mrs Ventura and Barescape owns one "I" Class Share which confers limited rights. Midfielder is the trustee of the Ace's Family Trust, which is a discretionary trust established by a trust deed dated 16 December 2008 (Ex D29). The potential beneficiaries of the trust include Mr Ventura, Mrs Ventura and Barescape.
24Mrs Ventura purchased the Longworth House property from the vendor, Scotts Road Pty Ltd, for $1.2 million by contract dated 23 December 2008 (Ex D57; T160). Mrs Ventura had previously used her married name in some property acquisitions (Ex D55) and used her married name in dealing with the Australian Taxation Office ("ATO") in relation to the matter (Ex D11) and dealings with the Australian Securities and Investments Commission ("ASIC") in relation to Barescape in 2008 and in relation to the matter (Ex D53). On the other hand, it appears that Mrs Ventura used her maiden name on her drivers licence and her passport (T487). Bacchus contended that the Longworth Institute building was purchased in the maiden name of Mrs Ventura to disguise her interest in the venture. The purchase of the property in Mrs Ventura's maiden name may have allowed Mr Ventura greater control over when, or whether, he disclosed that purchase to Mr Higgins. However, Bacchus had no basis for objecting to Mrs Ventura acquiring an interest in the property and Mr Ventura in fact disclosed his involvement in the operation of the function centre to Mr Higgins. I will address issues as to the adequacy of that disclosure below.
25I pause here to address the question of the structure of the arrangements between Midfielder, Samnite, Mr Ventura and Mr Pelosi as at late December 2008. Bacchus contended that that structure and the parties' intentions were fully formed at that time and I will refer below to the evidence on which it relied for that contention. In my view, although some work had been done, at least by Mr Ventura, to develop such a structure, that work was at a preliminary stage and consensus had not yet been reached between Mr Ventura and Mr Pelosi as to that structure.
26Bacchus relies on documents prepared in December 2008 to seek to establish that a partnership between Samnite (as trustee for the EM Family Trust) and Midfielder (as trustee for the Ace's Family Trust) was established to operate a function centre at Longworth House at that time. A structure diagram prepared about December 2008 (Ex D9) appears to have contemplated that that partnership would operate the Longworth House business and that Samnite and Midfielder as trustees for the relevant trusts would be investors in it. That partnership was registered for tax purposes at about that time as a function centre which would withhold PAYG tax and have five employees and was described as a partnership operating in the accommodation and food services industry as a function centre (Ex D12, Ex D26). An application form to register the business name of Longworth House was also prepared on behalf of that partnership (Ex D6, Ex D6A). The EM Family Trust was also registered for tax purposes as receiving partnership distributions rather than as an operating company (Ex D14; Ex D66).
27An email dated 19 December 2008 from Mr Ventura to his accountants, Cutcher & Neale, suggested that a partnership agreement between the Ace's Family Trust and the EM Family Trust was or would shortly be in existence and would be provided to Cutcher & Neale on 19 December 2008 (Ex D16). Mr Pelosi's evidence was that he had no involvement in the provision of the relevant information to Cutcher & Neale (Pelosi T328). I do not consider that I should draw the inference for which Bacchus contends, namely that this document had existed and was subsequently destroyed. I accept Mr Pelosi's evidence that that document did not, to his knowledge, exist at that time (Pelosi T344). Although that evidence does not prove that Mr Ventura had not prepared the document, it does establish that consensus had not then been formed between Mr Pelosi and Mr Ventura as to its terms.
28Mr Ventura's evidence was that the intent at this time was that Mr Pelosi would lease the Longworth House building to conduct a function business, Midfielder would contribute to the redevelopment of the building to facilitate a tenancy for Mrs Ventura and the business for Mr Pelosi, and Midfielder would obtain some interest appropriate to its contribution to the development (T160). Mr Ventura's evidence was that the intent at that time was to develop Longworth House as a building that could be used for a function centre (T172) and that Midfielder and Samnite would prepare the building to facilitate Mr Pelosi's operation of a function centre (T217). Mr Ventura accepted in cross-examination that, in December 2008, it was agreed that Ace's Family Trust and the EM Family Trust would incur expenses and conduct a partnership for the development of the property (T175).
29Under cross-examination, Mr Pelosi denied that, as at 19 December 2008, there was agreement that his and Mr Ventura's family trust would jointly operate the function centre (T344). Mr Pelosi's evidence was that at that time it was contemplated that he would be operating the function business, that Mr and Mrs Ventura would be the landlord and that Mr Ventura would help him [Mr Pelosi] to establish the venture because Mr Ventura wanted a business in the building (T344) and would obtain an interest reflecting funding which Mr Ventura provided to the extent that he [Mr Pelosi] did not have adequate funds to set up the business (T348). Mr Pelosi's evidence was that he wished to hold a significantly higher interest than 50% in the business but Mr Ventura would retain a percentage of the business to cover the money that he had put in if Mr Pelosi could not fund those costs (T436).
30In my view, Bacchus has not established its contention that, from December 2008, a partnership existed between Mr Ventura's interests and Mr Pelosi's interests for the operation of Longworth House. The evidence does not establish that the position had developed to that point at that time. First, Barescape had not then acquired any interest in the property from which Longworth House conducted its business, although Mrs Ventura acquired and later disposed of such an interest. Second, I accept Mr Pelosi's evidence that he was still seeking to operate the function centre himself at this time, although it is clear that he recognised that it was possible or likely that Mr Ventura would take up an interest in the venture reflecting the costs of the renovation work to the extent that Mr Pelosi could not fund those costs. Although Mr Ventura arranged for Cutcher & Neale to prepare documents on a basis which assumed that both Mr Pelosi and interests associated with Mr Ventura would have an interest in the Longworth House business, that appears to have been a possible or likely outcome rather than an agreed position between Mr Pelosi and Mr Ventura at that time. In my view, Midfielder and Samnite and Messrs Ventura and Pelosi were in December 2008 working together in anticipation of a partnership or joint venture (in the commercial sense) being established between them but that venture and their interests in it were still inchoate.
31Mr Higgins' evidence is that he was informed by the accountant to the Bacchus Partnership, Mr Siderovski, on 21 December 2008 that Mr Ventura had decided to turn Longworth House into a "tapas wine bar and function centre". Mr Higgins responded to Mr Siderovski that "that is a worry I need to find out more about that. I'll ask him" (Higgins 28.5.10 [23]).
32Samnite, the company associated with Mr Pelosi, registered the business name "Longworth House" from early January 2009. The Longworth House property was transferred by the vendor, Scotts Road Pty Ltd, to Mrs Ventura on 3 February 2009 (Ex D50). Mr Ventura subsequently had a significant involvement in steps in preparing for the opening of Longworth House, including the purchase of decorations, placement of yellow pages advertising and the printing of artwork advertising materials for Longworth House (Ex D17; T213; T226) and the renovation work on the property. The Statement of Environmental Effects for Proposed Re-Development of Longworth Institute Building (February 2009) (Ex D18) referred to a proposed "wedding and function centre".
33Ms Moore's evidence is that a conversation took place between her and Mr Ventura in the first week of February 2009 where he told her of the Longworth House project but asked her not to disclose it to Mr Higgins so that he would not "get jealous" (Moore 28.5.10 [5]-[6]). Mr Ventura denies that conversation (Ventura 22.7.10 [111]). I accept Ms Moore's evidence in this regard.
34Mr Higgins' evidence (Higgins 28.5.10 [24]) was that he raised the question of Longworth House with Mr Ventura in February 2009 and, during a tour of Longworth House provided by Mr Ventura, he put to Mr Ventura that Longworth House was going to operate a tapas wine bar and function centre in the style of Bacchus Restaurant, and that Mr Ventura responded:
"Not really Matthew. I own the building from which a consortium of investors from Sydney intends operating catering for functions".
I will address a further reference to the "consortium" below. Mr Higgins' evidence was that he observed that a significant amount of renovation work had been done during his tour of the building. Mr Ventura denied that this occurred in February 2009 (T186). This inspection plainly took place and little turns on whether it occurred in February 2009 as Mr Higgins contends or mid-March 2009 as Mr Ventura contends.
35Mr Ventura's evidence was that the first occasion he said anything to Mr Higgins about Longworth House was in about mid-March 2009 when he showed Mr Higgins around the Longworth House building and said:
"The two ballrooms and the boardroom are perfectly suited for events and conferencing, and the small space at the front of the building is to operate as a tapas and wine bar" (Ventura 22.7.10 [5]).
On cross-examination, Mr Ventura said that he disclosed to Mr Higgins that Longworth House would be operated as a function centre at this time (T186) and told Mr Higgins that Longworth House would be a function centre and wine bar (T190). Mr Higgins accepts that he was shown Longworth House (Higgins 28.5.10 [24]) but his evidence is that he was not told by Mr Ventura about the tapas bar (Higgins 28.5.10 [28]; Higgins 6.4.11 [5(c)]). Nonetheless, on Mr Higgins' evidence, Mr Siderovski had previously told him of that matter and he had previously questioned Mr Ventura about it. On either Mr Higgins' or Mr Ventura's account of the conversations to this point, at least the operation of Longworth House as a function centre and wine bar and its service of tapas had been raised by this time.
36The extent of expenditures by interests associated with Mr Ventura in respect of developing the Longworth House business in the first half of 2009 made it increasingly likely over time that those expenditures would have had to be recognised by his taking up an interest in the Longworth House business together with Mr Pelosi (Ex D36; T358). Mr Pelosi conceded in cross-examination that there was a "sort of informal partnership", without defined interests, where it was recognised that Mr Ventura would assist Mr Pelosi in operating the function centre (T348). Mr Pelosi's evidence was that, when it became clear that there was no chance of his funding a buy out of Mr Ventura completely, Mr Ventura acknowledged that he would have to take a percentage and at that stage indicated that he would need to offer Mr Higgins the opportunity to also acquire an interest in Longworth House, and suggested preparation of a business plan which could be shown to Mr Higgins (T436). Mr Ventura's evidence is that he talked to Mr Pelosi about the possibility of inviting Mr Higgins to invest in Longworth House in late March 2009 (Ventura 22.7.10 [6]), although Mr Pelosi's evidence put that conversation at an earlier date.
37Mr Higgins gave evidence of two conversations with Mr Ventura in April 2009, when Mr Ventura told him that the "consortium" of Sydney investors to which he had previously referred had "fallen over" and there was an opportunity "for us" in respect of Longworth House. Mr Ventura denies referring to a "consortium" in that conversation. There is no other evidence to corroborate either version of the conversation and I do not consider that I am in a position to find affirmatively either that the "consortium" was referred to or that it was not where I have indicated reservations as to both Mr Ventura's and Mr Higgins' evidence of disputed conversations. I do not consider it is ultimately necessary to reach a finding as to this matter given the other findings that I have reached.
38In mid-May 2009 Mr Ventura provided Mr Higgins with a business plan for Longworth House (Higgins 28.5.10 [28] Annexure "G") that had been prepared by Mr Pelosi. The Longworth House business plan refers to events of a "preferred size" of 100-150 persons per room and Mr Higgins maintains that he was told by Mr Ventura that Longworth House would hold large functions of a size that Bacchus could not hold (Higgins 28.5.11 [26]). However, that business plan contains other indications that Longworth House would conduct smaller functions including references to "weddings, christenings and birthdays and other parties ... corporate launches, conferencing and promotional events". I do not consider that a reader of the business plan would assume that all of these functions would have been larger functions than Bacchus Restaurant could have held. A financial analysis contained in the business plan refers to an estimate of 100 persons on average per function. Mr Higgins contended under cross-examination that he had understood this to refer to 100 persons per room, consistent with the representation he contended Mr Ventura had made that Longworth House would only hold functions of 200 persons or more (T1031-1032). I do not accept that a businessman of Mr Higgins' obvious intelligence and commercial sophistication, even one who was a recent entrant into the restaurant business, would have read the document in that manner and I cannot accept that evidence. Bacchus also criticises the business plan for failing to treat Bacchus Restaurant as a competitor of Longworth House. The business plan identifies other competing function centres that are businesses with a particular focus on functions rather than fine dining restaurants that also cater for functions.
39Mr Ventura sent a series of emails on 20 and 21 May 2009 to Mr Higgins about Longworth House (Ventura 22.7.10 Ex AV 2 (Ex P7) Tab A). The email dated 20 May 2009 stated:
"Hi Matthew
I have talked to Michael Pelosi further about becoming a joint venture partner in the function centre at Longworth House. He acknowledges that there could be synergies that would benefit both businesses.
I think his business plan is sound, as Newcastle certainly needs a specialist wedding/corporate event venue of superior quality.
Based on his rapidly escalating development costs, Michael wants a 50%-50% partnership share arrangement. Are you interested in being involved? If so, to what extent?"
That disclosure was at best incomplete and, more likely, misleading where Mr Ventura had a significant input into the business plan and Mr Ventura and his interests had borne the bulk of the costs of renovating the Longworth House building at this point.
40A meeting (or possibly two meetings) to discuss Longworth House took place between Mr Ventura, Mr Pelosi and Mr Higgins, although there is a dispute as to whether one or two meetings occurred and as to whether it or they occurred in mid-May (on Mr Higgins' account) or mid-June (on Mr Ventura's and Mr Pelosi's account) (Higgins 28.5.10 [28]; Ventura 22.7.10 [7]-[8]; Pelosi 28.7.10 [20]-[27]). Mr Higgins' evidence is that Mr Ventura said to him that:
"Matthew it [Longworth House] will do larger functions than those we do at Bacchus and will provide scope to do bigger and better functions. It will not compete with Bacchus." (Higgins 28.5.10 [26]).
Mr Higgins' evidence is that Mr Ventura also said "It will cost approximately $800,000.00 to finalise the Longworth Institute", Mr Pelosi had indicated that he wanted "to retain" a 40% equity interest and Mr Ventura proposed that he and Mr Higgins "go 50/50 and take a 30% interest each" for $240,000 each (Higgins 28.5.10 [27]). Mr Higgins' evidence is that the meeting ended with his saying:
"Ok Anthony, if it's not competing with Bacchus and will only add an extra dimension to what we are doing, I will consider it". (Higgins 28.5.10 [27]).
Mr Higgins' evidence is that Mr Ventura also said:
"There will be great synergies between the two businesses - they won't compete - they will compl[e]ment each other. Longworth will be different to Bacchus and will only do large functions that Bacchus cannot do." (Higgins 28.5.10 [28]).
41Mr Ventura's evidence was that he referred to the global financial crisis and said he could "see real benefits to Bacchus by having an association with a second venue" and that Mr Higgins asked him to "Tell me more about what is proposed" and that he said
"Basically, Longworth House is to be run as a function centre. I think events such as weddings, corporate events, private parties, product launches, and the like, will be the bulk of the business".
The reference to weddings and corporate functions here is consistent with the similar disclosure in the Longworth House business plan. Mr Ventura's evidence is that he disclosed the wine bar to be operated at Longworth House although he claims to have said "I imagine that [it] will be peripheral to the core business". Mr Higgins denies a reference to the wine bar at that meeting (Higgins 6.4.11 [5(i)], [9]).
42Mr Ventura initially accepted in cross-examination that, in May 2009, he indicated to Mr Higgins that the functions that could be catered for at Longworth House would be much larger than those at Bacchus Restaurant and that the operation at Longworth House would not compete with Bacchus (T192). On the other hand, Mr Ventura denied that he told Mr Higgins at the meeting with Mr Pelosi in mid or late May 2009 that Bacchus and Longworth House would not compete and would complement each other and that Longworth House would only do large functions that Bacchus could not do (T241). Bacchus criticises the matters raised by Mr Ventura at this meeting as saying nothing about past breaches of fiduciary duty or consent for the purpose of obviating future breaches. I will deal with the question of the adequacy of disclosure and consent below.
43Mr Ventura's evidence on cross-examination was that the first time he mentioned the partnership between Ace's Family Trust and EM Family Trust to Mr Higgins was in May 2009 "because that was when I was first contemplating getting involved in the operation of Longworth House, that is beyond development of the site" (T178). I do not accept this explanation of why this matter was raised at this point, since Mr Ventura was contemplating involvement in the operation of the Longworth House business from at least December 2008 when he had taken steps toward documenting a partnership, although I have held above that agreement had not been reached as to the interests in the partnership or final structure between Mr Pelosi and Mr Ventura at that time.
44Mr Pelosi also gave evidence of a meeting with Mr Higgins in late May or early June 2009 and referred to a conversation referring to the potential for "synergies" between the two restaurants including giving staff more shifts between the two businesses; Bacchus Restaurant referring functions to Longworth House; Longworth House referring small groups and restaurant trade to Bacchus Restaurant; and greater bargaining power with suppliers, especially wine suppliers (Pelosi 28.7.10 [22]). His evidence was that Mr Ventura said, during the course of the discussion:
"With the bar opening upstairs soon, we can't do exclusive use functions so those can be referred to Longworth which keeps the clients happy and maintains the relationships built with those clients.
Similarly Longworth can refer the small groups and restaurant trade to Bacchus."
Mr Pelosi gave much the same evidence under cross-examination (T437). Mr Higgins denied that Mr Ventura said the words set out in paragraph [22] of Mr Pelosi's affidavit so far as they were inconsistent with Mr Higgins' first affidavit and denied that there was any reference to or agreement with Bacchus Restaurant referring functions to Longworth House (Higgins 6.4.11 [10]). I prefer Mr Pelosi's evidence in this regard, having regard to my comments as to his evidence above and to the difficulties with aspects of Mr Higgins' evidence to which I referred above.
45A further email dated 26 May 2009 from Mr Ventura to Mr Higgins indicated that Mr Pelosi would be the operator of the business but would "expect/encourage considerable input" from Mr Ventura.
46By late May 2009, Mr Ventura was offering 10% discounts on wedding packages to be held at Longworth House when it opened later in the year (Ex D25). Deposits were being taken by Longworth House from June 2009 with respect to functions to be held up to a year later (Ventura 22.7.10 [11]; T363-T364, Ex D38; Ex D39).
47Mr Ventura sent a further email dated 17 June 2009 to Mr Higgins which included a reference to a change in taxation arrangements being very good timing for Longworth (Ventura 22.7.10 Ex AV 2 (Ex P7) Tab B). Mr Ventura sent a further email to Mr Higgins comparing the Longworth House function business and the Bacchus Restaurant business on 25 June 2009 (Ventura 22.7.10 Ex AV 2 (Ex P7) Tab C). That email sought to encourage Mr Higgins to buy into Longworth House and indicated that Mr Ventura proposed to get involved with Longworth House by reason of the "great business model which should prove to be very profitable" and because synergies could be generated to improve the profitability of both businesses. Mr Ventura proposed partnership arrangements of 40% for Mr Pelosi and either 40% for Mr Ventura and 20% for Mr Higgins or 30% each for Mr Higgins and Mr Ventura. Bacchus contended that the reference in this email to the price of $240,000 that Mr Higgins was being asked to pay for a 30% interest in Longworth House was misleading. It appears that price significantly exceeded 30% of the third party costs incurred to develop the business, since the MYOB balance sheet for the Longworth House business shows expenditures of $195,480 on buildings and improvements and fixtures and fittings made by 9 September 2009 by the Ace's Family Trust and the EM Family Trust (Exs D35-D36). However, there is a difficulty with this comparison, since there is evidence that Mr Ventura and Mr Pelosi each did substantial work themselves on the Longworth House premises and the record of third party costs incurred does not reflect the value of that work.
48On 9 July 2009, Mr Ventura again wrote to Mr Higgins about taking an interest in Longworth House (Ventura 22.7.10 Ex AV 2 (Ex P7) Tab C). That email read as follows:
"LONGWORTH
I have had lengthy discussions with Michael [Pelosi], and the result is as follows:
He would prefer a 50% - 50% partnership with me (or me and you).
He seems to want a partner so he is not carrying as much debt.
Assuming you are not interested in the business, I will proceed with a 50% share. If you do however want in, I am happy to split my share with you.
The rent agreed will be $1980 per week.
Once the restoration and fit-out of the building is complete I will be seeking expressions of interest to sell it, subject to the lease to the new business. The asking price will be around $2.4m. ..."
By email dated 9 July, Mr Higgins responded to that email stating that "That's fine, I would not want to lose any more equity than necessary."
49Mr Higgins rejected the offer to be involved in Longworth House in late July 2009 although there is a contest in the evidence as to the circumstances in which this occurred (Higgins 28.5.10 [25], [30]; Higgins 6.4.11 [5(j)], [11]; Ventura 22.7.10 [10]; Pelosi 28.7.10 [28]). Mr Ventura's evidence is that, in late July 2009, Mr Higgins told him "I see the advantages, you should go for it" (Ventura 22.7.10 [11]; T251; T260; T264). That conversation is denied by Mr Higgins (Higgins 6.4.11 [5(k)]). Mr Pelosi gave evidence of a subsequent telephone call from Mr Ventura, who advised him that Mr Higgins had said he was not interested in being part of the business and that Mr Ventura had told him he "will be going in anyway and [Mr Higgins] said go for it" (Pelosi 28.7.10 [28]; T437-441). Mr Pelosi's account of his conversation with Mr Ventura supports Mr Ventura's evidence as to this matter. I think it likely that Mr Higgins did at this point take the position that is attributed to him by Mr Ventura and Mr Pelosi, although his evidence is to the contrary. His taking that position would be consistent with his then interest in opening a mezzanine bar at Bacchus Restaurant which would have constrained its ability to hold functions, which was the subject of evidence from several witnesses (Moore T540; Clydsdale T612, T620; Alder T658-T659, T665; Montgomery T753-T754).
50On the other hand, Mr Higgins gave evidence of a second meeting with Mr Ventura and Mr Pelosi where Mr Pelosi had said he did not need further money for the venture and Mr Higgins had said he was not interested in getting involved in Longworth House if Mr Pelosi did not need the money. Mr Pelosi recalled only one meeting with Mr Higgins and Mr Ventura and took issue with Mr Higgins' claim to have advised Mr Pelosi to that effect and his evidence was that Mr Ventura had conveyed that information to him some weeks later (Pelosi T440). I prefer Mr Pelosi's evidence as to this matter.
51In July 2009, the Newcastle Herald published an article (with Mr Ventura's cooperation) which referred to the restoration of Longworth House by Mr and Mrs Ventura; noted that a "casual bar" was planned for downstairs at the building; that it was "fitted out in the same plush fabrics and ornate, generous furniture that had made Bacchus so welcoming"; that another large function room would be available upstairs and that there was a maze of rooms of "various sizes for private meetings or small gatherings"; and that one of the first functions would be a fundraiser for the Nicholas Trust. That article is annexed to Mr Higgins' affidavit dated 28 May 2010, although Mr Higgins does not say whether he read it when it was published. In my view, the publication of that article tends to corroborate Mr Ventura's evidence that he had by that time received Mr Higgins' consent to his involvement in Longworth House, and casts doubt on Mr Higgins' evidence to the contrary. It would, in my view, be very unlikely that Mr Ventura would have publicised his involvement in Longworth House in this expansive manner had he understood that his involvement was then unresolved between himself and Mr Higgins.
52Mr Ventura's evidence was that, by July or August 2009 (or possibly September 2009), it had been agreed between Mr Pelosi and himself that Midfielder would take a 50% share of the Longworth House business (Ventura T233). In the period after Mr Pelosi's arrival in Newcastle in August, Mr Ventura and Mr Pelosi devoted substantial time to the work to prepare Longworth House for opening (Pelosi T360). In September 2009, Mr Pelosi and Mr Ventura together applied for commercial credit from suppliers for the Longworth House business (Ex D24). Longworth House commenced regular trading on 9 September 2009, about a week after the Nicholas Trust Ball had been held there (Ventura 22.7.10 [11]; Pelosi 28.7.10 [36]).
53On 15 September 2009, Bacchus served notice of termination of Mr Ventura's appointment as General Manager of the Bacchus Partnership business under clause 21.11 of the Partnership Deed (Ventura 26.10.09 Ex AV (Ex P6) Tab E). That notice constituted a binding offer to purchase Barescape's share of the Bacchus Partnership and stated that:
"Further, we note that we are now pursuant to clause 21.1(b) of the Partnership Deed deemed to have irrevocably agreed to purchase at Market Value the whole of the share owned by Barescape ... as trustee for the Vs Family Trust, in the partnership."
There is a typographical error in that notice which refers to clause 21.1(b); that should be a reference to clause 21.11(b) of the Partnership Deed.
54On 15 September 2009, Bacchus also served Mr Ventura with a Notice of Dissolution of Partnership pursuant to clause 13.2 of the Partnership Deed that provided for dissolution of the Bacchus Partnership as at 17 October 2009 and asserted that compensation would be given in accordance with clause 16.3(b) of the Partnership Deed (Ventura 26.10.09 Ex AV (Ex P6) Tab E). Mr Ventura and Barescape responded on 15 September 2009 disputing any entitlement of Bacchus to rely on clause 13.2 of the Partnership Deed or invoke clause 16.3(b) of the Partnership Deed.
55An Interim Occupation Certificate was issued for Longworth House on 14 October 2009 (Ex D34). The partnership agreement between the EM Family Trust and the Ace's Family Trust in respect of Longworth House was formalised on 20 October 2009, after Mr Ventura's engagement as General Manager of Bacchus Restaurant had been terminated and, on my findings below, after the Bacchus Partnership had already been terminated. That partnership agreement refers to the conduct of the business of a "function centre and tapas lounge".
56Samnite subsequently entered a lease of the Longworth House property from Mrs Ventura for a term of 10 years with an option to renew for a further term of 5 years by lease commencing 1 May 2010 (Ex D51). Mr Pelosi acknowledged that it then did so as representative of the partnership between the EM Family Trust and the Ace's Family Trust (Pelosi T428). On 9 June 2011, Samnite and Midfielder each reduced their interest in the Longworth House business, following a sale of a one-third interest in that business to Spirow Pty Ltd as trustee for the Envision Trust, which is an entity associated with the event coordinator at Longworth House (Ex D13).
Barescape's claims in respect of the termination of the Bacchus Partnership
57Barescape and Mr Ventura seek declarations that the termination of Mr Ventura's engagement as General Manager of the Bacchus Partnership business in 15 September 2009 constituted a dissolution of the Bacchus Partnership under clause 21.11(b) of the Partnership Deed and rendered Bacchus liable to pay the market value of the whole of Barescape's share of the Bacchus Partnership to Barescape under that clause. Bacchus contends that clause was not applicable in the circumstances. Alternatively, Barescape and Mr Ventura seek a declaration that the service of a notice of dissolution of the Bacchus Partnership by Bacchus on 15 September 2009 rendered Bacchus liable to pay to Barescape the market value of the whole of their share of the Bacchus Partnership business, subject to any applicable deduction pursuant to clause 16.3 of the Partnership Deed.
58On the other hand, by its Amended Cross-Claim, Bacchus seeks declarations that the notice of dissolution of the Bacchus Partnership of 15 September 2009 brought about the dissolution of the Bacchus Partnership with effect on and from 17 October 2009; that the Bacchus Partnership lawfully terminated Mr Ventura's employment summarily for serious misconduct on 15 September 2009; that Barescape was only entitled to compensation in accordance with clause 16.3(b) of the Partnership Deed; and that Barescape was entitled to be paid a total of $39,530 pursuant to clause 16.3(b) of the Partnership Deed, subject to a right of set-off of damages claimed against Barescape and Mr Ventura.
59The relevant provisions of the Partnership Deed are as follows. Clause 12 provided a mechanism for a partner who wishes to sell part or all of their interest in the Bacchus Partnership. Clause 13.1(a) relevantly provided that no partner would during the Bacchus Partnership without the written consent of the other carry on or be concerned or be interested directly nor engage in or undertake any other trade or business except those which did not affect the conduct of the Bacchus Partnership's business. Clause 13.2 provided that:
"Should a Partner commit a breach of any of the terms or conditions of subclause .1 [sic], the other Partner may dissolve the Partnership on giving one calendar month's notice in writing by leaving that notice for the defaulting Partner at that party's usual or last known place of residence and unless otherwise agreed, the dissolution will be deemed to have become effective on the last day of the month's notice. The defaulting Partner will be compensated only in accordance with clause 16.3(c)."
60Clause 15.1 provided that:
"In any situation whereby a continuing Partner has the right to remain in the business of the Partnership and purchase the share of an outgoing Partner (other than where the continuing Partner has by clause 12 the right of first refusal to purchase), the continuing Partner must exercise that right by giving the outgoing Partner or its proper officer one month's notice in writing of the intention to purchase at any time within one month of becoming aware of the event or act resulting in termination or dissolution."
Clause 15.2 provided that such a purchase would take effect as and from the date of the relevant dissolution or termination.
61Clause 16, under the heading, "Valuation and Payment" provided that:
"16.1 The following provisions apply unless otherwise expressly provided herein or otherwise agreed by the Partners in writing.
16.2 The sum to be paid for the purchase of the share of an outgoing Partner ("Share") will be the value of that Partner's interest in the net assets inclusive of goodwill of the Partnership at the time of termination, to be ascertained from the account to be taken under the provisions of clause 10.
16.3 For the purpose of ascertaining the payment to an outgoing Partner, the Share value will be adjusted as follows:
(a) goodwill will not be included unless expressly so provided for in the clause relating to the purposes of that Partner's exit,
(b) the Share of a Partner in breach pursuant of clause 13 of this deed will be discounted by 40% of the goodwill,
(c) the Share of a Partner who is an "incapable Partner" under the provisions of clause 14 of this deed will be discounted by 20% of the goodwill value.
16.4 Payment by a continuing Partner to an outgoing Partner must be made by bank cheque within 14 days of the valuation of the outgoing Partner's interest becoming known by virtue of the advices of the Accountants."
62Clause 21 sets out the terms of Mr Ventura's employment as General Manager and provides for his dismissal as follows:
"21.11 The General Manager may be dismissed by written notice by a majority of shareholders at any time without cause or otherwise, on the following conditions:
(a) Ventura will be entitled to 4 weeks' notice of dismissal or 4 weeks' remuneration in lieu of notice.
(b) The shareholder/s voting for the dismissal will be deemed to be an "offeree Partner" which has the right of first refusal to purchase under clause 12 of this deed and which has irrevocably agreed to purchase at market value the whole of the share of the Partner of which Ventura is a director (or otherwise has a common interest).
(c) The provisions of clause 12 of this deed will apply so far as possible to the subsequent purchase.
(d) The offeree Partner will inform the Accountants of its action within one business day of service of the dismissal notice and will inform Ventura promptly on doing so.
(e) The offeree Partner will bear the cost of the Accountants determining the market value and will use its best endeavours to have that value determined expeditiously and forwarded forthwith to both the offeree Partner and Ventura.
(f) Both the offeree Partner and Ventura will do all things reasonably possible to enable the Accountant's Valuation to be undertaken and completed at the earliest practicable date.
(g) If either party regards the Accountant's Valuation as being in error they may seek a valuation from another accountant nominated by the President of the professional association of which the Accountants are members, in which case the offeree Partner will do all things necessary to enable the further valuation to take place without undue difficulty or delay and with the benefit of all of the accounting records available to the Partnership Accountants.
(h) If a second accountant is appointed pursuant to subclause (g), his fees and disbursements will be borne by:
(i) the offeree Partner, if the second valuation demonstrates that the market valuation carried out by the Partnership's Accountant understates the market value by at least 5% or
(ii) Ventura, if the second accountant's market valuation is at least 5% less than the Partnership Accountant's notified amount, or
(iii) the parties equally if the second accountant's valuation is within 5% of the Partnership Accountant's notified amount.
(i) If Ventura is not paid any part of the market valuation by the expiry of 42 days from receipt of his dismissal notice, the valuation of his interest in the Partnership will bear interest at the rate which is the greater of 12% per annum or 4% above the average of the reference rates known as the 'indicator' or 'base' commercial lending rates published by the four major Australian banks. Payment of such interest on completion of the purchase is an essential term of this deed."
63The manner in which commercial contracts should be interpreted is well-established by the case law. The contract must be read in a way that will result in a sensible and businesslike meaning: Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 at 109. Attention must be given to the language used by the parties and the commercial circumstances which the document addresses and the objects which it is intended to secure: McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579 at 589 [22]. The meaning of a particular term is to be determined by what the reasonable person in the position of the parties would have understood it to mean: Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540. In Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at [22] the High Court noted that:
"The construction of commercial contracts is to be determined by what a reasonable person in the position of [the contracting party] would have understood them to mean (Gissing v Gissing [1971] AC 886 at 906; Christopher Hill Ltd v Ashington Piggeries Ltd [1972] AC 441 at 502; ABC v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540). That requires consideration, not only of the text of the documents, but also the surrounding circumstances known to the parties, and the purpose and object of the transaction (Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896; [1998] 1 All ER 98.) In Codelfa Construction Pty Ltd v State Rail Authority of NSW ((1982) 149 CLR 337 at 350. See further Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 76 ALJR 436 at 445 [39]; 186 ALR 289 at 301) ..."
64The first issue that is in dispute between the parties is the basis on which the amount payable by Bacchus to Barescape on termination of the Bacchus Partnership is to be calculated. As I noted above, clause 16.3(d) of the Partnership Deed relevantly provides that:
"For the purpose of ascertaining the payment to an outgoing Partner, the Share value will be adjusted as follows: ...
(b) The Share of a Partner in breach pursuant of [sic] clause 13 of this deed will be discounted by 40% of the goodwill, ..."
Bacchus contends that the discount to goodwill under this clause applies not only in circumstances where there is a dissolution of the partnership under clause 16 of the Partnership Deed but also where a partner is in breach of clause 13.1 of the Partnership Deed and a dissolution of the partnership takes place under clause 21.11 of the Partnership Deed. On balance, I would accept that construction of clause 16.3, since the reference to the adjustment of share value in that clause applies "[f]or the purpose of ascertaining the payment to an outgoing Partner" and the amount of that payment needs to be ascertained whether there is a dissolution of the partnership under clause 13.2 of the Partnership Deed or by reason of a deemed offer to purchase the share of the outgoing partner under clause 21.11 of the Partnership Deed, arising from the dismissal of Mr Ventura as General Manager. It follows that, if a breach of clause 13 of the Partnership Deed is established (as I will hold, below, is the case), then the 40% discount for goodwill is applicable in determining the value of Barescape's share in the partnership.
65The amount of the discount to goodwill under this clause would arguably need to be treated as an offset against any damages which would be recoverable by Bacchus from breach of that clause, since the benefit of that discount to goodwill would not have been obtained by Bacchus without the corresponding breach of that clause. The parties should have the opportunity to make further submissions as to that issue prior to the making of orders to give effect to this judgment.
66Alternatively, Bacchus contended that, on service of the notice of dissolution of the Bacchus Partnership under clause 13.1(a) of the Partnership Deed on 15 September 2009, clause 13.2 of the Partnership Deed operated to determine the entitlements of the parties to the exclusion of the mechanism created by clauses 12 and 21.11 of the Partnership Deed. I do not consider that clause 13.2 operated in that manner. In my view, the notice given by Bacchus on 15 September 2009 under clause 21.11 of the Partnership Deed gave rise to an agreement by Bacchus to purchase Barescape's interest at market value, which had immediate effect, whereas the second notice given by Bacchus under clause 13.1(a) would not bring about a dissolution of the Bacchus Partnership until a month later. On the proper construction of the Partnership Deed, clauses 13.2 and 21.11 are alternative mechanisms for a sale of a partner's interest and, once Bacchus invoked the mechanism under clause 21.11 which had immediate effect, it was bound by its terms.
67The mechanism provided by clause 21.11 had the important benefits for Bacchus that it was immediately effective and did not require it to establish cause for termination of the General Manager or dissolution of the Bacchus Partnership and that such a termination would be effective even if such cause was not ultimately established. Bacchus took full advantage of the immediate effect of that notice by changing the locks to the restaurant on the afternoon the notice had been given, which it would not have been entitled to do had it relied only on the alternative mechanism under clauses 13.1 and 13.2 which would not bring about a termination of the Bacchus Partnership for another month.
68There is also a dispute in the evidence of Mr Higgins and Mr Ventura as to the order in which the notice of dissolution of the Bacchus Partnership and notice of termination of Mr Ventura's employment as General Manager were provided by Mr Higgins to Mr Ventura. I do not consider it is necessary to resolve that dispute having regard to the conclusions that I have reached above. Whichever of the notice of dissolution of the Bacchus Partnership or notice of termination of Mr Ventura's employment as General Manager was given first, the notice of termination of Mr Ventura's employment as General Manager had immediate effect to bring about the termination of the Bacchus Partnership and there was no room for any later operation of the notice of dissolution of the Bacchus Partnership.
69Bacchus points to various occasions on which, it contends, Mr Ventura contended that the Bacchus Partnership continued beyond 15 September 2009. No estoppel as to this matter was pleaded, nor is it likely that such an estoppel could be established in circumstances where Bacchus had itself asserted two alternative bases for termination of the Partnership Deed and there is no suggestion that Bacchus relied to its detriment on any assertion made by Mr Ventura in that regard.
70Bacchus also contends that the reference to clause 16.3(c) in clause 13.2 of the Partnership Deed ought to be read as a reference to clause 16.3(b) and a 40% not 20% discount to goodwill therefore applies on dissolution of the partnership in accordance with this clause. This issue does not arise having regard to the conclusions that I have reached above. However, I should record my view that the reference to clause 16.3(c) in clause 13.2 of the Partnership Deed is an obvious error and was intended to refer to clause 16.3(b). As Bacchus points out, this is clear from clause 16.3(b) itself which itself makes reference to clause 13, whereas clause 16.3(c) refers to clause 14. The Court may, as a matter of construction, read the reference in clause 13.2 to clause 16.3(c) as a reference to clause 16.3(b) without rectification of that clause: Fitzgerald v Masters (1956) 95 CLR 420; Watson v Phipps (1985) 60 ALJR 1; Mander Pty Ltd v Clements [2005] WASCA 67; (2005) 30 WAR 46 at [92] per McLure J.
71It follows that, on termination of Mr Ventura's employment as General Manager of the Bacchus Partnership in circumstances where Barescape was in breach of clause 13.1 of the Partnership Deed, Bacchus was required to buy out Barescape's interest in the Bacchus Partnership in accordance with clauses 12 and 21.11 of the Partnership Deed. In that situation, the value of Barescape's 25% share of the Bacchus Partnership was nonetheless to be discounted in the manner provided in clause 16.3 of the Partnership Deed.
The dispute as to the SiDCOR valuation
72I have referred above to the mechanism for valuation of a partner's interest in the Bacchus Partnership under clause 16 of the Partnership Deed. Bacchus contends that the amount payable to Barescape in respect of its interest in the Bacchus Partnership is determined by a valuation made by the accountants for the Bacchus Partnership, SiDCOR ("SiDCOR valuation") (Ventura 26.10.09 Ex AV (Ex P6) Tab 5; Higgins 28.5.10 [54] Annexure "M"; Amended Cross-Claim [24]). The SiDCOR valuation was provided to Mr Ventura at a meeting with Mr Higgins and Mr Higgins' solicitor on 22 October 2009 (Higgins 28.5.10 [55]). Barescape contends that the SiDCOR valuation is not binding on it, either because Barescape has validly invoked a right to a second valuation under the Partnership Deed or under the principles in Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314. I will deal with these contentions in turn.
73First, Barescape contends that it is not bound by the SiDCOR valuation because it has validly invoked a right to a second valuation under the Partnership Deed. There is also a dispute between the parties as to what is required to invoke that right.
74I have concluded above that the sale of Barescape's interest in the Bacchus Partnership to Bacchus was governed by clause 21.11 of the Partnership Deed following Bacchus' service of a notice invoking that clause. The right to a second valuation under clause 21.11(g) of the Partnership Deed was triggered if Barescape gave notice that it regarded the SiDCOR valuation as in error. Clause 21.11 of the Partnership Deed also applied the mechanism under clause 12 of the Partnership Deed so far as possible to the valuation process where Bacchus was required to buy out Barescape's interest following the termination of Mr Ventura's employment as General Manager. Clause 12.3 provided an alternative basis for Barescape to challenge the SiDCOR valuation, if it could show within 21 days of receipt of the valuation that it was "substantially in error".
75Bacchus contends that the requirement to show an error within 21 days in accordance with clause 12.3 of the Partnership Deed applies to the exclusion of clause 21.11(g) and that, to give business efficacy to the Partnership Deed, the "potential conflict" between clauses 12 and 21.11 should be resolved by recognising that clause 12 applies where there is a termination "with cause" and clause 21.11 applies where there is a termination "without cause". I do not consider that there is a "potential conflict" between the clauses where they are capable of having parallel operation. The manner in which a valuation proceeds depends upon which clause is invoked, and in this case, each clause was invoked and clause 21.11 had immediate effect. In my view, where clause 21.11 applied by reason of the termination of Mr Ventura's employment as General Manager, it provided an additional basis for objection to the accountant's report, which could be invoked without showing an error in that valuation, in addition to the basis for objection to that valuation permitted under clause 12. This is not a surprising outcome, where a compulsory acquisition of a partner's share under clause 21 of the Partnership Deed at a valuation which was in error would be more damaging to that partner than an error in the valuation under clause 12 which permitted but did not oblige a partner to sell its interest at a particular price.
76By letter dated 22 October 2009 to the solicitors for Bacchus and Mr Higgins (Ventura 26.10.09 Ex AV (Ex P6) Tab T), Mr Ventura contended that the SiDCOR valuation was in error and stated that Mr Ventura would contact the President of the professional association of which SiDCOR was a member asking them to nominate another accountant to undertake a valuation. By letter dated 23 October 2009 (Ventura 26.10.09 Ex AV (Ex P6) Tab Y), the solicitors for Bacchus and Mr Higgins noted Barescape's contention that the valuation was in error but contended that the SiDCOR valuation was applicable. In my view, the letter dated 22 October 2009 was sufficient notice that Barescape and Mr Ventura regarded the SiDCOR valuation as in error to invoke the right to a second valuation under clause 21.11(g) of the Partnership Deed.
77Since I have found that Barescape was entitled to obtain a second valuation under clause 21.11(g) of the Partnership Deed on giving notice, as it did, that it regarded the SiDCOR valuation as in error, it is not strictly necessary for me to decide whether Barescape validly invoked the alternate basis for a second valuation under clause 12.3 of the Partnership Deed by "showing" the SiDCOR valuation to be substantially in error within the specified 21 day period. However, I will record my views as to that matter in case an appellate court takes a different view as to the application of clause 21.11(g) of the Partnership Deed.
78On 28 October 2009, Mr Ventura wrote to the solicitors for Barescape and Mr Higgins enclosing an affidavit dated 26 October 2009 setting out detailed criticisms of the SiDCOR valuation as follows:
"i. The earnings figures relied upon by the accountant do not include the direct deposits to the partnership bank account, and so understate earnings for the period from 1 July 2008 to 31 August 2009 by $81,455.90 (see paragraph 19 above).
ii. The amount recorded by the accountant for "cash on hand" as at 15 September 2009 is incorrect. The amount recorded by the accountant in the balance sheet is $24,294.61. The actual "cash on hand" recorded in the bank statement as at 15 September 2009 is $30,973.84 (see paragraph 16 above). The accountant has understated the cash on hand by $6,679.23.
iii. It was expressly contemplated in the Partnership Deed that, in addition to management of the business, I would progress the development of the second (upper) level of the business premises (clause 21.2 of the Partnership Deed.) Between 1 July 2008 and 15 September 2009, substantial building and development work was undertaken by me and under my supervision to that end. That included, building of an upstairs bar area, the "rough-in" of plumbing and electrical services to the upstairs bar, building of a bar front and bar top, installation of ducted air conditioning, painting of the upstairs bar, and acquisition of the required furniture. These substantial expenses were paid for out of the profits of the business, as a capital re-investment. The accountant has treated some of these amounts of capital re-investment as ordinary expenses of the business, thus inflating the expenses, both actual and forecast.
iv. In addition, the substantial acquisitions for (and development of) the upstairs bar have not been included in the accountant's valuation of assets of the partnership, nor where relevant, in his valuation of plant and equipment. Thus grossly understating the assets of the business.
v. Further, additional earnings that will result from operation of the second (upper) level of the business have not been taken into account at all in the accountant's estimate of future earnings.
vi. After 15 September 2009 I observed on various occasions tradesmen performing building work to the business premises. This included electrical, carpentry and gyprocking works in the nature of re-development, that ought not be treated as ordinary expenses of the business for the purposes of valuation as at 15 September 2009, but appear to have been so treated by the accountant.
vii. There also appears to be a large number of other errors relating to expenses recorded for Advertising, Crockery and Cutlery, Donations, Hire - Plant & Equipment, Licenses and Permits, Light Heat and Power, Management Allowance, Repairs and Maintenance, and Salaries." (Ventura 26.10.09 [34])
79Bacchus contends that the concept of "showing" a substantial error in the valuation, for the purposes of clause 12.3 of the Partnership Deed, requires demonstration by admissible evidence within the 21 day period that the accountant's valuation was substantially in error (19.6.12 T42). An alternative way in which Bacchus puts that submission is that it was necessary for Barescape and Mr Ventura to demonstrate, and not merely assert, the existence of error with a degree of substantiation.
80I do not consider that clause 12.3 of the Partnership Deed (as distinct from clause 21.11(g) to which I have referred above) contemplated that the mere assertion by one partner of error in a valuation performed by the partnership accountant would displace the valuation by the partnership accountant and allow a right to obtain a second valuation which would then be binding upon the partners. Had that been the intent of the clause, it could have been achieved by a right to obtain a second valuation in the same terms as clause 21.11(g) of the Partnership Deed, nor would it have been necessary to allow 21 days for the partner to prepare the relevant material. In ordinary usage, the use of the word "show" in clause 12.3 of the Partnership Deed must contemplate something more than the assertion of error. For example, the word "show" is defined in the Macquarie Australian Encyclopaedic Dictionary, 2006 as "to prove, demonstrate". In my view, the clause contemplates a demonstration of error on an objective standard, which would ultimately be determined by the Court if a dispute arose as to whether the right to a second valuation under this clause has arisen. That error might be simple to demonstrate if, for example, the accountant made an obvious error of principle or method, for example by failing to value a part of the business or allow for proper accounting adjustments, or more complex to demonstrate if the alleged errors were matters of detailed fact. This reading of the clause is broadly consistent with the concept of "showing error" used in the context of review of decision-making where the correctness of a decision can only be challenged by showing error in the decision-making process. In the curial context, the showing of error may require demonstration of matter such as acting on a wrong principle, relying on extraneous or irrelevant matters, errors of fact, or failure to take into account a material consideration: House v The King [1936] HCA 40; (1936) 55 CLR 499 at 505.
81It is then necessary to determine whether Barescape (through Mr Ventura) has "shown error" in the SiDCOR valuation to this standard. First, Mr Ventura's affidavit contended that the earnings figures relied upon by SiDCOR did not include direct deposits to the partnership bank account, and so understated earnings for the period from 1 July 2008 to 31 August 2009 by $81,455.90. That statement was made by reference to paragraph 19 of his affidavit dated 26 October 2009 which referred to reports printed from the POS system, and paragraph 20 of the affidavit in turn stated that these figures did not include direct payments to the partnership bank account of the amount of deposits for group booking and events. I do not consider this paragraph showed substantial error in the valuation, although I recognise that the amount of earnings said to be omitted was significant and that earnings were relevant to the valuation undertaken by SiDCOR. In particular, Mr Ventura's affidavit did not, in my view, provide sufficient information to allow an assessment whether the effect of omitting those earnings in fact had a substantial impact on the valuation.
82Barescape also contended that the amount recorded by SiDCOR for cash on hand as at 15 September 2009 was incorrect, because the balance sheet referred to $24,294.61 and cash on hand recorded in the bank statement as at 15 September 2009 was $30,973.84 (Ex P34), so the accountant had understated the cash on hand by $6,679.23. I do not consider that Mr Ventura's affidavit showed substantial error in the valuation, where it did not show why bank statements were likely to be a more reliable source of the relevant information than the balance sheet or that the effect of any error had a substantial impact on the valuation.
83Mr Ventura also contended that the substantial acquisitions for and development of the upstairs bar had not been included in the accountant's valuation of assets of the partnership or plant and equipment (Ventura 26.10.09 [13]-[15]). I do not consider that Mr Ventura's affidavit showed that the acquisitions made for the upstairs bar were in fact substantial so as to have the result that the valuation was substantially in error. Mr Ventura stated that additional earnings which would result from the operation of the upper level of the business had not been taken into account in the accountant's estimate of future earnings. I do not consider that was shown to be an error; in any event, as events developed, the upstairs bar did not open, and could not have opened without amendments to Bacchus' then liquor licence. Mr Ventura also stated that, after 15 September 2009, he had observed tradesmen performing works on the business premises which ought not to be treated as ordinary expenses of the business for the purposes of the valuation as at 15 September 2009. I do not consider that Barescape (through Mr Ventura) had shown error in this regard. Mr Ventura also asserted, without any detail, a large number of errors relating to expenses for specific matters. I do not consider that Barescape (through Mr Ventura) had shown error in SiDCOR's valuation in that regard.
84Accordingly, had I not found that Barescape was entitled to obtain a second valuation under clause 21.11(g) of the Partnership Deed on giving notice that it regarded the SiDCOR valuation as in error, I would not have held that it had validly invoked the alternate basis for a second valuation under clause 12.3 of the Partnership Deed by "showing" the SiDCOR valuation to be substantially in error within the specified 21 day period.
85Since I have found that Barescape was entitled to obtain a second valuation under clause 21.11(g) of the Partnership Deed, it is not strictly necessary to determine Barescape's attack on the SiDCOR valuation under the principles in Legal & General Life of Australia Ltd v A Hudson Pty Ltd above. However, I should indicate my views as to that issue in case an appellate court were to take a different view as to Barescape's contractual right to a second valuation. In Legal & General Life of Australia v A Hudson Pty Ltd above at 335, McHugh JA observed that:
"[A]s between the parties to the main agreement the valuation can stand even though it was made negligently. While mistake or error on the part of the valuer is not by itself sufficient to invalidate the decision or the certificate of valuation, nevertheless, the mistake may be of a kind which shows that the valuation is not in accordance with the contract."
His Honour also observed that noted that a valuation obtained by fraud or collusion would usually be disregarded, and that the Courts would usually imply a term that the valuation must be made honestly and impartially.
86These principles have been regularly applied in the case law: Holt v Cox (1994) 15 ACSR 313, and on appeal (1997) 23 ACSR 590 at 594; Kanivah Holdings Pty Limited v Holdsworth Properties Pty Limited [2001] NSWSC 405 at [47]. In TX Australia Pty Ltd v Broadcast Australia Pty Ltd [2012] NSWSC 4 at [23], Brereton J noted that:
"It is not in doubt that there will be an error of law, and that the determination will not be binding, if the Expert misconceived his function, asked himself the wrong question or applied the wrong test [Ex parte Hebburn Ltd; Re Kearsley Shire Council (1947) 47 SR (NSW) 416 at 420 (Jordan CJ); Avon Downs Pty Ltd v FCT (1949) 78 CLR 353 at 360 (Dixon J); Coal and Allied Operations Pty Ltd v Australian Industrial Relations Commission (2000) 203 CLR 194 at 208-209, at [31] (Gleeson CJ, Gaudron and Hayne JJ)], as in that event, he would not have addressed himself to, nor performed, the task required of him by the contract."
Similarly, in McGrath v McGrath [2012] NSWSC 578 at [11], Pembroke J noted that:
"So long as [an expert], when appointed and instructed, carries out his engagement in accordance with the terms of the [relevant contract], and arrives at his decision honestly and in good faith, the parties will not be able to re-open it and will be bound by the result. Mistake or error by [the expert] in the process of valuation will not invalidate his decision: Legal & General Life of Australia v A Hudson Pty Ltd (19850 1 NSWLR 314 at 334-336 (McHugh JA). On the other hand, if he asks himself the wrong question or misconceives his function, he will not have performed the task required of him by the contract: TX Australia Pty Ltd v Broadcast Australia Pty Ltd [2012] NSWSC 4 at [23] (Brereton J); AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173 at [51]."
87The SiDCOR valuation valued the business of the Bacchus Partnership at $177,911, made up of $124,430 plus goodwill of $49,481, and valued Barescape's interest in the Bacchus Partnership at $39,530 after making the deduction under clause 16.3(b) of the Partnership Deed. It appears that SiDCOR's valuation amounted to a valuation of the partnership interest as required by the Partnership Deed (Ex P66 [30]; Vella T1923-T1924). That valuation took into account partnership assets and liabilities shown in a balance sheet as at 15 September prepared in connection with that valuation. That valuation referred to a profit for the 12 months to 30 June 2009 of $40,584, a loss of $7,678 for the 12 months to 15 September 2009 and a projected profit of $68,341 for the period to 30 June 2010; assessed future maintainable earnings of the restaurant as at 15 September 2009 at $68,341; and assessed goodwill at $136,681, being twice future maintainable earnings.
88SiDCOR then added the amount of goodwill to the adjusted net assets of the partnership as determined by its balance sheet, namely negative $55,410 and updated the valuation for the net assets of the partnership by replacing the written down value of furniture and fittings, leasehold improvements and property, plant and equipment with the values determined by Slattery Valuations Australia Pty Limited ("Slattery") and Capital Claims Property Depreciation Specialists ("Capital Claims"). The Slattery valuation in turn referred to a valuation of plant and equipment at a market value of $83,560 and an auction realisable value of $30,800 obtained from Capital Claims. The SiDCOR valuation then gives an assessment of the value of the plant and equipment, fixtures and fittings, leasehold improvements and net assets at a negative value of $40,964 which is deducted from the value of the business.
89It is plain that a significantly different value was attributed to the business in the SiDCOR valuation from that contained in, or implied by, the information memorandum for the sale of the business prepared by Mr Siderovski on Mr Ventura's instructions in 2008. I should note, however, that there was also a significant change in the restaurant's circumstances between the date of Bacchus' acquisition of a 75% interest in the Bacchus Partnership on 1 July 2008 and the valuation conducted in September 2009, including that the global financial crisis had occurred; the restaurant had not met the profit projections made in respect of the sale in July 2008; and one would expect an arm's length purchaser of an interest in the partnership in September 2009 to have regard to the return which the restaurant was generating at that time, rather than the position 18 months previously. Mr Vella, the accounting expert retained by Barescape and Mr Ventura, accepted in cross-examination that the circumstances of the 2009 valuation were materially different to those that existed in July 2008 (Vella T1940-T1942).
90Barescape contends that the valuation performed by Slattery on which the SiDCOR valuation relied did not include all of the plant and equipment, fixtures, fittings and leasehold improvements and that both Slattery and Capital Claims failed to value the assets that they valued on an ongoing business basis. The SiDCOR valuation states that it "does not include certain refurbishment costs incurred by Anthony Ventura when Bacchus was established, such as, toilets, sinks, taps, electrical, wallpaper & grease trap" (Higgins 28.5.10 Annexure "M" (CB11) p139). Although Barescape contended that significant amounts had been spent on those refurbishment costs, fixtures and fittings, the evidence of such expenditures is unsatisfactory. I review that evidence in dealing with Mr Jugmans' and Mr Vella's treatment of this issue below. I have concluded, for the reasons set out below, that some refurbishment and fitout costs were likely to have been omitted from the SiDCOR valuation but Barescape has not established that their amount was substantial or that any error in the SiDCOR valuation in omitting allowance for those amounts was material. In any event, I do not consider that such an error would have been an error of the nature that would have invalidated SiDCOR's valuation for the purposes of Legal & General Life of Australia Ltd v A Hudson Pty Ltd above.
91I also do not accept Barescape's criticism of SiDCOR's valuation that it did not value the assets on a going concern basis. As Bacchus points out, the future maintainable earnings methodology used to determine goodwill necessarily assumed the continuance of the restaurant. Mr Siderovski did not depart from the proposition that the valuation was undertaken on a going concern basis in cross-examination or re-examination (Siderovski T1435; Siderovski T1456). The Slattery report states that the relevant valuation is "based on the assumption that the assets are, or are capable of being, utilised as assets of a profitable undertaking at the date of the valuation" (Higgins 28.5.10 Annexure "M" (CB11) p143 [14]).
92Barescape also contends that SiDCOR was not, at the relevant time, able to approach the valuation in an impartial manner. Mr Ventura had previously terminated Mr Siderovski's retainer by letter dated 1 August 2008 after Mr Siderovski had sought to charge, and Mr Ventura had declined to pay, a percentage-based fee in respect of the sale of part of Barescape's interest in the Bacchus Restaurant to Bacchus. SiDCOR had remained as the partnership accountant because Mr Higgins did not agree to a change of accountants (Ventura 26.10.09 [36]-[37]). Barescape also attacked Mr Siderovski's independence by reference to correspondence between Mr Siderovski and Mr Higgins in late September 2009 as to whether payments made by SiDCOR on behalf of the restaurant could be seen as relating to "ownership" of the restaurant. For example, an email dated 8 October 2008 from Mr Siderovski to Mr Higgins stated "[m]ate with the valuation going to come in at $200,000 for 100% I own most of it". A further email dated 15 October 2009 from Mr Siderovski to Mr Higgins stated "[d]on't skip the country ... ha ha ha ... but then again I would own 100% of Bacchus". I accept Mr Higgins' evidence that these emails were humorous in character, rather than reflecting any ownership interest of the business, although they also indicate the closeness of the relationship between Mr Higgins and Mr Siderovski.
93SiDCOR, or Mr Siderovski personally, also had a "retainer" with Mr Higgins or his associated entities to cover the next 5 years work and it appears that the amount paid under that retainer was structured, as recognition of assistance previously provided by SiDCOR to Mr Higgins and his interests, to exceed the value of the work which was in fact required to be done in any of those years by up to $300,000 in each year and $1.5 million over the term of the retainer (Siderovski T1407-T1410, T1425; Ewing T1727). The retainer agreement was not discovered and there is a dispute between the parties as to whether it was discoverable which I do not consider it necessary to resolve. In any event, it was unfortunate that neither Mr Siderovski nor Mr Higgins disclosed the existence of that agreement in their respective evidence concerning the SiDCOR valuation.
94That agreement did, in my view, raise a substantial issue as to SiDCOR's independence in undertaking the valuation of Barescape's interest in the Bacchus Restaurant. I accept that, as Bacchus points out, the Partnership Deed nominated that the "Partnership Accountant" would value the partnership; Mr Siderovski was appointed as Partnership Accountant when the Partnership Deed was entered; and it was known to Mr Ventura at that time that he had a relationship with Mr Higgins, which had led to the introduction of Mr Higgins as a purchaser of the Bacchus Restaurant, so complete independence was not contemplated by the parties to the Partnership Deed. However, the fact that SiDCOR or Mr Siderovski stood to earn, in substance, a bonus of in the order of $300,000 a year over 5 years from the continuance of Mr Higgins' retainer of the firm, and that bonus had been paid in advance, seems to me well beyond the nature of the association between Mr Higgins and the Partnership Accountant that would reasonably have been contemplated by the parties to the Partnership Deed, and such that SiDCOR and Mr Siderovski could not in fact bring an independent mind to the performance of the task allocated to them under the Partnership Deed. So far as SiDCOR's impartiality or financial interest is concerned, a substantial amount paid in advance to SiDCOR or Mr Siderovski, that could be lost if Mr Higgins chose to terminate the retainer if the valuation of Barescape's interest by SiDCOR was unacceptable to him, seems to me to raise substantively the same difficulty as a substantial amount paid in arrears if the valuation was acceptable to Mr Higgins.
95I should emphasise that I am not making any finding of impropriety in fact in this regard. I note that SiDCOR's valuation of Barescape's interest in the Bacchus Partnership was, in fact, higher than the joint valuation reached by the accounting experts retained by the parties on the basis that I will accept below. However, I do consider that a term would be implied in the Partnership Deed, in accordance with the principle in Legal & General Life of Australia Ltd v A Hudson Pty Ltd, that the valuation by the Partnership Accountant would be impartial and I consider that the unusual character of the retainer between SiDCOR and Mr Higgins had the result that SiDCOR was not in a position to undertake an impartial valuation. That result is not avoided even if the valuation that SiDCOR undertook was in fact substantially accurate.
96Bacchus also contends that if, as I have found, clause 21.11 of the Partnership Deed applied, it provides that "the provisions of clause 12 of this deed will apply so far as possible to the subsequent purchase" and clause 12 of the Partnership Deed makes no provision as to what happens in the event that a valuation prepared by the Partnership Accountant is substantially in error. I do not accept this contention. Clause 12 does not exclude the operation of clause 21.11(g) of the Partnership Deed which, as noted above, expressly provides that:
"If either party regards the Accountant's Valuation as being in error they may seek a valuation from another accountant nominated by the President of the professional association of which the Accountants are members, in which case the offeree Partner will do all things necessary to enable the further valuation to take place without undue difficulty or delay and with the benefit of all of the accounting records available to the Partnership Accountants".
Barescape and Mr Ventura had, as I have noted above, invoked the right to a second valuation under that clause.
The Carpenter valuation
97Barescape and Mr Ventura subsequently caused a report dated 17 December 2009 ("Carpenter valuation") to be prepared by Mr David Carpenter of Cutcher & Neale Chartered Accountants that assessed the market value of the Bacchus Restaurant to be $500,000. Barescape and Mr Ventura seek a declaration that the Carpenter valuation is binding upon the parties under the Partnership Deed.
98Bacchus contends that, even if Mr Ventura was entitled to proceed under clause 21.11(g) of the Partnership Deed, the Carpenter valuation was not the product of a nomination in accordance with that clause. Mr Ventura adopted the procedure then specified on the website of the Institute of Chartered Accountants for nomination by the President of the Institute and that process identified three persons, from whom Mr Ventura chose Mr Carpenter (Ventura 7.4.10 Annexure "B"; Ventura T283-284). In my view, that process amounted to the nomination of the accountants in the manner provided by the Institute. I would not readily reach the contrary view where it would frustrate nominations undertaken under a widely used contractual mechanism.
99Mr Ventura chose Mr Carpenter, who was a partner of the firm which provided accounting services to Barescape and Mr Ventura, to perform the valuation from the list of persons produced by the Institute of Chartered Accountants' website. Mr Carpenter's report acknowledged that another director of Cutcher & Neale Pty Ltd had provided and was providing accounting and taxation services to Mr Ventura with respect to Barescape and recorded that he had notified Mr Ventura of that relationship. In my view, that step did not impugn the validity of the appointment of Mr Carpenter although it could have supported an arguable challenge to that valuation under the principles in Legal & General Life of Australia Ltd v A Hudson Pty Ltd above.
100The Carpenter valuation valued the Bacchus restaurant as at 15 September 2008. Mr Carpenter did not give evidence and that report was only admitted as evidence of the report received for the purposes of the Partnership Deed: see [2012] NSWSC 512 at [3]-[9]. An issue also arises as to whether the Carpenter valuation complied with the requirements for a valuation under the Partnership Deed, for the purposes of the Legal & General principle. Clause 21.11(b) of the Partnership Deed requires an assessment of the "market value of the whole of the share of the Partner of which Ventura is a director". Clause 12.12 of the Partnership Deed refers to the "fair market value (inclusive of goodwill) of the business and of the share intended to be sold" and, so far as that clause refers to the fair market value of the business, I would understand that reference to be to a step toward identifying the fair market value of the share intended to be sold by the relevant partner.
101The Carpenter valuation indicated that it valued the "Bacchus Restaurant business" and that report was not, in terms, directed to the value of Barescape's interest in the Bacchus Partnership for the purposes of the Partnership Deed. That report was also heavily qualified. Paragraph 1.8 recorded that:
"In determining the value of Bacchus Restaurant, I have adopted a tangible asset method, based on the adjusted written down value of the restaurant fitout and plant & equipment. I have attributed the tangible asset value of the Bacchus Restaurant business at $500,000. I note that I am not a quantity surveyor nor a valuation expert of plant & equipment and specialised building fitouts. I have taken the book (written down) value of the restaurant fitout and plant & equipment to be representative of value of the business, on a value in use basis as opposed to a liquidation value. In the event that the written down value of the fitout and plant & equipment is assessed at an amount more or less than the above amount [$500,000], my valuation should be amended accordingly."
The figures for fitout and plant and equipment used in the Carpenter valuation were sourced from a depreciation schedule attached to the Sale Agreement and were adjusted for the estimated decline in value of the assets during the period 1 July 2008 to 15 September 2009. The Carpenter valuation (Ventura 7.04.10 Annexure "C" (CB 2) p78 [1.9]) also noted that it:
"[did] not take into account any other assets or liabilities that may exist in the business. Should these items exist, then they would need to be adjusted against the valuation".
That report (Ventura 7.04.10 Annexure "C" (CB 2) p 89[11]) also noted that:
"I have not taken into account the other assets of the business including bank accounts, loans receivable and stock at cost in the tangible asset method. Similarly I have not taken into account liabilities of the business including trade creditors, loans payable and employee entitlements based on my instructions as to the reliability of the financial management information supplied. Should these items exist, then they would need to be adjusted against the valuation."
102The Carpenter valuation noted that the 30 June 2008 financial statements showed the written down value of improvements in respect of the Bacchus restaurant to be $76,174, compared to the value of $461,307 detailed in the depreciation schedule attached to the Sale Agreement. Had the Carpenter valuation adopted the recorded value of the assets and liabilities of the entity disclosed in the financial statements signed on 16 November 2009, the total value of fixed assets reflected in that report would have been $172,500 rather than $500,000 (Second Joint Report (Ex D87A)).
103The accounting expert retained by Bacchus, Mr Jugmans, expressed the view that it was not appropriate to ignore other assets and liabilities of the business in determining the value of the restaurant and, if a net asset valuation method was adopted, all assets and liabilities of the business must be valued. The accounting expert retained by Barescape, Mr Vella, also identified several criticisms of Mr Carpenter's methodology (Ex P66 [17]-[25]). Mr Vella observed that Mr Carpenter's report did not undertake the valuation by reference to the usual test of a hypothetical willing but not anxious buyer and seller but instead adopted a value attributable to the "owner", which he described as a test of "value to the owner" (Ventura 7.04.10 Annexure "C" (CB 2) p79 [2.4]; Ex P66 [23(a)]). Mr Vella noted that Mr Carpenter's valuation does not take into account the value of other assets or liabilities in the business (Ex P66 [23(b)]) and expressed the view that Mr Carpenter's not taking into account such other assets or liabilities had the result that Mr Carpenter's valuation was "not a valuation of an interest in the Bacchus Partnership" (Ex P66 [24]; Vella T1923-T1924).
104Barescape responds that there was no relevant difference because there were no matters which would make Mr Ventura's partnership interest different from the value of the business. Mr Vella acknowledged on re-examination that, if there were no debts and the only asset of the partnership was the business, then the value of the partnership and the value of the business would be the same (Vella T1987). However, even if that were the case, Mr Carpenter would still not have performed the task set under the Partnership Deed, even if the result of performing a different task was the same as that of performing the task set under the Partnership Deed. The assumption in the cross-examination of Mr Vella that there were no other assets or liabilities to be taken into account was also not established. As Bacchus points out, there were cash at bank, trade creditors, employee entitlements and payroll liabilities which were assets and liabilities of the partnership as at the date of its termination (Higgins 28.5.10 Annexure "M" (CB 11) p 140]). Barescape accepted in closing oral submissions that Mr Carpenter left off some assets but contended that he also left off liabilities, including goodwill, because his approach did not place emphasis on those items (19.6.2012 T6).
105I accept Bacchus' submission, which was supported by evidence both of Mr Jugmans and Mr Vella, that Mr Carpenter's valuation was a valuation of the Bacchus Restaurant business, rather than a value of Barescape's interest in the net assets (ie, the assets net of liabilities) and excluding goodwill. To the extent that Mr Carpenter undertook a different valuation than that which was required under the Partnership Deed, it was not binding upon the parties. Barescape relied on the decision in Re Contract 121 Pty Ltd [2011] NSWSC 519 to support Mr Carpenter's valuation. However, in that case, Hammerschlag J found that the relevant valuation report complied with the terms of the contract in adopting a discounted cashflow methodology to determine the "market value" of shares, because that report reflected the valuer's opinion as to that market value. In the present case, the difficulty with Mr Carpenter's report is not the methodology that he adopts, but that what he valued was not what the Partnership Deed required to be valued.
106There are several other difficulties as to the Cutcher & Neal report that, in my view, would not have impugned the validity of that report under the Legal & General standard. Cutcher & Neale's value of the Bacchus Restaurant at $500,000 is made up of an amount attributed to the Bacchus Restaurant fit-out and upper bar of $420,000 and restaurant plant and equipment of $80,000. The expert accountant retained by Barescape and Mr Ventura, Mr Vella, indicates that he has sought to replicate Cutcher & Neale's calculations totalling $500,000 but has been unable to do so and that Mr Carpenter did not respond to inquiries to seek to determine the basis of those figures.
107Bacchus also contends that the Partnership Deed did not prescribe that any second valuation under clause 21.11(g) is determinative and that the Partnership Deed is silent as to what must happen in the event that there are competing valuations. It is not necessary to determine this question given the findings that I have reached above. Had it been necessary to do so, I would have held that the proper construction of clause 21.11(g) of the Partnership Deed was that a second valuation obtained under that clause applies to the exclusion of the first, unless it is not binding under the principles in Legal & General. There would, obviously enough, be no utility in the parties' establishing a mechanism under the Partnership Deed to obtain a second valuation if that valuation did not operate in the place of the first.
108Barescape and Mr Ventura contend that they are entitled to the costs of the Carpenter valuation under clause 21.11(h) of the Partnership Deed regardless of whether that valuation is binding. That clause provides that costs of a second valuation will be borne by Bacchus, if that second valuation "demonstrates" that the market valuation carried out by the Partnership Accountant understates the market value by at least 5%. I do not consider that, on the proper construction of this clause, the Carpenter valuation "demonstrates" that matter. Since the Carpenter valuation valued the Bacchus Restaurant, not Barescape's interest in the Bacchus Partnership, it does not demonstrate the value of the latter interest or that the Partnership Accountant's valuation of that interest was incorrect. That is the case even if that result could be derived from it, by making further adjustments for assets and liabilities of the Bacchus Partnership which may or may not be contentious. The mechanism for reallocation of the costs of the report under the Partnership Deed from the party that incurred them, Barescape, to Bacchus is therefore not triggered.
Court's jurisdiction as to alternate valuation where the SiDCOR and Carpenter valuations have failed
109Barescape contends that, if the SiDCOR valuation and the Carpenter valuation are not binding on the parties under the Partnership Deed, the Court has jurisdiction to determine the value of the business by reference to the principle in Cameron v Cuddy [1914] AC 651 and on the basis that there has been a breach of Bacchus' obligation to pay the value of Barescape's interest in the Bacchus Partnership. Bacchus contends that the effect of the failure of those valuations would be that there has not been a valuation under clause 21.11(g) of the Partnership Deed; Mr Ventura's right to such a valuation has not been exhausted; Mr Ventura has the right again to invoke that valuation mechanism; and the Court has no jurisdiction to determine the value of Barescape's interest in the Bacchus Partnership.
110In Cameron v Cuddy above, a contractual reference to arbitration had failed and Lord Shaw observed (at 656) that, in that situation:
"... [I]t is the duty of a Court of law, in working out a contract of which such an arbitration is part of the practical machinery, to supply the defect which has occurred. It is the privilege of a Court in such circumstances and it is its duty to come to the assistance of parties by the removal of the impasse and the extrication of their rights. The rule is in truth founded upon the soundest principle, it is practical in its character, and it furnishes by an appeal to a Court of justice the means of working out and of preventing the defeat of bargains between the parties".
In Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444, the House of Lords held that the Court could determine the value of the reversion of a lessor under a lease where a contractual mechanism for the assessment of that value could not be invoked by reason of a party's default. In Beevers v Port Phillip Sea Pilots Pty Ltd [2007] VSC 556, where a valuation of shares in a company by its auditor was set aside and the contract did not provide for an alternative mechanism to appoint a different valuer where the company's auditor was unable to undertake the valuation, Dodds-Streeton J ordered that the contractual valuation be performed by a special referee appointed by the Court.
111On the other hand, the Court's jurisdiction to supply machinery to allow a valuation to take place where the contractual machinery has been frustrated is subject to a limit that the prescribed contractual machinery is not an essential part of the contractual bargain: Sudbrook Trading Estate Ltd v Eggleton above at 483-484; Candoora No 19 Pty Ltd v Freixenet Australasia Pty Ltd (No 2) [2008] VSC 478 at [14]. In Candoora, Hargrave J distinguished the position where the contractual machinery agreed by the parties had failed from that where the expert chosen by the parties had failed to properly undertake the task. His Honour noted that, in the latter situation, the Court could not simply impose an alternative machinery upon the parties for the purpose of determining the fair value of shares in the company. In Tawfik v Bill [2010] NSWSC 1034, Barrett J observed that the decision in Cameron v Cuddy "does not stand as authority for the proposition that the court can, as it thinks fit, add to, subtract from or otherwise meddle with the parties' contract" (at [24]).
112In my view, by contrast with the decision in Candoora at [15], the expert's failure to properly undertake their tasks here does amount to a failure of the contractual machinery, because the contractual machinery does not provide a mechanism for a further valuation to be undertaken after the initial valuation undertaken by the Partnership Accountant and the further valuation undertaken by the accountant nominated by the President of the Institute of Chartered Accountants had each failed. (The position might have been different had I accepted Bacchus' contention that Mr Carpenter had not properly been nominated to undertake that valuation, so that the process for nomination of the second valuer had not been exhausted).
113I consider that the Court may therefore proceed to determine the value of Barescape's interest in the Bacchus Partnership by reference to the expert accounting evidence led in the proceedings concerning that issue, where the valuations undertaken under the Partnership Deed have not determined that matter. That approach is consistent with the manner in which both parties conducted the proceedings, until Bacchus took the point that the Court lacked jurisdiction to determine the value of the Bacchus Partnership in closing submissions. On 21 July 2011, Bergin CJ in Eq directed the parties to confer and instruct their experts to confer for the purpose of providing assistance to the trial judge in respect of specified matters. Further expert reports were then filed addressing, inter alia, the valuation of Barescape's interest in the Bacchus Partnership as at 15 September 2009. Throughout this process, both parties appear to have proceeded on the basis that it was open to the Court to determine the value of Barescape's interest in the Bacchus Partnership on the basis of expert accounting evidence, if the valuation mechanism provided under the Partnership Deed had failed. Both parties led expert evidence from their respective experts and in the Second Joint Expert Report as to the value of Barescape's interest in the Bacchus Partnership.
Expert accounting evidence as to the value of Barescape's interest in the Bacchus Partnership
114I now turn to the question of the valuation of Barescape's interest in the Bacchus Partnership, so far as it emerges from the expert evidence led in the proceedings. In undertaking their valuations, Mr Jugmans and Mr Vella properly had regard to the value that would be paid by a willing but not anxious purchaser to a willing but not anxious vendor, both parties acting at arm's length, being under no compulsion and acting knowledgeably and prudently and in an open and unrestricted market. Mr Jugmans noted that there was a decline in the net profit before interest, tax and depreciation (EBITDA) of the Bacchus Restaurant between 2007 and 2009 and assessed the future maintainable earnings of the restaurant as $43,000 and expressed the view that an appropriate multiple to apply to those earnings for the purpose of determining goodwill was in the range of 1-1.5, with a midpoint of 1.25, resulting in goodwill of $53,750. That goodwill figure was adopted by both experts in the Second Joint Report (Ex D87A).
115Mr Jugmans assumed that the MYOB data files of Bacchus Restaurant could be relied upon for the purposes of the valuation of and that assumption was substantially contested in the proceedings. I have referred to the evidence as to the origin of particular versions of that data in my judgment delivered on 21 March 2012 ([2012] NSWSC 257). Mr Jugmans' evidence is that he relied on version 1 of the MYOB data (as defined in his reports) to prepare the balance sheet of the Bacchus Partnership as at 15 September 2009 (Ex D85 [9.1]-[9.26]; Ex D86 Attachment A18; Ex D86 Attachment A10). Mr Jugmans' report explained the differences between versions 1 and 2 of the MYOB data for 2009 and 2010 and expressed the view that the difference between versions 1 and 2 of the MYOB records were not material (Ex D86, Attachment A18). It appears that variations in the MYOB figures largely reflected accounting adjustments for depreciation, provision for annual leave and journal entries to produce accounting records on an accruals rather than a cash basis and I consider that I can properly accept Mr Jugmans' approach to this issue, and the accuracy of the MYOB data on which he relied.
116In the Second Joint Report, Messrs Jugmans and Vella relied on a valuation by Slattery dated 21 September 2009 of fixtures and fittings at $62,714 and a valuation by Capital Claims dated 29 July 2009 of plant and equipment at $83,560. (Notwithstanding the date of the latter report, it appears to reflect an inspection undertaken on 20 October 2009). Messrs Jugmans and Vella also had regard in that report to information contained in the financial statements of Barescape as trustee for the V's Family Trust for the year ended 30 June 2008 and the tax returns of Barescape as trustee for the V's Family Trust for the year ended 30 June 2008. The Second Joint Report added an amount of $76,174 appearing in the tax returns as assets of the business, depreciated to $68,998, for Bacchus Restaurant fit out (Second Joint Report (Ex D87A); Jugmans T1682). That figure was the total of $18,203.47 for upstairs fitout in the mezzanine level and $60,983 for other plant and equipment expenditure, which was adjusted down for further depreciation (Ex D85 [5.24]; T1666). On the assumption that none of the items of building improvements and fixtures are included in the Slattery and Capital Claims valuations, Mr Jugmans increased his assessment of the fair market value of the Bacchus Restaurant as at 15 September 2009 by the amount of those building improvements and fixtures, from $123,608 to $192,606.
117The Bacchus Restaurant fitout was included at a higher value of $418,038 under "Basis 1" of the experts' valuation and a lesser value of $68,998 under "Basis 2" of that valuation. The Second Joint Report recognised that the book value of the improvements in the books of account of Barescape, which operated the restaurant prior to 30 June 2008, record a significantly lesser amount for improvements than the amount recorded in the Sale Agreement and those items are not included in the valuation of plant and fixtures obtained from the Capital Claims and Slattery valuations. Messrs Jugmans and Vella noted that the exclusion of those items from the Capital Claims and Slattery valuations appears to reflect the fact that they are costs of intangible items such as plans or labour or represent fittings (such as toilets, taps and chandeliers) which would or may normally be considered as lessor's fittings.
118The Second Joint Report expressed the opinion that a willing but not anxious purchaser would be prepared to pay an amount to secure the use of such improvements if their value were reflected by way of a lower than commercial rent and that those costs should be reflected as an asset if it is established that they were incurred by the lessee and the rent paid for the Bacchus Restaurant was at a market rental, but without regard to the enhancement attributable to those fit-out costs, so as to give the tenant the benefit of those costs by discounted rent over the term of the lease. Messrs Jugmans and Vella considered they could only value Barescape's partnership interest on "Basis 1" including the higher value for fitout if several criteria identified in the joint expert report were satisfied, including that the relevant costs were in fact incurred and the rent for the Bacchus Restaurant was a market rent excluding reference to those fit-out costs, and allowing the tenant the benefit of those costs by discounted rent over the term of the lease (Second Joint Report (Ex D87A), [9(c)]).
119Messrs Jugmans and Vella identified the factors supporting a valuation on "Basis 1", allowing the higher value for fitout, as including the value allocated to fitout in the Sale Agreement and in the Bacchus Restaurant's books of account after the Bacchus Partnership ceased, although they noted that higher value was not recorded in the version of MYOB from which the partnership balance sheet at 15 September 2009 had been produced. Messrs Jugmans and Vella agreed that a valuation on "Basis 2" allowing a lesser value for fitout was appropriate if the conditions to which they referred could not be established (Second Joint Report (Ex D87A), [9(d)], [10]). I accept that approach, first, because it is the common position of well-qualified accounting experts retained by the respective parties in the proceedings and, second, because it is prudent and sensible on its face. Mr Vella indicated on cross-examination that his view was that the conditions for a valuation on "Basis 1" were not satisfied, albeit subject to a possible qualification if additional information became available in response to further inquiries made by a potential purchaser (T1944, T1947-1948, T1986-1987).
120In my view, the basis for a valuation on "Basis 1" including the higher value for fitout has not been established. Although the lease in respect of the Bacchus Restaurant excludes leasehold improvements from any market rent review on the exercise of the second option (Higgins 28.5.10 Annexure "A" (CB 11) p65, cl 21.02(c)(ii)), I cannot find that the market rental for the restaurant over the term of the lease was discounted for those expenses since there is no evidence that would support a finding as to the market rental for the premises. The evidence suggests that some refurbishment costs were in fact incurred but is not sufficient to establish the amount of those costs. Barescape relied on the information memorandum for the sale of the business prepared by Mr Siderovski on Mr Ventura's instructions prior to Mr Higgins' purchase of an interest in the restaurant (Ventura 26.10.09 Ex AV (Ex P6) Tab C p11, p14) which referred to fitout costs of approximately $460,000. However, that information memorandum provided only weak evidentiary support for that figure, since Mr Siderovksi's evidence was that he had relied on the information supplied to him and not seen invoices or other source documents supporting the amount incurred in respect of leasehold improvements or fitout costs at the time of preparing that information memorandum (T1455-T1457).
121The Sale Agreement referred to a written down value of fitout costs at June 2008 of $461,307 (Ventura 26.10.09 Ex AV (Ex P6) Tab B p29). Barescape contends that I should find that the cost of the leasehold improvements were incurred, because they were included in the amount paid by Bacchus to acquire its interest in the Bacchus Restaurant in an arm's length transaction. I do not consider that I can properly draw that inference, since, even if Mr Higgins purchased the restaurant on the assumption that such expenditures had been incurred in respect of fittings, it does not follow that that assumption was true.
122The income tax returns for the Bacchus Restaurant prior to mid-2008 and the MYOB records for the restaurant at that time did not record the amount for fit-out costs of approximately $460,000 on which Barescape relies (Ex D98 p119). Mr Jugmans noted that the book value of non-current assets at 30 June 2008 recorded in the financial statements of Barescape as trustee for the V's Family Trust for the year ended 30 June 2008 ($221,690) did not agree with the book value (or written down value) of $608,809 stated in the depreciation schedule of plant and equipment at 30 June 2008 as attached to the Sale Agreement; and there was a significant difference in the value of building improvements and fixtures shown as $76,174 in the 2008 tax return and $461,307 in the Sale Agreement. Mr Vella's evidence on cross-examination was that he considered the expenses stated in the tax return should be preferred to the statement as to fit out in the depreciation schedule attached to the Sale Agreement (T1938).
123I have had regard to the fact that fixed assets were later taken up at a higher value in the MYOB accounts of Bacchus after the Bacchus Partnership ceased (Ex P38). That is a matter to which the accounting experts also had regard in preparing the Second Joint Report (Second Joint Report (Ex D87A) [7(d)]). In my view, the higher amounts depreciated in later accounts do not support an inference as to the value of those assets at earlier dates, where Bacchus contends that it was open to it to depreciate the amount which it had paid for those assets, notwithstanding that amount was (on Bacchus' case) inflated, and it appears that Bacchus also incurred substantial additional expenditures in upgrading the restaurant.
124I should add that Mr Ventura sought, in an affidavit dated 30 March 2012, to lead evidence asserting that such costs have been incurred. I did not permit the reading of that paragraph of Mr Ventura's affidavit at a very late stage in the proceedings where that would have caused significant prejudice to Bacchus, quite apart from the difficulties with the form of the relevant statement. Barescape and Mr Ventura had many opportunities, commencing with inquiries made by Mr Vella, to provide substantiation of the costs incurred in respect of the Bacchus Restaurant fitout. Barescape contended that Mr Ventura had provided the records of those expenditures to Mr Siderovski and was therefore unable to produce them but Mr Siderovski denied that he was supplied with such records (T1456-T1457). Even if such records had been provided to Mr Siderovski, one might have expected that at least some of them could have been obtained by Barescape issuing subpoenas to the suppliers who had supplied the relevant items or the contractors who had undertaken the relevant work and Barescape and Mr Ventura made no attempt to do so.
125The Second Joint Report indicated Mr Jugmans' valuation of the Bacchus Restaurant (prior to adjustments to derive the value of the Bacchus Partnership) at $192,606 on "Basis 2" and Mr Vella's valuation of the restaurant at $160,818 on "Basis 2". The difference in those valuations reflected a difference between the experts as to whether certain assets are "surplus" or "business items" valued at $31,788, but this difference does not affect their ultimate valuation of the Bacchus Partnership and I therefore need not address it. The Second Joint Report in turn valued the Bacchus Partnership net assets as $160,818 on "Basis 2" (Second Joint Report (Ex D87A)).
126There was also some debate about a loan transaction of $1,030,000 between Commonwealth Bank of Australia and Mr Higgins or his interests; however, I accept Bacchus' submission that this matter does not impact on the valuation of the restaurant as at 15 September 2009, because Mr Higgins' personal interests (including any borrowings relating to the cost of acquisition of the interest) were not intermingled with restaurant income and expenses until after that date.
127In summary, I consider that Barescape's interest in the Bacchus Partnership should be valued on the basis of the valuation of that partnership in the Second Joint Report at $160,818 on "Basis 2" (Second Joint Report (Ex D87A). That amount will need to be adjusted for a discount of 40% of goodwill having regard to the findings that I reached above in respect of clauses 12, 16.3 and 21.11 of the Partnership Deed.
Account on dissolution of partnership and alternative claim for damages
128Given the findings I have reached, it is not necessary for me to address Barescape's alternative claim for an account on dissolution of the Bacchus Partnership. I should note, for completeness, that I see considerable force in Bacchus' contention that clause 21.11 of the Partnership Deed is a contrary agreement between the parties which excluded the right to an accounting under s 44 of the Partnership Act 1892 (NSW). I also cannot accept Barescape's alternative contention that the Court can determine damages relating to a failure by Bacchus to pay the outgoing partner's share in accordance with the Partnership Deed because, as Bacchus points out, the obligation to make that payment does not arise until that amount is validly determined.
Claim for interest
129Barescape claims interest on all amounts payable under clause 21.11(i) of the Partnership Deed or alternatively at Court rates under s 100 of the Civil Procedure Act 2005 (NSW). The claim for interest under the Partnership Deed must succeed in respect of the amount due and unpaid to Barescape, subject to Bacchus' claim for set-off in respect of damages or compensation recovered by it.
Bacchus' Cross-Claim - Claim for breach of fiduciary duty owed by Barescape to Bacchus
130The first part of Bacchus' Cross-Claim relates to allegedly wrongful conduct by Barescape and Mr Ventura prior to dissolution of the Bacchus Partnership and the termination of Mr Ventura's employment and raises questions of breach of fiduciary duty and breach of the Partnership Deed.
131It is well-established that the relationship between partners is fiduciary in character. In Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384 at 408, Dixon J held that in consequence of the relationship of mutual agency between them partners are under that duty "which requires a fiduciary to refrain from engagements which conflict, or which might possibly conflict, with the interests of those whom he is bound to protect". In Chan v Zacharia [1984] HCA 36; (1983) 154 CLR 178, Gibbs CJ cited Lindley on Partnership as to the obligation of "perfect fairness and good faith" owed by one partner to another and observed that a fiduciary relationship existed in a partnership. In Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64: (1984) 156 CLR 41, Gibbs CJ noted that the archetype of a fiduciary is a trustee and other accepted fiduciary relationships include partners (at 68) and Mason J also listed the accepted fiduciary relationships as including partners (at 96).
132The no profit rule provides that a fiduciary cannot obtain a profit from its fiduciary position without the principal's consent. The no conflict rule requires that a fiduciary cannot have a personal interest or duty owed to a third party which gives rise to a real and sensible possibility of a conflict. The two rules may overlap, as the case law illustrates: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 137; Boardman v Phipps [1967] 2 AC 46; [1966] 3 WLR 1009, where Lord Upjohn (dissenting) observed that the "relevant rule for the decision of this case is the fundamental rule of equity that a person in a fiduciary capacity must not make a profit out of his trust which is part of the wider rule that a trustee must not place himself in a position where his duty and his interest may conflict" and formulated the test for whether a conflict exists as whether a:
"reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in a conflict."
That passage was approved in Queensland Mines Ltd v Hudson (1978) 18 ALR 1 at 3 and in Hospital Products Ltd v United States Surgical Corporation above at 103.
133In Chan v Zacharia above at 198-199, Deane J observed that the equitable rule involved two themes and that:
"The first is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage. Notwithstanding authoritative statements to the effect that the "use of fiduciary position" doctrine is but an illustration or part of a wider "conflict of interest and duty" doctrine (see, eg, Boardman v Phipps; N.Z. Netherlands Society "Oranje" Inc v Kuys), the two themes, while overlapping, are distinct. Neither theme fully comprehends the other and a formulation of the principle by reference to one only of them will be incomplete. Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it."
134In Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544 at 557-558, in respect of a claim by an employer against a former senior executive, the High Court observed that:
"A fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position. The stringent rule that the fiduciary cannot profit from his trust is said to have two purposes: (1) that the fiduciary must account for what has been acquired at the expense of the trust, and (2) to ensure that fiduciaries generally conduct themselves "at a level higher than that trodden by the crowd". The objectives which the rule seeks to achieve are to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage."
135In Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165 at 197-199, McHugh, Gummow, Hayne and Callinan JJ formulated the no conflict rule as follows:
"... [T]he fiduciary is under an obligation, without informed consent, not to promote the personal interests of the fiduciary by making or pursuing a gain in circumstances in which there is 'a conflict or a real or substantial possibility of a conflict' between personal interests of the fiduciary and those to whom the duty is owed."
136In Streeter v Western Areas Exploration Pty Ltd (No 2) [2011] WASCA 17; (2011) 278 ALR 291; 82 ACSR 1, McLure P (with whom Buss JA agreed) observed that a fiduciary is under an obligation, without informed consent, not to promote his or her personal interest by making or pursuing a gain or benefit in circumstances in which there is a conflict or a real or substantial possibility of a conflict between the fiduciary's personal interest and those whom he or she is bound to protect. Her Honour also observed at [76] that:
"When examining the case law, a distinction needs to be drawn between those cases in which the fiduciary was under a positive duty to acquire or seek to acquire a particular benefit or property for the company (Cook v Deeks [1916] 1 AC 554; Chan v Zacharia; Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443; Keech v Sandford (1726) 25 ER 223) and cases where there is no such positive duty. This case falls into the latter category. Whether there is a sufficient connection in those circumstances can give rise to difficult questions of fact. Indeed, where a complex course of dealing is in issue, as in this case, minds reasonably may differ as to the outcome of the application of the principles: Maguire v Makaronis (468). The principles in this area of the law are easier to state than to apply."
137I should add, for completeness, that any fiduciary duty owed by Barescape ceased when the Bacchus Partnership was terminated namely, on my findings, on 15 September 2009: Ryder v Frohlich [2004] NSWSC 418 at [56]-[58] per Cripps AJ, on appeal Ryder v Frohlich [2004] NSWCA 472 at [52], [154]; White City Tennis Club Ltd v John Alexander's Clubs Pty Ltd [2008] NSWSC 1225 [at 88] per Young CJ in Eq; John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19; (2010) 266 ALR 462 at [30].
Scope of the partnership business
138The fiduciary duty in respect of a partnership overlaps with s 30(1) of the Partnership Act which relevantly provides that:
"If a partner, without the consent of the other partners, carries on any business of the same nature as and competing with that of the firm, the partner must account for and pay over to the firm all profits made by the partner in that business."
In order to determine whether there is a breach of fiduciary duty, it is therefore necessary to pay close attention to the scope of the relevant business and the competing business. It has been suggested that it is not necessary to establish that the business is competitive in all respects and "it is enough that the two operations contained identical elements and are pursued in the same market": K L Fletcher, The Law of Partnership in Australia, 9th ed, Lawbook Co, 2007, p 129.
139For example, in Glassington v Thwaites (1822) 1 Sim & St 124; 57 ER 50, the publication of a morning and afternoon newspaper were held to be of the same nature. On the other hand, in Aas v Benham [1891] 2 Ch 244, a ship broking partnership claimed an account of profits made by a partner from his interest in a ship building company. The Court of Appeal reversed the decision at first instance holding the partner accountable on the basis that the business of the company did not compete with and was beyond the scope of the business of the partnership. Lindley LJ at 255 observed that:
"The answer, however, to this claim is short and conclusive. It was no part of the business of [the partnership] to promote or reconstruct companies, nor to advise them how to improve the management of them. All such matters were quite foreign to the business of [the partnership] ... He never was in fact acting for his firm in this matter, nor did his partners ever suppose he was, or treat him as so acting. Nor is it true in fact that Mr Benham or the company for which he was acting ever derived any benefit from his connection with the firm of [the partnership]. It is clear law that every partner must account to the firm for every benefit derived by him without the consent of his co-partners from any transaction concerning the partnership or from any use by him of the partnership property, name or business connection ... (emphasis added)."
140In Gibson v Tyree (1900) 20 NZLR 278, the majority in the Court of Appeal held that a purchase of boot leather, although in small lots, was in the same class as the business of wholesale leather merchants. In Birtchnell v Equity Trustees, Executors and Agency Co Ltd above at 408, Dixon J held that the "subject matter over which the fiduciary obligations extend is determined by the character of the venture or undertaking for which the partnership exists, and this is to be ascertained, not merely from the express agreement of the parties ... but also from the course of dealing actually pursued by the firm". His Honour continued:
"Of the duties imposed by these doctrines, one which is material for the decision of this case is that which forbids a partner from withholding from the firm any opportunity of advantage which falls within the scope of its undertakings, and from using for his own exclusive benefit, information, knowledge or resources to which the firm is entitled. (See Dean v MacDowell [ (1881) 6 App Cas 79]; Aas v Benham [ (1891) 2 Ch 258, Bowen LJ]; and cf Trimble v Goldberg [ (1906) AC 499], and also secs 33 and 34 of the Victorian Partnership Act 1915.) Another duty of present materiality is that which requires a fiduciary to refrain from engagements which conflict, or which may possibly conflict, with the interests of those whom he is bound to protect. (Aberdeen Railway Co v Blaikie Bros [(1854) 1 Macq 461] (408)."
Dixon J also observed that:
"[T]he partnership was entitled to avail itself of any opportunity to embark upon such a transaction which came to the knowledge of the partners or any of them, and knowledge and information acquired by a partner as to the readiness of a client to share such profits, as to the conditions upon which he would do so, and generally as to every fact bearing upon the terms which the partnership might negotiate with him were all matters which no partner could lawfully withhold from the firm and turn to his own account. The relation between such a client and the partnership is a matter affecting the joint interests which each member was bound to safeguard and protect, and no member could enter into dealings or engagements which conflicted or might conflict with those interests or which gave him a "bias against the fair discharge of his duty" in that respect (at 412)."
Isaacs J observed that:
"For my purpose, I rely on part of s 33 and on the rules of Equity saved by s 4, which enable us properly to understand and apply s 33. Section 33 enacts that (1) "Every partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction" concerning the business of the firm, etc. The section is not new law (see per Lindley LJ in Aas v Benham [(1891) 2 Ch at p 255], since that case, as pointed out in Pollock's Digest of the Law of Partnership [11th ed], p 95, was commenced before the Act was passed.) The section plainly cannot be confined to matters within the scope of the partnership. The contrary view would open a wide door to fraud, besides being opposed to what Lindley LJ says at the page mentioned. If, for instance, A and B are in partnership as wholesale grocers, and B arranges with C, a retail grocer, to share C's profits if B influences A to agree to supply C, I take it as clear that B's arrangement with C is a "transaction concerning the partnership," though C's business itself is wholly outside its scope. The case would fall within the observations of Cotton LJ in Dean v MacDowell [8 Ch D at 354], "acquired by him by reason of his connection with the firm" (394)."
141The importance of definition of the scope of the fiduciary's undertaking is also emphasised by Professor P D Finn in Fiduciary Obligations, Lawbook Co, 1977 at 542:
"The all-important matter is the undertaking actually given by the fiduciary. Until the scope and ambit of the duties assumed by the fiduciary has been ascertained that no question of conflict of duty and interest can arise. You must ascertain what the fiduciary has undertaken to do, before you can say he has permitted his interest to conflict with his undertaking."
Similarly, R P Meagher, J D Heydon and M J Leeming, Meagher, Gummow and Lehane's Equity: Doctrines and Remedies, 4th ed, LexisNexis Butterworths, 2002 at [5-070] note that the reach of the equitable principles depends upon "the precise nature and scope of the relationship in each individual case". The proposition that the subject matter over which fiduciary obligations extend is to be determined from the course of dealing between the parties was also recognised in Chan v Zacharia above at 196 and 204, Canberra Residential Developments Pty Ltd v Brendas [2010] FCAFC 125; (2010) 188 FCR 140 at [36], Streeter v Western Areas Exploration Pty Ltd (No 2) above at [70] and in Links Golf Tasmania Pty Ltd v Sattler [2012] FCA 634 at [471]. In Omnilab Media Pty Ltd v Digital Cinema Network Pty Ltd [2011] FCAFC 166; (2011) 285 ALR 63 at [206], Jacobson J (with whom Rares and Besanko JJ agreed) characterised the proposition "that the scope of the fiduciary duty must be moulded according to the nature of the relationship and the facts of the case" as "fundamental".
142Bacchus pleads that the business of the Bacchus Partnership was the business of a "fine dining restaurant" which it defines as comprising (1) service of chef prepared meals to be consumed on the premises; (2) the hosting of group functions by prior arrangement including wedding receptions, balls and corporate events; (3) service of tapas meals (or "small plates") with or without alcohol; and (4) hosting of high tea events. Paragraph 15 of the Defence filed by Barescape, Mr Ventura and Midfielder to the Amended Cross-Claim admits that the Bacchus Partnership business has been a "fine dining restaurant"; does not admit the characterisation of "fine dining" in the Amended Cross-Claim and pleads that Bacchus Restaurant also hosted up to two private functions on a Friday or Saturday evening per calendar month, offered tapas in the lounges and offered "high tea" to the public every Sunday afternoon.
143There are several indicators of the scope of the business of the Bacchus Restaurant. The information memorandum dated January 2008 prepared by SiDCOR on Mr Ventura's instructions in respect of the sale of an interest in the Bacchus Restaurant (Ventura 26.10.09 Ex AV (Ex P6) Tab A pp 3-4) stated that:
"While Bacchus specialises in fine dining, the restaurant has a number of menu and catering options, such as informal dining on the terrace and lounges.
Bacchus caters for corporate events, weddings and other functions with food and beverage packages ranging from canapes to ten course degustation. ...
The restaurant may well be expanded by transforming the upstairs area into an elegant cocktail bar..."
The Partnership Deed dated 1 July 2008 recites that the parties have agreed to become partners "in the business of restaurateurs [sic]" and clause 2 states that the parties had agreed to become and remain partners in the "said business", namely the business of Bacchus Restaurant. The Bacchus business was described as "fine dining and contemporary tapas" in a brochure sent to a potential customer in July 2009 (CB 8/324).
144Bacchus Restaurant and Longworth House were in competition, at least to some extent, in respect of functions. The fact that functions could be and (as I will find below) were referred from Bacchus Restaurant to Longworth House evidences that competition. The proposed upstairs bar at Bacchus Restaurant (although it has not opened over an extended period) and the wine bar at Longworth House were also in potential competition. Bacchus Restaurant had also offered small plate or tapas meals with alcohol since its establishment in 2006 (Ex D59, T635-638; T645-646; T782-783). Mrs Ventura's evidence that she believed that tapas meals were served at the lounges near the fireplaces in Bacchus Restaurant from after the restaurant opened and certainly by the time Bacchus had purchased its interest in the Bacchus Partnership in July 2008 (T1771). A tapas lounge was also introduced at Longworth House although Mr Pelosi's evidence was that it was not a large part of the business (T416) and was introduced to facilitate the liquor licence application (T419). There was therefore also an overlap between the tapas business of the Bacchus Restaurant and Longworth House.
145In my view, the extent of overlap between the business of the Bacchus Restaurant and the Longworth House business, in respect of the conduct of functions and the operation of a tapas bar, and the extent of competition between them for particular functions, is such that the carrying on of the Longworth House business must be treated as of the same nature as and competing with that of the Bacchus Restaurant.
Pleaded breach of fiduciary duty
146Bacchus pleads that Barescape has breached fiduciary duties owed to Bacchus (Amended Cross-Claim [29]). I have had regard to the fact that allegations of breach of fiduciary duty are serious in character, and the question whether they have been established to the reasonable satisfaction of the Court must have regard to the gravity of the consequences flowing from the relevant finding requiring that the Court be comfortably satisfied as to an allegation of a serious character: Briginshaw v Bringinshaw [1938] HCA 34; (1938) 60 CLR 336 at 361; Australian Securities and Investments Commission v Healey [2011] FCA 717; (2011) 196 FCR 291; 278 ALR 618 at [103]; City of Sydney v Streetscape Projects (Australia) Pty Ltd [2011] NSWSC 1214 at [455].
147The matters pleaded by Bacchus to support the alleged breach of fiduciary duty are, broadly summarised:
- an agreement between Mr Higgins and Mr Ventura in respect of the renovation of the upstairs area of Bacchus Restaurant to open a new wine bar or tapas area (paragraph 10C);
- an alleged agreement formed between Mr Ventura and Mr Pelosi in or about December 2008 (paragraph 15C) and Mr Pelosi's acquisition of a leasehold interest in the Longworth House property, the incorporation of Midfielder, and the establishment of the Ace's Family Trust with Midfielder as trustee (paragraph 15D), so that Mr Ventura and Barescape could exploit and benefit from the opportunity to be involved in the Longworth House business (paragraph 15E);
- the work undertaken by Mr and Mrs Ventura in restoring the Longworth House property (paragraph 15H);
- the entry into a partnership deed between Mr Ventura, Mr Pelosi, Midfielder and Samnite on 20 October 2009 (paragraph 15J) (which, it should be noted, was after the Partnership Deed in respect of the Bacchus Restaurant had been terminated by Bacchus) and the alleged transfer of Mr Ventura's alleged interest in the Longworth House business to Midfielder for no consideration at that time (paragraph 15K);
- the acquisition of an interest in the Longworth House business by Mr Ventura or Barescape during the term of the Bacchus Partnership (paragraph 16);
- the use of Mr Ventura's ideas, skills, experience and expertise and time in establishing that business and the use of other resources of the Bacchus Partnership as alleged (paragraph 16A);
- the nature of the Longworth House business (paragraph 17);
- specific conduct alleged against Mr Ventura and Barescape (paragraph 18); and
- Barescape's failure to procure that Mr Ventura not engage in that conduct (paragraph 19).
148In submissions, Bacchus contends that the fiduciary duties owed by Barescape (and Mr Ventura) were breached:
"in connection with, principally, the diversion by Barescape and Mr Ventura of a maturing business opportunity (the Longworth House function and events centre and tapas and wine bar business) in the same line as the Bacchus Restaurant business, away from Bacchus and to themselves (and others with whom they had common interests)".
Bacchus' closing submissions characterise this claim as involving:
"breaches of duty concerned with the diversion during the time of the partnership of a maturing commercial opportunity in the same line of business as the business operated by the Partnership, namely the establishment and operation of a purpose built wedding reception and other function venue and tapas restaurant and bar (Longworth House)".
Bacchus' submissions tended to use the language of diversion of "business opportunity". While that is a useful explanatory concept, the no conflict and the no profit rules are the applicable legal principles to deal with claims for taking of such opportunities under Australian law: see R P Austin, "Fiduciary Accountability for Business Opportunities" in P D Finn, Equity and Commercial Relationships, Lawbook Co, 1987 at pp 141-185; Streeter v Western Areas Exploration Pty Ltd (No 2) above.
149In the present case, the opportunity to conduct the Longworth House business did not come to Barescape or Mr Ventura by reason of their respective positions as a partner in or General Manager of the Bacchus Restaurant. The opportunity to invest in a function centre was not one that the Bacchus Partnership had actively been pursuing or that was maturing in its hands. However, as I have noted above, the business of the Bacchus Restaurant extended to the conduct of functions, at least to the extent that they were consistent with the business of a fine dining restaurant, and to the service of tapas and that business was to be further expanded by the creation of the upstairs bar at the restaurant. Subject to the issue of consent which I will address below, this seems to me to be sufficient to establish a breach of the no profit rule by Barescape as a shareholder of Midfielder and a potential beneficiary of Ace's Family Trust (Ex D29 cl 3.1(e)).
150Bacchus also contends that Barescape breached its duty not to be in a position of conflict of interest and duty when it became a shareholder of Midfielder and a beneficiary of Ace's Family Trust and the Longworth House partnership was formed, with Midfielder as the trustee of the Ace's Family Trust. In my view, a conflict necessarily existed at this point, at least in respect of the function business of the Bacchus Restaurant. That conflict arose because, as a partner in the Bacchus Partnership, Barescape owed a duty to Bacchus in respect of the function business of the restaurant; whereas, as a shareholder of Midfielder and a beneficiary of Ace's Family Trust, it had an interest in maximising the function income of Longworth House. There was a real and sensible possibility of conflict between those two interests.
151For completeness, I should note that Bacchus relied on the fact that an initial offer to acquire the building from which the Longworth House business was to be operated was made on behalf of Barescape. However, the question which needs to be determined is what involvement Bacchus had in the Longworth House business not what involvement it might have had had earlier offers to acquire the property been accepted, when they were not in fact accepted. I also do not consider that Bacchus has established a basis for attributing the interest in the Longworth House business to Barescape or to Mr Ventura personally rather than to Midfielder in its capacity as trustee for the Ace's Family Trust, so as to treat Midfielder's entry into the partnership agreement in respect of Longworth House as involving the divestment or transfer of an earlier interest held by Barescape or Mr Ventura rather than the documentation of the earlier, contingent and informal, interest of Midfielder in the Longworth House business.
Consent, ratification and waiver
152A further issue arises as to whether Barescape and Mr Ventura sufficiently disclosed any interest in Longworth House business and whether Bacchus consented to the acquisition of that interest. The issue of consent was initially raised by Bacchus' Amended Cross-Claim which pleaded, in paragraph 18, that Barescape and Mr Ventura acted in the manner alleged "without the consent of Bacchus". Paragraph 24 of the Defence to the Amended Cross-Claim (as amended by leave granted during the hearing) pleaded that:
"In further answer to paragraphs 28-30, the cross-defendants say:
(a) At all material times, since February 2009 Bacchus Holdings Pty Limited and Mr Higgins knew that the Longworth House business (as that term is defined in the Amended Cross Claim) would:
(i) operate in the market for functions; and
(ii) operate as a tapas bar.
(b) Mr Higgins and Bacchus Holdings Pty Limited consented to the second cross defendant, Mr Ventura, operating, and having a financial interest in, the Longworth House business as a function centre and tapas bar;
(c) Mr Higgins gave that consent when he was fully informed of the material facts concerning the operation of the Longworth House business; and
(d) By giving that consent, Mr Higgins and Bacchus Holdings Pty Limited have ratified, waived and/or excused any fiduciary breach by Mr Ventura or Barescape Pty Limited in relation to setting up or operating the Longworth House business up to the time of consent."
153That Defence invokes several associated concepts. The first is "informed consent" which can operate to narrow the scope of a fiduciary duty to avoid conduct amounting to a breach of duty. The second concept raised by the Defence is ratification which typically occurs after a breach and the third is waiver and/or excusing the breach.
154Informed consent generally requires that a fiduciary disclose to the beneficiary all information in his or her possession in relation to the proposed transaction which was relevant to the beneficiary's consideration of whether or not to consent to it, and at least the material facts: Boardman v Phipps [1967] 2 AC 46 at 93, 98, 112; New Zealand Netherlands Society 'Oranje' Inc v Kuys [1973] 2 NZLR 163; 1 WLR 1126; 2 All ER 1222 at 1227; Spellson v George [1992] NSWCA 254; (1992) 26 NSWLR 666 at 670 per Handley JA; at 685 per Young AJA. It is not sufficient for a fiduciary to disclose information which is sufficient only to "put the principal on inquiry": New Zealand Netherlands Society 'Oranje' Inc v Kuys at 1227. The nature of existing legal rights between the parties may be material circumstances in respect of such consent: Short v Crawley (No 30) [2007] NSWSC 1322 at [619]. In Re McGrath & Anor (In their capacity as liquidators of HIH Insurance Ltd) [2010] NSWSC 404; (2010) 78 ACSR 405, Barrett J referred to that decision in noting that "the task of explanation inherent in a request to be excused from a fiduciary requirement is an onerous and exacting one."
155In Re Pauling's Settlement Trusts [1962] 1 WLR 86 at 108, Wilberforce J observed, in a passage which has frequently been cited in later cases that:
"The result of these authorities appears to me to be that the court has to consider all the circumstances in which the concurrence of the cestui que trust was given with a view to seeing whether it is fair and equitable that, having given his concurrence, he should afterwards turn round and sue the trustees: that, subject to this, it is not necessary that he should know that what he is concurring in is a breach of trust, provided that he fully understands what he is concurring in ..."
156In Winthrop Investments Ltd v Winns Ltd (No 2) (1975) 1 ACLR 222, in the context of ratification of directors' conduct by a general meeting, Bowen CJ in Eq referred to:
"the general principle of law, namely, that if a general meeting is called to approve an action or proposed action of the directors it will not be effective unless there is a disclosure of material facts to enable shareholders to make a properly informed decision and an absence of material misrepresentation or material concealment."
157In Commonwealth Bank of Australia v Smith (1991) 42 FCR 390; 102 ALR 453 at 477-478, Gummow J observed that:
"It frequently is said that the fiduciary will be absolved by the giving of fully informed consent to the existence of what otherwise would be a conflict. There is no precise formula which will determine in all cases if fully informed consent has been given; it is a question of fact in all the circumstances of each case: Re Pauling's Settlement Trusts [1962] 1 WLR 86 at 108 per Wilberforce J, whose judgment on this issue was untouched by the Court of Appeal, [1964] Ch 303. Turner LJ had spoken to the same effect in Life Association of Scotland v Siddal (1861) 3 De GF & J 58 at 73; 45 ER 800 at 806, and also had there said that the question was whether the party had been fully informed of his rights "and of all the material facts and circumstances of the case".
158In Maguire v Makaronis (1997) 188 CLR 449 at 455, the majority in the High Court (Brennan CJ, Gaudron, McHugh and Gummow JJ) observed that
"[w]hat is required for a fully informed consent is a question of fact in all the circumstances of each case and there is no precise formula which will determine in all cases if fully informed consent has been given".
159In Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at [107], the plurality of the High Court also noted that disclosure sufficient to establish informed consent could be made "at different times and in different ways" and that "the sufficiency of disclosure can depend on the sophistication and intelligence of the persons to whom disclosure must be made." Their Honours emphasised that, in that case, the principals of Say-Dee had much business experience and intelligence and were shrewd and astute, and pointed to the glaring improbability that they would not readily have deduced relevant matters from their own experience and the information which had been provided to them.
160In Blackmagic Design Pty Ltd v Overliese [2011] FCAFC 24; (2011) 191 FCR 1; 276 ALR 646 at 668 [110], Besanko J (with whom Finkelstein and Jacobson JJ agreed) observed that:
"There is no doubt that the disclosure required to avoid the consequences of a conflict is a full and frank disclosure of all material facts. The identification of the precise information which must be disclosed so that the fiduciary's principal is kept "fully informed of the real state of things" (Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1 at 14 per Lord Radcliffe) is likely to depend on the particular facts of the case before the court. It seems to me that the material facts in this case are the facts which give rise to the conflict ..."
In that case his Honour noted that certain matters were, and others were not, necessary to be disclosed to obtain informed consent to the relevant conduct.
161It is also important to recognise that consent is not an absolute defence to a breach of trust or breach of fiduciary duty. In Spellson v George above at 669 Handley JA noted that the authorities establish that:
"consent is only a prima facie defence and that the Court must consider in detail "all the circumstances" in order to determine whether it would be "fair and equitable" for that beneficiary to be permitted to complain of that breach."
Hope AJA also noted at 674-675 that it was necessary, in determining whether a defence of consent to a breach of trust was made out, to consider all the circumstances with a view to determining whether it was fair and equitable to allow the plaintiff to sue the defendants for breach of trust.
162In the present case, Mr Higgins had been informed, by Mr Siderovski or Mr Ventura or both, in the first quarter of 2008 that Longworth House would operate as a function centre, wine bar and that it would be serving tapas. Mr Higgins' evidence was that his dealings with Mr Ventura were, at least initially, directed to eliciting information from Mr Ventura about whether Longworth House would compete directly with Bacchus Restaurant "as a tapas wine bar and function centre" (Higgins 28.5.10 [26]) and that:
"I decided to take the opportunity to use Mr Ventura's approach as a means of eliciting information from him and Mr Pelosi concerning the manner and type of business to be operated from the Longworth [House]. I did this in various email communications with Mr Ventura and also in discussions with him."
This evidence suggests that Mr Higgins chose to continue dialogue with Mr Ventura and Mr Pelosi as to the terms on which he might invest in Longworth House, at least in part, to elicit further information from them rather than simply objecting to Mr Ventura's involvement or identifying terms on which he would consent to that involvement. Mr Higgins' evidence was also that he was, at least subsequently, satisfied by Mr Ventura's explanation of his potential interest in Longworth House and proceeded on the basis that Mr Ventura would not seek to operate a competing business from Longworth House (Higgins 28.5.10 [26]).
163Mr Higgins was advised, by being provided with the Longworth House business plan, at least that Longworth House was targeting a wide range of functions and a function size of an average of 100 persons. Although Mr Higgins had no prior experience operating a restaurant when he purchased the majority interest in Bacchus Restaurant and was not involved in the day to day operation of the restaurant, he was a businessman of considerable experience and intelligence and I do not accept that his comprehension of the matters that were in fact disclosed to him was limited by his lack of experience in the operation of restaurants.
164Barescape relied in closing submissions on Mr Higgins' email dated 9 July 2009 as amounting to consent for Barescape's and Mr Ventura's involvement in Longworth House. In that email, Mr Higgins responded to Mr Ventura's email dated 9 July 2009 suggesting that an interest in Longworth House be split between Mr Ventura and Mr Higgins by indicating:
"That's fine, I would not want to lose any more equity than necessary. ..."
I consider that email must be read as consent to Barescape and Mr Ventura proceeding with an interest in Longworth House, on the basis of Mr Ventura's offer to split that interest with Mr Higgins. Mr Ventura's evidence is also that, in late July 2009, Mr Higgins told him "I can see the advantages, you should go for it" (Ventura 22.7.10 [11]; T251; T260; T264). That conversation is denied by Mr Higgins (Higgins 6.4.11 [5(k)]). Mr Pelosi gave evidence of a subsequent telephone call from Mr Ventura, who advised him that Mr Higgins had said he was not interested in being part of the business and that Mr Ventura had told him he "will be going in anyway and [Mr Higgins] said go for it" (Pelosi [28]; T437-441). Mr Pelosi's account of his conversation with Mr Ventura supports Mr Ventura's evidence as to this matter and I have noted above that the publicity as to Mr and Mrs Ventura's involvement in Longworth House about this time is also consistent with a finding that Mr Ventura then understood Mr Higgins to have consented to his involvement in Longworth House. I find, on the balance of probabilities, that Bacchus (through Mr Higgins) gave such consent no later than late July 2009.
165The question then arises was whether the consent given by Bacchus (through Mr Higgins) to Barescape and Mr Ventura taking an interest in Longworth House was sufficiently informed consent to be effective to avoid, or ratify, a breach of fiduciary duty. Whether informed consent was given needs to be determined in the context that Mr Higgins was an intelligent and sophisticated businessman, although he had little experience in the restaurant industry: Farah Constructions above; see also Jireh International Pty Ltd t/as Gloria Jean's Coffee v Western Exports Services Inc [2011] NSWCA 137 at [107]. Barescape and Mr Ventura contend that, in order for Mr Higgins' consent to Barescape's involvement (as a shareholder in Midfielder and a potential beneficiary of the Ace's Family Trust) to be effective, he needed only to know that Longworth House would hold functions; those functions included functions of approximately 100 people; Longworth House would operate a bar that served food; and Mr Ventura would be involved in the project in a significant way. Bacchus contends that informed consent cannot be established, because it (through Mr Higgins) was not advised that Longworth House would compete directly with Bacchus Restaurant in the wedding reception (and other events) venue market and by offering its own "small plates" (or tapas) menu; that Mr Ventura planned to divert customers of Bacchus Restaurant to Longworth House; and that Longworth House had been promoted as an associated business of Bacchus Restaurant. Bacchus also contends that a proposal put by Barescape that Mr Higgins become a 30% owner of the Longworth House business, which was declined by Mr Higgins, was not consistent with Bacchus' 75% ownership of the Bacchus Restaurant.
166Mr Ventura's disclosure of some aspects of his dealings in respect of Longworth House was, at best, incomplete. Mr Ventura had not advised Mr Higgins of the extent of his early work on the development of Longworth House or the extent to which he had funded the relevant works, given the limits to Mr Pelosi's ability to do so. The reference to the "consortium" of Sydney investors, if made, was misleading, although it was in any event clear by the time that Mr Higgins gave the relevant consent that Mr Pelosi and Mr Ventura were to operate Longworth House.
167Bacchus contends that Mr Higgins was not advised that Longworth House would compete with Bacchus Restaurant in the wedding reception (and other events) venue market. As I have noted above, the disclosure of the nature of Longworth House's business in the Longworth House business plan, to which I referred above, necessarily disclosed that Bacchus Restaurant and Longworth House would be alternative venues for, and in that sense in competition for, particular functions. There were inconsistencies, to which I have referred above, in both Mr Ventura's evidence as to whether he had indicated to Mr Higgins that the functions that could be catered for at Longworth House would be larger than those at Bacchus Restaurant and that the operation at Longworth House would not compete with Bacchus Restaurant.
168In my view, an unqualified statement that Longworth House would hold larger functions than Bacchus Restaurant and would not compete with Bacchus Restaurant would have been materially misleading. Even if Mr Ventura did not make a statement in those terms, I consider that informed consent would have required a disclosure of the matters that were relevant to assessing the risk of competition between the two venues and the resulting detriment to Bacchus Restaurant, which included at least that Longworth House would be competing with Bacchus Restaurant for functions particularly on Friday and Saturday nights, although that competition might be mitigated by the extent of the high end function market in Newcastle, which Mr Ventura contended was abundant with functions needing to be booked well in advance, and by Bacchus Restaurant's policies limiting the size and number of functions it would hold. I do not consider that Mr Ventura adequately disclosed these issues to Mr Higgins and, had he done so, it is likely that Mr Higgins would at least have adopted a more cautious approach to whether to consent to Barescape's and Mr Ventura's involvement in Longworth House.
169There is also an issue as to whether Mr Higgins had been advised that Mr Ventura planned to divert, and was in fact diverting, customers of Bacchus Restaurant to Longworth House and whether informed consent cannot be established by reason of that matter. I address the evidence as to the disclosure of, and extent of, referral of exclusive use functions to Longworth House below, in respect of Bacchus' claim for diverted functions. Mr Ventura disclosed the referral of exclusive use functions only in the most general terms and that disclosure did not extend to the systematic character of the diversion or to the fact that functions were to be, and were, diverted to Longworth House well before the upstairs bar at Bacchus Restaurant was ready to be opened.
170Bacchus also contends that a proposal put by Barescape that Mr Higgins become a 30% owner of the Longworth House business, that was declined by Mr Higgins, was not consistent with Bacchus' 75% ownership of the Bacchus Restaurant. I do not consider that this matter would have impugned the disclosure that Barescape (through Mr Ventura) had made, had it otherwise been adequate. That proposal left it open to Mr Higgins to make a counter-offer or refuse consent if he wished to do so.
171The question whether informed consent was established is one of some difficulty, where the Longworth House business plan contained a significant amount of information and had been made available to Mr Higgins. However, with some hesitation, I find that the disclosure of information by Mr Ventura (orally and by email) and by the Longworth House business plan contained material omissions and misrepresentations, in respect of the extent to which Mr Ventura (and conversely, Mr Pelosi) were already involved with Longworth House, the extent to which competition from Longworth House would pose a risk to Bacchus Restaurant's function business and the extent to which particular functions were to be and were diverted by Mr Ventura to Longworth House. In these circumstances, I do not consider that Mr Higgins had been provided with sufficient information to give informed consent to, or acquiesce in, Barescape's and Mr Ventura's involvement in that venture. Where the disclosure to Mr Higgins contained the material omissions and misrepresentations to which I referred above, it cannot be said (to adopt the language of Handley JA in Spellson v George above) that it is not "fair and equitable" for Bacchus to be permitted to complain of the breach that arises from Barescape's or Mr Ventura's involvement in Longworth House.
Other conduct alleged to amount to breach of the Partnership Deed - diversion of customers
172Paragraph 18 of the Amended Cross-Claim pleads, inter alia, that from about early 2009 and during the term of the Bacchus Partnership, and without the consent of Bacchus, Mr Ventura and Barescape:
"(i) diverted customers and potential customers of the Bacchus business to Longworth House and procured employees of the Partnership to do the same."
Bacchus' closing submissions characterise the breach involved in diversion of customers as:
"[b]reaches of duty occasioned by each instance of either Mr Ventura and Barescape or employees under their direction taking a step to divert a customer or potential customer of Bacchus away from the restaurant (and to Longworth House)".
173Barescape and Mr Ventura accept that several function inquiries were referred to Longworth House, but contend that they were not within the capacity or policy of Bacchus Restaurant to host, were not in Bacchus Restaurant's best interests to host and did not result in any economic loss to Bacchus Restaurant. Barescape and Mr Ventura contend that Bacchus Restaurant's policy ("Functions Policy") required a minimum spend to host an exclusive use function of $5,000 on Sunday to Thursday nights and $10,000 on Friday and Saturday nights; that Bacchus Restaurant would not accept functions which required exclusive use of the premises and did not satisfy those requirements; and would accept only two functions each calendar month which required exclusive use of the premises on a Friday or Saturday evening.
174The gravamen of the alleged breach is that persons who were actual or potential customers of Bacchus Restaurant were "diverted" to Longworth House. I would myself have read an allegation in this form as requiring that a function was in fact diverted from Bacchus Restaurant to Longworth House, so the allegation would not be established if the function did not take place at Longworth House or, a fortiori, did not take place at all. However, Barescape and Mr Ventura accepted in oral submissions that they had conducted the case on the basis that this allegation comprised not only the diversion of customers whose functions were ultimately held at Longworth House ("Longworth Redirects") but also the diversion of customers whose functions were not held at Longworth House (and implicitly, were held elsewhere, or possibly were not held at all) ("Non-Longworth Redirects").
175Bacchus contends that, so far as this claim is concerned, it is irrelevant to the question of duty and breach of duty that the Bacchus Restaurant may not have had the capacity to hold a function or event on a particular day because of a prior booking or some other "operational detail". Bacchus relies on the well-established principle that, where a fiduciary breaches its duties, it cannot avoid liability by contending that the principal could not itself have made that profit: Birtchnell v Equity Trustees, Executors and Agency Co Ltd above at 408-409; Boardman v Phipps above; Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 395. Whatever the position had Bacchus' claim for breach been pleaded in a different way, the pleaded breach was, relevantly, that Barescape and Mr Ventura diverted customers and potential customers of Bacchus Restaurant to Longworth House and procured employees to do so, and the fact that persons were customers or potential customers of Bacchus Restaurant and their functions were diverted to Longworth House (or, on the extended reading of the allegation, elsewhere) needed to be established to make good this claim.
176A question then arises as to whether the persons who were the actual or potential customers of Bacchus Restaurant who were or might have been diverted to Longworth House are to be determined by its legal seating capacity, its physical seating capacity or some other standard, for example any common practice as to the size of the functions it holds. Witnesses gave diverging evidence as to Bacchus Restaurant's capacity. Ms Moore's evidence was that Bacchus restaurant could hold functions for 130 people, or 100 with a dance floor (Moore 31.3.11 [3]). Mr Alder referred to a wedding attended by 150 people and said that events are commonly held for 130 people (Alder 31.3.11 [6] - [7]). There was also a suggestion in Bacchus' case that the mezzanine area of the restaurant could be used to increase its capacity for functions. I do not accept that suggestion, since it was amply demonstrated on cross-examination that the one occasion on which this had occurred was anything but a success and that the mezzanine area was not thereafter used in that way. On balance, I will proceed on the basis that, in practice, Bacchus Restaurant would hold functions for up to 130 people, or 100 with a dance floor.
177The next issue which arises is whether the actual or potential customers of Bacchus Restaurant, for the purposes of this claim, were constrained by the Functions Policy. The Bacchus Policy Manual identifies a function of 40 people or more as an "exclusive use" function (Ex P18/132). The Bacchus terms and conditions for functions also provide that any booking in excess of 40 persons is an exclusive use function (CB 8/331), which is to be distinguished from a function of less than 40 people which can be accommodated without closing the restaurant to other business. Mr Ventura's evidence was that Bacchus Restaurant had applied a policy as to which exclusive use functions it should accept since 2007 (T176) and that Bacchus Restaurant would only take two exclusive use functions on Friday or Saturday evenings in any calendar month (T227). Mr Ventura's evidence was that he told Ms Moore in July 2008 that "limiting the number of events [functions] is necessary to prevent a decline in restaurant trade" and that Bacchus Restaurant had a policy to accept only two events that required exclusive use of the premises on a Friday or Saturday night in each month (Ventura 22.7.10 [109]). That evidence was corroborated by Ms Moore's evidence that Mr Ventura gave instructions at that time to limit the functions to "2 events per month on either a Friday or Saturday night" (Moore 28.5.10 [3]). Mr Montgomery also corroborated Mr Ventura's evidence that the restaurant's policy was to hold Friday or Saturday night functions (such as a wedding) only twice monthly, although he gives evidence that it would hold functions on other nights as well and that there were occasions on which the restaurant departed from the policy (Montgomery 31.3.11 [5]).
178It appears the Functions Policy existed long before there was any suggestion of Mr Ventura or associated interests acquiring an interest in Longworth House. The policy was by no means illogical, since the witnesses called by both parties recognised that a fine dining restaurant's business could be substantially damaged if it regularly turned away its fine dining customers because of functions. In closing submissions, Bacchus submitted that the Functions Policy "afforded market space" to Longworth House. Bacchus also submitted that that policy:
"allowed a demand for the previous Bacchus function business outside of the restaurant, being an opportunity created for Longworth House which was appropriated only months later by Mr Ventura, Barescape, Midfielder and Samnite".
However, no allegation that the introduction of the Functions Policy breached any duty owed by Barescape or Mr Ventura was pleaded. It is also difficult to see that allegation could have been established where the policy was introduced a considerable time before Mr Ventura inspected Longworth House.
179Mr Ventura's evidence was that his intent was to continue to reject functions at Bacchus Restaurant on the basis which they had been rejected since 2007 (T176) and that his instructions to staff that they should divert business from Bacchus to Longworth House after June 2009 related to Friday or Saturday night functions (T229). Barescape contends the Functions Policy was further narrowed from mid-2009 in anticipation of Bacchus Restaurant opening its upstairs bar. Mr Ventura gave evidence of a conversation with Mr Higgins in June 2009 where he advised Mr Higgins that, once the upstairs bar at the Bacchus Restaurant was open, the restaurant would not be able to continue with weddings or other private events on a Friday or Saturday evening, and Mr Higgins responded "[s]ure, just get the bar open" (Ventura 22.7.10 [18]-[20]; T192). Mr Ventura also sought to support the referral of functions to Longworth House on the basis that it was consistent, at least in respect of exclusive use functions, with Mr Higgins' "overwhelming goal to open the mezzanine level bar" (T251). Mr Ventura gave evidence that, in about mid-July 2009, he redrafted the pro-forma "terms and conditions" document used for functions for Bacchus Restaurant to remove the option of exclusive use of the whole of the premises, in anticipation of commencing operation of the mezzanine level bar. (That evidence was admitted as evidence of Mr Ventura's understanding of the effect of the redrafting).
180The evidence establishes that Mr Higgins was at that time committed to the opening of the mezzanine bar. However, Mr Higgins' evidence was that he did not agree to Bacchus Restaurant ceasing its function trade in respect of the upstairs bar and would not have done so (Higgins 6.4.11 [2[). Mr Ventura's evidence in cross-examination suggested that any discussion as to that matter was directed to the position after the upstairs bar was opened, rather than to the diversion of functions in anticipation of the future opening of the bar (T251-T252). Mr Ventura acknowledged that he did not inform Mr Higgins that he would be directing Bacchus Restaurant staff to send out promotional material for Longworth House (T254). Mr Higgins' evidence was that he was surprised when told on 15 September 2009 that there was a practice of referring functions from Bacchus Restaurant to Longworth House (Higgins 28.5.10 [46]) and this evidence is supported by Ms Clydsdale's evidence of his reaction to that disclosure (Clydsdale 30.4.10 [23]-[25]). I do not consider that Barescape has established that Mr Higgins consented to Bacchus Restaurant ceasing to take bookings for exclusive use functions on a Friday or Saturday night and referring those functions to Longworth House, particularly when the opening date for the mezzanine bar remained uncertain.
181I turn now to the evidence as to Mr Ventura's conduct alleged to give rise to the pleaded breach. It is common ground that, from about mid-2009 until at least 15 September 2009, Mr Ventura referred, and directed staff at Bacchus Restaurant to refer, certain functions to Longworth House, although the extent of functions which were referred in this manner is in dispute.
182Ms Moore's affidavit evidence was that, in early 2009, Mr Ventura told her that, if somebody rang for a function, she should mention to them that an alternative venue would be available at some point soon and that Mr Ventura also told her, in early 2009, that she should hold off taking bookings for functions into Bacchus Restaurant if possible. Mr Ventura denied that evidence (T227). Ms Moore's affidavit evidence was also that Mr Ventura instructed her, in the last week of March 2009, to respond to telephone inquiries that "we no longer hold functions at the Restaurant and that we have set up an alternative venue which is specifically designed to hold functions", and to take down details and Mr Ventura would contact them (Moore 28.5.10 [7]). Ms Moore retreated from that position in cross-examination (T565-T566) and accepted that this was not the entire story and indeed that the account of this matter in her affidavit was unfair (T567). It appears that such an instruction was at least given in respect of exclusive use functions.
183Ms Clydsdale took over as function coordinator for the Bacchus Restaurant on 1 July 2009 (Clydsdale 30.4.10 [10]). Ms Clydsdale's evidence was that she began redirecting function inquiries to Longworth House in mid-June 2009 (Clydsdale 30.4.10 [15]). Mr Ventura acknowledged in cross-examination that, from mid-June 2009, he gave instructions to staff members of Bacchus Restaurant, specifically Ms Clydsdale, to divert Friday or Saturday evening functions away from Bacchus Restaurant to Longworth House (T229). By about mid-June or mid-July 2009, Mr Ventura had drafted an email to be sent out by Ms Clydsdale on receipt of function inquiries which stated that "we are about to open a second venue, Longworth House, to accommodate events and private parties" and referred to Longworth House as having the "same outstanding food and service" as Bacchus Restaurant (Clydsdale 30.4.10 [13]-[15] Annexure "B"). That email plainly suggested an association between Bacchus Restaurant and Longworth House, although Mr Ventura supported that suggestion by the fact that it was then hoped that Mr Higgins would take up an interest in Longworth House (T250). Mr Ventura acknowledged that the effect of sending these emails was to divert inquiries of the relevant character away from Bacchus Restaurant to Longworth House from about July 2009 (T256).
184Ms Clydsdale's affidavit evidence was that, in late July 2009, Mr Ventura instructed her to telephone everyone who had inquired about the possibility of holding functions at Bacchus Restaurant recently, tell them that functions were no longer being held at the restaurant and advise that a new business had been set up to hold functions called Longworth House, and that the same management behind Bacchus Restaurant was responsible for operating Longworth House (Clydsdale 30.4.10 [17]). Ms Clydsdale conceded in cross-examination that this direction was limited to exclusive use functions (T624-T625). Mr Ventura's evidence was that he instructed Ms Clydsdale to cease taking deposits for exclusive functions on Friday and Saturday nights in July 2009 in anticipation of the upstairs bar at Bacchus Restaurant becoming operational in September or October 2009 (Ventura 22.7.10 [20]).
185Mr Alder's evidence was that he was instructed by Mr Ventura to tell inquirers that Bacchus Restaurant was "no longer doing functions" (Alder 28.5.10 [18]; Alder 31.3.11 [4]). Mr Ventura denied that evidence and his evidence was that instruction was restricted to functions on Friday and Saturday night (T263.30). I consider that Mr Ventura's account of the conversation is more probable, having regard to the similar conversation with Ms Clydsdale. An employee of Bacchus advised at least one potential customer, in August 2009, that Bacchus would not do such a function in December 2009 (Byth 3.8.11 [6]).
186Mr Montgomery was (and is) the chef at Bacchus Restaurant and his evidence was that, in June or July 2009, Mr Ventura advised him that the chefs would no longer be required to hold functions in the restaurant and instead they would be held at Longworth House (Montgomery 30.4.10 [6]). Mr Ventura denied that evidence (T265.15). Mr Montgomery's evidence was that Mr Ventura had advised him, prior to the Nicholas Trust Ball, that Longworth House would reduce the pressure on staff at Bacchus Restaurant "by effectively taking all of the function work away from the restaurant, re-directing it to the Longworth" (Montgomery 30.4.10 [13]). Mr Ventura also denied that evidence and contended that any such comment was limited to functions on Friday and Saturday night (T269.19). I prefer Mr Montgomery's evidence in respect of these matters.
187Bacchus also placed significant weight on the "diversion" of the Nicholas Trust Ball to Longworth House. Ms Moore's and Mr Higgins' affidavit evidence implied that the Nicholas Trust "Ball" had previously been held at Bacchus Restaurant, supporting an implication that Mr Ventura had "diverted" it to Longworth House. Ms Moore conceded in cross-examination that only a small function for potential sponsors, not the Nicholas Trust Ball, had been held at Bacchus Restaurant and accepted that the position had been misrepresented in her affidavit (T583-T584, T588). Mr Higgins did not make a similar concession in respect of his affidavit. Bacchus seeks to explain Ms Moore's and Mr Higgins' evidence on the basis that the reference to a Nicholas Trust "function" was accurate where there had been a small sponsors' function previously held at the Bacchus Restaurant. I do not accept this explanation; the implication of both Ms Moore's and Mr Higgins' affidavit was that the Nicholas Trust Ball had previously been held at the Bacchus Restaurant and had been diverted from it.
188In any event, I am satisfied that the Nicholas Trust Ball could not in fact have been held at Bacchus Restaurant and its organisers were not in fact actual or potential customers of Bacchus Restaurant. Dr Chen, who organised the function and had no interest at stake in these proceedings gave evidence that it was expected up to 250 people would attend the function and 181 people attended it (Chen 21.7.10 [8]). Mr Ventura's evidence was to substantially the same effect and is corroborated by Dr Chen's evidence (Ventura 7.4.10 [7]-[10]). Mr Ventura's evidence was that Bacchus Restaurant could not accommodate a ball of that size and I accept that evidence. I also do not accept Bacchus' contention that Mr Ventura should have sought to persuade the organisers of the Nicholas Trust Ball that it should be held at Bacchus Restaurant by serving canapes rather than a sit down meal or that they should reduce the numbers attending the ball from the 250 people they anticipated to the number that Bacchus Restaurant could hold (on the evidence, 100 people where a dance floor was required).
189The evidence to which I have referred above establishes, and Mr Ventura acknowledged, that he at least referred exclusive use functions on Friday and Saturday nights which were not within with Bacchus Restaurant's Functions Policy to Longworth House. I find that Mr Ventura went beyond the Functions Policy to refer other functions to Longworth House from about mid-2009, and, notwithstanding the anticipated opening of the upstairs bar and the brief discussion with Mr Higgins to which I have referred above, that conduct was in breach of fiduciary duty and in breach of the Partnership Deed. I address the question of the particular functions as to which Bacchus has established a breach in dealing with the question of quantification below.
190Bacchus also developed an argument, in submissions, that Barescape and Mr Ventura had sought to divert business by offering discounts in competition with Bacchus' pricing. That case was not pleaded and, in my view, is not open to Bacchus.
Amendment application
191In closing submissions, Bacchus sought to amend its Cross-Claim to include an allegation that Mr Ventura was in a position of conflict of interest by dealing with functions at Bacchus Restaurant while he was involved with Longworth House. Bacchus contends that there can be no prejudice by reason of that amendment because it relies upon the evidence that was admitted at the trial. Mr Wood, who appears for Barescape and Mr Ventura responds to the amendment application by contending that he did not understand that he was meeting a case that Mr Ventura's involvement in decision-making as to particular functions was itself a conflict and that, had such a case been put, it would have affected the questions he asked of witnesses in cross-examination. In these circumstances, I do not consider that I can allow the proposed amendment.
Delay in payment of suppliers
192Paragraph 18 of the Amended Cross-Claim pleads that from about early 2009 and during the term of the Bacchus Partnership, and without the consent of Bacchus, Ventura and Barescape:
"(ii) procured employees of the Partnership to delay payment of monies owed to suppliers of the Bacchus business thereby prejudicing the relationship between that business and its suppliers."
193Ms Bender's affidavit evidence was that Mr Higgins paid $399,096.64 to suppliers (Bender 28.5.10 [16]) after the termination of Mr Ventura's employment as general manager of the Bacchus restaurant but that evidence was qualified on cross-examination by her acceptance of a much lower figure of $65,017.21 (T1119) and that the higher figure included payroll, utilities and tax over more than two months and other payments (T1130). Bacchus made clear in submissions that it did not contend that $399,000 was due to unpaid suppliers on 15 September 2009, notwithstanding the implication to that effect in Ms Bender's affidavit. Ms Bender ultimately also accepted that she was not surprised by the view expressed by a SiDCOR employee that outstanding supplier payments were running at about $70,000 at the time Mr Ventura departed (Ex P33, p81 and p262). Mr Ventura denied the claim that he was deliberately slowing down payments and denied leaving $399,756.64 worth of unpaid suppliers as at 15 September 2009 (Ventura 22.7.10 [92] Ex AV 2 (Ex P7) Tab FF; T275-T276, T279).
194It was not established that the amount due to suppliers as at 15 September 2009 was unusually high and therefore this allegation was not established.
Use of Bacchus Partnership's resources
195Paragraph 18 of the Amended Cross-Claim also pleads that from about early 2009 and during the term of the Bacchus Partnership, and without the consent of Bacchus, Ventura and Barescape:
"(iii) appropriated wine belonging to the Partnership for Longworth House;
(iv) procured the Partnership to order from its suppliers, and to pay for, food supplies for Longworth House;
(v) procured employees of the Partnership to perform work for Longworth House including:
(A) the making of preparations for certain functions to be held at Longworth House;
(B) preparation of a function menu; and
(C) providing training, guidance and assistance to employees of Longworth House in the conduct of its business,
(vi) removed property of the Bacchus business to the premises of Longworth House for use by the Longworth House business."
196Ms Bender's evidence was that, between mid-August 2009 and mid-September 2009, Mr Ventura ordered supplies for Longworth House on the Bacchus Restaurant's account (Bender 28.5.10 [20]). Mr Ventura acknowledged that stock was ordered through Bacchus Restaurant for use at Longworth House, when Longworth House did not yet have accounts with suppliers, in respect of an architects' event and the Nicholas Trust Ball, but gave evidence of a process for reimbursement for that stock (Ventura 22.7.10 [61]). There is evidence that Longworth House paid, and possibly overpaid, for stock ordered by Bacchus Restaurant on its behalf (Ex P42).
197Mr Alder gave evidence of a conversation where Mr Ventura disclosed that additional stock had been ordered at Bacchus Restaurant for Longworth House and that Mr Ventura took 30 bottles of wine for Longworth House in early September 2009 (Alder 28.5.10 [15]-[17]). Mr Ventura was unchallenged on his evidence of reimbursement (Ventura 22.7.10 Ex AV 2 (Ex P7) Tab QQ; Ventura 22.7.10 [115]). Ms Bender's evidence shows that a credit was given for that reimbursement (Bender 28.5.10 Annexure "G"). Mr Alder also gave affidavit evidence that he noticed two boxes of glasses missing in early September 2009 (Alder 28.5.10 [15]-[17]) but did not suggest there was any improper conduct in this respect when cross-examined as to this matter (T640-T644). Mr Ventura's evidence was that glasses were ordered at the same time for both venues and paid for by Longworth House (Ventura 22.7.10 [117], [132]; Ex P28).
198Mr Montgomery gave evidence that he and the Bacchus Restaurant team assisted with the preparation of food for the Nicholas Trust Ball (Montgomery 30.4.10 [15]). Mr Ventura acknowledged that he asked the chefs at Bacchus Restaurant to assist with the preparation of food for the Nicholas Trust Ball (Ventura 22.7.10 [51]). Mr Ventura also conceded that he instructed Mr Montgomery to prepare canapés for an architect's function at Longworth House in Bacchus Restaurant's kitchen and that he had not sought Mr Higgins' agreement to that course (T268.33).
199Mr Ventura obtained an advantage through the use of Bacchus Restaurant's supplier accounts although the evidence established that, at least generally, he reimbursed the Bacchus Partnership for goods ordered for Longworth House, and used the Bacchus Restaurant's staff to assist with the Nicholas Trust Ball and architect's function at Longworth House without Mr Higgins' consent. In my view, these matters involved a breach of the no profit rule. However, Bacchus did not establish the quantum of any loss arising from this claim.
Renovation of upstairs bar
200Paragraph 18 of the Amended Cross-Claim pleads that from about early 2009 and during the term of the Bacchus Partnership, and without the consent of Bacchus, Ventura and Barescape:
(vii) delayed and obstructed the renovation of the upstairs area of the premises of the Bacchus business and the opening of the new wine bar and tappas (or small plates") meals area the subject of the agreement referred to in 10C above.
201Mr Higgins gave evidence of a conversation concerning the development of the upper level (Higgins 28.5.10 [8]) and that he had raised a concern as to the speed at which the upstairs bar progressed (Higgins [16]). Mr Ventura's evidence details the work done on the bar (Ventura 22.7.10 [12]-[18], [79]) and Mr Ventura acknowledged that there was a difference between Mr Higgins and himself as to the funding of work on the upstairs bar, with Mr Higgins' preference to do that work more quickly and inject capital and Mr Ventura's preference to fund the work from the restaurant's income. Bacchus did not lead any evidence which would provide a basis to determine how quickly the upstairs bar should have progressed, having regard to the available funding and business constraints. It appears that the bar was not further progressed in any substantive way after Mr Ventura's employment was terminated. This allegation was not established.
Claim for breach of fiduciary duty owed by Barescape to Mr Higgins
202Bacchus pleaded in its Cross-Claim that Barescape owed fiduciary duties, not only to Bacchus, but also to Mr Higgins. However, Mr Higgins was not a party to the Cross-Claim and it was difficult to see how Bacchus could maintain a claim for breach of fiduciary duty owed to him in circumstances where he is not a party. This claim was not pressed in oral submissions and I need not address it further.
Claim for breach of Partnership Deed by Barescape
203Paragraph 28 of the Amended Cross-Claim pleads that Barescape breached clauses 8, 13.1(a) and clause 17.1 of the Partnership Deed by reason of matters pleaded in sixteen paragraphs of the Amended Cross-Claim. The matters relied on to support the alleged breach of the Partnership Deed are the same as those relied on to support the alleged breach of fiduciary duty, with the addition of Mr Ventura's and Barescape's continuing involvement in the Longworth House business following the dissolution of the Bacchus Partnership (paragraphs 26-26A) which is relevant to the claim for breach of the restraint of trade under the Partnership Deed.
204Clause 8 of the Partnership Deed provided that:
"Each Partner will be just and faithful to the other in the business and at all times give to the other full information and truthful explanations of all matters relating to the affairs of the Partnership and afford every possible assistance in carrying on the business for their mutual advantage."
The findings which I have made above in respect of breach of fiduciary duty by Barescape also establish a breach of the obligation to be "just and faithful" for the purposes of this clause. The findings I have made above in respect of the deficiencies in the disclosure as to Mr Ventura's involvement with Longworth House and the referral of customers to Longworth House also establish that Barescape has breached clause 8 of the Partnership Deed.
205Clause 13.1(a) of the Partnership Deed relevantly provided that no partner would during the partnership without the written consent of the other carry on or be concerned or be interested directly nor engage in or undertake any other trade or business except those which did not affect the conduct of the partnership's business. Barescape had a somewhat limited role in respect of the Longworth House business, by holding a single "I" Class Share in Midfielder and its role as a potential beneficiary of the Ace's Family Trust. However, that role nonetheless amounts to being "concerned" in that business, although it would not satisfy the narrower criteria of being "interested directly" or engaged in or undertaking that business. Written consent was required to avoid the application of the clause and that was not obtained.
206Clause 17.1 of the Partnership Deed was a restraint of trade applicable after termination of the Bacchus Partnership and I deal with the claim under this clause separately below.
Claim for breach of fiduciary duty against Mr Ventura
207Bacchus also seeks to establish breaches of duties owed by Mr Ventura to the Bacchus Partnership as General Manager of the Bacchus Restaurant. Bacchus contends that Mr Ventura owed fiduciary obligations to the Bacchus Partnership not to be in a position of conflict as between his own interests (or his duties to anyone else) and his duties to the Bacchus Partnership and not to make an unauthorised profit from his position as fiduciary of the Bacchus Partnership, as a senior employee with managerial functions.
208In Weldon & Co Services Pty Ltd v Harbinson [2000] NSWSC 272, at [10] Bryson J observed that:
"An employee may incur fiduciary duties relating to the protection of interests of the employer which are not property under the general law but are protected in equity in ways similar to the protection given to property... The concepts of trade secrets, confidential information and maturing business opportunities are not highly defined, and much depends on circumstances."
The scope of such a duty was outlined by Palmer J in Digital Pulse Pty Ltd v Harris [2002] NSWSC 33; (2002) 40 ACSR 487 at 491, where his Honour observed:
An employee has a duty to act in the interests of the employer with good faith and fidelity. That duty is implied in every contract of employment if it is not otherwise imposed by an express term. In addition, the duty is imposed upon every employee by the law of fiduciaries, the relationship of employer and employee being recognised as a paradigmatic fiduciary relationship.
The obligations imposed by the duty are not coterminous with the employee's normal working hours: they govern all the activities of the employee, whenever undertaken, which are within the sphere of the employer's business operations and which could materially affect the employer's business interests. Whether a particular activity could materially affect the employer's business interests is a question of fact and degree.
The duty of loyalty requires that an employee not place himself or herself in a position in which the employee's own interest in a transaction within the sphere of the employer's business operations conflicts with the employee's duty to act solely in the employer's interest in relation to that transaction. A fortiori, an employee may not take for himself or herself an opportunity within the sphere of the employee's business operations without the employer's fully informed consent."
These principles were applied in Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd [2011] FCA 1154; (2011) 86 ACSR 393 at [85]ff and Labelmakers Group Pty Ltd v LL Force Pty Ltd [2012] FCA 512. The imposition of fiduciary duties upon Mr Ventura as employee, owed to the Bacchus Partnership, is reinforced by the fact that Mr Ventura was given "absolute discretion in the operational management of the business" under clause 21 of the Partnership Deed (Ventura 22.7.10 Ex AV (Ex P6) Tab C).
209On the other hand, Barescape and Mr Ventura contend that the existence of an employee/employer relationship did not give rise to a fiduciary duty: Woolworths Limited v Olson [2004] NSWSC 849 at [214] per Einstein J; Victoria University of Technology v Wilson [2004] VSC 33 at [145] per Nettle J. Barescape and Mr Ventura also contend that it was open to the contracting parties to impose fiduciary duties on Mr Ventura, but they did not do so by the terms of the contract, and that courts should be slow to equate an employee's contractual duties of good faith and loyalty with fiduciary obligations: Nottingham University v Fishel [2000] ICR 1462 per Elias J. Barescape and Mr Ventura contend that the only relevant constraint on Mr Ventura as an employee was the "double employment rule" referred to in Bristol & West Building Society v Mothew [1998] Ch 1 and Rigg v Sheridan [2008] NSWCA 79 at [46] per Handley AJA. Barescape and Mr Ventura contend that, in order to determine whether the double employment rule has been breached, it is necessary to look at the time that is required by each employer in order to determine whether any express term of the employment has been breached by taking on the alternate employment: Victoria University of Technology v Wilson above at [148]. Barescape contends that all that is necessary to avoid a breach of the double employment rule (even if it could have been breached in the present circumstances) is some form of consent by Bacchus to the employment and mere disclosure of the existence of the alternate employment will avoid a breach of the double employment rule in most cases: Rigg v Sheridan above at [47].
210In my view, Mr Ventura, as a senior employee of the Bacchus Partnership, with discretion as to the management of its business, owed wider fiduciary and contractual duties of the kind noted in Weldon & Co Services Pty Ltd v Harbinson above and Digital Pulse Pty Ltd v Harris above. In the absence of informed consent, Mr Ventura's involvement in developing the function business of Longworth House in potential competition with Bacchus Restaurant and the diversion of functions from Bacchus Restaurant to Longworth House breached those duties, in the same manner as Barescape breached its duties owed to the Bacchus Partnership.
211It appears that an employee, including a senior employee, may use his own time, but not the time for which he is paid by the employer, to develop a business in competition with the employer and may not use confidential information of the employer in doing so: Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] Ch 169 at 175; Spotless Group Ltd v Blanco Catering Pty Ltd [2011] FCA 979; (2011) 93 IPR 235 at [26]. The evidence indicates that Mr Ventura had somewhat flexible working hours in his role as General Manager of the business and, on balance, it appears likely that he used time for which he was remunerated by the Bacchus Partnership in developing the business at Longworth House. At the same time, the extent of that work undertaken by Mr Ventura and Mr Pelosi in respect of Longworth House is such that it is unlikely that it could have been wholly performed within the time for which Mr Ventura was remunerated by the Bacchus Partnership. Barescape and Mr Ventura neither sought nor obtained specific consent to the extent of time devoted by Mr Ventura to his involvement in the venture.
Claim for knowing assistance against Mr Ventura
212Bacchus also contends that Mr Ventura knowingly assisted Barescape's breaches of fiduciary duty. The Australian formulation of the requirements for knowing assistance is found in the High Court's decision in Consul Development Pty Ltd v DPC Estates Pty Ltd above. The Privy Council took a different approach in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, holding that dishonesty on the part of a third party was sufficient to establish liability, irrespective of the fiduciary's state of mind, if the relevant breach of duty by the fiduciary was established. In Farah Constructions Pty Ltd v Say-Dee Pty Ltd above at [160]-[164], the High Court noted that Royal Brunei differed from Consul Development in omitting the requirement that a fiduciary had engaged in dishonest and fraudulent design and that Australian Courts should continue to apply that requirement until the High Court further dealt with the matter.
213If Barescape was guilty of a dishonest and fraudulent breach of its fiduciary duties to Bacchus, then Mr Ventura would be liable as an accessory if he assisted that breach with knowledge of Barescape's dishonest and fraudulent design. However, Bacchus did not plead that Barescape's breach of duty was dishonest or fraudulent in character so as to give rise to liability in knowing assistance. The circumstances in which those breaches occurred, and in particular the pre-existing Functions Policy restricting the number of exclusive use functions on Friday and Saturday nights, the proposed development of the upstairs bar at Bacchus Restaurant which would potentially further restrict functions and the discussions as to cross-referral of custom between Bacchus Restaurant and Longworth House mean that it is not self-evident that the relevant breach was either dishonest or fraudulent, although I have held that the disclosure made to Mr Higgins was not sufficient to obtain informed consent. This claim must therefore fail.
Bacchus' claims for breach of contract against Mr Ventura
214Clause 21 of the Partnership Deed provided for Mr Ventura's appointment as General Manager of the business of the Bacchus Partnership for three years; he undertook to "continue to operate the business in the manner undertaken to date, with a view to continuing the growth and increasing the profitability of the business, including the progression of the development and opening of the upper level of the business premises"; and there was confided to him "absolute discretion in the operational management of the business" (Ventura 22.7.10 Ex AV (Ex P6) Tab C).
215Bacchus contends that Mr Ventura also owed a contractual duty of good faith and fidelity and loyalty to the Bacchus Partnership: Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 75 ALJR 312. By its Amended Cross-Claim, Bacchus contends that Mr Ventura breached that contractual duty of good faith and fidelity to the Bacchus Partnership. In particular, Bacchus submits that the diversion of customers from Bacchus Restaurant to Longworth House breached the implied obligation of good faith and fidelity.
216In Colour Control Centre Pty Ltd v Ty [1995] NSWSC 96 at [46], Santow J helpfully summarised the content of the relevant duty as follows:
"While the full scope of the implied duty of fidelity is not clearly defined, such duty does give rise to certain clear obligations relevant to the present circumstances. First, an employee may not retain, without approval, any profit or property the opportunity for the acquisition of which was furnished by the employment: Willey v. Syan (1937) 57 CLR 200; London Corporation v. Appleyard (1963) 2 All ER 834; 1 WLR 982; Reading v. The King (1948) 2 All ER 27 at 28; Reading v. A-G (1951) AC 507 at 518 per Lord Oaksey. Second, although in general employees are entitled to work in competition with their employer in their own time, special circumstances may give rise to an implied duty not to compete: Hivac Ltd v. Park Royal Scientific Instruments Ltd (supra). In particular, a director or senior employee who takes up a business opportunity within the scope of the company's actual or potential line of business, without the consent of the company upon full disclosure of the facts, may be required to account to the company for any profit made or to compensate it for any loss suffered: Cook v. Deeks (1916) 1 AC 554 at 563-4; (1916-17) All ER 285; Pacifica Shipping Co Ltd v. Anderson (1985) 2 NZCLC 96-040; (1986) 2 NZLR 328, Green and Cara Pty Ltd v. Bestobell Industries Pty Ltd (1982) WAR 1. The employee may be liable to account for such profit even where its acquisition did not adversely effect the employer: Boston Deep Sea Fishing and Ice Co v. Ansell (1888) 39 Ch D 339."
The first principle noted by his Honour relates to the acquisition of an opportunity furnished by the employment. There is no suggestion in this case that any opportunity in respect of Longworth House came to Mr Ventura in the course of his employment and that principle does not have present application. The second principle relates to the acquisition by an employee of a business opportunity "within the scope of the company's business" without the employer's informed consent.
217Mr Ventura did not acquire the property from which the Longworth House business was ultimately conducted, which was acquired by his wife, and there was no suggestion she held that property as his nominee or other than in her own right. However, Mr Ventura's involvement in developing the function business of Longworth House in potential competition with Bacchus Restaurant and the diversion of functions from Bacchus Restaurant to Longworth House breached the duty of good faith and fidelity to the Bacchus Partnership, for the reasons noted above, in the absence of informed consent by the Bacchus Partnership, Bacchus or Mr Higgins.
218Bacchus also contended that, on the proper construction and interpretation of the Partnership Deed, Mr Ventura had the same duties as Barescape had under clauses 8 (obligations of partner), 13.1 (engagement in other business) and 17.1 (restraint of trade) of that deed. I do not accept that contention. It would have been open to the parties to provide, by the terms of their agreement, that the principals of the partners were bound by the same obligations as the partners but they did not do so. The requirements for the implication of such a term are those set out by the majority of the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 282-283, as approved by the High Court in Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 at 347, namely the specified term (1) must be reasonable and equitable; (2) must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) must be so obvious that 'it goes without saying'; (4) must be capable of clear expression; and (5) must not contradict any express term of the contract. In particular, the implication of such a term depends upon the demonstration of necessity: Byrne v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410 at 452-453; Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104. In my view, the suggested term is not necessary to give business efficacy to the Partnership Deed which is effective without it. That term is also by no means so obvious that it goes without saying.
Claim for knowing assistance against Midfielder
219Bacchus contends that Midfielder knowingly assisted Mr Ventura's breaches of fiduciary duty. If Mr Ventura was guilty of a dishonest and fraudulent breach of his fiduciary duties to Bacchus, then Midfielder will be liable as an accessory if it assisted that breach with knowledge of Mr Ventura's dishonest and fraudulent design: Farah Constructions Pty Ltd v Say-Dee Pty Ltd above at [160]. Bacchus also submits that the knowledge of Mr Ventura is imputed to Midfielder, since he was the sole director and controlling mind of Midfielder: J C Houghton & Co Pty Ltd v Nothard, Lowe & Wills Ltd [1928] AC 1 at 14; Tesco Supermarkets Ltd v Nattrass [1972] AC 153; Nissho Iwai Australia Ltd v Malaysian International Shipping Corporation, Bhd [1989] HCA 32; (1989) 167 CLR 219 at 229-230; Hamilton v Whitehead [1988] HCA 65; (1988) 166 CLR 121 at 127; Federal Commissioner of Taxation v Whitfords Beach Pty Ltd [1982] HCA 8; (1982) 150 CLR 355 at 370.
220In Digital Pulse Pty Ltd v Harris above at [25], Palmer J observed that:
"Where the employee who is in breach of the fiduciary duty of loyalty incorporates a company in order to take the benefits of the breach, then the company itself will be held to have participated in the breach so that it will be liable to the employer to the same extent as the employee."
In Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd above at [123], Tracey J observed that such liability can arise because an individual respondent is the directing mind of the relevant company, because the rule in Barnes v Addy (1874) LR 9 Ch App 244 at 251-2 renders a third party who participates knowingly in the dishonest conduct of a defaulting fiduciary itself accountable as a constructive trustee and because the relevant company received the benefit of the corporate opportunity which the individual respondents' conduct denied to the applicants.
221However, Bacchus did not plead, and has not established, that the breaches of fiduciary duty which I have found against Mr Ventura were dishonest or fraudulent in character so as to give rise to liability in knowing assistance. I should not reach such a finding where it was not pleaded. As I have noted above, the circumstances in which those breaches occurred, and in particular the pre-existing Functions Policy restricting the number of exclusive use functions on Friday and Saturday nights, the proposed development of the upstairs bar at Bacchus Restaurant which would potentially further restrict functions and the discussions as to cross-referral of custom between Bacchus Restaurant and Longworth House mean that it is not self-evident that the relevant breach was either dishonest or fraudulent, although I have held that the disclosure made to Mr Higgins was not sufficient to obtain informed consent. This claim must fail.
Claim under restrictive covenant in Partnership Deed
222The second part of Bacchus' Cross-Claim relates to an alleged breach of the non-competition provisions and related terms of the Partnership Deed in relation to conduct after the termination of Mr Ventura's employment. Bacchus contends that Barescape is liable in respect of the post-termination period by reason that it has operated a business in competition with Bacchus Restaurant. Bacchus contends that Barescape's involvement in a competing function centre and restaurant business (encompassing a wine bar and tapas lounge) after the Bacchus Partnership was dissolved constituted a breach of the restraint of trade provisions of the Partnership Deed.
223Clauses 17.1 and 17.2 of the Partnership Deed provided that:
"17.1 The parties agree that, during the term of this Agreement and for a period of two years following the termination of the Partnership for any reason, and provided that the outgoing Partner has received payment of the full market value for all of its interest in the Business [emphasis added], the outgoing Partner will not (and will procure that each of its directors, shareholders, unitholders and other stakeholders do not):
(a) within the Restricted Area, carry on business, or accept or remain in employment with or act as a consultant to, agent for, shareholder or director of, trustee of, partner with or joint venturer with any person which carried on the business of a fine dining restaurant with associated On-licence (Restaurant) Liquor Licence;
(b) approach, solicit, entice, canvass or endeavour top obtain the custom of any customer of the continuing Partner who has been a customer of the continuing Partner at any time in the 2 years immediately preceding the date the outgoing Partner terminates its participation in this Agreement; and
(c) approach, solicit, entice, canvass or endeavour to engage any of the current employees of the continuing Partner (as at the date of the outgoing Partner terminates its participation in this Agreement) to become an employee of, consultant to, partner with, director or shareholder of or joint venturer with the outgoing Partner.
17.2 Both Partners agree to procure each of its directors, shareholders, unitholders or other stakeholders considered reasonably relevant by the other partner to enter into a Deed containing restrictive covenants of a nature similar to those set out in this clause 17."
224The Partnership Deed provided for various combinations of "Restricted Areas" and "Restricted Periods". Bacchus relies on the combination comprising "anywhere within a radius of 1 km of the continuing Partner's Newcastle business address from time to time" and a Restricted Period of 2 years. Bacchus contends that Barescape breached clause 17 by its involvement in the operation of the Longworth House business after the Partnership Deed had terminated.
225The operation of the restraint of trade was contingent on a payment being made to Barescape on termination of the Bacchus Partnership. There is an issue whether Bacchus sought to make that payment and it was refused by Mr Ventura on Barescape's behalf. That can only have occurred at a meeting on 21 October 2009 since, from 22 October 2009, Bacchus asserted that a right to set-off of its claims against Barescape entitled it to withhold that payment. Bacchus contends that payment was tendered on that date but refused by Mr Ventura and that Mr Ventura cannot now rely on his non-receipt of payment to defeat the operation of clause 17 of the Partnership Deed.
226In my view, Bacchus has not established that a payment which complied with the requirements of clause 17 of the Partnership Deed was offered to Barescape. Mr Higgins' affidavit evidence was initially that he handed over a cheque at the meeting, saying words to the effect "I also provide you with this cheque" (Higgins 28.5.10 [55]). However, that cheque and cheque butt were not produced although called for by the Plaintiffs in the course of the hearing. Mr Higgins then significantly qualified his earlier evidence, suggesting that, rather than having provided Mr Ventura with a cheque, he had been reaching for his cheque book when Mr Ventura left the meeting (T1007-T1009). I do not accept Mr Higgins' evidence in this regard, given the change in its content and the circumstances in which that change occurred. Mr Faraday-Bensley, the solicitor acting for Bacchus in the matter, did not have sufficient recollection of the meeting to corroborate Mr Higgins' evidence. Mr Ventura's evidence in cross-examination was that, at the meeting on 21 October 2009 with Mr Higgins and Mr Faraday-Bensley, Mr Faraday-Bensley stated that there was no cheque and that he had given his client advice (T279.45). It was put to Mr Ventura that Mr Higgins had his cheque book in his hand as Mr Ventura left the meeting, but Mr Ventura's evidence was that he did not see any cheque book (T280.24). In a letter sent the same day to Bacchus' solicitors, Mr Ventura stated that no such cheque had been tendered and Bacchus' solicitors did not then contest that statement, in circumstances where they had every reason to do so if it was not correct. From 23 October 2009, Bacchus' solicitors expressly took the position that Bacchus was exercising a right of set-off for the damages it claimed and would not make payment to Barescape. Accordingly, Bacchus has not established that it tendered or made the payment to Barescape which was necessary to give effect to the restraint of trade.
227Even if, contrary to my view, Bacchus had tendered or made the necessary payment and the restraint of trade had taken effect, I would not have found that it had been breached. Bacchus contends, and I accept, that clause 17 of the Partnership Deed is to be construed and interpreted in accordance with the intentions of the parties objectively ascertained at the time of contracting, with due regard to the then mutually known facts, in a commercially sensible way and so as to avoid inflicting unreasonable and unjust results on the parties that they could not have intended: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at 179; Pacific Carriers Ltd v BNP Paribas above; Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45; (2011) 282 ALR 604; Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603 at [4]-[5], [19]-[23] per Allsop P and at [240]-[305] per Campbell JA; Cypjayne Pty Ltd v Babcock & Brown International Pty Ltd [2011] NSWCA 173 at [66]; (2011) 282 ALR 152. I also accept that a covenant in restraint of trade should be interpreted "...with reference to the object sought to be obtained" and "in a restraint of trade case the object is the protection of one of the partners against rivalry in trade" and in its "context and in the light of the factual matrix at the time when the agreement was made": Clarke v Newland [1991] 1 All ER 397 at 402.
228Bacchus seeks to give the term "fine dining restaurant" in clause 17.1 of the Partnership Deed a very wide meaning as comprising the service of chef prepared meals to be consumed on the premises, the hosting of group functions by prior arrangement including wedding receptions, balls and corporate events, service of tapas meals (or "small plates") with or without alcohol, all of which are parts of the business of both Bacchus Restaurant and Longworth House. However, a definition of this width does not give sufficient weight to the concepts of either "fine dining" (as distinct from quality food which does not aspire to that standard) or "restaurant" (as distinct from other dining alternatives) and is sufficiently wide to include many coffee shops, function centres and tapas bars which, in my view, would not constitute "fine dining restaurant[s]" within the ordinary meaning of that term.
229On the one hand, Bacchus Restaurant was a fine dining restaurant and recognised as such by the Good Food Guide (Ventura 22.7.10 Ex AV2 (Ex P7) Tab 11). There is no suggestion that Longworth House aspires to, or has achieved, any such recognition. On the other hand, Longworth House was a function centre, which neither allowed individual choice of meals (although persons organising a function could choose the function menu). Mr Pelosi's evidence, which I accept, was that Longworth House was not set up as a restaurant and had never operated as a restaurant and its kitchen was set up to cook in bulk, by cooking large trays of the same dish rather than individual dishes. His evidence was that the menu for Longworth House is a fixed menu (although it is changed occasionally and may be varied for individual functions), so that patrons attending functions do not choose what they eat and meals are served as an "alternate drop" so that patrons are allocated one of two dishes depending where they are seated. Tapas were also served at lounges and low tables at Longworth House (Ex P15) with a limited selection menu (Pelosi 28.7.10 Annexure "C"). However, I am not persuaded by Bacchus' vigorous attempt to contend that a tapas bar serving quality food is a "fine dining restaurant".
230Bacchus contends that it is inconceivable that the parties would have intended that, following the acquisition (for $1,000,000) of Bacchus' 75% interest in the Bacchus Restaurant, and in the event of termination of the Bacchus Partnership, Mr Ventura and Barescape would be free to compete with Bacchus Restaurant in the wedding reception (and other event) venue and restaurant market. I do not consider that this reasoning assists, since the amount of the purchase price of the restaurant presumably reflects its perceived value at the time of purchase and does not necessarily indicate that the scope of any negotiated restraint of trade would be wide rather than specific. In any event, so far as the core of Bacchus Restaurant's business was "fine dining" in its ordinary meaning, a construction of the restraint of trade which reflects that meaning protects the goodwill of the restaurant.
Claim against Mr Ventura in respect of breach of restraint of trade
231Bacchus contends that Barescape was also obliged under clause 17.2 of the Partnership Deed to procure that Mr Ventura enter into a deed containing restrictive covenants of a similar nature to those set out in clause 17.1 and that, in breach of the Partnership Deed, Barescape failed to perform this obligation. Bacchus contends that, since Mr Ventura guaranteed the performance of Barescape's obligations under the Partnership Deed (and indemnified Bacchus against loss suffered as a result of Barescape's breaches of the Partnership Deed), Barescape is liable for conduct by Mr Ventura that would have been in breach of clause 17.1 had he been bound by it (owing to its failure to procure that he sign a deed in the terms of clause 17.1) and Mr Ventura is in turn liable on his guarantee and indemnity.
232This claim fails since I have found that the restraint of trade did not take effect and would therefore not have bound Mr Ventura. A breach of that clause would not have been established, even if Mr Ventura had been bound by it, since Longworth House was not a "fine dining restaurant".
Claim against Mr Ventura under the guarantee
233Clause 20 of the Partnership Deed provides that:
"Ventura and Higgins guarantee the performance of this deed by the Partners, and the directors enter into this guarantee on the following conditions:
(a) the guarantee hereby given extends to each director indemnifying the other's Partner for any loss under this deed caused by the director's defaulting Partner without the
claimant first being required to institute proceedings against the defaulting Partner.
(b) the guarantee will continue whilstever there are outstanding obligations by one Partner to another."
234Bacchus alleges that Mr Ventura is liable to Bacchus on his guarantee and indemnity in respect of Barescape's liability to Bacchus for breaches of the Partnership Deed. That liability is established to the extent that Barescape's liability for those breaches is established.
Remedies
235In its Amended Cross-Claim, Bacchus sought declarations that Barescape and Mr Ventura held profits gained by them in breach of fiduciary duty on constructive trust for the benefit of Bacchus and the Bacchus Partnership respectively. The claim for a constructive trust was not pressed in closing submissions although a claim for equitable compensation for the value of a 75% interest in Longworth House was pressed. Bacchus also pleads that it has suffered loss and damage (particularised as loss of customers, loss of income and loss of value of the business) by reason of Barescape's breaches of fiduciary duty and the Partnership Deed and has suffered the same loss and damage by reason of Mr Ventura's breaches of fiduciary and contractual duties.
Quantification - Bacchus Total Damages Claim 1
236The first basis on which Bacchus quantifies its damages ("Total Damages Claim 1") is by reference to the value of the opportunity to open the Longworth House business plus the value of the Non-Longworth Redirects.
237This claim is put as a claim for loss suffered by Bacchus, rather than an accounting for any profit made by Barescape or Mr Ventura, which would have depended on the extent to which they had in fact profited from an interest in Midfielder or the Ace's Family Trust. The claim therefore requires that the loss which Bacchus has suffered be established and quantified. An order for equitable compensation for breach of fiduciary obligation is intended to put the beneficiary in the same position as if no breach had occurred and equitable compensation is assessed by reference to the plaintiff's loss and irrespective of whether the defendant made a profit: Nocton v Lord Ashburton [1914] AC 932 at 952; Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211; (1966) 84 WN (Pt 1) (NSW 399; Hill v Rose [1990] VR 129 at 144; Target Holdings Ltd v Redferns [1996] 1 AC 421 at 436; O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262; 29 ACSR 148 at 157; GM & AM Pearce & Co Pty Ltd v Australian Tallow Producers Pty Ltd [2005] VSCA 113 at [65]. Equitable compensation will not be awarded in a manner which would put the party in a better position than they would have been in had the breach not occurred: Old v McInnes [2011] NSWCA 410 at [97].
238Bacchus quantifies its loss on this basis as $318,659, calculated as 75% (being the percentage of Bacchus' interest in Bacchus Partnership) of the total ($424,759) of the profit derived by Longworth House ($90,063) and the goodwill of the business of Longworth House ($334,696) assessed as set out below. The first component of this calculation is the total profits of Longworth House for the years ended 30 June 2010 and 30 June 2011 of $90,063 (Vella 15.8.11 Report (Ex P66)). The second component of this calculation is the value of the goodwill (as distinct from net tangible assets) of Longworth House.
239Messrs Jugmans and Vella initially agreed that the value of Longworth House as at 30 June 2011 was $275,304, comprising net tangible assets of $205,304 and goodwill of $70,000 (Second Joint Report (Ex D87A)). However, Messrs Jugmans and Vella also referred to, and Bacchus relies on, the subsequent sale of a one-third interest in Longworth House that was sold on 9 June 2011 to Spirow Pty Ltd as trustee for the Envision Trust, which is an entity associated with Ms Roanne Sarrouf, the event planner at Longworth House. Messrs Jugmans and Vella note that the price for the one-third interest paid in that transaction was $180,000, which implied a value for the goodwill of the business substantially in excess of the value they had initially assessed. Bacchus contends that, on that basis, the total value of the goodwill of Longworth House was $334,696. I accept that, as both experts agreed, a third party transaction provides a strong indicator of value. However, there are unusual features of the acquisition of the one-third interest in Longworth House by Spirow, since Ms Sarrouf had an existing involvement in Longworth House and was in that sense not an arm's length purchaser and finance was provided by the vendors at a low interest rate, which would have been a significant benefit to a purchaser who would either be required to pay a substantially higher interest rate to borrow monies from a commercial lender or would not be approved to borrow those monies. Had I held that Bacchus was entitled to recover compensation by reference to the value of an interest in Longworth House, I would not have substituted the price paid by Spirow for its interest in Longworth House for the value otherwise assessed by Messrs Jugmans and Vella.
240Bacchus contends that it is appropriate to have regard to goodwill, without reference to costs incurred by Midfielder, Mr Ventura, Samnite or Mr Pelosi in this calculation, by reason that:
"The net tangible assets component represents the value of the financial contribution made by the parties to the partnership that established and operated Longworth House [ie Midfielder and Samnite]. As [Bacchus] did not contribute to these costs, it is appropriate that the current owners of Longworth House be given credit for their capital contribution and that the value of that contribution be excluded from the assessment of [Bacchus'] losses that are referable to this lost opportunity."
241I do not accept that this approach properly quantifies any loss attributable to Bacchus' loss of the opportunity to invest in Longworth House. Bacchus' submission implicitly recognises that the calculation of its loss needs to take into account the costs incurred by Midfielder and Samnite, and indirectly Mr Ventura and Mr Pelosi, in establishing the Longworth House business. However, I do not consider that there is a proper foundation for any assumption that the value of the net tangible assets of the Longworth House business at one point in time, 30 June 2011, necessarily reflects the costs incurred by those parties in establishing that business. The costs of establishing a business may obviously be significantly greater, or less, than the value of its capital assets at a later point in time.
242An associated difficulty with the quantification of the claim on this basis is that the evidence indicated that Mr Ventura and Mr Pelosi devoted substantial time and effort, much of it outside working hours, to preparing the Longworth House business for opening, particularly from August 2009. There is no reason to think the Bacchus Partnership would have had access to Mr Ventura's work outside business hours or Mr Pelosi's work without payment had Bacchus acquired a 75% interest in Longworth House with the result that either Midfielder or Samnite would have had to surrender its interest in Longworth House or those entities would have each had only a small interest in Longworth House. The relevant work would potentially have needed to be done by Mr Ventura within working hours, by other staff of the Bacchus Restaurant or by Mr Pelosi or tradespersons on a paid basis and the costs that would have been incurred to perform that work would need to be established by evidence. There was no reason why such evidence could not have been led from a person who had appropriate expertise or experience in the renovation of heritage buildings for use as restaurants, function centres or other public venues. However, no such evidence by Bacchus was led and there is no evidence that would allow even a guess as to a proper allowance for those costs.
243An order for equitable compensation or damages (whether calculated by reference to goodwill or otherwise) that did not adequately allow for the costs that would have been incurred by Bacchus in order to take up a 75% interest in Longworth House would deliver Bacchus a windfall gain. I do not consider an order on this basis can be made for those reasons. I address Bacchus' claim in respect of the Non-Longworth Redirects below.
Quantification - Bacchus Total Damages Claim 2
244Bacchus' second claim ("Total Damages Claim 2") in the amount of $271,473 comprises damages for breach of contract or equitable duty in the diversion of Non-Longworth Redirects and damages for breach of the restraint of trade in clause 17 of the Partnership Deed after the dissolution of the Bacchus Partnership. I address Bacchus' claim in respect of the Non-Longworth Redirects below. I have held above that the restraint of trade in clause 17 of the Partnership Deed did not come into effect and, even if it had come into effect, it was not breached, so damages in that regard are not established.
Quantification - Bacchus Total Damages Claim 3
245Bacchus' third claim ("Total Damages Claim 3") is advanced if, as is the case, Bacchus has been unsuccessful in Total Damages Claim 1 and Total Damages Claim 2. In that case, Bacchus claims compensation for business directed away from Bacchus Restaurant during the term of the Bacchus Partnership whether those functions did or did not flow to Longworth House, and quantifies those losses as $78,305. That claim is made up of a claim for Longworth Redirects and the claim for Non-Longworth Redirects. I will deal with these claims in turn.
Longworth Redirects
246Bacchus relied on a document entitled "Follow up on Longworth inquiries" which it initially contended was a list of inquiries made to Bacchus Restaurant and subsequently referred to Longworth House. Mr Ventura's evidence was that the inquiries recorded in that document were in fact made to Longworth House and that he asked Ms Clydsdale to follow up those inquires while he was on vacation (Ventura 22.7.10 [32]; T135). The title of the document tends to support the characterisation that Mr Ventura gives that document, as a list of inquiries made about Longworth House rather than a list of inquiries made about Bacchus Restaurant. Ms Clydsdale conceded in cross-examination that at least some of the persons on the list had originally inquired about Longworth House rather than Bacchus Restaurant (T621-T626). Mr Jugmans' first report assumed that individuals referred to in that list should be treated as redirected potential customers and referred to advice provided by Bacchus' solicitors that the document was sourced from a laptop owned by the Bacchus Restaurant. It subsequently emerged that that was not the case and, on balance, I find this document to have included at least some inquiries that were made in the first instance to Longworth House. That document also included persons who, it ultimately emerged, had in fact held their functions at Bacchus Restaurant, who were initially included in, and subsequently removed from, Mr Jugmans' calculation of Bacchus' loss.
247I address the particular functions on which Bacchus relies in respect of the Longworth Redirects below: