Supreme Court of SA|1993-12-23|Before: King CJ

CHRISTOPHER PAUL ASHLEY WALKER; RICHARD FRANK WILSON and DONALD ANTHONY WALLIS v. ANDREW JOHN MARTIN No. SCGRG 93/1598 Judgment No. 4355 Number of pages - 9 Partnership - dissolution and winding up (1993) 12 ACSR 549 [1993] SASC 4355 (23 December 1993)

COURT IN THE FULL COURT OF THE SUPREME COURT OF SOUTH AUSTRALIA KING CJ (1), MILLHOUSE(2) and OLSSON(3) JJ

CWDS Partnership - dissolution and winding up - medical practitioners operating partnership - on dissolution respondent sought payment from appellants for his share of goodwill - whether any goodwill remained after dissolution - evidence suggested that goodwill affected by dissolution but the appellants retained substantial proportion of former goodwill of partnership.

HRNG ADELAIDE, 1 December 1993 #DATE 23:12:1993 Counsel for appellants: Mr G Hevey with Mr T Jackson Solicitors for appellants: Wallmans Counsel for respondent: Mr A Martin Solicitors for respondent: Stratford and Co

JUDGE1 KING CJ The facts are set out in the reasons for judgment of Olsson J. 2. The legal basis of the respondent's claim does not clearly appear from the Statement of Claim. The trial appears to have proceeded on the basis that the appellants purchased the respondent's interest in the partnership for a reasonable price. The price as to the tangible assets was agreed; the dispute was as to whether the respondent's interest in the goodwill possessed any, and if so what, value at the date of the purchase. The learned trial judge's view of the issue was expressed in his reasons for judgment as follows: "... it was open to one or more of the partners to purchase

that business from the other or others; and, in reality, that is what happened. It is simply that the defendants have not paid the full price for the plaintiff's share." 3. Mr Hevey, who appeared for the appellants, agreed that the appellants were liable for the reasonable value, if any, of the respondent's share of the goodwill. 4. The respondent had paid, on 1st September 1987, the sum of $35,000 for a one quarter share in the goodwill of the practice. On 28th February 1989 the goodwill was valued at $148,795. The partnership was dissolved on 31st March 1989. 5. On the dissolution Dr Wallis established his own practice in Stirling. There was no evidence as to what proportion of the patients followed him and, in the absence of evidence of any financial adjustment, it is reasonable to assume that the other parties accepted that the patients he took represented his one quarter share of the goodwill. The respondent left the district and established a practice at Morphettville. He was consulted there by only one of the patients of the partnership practice. That was in connection with a partly completed workcover matter. 6. The appellants conducted the former practice at Stirling and Bridgewater in the premises and with the staff of the previous partnership. Prior to dissolution they distributed dodgers to patients informing them of the continuance of the practice by the appellants. 7. The position appears to me to have been that the appellants took over the goodwill of the practice with the exception of Dr Wallis' quarter share which he took in kind. They are liable to pay the respondent for his quarter share of the goodwill. 8. Although the appellants practised, after the dissolution, as associates rather than partners, they treated the patients of the practice in the same premises and with the same equipment and staff. The practice's clientele was undiminished by any inroad from Dr Martin's Morphettville practice. Dr Walker's evidence was that the appellants had to work very hard, precisely no doubt because the clientele of the practice remained except for those patients who followed Dr Wallis. 9. There appears to be no reason to suppose that the dissolution of the partnership diminished the value of the goodwill of the practice. This is confirmed by the financial results of the practice continued by the appellants with another doctor who joined them, for the financial year ended 30th June 1990. The practice generated approximately the same fee income for about the same level of expenses as in the last year of the partnership. 10. The learned trial judge saw no reason to discount the valuation of goodwill as at 28th February 1989, and considered that a reasonable price for the respondent's share of the goodwill was $37,198.75. I see no reason to disagree. His Honor allowed interest at the rate of seven per centum per annum from the date of dissolution. He based that allowance upon s.42(1) of the Partnership Act. It is unnecessary to decide whether that section applies to the circumstances of the case as it would be appropriate, in any event, to allow interest at that rate under the provisions of s.39 of the District Courts Act. 11. I would dismiss the appeal.

JUDGE2 MILLHOUSE J I too suggest that the appeal be dismissed. During March 1989

after the partners had agreed on dissolution but before the partnership had been dissolved - this circular was put in the waiting rooms of the practice: " IMPORTANT ANNOUNCEMENT We have to advise the following changes to our Medical Practice. As from April 1st 1989, Dr.D.A. Wallis will cease to continue to be a partner in our practice. This has been Don's own decision as he feels it is in his best interests to instead, establish a "Solo" practice with assistants in Stirling. We of course, very much regret this decision which has only recently been made, and we wish to emphasise that this is purely a business rearrangement and will be effected with complete propriety. The timing of this announcement has been by mutual agreement. Dr. A.J. Martin has since decided to also resign from the practice and has no plans to continue working locally. It has not yet been determined who will be joining the practice but we will let you know as soon as arrangements have been finalised. The partners and staff of this practice feel justly proud of the level of service it has provided the people of this area over the last ten years. We want to reassure you, that we intend to continue to provide the best medical care available on a 24 hour a day, year round basis, and, despite losing Don's and Andrew's services, we look forward to maintaining our reputation of being a top family medical practice. Chris WALKER and Dick WILSON " 2. I do not see how the appellants can get over the clear implication of that circular - that the practice would continue despite the appellant Wallis and the respondent Martin leaving it. That is my view despite the valiant efforts of Mr Gary Hevey for the appellants to shew that, on 31 March, the practice disappeared, atomised, and was replaced by something quite different. The circular shews that was not the respondent's intention: the evidence shews that on and after 1 April that is not what happened. 3. The respondent is entitled to his share of the good will.

JUDGE3 OLSSON J This is an appeal against a judgment entered by a District Court judge in favour of the respondent and against the appellants, following the dissolution of a medical practice in which all parties had been partners. The judgment required the appellants to pay the respondent $37,198.75 for his share of the goodwill of the former practice, together with interest on it from 1 April 1989 to judgment. 2. On the pleadings, as initially framed, the relief sought was for the taking of accounts between the parties. However, when the matter came to trial, the sole issue remaining in contention between them was as to whether the appellants were liable to make any payment to the respondent in respect of the goodwill of the partnership and, if so, in what amount. 3. The primary facts giving rise to the litigation were, in large measure, common ground. 4. All four parties had been partners in general medical practice in the Adelaide Hills. There was no written agreement governing the conduct of the partnership affairs, or its winding up or dissolution. 5. The partners had been involved in the area for varying periods of time. The appellant Wallis ("Wallis") had apparently practised in the general locality for a considerable number of years and had a substantial following of patients. The appellant Walker ("Walker") and another doctor commenced practice in the locality in 1979. Wallis joined them in partnership the following year. The other doctor retired in 1981 but, in 1986, the appellant Wilson ("Wilson") entered the partnership. A female doctor, Dr Margaret Bennetts, became a part time employee in 1983. 6. Wallis, Walker and Wilson were joined by the respondent in partnership as of 1 September 1987. Upon entry he paid them a one-quarter share of the value of the practice buildings and fixtures and $35,000 for his one-quarter share of the then assessed goodwill. In return he was entitled to an immediate one-quarter share of the net partnership income. 7. Apparently no attention was ever given to what was to happen in the event of a dissolution of the partnership. Certainly nothing was ever documented in that regard. The practice was a very busy one and operated surgeries in both Bridgewater and Stirling. It provided a 24 hour, seven day per week patient coverage. I infer that the major surgery was that at Stirling, known as the Druid Avenue Medical Centre. 8. On or about 28 February 1989, Wallis gave notice to his partners of his intention to retire from the partnership as of 31 March 1989. This came as a complete surprise to his colleagues. 9. In the event the partnership was in fact dissolved on that date, at which point Wallis commenced practice, on his own account, in rooms in the immediate vicinity of the Druid Avenue Medical Centre. Dr Bennetts joined him at those rooms. A large number of patients left the practice with them, presumably to consult with those two doctors. 10. The learned trial judge summed up the situation apropos the other partners in these terms:- "As from 1 April 1989, the defendants Wilson and Walker continued to practise at the former surgeries of the partnership at Stirling and Bridgewater; retaining the staff of the old partnership and holding out to their patients and the community in the area that the surgeries were continuing to operate as before. To all intents and purposes, the old partnership continued to operate as before save that the plaintiff and the defendant Wallis had left it. As it happened, the defendants Wilson and Walker did not practise in partnership, but as associates; although, as I see it, that does not matter for present purposes. After the defendant Wallis had given notice of his intention to retire from the partnership, the defendants Wilson and Walker approached the plaintiff with a view to him joining them in practice, but he declined to do so; preferring to set up practice elsewhere. He now practises at Morphettville, although he still lives in the house he built in Stirling when he bought into the partnership." 11. It should be recorded that the discussions held between Walker and Wilson on the one hand and the respondent on the other did not envisage him continuing on in full partnership with them. They proposed to continue the practice as associates and their proposal was that he also remain at the practice simply as an associate. This meant that he would only receive fee income actually earned by him and have to bear his proportion of overhead expenses out of it. 12. He was not happy with such an arrangement and therefore elected to move elsewhere. 13. It is not in dispute that, upon the dissolution, Walker and Wilson paid out the respondent's interest in the fixed assets of the partnership at an agreed fair price. However, no satisfactory resolution was forthcoming of what, if anything, ought to be paid to him by the appellants for any aspect of goodwill. The goodwill of the partnership, as an existing going concern, was valued by an acknowledged expert as at 28 February 1989, at the sum of $148,795. However, that figure was based on the practice as it was then conducted by all four partners, bearing in mind the employment of Dr Bennetts who, as a female practitioner, was very valuable to the partnership because of her rapport with female patients. It was never in dispute that, on such a footing, the valuation was realistic. 14. When the respondent left the partnership the question of his alleged share in goodwill was, unfortunately, left in a very inconclusive state. 15. Minutes made of a meeting of all partners held on 20 March 1989 reveal quite clearly that specific agreements were arrived at as to the disposition and payment for all tangible assets of the partnership. However, they make no mention at all of goodwill. 16. On 22 March 1989 the respondent wrote to Walker and Wilson in these terms:- "71 Wilpena Terrace ALDGATE 5154 22 March 1989 Dear Chris and Dick, Following our partnership meeting of Monday 20th March I would like to clarify the following points and confirm our previous agreement for me to leave the partnership on Friday 31st March 1989, the same as Don. 1. an agreement to settle my share of the buildings and contents on or before 30th September 1989 with the usable stock etc to be settled by 30th April 1989. 2. I believe I am entitled to my full share of the goodwill and, although perhaps undervalued, I would be prepared to accept $40,000 to be paid on or before 30th September 1989. 3. If a new partner buys in before 30th September 1989, my full share of the partnership will be payable at the date of buying in. I would appreciate your reply by 28th March 1989, regarding these points. Yours sincerely, (Signed) Andrew." 17. This elicited the following response from Wilson:- "26/3/89 Dear Andrew, Further to your letter of 22 Mar 89, we confirm that:- (i) you will be ceasing work on 31.3.89. (ii) settlement of your share of the buildings and contents will be arranged on or before 30/9/89 subject to a satisfactory agreement on price as based on the independent valuation recently conducted. (iii) with respect to your request for goodwill, it is unclear to us from whom you are seeking such payment - an incoming associate - Dr. Wallis and/or Dr. Bennetts. - Dr. Walker and Dr. Wilson. Will you favour us with a reply by 1st April. Yours sincerely, Dr. R.F. Wilson." 18. The respondent replied:- "Dear Dick and Chris, Regarding your query, in your letter of 26/3/89, about my goodwill, I would expect that it should be payable by the ongoing partnership ie yourselves, presumably to be recouped when you take in another partner or two. If you take in another partner before September 30th 1989, I would expect goodwill and buildings to be paid out on the date that person joins your partnership. Should you not have someone joining by September 30th, 1989 then I would 6 expect goodwill and buildings to be paid out on that date viz 30/9/89. I would appreciate your confirmation of these arrangements by April 3rd 1989. Yours sincerely, (Signed) DR A.J. MARTIN" 19. No agreement was ever arrived at concerning goodwill, with the consequence that these proceedings were initiated on 28 July 1989, essentially to resolve that issue. When the matter came on for trial the sole issue which the learned trial judge was asked to decide was whether or not the present appellants were liable to pay the respondent any sum on account of goodwill - whether, on dissolution, any asset of goodwill remained and, if so, what value should be attributed to it. 20. Although Walker and the respondent both gave oral evidence, this merely set the factual scene and was essentially non controversial as to the primary facts. 21. The witness Sparnon was called as an expert witness on the topic of goodwill. It is conceded on all hands that he is an independent expert and the only person in this State with considerable experience and expertise in the valuation of medical practices. 22. At the end of the day the learned trial judge expressed his ultimate conclusions as under:- "It is not true to say, as Ms Colton for the defendants submitted, that, on the dissolution of the partnership, the goodwill of the partnership was extinguished. If the business of the partnership had come to an end, then it might be that would have been the case; but the business of the partnership did not come to an end: it survived to be carried on by the defendants; and, in that case, it was open to one or more of the partners to purchase that business from the other or others; and, in reality, that is what happened. It is simply that the defendants have not paid the full price for the plaintiff's share. In saying that, I do not impute any bad motive to them. I think it is possible that they did not fully understand the position. Ms Colton submitted, in the alternative, that the plaintiff, by refusing to accept the offer of the defendants Wilson and Walker, thereby abandoned his interest in the goodwill of the partnership. I do not accept that submission. The plaintiff was under no obligation to accept such a proposal and, having refused it, made it clear that he required payment for his share of the goodwill. As to the nature of the plaintiff's share in the goodwill, I see no reason why it should be anything other than one quarter of the valuation placed on it by Mr. Sparnon; in other words, the sum of $37,198.75. Ms Colton submitted that, in the circumstances, that valuation should be discounted. I think it possible that, in some circumstances, a discount might be appropriate; but not in the present case. The valuation was prepared on the basis that it would be used, at least in part, for the purpose of the sale of the business of the partnership or part thereof; and that is what happened." 23. He was there, of course, referring to the valuation made as of 28 February 1989. 24. He allowed interest on the sum of $37,198.75 at 7 per cent per annum from 1 April 1989 to date of judgment. 25. On the hearing of the appeal the appellants challenged the propriety of the findings made. They argued that the expert evidence conclusively established that, on dissolution, given the manner in which the dissolution was effected and in the events which actually happened, there was no tangible goodwill remaining at all. 26. In essence the main points made by the expert witness Sparnon, upon which the appellants sought to rely, may fairly be summarised in this manner:- . Had one partner alone left the practice and departed the area and the remaining partners continued in it, working longer hours and maintaining the pre-existing level of service, the valuation of $148,795 for goodwill would have been a fair valuation. . However, that did not occur. In fact the practice in its

pre-existing form ceased to exist. Wallis moved over the road and took many patients and Dr Bennetts with him. The appellant left the practice altogether and it would have been virtually impossible for those who remained to continue the former level of medical coverage. The very disappearance of a female practitioner would have had an adverse patient effect. . So far as the remaining partners (who thereafter practised as associates) were concerned it was, necessarily, almost a "salvage" operation to attempt to maintain the patient base and provide a reasonable level of service. Per capita operating/overhead costs would rise and it would probably be necessary to employ another doctor or a locum service to assist in providing a reasonable level of after hours service. . Experience indicates that, when a practice fragments, there is an inevitable adverse effect on the patient base. Patients become unsettled if "their doctor" leaves and they may well go to another practice. Some of them will "chase" him to his new location, even though it may be a long way away. In any event patients tend to be fickle and they do not like change. Thus the residual practice is going to be in a state of upheaval. (Walker deposed that Sparnon's opinion was an accurate resume of exactly what actually did happen. He testified that he and Wilson had to work extremely hard during

1989/1990 to keep the practice together. They did the best possible to rebuild it and attracted a lot of new patients as rapidly as they could. They endeavoured to recruit a new associate, but were unable to do so for a considerable time.) In giving evidence Sparnon was adamant that, in circumstances such as those before the Court, he would not attribute any value to goodwill. No other expert evidence was adduced to gainsay that opinion, yet the learned trial judge rejected it in favour of the conclusion which I have above recited. 27. I hasten to make the point that he was not, of course, bound by Sparnon's opinion. However, given that opinion and the reasoning underpinning it, it was incumbent upon him to proceed with caution and, if he rejected it, to proceed on a basis of unassailable logic, if for no reason other than Sparnon's independence and formidable reputation as a widely accepted and respected valuer of medical practices. 28. Having said that I am constrained to agree with the obvious conclusion that Sparnon's opinion was too absolute and was based on an obvious fallacy. 29. The evidence plainly reveals that Wallis took a significant portion of the client base with him when he moved out and took Dr Bennetts as well. He thus necessarily departed with a substantial segment of the former goodwill of the practice (for which the respondent had paid a substantial sum of money on entry into the partnership) and then nurtured it for his own benefit. (As Sparnon expressed the situation "Ethically not nice, but legally, in order".) 30. Equally Walker and Wilson also retained a substantial segment of the former goodwill by continuing practice in the original locations and making significant endeavours (by written solicitation and provision of service) to retain the maximum possible proportion of the original patient base and then building on it. 31. In neither case could it logically be said, at least in legal terms, that the whole of the goodwill of the former partnership had simply disappeared on the fragmentation of the practice. On the contrary, significant proportions still existed and were directly appropriated and enjoyed by all of the appellants. There was no evidence that the respondent was followed by any of the former patients to his new practice at Morphettville. In no sense did he unilaterally "abandon" the partnership and his share of goodwill, as suggested by the appellants. He was never offered an opportunity to continue in any form of partnership. His colleagues, having appropriated the goodwill to themselves (albeit that they thereafter practised as associates rather than partners), did not give him an option to continue as a partner in a partnership practice. 32. To express the situation in another manner the appellants, having sold a one-quarter share of the goodwill of the pre-existing practice to the respondent for $35,000 only 18 months previously, required him to walk away without reimbursement of any portion of that sum, despite the fact that they retained and enjoyed what, on the evidence, must have been the lion's share of the goodwill for which he had originally paid. 33. Undoubtedly Sparnon's evidence that the dissolution and breaking up of the partnership must have had an adverse affect on the value of the goodwill for the reasons expressed by him was valid. To some extent it was confirmed by the evidence of Walker. However, that depreciation was by no means to a nil value. 34. No doubt, in practical terms, there can be no pretence at precision as to the quantum of the depreciation, because of the unknown and intangible factors obviously involved. Some broad axe judgment was necessary. 35. It seems to me that the full one-quarter share of the February 1989 valuation opted for by the learned trial judge simply cannot be sustained. A discounted figure patently had to be arrived at to recognise the fragmentation of the former practice and its attendant adverse affects. 36. I would therefore allow the appeal and set aside the judgment entered as to the sum set out in it. Doing the best possible on the material available, I would discount the valuation figure of $148,795 by a factor of 25 per cent and then allow the respondent one-quarter of the resultant figure, namely $27,899. In my opinion that sum should be substituted for the original judgment figure, in addition to which interest ought to be allowed at the rate of 7 per cent per annum from 1 April 1989 to 17 August 1993. This gives rise to an "all up" figure of $34,517. The resultant total should be substituted for the judgment figure of $48,656 appealed against. The order for the costs of the action ought to stand. 37. I would hear counsel as to the question of the costs of this appeal.

CHRISTOPHER PAUL ASHLEY WALKER; RICHARD FRANK WILSON and DONALD ANTHONY WALLIS v. ANDREW JOHN MARTIN No. SCGRG 93/1598 Judgment No. 4355 Number of pages - 9 Partnership - dissolution and winding up (1993) 12 ACSR 549 [1993] SASC 4355 (23 December 1993)

At a glance

Court

Decision date

Before

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Judgment (10 paragraphs)

CHRISTOPHER PAUL ASHLEY WALKER; RICHARD FRANK WILSON and DONALD ANTHONY WALLIS v. ANDREW JOHN MARTIN No. SCGRG 93/1598 Judgment No. 4355 Number of pages - 9 Partnership - dissolution and winding up (1993) 12 ACSR 549 [1993] SASC 4355 (23 December 1993)

JUDGE2 MILLHOUSE J I too suggest that the appeal be dismissed. During March 1989