Fagenblat v Feingold Partners Pty Ltd [2001] VSC 479

5. The parties agree that the main issue in the proceeding is the correct value of the practice as at 30 June 2000. There was, however, much disagreement between the parties about some of the integers in calculating that value and of the method of their calculation. The defendant also counterclaims against Mr. Fagenblat an entitlement to recover against him certain liabilities which were incurred by the practice before 30 June 2000.

8. The legal structure of the practice changed in 1997. Until 1 July 1997, the legal practice had been conducted as a partnership of individuals in the usual way. In March 1997, approval was sought by the partners from the Legal Practice Board for the legal practice to be conducted thereafter through a corporate and trust structure. It appears that approval was granted, and with effect from 1 July 1997 a partnership of trusts was created by heads of agreement dated 16 June 1997 between Mark Fagenblat (in his capacity as trustee of the Mark Fagenblat Practice Family Trust), Simon Feingold (in his capacity as trustee of the Simon Feingold Practice Family Trust), Edmund Zelik Gurgiel (in his capacity as trustee of the Edmund Zelik Gurgiel Practice Family Trust), Ian Tuszynski (in his capacity as trustee of the Ian Tuszynski Practice Family Trust) and Philip Linacre (in his capacity as trustee of the Philip Linacre Practice Family Trust). The heads of agreement recorded that on 1 July 1997 each of the five individuals would resign as trustee of each of the respective practice family trusts and a new company, Feingold Partners Pty. Ltd., would be appointed to act as trustee of each of the respective family trusts. That appears to have occurred and the legal practice was thereafter conducted through the company Feingold Partners Pty. Ltd. in its separate capacity as trustee of each of the family trusts. The effect of this less usual arrangement was that Feingold Partners Pty. Ltd. was the trustee of five different trusts through which, by their respective earlier trustees, had formed a partnership to conduct a legal practice. The individuals performing the legal services were each connected with one of the practice family trusts and was a director in the new corporate trustee which conducted the legal practice.

11. The interest of each of the five practice family trusts in the partnership as at 1 July 1997 was not equal. The Fagenblat, Feingold and Gurgiel practice family trusts each enjoyed an equal interest in 80% of the practice, whilst the Tuszynski and Linacre practice family trusts each enjoyed a 10% interest in the practice. In this proceeding the parties accept that the structure did constitute a legal partnership of the trusts, and that so constituted the partnership through the single corporate trustee conducted a legal practice under the name of Feingold Partners.

14. Messrs Linacre and Tuszynski were referred to as partners in the letter of March 1997 to the Legal Practice Board but, it seems, they were never fully equity partners of the legal practice in their personal capacities. They, together with a Mr. Phillip Hamilton, came to the firm as part of a possible merger that did not eventuate as such. On 1 February 1996 Feingold Partners and Tuszynski, Hamilton, Linacre and Saks had joined the practise under the name Feingold Partners by an arrangement for a trial period of 12 months from 1 February 1996 during which time neither Tuszynski, Hamilton nor Linacre had equity in the practice. Mr. Hamilton was ultimately asked to leave the practice and did so around 31 January 1997. Messrs Tuszynski and Linacre, however, did acquire a "partnership" interest through the partnership of trusts effected by the heads of agreement in 1997.

17. During the latter part of 1997 and the first half of 1998 Mr. Fagenblat formed the view that Mr. Linacre was not performing as required and was eventually asked to retire from the partnership and the practice. Mr. Linacre agreed and left the practice as at 30 June 1998, leading to further changes to the interests held in the practice. Mr. Tuszynski's trust acquired the interest in the partnership held by Mr. Linacre's trust and acquired a further 5% from the interests held by the three other partners. This led, therefore, to there being four partnership interests of 25% each. That continued to be the position until June 2000.

20. The relations between Messrs Feingold and Fagenblat soured significantly in the period leading to June 2000. On 7 June 2000 Mark Fagenblat wrote a letter on behalf of the "Mark Fagenblat Practice Family Trust" ("the Fagenblat trust") giving notice to each of the other three individuals concerned, and also to each of their respective family trusts, and also to Feingold Partners Pty. Ltd., of the intention of the Fagenblat trust to retire from the partnership as from 30 June 2000. Although many fine questions of law might arise from this letter, its intent is clear and no point is taken as to the appropriateness of the method adopted. The letter went on to say that Mr. Fagenblat, the individual, also retired as a director of Feingold Partners Pty. Ltd., but would be pleased to become an employee of Feingold Partners Pty. Ltd. as from 1 July 2000 on terms and conditions to be agreed between the parties. On 14 June 2000 Mr. Fagenblat sent a memorandum to everyone in the practice informing them of his decision to retire from the partnership but indicating that he would remain with the firm on a full time basis as a senior consultant. By 29 June 2000 it had been agreed that the Fagenblat trust would retire from the partnership with effect from 30 June 2000 and thereafter would have no equity in the partnership or in Feingold Partners Pty. Ltd., but otherwise retained "an entitlement to be paid his [sic] share of the partnership as at 30 June 2000".

23. A meeting of the partners occurred on 29 June 2000 for the stated purpose of the further consideration of the retirement from the partnership of the Fagenblat trust and to consider the ongoing employment of Mr. Fagenblat with Feingold Partners Pty. Ltd. The minutes of the meeting record that it was a meeting of the trusts. It was, of course, also a meeting of individual lawyers for the purposes which the minutes record. The minutes were dated 30 June 2000 and record a number of matters including agreement being reached that the Fagenblat trust "had retired from the partnership effective from midnight on 30 June 2000 and thereafter will have no equity in the Partnership and/or Feingold Partners Pty. Ltd. but retaining an entitlement to be paid his share of the Partnership as at 30 June 2000". The minutes record also that the continuing partners were thereafter entitled "to use all of the assets of the Partnership" notwithstanding that the Fagenblat trust had not received its share as at 30 June 2000. There were a number of matters which were not yet agreed, however, including the value of the share of the partnership to which the Fagenblat trust was entitled as at 30 June 2000, and the method of valuation.

26. The main question raised by the plaintiff's claim is the value of the interest of the Fagenblat trust in the partnership. Each partner has an interest in all of the property, rights and interests of the partnership.[1] In this case those interests are set out in the partnership accounts for the year to 30 June 2000. Those accounts were prepared by Alexander & Spencer, who had been the accountants for the partnership for a number of years, and were sent to Mr. Feingold on 23 April 2001. The parties have proceeded in this case upon the basis that the figures appearing in the balance sheet are accurate unless some adjustment has been sought by either party. The balance sheet in the 2000 accounts themselves show that the net assets (tangible and intangible) of the partnership amounted to $1,916,890. Goodwill is shown in the balance sheet at $1,500,000. The parties agree that this is not the correct amount of goodwill for the purposes of calculating the value of the interest in the partnership of the Fagenblat trust, but disagree about what is the correct amount. The balance of the value of the partnership interests is substantially agreed subject to disputes concerning two adjustments. I shall deal first with the value, if any, for goodwill before considering the balance of the value.

29. In Federal Commissioner of Taxation v. Murry[2] it was said in the joint judgment:

"From the viewpoint of the proprietors of a business and subsequent purchasers, goodwill is an asset of the business because it is the valuable right or privilege to use the other assets of the business as a business to produce income. It is the right or privilege to make use of all that constitutes 'the attractive force which brings in custom'. Goodwill is correctly identified as property, therefore, because it is the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it. It is a right or privilege that is inseparable from the conduct of the business."[3]

"Goodwill has value because it can be bought and sold as part of a business and its loss or impairment can be compensated for by an action for damages. An existing business is the sine qua non of goodwill which cannot exist independently of the business which created and maintains it. The value of the goodwill of a business is therefore tied to the fortunes of the business. It varies with the earning capacity of the business and the value of the other identifiable assets and liabilities. It is seldom constant for other than short periods."[4]

It follows, therefore, that the subject matter for valuation is the goodwill of the business which was conducted by the partnership. In that regard it is important that a valuer pay careful attention to the specific actual business to be valued.

36. An accepted method for valuing the goodwill of a legal practice is that of capitalising what was referred to as either the future maintainable earnings or the future maintainable profits of the business. The plaintiff relied upon the evidence of two experts in support of calculations of the future maintainable earnings. The defendant took issue with that evidence in a number of respects principally relating to (a) the facts and circumstances which the valuers called for the plaintiff had taken into account in determining the historic earnings upon which to base the calculation of future maintainable earnings and (b) the rate of capitalisation which the valuers adopted. One area of dispute concerned the extent to which it was either permissible or proper to take into account facts subsequent to the valuation date in order to determine the value as at the date of valuation.

39. The law has long been that regard may be had to events after the date for valuation "in so far as they illuminate the value of the thing as at" the date for valuation.[5] It is equally plain, and correctly conceded by Mr. Glick S.C., that not every event subsequent to the valuation date may be taken into account in the valuation. In each case the Court has to consider "whether a subsequent event truly indicates or reflects"[6] the value at the date for valuation. The defendant contends that the valuer should have taken into account either as fact that Mr. Fagenblat would leave the firm, or as probability that he would do so. The defendant also contends that the valuer should also have considered either as fact or as probability that the departure by Mr. Fagenblat from the firm would result in a number of the clients transferring their business from the partnership with the consequence that the future maintainable earnings might substantially have been reduced. The plaintiff contends in partial response to that submission that such risks are in part taken into account by the adoption of an appropriate capitalisation rate.

42. The task of valuation of the goodwill of a professional practice is complex and is peculiarly within the domain of experts. The identification of the matters which will, or may, bear upon so elusive a concept as the valuation of goodwill requires detailed investigation by a person who knows how and what to investigate. It is imperative that the expert called upon to determine the, or a, value of a professional practice "understand[s] the business fully"[7]. That necessarily presupposes a degree of expertise and experience on the part of the valuer to know what to look for as well as how to evaluate what is found. These are tasks which are dependent upon expertise based upon experience and training; they are not suited to the mere intuition of a court. The foundations in fact and judgment of a valuation of professional partnerships are helpfully explained in the very useful text by W. Lonergan[8], which all of the experts who gave evidence before me referred to as authoritative. An important message which emerges from this text is the need for a valuer to have specific regard to the particular practice in question, as a few brief examples will explain. No two practices are the same and, by the way of examples, the physical location or the identity or personality of the partners, are but some factual circumstances that may impact upon the value of a particular professional practice. Whether physical location will impact upon value, and if so how and to what extent, are matters that cannot be known in abstract: they depend fundamentally and inextricably upon the combination of the expert's knowledge and judgment.

45. In this proceeding the expert who was best placed to form a reliable view about the goodwill of the practice was Mr. Borsky. It is alleged against him, however, that his personal relationship with the plaintiff is such that his expert evidence is unreliable and that it should not be relied upon by me. In an earlier ruling which I gave during the course of the proceedings[9], I explained why I did not accept that conclusion en bloc. However, the ruling left open for argument submissions that the relationship should be taken into account when I considered the weight to give to the evidence of Mr. Borsky or when evaluating specific judgments which he had made and which need to be made as an impartial expert.

48. Mr. Borsky explained how he arrived at his valuation of the goodwill of the legal practice, and the methodology which he employed to do so. His methodology was designed to determine the goodwill of the legal practice as at 30 June 2000 by reference to a calculation of future maintainable earnings of the legal practice. I accept both his evidence and that of Mr. Sincock (the other expert called by the plaintiff) that the methodology adopted by Mr. Borsky is an acceptable method for valuing the goodwill by reference to a calculation of the practice's future maintainable earnings. That, however, does not end the enquiry, because it was contended that what Mr. Borsky took into account, and his adoption of a capitalisation rate of 30%, were both wrong and were corrupted by the relationship he had with the plaintiff, namely that the plaintiff's wife (a beneficiary under the trust in the name of which the plaintiff sued) was Mr. Borsky's sister who has embarrassing debts that need to be paid.

51. The principal fact said to have been omitted by Mr. Borsky in his valuation was that Mr. Fagenblat, as at 30 June 2000, was at least likely, if not probable or certain, to leave the firm and that if Mr. Borsky had taken that into account there would have been a reduction to the future maintainable earnings of the legal firm. This fact was said to bear upon at least two interrelated matters which were relevant to the professional judgments which Mr. Borsky was called upon to make: namely, whether the average profit for the preceding years was a reliable guide for the future, and whether a capitalisation rate of 30% was appropriate. The matters are interrelated because the exercise of professional judgment in accepting a higher than appropriate average historical earnings figure might in appropriate circumstances (as was the evidence before me) lead to the adoption of a higher capitalisation rate.

54. In fact, Mr. Borsky did take into account whether Mr. Fagenblat would continue to have an involvement in the firm after ceasing to be a partner from 30 June 2000. One of the basic assumptions that Mr. Borsky made in determining the goodwill of the legal practice was that Mr. Fagenblat would continue to remain in the firm as a consultant employee. That, as Mr. Borsky said in cross-examination, was more than an assumption he had made, it was from his point of view the status quo as at 30 June 2000. The criticism of Mr. Borsky cannot be that he failed to consider Mr. Fagenblat's continued position as relevant to the valuation of the goodwill (since he regarded the topic as relevant and took into account a fact relating to it), but rather, that his working basis was not that Mr. Fagenblat would, or did, leave the practice.

57. The actual departure of Mr. Fagenblat from the firm overshadows the contentions in this proceeding. The possibility of a departure is undoubtedly a factor which the experts all agreed should be taken into account in the valuation of the legal practice as at 30 June 2000. The more complex, and more debated, issue was whether it was appropriate for a valuer valuing the legal practice as at 30 June 2000 to take into account the actual subsequent departure or its probability. One reason against taking into account the subsequent event might be that the subsequent event (the actual departure) might be due to another subsequent event (in this case perhaps a subsequent sacking or an inability to reach agreement) that might not reasonably be taken into account as a reliable contingency which should properly be considered as bearing upon the value of the enterprise as at the earlier date. In part the issue is whether a valuer must take into account the possibility of departure as at any particular date as against a departure which actually occurs after that date. In part, however, the issue is whether the actual departure in this case should be seen as an event occurring after the valuation date by reason of events occurring after that date and which may fairly be said not to reflect the value of the practice as at the earlier date. A valuation which takes into account the subsequent actual departure of Mr. Fagenblat may have the effect of valuing a fundamentally different legal practice from that which the parties may have agreed to value prior to 30 June 2000.

60. Mr. Borsky's valuation proceeds upon the basis that Mr. Fagenblat would be remaining in the legal practice as an employee. I am not satisfied that Mr. Borsky was wrong in assuming that Mr. Fagenblat would, as at 30 June 2000, be remaining in the legal practice. It was the defendant who advanced the contention that Mr. Borsky was in error in doing so, and in my view it has not satisfied me that as at 30 June 2000, the probability was that Mr. Fagenblat would leave. On the contrary, the evidence which I have seen leads me to conclude that as at 30 June 2000, the probability was that Mr. Fagenblat would remain in the legal practice as a consultant, although that was not certain. It is beyond doubt that by 30 June 2000, the personal relations between Mr. Fagenblat and Mr. Feingold had deteriorated badly, and possibly beyond repair, but that relationship had not deteriorated to such a point that Mr. Fagenblat could not continue working within the firm or that he did not feel that he could discharge the obligations which he had and felt to the other partners, to the practice as a whole, to the clients who came to him at the practice, to the staff, and to his own self-esteem. There is, in my view much evidence to support the conclusion that as at 30 June 2000 the probability was that Mark Fagenblat would continue in the firm for a least a sufficient period of time as would allow an orderly departure by him in the future in such a way as would preserve to the firm the entirety of its goodwill. Mr. Fagenblat had such strong personal feelings against Mr. Feingold that Mr. Fagenblat felt that he should procure the Fagenblat trust to resign from the partnership. He did so, however, in circumstances which sought to minimise disruption to the firm, clients and staff, and which were objectively calculated to ensure the firm's continued viability and reputation. Such an attitude might be thought to be little more than common sense and professional self-preservation; after all, Mr. Fagenblat would stand to gain nothing from, and had much to lose by, an immediate and disruptive departure from a firm which he had helped to build up during a critical time of his professional career.

63. Mr. Fagenblat's letter of resignation expressed what I accept to have been an honest intention, and an achievable goal, of continuing with the firm as a consultant employee. On 14 June 2000 he wrote a memorandum to everyone in the firm to assure everyone that he would remain "with the firm on a full time basis in the position of Senior Consultant" retaining the position as head of the litigation department and continuing his legal education activities. This memorandum was sent two weeks after the letter of resignation. It was sent one day after a meeting of the partners which was held to discuss the basis of the resignation and to discuss the suggestion of continuing employment to Mr. Fagenblat. The memorandum was written on the same day as a further meeting of the directors of Feingold Partners Pty. Ltd. at which Messrs. Feingold, Gurgiel and Tuszynski had put a proposal for the continuing employment of Mr. Fagenblat for at least six months on a trial basis. This was confirmed in a memorandum on 20 June 2000, and negotiations between the individuals continued until August. Concern had been expressed about the need for Mr. Fagenblat to give a restraint of trade in the event that he left the practice after payment of goodwill if clients followed him, and, on 22 June 2000, Mr. Fagenblat wrote to the others expressing his willingness to give a restraint albeit limited, in my view quite properly, to the extent necessary to compensate the remaining partners for any loss occasioned by clients ceasing to use the legal practice and following Mr. Fagenblat. That is to say, that Mr. Fagenblat was willing to compensate the remaining partners "in respect of any client of the practice that might follow" him if he were to leave. The partners were ultimately unable to reach agreement and it was the remaining partners who, by memorandum dated 14 August 2000, reached the conclusion that Mr. Fagenblat's engagement by the firm "be terminated at the earliest opportunity" and thereupon "invite[d]" Mr. Fagenblat to nominate an "early date" to cease employment and vacate the office. In short, Mr. Fagenblat was dismissed from his employment by his employers rather than having left of his own accord. Mr. Feingold's refusal in cross examination to accept that Mr. Fagenblat had been sacked was surprising. In my view it would be wrong for the purposes of a valuation of the practice as at 30 June 2000 to assume that Mr. Fagenblat would, or even probably would, be dismissed from an employment which he was eager to keep.

66. The mere fact of leaving a practice need not have a negative impact upon its goodwill. So much was clear from the direct oral evidence of Mr. Lipson who was called by the defendant to give expert evidence on its behalf. He gave as but one example an actual case he had had of a partner leaving a legal practice to go to Israel after having given either 6 or 12 months notice. Mr. Lipson described the effect of such a smooth transition as being the transferring of the departing partner's files, clients, contacts and marketing from himself to the existing partners or to the incoming potential partners. The defendant has not satisfied me that such a process was so unachievable as at 30 June 2000 that the valuation of the legal practice as at that date should be made upon the assumption that Mr. Fagenblat would leave in such circumstances as would bring with it a wake of disruption, loss of income and destruction to the goodwill of the firm. I would have thought that the reasonable self-interest of professional men and women in the law would itself tend against the self-infliction of harm that the defendant maintains must necessarily have been taken into account by a valuer. In any event, the basis upon which Mr. Borsky made his calculation was that Mr. Fagenblat would continue in the firm. The appropriateness of that assumption was a matter within the special factual knowledge of Mr. Borsky because, amongst other things, he had been involved in the negotiations between the individuals towards their achieving an agreement. The parties had acted, to his knowledge, upon the basis that Mr. Fagenblat would continue in the practice, or, at least, that the parties had entered into bona fide negotiations in which Mr. Borsky participated to achieve that result. Subsequent events may, of course, be taken into account when they truly reflect upon the earlier position, but hindsight is not always beneficial and does not always bring enlightenment. An automatic substitution of what did happen with what might have happened could seriously distort the proper assessment of a situation. In this case I do not think the substitution of Mr. Fagenblat's actual departure with a hypothetical possibility of departure is either necessary or appropriate. More specifically, I do not consider that the basis upon which Mr. Borsky proceeded with his valuation to have been in error. Nor do I accept that his relationship with the plaintiff has infected the objective reasonableness of the assumptions made by Mr. Borsky in relation to Mr. Fagenblat's future involvement in the legal practice. Mr. Borsky struck me as a diligent professional man conscious of his responsibilities to the Court. In any event, the matters he has taken into account seem to me to be objectively supported.

69. It follows that I accept Mr. Borsky's evidence that it is appropriate to determine the future maintainable earnings of the legal practice as at 30 June 2000 by reference to the assumption that Mr. Fagenblat would be continuing in the firm. His approach of averaging the preceding three years' profits from the firm is an acceptable means of determining the historical profits which "must be taken into account"[10]. These profits "must be adjusted for non-recurring items, and include only the operating results of current activities"[11]. This Mr. Borsky has done by making a number of adjustments to the historical profits on a year by year basis. Each of the adjustments that Mr. Borsky made was the subject of some evidence and each is of a kind which in my view falls within the permissible range of matters within the judgment of an expert valuer. The amounts themselves are independently verifiable. One of the adjustments is a deduction for notional interest on the partners' working capital. This deduction was made for the purpose of making the calculation of the future maintainable profits on an "ungeared" model; that is, to ensure that the value of the goodwill once calculated would not be distorted by funding decisions which had been made to conduct the practice. The necessity of making gearing adjustments to determine the value of an entity is clearly established in the relevant literature as something which may be done by a valuer[12]. In this case the adjustments have the effect of producing a lower adjusted average profit before applying the capitalisation multiplier. The adoption of a notional interest rate of 10% was not explored extensively in cross-examination but does not seem unreasonable for a valuer to adopt.

72. The next contentious element in Mr. Borsky's calculation of the firm's goodwill was the capitalisation rate he used. He adopted a figure of 30% because it had been used by the firm in the past for other calculations. The criticism of that rate was that it was inappropriate when calculating the goodwill upon the departure of a partner. That may be true as a matter of general proposition but its strength will depend upon the facts of each particular case. In this case the 30% capitalisation rate was adopted by Mr. Borsky upon the assumption of a continuation by Mr. Fagenblat in the firm. On that basis I do not consider its adoption to be an error in his judgment and am confirmed in that view by the evidence of Mr. Sincock that a capitalisation rate of 30% in the circumstances of a departing partner was appropriate. Although Mr. Sincock did not undertake a valuation himself, he did know that the valuation in question concerned the amount to be paid to a departing partner. I am confident that he would have said that the capitalisation rate used by the firm when partners joined a practice was not appropriate when leaving it, if he had thought so, and he was not challenged on this matter. Accordingly, I accept the value of the goodwill for the legal practice calculated by Mr. Borsky and accept that the entitlement of the Fagenblat trust for the goodwill component of the legal practice is $245,602.00. As will appear below, there is no need to recalculate these figures in light of other adjustments because I do not consider those other adjustments to be warranted.

75. The next issue to consider is the balance of the entitlement of the Fagenblat trust to which I have previously referred. This was described by Mr. Borsky as the loan account and was rounded up by him to $130,000. In fact the figure was calculated at $129,797 but it was contended for Mr. Fagenblat that it should be increased by two adjustments. It was contended for Mr. Fagenblat that some amounts for work in progress which had been written off should be written back into the accounts and that some doubtful debts which had been provided for should be reduced. The arithmetic effect of them was explained by Mr. Sincock in his supplementary witness statement. The underlying facts were described by Mr. Fagenblat. Whether items in accounts should be written off are matters of judgment for those preparing the accounts and who are responsible for making decisions about the writing off of debts and the proper provision to be made for doubtful debts. Evidence about each was given and I do not regard the writing off of either amount or the provisions which have been made as being beyond the proper bounds of judgment by those who made the relevant decisions. Accordingly I do not accept that the adjustment should be made and conclude that the value for the assets other than the goodwill remains at $129,797.

78. The counterclaim seeks to recover from Mr. Fagenblat certain costs incurred by the partners during the time that the Fagenblat trust was a partner, that is, for fees and expenses incurred before 30 June 2001. It is said against Mr. Fagenblat that he incurred unauthorised expenses in relation to two matters, namely, the Spalla and the Grossberg matters. The Spalla matter involved the incurring of counsels' fees, and interests and costs in the order of $152,404. The Grossberg matter involved a claim for unauthorised work done for Mr. Grossberg in the sum of $33,373.86, less an allowance of some $10,723.50 for what was referred to as the Soho Lemon Farm work. In my view neither claim has been made out.

81. The counterclaim for the defendant was put in different ways. One way in which it was put was that there was a policy of the firm that counsels' fees would not be incurred without having first received money up front from the client. The evidence before me is that this was, at best, a general guideline of a desirable position to which there were numerous and constant exceptions, and that on each occasion it was a matter well within the discretion of each partner to decide whether to incur expenses without first having got in funds from the clients. It was also maintained for the defendant that Mr. Fagenblat's conduct in incurring the expenses was a breach of the fiduciary duty, which he owed to his partners[13]. There has, in my view, been no breach of fiduciary duty shown in respect of either of the Spalla expenses or the Grossberg expenses. The expenses were incurred in Mr. Fagenblat's honest endeavours to conduct the practice for the mutual profit of all of the partners. There was no preferring of his own benefit to that of the firm and, in my view, he acted reasonably and within the bounds of his discretion as a solicitor in a legal firm and within the duties he owed to the partners in a legal practice.

84. In the case of the Spalla expenses, Mr. Spalla had been told that the firm required money to be paid up front before it could act on his behalf. Mr. Spalla had given assurances that money would be paid and did pay substantial amounts of money over a period of time. A letter was authorised by Mr. Fagenblat to be sent to Mr. Hayes Q.C., acknowledging that the firm would be liable for counsels' fees. This, in hindsight, may have been an error of judgment. If it was an error of judgment, however, it was an error of judgment which favoured the interests of a client in need of legal services over the interests of a firm of legal practitioners engaged in a profession or calling, albeit for profit. In the event, the total sums paid by Mr. Spalla were not sufficient to meet the total costs for counsels' fees incurred over a trial which extended beyond what had been estimated. I am not persuaded that what Mr. Fagenblat did was an error and I am not persuaded that the incurring of counsels' fees amounted to any breach of agreement with the other partners or a breach of duty owed to them.

87. The facts in relation to the Grossberg claims are, in my view, even weaker. The evidence was that Mr. Grossberg was a slow, but proven, payer of the firm. I accept that Mr. Feingold, in Mr. Fagenblat's presence, at the end of 1999 informed Mr. Grossberg that the firm required Mr. Grossberg to pay outstanding fees and to pay up front before future work would be undertaken for him. There was, however, no agreement between the partners of the firm that bound Mr. Fagenblat not to exercise his own judgment, as and when required, in relation to whether the firm could or should continue to work for Mr. Grossberg notwithstanding the strong terms in which Mr. Feingold had spoken to Mr. Grossberg. The fact was that Mr. Grossberg had been a valuable client of the firm over the years. The firm, including Mr. Feingold, wished to continue acting for Mr. Grossberg. The complaint was that Mr. Grossberg paid his fees late not that he was otherwise a client whose work and fees were not wanted.

90. Accordingly, I find for the plaintiff and order that the defendant pay $375,399.00 to the plaintiff. I will hear counsel on the question of costs but otherwise order costs in favour of the plaintiff.

[1] Partnership Act 1958 (Vic.), s.24; Keith L. Fletcher, Higgins & Fletcher The Law of Partnership in Australia and New Zealand (8th ed., 2001) pp.130, 143.

[2] (1998) 193 C.L.R. 604

[5] Kizbeau Pty. Ltd. v. W.G. & B. Pty. Ltd. [1995] HCA 4; (1995) 184 CLR 281 at 291, 294-6; The Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd. v. Pontypridd Waterworks Co. [1903] AC 426 at 432-3; VACC Insurance Co. v. Lekkas [1999] VSCA 31; [1999] 2 VR 529, 535-6; Target Pty. Ltd. v. Moloney [2000] VSCA 124 (unreported, Court of Appeal, 24 July 2000) [28]; M.T. Associates Pty. Ltd. v. Aqua-Max Pty. Ltd. (No. 2) [2000] VSC 78 (unreported, Gillard, J., 14 March 2000) [211]-[221].

[7] Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (3rd ed., 1998) 355

[9] Fagenblat v. Feingold Partners Pty. Ltd. [2001] VSC 454 (unreported, Pagone, J., 27 November 2001)

[13] Birtchnell v The Equity Trustees, Executors and Agency Co. Ltd [1929] HCA 24; (1929) 42 CLR 384 at 407-8; Johnson v Snaddon [2001] VSCA 91 (unreported, Ormiston, Batt and Buchanan, JJA., 14 June 2001)