Fagenblat v FGT Custodians Pty Ltd [2004] VSC 196

5. This hearing has been concerned with the retrial ordered by the Court of Appeal of "the issue as to how much, if anything, the plaintiff is entitled to be paid in respect of the value of his interest in the goodwill of the partnership as at 30 June 2000, as raised in the amended statement of claim." The issue was limited to the value of the plaintiff's interest in the goodwill of the partnership because the parties had previously agreed that Mr Fagenblat's share in the assets of the partnership, apart from the goodwill, was $129,797.

8. The circumstances of the plaintiff leaving the practice are set out in detail in the judgments of Pagone J[1] and of the Court of Appeal[2] and it is unnecessary to repeat them. After a trial on a number of issues, on 17 December 2001 Pagone J gave judgment in favour of Mr Fagenblat in the sum of $375,399, together with interest, for the value of his 25% interest in the firm as at 30 June 2000. That judgment, other than the judgment dismissing the counterclaim, was set aside by the Court of Appeal by order made on 15 April 2003. The leading judgment was delivered by Ormiston JA, with whom Chernov and Eames JJA agreed.

11. The point on which the appeal turned was the trial judge's erroneous reliance on the assumption of the plaintiff's main expert witness, Mr Thomas Borsky, who happened also to be his brother-in-law and a member of the firm of accountants which had acted for the practice for many years, that Mr Fagenblat was likely to remain in the employment of the partnership for some time, notwithstanding that he had in fact left that employment on 31 August 2000. Ormiston JA said in respect of this point:

"In my opinion both Mr Borsky and the learned judge were in error in concluding that the respondent would remain with the firm as a consultant employee for any relevantly significant length of time, so that the valuation relied upon and given effect to by his Honour was likewise vitiated. What was in issue, of course, was whether it was likely that the respondent would remain as an employee into the indefinite future, for it could certainly be inferred that if he had departed, or if it were shown that it was probable that he would depart, relatively shortly thereafter without being subject to a covenant restraining him from dealing with any of the firm's existing clients, that must have had a bearing on the valuation, albeit that that had to be calculated as at 30 June 2000. On a proper examination of the evidence I would conclude that there was, at that date, no established likelihood that he would remain with the firm as an employee solicitor for more than a few weeks. It is not a conclusion dependent on credibility, for a question of this kind is one primarily resolved by the drawing of inferences, not the acceptance of one witness's testimony or another's, about which there were very few findings. This is a conclusion I would also reach having regard only to the evidence up to that date, although, if necessary, I would hold that one might have regard to the events over the succeeding two months, for the purpose solely of determining what was the likelihood of the respondent's continued employment as at 30 June, to the extent that that evidence reflected on both the actual relationship between the parties and their intentions as at that date. ... For myself I would prefer to rest my conclusion on an objective consideration of the matters which took place up to 30 June. I would use the later materials only in this way. If it be suggested that what had occurred was merely hard bargaining and that suddenly there would be light at the end of the tunnel, with a happy outcome and with all parties satisfied as to the terms for extended employment of Mr Fagenblat, then one could have used the evidence of the later events to show that conclusions of that kind were ill-informed as to that negotiating position. It is more than clear, however, that the attitude of the remaining partners here remained equally tough, equally intransigent at least in the case of Mr Feingold, and the negotiations continued to their end substantially in the way that they had begun and continued through to 30 June. There was indeed no real probability that the respondent would be employed as a solicitor for any substantial length of time after 30 June 2000."[3]

15. Having decided that the figures relied upon by the trial Judge could not otherwise be justified, Ormiston JA considered whether a substituted judgment could be given in favour of Mr Fagenblat, and determined that it could not. His Honour said that the difficulty arose "entirely from the unsatisfactory nature of the expert evidence." This was because the plaintiff's valuers, Mr Borsky and Mr Geoffrey Sincock, did not put forward alternative calculations or valuations based on an assumption other than that Mr Fagenblat would remain with the practice as a consultant/employee for some time. His Honour said that:

"Except in general terms and in the course of cross-examination, they did not consider what value should be placed on the respondent's share on the basis that he was at liberty to set up practice on his own and the partnership was at risk of losing some proportion of its business thereby."[4]

On the other hand, the evidence of the defendant's valuer, Mr Mark Lipson, was the subject of a number of criticisms by Ormiston JA, including that:

"In the first place he made the diametrically opposite assumption, namely, that not only was the respondent ceasing to be a partner as at 30 June, but also that he was not to be employed at all. In the end I do not believe this criticism to be fundamental, certainly in the light of the conclusion I have expressed above, but the witness seemed to be surprised at discovering the possibility of some future connection of the respondent and it is not clear what conclusion he would have reached ultimately on that basis."[5]

21. In the hearing before me, each of the parties accordingly called evidence from a new expert valuer. The parties provided the expert valuers with a set of agreed facts which stated as follows:

"1. Mr Fagenblat retired from the partnership on 30 June 2000. 2. There was no real probability that Mr Fagenblat would be employed as a solicitor for any substantial length of time after 30 June 2000 (paragraph 84). 3. Mr Fagenblat was free to set up in competition with the old practice and to undertake legal work on behalf of clients of the old practice. 4. Each of the remaining partners was free to leave the partnership and to set up in competition with the old practice and to undertake legal work on behalf of clients of the old practice. 5. Upon leaving his employment with the practice on 31 August 2000, Mr Fagenblat set up his own practice taking with him (without complaint) a number of the clients whom he had served whilst a partner in the old practice. In his new practice, Mr Fagenblat wrote a considerable volume of business with his old clients, in the order of $500,000 in the first year, which was estimated to represent one-sixth to one-fifth of the partnership's turnover in the previous year (paragraph 51). The fees generated by former clients who specifically authorised the practice to pass their files, documents and matters to Mr Fagenblat averaged fees during the years ending 30th June, 1999 and 30th June, 2000 in the average sum of approximately $330,000 per annum. These average fees of $330,000 per annum represented about 10% of the average fees of the practice during the years ending 30th June, 1999 and 30th June, 2000. 6. Mr Fagenblat's share of the assets of the partnership, other than goodwill, was $129,797 (paragraph 52)."

It was said that the statement of agreed facts was to be read in conjunction with the whole of the judgment of the Court of Appeal. The references to paragraph numbers in the statement were to that judgment.

26. The defendant also called as witnesses, Mr Feingold and Mr Tuszynski. Mr Feingold said in his witness statement that as at June 2000 he held the view, which he expressed to his partners, that litigation in the context of the practice "may not be commercially viable" and, unless extremely well managed, might amount to a financial burden. He said that he was not alone in this view. He referred to the fact that on 16 February 2000 Mr Gurgiel had suggested to his partners that the practice should cease to do litigation altogether unless it could be done profitably. Mr Feingold then exhibited some emails between Mr Fagenblat and his partners following Mr Gurgiel's suggestion. In Mr Fagenblat's email dated 17 February 2000 it was claimed that in the year ended 30 June 1999 out of total billings of $3,126,027, the litigation department's billings were $902,830 (or 28.9%) and in the seven months to 31 January 2000, out of total billings of $1,870,880, the litigation department's billings were $532,552 (or 28.5%) It was also said by Mr Fagenblat that profitability figures, which might not be reliable, showed that litigation had "the highest dollar profit and second lower expense ratio". In Mr Tuszynski's responding email dated 18 February 2000 he said:

"As I stated litigation is an integral part of our practice and a worthwhile service for our commercial clients but clearly it needs to be viable."

30. Mr Feingold further said in his witness statement that when Mr Fagenblat ceased to be employed on 30 August 2000, he prepared to reduce the size of the litigation department within the practice because he believed that Mr Fagenblat would take much of the litigation work with him and that none of the remaining partners had the skills, or was prepared to be responsible, for building up the litigation department or felt confident of replacing the expertise or the clients of Mr Fagenblat. Mr Feingold said that, as anticipated, when Mr Fagenblat left employment with the practice, "he took with him a substantial portion of the fee earning clients and work". Mr Feingold said that, accordingly, he and Messrs Gurgiel and Tuszynski agreed to complete the litigation that remained with the assistance of junior solicitors and a locum solicitor, and that they resolved:

"not to encourage any further litigation work in the practice, but to do only what was reasonably necessary to provide a generally limited litigation service to the ongoing commercial clients."

The remaining partners also decided that they would "endeavour to build up the commercial and property side of the practice, but without offering a specialist litigation service". Mr Feingold said that, as expected, over time the employed solicitors in the litigation department left or were made redundant, but that fixed costs could not be reduced in the short term.

35. A rather different picture emerged, however, during cross-examination of Mr Feingold. He agreed that what in fact happened to the litigation department was all brought about by a management decision by the continuing partners and that it was open to them to have taken a different decision about litigation. Mr Feingold agreed that Mr Tuszynski would have preferred that there be more litigation carried on and said that the eventual decision was a compromise. Mr Feingold also agreed that, in addition to the matters he had mentioned, in February 2001 Mr Barry Farrugia, an experienced solicitor, was employed by the practice and that he continued to do the litigation work until the continuing partners of Feingold Partners joined Home Wilkinson Lowry on 1 August 2001.

38. Moreover, Mr Feingold was taken to a letter dated 27 July 2000 which he had written to Mr Borsky commenting on his analysis of what might happen if Mr Fagenblat left. Mr Feingold agreed that it was his view at that time that "it would be beneficial to the firm that particular clients went with Mark or went elsewhere." He also agreed that at that time he did not know what effect Mr Fagenblat's departure might have in fees and that he felt that Mr Borsky's estimate might be overstated. Indeed, in his letter Mr Feingold had said to Mr Borsky:

"9. Your analysis of the financial position if Mark left is in my view superficial. Mark's departure may not result in the loss of the fees of the magnitude that you mention. We would, it seems, need to restructure the litigation department and probably scale it down if there was a mass departure of clients. I suspect however that we would not lose all the matters which Mark is presently working on and that given the right circumstances and a decision by the directors to maintain an active litigation section it could be built up to cover at least some of the fees lost. On the other hand if we scaled down the section:- 9.1 The direct savings would be substantially more than the amount that you mention. 9.2 The indirect resources utilised might be better employed elsewhere to generate other fees. ... What concerns me most about your comment is that you assume categorically that we will have a lower fee base ..."

42. Further, Mr Feingold agreed in cross-examination that as at both 1 July 2000 and 1 September 2000 he believed that the business of Feingold Partners was a viable business. He said that:

"I was sure that if Fagenblat was going to leave that it would suffer some downturn in its fee income and I was hopeful that we might be able to recover from it by generating fees in other areas. That's why we admitted partners in other areas."

46. Mr Tuszynski's evidence basically corroborated relevant parts of Mr Feingold's evidence.

50. Although there was no dispute between the parties about the nature of goodwill, it is appropriate to refer by way of introduction to the authoritative discussion by the High Court of Australia of this concept. In Federal Commissioner of Taxation v Murry[6], Gaudron, McHugh, Gummow and Hayne JJ in thier joint judgment referred to the statement by Dawson J in Hepples v Federal Commissioner of Taxation[7] that "goodwill is notoriously difficult to define" and continued:

"One reason for this difficulty is that goodwill is really a quality or attribute derived from other assets of the business (cf Slater, 'The Nature of Goodwill', Australian Tax Review, vol 24 (1995) 31). Its existence depends upon proof that the business generates and is likely to continue to generate earnings from the use of the identifiable assets, locations, people, efficiencies, systems, processes and techniques of the business. As Dixon CJ, Williams, Fullagar and Kitto JJ pointed out in Box v Federal Commissioner of Taxation [1952] HCA 61; (1952) 86 CLR 387 at 397, '[g]oodwill includes whatever adds value to a business, and different businesses derive their value from different considerations'."

"One of the most cited definitions of goodwill for legal purposes in the Anglo-Australian legal world is found in the speech of Lord Lindley in Inland Revenue Commissioners v Muller & Co's Margarine Ltd ([1901] AC 217 at 235) where his Lordship said: 'Goodwill regarded as property has no meaning except in connection with some trade, business, or calling. In that connection I understand the word to include whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers, and agreed absence from competition, or any of these things, and there may be others which do not occur to me. In this wide sense, goodwill is inseparable from the business to which it adds value, and, in my opinion, exists where the business is carried on. Such business may be carried on in one place or country or in several, and if in several there may be several businesses, each having a goodwill of its own.' Lord Macnaghten gave another much cited definition of goodwill in the same case. His Lordship said ([1901] AC 217 at 223-234): 'What is goodwill? It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old-established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade'."

57. The plaintiff's only witness in the hearing before me was Mr Paul Lom of DMR Corporate Pty Ltd, Chartered Accountants. Mr Lom was a chartered accountant with 21 years' experience with KPMG and one of its antecedent firms Touche Ross & Co, including as a partner since 1989. Mr Lom had worked for these firms in Australia, the United States of America, the United Kingdom and the Czech Republic predominantly in audit but also involving the areas of forensic accounting, valuations, prospectus preparation, financial analysis, due diligence reviews, expert reports and investigations. Mr Lom had in excess of 6 years' experience with DMR Corporate Pty Ltd specialising in forensic accounting, investigations, valuations and expert reports.

60. Mr Lom prepared a report which adopted a capitalisation of future maintainable profits approach. He rejected the use of earnings before interest and tax ("EBIT") and decided to capitalise the earnings after interest. He concluded that "the maintainable profit as at 30 June 2000 was $450,000, or $112,500 per partner". He had arrived at this figure by adjusting the actual historical profits of Feingold Partners for the financial years ending 30 June 1998, 1999 and 2000 and then averaging the adjusted profits on a simple average basis and a weighted average basis, which he preferred. Before referring to his figure of $450,000 Mr Lom said in his report:

" ... the adjusted profit for the year ended 30 June 2000 is $451,174, the average profit for the past three years is $412,084 and the weighted average profit is $464,435."

The figure of $450,000 was, therefore, a rounding down of the weighted average profit figure. Mr Lom said that he did this "to be on the conservative side".

65. Mr Lom then considered the appropriate capitalisation rate. He concluded that a higher capitalisation rate, than the 30% at which new partners had joined the firm of Feingold Partners, was appropriate in the case of Mr Fagenblat and decided that it should be 45% to 50%. This meant that, in his opinion, the value of Mr Fagenblat's share of the goodwill of Feingold Partners as at 30 June 2000 was in the range of $225,000 to $250,000 or a mid-point of $237,500.

68. The defendant's expert witness was Mr Jon Kenfield, a forensic accountant practising under his own name. Mr Kenfield was a chartered accountant with 24 years' experience in England, Africa and Australia, including 15 years' specialising in forensic accounting. He had formerly been the partner in charge of forensic accounting at Spencer & Co, a principal in Ernst & Young's Litigation Consulting Group and a director of Deloitte Touche Tohmatsu's Legal Support Division in Melbourne and Perth.

71. Mr Kenfield's report set out how he had valued Mr Fagenblat's share of the partnership. He also adopted a capitalisation of future maintainable profits approach, but used EBIT figures. He averaged the profits of the previous three years after adjustments and came up with the figure of $271,097. Mr Kenfield said that he then:

"... adjusted the result to take into account the probable (net) financial effect on the practice of Fagenblat's departure with a substantial number and value of clients (per the Agreed Facts)."

For the purposes of this calculation, Mr Kenfield started with the figure of $415,000:

"being the mid-point between the $500,000 billed by Fagenblat in the following year and the $330,000 of clients who formally requested their files be transferred to Fagenblat (Agreed Facts, item 5)."

He said that he adopted this approach because $330,000 was the verified minimum of clients transferred, while the $500,000 might have included extra work or charges in excess of what was previously applicable to these clients. He emphasised that he had not assumed that because Mr Fagenblat billed these clients $500,000 in 2001, that this represented the actual value lost to the practice as at 30 June 2000. He then calculated a "conservative notional salary cost" for Mr Fagenblat and one staff member to service the lost clients and deducted this saving in costs of $228,000 ($120,000 + $70,000 + 20% on-costs on both). Mr Kenfield deducted the lost net profit of $187,000 ($415,000 - $228,000) from the three year profit average of $271,097 to achieve his adjusted future maintainable profits figure of $84,097.

78. Mr Kenfield used a capitalisation rate of 30%. In his report he said that he had "accepted as reasonable the 30% pre-tax capitalisation rate adopted and approved by the previous three accounting experts". This gave him a total practice value, including goodwill, of $280,322 or $70,081 per partner. Therefore, it was Mr Kenfield's opinion that, as Mr Fagenblat's "entire entitlement to a 25% share of the value of the practice, including goodwill (if any)" was less than the agreed value of the assets of the partnership, other than goodwill, as at 30 June 2000, there was no positive goodwill in the practice at that date.

81. The main point of disagreement between the two experts, and the critical issue in the case, in my opinion, was whether the potential risk to the partnership's earnings in the future as a result of Mr Fagenblat not being employed as a solicitor by Feingold Partners but instead setting up in competition with that practice and attracting clients away from it, should be recognised in the figure for future maintainable profits or in the capitalisation rate. Mr Kenfield said it was the former, whereas Mr Lom said it was the latter. I shall return to consider this issue in due course.

85. In evidence, each of the experts amended the figure which he had set out in his report as the value of Mr Fagenblat's share of the goodwill of Feingold Partners. It is appropriate to consider each of these changes before proceeding further.

88. Mr Lom's change arose out of certain payments which had been made in the year ended 30 June 2000 to an employee of Feingold Partners, Ms Kate Cramond. Mr Phillip Grant, a member of the firm of accountants which had acted for the practice, had prepared a draft set of accounts for that year (draft 1) which recorded a profit figure of $926,381. Subsequently, a second set of accounts (draft 2) was prepared by Mr Grant which contained a profit figure of $726,089 or a reduction of $200,292 in respect of six items. Mr Kenfield used the draft 2 profit figure as his starting point, whereas Mr Lom used the draft 1 profit figure as his starting point. Thus, even before adjustments, Mr Lom's profit figure was $200,292 higher than Mr Kenfield's. Part of the reason for the reduction of $200,292 in the profit figure for that year was an item called "provision for employee entitlements" of $33,829. In fact this related to a redundancy payment to Ms Cramond of $33,829. Mr Kenfield had added back to his starting profit figure of $726,089 an amount of $63,000, consisting of Ms Cramond's redundancy payment of $33,829 and an adjustment of $29,171 for her higher than normal salary, because they were both considered one off items. Mr Lom also added back the amount of $63,000 to his starting profit figure of $926,381.

91. It was put to Mr Lom in cross-examination that he had made an error in adding back the amount of $63,000, because his starting profit figure of $926,381 already included the redundancy payment $33,829. Mr Lom said that he had added back both parts of the $63,000 to his starting profit figure because he did not understand that the amount of $33,829 related to Ms Cramond's redundancy. He thought that the description "provision for employee entitlements" meant that it related to all employees generally. When the true position was explained to him, he readily conceded that he was in error to have added back the $33,829 as part of the $63,000.

94. Mr Lom denied the further suggestion that this error resulted from a lack of care and diligence on his part. He pointed out that he had no information available to him to suggest that the $33,000 referred to by Mr Borsky as a termination payment to "Kate" was the same item as the $33,829 that was a "provision for employee entitlements".

97. Mr Lom accepted that the rounded figure of $30,000 and not $63,000 should have been the amount of his adjustment to profit figure for the year ended 30 June 2000 in respect of Ms Cramond. This amendment reduced the amount of his adjusted profit figure for the year ended 30 June 2000 to $418,174, the average for the preceding three years from $412,084 to $401,084 and the weighted average from $464,435 to $447,935. Mr Lom said that he would have "probably made the maintainable earnings $440,000" again being conservative and bearing in mind "the very high profit in 1999". He subsequently produced a document setting out these amendments to his final figure for future maintainable profits. After capitalising the new future maintainable profits at 45% to 50%, the value of Mr Fagenblat's share of the goodwill of Feingold Partners as at 30 June 2000 was, in the opinion of Mr Lom, between $220,000 and $244,444 or a mid-point of $232,222.

100. Mr Kenfield's change, which surfaced late in the hearing, arose out of the appropriate adjustment to be made to the starting profit figure in each year for the notional salary which would have to be paid to an employee solicitor if the partner were not there. Both Mr Lom and Mr Kenfield agreed that an amount of $460,000 or $115,000 per partner should be deducted from the starting profit figure in the year ended 30 June 1998 and an amount of $480,000 or $120,000 per partner in each of the following two years. However, Mr Kenfield also deducted a further 20% for on-costs ($92,000, $96,000 and $96,000 in the three years). Subsequently, Mr Kenfield produced a document in which he added back the 20% of on-costs on top of partners' notional salaries, which he had previously deducted. However, rather than adding back the appropriate amount to each year's profit figure before averaging, he added back the amount of $96,000 after averaging and deducting his lost net profit of $187,000. Mr Kenfield agreed in cross-examination that he may have made a mistake in taking out the 20% on costs because they were "already in the costs of the practice". He said that he was not convinced that it was correct to take out the $96,000 but he was also not convinced that it was not prudent to put it back in. He also agreed that by adding back at this stage the last two years' figure of $96,000 instead of the average of $94,667 he had made a further mistake. He suggested he had been "ultra-conservative". After adding back the figure of $96,000 Mr Kenfield's new adjusted future maintainable profits became $180,097, not $84,097. Capitalised at 30%, this produced a total practice value of $600,323 or $150,081 per partner. Thus, on Mr Kenfield's amended figures, Mr Fagenblat would appear to be entitled to a small amount for goodwill on top of his agreed share of the value of the assets of $129,797 ($22,284 to be precise). However, as will be seen, the logic of Mr Kenfield's approach remained that Mr Fagenblat should receive nothing more than the agreed figure of $127,797 because there was no goodwill in the practice.

Geared or Ungeared Approach to Calculation of Future Maintainable Profits

104. An initial difference in approach between the two experts was that Mr Lom used a geared approach or the capitalisation of earnings after interest, whilst Mr Kenfield adopted an ungeared method or the capitalisation of EBIT. Mr Lom explained in his report that the EBIT approach aided:

"in the comparison across different businesses as it eliminates the impact of differential gearing (the percentage of the business funded by borrowings) ..."

On the other hand, he said that the geared approach could also achieve comparison between businesses by assuming that all funding requirements were supplied by borrowings. Mr Lom said that this assumption was not unrealistic, as in his experience professional practices often paid interest on the partners' capital accounts. In cross-examination, Mr Lom rejected the suggestion that one methodology was preferable to the other or more commonly used than the other. He said that he often used the geared approach and that "Lonergan's text ... does not use EBIT model at all ... in professional practices." However, he did agree that another advantage of using the EBIT model was that it enabled a valuer to form an opinion of valuation which was independent of the financing and tax structures of the business.

109. In his report, Mr Lom gave as his only reason for deciding to use the geared approach that the interest rate expense was "unrealistically low". He said that he had reached this conclusion because the financial statements of Feingold Partners for the year ended 30 June 2000 showed that the interest cost for the year was $9,350 and that the bank overdraft at 30 June 2000 was $326,197 and that this translated to "an interest rate of 2.87%". Not surprisingly, Mr Lom was severely criticised for this rather extraordinary conclusion by Mr Glick SC, who appeared on behalf of the defendant. Mr Lom said that he had "never suspected" that the interest rate in fact paid by the practice was 2.87%. He was sure it would have been "the commercial rate at the time." Nevertheless, he did not make any inquiries:

"... as to what the bank overdraft balance was on a daily or monthly basis or what the correct interest charge was to the profit and loss account because I had decided to use a different methodology ... which [was] equally valid."

In any event, Mr Lom added, the two models end up giving the same answer.

114. When asked whether there were any other reasons for preferring the geared approach to the EBIT model, Mr Lom said that with the latter:

"You run into issues of timing and quantum of partner drawings increasing the interest bearing debt."

He said that even if he had had all of the information about interest rates and the quantum of the interest bearing debt from time to time, he would still have adopted the same geared approach. He further stated that "in hindsight" he would have worded the report "slightly differently". I would not disagree with the sentiment behind that comment.

119. As previously stated, Mr Kenfield used EBIT figures in calculating future maintainable profits. He did not give any reason in his report for preferring this approach to the geared approach. Neither did he set out in his report the steps required to be taken using this approach. The latter point is important because it was common ground that the EBIT model required the amount of the interest bearing debt to be deducted from the valuation obtained after applying the capitalisation rate. Yet, rather surprisingly, Mr Kenfield never made that final calculation. He stopped short. He rejected the suggestion that he did not do it because it would have produced "a laughable negative figure" although he conceded that "it wouldn't have looked too good". His explanation for the omission was that:

"My result was that the practice had such limited prospects of profitability that there was little point in carrying it forward, and capitalising the figures up, because there simply was not going to be a goodwill figure, whatever happened. That was the overall conclusion."

"... I accept the fact that with the ungeared model the debt should have been taken off the final valuation. I did not consciously decide to not take it off. I simply didn't address it because my focus, having done the calculation, was on the fact that my conclusion consistent with my inquiries about the practice, was that this was a practice which needed to be absorbed somewhere else. It didn't have a long term future. Hence there was very little point in trying to project it five years out or three years out or two years out."

The reference to the practice being absorbed somewhere else had previously been explained by Mr Kenfield in the following terms:

"There was conflict in the practice, there was known to be conflict in the practice. One out of four partners was leaving. The senior partner was keen to wind back his legal activities and move over into something else. This was a practice that did not have great prospects for the future. It had talent and it had capability and it had a client base. And that's the reason why the partners were trying to realise the value in the practice by getting absorbed into a larger practice. So I don't think it's a nonsense calculation. Because we're not talking about it becoming non viable. We're talking about it becoming increasingly non attractive."

Yet Mr Kenfield had made the comment in the sheet of calculations annexed to his report, alongside his adjusted future maintainable profits figure of $84,097, that the practice was "marginal".

128. If I have understood the arithmetic correctly, the result of Mr Kenfield's calculations, if he had completed the formula by deducting the interest bearing debt of $326,197, would have been that the total practice value was not $280,322 but negative $45,875 or negative $11,469 per partner. Even after Mr Kenfield amended his figures, the result would only have been that the total practice value was not $600,323 but $274,126 or $68,532 per partner. It was for this reason that I said in paragraph 26 above that the logic of Mr Kenfield's approach remained that Mr Fagenblat should receive nothing more than the agreed figure of $127,797 because there was no goodwill in the practice.

131. There are therefore criticisms which can be made of both experts in respect of their choice of either the geared or ungeared method. However, it was agreed by both experts that if the two methods were correctly applied they should lead to the same result. Therefore, it could be said that it does not really matter which method I favour. Although Mr Lom's reasons for using the geared method as expressed in his report were not at all convincing, he did give a better justification in evidence. Moreover, it is difficult to be persuaded of the merits of Mr Kenfield's method when he did not even complete the accepted formula. I therefore propose to follow Mr Lom's geared approach when considering the question of the calculation of future maintainable profits. I will do this by examining whether there should be any changes to Mr Lom's figures as a result of challenges by the defendant. This means that I can ignore the extra adjustments made by Mr Kenfield to take account of the fact that he was using an ungeared approach.

135. Both Mr Lom and Mr Kenfield commenced their calculation of a figure for future maintainable profits by looking at, and then making what they considered to be the appropriate adjustments to, the profits of the partnership in the three preceding years. In the end, there were very few disputes about the adjustments.

139. There was no dispute raised by the defendant about Mr Lom's figures for this financial year. I therefore accept Mr Lom's adjusted profit figure of $137,066 for the year ended 30 June 1998 as appropriate.

143. There was only two significant criticisms raised by the defendant about Mr Lom's figures for this financial year. They were the adjustments made by Mr Lom in adding back $221,000 for the write off of the Spalla bad debt and spreading the cost of certain computer training over five years.

147. Having examined the bad debt history of Feingold Partners over the five years ended 30 June 2000, Mr Lom stated in his report:

"As can be seen from Appendix B Feingold Partners has a very variable history in respect of the level of bad debts. Bad debts have varied from a low of 0.13% of total income in 1997 to a high of 10.43% of income in 1999. I have been informed by Fagenblat that during the year ended 30 June 1999 a major bad debt of approximately $221,000 was incurred in relation to Spalla. I have also been informed that this was an abnormal event. Based on the available information I have concluded that the Spalla bad debt was abnormal and I have reduced the bad debt expense for 1999 by $221,000. Borsky and Lipson have made no such adjustment."

151. Mr Lom could not recall the detail of his conversation with Mr Fagenblat, but said that he "certainly formed the view that it was abnormal". He said:

"It's an unusual event for a practice of this size to be caught with a bad debt of this size."

It was put to Mr Lom in cross-examination that it was unacceptable for him to reject the practice accountant's view of this item based on such limited information as he had. He disagreed. Mr Lom was asked to list what "the available information" was that led him to form his conclusion. He answered:

"The size of the debt. Its percentage to income for that year. The comparison of the bad debt experience in other years to that year. The fact that it involved significant proportions of barristers' fees."

In addition, he referred to his conversation with Mr Fagenblat. Mr Lom rejected the suggestion that he should have made partial adjustment of say a third or a half or the amount of the barristers' fees, rather than adopting an all or nothing approach. He said that he "simply had no basis on which to make such an adjustment."

158. Mr Lom said that he had considered an alternative approach which was to calculate the average bad debt percentage over the five years he had looked at and apply that to each year. However, he did not persist with this approach because he believed it was not the right way to do it. He said that in doing it that way:

"there was an inherent assumption that a Spalla type disaster would happen every five years and overall the bad debts will be maintained at four percent of professional fees which I regard as being far too high."

162. Mr Feingold agreed in cross-examination that in no year between the financial year ended 30 June 1992 and the financial year ended 30 June 2000 did the practice have a bad debt experience in terms of either percentage or size like the year ended 30 June 1999. He also agreed that the practice never had a bad debt as large as the Spalla debt. Mr Tuszynski said that the Spalla bad debt was:

"Extraordinary in the sense that I certainly don't like to have it there and it certainly was a one-off large matter."

166. Mr Kenfield made no adjustment for the Spalla bad debt. When he was cross-examined about this item, it was put to him that the adding back of the biggest single bad debt ever incurred by the practice was an appropriate adjustment to be made. He responded:

Nevertheless, Mr Kenfield said that the reason he had made no adjustment was that neither Mr Borsky nor Mr Grant, who were by far the best informed people to know what the real position was, had considered it correct to add that bad debt back because they did not feel that it was that much out of the normal course of trading. Mr Kenfield further said:

"If both Borsky and Grant had not appeared to be convinced that it was within the nature of the practice, then I would perhaps have said a component of that perhaps should not have been allowed. Maybe I could have taken half of it - have added half of it back. It seems to me that 220 is a large amount and it didn't sit entirely comfortable with me but I didn't have sufficiently good alternative reason to add it back in, given the practice accountant (indistinct) and I was content to work with that."

When Mr Kenfield was taken to the figures for bad debts as a percentage of total income over the five years and asked whether the single bad debt of $221,000 which caused the very sharp rise in 1999 provided a sound basis for adjusting that single anomalous bad debt back into earnings, he replied:

"On the face of it I agree with you and I think it's a powerful argument."

However, he went on to explain his "fundamental" reason for not doing so:

"... the practice accountant said taking it all together, taking the way that the practice interfaces and handles its debtors through discounts, through bad debts, through provisions, through non recoveries, their conclusion was that this did not qualify as an abnormal item for adding back and I accepted that and I acknowledge there is a contrary argument."

176. As the question of whether Mr Kenfield was correct to follow the view of the practice accountant and whether Mr Lom was in error in making adjustments to that accountant's figures arises frequently in respect of the following items, it is appropriate to express my view about this issue at this stage. I agree with Mr Lom that the figures contained in the accounts prepared by the practice accountant for corporate and taxation purposes are not necessarily what should be used for the purpose of a valuation. Some adjustments may be appropriate, because the two tasks are different. Thus, blindly following the practice accountant without any reasoned justification is not a proper approach, in my opinion. This is not to say, of course, that after due consideration a valuer may not legitimately decide to adopt the practice accountant's view.

179. My conclusion is that I prefer Mr Lom's evidence in respect of the Spalla bad debt. It was certainly an abnormal event. It even formed part of the defendants' unsuccessful counterclaim. Further, Mr Kenfield recognised the strength of Mr Lom's point of view. His "fundamental", and I believe, only reason for not making some adjustment in respect of it was that the practice accountant had not done so, and I am not persuaded by his reasons for following his view so rigidly. The more difficult question is whether all or only some of the $221,000 should be added back. Again, I consider Mr Lom's reasons for not making a partial adjustment were valid. Neither Mr Lom nor Mr Kenfield could suggest a proper basis on which to make such an adjustment.

183. In his report, Mr Lom pointed out that the partnership incurred an expense of $40,162 on computer training in the financial year ended 30 June 1999. He said that this was "an abnormally large expense for the business" and that he assumed that the expense was related to the new software purchased during that year. He considered that the benefit of the training would emerge over the useful life of the software and consequently he spread the cost over five years by reducing the 1999 figure by 80% of the expense and increasing the 2000 figure by 20% of the expense.

186. Mr Borsky, and therefore Mr Kenfield, made no such adjustment. In fact, Mr Kenfield said nothing at all about this item. The situation therefore is that no reason was given by the defendant to reject Mr Lom's adjustment. Nevertheless, the defendant challenged the correctness of Mr Lom's approach.

189. The question of the useful life of the software will be considered below in respect of the item of software depreciation in the next financial year. As discussed there, Messrs Lom, Kenfield and Borsky all considered that the software should be depreciated over five years and I accept that their approach was correct. Once the five year useful life is accepted as appropriate for the software, then it seems to me that Mr Lom's logic is impeccable in respect of the cost of the computer training.

192. Therefore, I accept Mr Lom's approach in respect of this item which involved adding back an amount of $32,130 (or 80% of the cost of $40,162) to the starting profit figure for the financial year ended 30 June 1999. It also involved deducting an amount of $8,032 from the starting profit figure for the following financial year.

Conclusion in Respect of the Year Ended 30 June 1999

196. Having concluded that the adding back of the Spalla bad debt and the spreading of the computer training costs over five years were correct, I therefore accept Mr Lom's adjusted profit figure of $648,013 for the year ended 30 June 1999 as appropriate.

200. As previously stated, because of the two sets of accounts prepared by the practice accountants (drafts 1 and 2) there was a difference in the starting profit figures for this financial year used by Mr Lom and Mr Kenfield. Of the six items which constituted the difference of $200,292, Mr Lom initially accepted two of them. They were "reduction in recoveries" of $10,973 and "additional discount allowed" of $12,495. A third item, "additional bad debt write off" of $14,701, was partly accepted by Mr Lom in the amount of $6,048. Mr Lom did not allow the full amount of the reduction because, as he said in his report, the draft accounts for the year ended 30 June 2001 disclosed a recovery of a previously written off bad debt of $8,653 and so he reduced the additional bad debt write off by the amount of the recovery achieved in the following financial year. Mr Lom was not challenged about this item, other than by Mr Kenfield saying that he considered that the practice accountant's approach should be followed. I consider that Mr Lom's reasoning is preferable in respect of this item. In addition, Mr Lom agreed during the hearing that the items relating to Ms Cramond should be adjusted by $30,000 and not $63,000, as already discussed. (In my opinion, the adjustment should be the exact amount of $29,171 and not the rounded figure of $30,000. This will be referred to later.) Thus, only two items, which in fact made up the bulk of the original difference of $200,292 were left in dispute between the parties.

204. The first of the disputed items arising out of the difference between the two sets of accounts was the further deduction of $60,391 for "non-recoverable work in progress", which Mr Lom rejected. As expressed in his report, the reason for this was that, as a result of adjustments, the percentage of work in progress as at 30 June 2000 to billed work in the year ended 30 June 2000 was already only 1.6%. This was extremely low compared to all preceding years when the percentages ranged between 8.2% and 15.5%. Mr Lom therefore concluded that "the result for the year ended 30 June 2000 has been determined using a significantly more conservative approach than adopted in other years".

207. In cross-examination, Mr Lom was taken to a letter dated 21 February 2001 from Mr Grant to Mr Fagenblat. Mr Lom had not seen that letter before he completed his report. In it Mr Grant stated that "a significant reduction in the work in progress was largely due to our advice to Feingold Partners to clean up the work in progress prior to GST". Mr Lom's view was that this was only "part of the explanation" for the extremely low percentage in this year. However, he later agreed that it went "a long way to explaining it". In the end, it does not matter whether or not the explanation was correct, because Mr Grant's letter revealed that the further deduction of $60,391 concerned eleven matters each of which had its own justification. Mr Lom had not addressed any of these matters in his report but when he was asked in cross-examination about Mr Grant's comments, Mr Lom said that the letter had not changed his view.

210. The further deduction principally arose from two substantial matters which together totalled $53,273.80. There could be no argument that one of these two matters should not have been deducted, because it had already been conceded by Mr Grant in his letter of 21 February 2001 on the instructions of the remaining partners. This was an amount of $24,420 for work done for Mr Feingold in respect of the acquisition of Rockley Apartments.

213. The second substantial matter was an amount of $28,853.80 which related to fees incurred in acting in litigation for a client on a no win, no fee basis. Mr Lom said that he presumed that the partnership would not have taken on the matter "without an expectation of success." Moreover, the partnership had been given a guarantee of $37,000, although Mr Feingold said that he had concerns about the validity of the execution of the guarantee and in any event it was only of use if the client won the litigation.

216. Mr Kenfield said that he had not looked into this matter because:

"... the primary documents didn't appear to be available so again the best I've been able to do with that was to use the Borsky figures and also to query Phil Grant about that and review his explanations of the reasons for making the adjustments."

This was hardly a persuasive explanation for deducting this matter. In all the circumstances, I do not consider that it was reasonable to treat this amount as non-recoverable as at 30 June 2000. I do not agree with the view that because the work was undertaken on a contingency basis, it was inappropriate to be recording it as income.

221. However, it seems to me that the balance of the disputed item, consisting of nine small matters, should have been deducted. They totalled $7,117.20 after removal of the two substantial matters. The explanations given for adjusting all nine matters seem reasonable and Mr Lom gave no reason for rejecting them.

225. The second disputed item arising out of the difference between the two sets of accounts was the deduction of $67,903 for an item described as "provision for doubtful debts". Mr Lom noted in his report that no such provision had been recorded in previous balance sheets and no such provision was reflected in the 30 June 2001 draft financial statements. He concluded that the deduction was a one off adjustment made as at 30 June 2000 and that it did not "represent a recurring cost of doing business". Accordingly, he made no deduction from his starting profit figure.

228. Mr Kenfield did not refer to the matter in his report. He said in cross-examination that he had not looked at the item "in detail". As with many of these items, Mr Kenfield was content simply to follow the view of the practice accountant. In his letter to Mr Fagenblat dated 21 February 2001, Mr Grant had said that his firm had been "advised by Feingold Partners Pty Ltd that it has expended inordinate time, cost and effort to recover the fees owing". After discussing the status of each of the fees making up the $67,903 figure, Mr Grant concluded:

"In all cases the amounts provided as doubtful debts are considered to be non recoverable at 30 June 2000. They have not yet been written off as bad because all avenues of recovery are still being explored."

232. Mr Dreyfus QC, who appeared with Mr Robins of counsel on behalf of the plaintiff, submitted that Mr Lom's evidence should be accepted, because he had not been challenged on this point in cross-examination. Mr Glick submitted that where an expert had not exposed his or her reasoning in a report, counsel was not obliged, in the words of Heydon JA:

"to cross-examine in the dark, with the perils which usually face journeys into darkness, to establish the factual assumptions underlying the valuation, and the relationship between the valuer's conclusion and the valuer's expertise as applied to those assumptions."[8]

Mr Glick therefore submitted that I should reject Mr Lom's evidence on this item, even though he had not been cross-examined, because he had not explained the basis on which his opinion had been reached. Again, in the words of Heydon JA:

"Examining the substance of an opinion cannot be carried out without knowing the essential integers underlying it."[9]

238. Whatever might be said about Mr Lom's treatment of other items in his report, it seems to me that in respect of this item he did sufficiently expose the reasoning that led him to conclude that this deduction of $67,903 as a "provision for doubtful debts" was a one-off adjustment as at 30 June 2000 which was not relevant to his assessment of the appropriate figure for future maintainable profits. Moreover, his reasoning has persuaded me that the deduction made by Mr Grant, and adopted by Mr Kenfield, was not correct.

242. There were two further adjustments by Mr Lom to the starting profit figure for the year ended 30 June 2000, which the defendant disputed. The first was that Mr Lom adjusted the profit figure by reducing the amount allowed for depreciation of office equipment. In his report, Mr Lom referred to this item as follows:

"The balance sheet at 30 June 1999 shows office equipment at cost of $48,342 and accumulated depreciation of $27,194. Depreciation of office equipment for the 1999 financial year was $11,610. Office equipment at cost increased to $198,814 at 30 June 2000. This means that new equipment with a cost of approximately $150,000 was acquired during the 2000 financial year. Depreciation of office equipment for that year was $67,750, indicating that the newly acquired equipment was depreciated by $56,140 ($67,750 - $11,610), a depreciation rate of approximately 37%. I have adjusted equipment depreciation based on a five year useful life. My adjustment is calculated as follows: ($67,500 - ($150,000/5)). Borsky and Lipson have not adjusted equipment depreciation."

In the notes to the accounts, the practice's accountants had stated that equipment was depreciated:

"... at rates prescribed from time to time by the Income Tax Assessment Act which, in general, results in the asset being written off over its estimated useful life."

248. When asked why he had rejected the rate used by the practice accountant, Mr Lom said that he was trying to do a valuation not a tax return and that in his "experience" the rate was "too high". He said that he believed the item consisted of "new computer and ancillary equipment for the office", but he agreed that he had not viewed the equipment, and that he did not really know anything about it, including whether it was covered by "any guarantees or any other assurances about its longevity". He accepted that Mr Borsky had not adjusted the depreciation rate stated in the books, and although Mr Lom said that Mr Borsky would have had "access to more information" than him, he decided that the equipment had a five year useful life not less than three years. He further agreed that this issue had not been raised by Mr Fagenblat as one of the matters he disputed.

251. Mr Kenfield said that he made no adjustment for this item because Mr Borsky did not do so. Nor had he checked Mr Lom's calculations. However, he said that he did not disagree with what Mr Lom had done. It was just that throughout the exercise he followed what Mr Borsky, the practice accountant, had done because he did not have "the real numbers to work from". Mr Kenfield's view on this item was, therefore, not very helpful.

254. However, I had some difficulty during the evidence in following why Mr Lom's approach resulted in him making an adjustment of increasing the earnings by $27,987. The explanation in his report should have resulted in a figure of $37,750 ($67,750 - $30,000) or a figure of $26,140 (($67,750 - $11,610) - $30,000). But instead of adding back $37,750 or $26,140, Mr Lom had added back $27,987. When asked about this apparent discrepancy, he said that without his calculations in front of him, he was unable to explain why the amounts differed. Perhaps because of the small amount involved, the issue was not taken further, but it does concern me that Mr Lom could not explain his workings.

257. I also have concerns over the number of errors which I believe exist in Mr Lom's explanation in his report. Having had the opportunity to study and to consider Mr Lom's reasoning and calculations concerning this issue, I make the following comments. First, the balance sheet at 30 June 1999 showed accumulated depreciation for office equipment of $24,469 not $27,194 as Mr Lom asserted. That amount was the accumulated depreciation for another item - "plant and equipment under lease". Secondly, it was not correct that "the newly acquired equipment was depreciated by $56,140 ($67,750 - $11,610) ..." The amount of $11,610 was the amount of depreciation in the previous year. By my calculations, the newly acquired equipment was depreciated by $60,140 and the older equipment by $7,610. Thirdly, the depreciation rate was not "approximately 37%". Rather, of the nine items comprising "the newly acquired equipment", three were depreciated at 20%, three at 40% and three at 100%. Further, of the three items depreciated at 20%, two (mobile home and dictaphone machine) were not even computer equipment. By far the greatest part of the newly acquired equipment ($146,062 out of $150,473) was depreciated at 40%. Finally, even ignoring the typographical error of $67,500 for $67,750, there is the lack of logic in setting out his calculation as "($67,500 - ($150,000/5)". As previously discussed, one might have expected that Mr Lom's calculation would be "$56,140 - $30,000."

260. All of the above left me with very little confidence that Mr Lom's adjustment of $27,987 could be justified. I am not persuaded that he has made out a case for reducing the amount allowed for depreciation of office equipment by $27,987, or indeed by any other amount. Accordingly, I propose to ignore the adjustment by Mr Lom.

264. The second further adjustment made by Mr Lom to the starting profit figure, which the defendant disputed, was a reduction in the amount allowed for depreciation of software. Mr Lom's explanation in his report for this adjustment was as follows:

"The balance sheet as at 30 June 1999 shows software at cost of $119,657 with nil accumulated depreciation. I have interpreted this information to mean that Feingold Partners acquired new software prior to 30 June 1999 however it was not in use until the following financial year. As at 30 June 2000 software at cost increased to $125,055 and accumulated depreciation was $50,162. This indicates that the software was depreciated at a rate of 40% per annum, the maximum rate allowable for income tax purpose. I regard this rate of depreciation as being excessive. Based on my experience I have assumed that the useful life of the software would be 5 years and reduced the depreciation expense accordingly. Borsky has made the same assumption as to useful life of the software, however he reduced the depreciation by $40,000. Lipson made no adjustment to depreciation."

In his evidence Mr Lom said that he used a rate of 20% per annum instead of the rate used by the practice accountant of 40% per annum. He therefore added back half of the amount allowed for software depreciation, or $25,011.

269. Again, I believe Mr Lom has made an error in his calculations. It was not correct to say that the software was depreciated at 40%. In fact, four of the ten items were depreciated at 100%. However, they totalled only $1,007 out of $125,055. That is why the amount deducted for depreciation of software in the accounts was $50,162 and not $50,022. Mr Lom's correction should therefore have been $25,151 ($50,162 - $25,011) (if all items were to be depreciated at 20%).

272. Mr Kenfield followed Mr Borsky's approach, which in fact involved an adjustment to the practice accountant's figure. In his report Mr Borsky had made a reduction in depreciation of $40,000. He said:

"Computer software depreciation was accelerated in the 2000 year. I have assumed that the CLO software had an effective 5 year life when acquired."

It is not clear to me how Mr Borsky arrived at this figure of $40,000. Mr Kenfield gave no explanation of how it was calculated. Mr Kenfield denied that he was simply "rubber stamping what Mr Borsky said." He considered that Mr Borsky, "as the man on the spot with the inside knowledge", was "the best one to make a professional judgment, because depreciation rates are very much a question of professional judgment." Mr Kenfield did not explain why, in this case, he preferred Mr Borsky's approach to that of the practice accountant, Mr Grant.

277. Mr Glick submitted that it was not in accordance with accepted practice for Mr Lom to simply assert that the rate of depreciation was excessive, without exposing that he had some reason for saying this based on actual knowledge of the software and its likely useful life. However, the strength of this criticism is rather blunted by the fact that Messrs Lom, Kenfield and Borsky all agreed that there should be an adjustment to depreciate the software over five years. The only difference was in the calculation of the amount of the adjustment.

280. Thus, whilst I am not particularly persuaded by Mr Lom's approach to the issue of how the depreciation for software figure should be adjusted, I am even less persuaded by Mr Kenfield's approach. He based his adjustment entirely on Mr Borsky's analysis and in this respect Mr Borsky's explanation leaves a lot to be desired. There is no explanation of how he reached his adjustment of $40,000. No doubt Mr Borsky could have given a better explanation if he had been a witness in the hearing before me. In the circumstances, I consider the appropriate adjustment to be a reduction of $25,151 in the amount of the software depreciation.

Conclusion in Respect of the Year Ended 30 June 2000

284. The result of the above is that the following further adjustments should be made to Mr Lom's adjusted profit figure of $418,174 for the year ended 30 June 2000. First, it should be reduced by $829, being the correction to the rounded figure of $30,000 in respect of Ms Cramond. Secondly, it should be reduced by the allowance of a further amount of $7,117 for non-recoverable work in progress. Thirdly, it should be reduced by the deletion of the amount of $27,987 for depreciation of office equipment. Fourthly, it should be increased by $140 for the amendment of the amount of $25,011 for software depreciation to $25,151. Thus, the net reduction that should be made to Mr Lom's adjusted profit is $35,793. I therefore consider that the appropriate profit figure for the year ended 30 June 2000 is $382,381.

288. Both Mr Lom and Mr Kenfield averaged their adjusted profit figures for the preceding three years. As previously stated, Mr Lom preferred to use a weighted average. This was, he said, because it recognised that "recent results are more relevant to assessing future maintainable earnings than results from earlier years". Weighting was, according to Mr Lom, "an accepted practice. It was done often." He used a formula of multiplying the most recent year's results by three, the next year by two and leaving the oldest year as it was. This total was then divided by six.

291. Mr Lom agreed in cross-examination that averaging past historical profits might not result in a fair representation of future maintainable profits, whether or not a weighted average was used. Mr Lom also agreed that this was particularly the case if there was a clear trend either up or down. Obviously, there is no magic in an average, whether weighted or not. It seems to me, however, that averaging is useful where, as here, profits have fluctuated.

294. Mr Kenfield did not calculate a weighted average. However, he agreed that there was some sense to it because "the most recent year is obviously the best indication probably of what's going on." Mr Kenfield said that if you were going to weight, Mr Lom's three to one formula was "as good as any" even though there was "no real scientific basis for it." What was important was to see how the average (whether weighted or not) compared with the most recent year's figure. He said that if it was significantly higher or significantly lower than the most recent year then he would query the result. Subject to this caveat, I consider that Mr Lom's preference for using a weighted average should be followed.

297. The result of the above analysis of the defendant's criticisms of Mr Lom's figures is that the average adjusted profit figure for Feingold Partners for the three years preceding 30 June 2000 was $389,153 and the weighted average, using Mr Lom's formula, was $430,039. Following Mr Lom's approach, I consider that this figure should be rounded down slightly to, say, $420,000, to take into account the exceedingly high profit figure in the year ended 30 June 1999. Even after rounding down, it seems to me that one has to say that the weighted average was on the border of being, in the words of Mr Kenfield, "significantly higher" than the figure for the year ended 30 June 2000. Nevertheless, I consider that, subject to the significant issues yet to be discussed, the figure of $420,000 was a fair and reasonable amount to use for the future maintainable profits of Feingold Partners.

Taking into Account the Potential Risk to the Partnership's Earnings

301. As previously mentioned, the main point of disagreement between the two experts who gave evidence before me was whether the potential risk to the partnership's earnings in the future as a result of Mr Fagenblat not being employed as a solicitor by Feingold Partners but instead setting up in competition with that practice and attracting clients away from it, should be recognised in the figure for future maintainable profits or in the capitalisation rate.

304. Part of this issue involved a debate about what "business" was being valued and what use could be made of the agreed facts, including in particular what had occurred after 30 June 2000.

307. The plaintiff submitted that the "partnership" whose goodwill was to be valued in compliance with the order of the Court of Appeal was the business of Feingold Partners Pty Ltd as it stood at 30 June 2000 in the light of matters known, or which reasonably could have been expected, at that date. It was not "the business" as altered by unforeseeable management decisions made after 31 August 2000. Nor was it "the business" as actually conducted by the defendant after 30 June 2000. It was the business owned by the four partners at the date of the retirement of the plaintiff, namely 30 June 2000. This was what the parties had agreed and was what Mr Fagenblat would have been entitled to pursuant to s.47 of the Partnership Act 1958 if there had been no agreement. Mr Dreyfus submitted that the share was to be valued as at 30 June 2000, by reference to information known at that time and not by reference to events occurring afterwards, except so far as those events threw light on the value at that time.[10] Reference to the agreed facts, in particular paragraph 5, illuminated the risk that Mr Fagenblat would compete and take clients away from the practice, but did not establish the quantum of any earnings which would be lost. Mr Dreyfus submitted that just as it was not permissible to look at the earnings of the new three person partnership in the year ended 30 June 2001 to assist in valuing the goodwill of the practice as at 30 June 2000, because of all of the supervening events, in particular the management decision concerning the continuation of the litigation department, so it was equally not permissible to look at part of that picture, such as earnings actually received by Mr Fagenblat in a subsequent period, to assess the value of goodwill at the earlier date. Agreeing to certain facts simply avoided the need to spend time proving them and carried no concession as to their relevance. Mr Dreyfus therefore submitted that Mr Lom had performed his valuation on a proper basis because the risk that the future maintainable profits would not continue at the assumed level because of the loss of clients to Mr Fagenblat was built into the capitalisation rate chosen by him.

310. On the other hand, the defendant submitted that "the business" to be valued was the business conducted by the reconstituted three person partnership as at and from 30 June 2000. That business should not be considered "at large". The relevant particular features and characteristics of the business, including any likely future events which would impact on the expected future income of the business, included that the partnership of four persons would end on 30 June 2000 and would then be reconstituted as a three person partnership; that Mr Fagenblat had headed the partnership's litigation department with each of the other partners heading another department; that the litigation department had the highest dollar profit and the second lowest expense ratio of the four departments; that there was no real probability that Mr Fagenblat would be employed as a solicitor for any appreciable length of time after 30 June 2000; that Mr Fagenblat was free to set up in competition with the old practice and to undertake legal work on behalf of clients of the old practice; and that each of the remaining partners was equally free to do the same.

313. Mr Glick submitted that the appropriate question for the valuers was:

"What profits can the new partnership of three partners given the state that it was in as of 30 June 2000 be reasonably expected to achieve and maintain into the indefinite future having regard to the agreed facts and mandated assumptions?"

He argued that in answering that question and working out the figure for future maintainable profits the Court should look to the post 30 June 2000 events because simply considering the past history of the practice did not "provide a logical basis for the future."[11] Further, Mr Glick submitted that Mr Lom had fallen into the error, referred to by Mr Lonergan in his standard text on the subject, of "employing historical profits as a proxy for FMP, without undertaking sufficient critical examination of past performance and likely future events."[12] He argued that it was quite misleading to use the historical earnings of the partnership when Mr Fagenblat was a partner as the future maintainable profits of a partnership of which Mr Fagenblat was no longer a partner and whose employment he was going to leave in a few weeks. Paragraph 5 of the agreed facts could be used to calculate what reduction should be made to the future maintainable profits to take account of Mr Fagenblat's probable departure.

318. Further, Mr Glick submitted that the plaintiff's submissions that as at 30 June 2000 -

(a) the continuing partners did not know, as a matter of certainty, whether Mr Fagenblat would leave or stay;

(b) the continuing partners did not know, as a matter of certainty, whether Mr Fagenblat, if he left, would compete with his old partnership;

(c) the continuing partners did not know, as a matter of certainty, how many clients of the firm would leave the firm and/or become clients of Mr Fagenblat, if he left; and

(d) the continuing partners did not know, as a matter of certainty, what was to happen to the litigation department;

subverted the mandated assumptions and agreed facts. However, whatever one might say about the high degree of probability of the first two propositions in fact occurring and therefore that they were almost certainties (see paragraphs 2 and 3 of the statement of agreed facts), I do not consider that the same could be said about the last two propositions. I accept Mr Dreyfus' submission that as at 30 June 2000 these propositions were not known as a matter of certainty. Mr Glick submitted that paragraph 5 of the statement of agreed facts supplied the answer but that paragraph is only useful, in my opinion, if it is permissible to look at what actually occurred after 30 June 2000.

324. Each of the experts was subjected to quite lengthy cross-examination in an attempt to show that there had been flaws in the assumptions they had made. Particular attention was directed towards any assumptions concerning the future of the litigation department.

327. Mr Lom agreed with the proposition put to him in cross-examination that the concept of future maintainable profits was that it was an endeavour to identify that level of profits which the business could reasonably be expected to achieve and maintain in the foreseeable future. He further agreed that in certain circumstances, where the conclusion had been drawn that the past maintainable earnings could not be maintained in the future and that there was no other way of estimating future maintainable earnings, such as budgets, the methodology he had used might not be appropriate. Mr Glick then asked Mr Lom a lot of questions based on the assumption that "a section of the firm being litigation would not continue into the future, the litigation would be closed down" albeit with the savings of the cost of the relevant staff. Mr Lom agreed that his valuation would be inapplicable in that case because it would be "a fundamentally different practice." However, he disagreed with the suggestion that the facts of this case rendered his methodology inappropriate.

330. Mr Lom said that in deciding upon his figures for future maintainable profits and the capitalisation rate he had "considered that litigation would continue to be a part of the business of the firm", and that he had assumed that it would continue "under the care and control of a partner." He also said:

"I have made the assumption that the litigation was there. There were several other employees in the litigation section and that litigation was certainly able to continue, and would probably continue, because of the amount of staff and - you know, one person wasn't going to represent all of the litigation practice."

334. Mr Lom said that he had worked on the basis that his figure for future maintainable profits was correct for "that practice as it was, and it was open to continue in that way into the future."

337. Mr Glick submitted that the proper approach to the task of valuing Mr Fagenblat's interest could not include any preconceived view that the practice would continue with litigation work. The plaintiff had not sought to establish that by evidence. Mr Glick argued that Mr Lom erred because he assessed the maintainable earnings going forward at the same rate as the historical earnings as though it were the same practice, but without litigation it was, as Mr Lom himself acknowledged, "a different practice." In my opinion, this submission was itself misconceived because it assumes that there would be no litigation, whereas, as Mr Dreyfus submitted, it was not known whether or not litigation would continue and the continuing partners themselves were uncertain about the future of litigation.

340. The plaintiff submitted that Mr Kenfield had wrongly proceeded on the basis that it was certain that there would be substantial earnings lost as a result of competition from Mr Fagenblat and that the litigation department would be closed. It was submitted that the defendant had not established any basis for Mr Kenfield to assume that as at 30 June 2000 the probability of Mr Fagenblat leaving would destroy the practice's litigation department. On the contrary, given that Mr Feingold had said that the majority of the litigation work was performed for clients who provided other work to the firm and the views expressed by him in his letter to Mr Borsky dated 27 July 2000, Mr Dreyfus submitted that the net effect on the practice generally, and the litigation department in particular, was quite uncertain. Further, it was submitted that the defendant gained no support from looking at the post 30 June 2000 events as what they showed was that the litigation department continued to operate and that clients who had generated about 90% of the average fees of the practice during the preceding two financial years and about $600,000 or more in fees from litigation work in the year ending 30 June 2000 (approximately 65% of the total fees from litigation work) had remained with the practice. Mr Kenfield denied that he had elevated into a certainty the loss of $415,000 in earnings. He said:

"What I think I have done is I have attempted to exercise professional judgment to conclude that on the instructions that I have and the information I've received, that is a reasonable estimate of the fees that will be lost to the practice."

344. Strangely, despite the way in which Mr Kenfield approached his task, he agreed in cross-examination that the capitalisation rate was the mechanism used to account for the risk or chance that the maintainable earnings will not be continued into the future. The explanation for this apparent contradiction was that Mr Kenfield considered that it was "certain" that the practice would lose substantial profits if Mr Fagenblat left. He said that if things:

"are certain to happen ... for example, in this case some of the agreed facts ... then I believe it's more appropriate to factor these in as hard numbers to the profitability ... and not to put them in the more speculative cap rate. The cap rate is used for the bits that you really can't quantify where you're attempting to make an informed estimate up or down ..."

348. It was perhaps not surprising that Mr Kenfield made this assumption because it would appear that he was told in his meetings with some of the continuing partners prior to the preparation of his reports that at the relevant time they believed that Mr Fagenblat's departure would mean that most of the litigation work would also terminate and that they would not continue with a litigation practice. For example, Mr Feingold said that he told Mr Kenfield that after 30 June 2000 there was no future for the litigation department and that it was of a very limited nature and "did not play a major part in our practice". Yet, as has been seen, this was not part of Mr Feingold's and Mr Tuszynski's thinking as at 30 June 2000. This led to Mr Kenfield treating as:

"a known and accepted fact, a certainty in effect, not a risk, that (a) Mr Fagenblat is going to leave and (b) that he is going to take with him, without complaint from the practice, a significant value of clients, somewhere between perhaps 330,000 and half a million. ... I take that as something which I am obliged to factor into the financial impact, not as an issue of risk, but as an issue of certainty."

352. This was a mistake on the part of Mr Kenfield, in my opinion, because as he subsequently agreed in cross-examination, it was not known as at 30 June 2000 that it was certain that Mr Fagenblat would leave, that he would set up his own practice, and that clients would leave the practice if Mr Fagenblat left or, perhaps more relevantly, how many clients would leave and what replacement work would be obtained. Yet Mr Kenfield put a precise figure on the amount of lost earnings. He said that he made a calculation based on the information contained in the agreed facts, which he took to be "an established financial impact on the practice." Elsewhere he said that "they were an indication of the fees that were going to be lost." Further, as he said in his report, he assumed that:

"the practice, being heavily structured along specific service lines, would not be readily capable of replacing the fees taken by Fagenblat with alternative fees."

356. Mr Kenfield said that in making his calculation about the loss in earnings he was not aware that the partnership had taken on two salaried partners on 1 July 2000 or that Mr Farrugia was employed in February 2001 to act as a senior litigation solicitor. He also apparently misunderstood what in fact happened to the litigation department after Mr Fagenblat's departure, because he referred in his report to the anticipation that it would not be "re-established", whereas as has been seen, what happened was that it continued in existence until the merger albeit, in Mr Feingold's words, in a "progressively reduced form", but due in part at least to a decision taken by the continuing partners that that was the way they wanted to go.

359. It seems to me that Mr Kenfield's approach meant that he was not valuing the goodwill of the partnership as at 30 June 2000. Rather, he was attempting to value the goodwill of the new reconstituted three person partnership by reference to what he believed actually occurred over the 12 month period after Mr Fagenblat left the employment of the practice on 31 August 2000.

362. I consider that this was a further error on the part of Mr Kenfield. The goodwill which had to be valued was that of the business as at 30 June 2000, as it was affected by information known at that time and not by reference to events occurring afterwards, except so far as those events threw light on the value at that time. I do not agree with Mr Glick's submission that the valuers were required or entitled to take such matters into account in the way he suggested. In my opinion, the judgment of Ormiston JA, in particular the passages quoted in paragraph 4 above, set out the extent of the permissible use of the post 30 June 2000 events. They could be used to determine the likelihood of Mr Fagenblat as at 30 June 2000 continuing his employment with the practice for any substantial length of time and the likelihood of Mr Fagenblat competing with the practice if he left and taking clients away from the practice, but not to determine the quantum of any earnings which would be lost.

365. Further, I accept Mr Dreyfus' submission that the judgment of the Court of Appeal makes it clear that the potential risk to the partnership's earnings as a result of Mr Fagenblat leaving was to be taken into account in the fixing of the capitalisation rate, and not by altering the figure for future maintainable profits by looking at what was likely to occur or what actually occurred to earnings after 30 June 2000. I consider that there are two passages where Ormiston JA indicates that this was his view. First, after discussing what effect Mr Fagenblat's retirement might have on the actual earnings of the partnership after 30 June 2000 his Honour said that it was preferable to conclude that:

"... the judge was entitled to accept Mr Borsky's expert view that it ought not to affect the future maintainable earnings calculation so much as the rate of capitalisation, which he conceded was based on the assumption that the respondent would remain as an employee. That this approach is at least appropriate, from a valuation point of view, is again stated generally by Lonergan[13] where he states: 'The maintainable earnings figure should reflect an 'average' of the expected earnings with variability around this average built into the capitalisation rate. Although earnings in the future are expected to vary, this does not make the maintainable earnings figure inappropriate. The variability (risk) is normally reflected in the capitalisation rate. The higher the degree of variability, the higher the risk and thus the lower the [price earnings ratio] and the lower the value'."[14]

I consider this to be a clear statement by his Honour of how the risk was to be taken into account.

370. Secondly, his Honour described what he saw as the nub of the respondent's difficulties and continued:

"The whole point of its argument about his prospective employment was an assumption that, if he were employed long enough and on sufficiently suitable terms, somehow the risk of loss of clients would disappear and thereby the capitalisation rate would remain appropriate to the hypothesis upon which Mr Borsky had made his valuation. That hypothesis was not accurate in any relevant sense, for there was no likelihood that, if say the respondent had left at the end of the year (perhaps an optimistic view of the likelihood of employment), the practice's position would have been protected and its goodwill preserved against the legitimate activities of the respondent in a new practice."[15]

I do not accept Mr Glick's submission that all Ormiston JA was doing here when he referred to the capitalisation rate "remaining appropriate" was addressing Mr Borsky's error. It seems to me that if his Honour had been of the view that possible loss of earnings should be taken into account when determining the figure for future maintainable profits then he would have said so.

375. Similar reasoning applies, in my opinion, to a passage from the judgment of Chernov JA where his Honour referred to Mr Borsky's erroneous assumption about the likelihood of Mr Fagenblat staying with the practice as an employee or consultant after 30 June 2000 as being:

"an important, if not a fundamental, plank in Mr Borsky's determination of the capitalisation rate which he applied to the future maintainable earnings of the firm in order to value the respondent's share in it."[16]

379. Even if I am wrong in concluding that the Court of Appeal has already decided this point, I would have formed the view that the potential risk to the partnership's earnings as a result of Mr Fagenblat leaving was correctly taken into account by Mr Lom when he came to fixing his capitalisation rate.

382. Finally, I should record that, with respect, I do not consider that one other reference to this issue in the judgment of Ormiston JA assists in resolving the matter. After referring to the fact that the trial judge recognised that Mr Borsky's adoption of the capitalisation rate of 30% was, at least in part, affected by his conclusion that Mr Fagenblat would stay as an employee with the firm, Ormiston JA stated as follows in a footnote:

"The appellant contended not merely that this conclusion affected the capitalisation rate but ought also to have led to a reduction in his estimate of future maintainable earnings." [17]

His Honour did not say whether he agreed or disagreed with this contention and it is for this reason that I have said that I did not consider the statement to be of assistance on this question.

388. I turn therefore to consider what, in the circumstances of this case, is the appropriate capitalisation rate to be used in calculating the goodwill of the partnership. In MT Associates Pty Ltd v Aqua-Max Pty Ltd[18] Gillard J said:

"In determining the rate of capitalisation one must identify and evaluate the risks involved in the business. The type of business, its competitors, its stability, the backing of assets, its gearing and reputation in the market place are some of the factors which have to be evaluated."

392. In his his report, Mr Lom first looked at some more general matters that he considered he should have regard to in selecting an appropriate capitalisation rate to apply to the maintainable profit. They were:

". the ten year Commonwealth Bond rate as at 30 June 2000 (6.16%); * the risk that Feingold Partners would not continue to produce a profit of $450,000 per annum due to internal factors such as loss of clients or loss of key staff; and * the risk to profitability arising from changed economic circumstances, actions of competitors and changed legislative framework; * the interest of a previous partner (Linacre) was valued upon his retirement by using a capitalization rate of thirty percent. This partner gave an undertaking that he would not serve the existing clients of Feingold Partners for a period of four years; * Feingold Partners had previously admitted new partners using a capitalization rate of thirty percent. These partners did not receive the benefit of a non-compete clause and therefore accepted that thirty percent was the appropriate capitalization rate in circumstances when one or more of the existing partners were at liberty to leave at any time, taking their own clients with them."

These matters led him to conclude that apart from "the specific circumstances surrounding the position of Fagenblat as at 30 June 2000", he would have selected a capitalisation rate of 30%.

397. Mr Lom said that the specific circumstances he referred to were what was set out in the agreed facts, to which he added that there was "no evidence that at 30 June 2000 Fagenblat planned to commence his own legal practice if mutually acceptable terms could not be agreed and it was open to him to seek a position as an employee solicitor elsewhere" and that "equally at 30 June 2000 it was not clear as to how many clients would follow Fagenblat if he commenced his own legal practice or if he became an employee solicitor with another practice." Mr Lom concluded that "the risk to future earnings of Feingold Partners was higher in the circumstances as they existed at 30 June 2000 than at other times when the 30% capitalisation rate was used and therefore a capitalisation rate higher than 30% is justified." He considered that a capitalisation rate in the range of 45% to 50% was "appropriate".

400. Mr Glick criticised Mr Lom for not explaining in his report the matters which led him to choose the range of 45% to 50% and referred again to the judgment of Heydon JA in Makita (Australia) Pty Ltd v Sprowles[19]. However, Mr Dreyfus submitted, correctly in my opinion, that Mr Lom did explain as far as he could the reasons for his choice of rate, but that in the end it came down to a matter of professional judgment.

403. Mr Glick attempted to demonstrate that Mr Lom's starting point of 30% was too low by referring to what he described as the first "draft" of Mr Lom's report. In that document Mr Lom had used 30% as the appropriate capitalisation rate assuming Mr Fagenblat entered into a four year non compete clause. Later, he used 30% as his starting point without any restraint clause. However, Mr Lom denied that the document was a "draft", in the sense that it at any time represented the result of any considered thought process. I accept Mr Lom's evidence on this aspect. In any event, it is the expert's final view as sworn to in Court which is important, unless it can be shown, for example, that the witness has altered his or her view in order to come up with the result desired by the client.

406. Mr Glick also attempted to demonstrate that Mr Lom's range of 45% to 50% was not valid because it had not changed between the first and second drafts, when there were no agreed facts, and the final version, when he had the agreed facts. However, Mr Lom responded that initially he had had regard to all of the facts that were in the judgment of the Court of Appeal and that was why "when the agreed facts were presented to me, it did not alter my opinion." I therefore reject this criticism of Mr Lom's approach.

409. Mr Glick pressed Mr Lom about what assumptions he made about matters such as the chances at 30 June 2000 of Mr Fagenblat staying with the practice, of him leaving and opening a practice in his own name and of him competing with the practice. After a rather confused series of questions and answers, it seemed to me that Mr Lom's position was that he assumed that it was "more probable than not" that Mr Fagenblat would leave the practice after a short period of time and that it was "possible" that when Mr Fagenblat left he would open up a practice in his own name and thereby compete with his former partners. Mr Lom was then asked what capitalisation rate he would have used if his second assumption had been that competing was probable rather than possible. He replied that he did not think that he would have "changed the cap rate even under those assumptions." While this last answer was perhaps a little surprising, it seems to me that Mr Lom's assumptions were generally in accordance with the facts as I understand them. Although nothing was certain at 30 June 2000, it was the case, in my opinion, that it was probable that the earnings of the practice from litigation would be detrimentally affected by competition from Mr Fagenblat following his departure.

412. Mr Kenfield, of course, adopted a different approach. He reduced the future maintainable profits by deducting what he considered would be the net loss of earnings. He then applied a capitalisation rate of 30% which he said in his report was the rate "adopted and approved by the previous three accounting experts". Unfortunately, Mr Kenfield did not say what capitalisation rate he considered should be adopted if Mr Lom's approach was followed, other than that it should be higher than 50%. I regard this as a regrettable failure to provide the Court with the assistance which it is entitled to expect from expert witnesses. Naturally any such expression of opinion could be qualified by caveats about how wrong the approach was, but to say that 45% to 50% is too low to reflect the real and probable risk without saying what the rate should be is, in my opinion, quite unsatisfactory.

415. Thus, although I have some doubts about whether 45% to 50% is a high enough capitalisation rate, that range is the only evidence before me of an expert's opinion on this issue. Mr Glick submitted that if I were not satisfied with Mr Lom's assessment of the capitalisation rate, the plaintiff should fail as he would not have made out his claim. Despite my doubts, I am not prepared to go as far as rejecting Mr Lom's view entirely, given the generally impressive way in which he approached his task and gave his evidence. As an alternative "fall-back" position, Mr Glick conceded that I would be entitled to choose a higher figure (but submitted that I should not do so because any such conclusion would not be "safe"). Mr Dreyfus submitted that I should not "pluck some figure out of the air." He also argued that there was "no warrant for adopting a higher rate" than that advanced by Mr Lom. I do not consider that I can choose my own rate, simply because another expert has said 50% is too low. After all, I just do not know whether I should choose 55% or 75% or some other figure as the approriate rate. In all the circumstances, I have concluded that I will adopt the highest figure in Mr Lom's range, and select a capitalisation rate of 50%.

Quantification of the Plaintiff's Share of the Goodwill

419. The outcome of the above consideration is that, in my opinion, Mr Fagenblat's share of the goodwill of Feingold Partners as at 30 June 2000 is to be calculated by capitalising the future maintainable profits of $420,000 by 50%. This results in an amount of $210,000 for Mr Fagenblat's share.

Alternative Approach to the Potential Risk Issue

423. Theoretically, it seems to me that one could test the reliability of the above conclusion by following the approach taken by Mr Kenfield, even if it were not considered to be the correct approach. Counsel for both sides agreed that so long as the right adjustments were applied, a similar result should be reached whatever approach was used. Indeed, in final submissions, the plaintiff's counsel did put forward such an exercise merely for the purpose of illustrating what result might be attained. In the calculations set out below, I have started off using Mr Kenfield's adjustments in conjunction with my figure for future maintainable profits of $420,000.

426. The first step is to calculate the net lost profits as a result of Mr Fagenblat leaving. This is found by deducting the consequential cost savings from the lost earnings. Mr Kenfield's cost savings figure was $228,000 and his lost earnings $415,000, resulting in net lost profits of $187,000. If this figure is then deducted from what would otherwise have been the future maintainable profits of $420,000, a new figure of $233,000 is reached for future maintainable profits. Capitalised at 30%, this results in a total practice goodwill value of $776,666, or $194,166 for each partner's share, which is not so different from the figure of $210,000 calculated above.

429. The plaintiff's counsel criticised the way in which Mr Kenfield calculated his figures. It was submitted that there was no justification for averaging the $330,000, being the approximate amount of fees generated during the previous two years by "former clients who had specifically authorised the practice to pass their files, documents and matters to Mr Fagenblat", and the $500,000, being the approximate amount of the "volume of business with his old clients" written by Mr Fagenblat in his first year in his new practice, to come up with a figure for gross earnings lost by the Feingold Partners practice as a result of Mr Fagenblat leaving. Further, as the plaintiff's counsel submitted, Mr Kenfield gave no reasons for his stated assumption in his report that "Mr Fagenblat's departure would not reduce any of the fixed, nor most of the variable operating costs of the practice." It was put to Mr Kenfield that items such as rent (through sub-letting) and bad debts (as a percentage of reduced fees) would be likely to be less. The plaintiff's counsel also criticised Mr Kenfield's limitation of the savings in salaries to one partner and one unidentified staff member. Whilst Mr Kenfield conceded that "the exercise could have been done in more detail without doubt", he said that he believed his 20% on-costs covered these extra items. I note, however, that despite these criticisms the figure for cost savings used by the plaintiff's counsel in their illustration was only $204,000 whereas Mr Kenfield's had been $228,000.

432. It is unnecessary to spend further time examining the merits of these various criticisms. For present purposes, it is sufficient to point out what would happen if Mr Kenfield's figure for net lost profits were reduced by only $19,000 to $168,000. This relatively minor change could be achieved in any number of ways, for example, by decreasing the lost earnings by $19,000 to $396,000 and leaving the cost savings the same, or by decreasing the lost earnings by $14,000 to $401,000 and increasing the cost savings by $5,000 to $243,000. Such changes would be well within the bounds of reality, in my opinion. If this amount of $168,000 were then deducted from $420,000, the new figure for future maintainable profits would be $252,000. Capitalised at 30%, this would result in a total practice goodwill value of $840,000, or $210,000 for each partner's share. Thus, as Mr Dreyfus put it, this different method of valuation can lead to "a comparable result". Although this calculation is very rough and ready, as the figures used are not based on any thorough or reliable analysis of the likely lost earnings and cost savings, nevertheless, the exercise does illustrate, in my opinion, that the figure obtained from Mr Lom's approach, subject to the adjustments I have made, does have validity.

436. In my opinion, therefore, there should be judgment for the plaintiff against the defendant in the sum of $339,797, consisting of Mr Fagenblat's agreed share in the assets of the partnership of $129,797 and his share of the goodwill of the partnership of $210,000. Once the parties have had an opportunity to consider these reasons, I will hear submissions on the questions of interest and costs.

[1] [2001] VSC 479

[2] [2003] VSCA 33

[3] [2003] VSCA 33 at [65] and [84]

[4] [2003] VSCA 33 at [87]

[5] [2003] VSCA 33 at [88]

[8] Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705 at [62]

[9] Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705 at [71]

[10] See Kizbean Pty Ltd v WG & B Pty Ltd [1995] HCA 4; (1995) 184 CLR 281 at 291 per Brennan, Deane, Dawson, Gaudron and McHugh JJ.

[11] MT Associates Pty Ltd v Aqua-Max Pty Ltd [1999] VSC 286 at [38] per Gillard J

[12] W. Lonergan: "The Valuation of Business, Shares And Other Equity", Fourth Edition 2003 at p.35.

[13] This passage quoted from Lonergan appears at p.41 of the third edition and p.44 of the fourth edition.

[14] [2003] VSCA 33 at [72]

[15] [2003] VSCA 33 at [80]

[16] [2003] VSCA 33 at [92]

[17] [2003] VSCA 33 at [57]

[18] [1999] VSC 286 at [41]

[19] [2001] NSWCA 305; (2001) 52 NSWLR 705