Fry & Ors v Oddy [1998] VSCA 26

Fry & Ors v Oddy [1998] VSCA 26 - VSCA 1998 case summary — Zoe

[15]

The stand taken by the defendants with regard to the plaintiff's attempts to extract money from the partnership after its dissolution has always been a determined one. I have already mentioned their unexplained failure to make any payment in respect of surplus assets - the plaintiff's original claim - until after the matter came before the Court, some 20 months after the dissolution. The plaintiff's second claim - for an account of profits - was the natural result of that failure. That claim, too, has always been resisted with determination, although the position taken up by the defendants has varied from time to time. As already mentioned, on 16 May 1996, they consented to an order which presupposed the applicability of s.46 of the Partnership Act, while leaving open the question of the result of its application. Yet, as his Honour recorded in his decision given on 18 December 1996 (Oddy v. Fry [1998] 1 V.R. 142 at 146-7), when argument was held on whether the Special Referee's answer to question (f)(ii) should be adopted, the defendants took up the position that s.46 of the Partnership Act had no application at all, since the plaintiff had retired from the partnership voluntarily and acquiesced in the continuance of the business and there had been no fraud or misconduct on the part of the continuing partners. That submission was rejected by his Honour ([1998] 1 V.R. at 153-4). His Honour's decision on the point was not sought to be challenged by way of appeal, nor has it been called in question in the present appeal. But at the outset of the hearing of the present appeal the defendants, by a point not taken at any earlier stage of the proceedings, sought to persuade us that for another reason s.46 had no application at all to the present case. This had not been the position taken up by them at the hearing during March 1997: in that hearing they had accepted that the section was applicable and resisted the plaintiff's claim on the merits, as it were, contending, as one might have expected them to contend in view of the earlier course of the litigation, that no amount whatever was payable to the plaintiff once s.46 was applied to the facts of the case.

[46]

If the early cases show one thing, it is that each case depends on its own facts. Sometimes the skill, industry, credit and reputation of the continuing partners will be of particular importance in the generation of profits and the assets employed in the business will be of less importance: Vyse v. Foster (1872) 8 Ch. App. 309 at 331, where James and Mellish, L.JJ. instance the case of solicitors. But this was said in 1872. In the days when Mr Wickfield could carry on his practice with the aid of Uriah Heep, and Soames Forsyte and his father could rely for assistance on the venerable Gradman, the contribution of the partnership assets to a legal firm's profits may have been small. But the last half century has seen a transformation in the practice of solicitors. The mega-firm will be courted as the prospective tenant of a block of floors in the latest skyscraper. The wasted space of the atrium - a form of conspicuous consumption - emphasises by way of advertisement the firm's standing and success. Sponsorships will be used. Less oblique forms of advertising are commonplace: in newspapers and journals; on television; by public relations exercises; even by the "shopper-docket" offering one free will. Discounts are in terms offered by some firms on a variety of products. Old Gradman wrote everything by hand. Now the pen has been replaced by the word processor, if not by voice recognition software. The new technology is used both for communication and for the management of information and activities. With technological change, no large firm could now prosper without its computer on every desk, its giant photocopiers (themselves a source of revenue), its computer notebooks, its fax machines and answering machines, its mobile telephones and pagers, its dictation equipment, its video conferencing facilities. Its library will be to a considerable extent in electronic format. Its drafting will be done with the aid of artificial intelligence. Its requirements in terms of human resources will range from caterers to librarians. Outsourcing may be used. The firm will need a managing partner or general manager or office manager to carry the cares of the practice. It may be so large that some partners hardly know one another. A service entity will provide services to the practice at a profit. It will have complicated financing arrangements with its banker and others. It will train its staff by means of continuing professional development courses or seminars. It will make provision for the supply of floral arrangements and potted palms. Its staff will be legion; many of them will have quotas to meet and will charge their time in small units. Charge rates per unit of time will be determined for the various categories of employee and the productivity of employees will be monitored. It has been said that legal partnerships use "leverage through people", and that the large Australian firms do this more than the smaller ones, having 5.5 fee earners to each principal: Stein and Stein, Legal Practice in the 90s, p.4. Competition will be a major consideration in relation to pricing. Partners and senior staff may be headhunted ruthlessly. Clients may be poached.

[56]

The order made in Manley v. Sartori reflects the view expressed in the judgment that profits are prima facie attributable to the use of the partnership assets. The view is adopted in other texts: Higgins and Fletcher, The Law of Partnership in Australia and New Zealand, 7th ed., p.254; Webb and Molloy, Principles of the Law of Partnership, 6th ed., pp.315 and 322-3. It is supported by what was said by the Judicial Committee in Pathirana v.Pathirana [1967] 1 A.C. 233 at 240 and by what was said by the Court of Appeal in Popat v. Shonchhatra [1997] EWCA Civ 1966; [1997] 1 W.L.R. 1367 at 1373-4. It is consistent with the practice of courts of equity in partnership cases before the Partnership Act of taking an account of the profits made by the use of the property and making a just allowance for the exertions of the continuing partner: Brown v. De Tastet [1821] EngR 543; (1821) Jac. 284; 37 E.R. 858 (a decision of Lord Eldon, affirmed by the House of Lords); Cook v. Collingridge [1823] EngR 419; (1822) Jac. 607; 37 E.R. 979; Crawshay v. Collins [1826] EngR 1141; (1826) 2 Russ. 325; 38 E.R. 358 (another decision of Lord Eldon); Yates v. Finn (1880) 13 Ch.D. 839. Compare Page v. Ratliffe (1896) 75 L.T., a decision given under the Partnership Act. Generally as to the making of just allowances on the taking of accounts see Daniell's Chancery Practice, 8th ed., pp.923-8; Parkinson (ed.), Principles of Equity, chap. 26, especially para. 2626. As regards the particular case of a just allowance for the exertions of a continuing partner see De Renzy v. De Renzy [1924] N.Z.L.R. 1065 at 1071-3; Powell v. Powell (1932) 32 S.R.(N.S.W.) 407 at 419-20; Castle v. Castle (1951) G.L.R. 541 at 549; Atkin's Encyclopaedia of Court Forms, 2nd ed., vol. 30 (1994 issue), title Partnerships and Firms, Form 31. In De Renzy v. De Renzy Stringer, J. declined to direct that a salary be allowed to the defendant on the taking of the account, observing that any reward to the defendant would be reflected in the taking of an account of the profits attributable to the use of assets, which would not credit the plaintiff with profits attributable to the exertions and qualities of the remaining partner. To say this is to recognise that the making of the just allowance is only a means of arriving at the true profit attributable to the use of assets; compare Mr Justice Kearney's discussion of just allowances to fiduciaries in Finn (ed.), Equity and Commercial Relationships, at p.195 and what was said by the High Court in Warman International Ltd. v. Dwyer [1995] HCA 18; (1995) 182 C.L.R. 544 at 561.

[64]

In truth, as may be seen from the judgment of Brooking, J.A., there was no relevant error of law in the learned judge's reasoning and no error of fact has been made out. Upon a consideration of the authorities, what is to be fairly attributed as a retiring partner's appropriate share of subsequent profits is largely a matter of estimation and impression, assuming that the correct questions have been asked from the outset. What s.46 of the Partnership Act 1958 requires is a determination as to what share of those profits was fairly attributable to the use of the retiring (or deceased) partner's share of the "partnership assets". The vagueness, though not unfairness, of the concept may be seen by the section's reference to the use which an aliquot share of the partnership assets has in the production or derivation of profits by others which will almost invariably be expressed in an undifferentiated figure in the profit and loss account. The individual partner's former share, as such and calculated at the date of retirement, can hardly contribute in itself to the production of profits, except to the extent that all assets may produce profits to the extent that they are in whole or in part attributable to the use of those assets. But, whichever way one approaches the matter, it is not an exercise capable of producing a sum by way of share of profits which will be capable of being verified as unquestionably right or wrong, for there will be no mathematical or other means of checking its correctness. One may start with what may be assumed to be correct for accounting and practical purposes as the appropriate figures for the retiring partner's share of the partnership assets and for the subsequent years' profits of the new partnership, but what was attributable one to the other had to be an estimation, no doubt assisted by such expert evidence as was available, which the learned trial judge reached as best he could on the whole of the relevant materials. As has been said in relation to the taking of an account of profits resulting from an infringement of patent: "The ultimate process is one of judicial estimation of the available indications": per Lord Wilberforce in General Tire Co. v. Firestone Tyre & Rubber Co. Ltd. [1975] 1 W.L.R. 819 at 826, a passage cited and approved by the High Court in Warman International Ltd. v. Dwyer [1995] HCA 18; (1995) 182 C.L.R. 544 at 567. For the purposes of consideration upon appeal it might be said that the judge's decision on such a question is not unlike that involved in reaching a judgment as to non-economic loss or other general damages: cf. the discussion and the authorities cited in Mobilio v. Balliotis (C.A. unreported 10 November 1997) per Brooking, J.A. at pp.6-12, even if I did not there agree entirely in describing those judgments as "discretionary".

[65]

In that sense I have no reason to believe that the learned trial judge's decision in this case was incorrect or that this appeal should be allowed: a number of attacks were made upon the findings, but in the end, although presented to this Court with ingenuity and persuasiveness, none of them went to establish appellable error, unless it could have been said that none of the profits resulted from the application or use of the partnership assets or, as the section requires, the respondent's share of them. The remedy now sought on appeal, which appears to assume that at least some part of the later profits were attributable to the respondent's share of assets in order to calculate the amount which should be paid to the respondent by way of his share of those profits, shows that no such broad approach is now contended for, whatever was said and sought at the trial. Moreover, I am not satisfied of the correctness of the corollary of that concession, namely, that no other part of the subsequent profits was attributable to the respondent's share of assets because they were all the product of the individual endeavours of the appellants, their new partners and, so it would seem, the employed lawyers, because those profits were earned by the exercise of their personal skills and abilities as solicitors. Such an argument may once have been thought capable of being easily made out, but the statements made in the authorities to which counsel referred were made of solicitors (and others) practising in a very different era and in a very different way which it is hard to believe would now be replicated in the conduct of a legal practice, at least of the kind here in question. The matter is discussed in detail by Brooking, J.A. in his judgment. I would add only that it does not follow, as the night the day, that in every case a former partner is entitled on the same basis as was adopted by the learned judge in this case to a share in the profits of a continuing partner or partners. One may contemplate partnerships in which the partners joined as a matter only of convenience or where the continuing partner continues in practice in a modest way from home, but each case must depend upon its own circumstances.

[67]

The second factor might be thought to be the large figure adopted as the total assets of the partnership at date of dissolution. Some argument was put to the effect that the trade debtors and work in progress should not have been included for this purpose as they were sums which did not truly constitute the partners' capital or its assets at the relevant date and so were irrelevant to calculating the respondent's share of those assets for present purposes. For the first period, of course, this criticism was misplaced as the respondent's share must have been one-ninth on any basis of calculation and this had never been in dispute. It could only have been relevant in calculating a different share for subsequent years as the expert Hardy attempted to do and as the trial judge accepted. This was a difficult calculation and one upon which minds could differ. But the fact is that there were no alternative bases put forward in the expert evidence called on behalf of the appellants. Their bald denial of attribution meant that there were no other reliable figures upon which the judge might have acted and it was not for the trial judge to guess at what other figures might be substituted as the relevant assets for the later years of the calculations. Even if it would have been inappropriate to use the year by year balance sheet figures for trade debtors and work in progress over a further period of ten or more years, I am not persuaded that it was wrong to use those assets for the purpose of determining a share of profit for the period of slightly under two and a half years. There was no evidence which would justify disregarding those figures, but even if they were removed from the present calculation in whole or in part, the respondent's interest started at one-ninth and was in any event reduced considerably for later periods of calculation, and the inquiry was to what extent the firm's profits were attributable to the respondent's share of assets. The conclusion that essentially the relevant proportion of the profits were all so attributable except for a reasonable allowance for the other partners' own contributions cannot be shown to be affected in any significant way by any reduction in the relevant figures for partnership assets. As I have said, there was no evidentiary basis for reducing the figures chosen as representing partnership assets and it has not been shown in the circumstances that they were incorrect. I would add that I am by no means persuaded that the goodwill of the former partnership did not contribute in a very significant way to the earning of the firm's future profits, but for technical accounting reasons (see judgment of the trial judge at p.4), it had been given a value of "nil" by both the referee and the expert witnesses. "Goodwill" has many meanings for the purposes of the law: see generally Commissioner of Taxation v. Murry [1998] HCA 42; (1998) 72 A.L.J.R. 1065. For present purposes it may have had a significant practical value, to which the respondent must have been entitled to one-ninth. This possibility of the "valueless" goodwill nevertheless contributing to future profits was clearly recognised by Romer, J. in Manley v. Sartori at pp.166-167. No argument was addressed to this issue but it may help to explain any seeming anomaly in the outcome.

[68]

The first factor is the only aspect of the case which, in the circumstances and having regard to the whole of the evidence, gave me concern. One of the key points of the appellants' argument was that, although the expert witness and the trial judge had chosen a figure by way of "allowance" of $130,000 for each of the continuing partners, that figure was treated only as the notional salary of each of those partners to be deducted from gross profits to produce the net profits for the present purpose, whereas the true exercise should have been to ascertain what part of the subsequently earned profits was attributable to the retiring partner's share in the assets. That, it was said, would have also made allowance for the profit element in the other partners' earnings. Of course it must be noted that this concept of "allowances" does not flow directly from the language of s.46 or any other section of the Partnership Act 1895 , except in Western Australia where s.s.(3) has been there added referring to allowing of "remuneration ... for carrying on the partnership business"; s.55(3) of the Partnership Act (W.A.). There is no doubt, notwithstanding the absence of any specific provision in this State, that the previously worked out equitable rules as to the making of such allowances continue to apply to the taking of an account of profits such as the present, but it is not in terms specifically characterised in the cases either as a deduction from profits or as a reduction in the share of those profits attributable to the former partner's share. It may be said, as was argued, that, if the salaries are treated only as a deduction, the continuing partners' notional salaries contained no allowance for profit, representing merely the cost of their labour as best could be calculated. The appellants argued that, even after making some such deduction for salaries, it was still necessary to take into account the element of profit to which those partners would have been entitled before ascertaining the share of profits which were attributable to the outgoing partner's share. Logical as this may appear to be, I am not persuaded that the deduction required must be dealt with on that basis and none of the authorities cited to us required that conclusion. To this must be added, in the present case, that there were no figures put forward by expert witnesses or others as to what the additional component should be and the judge was thus left in the unenviable position of having to guess that element of profit, even if it had been put to him as a required calculation. That reason is itself sufficient reason not to accept the argument put forward on this appeal by the appellants.

[79]

The difference, if there be one, does not appear to be resolved by any decision of courts in England or Australia, but I am inclined to believe that the explanation is to be found in some observations contained in the series of annotations on this subject in the American Law Reports entitled "Accountability of Partner or Joint Adventure for Profits Earned Subsequently to Death or Dissolution", which appear first in 80 A.L.R. 12-98 (1932), revised and updated under the title "Rights in Profits Earned by Partnership or Joint Adventure After Death or Dissolution" in 55 A.L.R. 2d 1391-1427 (1955), further updated to April 1998 in the Later Case Service (1987 and 1998). I refer to these materials with diffidence in the light of what I have said previously about the untutored use of American authorities: see most recently Gascor v. Ellicott [1997] 1 V.R. 332 at 358, including the references to earlier observations. However, partnership law, at least at the relevant time, was a field of law where common law and more particularly equitable principles seem to have been applied largely upon the same basis in the United States and England. The reason for this may be perhaps traced to the reliance which Joseph Story placed on English authority in writing his Commentaries on the Law of Partnership (1841): see the preface thereto at pp.ix-xi. Its continued influence may be seen in the annotation at 80 A.L.R. passim where there are frequent references to English authority: indeed the author's first proposition is supported by a quotation from Lord Eldon in Crawshay v. Collins [1826] EngR 1141; [1826] 2 Russ. 325; 38 E.R. 358: see 80 A.L.R. at p.15. This is an area of the law where statutory codification also intervened but on this occasion, so far as I am aware the statutes passed, say in New York and Pennsylvania, were almost identical and thereafter in those of the 49 States which adopted the uniform Partnership Act, the legislative provisions were similar to those of the English Partnership Act: see 80 A.L.R. 73-74 and 55 A.L.R. 2d 1419-1420. The relevant provision is almost the same and in the latter case the right of the outgoing partner was expressed in terms of the "profits attributable to the use of his right in the property of the dissolved partnership". Although there appear to be some differences in the uniform Partnership Acts, there seem to have been few changes to the statement of principles contained in the primary annotation and no reflection of change in the Later Case Service. However, the 1993 Revised Uniform Partnership Act has different provisions as to retirement, so far as I can gather.

[86]

Finally I would add a footnote on a matter which was not in the end argued before us. If I were to cavil with any part of the learned judge's reasoning it would be as to his approach to the interpretation of the Partnership Act as a code. At one stage (at p.28 of his reasons for judgment) the judge comes dangerously close to saying that cases such as Willett v. Blandford are of no present use in interpreting the Partnership Act and its provisions. No doubt heavy weight was placed on the observations in that case and in Vyse v. Foster [1872] L.R. 8 Ch. App. 309 implying that former partners in firms of solicitors can rarely show that any part of future profits is attributable to their share in assets. Those statements have been dealt with in detail in the judgment of Brooking, J.A. However, by seeking to dispose of them by saying they are inapplicable because of the passing of the code contained in the Partnership Act the learned judge has perhaps (I say only, perhaps) given undue weight to a proposition that where a code such as the present sought to re-enact existing common law and equitable rules, little weight could be put on earlier authorities after the passing of the Act. It is unnecessary to express a final view on this issue, but this is an area of the law where, upon reading the many cases raised for our consideration and those cases I have found useful to consider for the purpose of writing this judgment, not one to my recollection said that it was impermissible to look to these earlier cases for the purpose of interpreting at least this section and indeed most of them (taking only by way of example Manley v. Sartori) placed considerable weight on the learning on partnership law worked out by the courts of equity in the nineteenth century. The earliest reported case defining the basic principle seems to have been Crawshay v. Collins, when first reported in (1808) 15 Vesey 218, although Lord Eldon, L.C. makes reference to a brief dictum 100 years earlier in Brown v. Litton [1711] EngR 8; (1711) 1 P. Wms 140; 24 E.R. 329 by Lord Harcourt, L.C. when Lord Keeper. It has changed little since those times.

[101]

"It is well established that a point cannot be raised for the first time upon appeal when it could possibly have been met by calling evidence below. See, for example, Suttor v. Gundowda Pty. Ltd. [1950] HCA 35; (1950) 81 C.L.R. 418 at p.438 and Water Board v. Moustakas [1988] HCA 12; (1988) 180 C.L.R. 491 at pp.497-498. Mr. Kaye did not suggest that the new ground might have been met by evidence. Instead he opposed leave to amend the grounds of appeal on the broader policy bases explained by Tadgell, J., with whom the other members of the Full Court agreed, in Geelong Building Society v. Encel [1996] VicRp 44; [1996] 1 V.R. 594 at pp.604-609. He submitted that that case and the authorities to which Tadgell, J. referred qualified broader statements of principle such as that to be found in O'Brien v. Rosedale Corporation [1969] VicRp 81; [1969] V.R. 645 at p.647. It was also contended that a respondent is more readily allowed to support the judgment given below by reference to a new point. Ravinder Rohini Pty. Ltd. v. Krizaic [1991] FCA 318; (1991) 30 F.C.R. 300, on which Mr. O'Callaghan relied, was a case of that kind and so too was Chalmers Leask Underwriting Agencies v. Mayne Nickless Ltd. [1983] HCA 20; (1983) 155 C.L.R. 279, a point emphasized by Brennan and Deane, JJ. at p.285. The ordinary rule is that a new point may not be raised by an appellant unless there are exceptional circumstances. The latter are various and it is not profitable to try to catalogue them. Mr. Kaye's submission was that there were no exceptional circumstances here. As in the case of an express concession that is sought to be withdrawn, the ultimate question is usually whether it is in the interests of justice to permit the appellant to rely upon a point not raised below: cf. Masters v. McCubbery [1995] VICSC 209; [1996] 1 V.R. 635 at p.658. The interests of justice include the policy considerations referred to in the authorities, such as the proper division of responsibility between a trial court and an appellate court, deciding cases with reasonable expedition and without undue cost; and the adversary system, which requires the parties to formulate the issues that they desire to have resolved. Considerations of fairness and the reasonableness of taking a point at a late stage are often of great importance. In the present case it may fairly be said that, if the references to CPQ and CPC do make the notice ambiguous, that was an obvious point that was readily available to the appellants and should have been raised at the earliest opportunity. There is no suggestion that the notices were in truth perceived to be ambiguous on that account. Whatever relevance that might have if the point had to be decided (cf. Tenth Dancote Pty. Ltd. v. Pyramid Building Society, Court of Appeal, unreported, 7th May 1997, at p.7), it is permissible to take it into account on the question of leave."

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