FULLSTON v DIGNAN AND ANOR No. SCGRG-98-213 Judgment No. S452 [1999] SASC 452

The plaintiff had been carrying on the business of a primary producer in partnership with Ms J. B. Fennell since 1 July 1976. The plaintiff and Ms Fennell had entered into a written partnership agreement. Ms Fennell died on 14 November 1996. Her daughters are the executors of her estate and are the second defendants.

The partnership agreement contained a clause which gave the surviving partner an option to purchase the share of the deceased partner in the capital and assets of the business. The clause is in these terms:

"19. If any partner shall die during the continuance of the said partnership the surviving partner shall have an option (to be exercised within one calendar month after the death of the deceased partner) to purchase the share of the deceased partner in the capital and assets of the business (such purchase to take effect as from the date of the death of the deceased partner) on the following terms: (a) the purchase price shall be the net value after providing for the debts and liabilities of the partnership of the deceased partner's share in the partnership as at the date from which the purchase is to take effect and in determining such value goodwill shall not be taken into account. If the parties shall be unable to agree as to the value of the deceased partner's share the same shall be ascertained by two independent licensed valuers one to be appointed by either party or by an umpire to be appointed by the two valuers. If either party shall fail to appoint a licensed valuer within 14 days after being called upon so to do the valuer appointed by the other party may proceed to make a valuation alone. The cost of such valuation shall be paid by the parties to this agreement in equal portions of the total cost of the valuation. (b) the purchase price shall be paid by the surviving partner by equal quarterly instalments over a period of 5 years or such lesser time as may be mutually agreed upon the first of such instalments to be paid at the expiration of three calendar months from the date as from which the purchase is to take effect. (c) payment of the purchase price as aforesaid shall be secured by the bond of the surviving partner who shall also enter into a covenant to indemnify the personal representatives of the deceased partner from the debts engagements and liabilities of the partnership both existing and future."

The plaintiff claims to have exercised the option. The disputes between the parties include the question whether the plaintiff has validly exercised the option and whether clause 19 is valid. It was ordered that the validity of clause 19 be heard as a preliminary question. The Master held that clause 19 was valid. The second defendants appeal from that decision.

The assets of the partnership include the land which is the farming property. The second defendants asserted that clause 19 was invalid in that the resulting contract contravened s 6(1) of the Land and Business (Sale and Conveyancing) Act 1994 ("the Act"). Section 6(1) provides:

"A contract for the sale of land or a business that provides for the payment of part of the purchase price of the land or business (except the deposit) before the date of settlement is void."

The defendants contend that because clause 19(b) provides that, in the event of the option being exercised, the purchase price is to be paid by equal quarterly instalments over a period of five years, or such lesser time as may be mutually agreed upon, the resulting contract constituted a sale by instalment which was expressly prohibited by the terms of s 6(1) of the Act.

The question whether s 6(1) of the Act applies to an exercise of this option to purchase depends on whether the effect of clause 19 is that the instalments provided for in clause 19(b) are paid before or after settlement. Clause 19 does not expressly specify a date of settlement or, as it is sometimes called, a date of completion. When considered as a whole, it is apparent that it is a necessary implication of the clause that the transfer of the interest of the deceased partner in the land is to occur before any part of the purchase price must be paid. The scheme of clause 19 is that, upon the option being exercised, the purchase price is then agreed or ascertained by an independent valuer or an umpire, and then the purchase price is paid in instalments, the payment of those instalments being secured by a bond from the partner exercising the option. Clause 19 states that the purchase shall take effect as from the date of the death of the deceased partner and the purchase price is to be calculated as at that date. The surviving partner is, therefore, entitled to call for a transfer of the interest of the deceased partner in the capital assets of the business, including the land, once the purchase price had been determined. (There is a nice question whether he could call for the transfer immediately after the option had been exercised but it is unnecessary to determine that question now.) That is not only the scheme of clause 19 but it also accords with business efficacy in that the surviving partner would need to be able to use the assets of the partnership business in order to be able to continue to operate the business, a need expressly recognised in clause 19 by providing that the purchase will take effect as from the date of the death of the deceased partner. For these reasons, the surviving partner does not have to pay any part of the purchase price before he is entitled to a transfer of the interest of the deceased partner in the capital and assets of the partnership, including the land.

The term "settlement" in s 6(1) of the Act means the occasion when the balance of the purchase price, after the prior payment of a deposit, is tendered in exchange for a transfer of the land in the case of a contract for the sale of land, or the interest in the business, in the case of a sale of a business. More particularly, in the case of a contract for the sale of land, it is the occasion when the balance of the purchase price, after payment of a deposit, is tendered in exchange for a transfer in registrable form of the fee simple in the property. In this agreement, since the surviving partner is entitled to call for a transfer of the interest of the deceased partner without having paid any part of the purchase price, there is no settlement in the sense contemplated by s 6(1) of the Act with the consequence that s 6(1) has no operation. Alternatively, if the transfer of the interest of the deceased partner is the settlement as contemplated by s 6(1), it occurs before the payment by instalments and is not within s 6(1).

It might be noted in passing that, if the purchase price is not promptly agreed, it may not be possible to comply strictly with the obligation in sub-clause (b) to pay the first instalment within three calendar months of the date of the death of the deceased partner. But that does not affect the enforceability of this clause and it does not bear upon the issues in this case.

On this approach, there is no need to consider two questions which were explored in argument. The first was the nature of this option which Dixon CJ called in Braham v Walker [1961] HCA 7; (1961) 104 CLR 366 at 376 a "standing controversy". The second was whether s 6(1) of the Act would operate in respect of that part of the partnership assets which comprised the land upon which the business was conducted. Section 22 of the Partnership Act 1891 provides:

"Where land or any interest in land has become partnership property, it will, unless the contrary intention appears, be treated as between the partners (including the representatives of a deceased partner) as personal and not real estate."

It was contended by the plaintiff that by reason of s 22 the land was personal property so that the option to purchase did not give rise to a contract for the sale and purchase of land. The Master upheld that contention, relying on the decision in Brannigan v Brannigan [1954] NZLR 858. There is some force in the Master's conclusion but I prefer not to express a final view. A further reason why it is unnecessary to examine that question is that s 6(1) of the Act operates in the case of both a contract for the sale of land and a contract for the sale of a business. The noun "business" is defined in s 3 of the Act to include, among other things, a share of or an interest in a business. As the majority of the High Court noted in Federal Commissioner of Taxation v Everett [1980] HCA 6; (1980) 143 CLR 440 at 446 - 477:

"Although a partner has no title to specific property owned by the partnership, he has a beneficial interest in the partnership assets, indeed in each and every asset of the partnership (Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd [1974] HCA 22; (1974) 131 CLR 321 at 327 - 328; Livingston v Commissioner of Stamp Duties (Q) [1960] HCA 94; (1960) 107 CLR 411 at 453. His share in the partnership consists of a right to a proportion of the surplus after the realization of the assets and payment of the debts and liabilities of the partnership (Bakewell v Deputy Federal Commissioner of Taxation (SA) [1937] HCA 11; (1937) 58 CLR 743 at 770."

By exercising the option, the plaintiff is purchasing the interest of the deceased partner in each of the partnership assets or at least her share in the partnership so that the operation of s 6(1) of the Act might be attracted even if the land is to be treated as personal estate. However, for the reasons already given, it does not apply to an exercise of the option in clause 19.

The mischief at which s 6(1) is directed is the loss to purchasers who pay the whole or part of the purchase price of land without obtaining title and then find that the vendor is unable to make title and to give any effective transfer: Pooraka Holdings Pty Ltd v Participation Nominees Pty Ltd (1991) 58 SASR 184 at 188. It is very doubtful whether s 6(1) of the Act should apply in the case of a transfer of an interest in a partnership or a transfer from a deceased or retiring partner to the surviving partner or partners. Furthermore, the surviving partner will, generally speaking, need to be able to obtain title to the interest of the retiring or deceased partner as soon as possible in order to be able to continue to operate the partnership business. For these reason, it would seem to be desirable to amend s 6 to except from its operation the transfer of an interest in the assets of a partnership from a deceased or retiring partner to a surviving partner. In the meantime legal practitioners will need to ensure that clauses of this kind are drawn in a way which do not attract the operation of s 6(1).

For all of these reasons the appeal is dismissed.

WICKS J. This is an appeal from a decision of a Master of this Court. The facts of the matter are set out in the judgment of Debelle J. No good purpose would be served by repeating them here.

Clause 19 of the partnership agreement made provisions for the surviving partner on the death of a partner to have an option to purchase the interest in the partnership of the deceased partner. To quote the terms of the clause, the surviving partner is to have an option "to purchase the share of the deceased partner in the capital and assets of the business ...". In my view, what that really means is that the surviving partner is given an option to purchase the partnership share of the deceased partner.

This is reinforced by the description of the purchase price which appears in paragraph 19(a) of the partnership agreement. The purchase price is described as "the net value after providing for the debts and liabilities of the partnership of the deceased partner's share in the partnership ...".

Section 6 of the Land and Business (Sale and Conveyancing) Act 1994 provides in subs (1) as follows:

"(1) A contract for the sale of land or a business that provides for the payment of part of the purchase price of the land or business (except a deposit) before the date of settlement is void."

Having regard to the matters relating to the nature of the interest being sold, in my view, the sale contemplated by clause 19 of the partnership agreement should not be characterised as a sale of land, but rather the sale of a chose in action known as a partnership share.

The nature of a partner's interest in partnership property is referred to in Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd [1974] HCA 22; (1974) 131 CLR 321. In the judgment of the court (McTiernan, Menzies and Mason JJ) at page 327, the following statement appears:

"The nature of a partner's interest in the partnership property has often been explained. The partner's share in the partnership is not a title to specific property but a right to his proportion of the surplus after the realisation of assets and the payment of debts and liabilities. However, it has always been accepted that a partner has an interest in every asset of the partnership and this interest has been universally described as a 'beneficial interest', notwithstanding its peculiar character."

Similar observations appear in the later case of Federal Commissioner of Taxation v Everett [1980] HCA 6; (1980) 143 CLR 440 at 446 - 447.

Although the sale in this instance is not a "sale of land", it may nevertheless be a "sale of a business". In the Land and Business (Sale and Conveyancing) Act, "business" is defined to include "a share of, or interest in, a business". The activity carried on by the partnership here was that of farming. I can think of no reason why that activity cannot be characterised as a "business". Under s 6 of the Act, if the contract "provides for" the payment of any part of the purchase price of a business (except a deposit) before the date of settlement, the contract is void. "Date of settlement" is defined in the Act as follows:

"'date of settlement' in relation to a contract for the sale of land or a business, means - (a) if a date is fixed by the contract for settlement - the date fixed by the contract or some other date agreed by the parties in substitution for that date; (b) in any other case - the date on which settlement takes place".

The next question to consider is whether the contract arising from the exercised option fixes a date of settlement. There is no reference in the document to a date of settlement. Clearly, in the circumstances of this case, a date of settlement would be implied as being a date at the expiration of a reasonable period to elapse after the date of exercise of the option to purchase the partnership share in question: BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1978) 52 ALJR 20 at 26. The date so fixed would need to take account of the fact that a grant of probate or letters of administration would be required, the partnership assets would need to be valued and statements as required by s 7 of the Land and Business (Sale and Conveyancing) Act would need to be prepared or obtained. These matters may involve a delay of some months. In all probability, the first and possibly other instalments on account for the price would become payable before the above arrangements could be attended to.

In the present case, by the application of the principles set out in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council, a date of settlement would be implied by the contract but that is not the same thing as being "fixed by the contract" as the Land and Business (Sale and Conveyancing) Act requires.

Section 6 of the Land and Business (Sale and Conveyancing) Act speaks of a contract that "provides for" the payment of any part of the purchase price before the date of settlement in the sense that such part must be paid before the date of settlement. In fact, in this case, the contract is silent on whether any part of the purchase price must be paid before settlement. There is simply no link between the monthly payments and the date of settlement, as defined in the Act. For this reason, I am of opinion that s 6 of the Land and Business (Sale and Conveyancing) Act has no application in this case. If the agreement arising from the exercise of the option to purchase were to contain a date of settlement, the result might have been different. It follows that paragraph 19 of the partnership agreement or, perhaps more correctly, an agreement resulting from the exercise of the option referred to in clause 19 of the partnership agreement is valid.

I have come to the same conclusion in this matter as the learned Master but for different reasons. I have considered the application of s 22 of the Partnership Act 1891 but I am of the view that there is a solution to this matter which does not require one to have resort to that section.