Harvey v Harvey

Harvey v Harvey - [1970] HCA 11 - HCA 1970 case summary — Zoe

[45]

I should here refer to the written agreement relied upon by the appellant. The Chief Justice held that the agreement of 3rd September 1953 was not binding upon the respondents for lack of authority in the partner H. L. Harvey to make it on behalf of the firm of H. L. Harvey & Sons. But whether binding upon them or not, by its express term the agreement expired in 1958. The notice given by the appellant in 1967 to terminate the agreement was therefore abortive. Further the conditions which the agreement fixed for the non-payment of compensation by the appellant for the improvements made by the firm of H. L. Harvey & Sons were not capable of being fulfilled in 1967 nor were they fulfilled. Thus there is actually no need, in my opinion, to resolve the question of the authority of H. L. Harvey to make the agreement on behalf of the firm of H. L. Harvey & Sons. But I would observe that the making of such an agreement did not fall within the ordinary course of business of that firm, and that there clearly was no holding out by the respondents of any authority in their partner to make any such agreement. There remains the possibility of an actual authority implied from a course of conduct on the part of the firm. But I should find it impossible myself to conclude from the available material that there was any relevant and sufficient course of conduct with respect to the subject matter of the agreement out of which to infer actual authority to make such an agreement as that of 3rd September 1953. Consequently, I would find no warrant for disturbing the conclusion of the trial judge. Indeed, in my opinion, he was correct in holding that the agreement was not binding on the respondents. Thus both because of the fact that it expired in 1958 and in any case was not binding upon the respondents, I would dismiss the agreement from the case, except as indicating that the appellant and H. L. Harvey had become aware of the situation which had arisen with respect to improvements to "Fonthill" effected by the partnership. They sought to solve the difficulty they saw first by denying the existence of any partnership and then by assuming that a return of profits over seven years would be adequate compensation to the firm of H. L. Harvey & Sons, not in the role of partner, but in the role of a person improving the property of another by his own expenditure of time and money and paying but half of the profits derived from the property as the price of what presumably was a licence to use the land. Whether they realized it or not, this would have been a radical departure from the rights that then and during the contemplated seven years had and would have obtained with respect to improvements effected by the partnership.

[55]

whether, having regard to the terms of the partnership and to the purposes for which the works at the pit called the "Meadow Pit" were erected, made and formed, and are now used and capable of being used, and the circumstances under which the expenses of the said works were discharged and defrayed, any and what sum ought to be allowed in respect of such expenses. The partnership had been formed to work a seam of coal on the land of one partner and when that seam was exhausted, the managing partner proceeded to sink a new pit being the Meadow Pit referred to in the order for the inquiry so as to gain access to another seam of coal on the same land. Moneys were borrowed on the partnership account which along with other moneys of the partnership derived from its profits were expended in this work. The partner owning the land was aware of the activity and did not appear to make any objection to it: and of course stood to benefit thereof by the receipt of his share of the additional profits which working the seam would bring the partnership. The Lord Justices thought that though the partnership had acquired no interest in the land, upon a dissolution the partner not owning the land could not be deprived of the share of the profit of the partnership which had been expended in the work of constructing the pit. Turner L.J. said: Then when the pit is completed, or nearly completed, he gives notice to dissolve the partnership, and the effect of the dissolution is that all the benefit to be derived from the pit will belong to him, and the defendant will lose all his share of the profit which has been expended in making the pit. It is to meet this manifest injustice the inquiry we are now considering has been directed, and in my opinion has been rightly directed. This is not the case of a mere tenant at will laying out money on the land which he occupies, it is not even the case of an ordinary partnership carried on upon property belonging to one of the partners, and of the partnership profits being laid out upon the property. In such cases the expenditure is not necessary but is voluntary, and the party who makes or concurs in the expenditure, knowing the limit of his interest, may well be said to so do at his own peril. But this is a case of a partnership for working a mine, in which case, if the partnership is to continue at all, the expenditure is necessary and not voluntary, and it can hardly be that where money is necessarily expended for the benefit of a partnership, the partner expending it is not entitled to be repaid out of the partnership assets. It is true that, expenditure being out of the partnership profits, it falls upon the plaintiff no less than upon the defendant, and if, therefore, no profit can result to the defendant it may not be just that he should be charged with it; but the inquiry leaves this question open [1] . His Lordship seemed to place the equity to such an inquiry generally upon the need to prevent an injustice as between the partners but particularly on "the general doctrine of this Court" (i.e. the Court of Equity) "with reference to parties standing by and encouraging expenditure". If I may say so, I would myself prefer to express the particular ground upon which an inquiry of the kind in question should be justified by saying that the construction of the pit had become part of the partnership business, so that expenditure upon it was a partnership expense. But however that may be, the purpose of equity to prevent injustice remains as a overriding consideration in the taking of the partnership accounts. 1. (1862) 4 De G. F. & J. 42, at p. 50 [45 E.R. 1098, at p. 1101]. 2. (1862) 4 De G. F. & J., at p. 51 [45 E.R., at p. 1102].

[58]

His Honour formed the view that because of the nature of the business of the partnership, the land must itself be regarded as a partnership asset. But he took the view that the appellant's capital contribution by reason of the land becoming the equitable property of the partnership should be rated at the value of the land from time to time in its state and condition when contributed to the partnership by the appellant. Of course, at times of little or no inflation by changes in the purchasing power of money, and otherwise of stable land values, to credit a partner in capital account with the value of the land at the date of its contribution to the partnership will be enough to reflect the contribution of the land to the partnership venture. But where land values are likely to change due to circumstances outside the activities of the partnership it may be too simple a view to say that the land either becomes unqualifiedly an asset of the partnership or it does not. The realities of a situation may require that the sum to represent the land brought into the partnership in the partner's capital account should reflect changes in value of the land unassociated with partnership activity. I see no reason why the partner contributing his land to the partnership should not stipulate, expressly or impliedly, to retain for himself and not contribute to the partnership the increment in value of the land which does not come from any activity of the partnership. He could stipulate for a fluctuating sum to be credited to him to be equal to the value from time to time of what he contributed, on the assumption that no changes in the land had been made by the partnership. Such an arrangement would call for no more than the adjustment of the capital account at the time of distribution, unless of course the partnership agreement should provide for the payment by the partnership of interest upon the capital accounts of partners. In that case annual changes might be necessary in the partner's capital account.

[64]

However, even if the land did not become the equitable property of the partnership, the appellant in my opinion is accountable to the partnership for any benefit which he would have as the beneficial proprietor of the land and which is the creation or product of partnership expenditure of money or effort. Let it be supposed that the land remained throughout the legal and equitable property of the appellant, yet the partnership business - in which as a partner the appellant was inevitably involved - was to improve that land by the expenditure of money and effort. That expenditure did effect improvements which, on the assumption made, accrue to the appellant as owner of the land. As I mentioned earlier, it could not be concluded that the respondents had agreed that the partnership should have no claim in respect of these improvements. Whilst the improvements cannot be separated from the land and separately sold, the benefit to the land which they represent is clearly identifiable and measurable in terms of money. It seems to me both a sound and an undeniable principle of partnership law that no partner can retain for his sole benefit the product of the necessary expenditure of partnership money and effort in the conduct of the partnership business, see generally Lindley on Partnership, 12th ed. (1962), pp. 344 et seq. Necessary expenditure in this connexion is in contrast with voluntary expenditure as the words were used in Burdon v. Barkus [2] . Here the appellant on the assumption made would have as owner of the land the added value brought to it by the improvements effected by the partnership as a necessary part of the carrying on of the partnership business at partnership expense. As partner, he is, in my opinion, accountable to the partnership for that added value. It would be inequitable, unjust and a breach of the good faith required between partners for him to retain the full benefit of the added value created in the stated circumstances. Therefore whether or not the land became a partnership asset, the appellant in the taking of the accounts ought, in my opinion, to be debited with half the added value of the land brought to it by the improvements effected by the partnership in the carrying on of the partnership business. His Honour has achieved this result by the capital accounts of the partners which he has directed.

[74]

it was decided at that meeting we were to go in it together - I was to pay half the expenses of running the place and they were to pay half the expenses. We were to divide the profits up - half to me and half to the firm. H. L. Harvey and his three sons were in a firm at that time - I was not in a very good condition at that time - I had just suffered a nervous breakdown. I think he did mention the implements and I said they could go in too. My son Robin was about 6 at that time. H. L. said to me instead of selling the place keep it on - it'll do my boys a lot of good because they will become established and when Robin is ready to go back it will be ready for him. H. L. Harvey and sons took over "Fonthill" about March 1946 pursuant to that agreement. H. L.'s sons were David, aged 24-25; Bruce was a couple of years younger and Gerald I think was over 21. Horace Lionel Harvey is now deceased, so that the only evidence of the oral agreement made in 1946 comes from Harold Harvey. For reasons which hereafter appear I regard him as an unreliable witness and I have rejected certain parts of his evidence where it was in conflict with that of his nephews. However I have no reason to doubt that the substance of the discussion between Harold and Horace Lionel Harvey was as stated by Harold Harvey. There was therefore a bare agreement that the "firm" (consisting of Horace, Lionel, David and Gerald Harvey) and Harold Harvey would carry on the business of pastoralists on "Fonthill" as partners in equal shares and that Harold would "throw in" the sheep and implements. It was implicit in the circumstances that Harold would be a dormant partner and take no active part in the business. The substance of the agreement is plain enough. Harold was to provide the whole of the assets necessary to carry on the business. Horace and his three sons were to contribute their labour and skill but no capital; the net profits were to be divided equally as between Harold and the "firm". No period for the partnership was set but no doubt the parties contemplated that the partnership would continue until Harold Harvey wanted "Fonthill" for his son Robin (then aged 6).

[83]

At this point it is convenient to refer to a document of 3rd September 1953 purporting to be an agreement between H. H. Harvey and H. L. Harvey & Sons which was signed by H. H. Harvey and H. L. Harvey for and on behalf of H. L. Harvey & Sons. This document records that H. H. Harvey and H. L. Harvey & Sons "have heretofore been carrying on the business of pastora-lists on "Fonthill" " and purports to record the relationship between the partners with regard to that business. Except as to two matters the terms of the partnership as recorded do not differ materially from those agreed to in 1946. The document does, however, contain special provisions about a bulldozer purchased by the partnership in 1951. It also fixes the expiration of the partnership as at the end of seven years from 6th December 1951, i.e. 6th December 1958, and it provides that if H. H. Harvey should decide to sell "Fonthill" before 6th December 1958 it should be offered first to H. L. Harvey & Sons. If in the event "Fonthill" should be sold otherwise than to the firm, provision is made relating to the cost of improvements upon "Fonthill". The effect of these provisions is that if "Fonthill" should be sold after 6th December 1958 H. H. Harvey should have it, with all improvements, and without any payment for the improvements, but if it should be sold before 6th December 1958 H. H. Harvey should pay as compensation one half of the costs of "permanent improvements of a capital nature effected while the partners have been or shall now carry on the said business at "Fonthill" ". His Honour found that H. L. Harvey did not have the authority of the firm of H. L. Harvey & Sons to sign this agreement on their behalf and this is not a finding with which I think this Court can interfere. Had the agreement bound H. D. Harvey and Gerald H. Harvey, the sons of H. L. Harvey and the parties to these proceedings, it would, of course, have negatived altogether any suggestion that "Fonthill" became partnership property and there would have been some express provision about some matters now in dispute. As it is, however, these proceedings must be decided on the footing that the agreement did not bind H. D. Harvey and Gerald H. Harvey. I see no reason, however, why the agreement should not be regarded as a declaration against interest by H. L. Harvey - who died before these proceedings began - and used to support the conclusion which, apart altogether from the agreement, I think I am obliged to draw, viz. that "Fonthill" was not an asset of the partnership.

[86]

whether, having regard to the terms of the partnership and the purposes for which the expenditure upon the mill and other buildings was made, any and what sum should now be allowed to the partnership in respect of such outlay [3] . Kay J. had earlier stated the basis of this last direction as follows: Then comes the question what is to be done as to the expenditure on the property, both on the Cumberland Mills and upon this additional property; and in order to make the inquiry which I think myself bound to direct upon that subject plain, and in order to prevent as far as I can any difficulty arising in the working out that inquiry, I wish to explain distinctly the grounds upon which I am going to direct that inquiry. If this money was expended out of what would otherwise have been divided as partnership profits, prima facie the effect of that would be to diminish the amount of profits to be divided. If it did diminish the amount of profits to be divided, then the extent to which it diminished Mr. Pawsey's profits may be treated as having been expended out of Mr. Pawsey's money. But it does not follow, even then, that Mr. Pawsey is entitled to get that money back. It may be that the expenditure has been practically exhausted, that the partnership had the full benefit of it, and that nothing remains now to be divided or to be recovered in respect of that expenditure. It may be that it was expended with Mr. Pawsey's full consent, as he admits, and with his eyes open to the fact that his interest would be a determinable interest, and it may be that having permitted the expenditure to be made, knowing precisely what his interest was, that he is not now entitled to get back any part of it. I do not mean to prejudice even that question. On the other hand, it may be that he looked to the partnership continuing much longer than it has in fact continued. The expenditure may have been so large that it is not an exhausted improvement even now, and it may be fair and right, looking to all the circumstances of the case, that he should have some portion of the money paid back to him in respect of that amount of profit which would otherwise have come to his share, and which has been expended upon these mills and cannot be treated as having been exhausted; and it is in order not to prejudice that, and to give him any advantage which he is fairly entitled to upon that last head, that I shall direct an inquiry upon the subject [1] . 1. (1862) 4 De G. F. & J. 42 [45 E.R. 1098]. 2. (1881) 18 Ch. D. 698. 3. (1881) 18 Ch. D. 698. 4. (1881) 18 Ch. D., at p. 710. 5. (1881) 18 Ch. D., at pp. 707-708.

[91]

The learned Chief Justice of the Supreme Court of Tasmania decided that the property called "Fonthill" became in equity an asset of the partnership. He cited a passage from Lindley on Partnership, 12th ed. (1962), pp. 366, 367, to which I shall refer again. He referred to the cases of Burdon v. Barkus [1] , Pawsey v. Armstrong [2] and Miles v. Clarke [3] as illustrating "the broad equitable approach the Courts have taken in adjusting the rights of partners on a dissolution of partnership". His Honour pointed out that in none of those cases did the Court hold that the land itself became a partnership asset in equity. His Honour then stated that the present case is not one merely of a firm carrying on business on property belonging to one member and partnership moneys being outlaid on the property, but a case where the property itself is the very asset which produces the partnership profits. He said also "The land itself was physically involved in the business and therefore an asset of the business". But, with respect, I cannot agree that it follows from the fact that land is the asset which produces the partnership profits and is physically involved in the business that it is an asset of the partnership. It is common for agreements to be made, particularly amongst members of a family, for the use by a partnership of land which belongs to one of the partners. By such an agreement, unless a different intention is expressed or is to be inferred from the circumstances, the partnership acquires a right to have the use of the land so long as the partnership continues but no greater right or interest in it either at law or in equity than a right to use the land, a right which may be regarded as arising either from a tenancy or from a licence. Subject to that right the ownership of the property remains with its former owner. This type of arrangement is illustrated by the case of Munro v. Commissioner of Stamp Duties [4] , in which transfers by way of gift by the owner of the land, upon which under an earlier verbal agreement the business of graziers had been carried on by the owner and his children in partnership, were considered to be gifts of "the property shorn of the right which belonged to the partnership" [5] .

[94]

A further important question arises out of the conclusion that the land did not become an asset of the partnership. If it had done so then the land in its present state would belong to the partnership. The members would be entitled to share in the proceeds of its sale or alternatively, if the members so agreed, its present value could be taken into account in the working out of the respective rights of the members of the partnership. It is contended that if it be found that the land remained the property of the appellant, he is nevertheless required to account to the other partners, in accordance with their shares in the partnership, for a proportion of the amount by which the value of the land has been increased by the improvements. The question raised by this contention is distinct from the question of what adjustments are needed in the taking of the accounts of the partnership in respect of moneys expended upon the making of improvements in the course of carrying on the partnership. In relation to the latter question I am of opinion that to the extent that any of such expenditure was in fact met by some of the partners only, they are entitled to an adjustment in the accounts on the footing that the expenditure is charged against the partnership. It has been argued that the respondents should not now be permitted to require the appellant to make good his share of any expenditure on improvements which should have been, but was not, debited against the partnership. For the reasons given by Menzies J. I do not accept this argument. But it is necessary to consider also whether this is a case in which upon the dissolution of the partnership an inquiry should be directed in respect of expenditure on improvements, going beyond the making of such adjustments as are necessary to ensure that the burden of partnership expenditure is made to fall upon the partnership. In some cases where the money expended came from partnership profits or funds, so that there was no need for such adjustments as I have last mentioned, it has been held that it may be proper to recoup to one partner, who by reason of expenditure on property which belongs solely to another partner has received less as his share of profits than he would otherwise have received, all or part of the sum which for that reason he has not received. Cases in which inquiries have been directed to ascertain whether or not it is proper to allow a recoupment of this kind include Burdon v. Barkus [1] and Pawsey v. Armstrong [2] . But in my opinion the present case is not one in which an inquiry for that purpose should be directed. It was in my opinion part of the agreement that the expenses which were to be shared by the partners should include the costs of improvements to the property, subject to the condition that the labour of the members of the firm of H. L. Harvey & Sons should not be a charge against the partnership. In my opinion the events which happened do not require that notwithstanding that agreement the respondents should be held to have a right to call upon the appellant to repay to them all or part of what was expended by the respondents' firm as their share of the expenses to which they were obliged by that agreement to contribute. If the appellant had exercised his right to determine the partnership at such a time and in such a manner that any benefit, which might have been expected to come to the respondents' firm by way of increased profits from the land resulting from the improvements, was thereby taken from them and the whole of the benefit therefore accrued to the appellant, I think that in those circumstances probably an inquiry of the kind directed in a somewhat similar situation in Burdon v. Barkus [1] would have been proper. But in my opinion this is not a case where this is required. The parties agreed to share the profits and to share the expenses. It was contemplated that improvements would be made and it must have been expected that this would add to the expenses but would also increase the profits of the business. It was contemplated that the agreement would go on for a substantial period and in fact it did so.

[97]

Not only may one partner make outlays or advances for the benefit of the firm, but the firm may make advances and outlays to or for the benefit of one partner. Under ordinary circumstances such advances and outlays will be equivalent to a loan by the firm to him, and must be treated accordingly in taking the partnership accounts. But occasionally considerable difficulty arises, e.g., where there has been an outlay by the firm on property belonging exclusively to one of the partners, but used by the firm for partnership purposes. In the absence of all evidence of any agreement upon the subject, justice seems to require that in taking the partnership accounts the owner of the property in question should not be allowed exclusively to gain the benefit of the outlay, but that the improved value of his property should be treated as a partnership asset, and be shared between him and his co-partners accordingly. In a footnote there is a reference to Miles v. Clarke [1] and a reference to p. 366 of the text. When one goes to p. 366 it is seen that the question with which the text and the cases there discussed are concerned is really the different question which I have mentioned above, that is, whether money laid out on property can be considered as a charge on it or whether the owners obtain the benefit of the outlay. Immediately after the paragraph which I have quoted the text refers (at p. 418) to Burdon v. Barkus [2] and to Pawsey v. Armstrong [3] . It is not asserted that these two cases lay down the rule which according to the author "justice seems to require" and upon examination they do not support it. In Pawsey v. Armstrong [3] a declaration was claimed that the premises belonging to the defendant were subject to a charge in favour of the partnership for all moneys of the partnership laid out thereon for the purposes of the partnership business, together with interest. It does not appear that a claim was made for a share in the increased value of the property and no relief of that kind was granted. The basis upon which Kay J. thought that it was possible, but by no means certain, that the plaintiff was entitled to get back some of the money expended, which otherwise he would have received as a share of profits, was explained in the judgment [4] . The case gives no assistance to the respondents in the present case, in respect of their claim to receive a share of the increased value. Nor does the case of Miles v. Clarke [1] where Pawsey v. Armstrong [1] was mentioned and a similar inquiry was directed. 1. [1953] 1 W.L.R. 537. 2. (1862) 4 De G. F. & J. 42 [45 E.R. [1098]. 3. (1881) 18 Ch. D. 698. 4. (1881) 18 Ch. D. 698. 5. (1881) 18 Ch. D., at pp. 707, 708. 6. [1953] 1 W.L.R. 537. 7. (1881) 18 Ch. D. 698.

At a glance

Court

Decision date

Before

Source

Judgment (116 paragraphs)

Parties