Johnson v Snaddon & Ors [2001] VSCA 91

Court of Appeal (Vic)|2001-06-14|Before: ORMISTON, BATT and BUCHANAN, JJ.A.

PARTNERSHIP - Duty of good faith owed by partners to each other - Partner informed by fellow partners that he was not wanted as a partner - No breach of duty.

One cannot help feeling some sympathy for the appellant who, after many years of loyal service to the respondent firm, was at the age of 57 effectively cast aside by his partners in the name of business efficiency. Partnerships of solicitors once were more gentlemanly institutions where those who in their early years were in part subsidised by the leading partners were prepared to subsidise those partners as they grew older and slightly less busy, if only because their continued membership of the firm retained a level of goodwill in the partnership which the latter had helped to build up. That view of professional life, however, did not arise from the application of equitable principles relating to good faith but out of fellow feeling and good manners, even if that altruism was tempered by a belief that goodwill was largely a product of personal contact which ought to be assiduously cultivated.

The present case, though purporting to be founded on an application of the fiduciary principle of good faith, was rather an unhappy accident of a more modern, business-oriented approach to professional life. Doubtless in other circumstances that principle may be called in aid where there is an improper expulsion of one partner by others, but this case, as the judgment of Buchanan, J.A. demonstrates, does not truly raise any such issue. Indeed, on one view, if good faith were to be called into play in these circumstances, the facts might be said to demonstrate that the appellant had lost the confidence of all, or all but one, of his fellow partners and that too, in a different era, might have prompted the appellant's resignation. That is in fact what he did, for which he might have been commended, if he had left it at that, because, for better or worse, it was obvious what the younger members of the firm wanted to do. On the other hand he might have called their bluff, required them to go through the requisite hoops for expulsion, and come to the same fate. Then he might have turned to his lawyers to see whether his former partners had properly gone through those hoops, but that is not what he chose to do.

3 Along with others, he may also have found the process of so-called "anonymous" and elaborate questionnaires distasteful and even in part lacking in coherence and logic, but he was well aware of what was in train, even though he may not have fully appreciated what was likely to come out of it in his case. He may have queried the results, he may have asked the other partners whether those results displayed their true beliefs and desires at either the retreat or at some other general meeting of the partners, but, as the facts amply demonstrate, he knew that in the end that would make little difference to his fate, however unpleasant that was for him. It was only after he had done the right thing, as I have said, that he cast around for reasons to bring the present proceedings. That may have revealed that some, including the Chief Executive Officer, were not entirely unhappy to see him depart but it does not show that his fellow partners acted in bad faith or in any manner which would entitle him to relief in these proceedings.

Regrettably, therefore, I would dismiss the appeal for the reasons stated by Buchanan, J.A.

I agree with Buchanan, J.A. on the wrongful expulsion claim. In another context, the word "anonymous", where the words "private and confidential" are also used, may be capable of referring to the information itself with the sense of "without names"; but, as the trial judge, correctly in my view, found, that is not how it was used in this case.

On the subsidiary aspect of this appeal, I was for some time in favour of exercising this Court's undoubted power of amendment under Rule 64.22(1) of Chapter I to enable the appellant to claim redemption of his units in the Eltav Unit Trust as upon his retirement (as established by the primary judge's decision and confirmed by this Court), notwithstanding that amendment to make an alternative claim had not been sought below, even after his Honour published his reasons, and

then remitting to the Trial Division the determination of the amount, if any, due to the appellant for his units. The object of that course would have been to save the trouble and expense of a new proceeding. But on reflection I am persuaded that such an amendment would be foreign to the nature of the proceeding, the true and only basis of which is that the appellant was wrongfully expelled. Moreover, closer consideration suggests that there would be little, if any, saving in trouble or expense.

The appellant was a partner in a firm of solicitors called Purves Clarke Richards between October 1988 and October 1997. In these proceedings the appellant claimed that he was expelled from the partnership in circumstances that amounted to a breach of the duty of good faith owed to him by his fellow partners. The defendants to the proceedings are the remaining partners and Eltav Investments Pty. Ltd. ("Eltav"), the company acting as trustee for the unit trust which provided services to the firm. In addition to compensation for his wrongful expulsion the appellant claimed redemption of the units which he held in the trust.

The partnership was regulated by the terms of a deed dated 9 April 1991. The deed provided that the partners were to retire on 30 June immediately following attaining the age of 65 years. Provision was made for expulsion of a partner by vote of at least three-quarters of the remaining partners. The deed could only be amended by a resolution carried by three-quarters of the partners. Upon the retirement, death or expulsion of a partner the units held by him in the unit trust were to be redeemed and the proceeds paid to him or his estate. The management of the firm was committed to a management committee consisting of four partners. Clause 4(b) of the Deed provided:

"(d) The function of the Management Committee shall be to - (i) recommend policies to the Partnership. (ii) manage the operations of the Partnership. (iii) supervise and assist in the management of the Partnership."

On 9 August 1984 the partners resolved to change the management committee to a board consisting of a partner as chairman and four members, two of whom were to be partners and two outsiders. The chairman during the events with which this proceeding is concerned was John Evans. The partnership deed contained no provision for a manager, but it would appear that a manager was employed by Eltav. The position of manager, who from 9 August 1994 bore the title of chief executive officer, was filled at all material times by one Bradley Brown.

In the mid-1990s the partners became concerned about the level of their remuneration. At a partners' meeting held on 13 December 1994 the chief executive officer was recorded by the minutes as reporting that "It is a board imperative to raise the net earnings per Equity Partner - so as to retain and attract those needed in the Partnership." The partners responded by pursuing two courses of action. One was to replace the system of distribution of profits to the partners equally with a distribution that gave a larger share of profits to those partners who earned the highest amounts in fees. That was achieved in June 1995. The other was to reduce the number of partners. The appellant shared the view that there were too many partners. He told Brown in July 1994 that the firm was "over-partnered". At that time there were 23 partners.

It was the pursuit of the objective of reducing the number of partners that eventually led to the appellant leaving the firm and to these proceedings.

At a partners' meeting in March 1995 a motion was carried by a majority of eight to five that the board have power to exclude a partner, with a right of appeal to the partnership. The level of support for the motion was regarded as insufficient by the board to take the matter further. In a report to the board made in June 1996 Brown said:

"I am deeply troubled with the partnership issues that face the Board. I do not believe the Firm can sustain 23 partners, nor do I believe all the partners in place should be with the Firm."

On 25 June 1996 the partners resolved that the board be empowered to negotiate the retirement from the partnership of individual partners without being required to have the terms of the retirement approved by the partnership. Pursuant to this resolution the departure of three partners was negotiated by the board.

The remaining partners believed that there were still too many partners. In a memorandum to the board dated 25 March 1997 Brown said: "There are simply too many equity partners to support a practice of this size." Four days after this memorandum the board held a special meeting to discuss the topic of partner numbers. According to notes made after the meeting, the board resolved to develop a plan involving three elements: discussions between the chief executive officer and board members and each partner; a survey to obtain the views of the partners with respect to their fellow partners; and a detailed analysis of the each of partners' contributions to the firm. It was envisaged that those activities would lead to a report in which the board would recommend to the partners those partners which the board thought should leave. Although the foregoing was expressed as a resolution in a record of the events of that meeting, the trial judge held that it was impossible to conclude that the notes faithfully reflected what the participants decided. At all events, by June 1997 the board had not been able to reach any agreement about a settled course which could be suggested to the partners. This inertia was frustrating to Brown, who described the position as "gridlocked". A partners' retreat was suggested to discuss the future of the partnership. In a memorandum dated 10 June 1997 Brown wrote:

"Perhaps as part of the retreat the partners could complete an anonymous questionnaire on a range of issues about the partnership and their aspirations in terms of the type of practice they have and the profit they receive. This information will be very useful to the board."

The minutes of a board meeting held on 17 June 1997 record Brown suggesting that "a retreat be held in July" and proposing that "a survey be completed by all equity partners on an anonymous basis to establish their views as to the partner structure of the partnership."

Evans raised the matter of a questionnaire and retreat at a partners' meeting held on 19 June 1997. According to minutes of the meeting Evans said that the purpose of the questionnaire was to establish the views of the partnership as to issues such as "the number of equity partners, the role of non-equity partners, the income returned to partners, the partner make-up of each team, the ability to retain partners, and attractiveness or otherwise of a national link-up." In his evidence Brown said that the partners were told that the questionnaire was to be anonymous and private with the results available for discussion at the retreat. Another partner in his evidence said that "The confidentiality [of the information] was as to the partnership, it wasn't just to the board. I mean it was always anticipated that the information that came out of the questionnaire would be available to the partnership, albeit on an anonymous basis." Another partner's recollection was that either Brown or Evans told the partners that the questionnaire would be anonymous, private and confidential and a compilation of the results would be distributed to the partners. The trial judge concluded that there did not appear to have been any dissent by the partners from the proposals advanced by the board.

The questionnaire was prepared principally by Brown with the participation of one partner. Questions ranged broadly over the affairs of the partnership, dealing with issues such as management structure, the desirability of a merger with another firm, and whether particular teams of partners and solicitors should be combined to form one litigation unit. The questionnaire also contained questions which were designed to elicit the views of the partners as to their peers according to criteria such as legal skills, leadership skills, and staff, partner and client rapport. The questionnaire invited the partners to comment upon whether each of their fellow partners should remain as an equity partner, become a non-equity partner, become a consultant of the firm or leave the firm. Evans conceded in his evidence that it was foreseeable that a partner the subject of an adverse judgment might consider that it was not feasible to continue to practise as an equity partner. Another partner in his evidence assented to the proposition that disclosure of an adverse judgment was likely to erode the confidence and trust necessary for a partner to continue to function as a partner.

The trial judge found that there was no suggestion of any protest by any partner, including the appellant, to the contents of the questionnaire. The trial judge found that the partners agreed that the information contained in the answers to the questionnaire would be circulated to the partners in the form of a summary. He found that the reference to privacy, confidentiality and anonymity was to be seen as relating to the source of the information rather than the information itself. The trial judge found:

"[T]he preponderance of evidence is that all the partners including Mr Johnson were prepared for a full summary of the survey results to be circulated for discussion at the retreat."

His Honour described the contrary evidence of the appellant as "a retrospective rationalisation stemming both from the devastating results that were revealed and the passage of time."

The survey revealed that the majority of the partners no longer desired that the appellant remain as a partner. Nine of the 16 persons then constituting the partnership expressed the view that if the appellant would not consider any position with the firm other than that of equity partner and was considering leaving the firm, he should be encouraged to do so, or the board should actively pursue his departure. Only one partner other than the appellant considered that ideally he should be an equity partner. Two partners said that ideally he should be a non-equity partner, eight said that he should be a consultant and three that he should not be in the firm in any capacity. On the score of trust and respect the appellant was rated at 3.08 and 2.58 respectively. The partners were instructed that 3 was average.

Brown conferred with Evans, and as a result Brown spoke to the appellant to inform him that the survey revealed that his fellow partners did not wish the appellant to remain as an equity partner, although they wanted him to remain with the firm in another capacity. In his evidence Brown said that he informed the appellant that "it was up to him whether or not he wanted to attend the retreat, but that he was certainly welcome, but that it was understandable if he didn't want to attend." At the retreat held on the following day, 19 July 1997, the appellant announced to his fellow partners that it was clear that he was not wanted as an equity partner.

The survey also revealed that a majority of partners did not wish another two partners to remain with the firm. Those partners were members of the Commercial Dispute Resolution team, one of five teams into which the partners and solicitors employed by the firm were divided. The appellant was the leader of this team. The results of the survey were communicated to the two partners, who left the firm on 5 September 1997. On that day the team was merged with the Insurance and Employment Services Litigation team. The appellant was not consulted about the change.

On 23 July 1997 Evans and another partner and Brown met the appellant and offered him a consultancy. On 29 July 1997 the appellant told Evans that he could not work for the partners who had treated him as they had done and he was unable to contemplate ever sitting again at the boardroom table with the partners. On 7 August 1997 an offer of a consultancy was made in writing to the appellant. Five or six days later the appellant told Evans that he had decided not to remain with the firm. He said that he was leaving as he considered he was being expelled. In a letter to Evans dated 23 September 1997 the appellant spoke of the "humiliation and anguish" caused to him by the survey and the publication of its results. The appellant left the firm at the end of October 1997, contending that he had been effectively expelled from the partnership, while the firm's insurers in a letter to the appellant contended that by his conduct the appellant had repudiated the partnership agreement.

By his amended statement of claim the appellant alleged that the events in 1997 described above were part of a course of conduct undertaken by the respondents for the purpose of rendering the appellant's position as a partner intolerable and amounted to expelling the appellant from the firm. In so acting, it was alleged, "in breach of the fiduciary duties owed by the defendants, and each of them, to the plaintiff", each of the defendants:

"(a) acted for his own benefit; (b) failed to act for the benefit of the partnership; (c) failed to treat the plaintiff equally with all other partners; (d) failed to act with honesty, integrity and fairness towards the plaintiff; (e) failed to act in good faith towards the plaintiff."

Instead of alleging that a particular duty was breached and giving particulars of the acts constituting the breach, the appellant recounted a large number of acts and averred that some or all of them constituted breaches of the duties alleged to be owed to the appellant by the respondents, which were:

"(a) duties of honesty, integrity and fairness; (b) a duty not to act for his own benefit or for the benefit of any third person; (c) duties to treat each partner in the firm equally; and (d) a duty of good faith."

In his final address to the trial judge counsel for the appellant relied upon seven events as constituting the respondents' breach of the obligation of good faith which they owed to the appellant. He said:

"First, when the board sanctioned the development of a questionnaire which was to invite peer judgement of partners on each other for potential use against individual partners. Secondly ... when the board did not disclose to fellow partners its agreed strategy to reduce partner numbers to 11 or 12 by 31 December. Thirdly, when the board did not disclose its clear legal advice obtained from senior counsel and affirmed by senior counsel that acting in good faith to reduce partner numbers required the adoption and promulgation of objective criteria and measurement of partner performance against those criteria. Next, when the board did not disclose that the results of the questionnaire might be used against individual partners rather than simply for planning purposes. Next, when the board permitted the survey results to be published to partners knowing of their heavily adverse content when the destructive character of the disclosure was the seal. Next, when the board did not allow Mr Johnson any opportunity to be heard before doing so. And lastly, when the partners themselves acted and permitted the board to act on the survey result to pursue the termination of Mr Johnson's position at the firm as an equity partner."

The trial judge dealt with each matter. He held that none of them amounted to breach of the duties alleged to be owed to the appellant by his partners.

The appellant has challenged findings made by the trial judge, principally as to commissioning and using the survey of the partners' views as to their fellows. For the most part the appellant pointed to evidence which he contended the trial judge ignored or incorrectly failed to prefer to other evidence. In my view it has not been demonstrated that the trial judge erred in reaching any of his findings.

The appellant submitted that the trial judge erred in concluding that only the source, not the results, of the survey were to be confidential. The appellant relied upon his own evidence and a somewhat ambiguous sentence in the witness statement of the chief executive officer. On the other hand, there was a large body of evidence supporting the trial judge's finding. In the partnership there was an established practice of using personal and peer group assessment of partners' performance. The evidence of the appellant himself was that one of the principal purposes of the questionnaire was " ... the future of the structure including issues such as the number of equity partners. Now, it goes without saying that could involve possibly the reduction of equity partners. To that extent I believed that that was what this retreat or questionnaire would flush out." The evidence of the other partners was that the results of the questionnaire would be available for discussion at the retreat. There was no reference in the minutes of the meeting of partners held on 19 June 1997 that the results of the questionnaire would be confidential, and the appellant agreed in his evidence that the minutes accurately reflected what occurred at the meeting. The appellant did not object to the release of the survey results, notwithstanding that he was forewarned of them prior to their dissemination.

The appellant submitted that the trial judge erred in finding that the appellant was content that the results of the survey be published. In the light of the evidence from the respondents that the appellant did agree to publication, in my view the trial judge, having seen the appellant give evidence, was entitled to conclude "that all the partners including Mr Johnson were prepared for a full summary of the survey results to be circulated at the retreat."

The appellant questioned the motives of Brown, the chief executive officer, and sought to fasten responsibility for his actions upon the respondents. It appears from the evidence that Brown was prominent in the campaign to reduce the number of partners. The appellant contended that the trial judge should have inferred that Brown's action in releasing the survey results was motivated by his desire to decrease the appellant's standing and influence in the partnership. The appellant pointed to the fact that in a memorandum dated 10 June 1997 Brown referred to "one or two partners who are targets and not too difficult to knock off" and to the fact that in another memorandum bearing the same date Brown referred to the firm being influenced strategically to its detriment by the appellant. In my view this evidence did not establish that Brown was motivated by any desire to belittle the appellant or to decrease his standing. In any event, the respondents were not liable for the actions of Brown. The appellant submitted that as chief executive officer of the firm, Brown's actions were those of the firm. That may have been so with respect to outsiders, but in my view Brown did not act as agent for the respondents vis-a-vis the appellant in dealings between partners. If the respondents were vicariously liable for the conduct of Brown, so was the appellant.

The list of events referred to in paragraph [21], which were said to constitute the breach of duty by the respondents, did not mirror the amended statement of claim, although there were many common elements. In this Court the appellant's counsel identified what he termed key evidence of the respondents' breaches of duty. The elusive nature of the appellant's case is shown by the fact that the elements of that evidence constituted another, somewhat different list.

I think that in large measure the difficulties encountered by the appellant in formulating breaches of duty were due to the facts that his real complaint was that the partners decided that they no longer wanted him to remain a partner and said so, and such conduct did not amount to a breach of any duty owed by the respondents to the appellant. Partners are required to be honest with each other and not to pursue their own interests to the detriment of the interests of the partnership. Partners must deal with each other in good faith. Judicial statements of partners' duties have been expressed in grand terms. In the first edition of his Treatise on the Law of Partnership, Lindley said that a partner's conduct was to be tried "by the highest standard of honour"[1]. Dixon, J. said that "a stronger case of fiduciary relationship cannot be conceived than that which exists between partners."[2] Cardozo, J. referred to the duty owed by partners to each other as "the finest loyalty."[3] It should not be supposed, however, that partners cannot fall out without breaking their duties to each other. While partners must be worthy of each other's trust and faith, they are not obliged to continue to trust and have faith in each other's abilities. Equally, they are not obliged to continue to respect each other and to wish to remain in partnership. Rectitude is demanded of a partner, but not good manners or sympathy. A partnership is a commercial undertaking, the principal object of which is to make profits, and the partners are entitled to pursue that objective robustly provided that they act honestly with each other and do not act in their own interests where to do so conflicts with the interests of the partnership.

Counsel for the appellant relied upon the duties of partners to be loyal and faithful to each other and to act with the utmost good faith and contended that those duties were breached by the respondent's conduct in pursuit of the aim of reducing the number of partners. The duties so stated are general descriptions of a number of particular duties, such as the duty not to derive a personal profit from partnership property, the duty to make business opportunities available to the partnership and the duty to reveal to partners matters that affect the affairs of the partnership. The faithfulness and loyalty required of a partner is not uncritical devotion. Partners are fiduciaries in that trust and confidence are reposed in them by their fellow partners. They must act accordingly. That is not to say that partners are obliged to continue to trust and have confidence in the abilities of their fellow partners and the value of their work for the partnership. If the partners determine that one of their number is no longer an asset to the partnership, so that they consider it is in the best interests of the partnership that the partner leave, they may embark upon negotiations for his departure without breaking any fiduciary obligation owed to him. That is essentially what the trial judge found occurred in the present case.

It may be assumed for present purposes that the respondents might have been in breach of the duty of good faith which they owed to the appellant if they had deliberately employed the device of a survey to target the appellant with the object of manoeuvring him into resigning from the partnership. A scheme along those lines was put forward by the appellant and rejected by the trial judge. His Honour said:

"It was further argued by [counsel for the appellant] that one undisclosed purpose of the questionnaire was to use the results against individual partners. In my view the evidence does not bear that out. The results of the questionnaire, as it referred to individual partners, could not have been known in advance to the board or the partners collectively. There is nothing to suggest that any individual partner, including Mr Johnson, was `set up'. It is one thing to formulate a questionnaire with the specific intention to use it in the way suggested by [counsel]. It is quite another, the results having been obtained, to seek and negotiate with individual partners on the basis of those results. Any assertion that there was a hidden agenda in the completion and administration of the questionnaire is not made out."

In my opinion this finding was correct. In agreeing to the preparation and publication of the survey, the partners foresaw that if the survey disclosed that a partner was not wanted, he might resign on that account. There was no basis, however, for inferring that the respondents intended that the appellant would or might be placed in that position and acted to bring about his departure from the partnership. Once the trial judge found that the respondents had not embarked upon a course of conduct designed to force out the appellant, but were pursuing what they conceived to be the best interests of the partnership, the substratum of the appellant's case disappeared and the dismissal of the claim was inevitable.

After the publication of the trial judge's reasons for dismissing the appellant's claim, counsel for the appellant submitted that there remained a live issue as to quantum, namely, the value of his units in the Eltav Unit Trust. He submitted that the issue did not depend upon whether the appellant was expelled or resigned from the partnership. The trial judge held that the appellant's claim for redemption of his units depended upon establishing the allegation that the respondent's conduct amounted to wrongfully expelling the appellant. In my opinion his Honour's conclusion was plainly correct. In his amended statement of claim the appellant pleaded:

"By reason of his expulsion as a partner, the plaintiff on 31 October 1997 became and was entitled to receive payment from the defendants and from Eltav pursuant to the terms of the partnership agreement as alleged herein and for Eltav to redeem his units in the Eltav Unit Trust."

No claim for redemption was made on the basis that the appellant had retired from the partnership. Accordingly, the trial judge refused an application for an order that issues as to quantum be fixed for trial.

The appellant did not seek leave from the trial judge to amend the pleadings and claim redemption of the units on the basis of his retirement from the partnership. He did seek leave to do so from this Court. The facts proved at trial, namely, the terms of the partnership agreement and the resignation of the appellant, entitled the appellant to redemption of the units. Although those facts may not be contested by the respondents, the respondents contend that the amounts due to the appellant have been paid to him. As the value of the units remains in issue, this Court cannot determine the proceedings. Further facts remain to be found.

An appellate court in certain circumstances may entertain a plea not made at first instance. Thus an appeal court may affirm a decision by giving the facts found below a different legal character[4], provided that it can dispose of the plea "without deciding nice questions of fact"[5]. That is not the position in this case. The appellant seeks to make a new claim based on facts established at first instance in the context of another claim. In my view such a claim should not be entertained for the first time on appeal.

[2] Birtchnell v. Equity Trustees, Executors & Agency Co. Ltd [1929] HCA 24; (1929) 42 C.L.R. 384 at 407.

[3] Meinhard v. Saloman (1928) 164 NE 545 at 546.

[4] Ravinder Rohini Pty Ltd v. Krizaic [1991] FCA 318; (1991) 30 F.C.R. 300.

[5] Connecticut Fire Insurance Co v. Kavanagh [1892] A.C. 473 at 480 per Lord Watson delivering the advice of the Judicial Committee. See also Suttor v. Gundowda Pty Ltd [1950] HCA 35; (1950) 81 C.L.R. 418 at 438; Green v. Sommerville [1979] HCA 60; (1979) 141 C.L.R. 594.

At a glance

Court

Decision date

Before

Source

Judgment (56 paragraphs)

Parties