Lane v Bushby

COUNSEL : Mr DK Jordan (Plaintiffs/Appellants) Mr AJ Grant (Defendant/Respondent) PD White (Plaintiffs/Appellants) SOLICITORS : Phillip Bushby International (Defendant/Respondent)

CATCHWORDS : PARTNERSHIP - no written partnership agreement - partner negligent but not gross or culpable negligence - whether implied term that defaulting partner indemnify the others - whether other partners entitled to contribution LEGISLATION CITED : Partnership Act 1892, s 24 Law Reform (Miscellaneous Provisions) Act 1946, s 5(1)(c) BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 Hawkins v Clayton (1988) 164 CLR 539 Byrne v Australian Airlines Ltd (1995) 185 CLR 410 Breen v Williams (1996) 186 CLR 71 CASES CITED : Cragg v Ford (1842) 1 Y & C 280, 62 ER 889 Bury v Allen (1845) 1 Coll 589, 63 ER 556 Thomas v Atherton (1878) 10 Ch D 185 Ford v Miller (unreported - NSWCA - 11 October 1996) Lister v Romford Ice & Cold Storage Ltd [1957] AC 553 McGrath v Fairfield Municipal Council (1985) 156 CLR 672 DECISION : Appeal dismissed.

THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION DUNFORD J Tuesday, 7 NOVEMBER 2000 011674/99 - Adrian John LANE & ors v Phillip Andrew BUSHBY JUDGMENT 1 HIS HONOUR: This is an appeal pursuant to s 69 of the Local Courts (Civil Claims) Act 1970 and s 101 of the Justices Act 1912 against the decision of Mr J R Dive, a magistrate in the Civil Claims Division, Local Court at Sydney, dismissing a third party claim by the present plaintiffs against the present defendant. 2 The plaintiffs and the defendant were partners in a firm of solicitors known as "Lane & Lane", which as between the plaintiffs and the defendant has since been dissolved. There was no formal partnership agreement between the partners and accordingly s 24 of the Partnership Act 1892 applied. 3 During the continuance of the partnership, the defendant, Mr Bushby, in the course of his work as a partner of the firm, acted for two clients, Peter Balafoutis and John Mendes, in relation to the purchase of some land, and it is now agreed that he acted negligently in that he failed to ensure that a deed of trust in respect of the land was executed after the contract for the purchase thereof with the result that pursuant to the Stamp Duties Act 1920 both documents became liable to ad valorem duty resulting in a loss to the clients of $16,180, and he also incurred counsel's fees of $600 for obtaining advice on the subject. 4 The clients sued the plaintiffs and the defendant in the Local Court and by consent recovered a judgment against them for $16,780 plus interest and costs on an indemnity basis. By a Third Party Notice in such proceedings, the plaintiffs, being the other partners, sought indemnity or contribution against the defendant as the partner responsible for the loss. The learned magistrate dismissed the claim and hence this appeal. 5 The Partnership Act 1892, s 24 so far as relevant provides as follows: "The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be determined, subject to any agreement expressed or implied between the partners, by the following rules:

(1) All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses whether of capital or otherwise sustained by the firm.

(2) The firm must indemnify every partner in respect of payment made and personal liabilities incurred by the partner (a) In the ordinary and proper conduct of the business of the firm; or (b) In or about anything necessarily done for the preservation of the business or property of the firm." 6 Both in the Local Court and in this Court it was submitted that there were implied terms in the partnership agreement between the plaintiffs and the defendant that the defendant would at all times act in the best interests of the partnership and would conduct all work performed by him in a careful and competent matter having regard to his years in practice as a solicitor and his seniority in the profession of law, and that as the defendant was in breach of such implied terms he was liable to the plaintiffs for any loss suffered by them, namely the loss represented by the judgment in favour of the clients. It was also submitted that in the light of such implied agreement the provisions of s 24(2) were overruled because that section is "subject to any agreement express or implied between the partners". 7 The circumstances in which a term will be implied in a contract have been referred to in a number of cases e.g. BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283, Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, but they were cases of detailed written contracts and it now appears to be established that in cases where the parties have not attempted to spell out the full terms of the contract, a term will be implied only if the implication of the particular term is necessary for the reasonable or effective operation of the contract in the circumstances of the case: Hawkins v Clayton (1988) 164 CLR 539 at 571, Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 422, 442, Breen v Williams (1996) 186 CLR 71 at 123-4, or as expressed by Brennan CJ, in that case at 80, "a term is not implied in a contract if the contract is effective without it". 8 Whilst it might be conceded that obligations to act in the best interests of the partnership and to perform work on behalf of the partnership in a careful and competent manner may possibly be inferred from the obligation of mutual good faith that exists between partners, that is a different thing to implying a term that in the event of the partnership incurring a liability to a third party because of the negligence or default of a particular partner such partner will be liable to indemnify the other partners in respect of their liability to the third party. 9 The implication of such a term would contradict the clear and explicit terms of s 24(2)(b), and although the provisions of s 24 are subject to any agreement expressed or implied between the parties, the fact that the proposed implied terms would be contrary to the rights and obligations provided by the section is a very strong indication that such implied term is not necessary for the reasonable and effective operation of the partnership agreement. 10 If it were appropriate to imply the terms alleged by the plaintiff with the effect claimed by them, it would seem to be appropriate to imply such or similar terms in all partnership agreements, but if that were the case one would expect such a term to be included in s 24 itself as a proviso or exception. 11 The effect of the subsection however is not absolute; the right of a partner to indemnity from the firm only applies in respect of payments made and liabilities incurred in "the ordinary and proper conduct of the business of the firm." It therefore does not apply in cases where the partner incurring the liability has been guilty of fraud, illegality, wilful default, or culpable or gross negligence: Cragg v Ford (1842) 1 Y & C 280, 62 ER 889, Bury v Allen (1845) 1 Coll 589 at 604, 63 ER 556 at 563, Thomas v Atherton (1878) 10 Ch D 185 at 202, see also Ford v Miller (unreported - NSWCA - 11 October 1996), see also Lindley and Banks on Partnership 17th ed. at para 20-10 where the author draws a distinction between acts and omissions which are negligent as regards third parties and those which are negligent as regards co-partners. 12 But, apart from fraud or illegality, it is only in cases of wilful misconduct or gross or culpable negligence that a partner will be required to bear any loss himself: Thomas v Atherton at 202, provided he is acting in the "ordinary and proper conduct of the business" of the partnership. In the present case the defendant was acting for the clients in a conveyancing transaction which was part of the ordinary and proper business of the partnership. His negligence was in failing to have the contract for purchase of the land executed prior to the deed of trust. Whilst such an act was (because of the Stamp Duty implication) negligent as regards the clients, it was the kind of thing which could easily occur (although it should not) in the ordinary day to day practice of a busy solicitor; and could not be characterised as gross or culpable negligence. 13 It follows that the plaintiff's have not established an implied term which has the effect of varying the ordinary rule laid down in s 24(2) and all the partners are equally liable; and just as if the defendant only had been sued and paid the full debt, he would be entitled to indemnity from the other plaintiffs, so the plaintiffs being equally liable for the debt, are not entitled to be indemnified by the defendant. 14 Alternatively, the plaintiffs rely on s 5(1)(c) of the Law Reform (Miscellaneous Provisions) Act 1946 on the ground that the plaintiffs and the defendant were all tortfeasors and accordingly the plaintiffs can recover contribution or indemnity from the defendant. So far as relevant, that section provides as follows: "5(1) Where damage is suffered by any person as a result of a tort (whether a crime or not) - . . . (c) any tort-feasor liable in respect of that damage may recover contribution from any other tort-feasor who is, or would if sued have been, liable in respect of the same damage, whether as a joint tort-feasor or otherwise, so, however, that no person shall be entitled to recover contribution under this section from any person entitled to be indemnified by that person in respect of the liability in respect of which the contribution is sought. (2) In any proceedings for contribution under this section . . . the court shall have power . . . to direct that the contribution to be recovered from any person shall amount to a complete indemnity." 15 The Act contains no definition of "tortfeasor" and I have some difficulty in comprehending within that term persons such as the plaintiffs who have not committed any tort themselves but are liable as such only in a vicarious capacity, but cases involving employers e.g. Lister v Romford Ice & Cold Storage Ltd [1957] AC 553, McGrath v Fairfield Municipal Council (1985) 156 CLR 672 seem to have regarded such persons as "tortfeasors" for the purposes of the legislation. 16 But in any event, the proviso at the end of the paragraph, which according to the text writers was designed to prevent circuity of action, expressly provides that the rights given by the section do not apply where the person against whom the contribution is claimed is entitled to be indemnified by the claimants. Here the defendant is, by virtue of s 24(2)(a) of the Partnership Act, entitled to be indemnified by the firm for any liability he had to the clients, and it follows that the plaintiffs cannot maintain a claim against him for contribution or indemnity under s 5(1)(c). 17 For these reasons I am satisfied that the Magistrate did not fall into error, and the appeal is dismissed with costs. -----------------

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