Old v Hodgkinson; Old v McInnes

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

1063/04 - OLD v HODGKINSON 4064/04 - OLD v McINNES JUDGMENT 1 HIS HONOUR: Today we have spent two hours debating procedural matters that arise out of a partnership suit between three gentlemen who were formerly partners in a practice of patent attorneys. The issues between the parties have fluctuated somewhat and there have been piles of papers exchanged between them, but the issue before me today is whether to refer to a chartered accountant/liquidator all the issues that arise between the parties or just the accounting issues. 2 I have been assisted in determining these issues by the submissions of Mr Marshall of counsel for the plaintiff and Mr Condon of counsel for the defendants. Although Mr Condon says that there has been no consent to any reference out in the correspondence, the way the case has been presented to me is that there is no fundamental objection to the accounting issues being sent out for reference, but not the legal issues. 3 The issues that remain can to my mind be distilled into four categories:

A. Whether the draft accounts as at 30 June 2003 can be adopted;

B. Whether the plaintiff has been guilty of breach of fiduciary duty such as would warrant adjusting those accounts;

C. A claim by the defendants against the plaintiff for breach of the Fair Trading Act (a claim that is put in some other ways as well); and

D. A dispute as to whether the plaintiff is entitled to payment of what I will call a premium which is said to be due pursuant to a document called a memorandum of understanding. 4 As to issue A, the situation is, and I think has now been accepted by all concerned, that there has been an account stated with respect to the accounts of all of the partnerships between the parties (because there are at least three if not four) up to 30 June 2002. 5 Accounts stated is a defence to an action in account because once the accounts are stated the parties cease to have equitable rights to an account and instead have available a common law right which can be vindicated by an indebitatus count. Accordingly, the issue is, accepting the figures in the 2002 accounts, should the 2003 draft accounts be adopted? Mr Condon says that there has been no indication of any problem with the draft 2003 accounts which have been prepared by an independent accountant briefed by the partnership and he relies on some words of Lord Millet in Hurst v Bryk [2002] 1 AC 185 at 192. 6 Today Mr Marshall says that the problem with the 2003 accounts for his client is that not all billings have been included. 7 If the matter was to be dealt with in the court, there would need to be the basis of accounting made out which would normally be the accounts prepared by the firm's accountant and then the partner that wished to stand by them, namely the defendants, would be considered the accounting party. There would need to be vouching of the accounts before the Chief Clerk, or more usually these days, informally between the solicitors' clerks. There would then perhaps be cross-examination on the accounts and then surcharges and falsifications, which would throw up discrete issues for the Master to determine. However, this can be an expensive process and any other method of defining issues that a referee might adopt, with or without the consent of the parties, may in any particular case be as or more efficient. 8 I have my doubts about this because I would not see how the plaintiff could get sufficient information to be able to surcharge or falsify without cross-examination of the accounting parties, and I cannot see how this could take place before a referee. However, as it is the plaintiff who is seeking this procedure, I really do not have to worry too much about that. 9 The defendants are content that accounting issues go before the referee, though they say that it might be less expensive if it were done before the Master. I have been given some figures by Mr Bilinsky, a very experienced solicitor for the plaintiff. However, with great respect, the estimate of how long the present dispute may take before a referee, namely half a day, must be wrong. The fact that we have taken two hours today merely in discussing the preliminary issues, would seem to me to suggest that we are really looking at a one to two week case, whether it is before a Master or before a referee. However, the referee, being an accountant, may save some time by being able to cut through some of the accounting processes. 10 Issue B is the fiduciary obligation. Again this, on the authorities, is a matter to be dealt with in the accounts because partners owe each other fiduciary obligations. These obligations do not sound in common law damages, only in equitable compensation to be adjusted in the partnership accounts. The trial of that issue will involve someone having to find facts as to whether Mr Old, the plaintiff, did what the defendants said he did, then someone applying the law to those facts in order to ascertain whether that was a breach of fiduciary duty, and then working out the equitable compensation that would need to be allowed to the defendants on the accounts. The third of those matters might be a matter for an accountant. I worry about the first two, but traditionally this is an accounting matter. 11 C. The Fair Trading Act is not a matter that comes within the partnership accounts. For most of the history of partnership suits, the claim would have been struck out either because of multifariousness or because the claim arose at law and not in equity. 12 Mr Condon points out that since the Judicature Act system was adopted there can no longer be a strict separation of issues that arise at law and those that arise in equity. Furthermore, s 63 of the Supreme Court Act tends to go against striking out proceedings on the ground of multifariousness. 13 He also points out that even apart from the Judicature Act the principle now seems to be that claims at law in tort are able to be brought between partners, notwithstanding the classic rule that all actions between partners must be dealt with within the accounts. In support he relies on Beckingham v The Port Jackson and Manly Steamship Company (1956) 57 SR (NSW) 403 at 410-11 and Huston v Burns [1955] Tas SR 3 at 9. 14 The solution that Crisp J found in that latter case was that if there is a claim in contract which arises out of the partnership relation then the old rule may apply, but not a delictum action between partners where the relationship is merely an incidental circumstance. The present case is neither of these. However, the flavour of the decisions is that one can nowadays combine proceedings between fiduciary for an account in equity with common law damages proceedings, and, accordingly, I should not strike the claim out. 15 The claim does raise questions of fact, but it is only a relatively minor aspect of the whole dispute between the parties. Almost all of the other matters between the parties are matters within the equitable accounting procedures. 16 D. The action 4064/2004 is a claim at law under the contract for recovery of the balance of what I will neutrally call a "premium". Although this is a claim at law and a contractual claim, it may not be a claim arising under the partnership. It is not completely clear whether the present claim is a claim for a premium, a claim for a contribution to capital of the partnership business, or a claim as part of the purchase price for goodwill. These are vital distinctions; see eg Higgins and Fletcher Law of Partnership in Australia and New Zealand 8th ed (LBC, Sydney, 2001) p 240 and Re Bruges and Gow [1926] NZLR 893. 17 Section 40 of the Partnership Act 1891 now provides an action at law for certain types of relief against certain types of premiums, but it is very doubtful whether the present case, no matter how the facts fall out, can come within it. The types of action that can be mounted with respect to return of a premium were dealt with by Stirling J in Belfield v Bourne [1894] 1 Ch 521 at 526-7. A lot may depend upon very slight differences in the facts. Normally, equity can give relief against the unconscionable demanding at law for the whole premium, where the partnership has failed as a result of no-one's fault, or the fault of the other party. However, if there is an agreement terminating the partnership, that agreement may put an end to the equity. 18 Mr Condon quoted from the judgment of Jessel MR in Lyon v Tweddell (1881) 17 Ch D 529 at 531 which, if one reads it by itself, might give one the false impression that somehow or other equity varies as the chancellor's foot and there is some discretion. The matter is really not one of discretion at all, but working out, in all the circumstances, what is unconscionable for the partner entitled at common law to retain. See particularly the discussion by Vice Chancellor Knight-Bruce in Bury v Allen (1845) 1 Coll 589; 63 ER 556. 19 The principles upon which a court of equity in taking partnership accounts would order repayment of a premium are dealt with in the classic passage of the judgment of Lord Cairns in Atwood v Maude (1868) LR 3 Ch App 369 at 372. I will not quote the passage but the court does not exercise some discretion in the air; it does not allow a person who has taken a premium to keep the whole of the premium if, having regard to the terms of the contract, the length of time the partnership has continued, and the behaviour of each of the parties, it would be unconscionable to allow him to do so. Accordingly, the issues arising on payment of whether the premium is to be paid in full or whether there is to be apportionment, or relief, whilst an equitable concept, is one which takes place on the accounts. 20 Although the issues are categorised by the authorities as accounting issues, Mr Condon says that in reality they involve both factual issues and issues of law of some complexity, a submission for which he relies on the words of Austin J in Alan Cadwallader v Bajco Pty Ltd [1999] NSWSC 439 [11]. I have certainly given that point consideration, but feel that as the wisdom of both parties is that the true accounting issues should go to the referee, there is such an admixture that I should send out the issues to the referee. 21 Accordingly, although there are some very awkward questions of fact to be decided, and the decisions have to be made with awareness of the principles of equity and good conscience, essentially all the issues that currently remain between the parties, other than the minor matters arising under the Fair Trading Act counts, are matters to be dealt with in the accounts. As it is conceded that at least the strictly accounting issues can be dealt with more efficiently and at less cost by the referee, it seems to me that all the issues should go to the referee because they are so intertwined. 22 In some respects I regret this because if I were a prophet I would think, as I have said, that the referee will take one to two weeks and it will be very expensive to pay for the "judge" at $494 an hour for two weeks. Then, almost certainly, the matter will have to come back to the court for another few days for the court to correct his mistakes because even the best referee in the world is bound to make some mistakes in this sort of case. But there is no easy solution when parties are at war with each other and wish to take as many points as they can against each other. I am told that there is only a matter of a quarter of a million dollars, plus the value of goodwill at stake. Unfortunately, unless it is settled earlier, that will all be eaten up. 23 Accordingly I will refer the matter to a referee when I consider the appropriate form of order shortly. 24 Mr Condon reminds me that there are various applications with respect to strike out of the proceedings. I do not consider that, strictly speaking, I can strike out anything. The claim made by Mr Old for the balance of the premium is a valid common law claim, which may be met by an equitable defence. The claims for common law relief as part answer to a partnership suit would seem, under the Judicature Act scheme, not to be claims which could be struck out, though if the matter were to be heard in the court it may be that various of the claims would be heard at different times. 25 Accordingly, all claims to strike out should fail. I stand the matter over to 8 December 2004 at 10 am for short minutes.

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