(It was signed by all three partners).
68 No such unit trust deed was ever drafted or executed following the MOU.
69 However it is clear that there was at least a partnership at will between the parties as from 1 July 2002.
70 FPO was cross-examined on the shifting basis of his claim in contract. At first the claim was made that the contract was in the MOU, later the February 2002 meeting is brought into the picture and, indeed, in cross-examination, FPO asserted that that is when the contract was made.
71 On 2 July 2002, FPO wrote a letter to HRH. The letter was in handwriting on the letterhead of the Megalong Trust. Its text was as follows:
"Dear Hugh,
You will recall that on 1 st May 2000 I paid you $500,000 for a half share in your then practice H R Hodgkinson & Co.
In our discussions before that date I said to you that I was prepared to pay a goodwill figure of twice the profit averaged over 3 years as this was the basis on which the goodwill of my former firm (and your father's and half brother's firm) had been calculated over many years. You said that I should discuss financial matters with your internal accountant Ms Di Chisholm.
Ms Chisholm told me in early 2000 that the turnover of your firm was $3,000,000 pa and that the profit was $500,000 pa. On that basis I paid the $500,000.
You will recall that after several months I came to you and pointed out that if we were supposed to each be earning a profit share of $250,000 pa this approximated to drawings of $20,000 per month each. However, the drawings had at that time (and since) been nowhere near this amount. This discussion lead to Stephen Guthrie's visit to Ms Chisholm's home. At that time you did not challenge my assumption of an income of $250,000 pa each.
Arising from our discussions as to valuation of goodwill for the admission of a further equity owner of the practice and the proposed unit trust, you have agreed to the 'twice profit averaged over 3 years' formula.
You now have before you figures prepared by Stephen Guthrie which show the calculated goodwill value at various different dates. These figures clearly show that the goodwill of the firm at both June 1999 and June 2000 was just under $800,000. So I should have paid approximately $400,000 not $500,000.
In my view I have been mislead as to the value of the business I was buying into.
If you are prepared to discuss this matter with me, I have a proposed solution which would at least save you having to write a substantial cheque at this time.
I am particularly concerned that at our discussions at the solicitor's office yesterday morning relating to the draft unit trust deed, you appear to have gone back on topics which I had thought were previously agreed.
If you do not agree with the above calculations, I propose that the matter be mediated to avoid continuing litigation.
Please reply within 7 days."
(Signed F P Old)
72 Mr Old was strongly cross-examined on that letter. He was taxed with the fact that the letter merely mentioned "profit" as the focus for the calculation of goodwill not calculated profit or "fair dinkum profit".
73 The first question to tackle is whether there was any contract or whether everything was dependent on the contemplated trust deed being executed.
74 KJM denies the conversation that FPO says took place on 23 February 2002. However, the minutes which were signed by all parties disclose that something like what FPO says he said must have been said.
75 However, the words were said during negotiation and the parties contemplated further documentation. I would not infer that they constituted a binding agreement.
76 The MOU does not use the term "fair dinkum" profit, merely "profit".
77 I do not consider that this is vital. The word "profit" is a nebulous term and it may very well be construed in the circumstances of this case as "fair dinkum" profit as that appears to be the way in which all parties were accustomed to think of profit.
78 What is significant about cl 5 in the MOU, however, is that it recites that KJM has already prior to 30 June 2002 agreed to pay an amount to FPO of one-sixth of the average profit over the then past three years.
79 As I have noted, FPO's grounds for saying that there was a contract have shifted over the years.
80 In their final submissions, FPO's counsel opted for saying that this was one of those cases where the court may not be able to find a definite offer and a definite acceptance, but, when one looked at all the facts and circumstances, the parties must have reached a binding contract. They cite the decision of the Court of Appeal in Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 at 11,117-8.
81 This was wise because, as the evidence abstracted above shows, the precise terms of the contract, if there be a contract, keep changing albeit in minor, though significant, respects.
82 It must be remembered too that the mere fact that parties come to a common mind on the key terms of their bargain may well be insufficient in the circumstances for the court to find that they have entered into a contractual regime.
83 The reason for this was explained by Lord Greene MR in giving the judgment of the English Court of Appeal in which Finlay & Morton LJJ agreed in Clifton v Palumbo [1944] 2 All ER 497 at 499:
"When parties are beginning to negotiate a transaction of this magnitude it is common experience - and, indeed, it is only business - to find that the first thing they begin to think about is the price…. The use of the word 'agree' in such a context may or may not involve a contractual result…. if you say that the price has been agreed when the contract is being negotiated, you do not use the word 'agree' in the sense that any binding contract has been entered into. All you mean is that a particular element in the contract you are negotiating has been decided."
84 Again, authorities have pointed out that agreements in principle are not binding contracts. The unreported judgment of Philippides J in First Church of Christ, Scientist, Brisbane v Ormlie Trading Pty Ltd [2003] QSC 351 at [16] [BC 200306174] collects a series of observations on the nature of the agreement in principle which justify the summary in the previous sentence.
85 Of course, there can be cases where parties have been held to be in a contractual regime even though some aspects of their contract have not yet been settled; see eg Toyota Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106 at 178; Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101 and Thompson v White (2006) 13 BPR 24,537 at 24,556-7 [100].
86 No-one argued that this unusual situation had arisen in the instant case.
87 In his written submissions, Mr Condon points out a number of matters concerning the obligation of KJM to pay for goodwill which go to show that the parties never reached the stage of entry into a binding contract. The most significant of these were:
"(1) the remarks of the plaintiff at the partners' meeting of 30 October 2002 that purchase of goodwill was still one of the outstanding issues for the unit trust;
(2) discussions at partners' meetings even as late as 9 February 2003 about Capital Gains Tax if there was an out and out transfer of goodwill."
88 In the present case, the circumstances, including those outlined above and most particularly the fact that the end in view was a unit trust regime which never came into being and the adjustments constantly being made by further discussions, lead me to the view that the parties never reached the stage of entering into a contractual regime in which KJM was to pay the other partners a premium.
89 Of course, the parties did enter into a partnership contract governing their partnership at will. However, that was a contract which is oral and basic, though it is fleshed out by the terms of the Partnership Act 1892, but does not provide any contractual right to the plaintiff to obtain a premium.
90 Because I do not find a relevant contract, it is not necessary for me to delve into detail as to whether the contract on KJM's part was not made by him, but by Dafuzu. However, if it be relevant on appeal, I do not find that any contract was made by Dafuzu.
91 In coming to this view, I bore in mind that courts normally look for some strong indication that a contract ostensibly made by a person is in law being made on behalf of a related corporate party. I see no material in the evidence presented that would enable me to find that the alleged contract was made with Dafuzu. The only flavour of this possibility is that Dafuzu was to be the entity that would be the primary beneficiary of one third of the units in the head trust. This is not enough to establish the proposition.
92 I now turn to the claim in quantum meruit. The term is Latin and merely means "as much as it is worth" showing that the court's main task, if the proper preconditions are established, is to assess what is reasonable remuneration for the work done or the like.
93 Quantum meruit is of two types. Type A is where there is a contract between parties whereby Y is to do something for Z, but either the remuneration Y is to receive is not specified or the specified formula fails. Type B is where Y does something for Z without any contract, but under circumstances where both Y and Z understand that Y will be reasonably remunerated.
94 Type A Quantum Meruit is often called contractual quantum meruit. Type B is often called Quasi-Contractual quantum meruit or quantum meruit under restitutionary principles.
95 If this is a case of quantum meruit, it is a case of type B.
96 Mason, Carter and Tolhurst, Restitution Law in Australia, (LexisNexis, Sydney, 2nd ed 2008) at [914] note that whilst once type B quantum meruit claims were based on a fictional implied contract to pay, nowadays the court looks for circumstances to show that it was unjust for the defendant to receive or retain the benefit without rewarding the plaintiff.
97 The most common case of type B quantum meruit is where Y does work for Z's benefit as was the situation in the seminal case of Pavey & Matthews Pty Ltd v Paul [1987] HCA 5; 162 CLR 221. However, the cause of action extends beyond this situation to all cases where Y provides benefit to Z on the understanding that Y would be remunerated or that Z accepted the benefit on that basis whether or not the services have any marketable end product; see Mason, Carter and Tolhurst, op cit at [935] and cases there cited.
98 Of course, if there is a contract between the parties, one cannot consider type B quantum meruit (see Mason et al at [909] based on authority such as Automatic Fire Sprinklers Pty Ltd v Watson [1946] HCA 25; 72 CLR 435 at 450).
99 Again, one must be very wary of employing a restitutionary cause of action where the parties have failed to make a contract where there was no impediment to them so doing; see eg Ford v Perpetual Trustees Victoria Ltd [2009] NSWCA 186 at [132].
100 Analogously, one cannot rely on equitable estoppel merely because one failed to reduce an understanding into an enforceable contract: Yeoman's Row Management Ltd v Cobbe [2008] 1 WLR 1752.
101 The strongest way for the plaintiff to assert this cause of action is to say that KJM was paid one-third of profits of the partnership for one year and that the only reason that the plaintiff and HRH consented to this happening was because they understood that KJM would, in due course, become bound to pay for one third of the goodwill of the former partnership over ten years. Thus, there has been free acceptance of an incontrovertible benefit and it is just that KJM pay for it as much as it was worth.
102 Mr Condon pointed out that the only proposal about KJM acquiring goodwill was on the basis that he would pay for it over a ten year period with interest only in the first two years. This indicates that: (a) it was never any of the parties' intentions that the whole "purchase price" of the goodwill would be due and payable after one year; and (b) that the parties had in mind a partnership which would last for at least ten years.
103 Thus, it is put that KJM never received the benefit of the class of goodwill over which the negotiations were being held. Indeed, he never received any transfer of goodwill.
104 Paragraph 10 of the further amended statement of claim is a bald assertion of quantum meruit. It is difficult to describe the claim for using the goodwill to produce income as a quantum meruit.
105 Indeed this is not a case of someone acquiring property or tangible benefit where it is just that he or she pay for it. he only benefit which KJM received was to be treated as an equity partner using the goodwill of the previous firm. I do not consider it a case of quantum meruit at all.
106 It is not the law that a person who receives a benefit during negotiations for a contract which negotiations do not reach their intended fulfilment is necessarily bound to pay for benefits received in anticipation of the contract.
107 In the present case, it was in the interests of all parties that the partnership business be continued while the negotiations were continuing. KJM paid a $100,000 contribution to capital and it was understood that he would be working as a partner and would receive one-third of the profits. There is nothing for the principle of quantum meruit type B to latch upon.
108 I might note the decision of the Western Australian Full Supreme Court in Sinclair v Rankin (No 2) (1908) 10 WAR 126 where a claim in quantum meruit for work done in reliance of the grant of a partnership was dismissed on principle.
109 A possible way out of this difficulty for KJM is to rely on the equity of windfall.
110 The present situation has great similarities to the case where a partnership continues to trade with the share of capital contributed by a former partner. That situation is partially dealt with by s 40 of the Partnership Act.
111 It must be noted that s 40 by its terms only applies to a partnership for a fixed term and the present case is dealing with a partnership at will. Nevertheless, as Lindley & Banks on Partnership (Sweet & Maxwell, London 1995) say in their 18th ed (ch 25), this section so far as the field it covers is concerned represents the main thrust of the old authorities.
112 Before delving into this area, I should note that the standard text books on partnership (Lindley & Banks op cit [25.07] and Higgins & Fletcher, The Law of Partnership in Australia and New Zealand (Thomson Legal Asia Pacific, Sydney, (2007)) 9th ed pp 261-2 [7.105]) say that one must not only distinguish between a premium and a contribution to capital (in the former the new partner pays the continuing partner, in the latter the payment is to the new firm), but there is also a distinction between a premium and a purchase of part of the goodwill. The distinction is between an amount to be let into the partnership and the value of an asset of the partnership.
113 However, whilst Mr Condon pointed out this distinction, he did not make any point of it. Mr Marshall submitted that the purchase of goodwill in the instant case must be treated as a premium.
114 In the case where the new partner had good cause for grievance about the continuing partner retaining the premium even though the partnership folded soon after the payment was made, equity applied principles that it is unconscionable to retain a windfall.
115 An instance of this principle is Atwood v Maude (1868) LR 3 Ch App 369 where there was a solicitors' partnership for seven years. The plaintiff paid a premium, yet after two years, the other partner dissolved the partnership. The court returned a proportionate part to the plaintiff.
116 This case was considered by the High Court in Muschinski v Dodds at 620, where Deane J explained the decision by saying:
"…the principle operates in a case where the substratum of a joint relationship or endeavour is removed without attributable blame and where the benefit of money or other property contributed by one party on the basis and for the purposes of the relationship or endeavour would otherwise be enjoyed by the other party in circumstances in which it was not specifically intended or specially provided that the other party should so enjoy it."
117 I should state here that the evidence indicates to me and I so find that the partnership did make a net profit in the financial year 1 July 2002-30 June 2003.
118 What evidence I have on the way profits were drawn suggests that they went to KJM rather than to Dafuzu.
119 In one sense, this case is the reverse to the usual fact situation in that KJM has enjoyed the right to the profits due to an equity partner, yet has not paid what was expected in order to gain those profits.
120 Again, this case could be tagged as an instance of the Ocean Island Equity (Tito v Waddell (No 2); Tito v Attorney General [1977] Ch 106 at 289 et seq) that in certain situations equity affixes a person who takes the benefit of a transaction with bearing its burden.
121 As I noted earlier, Mr Condon for HRH and KJM made further submissions in reply making strong protest against the court considering any equitable restitutionary claims on two grounds: (a) they were not pleaded; and (b) they would be doomed to failure.
122 FPO's recent written submissions do not assert that this claim was pleaded nor is any amendment sought, nor is there any reason given as to why this alternate way of looking at the claim was not put forward earlier.
123 In my view, although the claims are widely framed, there is no hint of a claim in equity among them.
124 Mr Condon refers to the recent High Court decision in Aon Risk Services Australia Pty Ltd v Australian National University [2009] HCA 27; 83 ALJR 951 where the Court made it clear that cases are not to be delayed by late amendments even if costs are paid, but that the court must consider whether there is a sufficient reason consistent with a just resolution of the dispute to allow a change in position or amendment.
125 Although I am always reluctant to shut out an available argument, it seems to me that in the light of the provision of the Civil Procedure Act 2005, sections 56 and following and the guidance given in the Aon case, I should not entertain this equitable claim.
126 However, if I did entertain it, the claim should fail. This is not a case where there is a windfall in the sense of the term in Muschinski v Dodds. Deane J made it clear that the windfalls of which he was speaking were the classic situations covered by authorities in equity over the centuries many of which were mentioned in his judgment.
127 Generally speaking, at common law, if a person does work or spends money before there is a binding contract with regard to it, he or she cannot recover: Schreiber v Dinkel (1886) 54 LT 911 at 912 (CA) per Cotton LJ.
128 There are exceptions, such as where there is an implied preliminary contract or where a quantum meruit claim lies. In the latter case the court must consider whether it should infer that the parties have expected that the plaintiff will be remunerated or reimbursed should the contract not materialize: see Mason et al at [1033] and [1233]. See also Independent Grocers Co-operative Ltd v Noble Lowndes Superannuation Consultants Ltd (1993) 60 SASR 525.
129 A person is no more entitled in equity to recover a benefit given to another during negotiations for a contract which fails than he or she is at law, unless there are special factors involved.
130 Furthermore, Mr Condon is correct in saying that the windfall principle only applies if the project to be is aborted without relevant fault on the part of the plaintiff in equity. Here FPO was at fault in and about the termination of the partnership by removing files and by actively preparing to trade in competition with the partnership whilst the partnership was still current.
131 In case this matter should go further, I should say what adjustment I would have made had I found for FPO on this point.
132 The quantum of the benefit is the amount actually received by KJM as an equity partner over and above what he would have earned as a salary partner or interest on the value of the goodwill used to produce that surplus income.
133 As there is insufficient information before me to calculate the profit, I will use the interest method. The goodwill was thought to be between $200,000 and $300,000, so that FPO's share would be $125,000 taking a midway figure. The referee valued FPO's goodwill when he entered the partnership at $142,931. It thus seems to me that I should take a figure of $140,000 as a rounded approximation, take 10% for one year which produces a figure of $14,000 for equitable compensation.
134 3. The referee has now retained new solicitors. These solicitors have said that the referee was not given sufficient indication of the need to support his account.
135 I do not accept those submissions. The referee was represented by senior and junior counsel and a solicitor and the written submissions of the other parties before the hearing in August 2008 made it quite clear that reliance was being placed on authorities such as the decision of Allen J in Moray v Lane (NSWSC, 26 February 1993, unreported, BC9303682) that the mere listing of persons who performed the work, the hours worked by each and the amounts claimed may not be sufficient to establish the referee's claim.
136 As noted above, the invitation was not to relitigate the question of the referee's fees, but to pick up matters which may have been overlooked.
137 Thus, I do not propose to make any adjustment on the basis of material now put forward on behalf of the referee.
138 Mr Marshall and Ms Arste say that one such matter is the proper apportionment of the referee's costs.
139 In my February "Referee's Costs Judgment" I said that I think that the way in which I had apportioned matters between Pink section and Blue section has probably meant that further apportionment was probably not worth considering. However, I was willing to hear further submissions on this if anyone wished to do so at their own risk as to costs (vide [215] of the present judgment).
140 Plaintiff's counsel say that the principle laid down in Hamer v Giles (1879) 11 Ch D 942 means that, ordinarily each of the partners must bear one-third of the costs of winding up including the referee's fees.
141 Plaintiff's counsel submit that the proper way of apportioning the fees is for 80% of the fees to be paid as to one-thirds each and the loser of the premium proceedings should pay the other 20%.
142 In the light of my approach to the premium proceedings, this formula needs adjustment. The plaintiff succeeded in the premium proceedings by a side issue, having had his two principal bases for succeeding rejected and being awarded a fraction of his claim.
143 In my view, there should be no costs of the premium proceedings.
144 Adjusting the plaintiff's formula means that the referee's costs should be shared one-third by each partner.
145 Mr Condon says that the plaintiff is attempting to reargue the matter already decided and should not be permitted to do so. Further, he says that the principle in Hamer v Giles only applies where the costs are not attributable to the fault of a partner (see eg Meekin Enterprises v Gersbach (NSWSC, MH McLelland CJ in Eq, 6 August 1997, unreported).
146 I agree with the second part of the submission: that is why I employed the word "ordinarily" above.
147 Whether I should re-examine the matter or not, my view is that the approach I took previously was correct in the circumstances of the present case.
148 4. I must now provide final reasons on the issue of the referee's costs. What follows is essentially a revised version of the draft judgment of February 2009, omitting formal parts. Section A refers to questions of principle, Section B deals with particular items in the referee's bill and Section C deals with costs.
149 The arguments in respect of the referee's costs were heard by me on 14 August 2008, Mr R D Marshall and Ms B A Arste appeared for Mr Old, Mr Miles Condon appeared for Mr McInnes and Mr Hodgkinson (the defendants) and Mr T Hale SC appeared for the referee.
150 As Mr Marshall reminded me, the formal processes before the Court were: