Old v McInnes and Hodgkinson

Court of Appeal (NSW)|2011-11-02|Before: Beazley JA, Giles JA, Meagher JA, Young JA

teen days in Rule 36.16.] Catchwords: PARTNERSHIP - dissolution - former partners continuing to trade but as two separate firms - one firm making use of sources of goodwill of former partnership - distinction between goodwill and sources of goodwill - breach of fiduciary duty - removing and retaining files - whether equitable compensation include amount for reduction in value of goodwill CONTRACT - whether binding agreement for payment by incoming partner for share of goodwill COSTS - exercise of discretion - whether costs of partnership dissolution proceedings should be borne equally by partners - whether offers of compromise comply with UCPR r 20.6(2) Legislation Cited: Civil Procedure Act 2005 (NSW), ss 14, 56, 98 Uniform Civil Procedure Rules 2005 (NSW), rr 20.26, 42.1, 42.13, 42.13A, 42.15A Cases Cited: Bellevarde Constructions Pty Ltd v CPC Energy Pty Ltd [2008] NSWCA 228 at [51] Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153 Branir Pty Ltd v Owston Nominees (No. 2) Pty Ltd [2001] FCA 1833; (2002) 117 FCR 424 Calderbank v Calderbank (1975) 3 WLR 586 Clifton v Palumbo [1944] 2 All ER 497 Commonwealth of Australia v Gretton [2008] NSWCA 117 Computer Machinery Co Ltd v Drescher [1983] 1 WLR 1379; [1983] 3 All ER 153 Dean v Stockland Property Management Pty Ltd & Anor (No. 2) [2010] NSWCA 141 Elite Protective Personnel Pty Ltd v Salmon [2007] NSWCA 373 Federal Commissioner of Taxation v Murry [1998] HCA 42; (1998) 193 CLR 605 Geraghty v Minter (1979) 142 CLR 177 Hamer v Giles (1879) 11 Ch D 942 at 944 Integrated Computer Services Pty Ltd v Digital Equipment Corporation (Australia) Pty Ltd (1988) 5 BPR 11,110 Jones v Bradley (No 2) [2003] NSWCA 258 Leichhardt Municipal Council v Green [2004] NSWCA 341 Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 Meekin Enterprises v Gersbach (McClelland CJ in Eq, 6 August 1997) Monie v Commonwealth of Australia (No 2) [2008] NSWCA 15 Nine Network Pty Ltd v Kennedy Miller Television Pty Ltd [1994] NSWCA 235 O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 275 Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 Robb v Allcock (1978) 2 BPR 9630 SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 South Eastern Sydney Area Health Service v King [2006] NSWCA 2 Target Holdings Ltd v Redferns [1996] AC 421 Thorby v Goldberg (1964) 112 CLR 597 Tonelli v Komirra Pty Ltd [1972] VR 737 Trustee for the Salvation Army (NSW) Property Trust & Anor v Becker (No. 2) [2007] NSWCA 194 Walker v Martin (23 December 1993 - BC 9300519) Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484 Category: Principal judgment Parties: In each appeal: Fraser Patison Old (Appellant/Cross Respondent) Kenneth John McInnes (First Respondent/First Cross Appellant) Hugh Rudyard Hodgkinson (Second Respondent/Second Cross Appellant) Representation: Counsel: S.R. Donaldson SC, R.D. Marshall, B.A. Arste (Appellant/Cross Respondent) G. Inatey SC, M. Condon (Respondents/Cross Appellants) Solicitors: Horowitz & Bilinsky (Appellant/Cross Respondent) Griffith Nicholson Lawyers (Respondents/Cross Appellants) File Number(s): CA 2004/184482 CA 2004/187484 Decision under appeal Citation: Old v Hodgkinson; Old v McInnes [2008] NSWSC 697 Old v Hodgkinson; Old v McInnes [2009] NSWSC 1160 Old v Hodgkinson; Old v McInnes [2010] NSWSC 1335 Old v Hodgkinson Before: Young CJ in Eq/Young JA File Number(s): SC 2004/1063 SC 2004/4064

Judgment 1BEAZLEY JA : There are two appeals before the Court, which are conveniently identified as the premium proceedings and the partnership proceedings. I agree with the reasons of Meagher JA and the orders he proposes in respect of both. 2There are also two summonses for leave to appeal brought by Mr McInnes and Mr Hodgkinson in which they seek leave to appeal from the costs orders in each matter by the trial judge. I have come to a different conclusion in respect of the summonses from Meagher JA 3Meagher JA has considered that leave should be granted to Mr McInnes in respect of the costs order in each matter. I agree with his Honour in that regard. However, his Honour considered that leave should not be granted to Mr Hodgkinson in respect of the costs order in the premium proceedings. 4Mr Hodgkinson was joined as a defendant in the premium proceedings, although no claim was made against him. As Meagher JA points out, he responded to the statement of claim, in para (93) of the defence, in terms that he " did not plead to the claim because it did not contain any claim against me ". As Meagher JA also points out, senior counsel informed the Court that the costs he and Mr Hodgkinson had incurred in defending the proceedings, which were in the sum of approximately $350,000, were mostly costs incurred by Mr McInnes. It was for that reason that his Honour would refuse leave to Mr Hodgkinson to appeal. 5However, there are other considerations relevant to the question as to whether leave should be granted. First, the costs applications were part of a much larger appellate dispute. Secondly, the trial judge erred in the costs order he made for the reasons explained by Meagher JA. However, because of the costs order made by the trial judge, no occasion arose for him to consider Mr Hodgkinson's offer of compromise at trial and it has not ever been considered. 6Litigation is not a process for the faint hearted. It is a costly and time-consuming process and usually productive of stress, all of which, of their nature, have adverse effects upon those involved in the process. In some, if not most, cases that come before the courts, it is a necessary evil. However, the court processes are designed to encourage parties to engage in the litigation efficiently and with an eye to ensuring costs bear an appropriate relationship with the matter in dispute. Thus, the statutory injunction in the Civil Procedure Act 2005, s 56, which is binding on the court, the legal practitioners and the parties alike, looks to the " just, quick and cheap " resolution of disputes. 7A successful party to litigation is, in the usual case, entitled to costs. On the assumption that a party, against whom no claim is made, receives a judgment or verdict, UCPR, r 42.1 operates. The party is thereby entitled to costs, unless it appears to the court that some other order ought to be made. There was no suggestion that some other order ought to be made in the present case. 8As a party to the proceedings, Mr Hodgkinson was entitled to utilise the processes of the rules and procedures of the court, including those relating to costs. He sought to do so by invoking the procedure for offers of compromise in UCPR, r 20.26. Mr Hodgkinson's offer of compromise complied with the Uniform Civil Procedure Rules 2005 (UCPR), r 20.26. Had it been acted upon by Mr Old, the premium proceedings, as against Mr Hodgkinson, would have been finalised in 2007. The failure to accept the offer not only kept him in the proceedings at first instance, but he was also joined as a party to the appeal. 9For the reasons in the foregoing paragraphs, I am of the opinion that leave to appeal should be granted to Mr Hodgkinson. As Mr Old did not accept the offer, UCPR, r 42.15A applies. That rule provides, relevantly, that where a defendant's offer is not accepted by the plaintiff and the defendant obtains an order or judgment on the claim as favourable or more favourable to the defendant than the terms of the offer, the costs payable are as follows: costs on the ordinary basis up until the day of the offer, and indemnity costs from the day after the offer. UCPR, r 42.15A is subject to any other order made by the court. 10I see no reason for the making of any other order. Accordingly, I am of the opinion that Mr Hodgkinson should have his costs of the premium proceedings at first instance on an indemnity basis in accordance with UCPR, r 42.15A. 11That leaves the question of Mr McInnes's appeal as to costs in the premium proceedings. 12On 24 March 2005, Mr McInnes wrote to Mr Old in relation to the " Supreme Court Proceedings ." Prior to writing that letter, there had been meetings between Mr Old and Mr McInnes in relation to the matters in contention between the parties. In the letter of 24 March, Mr McInnes stated: "You appreciate that the Referee has probably expended already at least A$30,000 in expenses. In the absence of prompt settlement that figure is likely to increase exponentially. I have already resigned myself to the probability that the money will be squandered and denied to us both for no good reason. I seek to avoid that if at all possible and I am sure you are of a like mind. ... It seems to me that there are only two real issues in debate between us, namely whether you have any entitlement to payments for alleged 'goodwill' consequent to the dissolution of HOM 2, and secondly whether there is any premium payable by me for the alleged transaction between us in June 2002. ... Hodgkinson and I have agreed jointly to offer you an additional sum of A$120,000 from these funds. This would mean you taking about $210,000 from the available funds (and the benefit of the Cronk & Hugo debt) if this matter is to be settled immediately. Obviously, this would involve the parties bearing their own costs to date and execution of a Deed of Settlement with appropriate releases and bars to further litigation between any of us or related entities." (White book 62-63) 13Mr Old responded in a handwritten notation on Mr McInnes letter, on 31 March 2004, stating: "Dear Ken, your offer is rejected." (White book 65) 14Mr McInnes responded in a like fashion on the same date, stating: "Dear Fraser, noted but are you prepared to suggest some alternative? If not then so be it and I will stop wasting my time." (White book 65) 15On 18 May 2006, the solicitor acting for Messrs Hodgkinson and McInnes wrote to Mr Old's solicitors in the following terms: "I have instructions to forward you a copy of a without prejudice offer to settle these proceedings which Mr McInnes sent to Mr Old on 24 March 2005. A copy is enclosed. I also enclose a copy of the front page of the letter which contains handwritten comments dated 31 March 2005 by which Mr Old rejected that offer. I am also instructed that Mr Old did not reply to Mr McInnes' written invitation to make a counter-offer, also dated 31 March 2005. To the extent necessary I inform you that the offer made by Mr McInnes on his own behalf and Mr Hodgkinson's behalf was made in accordance with the principles in Calderbank v Calderbank . If your client instructs you to dispute this please let me know by return and I will formally make the same offer again. This would appear to be a waste of time and money. Otherwise in accordance with Calderbank my clients intend in respect of any costs argument to refer to this letter in support of an application for indemnity costs." (White book 66) There was no response to that letter. 16On 22 June 2006, Mr McInnes made the following offer of compromise to Mr Old: "The First Defendant offers to compromise the Plaintiff's claim against him on the following terms:

Judgment for the Plaintiff against the First Defendant in the sum of $8,190.00.
First Defendant to pay the Plaintiff's costs as agreed or assessed. This offer is made pursuant to Rule 20.26 of the Uniform Civil Procedure Rules 2005. This offer is open for acceptance for 28 days." (White book 67) 17UCPR, r 20.26(2) provides, relevantly, that an offer must be exclusive of costs. The costs consequences that flow from an acceptance or rejection of the offer are governed by UCPR, Pt 42, Div 3. If a defendant's offer is accepted by a plaintiff, the plaintiff is entitled to costs on the ordinary basis up until the time when the offer was made: UCPR, r 42.13A. The rule is subject to the court ordering otherwise: UCPR, r 42.13A(2)(b). 18The offer did not conform to UCPR, r 20.26, because it included an offer that Mr McInnes pay Mr Old's costs. However, the practical effect of Mr McInnes' offer of compromise was that, had it been accepted according to its terms, Mr Old would have received a sum of money together with his costs up until acceptance of the offer. The almost certain result of Mr McInnes's offer of compromise, had it conformed with the rules, would have been that by operation of the UCPR, Mr Old would have received a sum of money and his costs up until the acceptance of the offer. 19I say " almost certain result " had the rules been complied with because UCPR, r 42.13A is subject to the court ordering otherwise, as I have indicated above. A court might make a different order, in favour of either party. However, there were no circumstances apparent from the facts in this case as they emerged in the proceedings that indicated that the court would have made some other order. 20Mr McInnes submitted that as the offer did not strictly comply with the UCPR, the Offer should nonetheless be treated as a Calderbank offer. Meagher JA has concluded that that submission should not be acceded to, because, as I understand his Honour's reasons, it did not contain a statement that if the offer failed as an offer of compromise under the UCPR, the offer was to operate as a Calderbank offer: cf Trustee for the Salvation Army (NSW) Property Trust & Anor v Becker & Anor (No. 2) [2007] NSWCA 194. 21I have a different view of the matter from his Honour. 22As this Court (Meagher, Beazley and Santow JJA) stated in Jones v Bradley (No 2) [2003] NSWCA 258 at [5], a Calderbank offer is a well recognised means of making an offer of settlement where the party making the offer ultimately seeks to obtain a costs advantage if the offer is not accepted: see Calderbank v Calderbank (1975) 3 WLR 586. When a Calderbank offer has been made, the rules of court governing offers of compromise do not apply. Rather, the court is asked to exercise its discretion as to the costs order that it considers ought to be made. 23In Trustee for the Salvation Army (NSW) Property Trust , the respondent made an offer of compromise that was intended to be a formal offer made in accordance with the UCPR. The last paragraph of the offer stated that, in the event that the UCPR was held not to be applicable to offers of compromise in probate proceedings, the offer was to be treated as an offer on the same terms and conditions made pursuant to the principles in Calderbank v Calderbank . 24The Court held that offers of compromise under the UCPR applied to probate proceedings. However, the offer of compromise did not comply with the UCPR, as it was not made exclusive of costs. The offer made was in a lump sum inclusive of costs. Ipp JA, with whom Mason P and McColl JA agreed, stated, at [27]: " Calderbank offers are simply offers that do not comply with the relevant rules of court relating to the making of offers of compromise: Jones v Bradley (No 2) (at [5]). Whether an offer, intended to be an offer under the Uniform Civil Procedure Rules but which is ineffective because it does not comply with those Rules, operates as a Calderbank offer, depends upon the intention of the offeror as revealed by the terms of the offer. The offer may disclose an intention that it should take effect only if it complies with the Uniform Civil Procedure Rules . On the other hand, it may disclose a general intent to make an offer, irrespective of whether it takes effect under the Uniform Civil Procedure Rules or not. 25His Honour considered that the offer reflected an overriding intention that, irrespective of its effectiveness under the UCPR, it should take effect as a Calderbank offer. His Honour considered that the offer was capable of acceptance by the appellant on that basis and should be so regarded. Accordingly, an order for indemnity costs was made. 26In my opinion, the decision in Trustee for the Salvation Army (NSW) Property Trust should not be treated as a prescriptive template for when an offer, purportedly made under the UCPR, may be treated as a Calderbank offer. More particularly, the court's discretionary power in respect of costs, provided for in the Civil Procedure Act 2005, s 98 should not be circumscribed by such an approach. 27It is apparent from the correspondence from Mr McInnes to Mr Old that Mr McInnes evidenced an intention to settle the proceedings from at least 2005. He did so initially with Mr Old directly. He made a further attempt through his solicitors, until he finally made the offer of compromise on 22 June 2007, which was the offer that was intended to be made under the UCPR. 28The court encourages the settlement of matters for reasons both of public policy and private interest. 29In Computer Machinery Co Ltd v Drescher [1983] 1 WLR 1379; [1983] 3 All ER 153, Megarry VC stated at 1383: "Whether an offer is made 'without prejudice' or 'without prejudice save as to costs,' the courts ought to enforce the terms on which the offer is made so as to encourage compromises and shorten litigation. The latter form of offer has the added advantage of preventing the offer from being inadmissible on costs, thereby assisting the court towards justice in making the order as to costs." 30This approach has been judicially endorsed by this Court on innumerable occasions. In Leichhardt Municipal Council v Green [2004] NSWCA 341 in referring to Calderbank offers, Santow JA stated, at [17]: "... the practice of Calderbank letters is allowed because it is thought to facilitate the public policy objective of providing an incentive for the disputants to end their litigation as soon as possible. Furthermore, however, it can be seen as also influenced by the related public policy of discouraging wasteful and unreasonable behaviour by litigants." 31See also South Eastern Sydney Area Health Service v King [2006] NSWCA 2 where Hunt AJA (Mason P and McColl JA agreeing) stated, at [83], that the purpose of offers of compromise was: "... to encourage the proper compromise of litigation, in the private interests of the litigants and in the public interest of the prompt and economical disposal of litigation." See also Elite Protective Personnel Pty Ltd v Salmon [2007] NSWCA 373; Monie v Commonwealth of Australia (No 2) [2008] NSWCA 15. 32The significance of a Calderbank offer is that it provides a readily recognisable basis for the court to exercise its costs discretion in a form which may result in a more favourable costs outcome than would have been the case had UCPR, r 42.1 applied: see SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 at [37]; Jones v Bradley (No 2) ; Commonwealth of Australia v Gretton [2008] NSWCA 117 at [40]; [114]. However, the Court's discretion is not confined to cases which are 'strictly' characterised or expressly stated to be Calderbank offers. 33In Commonwealth of Australia v Gretton Hodgson JA stated, at [121]: "In my opinion, underlying both the general rule that costs follow the event, and the qualifications to that rule, is the idea that costs should be paid in a way that is fair, having regard to what the court considers to be the responsibility of each party for the incurring of the costs . Costs follow the event generally because, if a plaintiff wins, the incurring of costs was the defendant's responsibility because the plaintiff was caused to incur costs by the defendant's failure otherwise to accord to the plaintiff that to which the plaintiff was entitled; while if a defendant wins, the defendant was caused to incur costs in resisting a claim for something to which the plaintiff was not entitled: cf Ohn v Walton (1995) 36 NSWLR 77 at 79 per Gleeson CJ. Departures from the general rule that costs follow the event are broadly based on a similar approach." (emphasis added) 34Given the court's discretionary power as to costs and the important public policy considerations and the private interests of parties in settling litigation, the fact that a failed Rules offer of compromise is not strictly conformable with the usual Calderbank offer, does not preclude the court from considering whether it should exercise its discretion as to costs so as to make some other order than costs follow the event, in accordance with UCPR, r 42.1. Rather, when the court is asked to exercise its discretion as to costs, it is entitled to look at the conduct of the parties throughout the proceedings, including attempts made at settlement and the terms of the failed UCPR offer. 35In this case, Mr McInnes demonstrated both a willingness to settle and a clear intention do so from 2005. Those efforts were rebuffed by Mr Old, without seeking to engage in any alternate compromise, at least from the end of March 2005. As a consequence, the proceedings continued at first instance until late 2009. Had Mr Old accepted the offer of compromise made on 22 June 2007, he would have received a small sum of money, and importantly, his costs up until that date. As events turned out, Mr Old failed completely in the premium proceedings and Mr McInnes has incurred substantial costs, a significant proportion of which would have been incurred after 22 June 2007. 36In my opinion, the circumstances are such that, in the exercise of the Court's discretion, Mr McInnes should have his costs on an indemnity basis from 23 June 2007, that is, from the day after the failed rules offer of compromise was made. In exercising the discretion in that way, I do not suggest that Mr Old engaged in 'misconduct' in the proceedings, as discussed by McHugh J in Oshlack v Richmond River Council [1998] HCA 11; 193 CLR 72. Rather, I am of the opinion that, in circumstances where the offer of compromise was technically deficient, but nonetheless would have achieved the same result for Mr Old had it been accepted, as would have been achieved under the UCPR, the Court should act pragmatically and justly as between the parties. 37Having reached this conclusion, it is unnecessary for me to consider the alternative argument that recourse could be had to Civil Procedure Act , s 14 to dispense with the requirement under the UCPR that the offer contained in the offer of compromise be made exclusive of costs. In my opinion, however, s 14 does not apply in a case such as this, as its effect would be to change the terms of the offer. This would occur because the application of s 14 would mean that the offer of costs made in the second clause of the offer for compromise would have to be treated as if it had not been made. 38Once the offer of costs was 'excised' in this way, the UCPR would come into play. I have already indicated that had the UCPR operated in this case, it was unlikely that the court would make some different order than that specified. Nonetheless, if the UCPR applied, Mr Old would still be entitled to seek to persuade the court that some different costs order should be made. The effect of applying s 14 would thus be to change the offer that was made. I do not consider s 14 was intended to operate in that way. 39Insofar as the partnership proceedings are concerned, I agree with Meagher JA that leave to appeal from his Honour's costs order should be granted. However, I again have a different view regarding the outcome as to costs, essentially for the same reasons as I have already given in relation to the partnership proceedings. 40Mr McInnes and Mr Hodgkinson demonstrated a clear willingness to settle from 2005 onwards, although there was an element of uncertainty in the 24 March 2005 letter as to the exact amount that Mr Old would receive. However, the intent was clear: Messrs McInnes and Hodgkinson were willing to pay Mr Old a sum of money in the order of $270,000. On 22 June 2007, they made an offer, purportedly under the UCPR, to pay Mr Old the sum of $20,000. However, that offer did not comply with the rules, as it included an offer that they would pay Mr Old's costs. 41I again refer to the practical consequence of accepting the offer if it had been made strictly in accordance with the rules. In my opinion, the respondents should have an order for indemnity costs from 23 June 2007. 42Giles JA : I agree with Meagher JA. 43Meagher JA : These appeals are from decisions of Young JA (or Young CJ in Eq as his Honour was at the time of the 2008 decision) in two proceedings relating to the formation and subsequent dissolution of a partnership carried on between the parties under the name "Hodgkinson Old McInnes". That partnership carried on business as patent and trademark attorneys from premises in Alfred Street, North Sydney from 1 July 2002 to 30 June 2003 ( the HOM partnership ). 44Prior to 1 May 2000, Mr Old and Mr Hodgkinson had carried on business in partnership and from July 2000 Mr McInnes had joined that partnership as a salaried partner. From that time the business was carried on under the name "Hodgkinson Old McInnes". That partnership was dissolved on 3 December 2001 and a second partnership was formed between Mr Old and Mr Hodgkinson, as equal equity partners, and Mr McInnes, as a salaried partner. That partnership terminated on 30 June 2002 and the HOM partnership, between the three partners as equal equity partners, commenced on 1 July 2002. 45The HOM partnership was dissolved on 30 June 2003 by a notice given by Mr Old, dated 29 May 2003. There were subsequently disputes between the parties which resulted in two proceedings and four decisions of the primary judge. Those decisions are the subject of the two appeals to this Court. Before identifying the issues in those appeals I will summarise briefly those proceedings and decisions.

The proceedings before and decisions of the primary judge 46On 21 July 2003, Mr Old commenced proceedings in the District Court against Mr McInnes to recover an amount, being one-third of the value of the goodwill of the partnership business as at 30 June 2002, said to be due under an agreement made with Mr Old and Mr Hodgkinson (the premium proceedings ). In November 2003, Mr Hodgkinson was joined as a defendant in those proceedings. 47In early 2004, Mr Old commenced further proceedings against Mr Hodgkinson and Mr McInnes in the Equity Division of this Court seeking a declaration that the HOM partnership had been dissolved on 30 June 2003 and an order for the appointment of a receiver and manager and the preparation and passing of accounts for the partnership (the partnership proceedings ). He also sought orders that there be an inquiry to ascertain the assets of that partnership and as to whether those assets including goodwill had been retained by any of the partners, and an order that any such partner pay to the receiver any amount found to be the value of such goodwill. Mr Hodgkinson and Mr McInnes filed a cross-claim in those proceedings. By that cross-claim they alleged breaches of fiduciary duty by Mr Old because he had taken a number of files belonging to patent clients of the firm on or prior to 6 June 2003. They claimed equitable compensation for those breaches of duty. 48In July 2004 orders were made transferring the premium proceedings into the Supreme Court and that those proceedings and the partnership proceedings be heard together. On 8 December 2004 the primary judge ordered that all issues in both proceedings be referred to Mr A.H.W. Wily, a chartered accountant, for inquiry and report. By that time a draft set of accounts for the HOM partnership had been prepared drawn as at 30 June 2003. 49Mr Wily's report was dated 19 March 2007 and delivered to the Court on 21 March 2007 (the Referee's Report ). In the intervening period there were applications to remove the referee and to suspend the reference. The Referee's Report was released to the parties in August 2007. After that time there were applications in which the quantum and liability for payment of the referee's fees were disputed. 50The parties then filed motions in the premium and partnership proceedings dealing with the adoption or rejection of all or parts of the Referee's Report. Those motions and the proceedings generally were the subject of judgments of the primary judge delivered on 9 July 2008 ( [2008] NSWSC 697 ), 3 November 2009 ( [2009] NSWSC 1160 ) and 23 November 2010 ( [2010] NSWSC 1335 ). In those judgments and a short judgment delivered on 10 December 2010, the primary judge also dealt with issues as to the form of the final orders to be made in the partnership proceedings including orders as to the payment of the referee's costs and the costs of the partnership proceedings. On 10 December 2010, the primary judge also ordered that there be judgment for Mr McInnes and Mr Hodgkinson in the premium proceedings and that there be no order as to the costs of those proceedings.

The appeals to this Court 51There are two appeals to this Court which have been heard together. In appeal No. 184482 of 2004, Mr Old appeals from the judgment dealing with the issue in the premium proceedings: [2009] NSWSC 1160, esp at [24], [36]-[133]. Mr McInnes and Mr Hodgkinson also seek leave to cross-appeal against the order that there be no order as to the costs of the premium proceedings. The primary judge's reasons addressing that subject are in [2009] NSWSC 1160 at [138]-[147] and in [2010] NSWSC 1335 at [5], [53]-[63]. The summons seeking leave to cross-appeal was filed more than three months after the service of a notice of intention to appeal. For that reason, Mr McInnes and Mr Hodgkinson seek an order under UCPR Pt 51, r 51.9(1)(b) extending the time for filing and serving the summons. 52In appeal No. 187484 of 2004, Mr Old appeals from the primary judge's decisions dealing with two parts of the Referee's Report. The first is the decision to reject the referee's recommendation that there be included in the accounts of the partnership as at 30 June 2003 an amount representing the value of the goodwill upon the basis that goodwill, subject to an adjustment, had been appropriated or retained by Mr McInnes and Mr Hodgkinson and accordingly should be brought to account in the settlement of accounts between them and Mr Old. That question was dealt with in [2008] NSWSC 697, esp at [4]-[52]. 53The second is the decision that Mr Old was liable to pay equitable compensation to Messrs McInnes and Hodgkinson in an amount of $95,288 for breach of fiduciary duty in relation to the removal and retention of the files of patent clients. That question is dealt with in [2009] NSWSC 1160 at [24] and [25]-[35] and in [2010] NSWSC 1335 at [5] and [10]-[16]. Mr McInnes and Mr Hodgkinson also seek leave to cross-appeal against the order in the partnership proceedings that, except for the costs of the motion of Mr McInnes and Mr Hodgkinson to remove the referee, the costs of those proceedings assessed on a party/party basis be borne equally by the parties. The reasons for that order are in [2010] NSWSC 1335 at [5], [24] and [62]. Mr McInnes and Mr Hodgkinson also seek an order extending the time for filing the summons for leave to cross-appeal.

The issues in the appeals 54There are three issues which arise in Mr Old's appeals and questions in relation to costs orders which arise on each of the applications of Mr McInnes and Mr Hodgkinson for leave to cross-appeal. 55The first issue is whether, in the premium proceedings, the primary judge erred in concluding that there was no binding agreement by which Mr McInnes agreed to pay Mr Old and Mr Hodgkinson to acquire a one-third share of the goodwill attached to the business previously owned by Mr Old and Mr Hodgkinson in equal shares. 56The second issue is whether the primary judge erred in rejecting the parts of the Referee's Report which recommended that an adjustment as between the partners should be included in the accounts for the partnership as at 30 June 2002 for the value of the goodwill of the HOM partnership upon the basis that the business continued to be conducted after 30 June 2003, in part by the entity Fraser Old & Sohn Unit Trust and as to part by the Hodgkinson and McInnes partnership. 57The third issue is whether, accepting that there were breaches of fiduciary duty on the part of Mr Old in removing and retaining the patent files, the primary judge was correct in concluding that the amount which should be paid by way of equitable compensation was $95,288. That amount was said to represent the reduction in the value of the goodwill of the HOM partnership business due to the removal of those files. 58The following questions arise on the applications for leave to cross-appeal. In the premium proceedings, there are two issues in relation to the primary judge's exercise of the discretion as to costs. The first is whether he did so on a wrong factual basis, namely that Mr Old had succeeded in that claim, albeit for a fraction of the amount claimed: [2009] NSWSC 1160 at [142]-[143]; [2010] NSWSC 1335 at [53], [63]. The second is whether he erred in not treating Offers of Compromise dated 22 June 2007 and 18 July 2007 as complying with UCPR r 20.26, so as to attract the operation of UCPR r 42.14, or in treating those offers as informal Calderbank offers for the purpose of exercising the discretion as to costs. 59In the partnership proceedings, there are also issues as to whether the primary judge's exercise of discretion as to costs miscarried. The first is whether he erred in approaching the question of costs on the basis that the costs had been incurred in a proceeding necessary for the winding-up of a partnership which did not involve any sufficient misconduct by either Mr Old or Mr McInnes and Mr Hodgkinson which would justify a departure from the ordinary rule that such costs be borne equally by the partners: see Hamer v Giles (1879) 11 Ch D 942 at 944; Meekin Enterprises v Gersbach (McClelland CJ in Eq, 6 August 1997 at pp 2-3). The second is whether he erred in not treating an Offer of Compromise dated 22 June 2007 as complying with UCPR r 20.26 or as an informal Calderbank offer when exercising his discretion as to costs and in not taking into account a letter of offer dated 24 March 2005: [2010] NSWSC 1335 at [25]-[62].

Was there a binding agreement that Mr McInnes pay an amount to Messrs Old and Hodgkinson to acquire a one-third equity interest in the partnership? 60Prior to February 2002 there had been differences and disputes, particularly between Mr Old and Mr Hodgkinson, concerning the operation of the previous partnerships. Mr Old had commenced proceedings against Mr Hodgkinson and Mr McInnes in relation to the partnership which Mr McInnes had joined in July 2000. 61On 23 February 2002 there was a lengthy meeting between Mr Old, Mr Hodgkinson and Mr McInnes chaired by a lawyer, Mr Sam Beasley. The meeting was held to discuss the admission of Mr McInnes to the partnership as an equity partner and to consider issues that then existed between Mr Old and Mr Hodgkinson. The matters discussed at the meeting are recorded in minutes which include introductory comments made by each of the partners and what are described as 11 resolutions. After review and correction, those minutes were signed by each of the parties. The introductory comments include Mr Old saying that he did not consider that the three could "stay in a partnership and therefore wishes to change the structure in order to prevent last year's events being repeated". The 11 resolutions included the following: " Resolution 1 - Future Business Structure 1.1 To explore the use of a unit trust as the vehicle for the business structure in the future KJM is to · Obtain a Unit Trust document for discussion · Distribute the Cropper Parkhill Trust and the KMI Holdings Trust · Distribute copies of Spruson's employment contracts FO is to provide copies of the Megalong Trust 1.2 The Trust Deed is to be supported by a "Policy Manual" which would be an indexed manual of policies agreed and minuted at partners meetings. Resolution 2 - Profit sharing 2.1 It was agreed that the profit of the firm is to be distributed in proportion to the share/unit holding. 2.2 A Partner may elect to take their share of profits in different forms (salary, superannuation, etc) provided they are tax-deductible and cash flow is evenly maintained or as otherwise agreed by the unit holders from time to time. Resolution 3 - Goodwill 3.1 There is continued agreement that the firm accepts the concept of goodwill 3.2 Goodwill is to be calculated as twice the average "fair dinkum" profit over the last three years Resolution 4 - Ken McInnes's entry to the partnership 4.1 Agreed in principle Hugh Hodgkinson and Fraser Old will sell one-third interest equally to Ken McInnes to result in one third each. 4.2 The conditions of entry are to be negotiated no later than the 28 th of February, 2002" 62The primary judge found, and it is common ground, that the intent of the parties at this time was that a unit trust would be set up, that the affairs of the partnership would be conducted through that unit trust and that each "partner" or his nominee would hold an equal number of units in that trust. By 25 June 2002 Mr McInnes had proposed a draft trust deed with the intention that it should operate from 1 July 2002. That deed was never executed, primarily because Mr Hodgkinson had concerns that under its provisions as drafted, he could be out-voted and ousted from the "partnership". 63From 1 July 2002 the HOM partnership carried on the business which had been conducted by the previous partnerships. On about 2 July 2002, each of the parties deposited $100,000 into a newly opened bank account in the name "Hodgkinson Old McInnes UT". Those funds were to be used as working capital for the new partnership and the contributions were made into an account of that name in anticipation of the execution of a trust deed. 64In July 2002 a document entitled "Memorandum of Understanding" ( MOU ) was prepared by a solicitor acting for Mr Hodgkinson. The MOU is dated 18 July 2002 and was signed by Mr Hodgkinson and Mr McInnes on about that date and by Mr Old, probably in early August. The MOU was in the following terms: " Relationship between Hugh Hodgkinson (HRH), Fraser Old (FPO) and Ken McInnes (KJM) on and from 1 July 2002, in respect of the business entity known as Hodgkinson Old McInnes (HOM):

The partnership between HRH and FPO in HOM ceased on 30 June 2002;
HRH, FPO and KJM agreed that on and from 1 July 2002 they would form an equal partnership at will, to continue until execution of a Trust Deed to regulate the activities of a business carried on in the name HOM;
In the event that a Trust Deed was not executed promptly, the partnership at will would continue until the execution of the Trust Deed. No agreement has been made as to what would occur if no Trust Deed was executed. As at today's date, 18 July 2002, a draft Deed has been prepared but not finalized or executed. The terms of material provisions have not yet been finalized;
Each of HRH, FPO and KJM agreed prior to 30 June 2002 to contribute, and on or about 2 July 2002 in fact contributed, the sum of $100,000 b way of working capital; This sum totalling $300,000 was placed into a bank account newly opened with National Australia Bank, in the name of Hodgkinson Old McInnes UT. The contributions were in anticipation of the execution of a Trust Deed;
In respect of goodwill, KJM agreed prior to 30 June 2002 to pay an amount to HRH and FPO equally being one third of a sum representing twice the average profit over the last 3 years of HOM and its predecessor in business HRH & Co - an amount expected to be in the vicinity of $300,000-$400,000; The terms of the payment were to be spread over 10 years, the first 2 years to be interest only at a nominated bank rate. Thereafter, the annual repayments were to comprise equal capital repayments and simple interest;
Agreement was reached prior to 30 June 2002 that no payment was required from KJM for the fixed assets and undertakings of the partnership carried on in the name HOM (whether owned directly by HRH and FPO, or by Rakobit); No agreement was made orally or in writing as to the basis of HOM's occupancy of premises at 20 Alfred Street Milsons Point. However it was agreed that the business HOM would continue to pay the rent of the tenant RAKOBIT (reviewed as at 30 June 2002) direct to the Landlord monthly. The first payment due in advance for the period commencing 1 July 2002 was paid out of the new HOM/UT bank account;
In respect of creditors and debtors of the pre 30 June 2002 partnership it was agreed: 7.1 That work in progress to 30 June 2002 would be billed to the greatest extent possible (by agreement debit notes were prepared up to 7 July 2002), and that those billings when paid would be divided equally between HRH and FPO; 7.2 That HRH and FPO would be responsible for creditors up to and including 30 June 2002, confined to those creditors who had rendered their bill by that date;
Prior to 30 June 2002 Rakobit (Trustee for the Hodgkinson Family Trust - HRH and CLH trustees) employed all HOM staff and owned or leased the majority of equipment; It was agreed that subsequent to 30 June 2002 staff be paid out of the new HOM/UT bank account and this in fact occurred on the first pay date, namely 16 July 2002 (at this stage solely funded by the contributions of $300,000 referred to in paragraph 4). It was also agreed that Rakobit's involvement in the day to day business of HOM would cease and be paid out of the HOM/UT account so that all liability to Rakobit in respect of its prior provision of services to HOM would cease. It was agreed that Rakobit would become a unit holder in the proposed trust if a HRH so required;

Should there have been an allowance in the accounts for goodwill acquired or retained by Mr Hodgkinson and Mr McInnes? 78By early May 2003, Mr Old had registered the business name "Fraser Old & Sohn". Upon becoming aware that Mr Old had removed files from the office (see [90] below), Mr Hodgkinson and Mr McInnes wrote to him on 10 June 2003 on the letterhead of the HOM partnership. That letter stated: "... Since the HOM partnership still subsists and will continue to do so until 30 June 2003, any removal of files from the office by you without our knowledge and consent constitutes a breach of the fiduciary obligation you owe us as your partners. ... After 30 June 2003 you may continue to act for one or more clients of the HOM partnership and we may continue to act for other clients. There is only one criterion as to how this distribution of work should take place, and that is the wish of the client. If a client wishes us to continue to act for him, the file will remain in the office and his business will occur in the same manner as has occurred before." 79On 13 June 2003 Mr Old wrote to a significant number of the patent clients of the HOM partnership in the following terms: "Effective 30 June 2003 the partnership of Hodgkinson Old & McInnes is dissolved by agreement between the partners. Messrs Hodgkinson and McInnes, who practise exclusively in relation to trademarks, propose to jointly conduct a practice. The writer, who practises exclusively in relation to patents, proposes to conduct a practice in accordance with the above particulars." The reference to "above particulars" was to a "Patent Attorneys" practice to be carried on under the name "Fraser Old & Sohn". 80On 18 June 2003 a circular letter on the letterhead "Hodgkinson Old & McInnes" was sent to clients of that partnership by Mr Hodgkinson and Mr McInnes. That letter stated: "This letter is to inform you that the HOM Partnership has been dissolved effective 30 June 2003 by Notice served upon us by Mr Fraser Old. Mr Old may have already informed you of this. After 30 June 2003 we will continue in partnership from our current address under the name: HODGKINSON & McINNES Mr Frank Pappas, a patent attorney of many years experience, will be admitted to our partnership on 1 July 2003 as partner in charge of the Patent Department. The new partnership (H&M) will continue to offer the full range of services previously provided by the firm including both Patent and Trademark work. Contrary to what you may have been led to believe, our Patent Department is unchanged. All professional staff of HOM together with all support staff (with the exception of Mr Old's personal secretary) will continue in the employment of H&M." The letter invited the recipient to authorise Mr Hodgkinson and Mr McInnes to assume conduct of all matters in respect of which the HOM partnership had previously acted and to take possession of all files and records relating to such matters, by signing and returning a copy of the letter. 81Following dissolution of the HOM partnership on 30 June 2003, Mr Hodgkinson and Mr McInnes carried on business under the name of "Hodgkinson & McInnes" from the North Sydney premises and Mr Old established a business under the name "Fraser Old & Sohn" in other offices in Alfred Street, North Sydney. 82In his report the referee considered that there was goodwill attached to the business of the HOM partnership as at 30 June 2003 and that that business: "... continued after 30 June 2003 as a going concern, by virtue of the partners continuing to operate the business, albeit, via two separate entities that is, Fraser Old & Sohn Unit Trust and the Hodgkinson & McInnes Partnership." See Referee's Report at [5.10.5], [5.10.15]. On that basis the referee made an allowance for what he calculated to be the value of the goodwill in respect of the part of the business which the Hodgkinson and McInnes partnership operated after 30 June 2003. Mr Old relied upon the decision of the Full Court of the Supreme Court of South Australia in Walker v Martin (23 December 1993 - BC 9300519) as supporting a conclusion that in the circumstances there should be an allowance in the partnership accounts for the value of the goodwill retained by Mr Hodgkinson and Mr McInnes. It was argued that as in Walker v Martin "for all intents and purposes the business continued to operate in the hands of Mr Hodgkinson and Mr McInnes as it had" during the earlier partnership: [2008] NSWSC 697 at [39]. In support of that argument a number of sources of the goodwill of the HOM partnership business were identified and described as retained by Messrs Hodgkinson and McInnes. They included the premises, telephone number, fax number, email address, post office box number, approximately 30 experienced staff, active patent and trademark files, promotional material which was almost identical and the opportunity to renew patents and trademarks attaching to the files which had been retained. It was said that the fact that the new business was taking advantage of these sources of goodwill confirmed that the goodwill itself had been retained or appropriated at least to a significant extent. 83The primary judge rejected this argument. He concluded that the business had come to an end and that as goodwill has no existence independent of the conduct of a business, once the business came to an end the goodwill in it could no longer exist. He relied upon the following statement of the relevant principles by Needham J in Alcock v Robb (1978) 2 BPR 97152 at 9630: "In my opinion, once a business comes to an end goodwill in it can no longer exist. If the former partners so desire, they can sell the assets of the business including goodwill, but such a sale would prevent any of them from soliciting the custom of the former clients of the firm. They may, alternatively, sell the business to one of their number. In that case, an allowance for goodwill would be proper. If, however, the former partners decide to give up the business and go their separate ways, it seems to me that they destroy the goodwill of that business. Each of them would be liable to restraint if it were to be suggested that they were carrying on the old business. The agreement of the former parties that clients would be circularised and given the opportunity of choosing which of the former partners should perform their work is not an agreement to divide goodwill in specie. No former client can be held to his decision and each could go where he wished. Each party remains entitled to use the name (an integral part of the former goodwill) and the goodwill which each of the former partners builds up is his own goodwill, ie the goodwill of his new business. It cannot be equated or identified with a portion of the former goodwill." See [2008] NSWSC 697 at [26]. 84In this Court, Mr Old argued that, accepting goodwill is inseverable from the business, the factual inquiry was whether the business of the HOM partnership continued "in form and in substance" in the hands of Mr Hodgkinson and Mr McInnes after 30 June 2003. On the basis that Mr Hodgkinson and Mr McInnes had access to and used the same sources of goodwill as were used by the HOM partnership, it should be concluded that the goodwill of the business survived its dissolution. It was accepted that the relevant question was ultimately a question of fact. 85The primary judge did not err in concluding that the business conducted by the HOM partnership had come to an end on 30 June 2003. The facts of the present case are distinguishable from those in Walker v Martin . In that case a partner, Dr Wallis, had given notice of his intention to retire from a partnership of medical practitioners with effect from 31 March 1989. Later another partner, Dr Martin gave notice of his intention to resign from the partnership. The partners agreed that the partnership would be dissolved on 31 March 1989. The remaining partners circularised clients of the practice in March 1989 advising that two partners were resigning from "the practice" and that "this practice" would "continue" and that they looked "forward to maintaining our reputation of being a top family medical practice". The primary judge concluded, in a passage quoted by Olsson J in his judgment on appeal (p 6): "It is not true to say ... that, on the dissolution of the partnership, the goodwill of the partnership was extinguished. If the business of the partnership had come to an end, then it might be that would have been the case; but the business of the partnership did not come to an end: it survived to be carried on by the defendants; and, in that case, it was open to one or more of the partners to purchase that business from the other or others; and, in reality, that is what happened." In the Full Court the other judges dealt with the matter on the same basis. King CJ (p 2) noted that prior to dissolution the remaining partners "distributed dodgers to patients informing them of the continuance of the practice by the appellants". Referring to the same circular, Millhouse J observed (p 4) that its clear implication was "that the practice would continue despite the appellant Wallis and the respondent Martin leaving it". 86In this case the partners by their conduct, and in particular by the written communications between themselves and to the clients of the HOM partnership (see [78] , [79] and [80] above) agreed as to the following: first, that the HOM partnership should be dissolved effective from 30 June 2003; secondly, that thereafter they would conduct different and competing practices under different names; thirdly, that the clients of the HOM partnership would be divided between them according to the wishes of the client as to which of the new practices the client chose; and finally, that other assets used in the HOM partnership would be acquired by Mr McInnes and Mr Hodgkinson. These agreements were inconsistent with the preservation and sale of the goodwill of the HOM partnership for the benefit of all of the partners. The position is correctly summarised by Needham J in the passage cited by the primary judge. In a judgment in earlier proceedings between the same parties, Bowen CJ in Eq summarised the relevant principles as follows ( Alcock v Robb (1978) 2 BPR 97152 at 9627-9628: "The right to use a partnership name is an element in goodwill. On dissolution, in the absence of express provision in the partnership agreement covering the matter, the prima facie right of the partners is to have the partnership assets, including goodwill, sold, and the proceeds applied first in discharging liabilities of the partnership and then by way of distribution to the partners. ... If goodwill including the firm name is to be sold, no previous partner will be entitled thereafter to use the firm name. Such a right would be inconsistent with the right of the other partners to have the goodwill sold for the common benefit of all. On the other hand, if the goodwill is not to be sold, either because the partnership agreement contains a contrary provision, or because the partners agree on terms of dissolution which preclude its sale, or because they act in such a way, as, for example, by dividing the clients between them, as to render the sale of goodwill impracticable, then each partner may continue in business in competition with his former partners; each may represent himself as 'late of' the old firm; and each may use the old firm name, provided he does not hold out that the other members of the old firm are still in partnership with him, and does not use the name in such a way as to expose his former partners to the risk of liability." 87In Page v McKensey (Supreme Court of NSW, Windeyer J 17 December 1993) a partnership between six accountants was dissolved by notice given by Mr Page. The remaining five partners continued to use the name of the firm and "to all intents and purposes ... continued the partnership business" (p 4). In the circumstances, the retiring partner was held to be entitled to have the value of goodwill brought to account in the dissolution of the partnership. That aspect of Windeyer J's decision was not challenged on appeal: Page v McKensey [1995] NSWCA 351. 88Mr Old argued that Mr McInnes and Mr Hodgkinson had the benefit of the goodwill of the HOM partnership business because they continued, after the dissolution of that partnership, to use a number of the sources of the goodwill to that partnership. That argument does not take into account the distinction between goodwill, which attaches to a business and cannot be dealt with separately from the business with which it is associated, and the sources of that goodwill, which may be assets of the business which are not themselves elements of the goodwill: Federal Commissioner of Taxation v Murry [1998] HCA 42; (1998) 193 CLR 605 at [22], [24], [30]. The sale of an asset of a business which may itself be a source of the goodwill of the business does not involve any sale of goodwill unless the sale of the asset is accompanied by or carries with it the right to conduct the business. That is because goodwill is the right or privilege to conduct a business in substantially the same manner and by substantially the same means as have attracted custom to it: Federal Commissioner of Taxation v Murry at [23], [31], [45]. 89Here, the partners did not agree to sell the right or privilege to conduct the business of the HOM partnership. Nor was there any agreement between the partners that any of them should have exclusive use of the old firm name or the right or privilege to conduct a business in that name: cf Geraghty v Minter (1979) 142 CLR 177 at 193-194. To the extent that a number of the assets of that business which were sources of its goodwill were acquired or used by Messrs McInnes and Hodgkinson, Mr Old was entitled to have the value of those assets brought to account in the winding-up of the partnership. The value of those assets would usually take account of their potential use which is an attribute of the asset and not an element of the goodwill: Federal Commissioner of Taxation v Murry at [33], [51]. To the extent that they thereafter might be said to have generated goodwill, this would be goodwill attaching to the new business conducted by the "Hodgkinson & McInnes" partnership.

Whether the equitable compensation for which Mr Old was liable included an amount for his having appropriated goodwill or otherwise reduced the value of goodwill of the HOM partnership? 90Shortly before 10 June 2003, Mr Old removed 446 files from the North Sydney premises. Approximately 4,000 files remained. The files removed were files of patent clients that Mr Old had previously worked on. Of those files, at the direction of each particular client, 286 ultimately were retained by Mr Old, 35 were transferred to other patent attorneys and 125 were returned to Mr Hodgkinson and Mr McInnes in their new practice. The evidence was that all of the files which were returned had been returned by 5 August 2003 and that the great majority of those files had been returned before the end of July. Upon becoming aware that Mr Old had removed those files, Mr Hodgkinson and Mr McInnes wrote the letter to him dated 10 June 2003 (see [78] above). 91In his report, when providing for the adjustments between the parties as at 30 June 2003, the referee made provision for Mr Old having to account for fees of $18,660 billed by him for work carried out prior to 30 June 2003 for clients whose files had been removed in early June. He also made a provision of $58,894 for what were described as costs invoiced by Messrs McInnes and Hodgkinson after 30 June 2003 "as a result of Mr Old's breach of his fiduciary duties": Referee's Report [5.16.1]. Those costs included time spent in July 2003 in locating files of the HOM partnership. Neither of those adjustments made by the referee was the subject of any dispute addressed by the primary judge which is the subject of any appeal. 92Having earlier concluded that part of the partnership business was conducted by Mr Old after 30 June 2003 (see [82] above), the referee undertook a calculation of what was said to be the value of that goodwill. He did so by reference to the fees generated by Mr Old after 30 June 2003 from clients who had been clients of the HOM partnership. It is unnecessary to consider the precise basis on which his calculation was made. The estimate of value was $142,931. The referee described that amount as the "estimated goodwill of that part of the business taken over by Mr Old": Referee's Report [5.16.1], [6.6.2]-[6.6.3]. 93The issue before the primary judge was whether he should adopt, vary or reject the recommendation that the compensation for breach of fiduciary duty should include an allowance for loss of value of goodwill. The primary judge addressed this issue very briefly. Mr Old argued that, consistent with the primary judge's conclusion that there should be no allowance for goodwill retained or acquired by Mr McInnes and Mr Hodgkinson, there should be no allowance for any loss of goodwill by way of equitable compensation. The primary judge rejected that argument and varied the referee's recommendation to provide for compensation of $95,288. He reasoned as follows ([2009] NSWSC 1160): "28. The referee considered that the amount of equitable compensation for this breach to be taken into account when adjustments were made included $142,931 being the amount of goodwill of the [HOM partnership] which the referee held had been taken over by [Mr Old]. The referee reached this figure after valuing the goodwill at $909,580. 29. The only question for me is whether the equitable compensation should or should not include goodwill. 30. In my judgment [2008] NSWSC 697, I said that as goodwill had no existence except as an adjunct to the relevant business, the referee was not justified in including it in the partnership accounts. 31. [Mr Old] says that it should follow that the adjusted goodwill factor in the figure allowed for equitable compensation also should not be allowed. 32. In my view this conclusion does not follow. Part of the damage by (Mr Old's) breach of fiduciary duty occurred whilst the [HOM] Partnership was still in existence. The mere fact that, on dissolution it ceased to exist does not mean that at the time of the breach of duty it had no value. 33. However, the breach occurred very close to the obvious finish of the partnership. Some discount should have been made in the value of the goodwill abstracted because of the chances of its becoming valueless in any event. 34. There was little argument put on this proposition. Doing the best I can I consider that one-third should have been discounted for this chance. 35. The referee should thus have taken a goodwill factor of $95,288." 94Mr Old argued that the measure of compensation for breach of fiduciary duty is to be assessed at the date of judgment and is assessed as the amount then necessary to put the beneficiary back into the position it would have been in had there been no breach: Target Holdings Ltd v Redferns [1996] AC 421 at 437; Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484 at [35]. [50]; O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 274-276. Mr McInnes and Mr Hodgkinson did not argue that any different principles applied in the circumstances of this case. Applying those principles, Mr Old submitted that Mr McInnes and Mr Hodgkinson were not entitled to any amount reflecting the proportion of the value of the goodwill of the HOM partnership business which could be attributed to the files which had been removed. Mr McInnes and Mr Old argued that the primary judge was correct for the reasons he gave. They did not advance any other argument which would justify an award of equitable compensation for the asserted loss of a part of the value of the goodwill. 95What then would have been the position if Mr Old had not removed and retained the files? In that event the HOM partnership would have generated revenue from those files until 30 June 2003 when the partnership was dissolved and the business ceased to be carried on. Thereafter, revenue would have been generated from the files, probably for the benefit of that partnership in its winding-up, until such time as the files were allocated in accordance with the wishes of the clients. That process had concluded by late July/early August. On no view of the matter would Mr McInnes and Mr Hodgkinson have received any amount reflecting a proportion of the value of the goodwill of the HOM partnership business. 96It was accepted that Mr Old had provided compensation in respect of fees generated by the patent files up to 30 June 2003. Allowance was also made for the costs incurred in July 2003 in locating and dealing with the files which he had removed. It was conceded that it was not possible on the evidence to establish whether any other losses had been incurred by Mr McInnes and Mr Hodgkinson as partners of the HOM partnership as a result of Mr Old having removed files. 97Because to award compensation to Mr McInnes and Mr Hodgkinson reflecting any part of the value of the goodwill of the HOM partnership would be to put them in a better position than they would have been in had the breach of fiduciary duty not occurred, the primary judge erred in not rejecting as distinct from varying, the referee's recommendation that allowance should be made for that value. Mr Old's appeal in relation to this question should be allowed. 98This conclusion requires that orders 4(a) and (c) to (f) made by the primary judge on 10 December 2010 be varied in the following respects. The statement of account appended to those orders and marked "A" requires amendment in the column headed "Final Amount" to delete the amounts of $47,644 in respect of Mr McInnes and Mr Hodgkinson and also to delete the amount of -$95,288 in respect of Mr Old. The deletion of those amounts does not alter the Total Partners Funds shown in that statement as $318,379. Secondly, the amounts in orders 4(c) to (f) have to be varied. I have taken the varied amounts from the orders sought by Mr Old in his notice of appeal. In doing so I have assumed that the calculations on which they are based are correct.

The cross-appeal from the costs order in the premium proceedings 99At the outset it is important to note that although Mr Hodgkinson was a party to the premium proceedings, no substantive relief was sought from him. The final form of the defence filed on behalf of Mr McInnes and Mr Hodgkinson recorded (at paragraph 93) that Mr Hodgkinson "does not plead to the claim because it does not contain any claim against him for relief". In the circumstances, as was conceded in argument, the substantial costs in relation to this claim were incurred on behalf of Mr McInnes. This notwithstanding, the affidavit filed on behalf of Mr McInnes and Mr Hodgkinson in support of the summons seeking leave to cross-appeal makes no distinction as to the costs said to have been incurred in the proceedings on behalf of "the applicants". That affidavit says that those costs exceed $350,000. In the circumstances it is appropriate that leave to cross-appeal be granted to Mr McInnes but not to Mr Hodgkinson. As will become apparent, that makes it unnecessary to consider the effect of an Offer of Compromise dated 22 June 2007 and made on behalf of Mr Hodgkinson. It is also unnecessary in relation to the costs order made in these proceedings to consider the effect of "without prejudice" correspondence between the parties which commences with a letter of 24 March 2005. In oral argument Mr McInnes and Mr Hodgkinson stated that they did not rely upon that letter as a Calderbank offer relevant to the exercise of the discretion as to costs in this cross-appeal. It has, however, been necessary to consider that letter in the cross-appeal from the costs order in the partnership proceedings. 100On 10 December 2010 the primary judge ordered that there be no order as to the costs of the premium proceedings. He did so upon the basis that Mr Old had "succeeded on a side issue and that his two principal bases for his claim failed and that he ended up with only a fraction of his claim": [2010] NSWSC 1335 at [53]. He did not consider that Offers of Compromise made on behalf of Mr McInnes and dated 22 June 2007 and 18 July 2007 should have any effect on his view that there should be no order as to costs. In reaching that conclusion he said that there was "some doubt as to whether" the offers complied with the rules and that as "formal offers of compromise" they had little significance in a case where the dispute was as to the balance of the partnership accounts: [2010] NSWSC 1335 at [60], [61]. 101Before addressing the argument that the primary judge erred in the exercise of his discretion, it is necessary to record the relevant provisions of the Offers of Compromise. Each was an offer from Mr McInnes. Each announced that it was made "pursuant to Rule 20.26" of the UCPR. Neither Offer contained a statement that it was intended to operate as a Calderbank offer if it was ineffective under the rules: cf Trustee for the Salvation Army (NSW) Property Trust & Anor v Becker (No. 2) [2007] NSWCA 194 at [11]. Each included as a term of the offer made: "2. First defendant to pay the plaintiff's costs as agreed or assessed." 102The primary judge erred in the factual basis upon which he addressed the costs of the premium proceedings. His description of the outcome of those proceedings was incorrect. The plaintiff, Mr Old, did not succeed on any claim. That error has its origin in [2009] NSWSC 1160 at [142] where, in the context of addressing the question of the parties' liability for payment of the referee's fees, the primary judge noted: "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-third each and the loser of the premium proceedings should pay the other 20 percent. 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." 103The apparent explanation for the error is a mis-recollection as to the outcome of the premium proceedings. In [2009] NSWSC 1160 the primary judge addressed Mr Old's contract claim as originally pleaded and a quantum meruit claim which he sought to bring by way of amendment: [2009] NSWSC 1160 at [2], [38]. He rejected the contract claim (at [88]) and the quantum meruit claim (at [105]). He also addressed whether Mr Old might have some basis for a claim based on what the primary judge described as an "equity of windfall" (at [109]). He considered that if there was such a claim it would produce a figure of $14,000 equitable compensation but ultimately decided he could not entertain such a claim. (at [125], [133]). It is likely that this last matter is the "side issue" referred to in [2009] NSWSC 1160 at [142] and [2010] NSWSC 1335 at [53]. 104In these circumstances, the claim made in the premium proceedings not being in respect of the administration of the partnership but to determine a disputed claim between partners, in the absence of any circumstances indicating otherwise, the costs should have followed the event: Civil Procedure Act 2005 (NSW), s 98 and UCPR r 42.1. As no such circumstances are identified by Mr Old, the order of the primary judge as to costs must be set aside and Mr Old must be ordered to pay the costs of the premium proceedings. There remains a question as to the basis on which those costs should be awarded. 105Mr McInnes relies upon the Offers of Compromise as offers in accordance with UCPR r 20.26 and alternatively as informal offers relevant to the exercise of the discretion as to costs: see Trustee for the Salvation Army (NSW) Property Trust & Anor v Becker (No. 2) at [7], [27]; Miwa Pty Ltd v Siantan Properties Pte Ltd (No. 2) [2011] NSWCA 344 at [7]-[8]. UCPR r 20.6(2) provides: "(2) An offer must be exclusive of costs, except where it states that it is a verdict for the defendant and that the parties are to bear their own costs." Neither of the offers made on behalf of Mr McInnes was "exclusive" of costs or within the exception in r 20.6(2). Each provided that Mr McInnes should pay Mr Old's costs "as agreed or assessed". For that reason, neither was an offer in fact "made under rule 20.26" for the purposes of UCPR r 42.13 and accordingly each was of no effect for the purposes of the Offer of Compromise regime under the UCPR: Trustee for the Salvation Army (NSW) Property Trust & Anor v Becker (No. 2) at [22]-[24]; Dean v Stockland Property Management Pty Ltd & Anor (No. 2) [2010] NSWCA 141 at [16]-[29]. 106Whether either offer could operate as a Calderbank offer depends upon the intention of the offeror, Mr McInnes, as revealed by the terms of the offer: Trustee for the Salvation Army (NSW) Property Trust & Anor v Becker (No. 2) at [27]; Dean v Stockland Property Management Pty Ltd & Anor (No. 2) at [31]. Each offer was stated as being made pursuant to the UCPR. Neither contained any statement that it was to operate as a Calderbank offer: cf Trustee for the Salvation Army (NSW) Property Trust & Anor v Becker (No. 2) at [11]. In the circumstances, neither could be relied upon on that basis. 107Finally, and faintly, Mr Old submitted that the Court could exercise the power under s 14 of the Civil Procedure Act 2005 to dispense with the requirement in r 20.26(2). It is not appropriate to exercise that power in the circumstances of this case. It is not in the interests of justice that the power be exercised after the event and where the parties were entitled to proceed, and no doubt have proceeded, upon the basis that their rights and obligations with respect to the offers were defined by the express provisions of the UCPR. As is stated in Dean v Stockland Property Management Pty Ltd & Anor (No. 2) at [34]: "A party receiving an offer of compromise apparently made under the rules should be entitled to decide whether or not to accept it according to the offer of compromise regime in the rules, including deciding whether or not it is an effective offer of compromise." If the position was otherwise, the whole purpose of having such a regime would be defeated. 108It follows that the order that there be no order as to costs in the premium proceedings should be set aside and that an order should be made that the appellant pay the first respondent's costs of those proceedings.

The cross-appeal from the costs order in the partnership proceedings 109The affidavit filed on behalf of Mr McInnes and Mr Hodgkinson in support of the summons seeking leave to cross-appeal indicates that their solicitor/client costs incurred in the partnership proceedings exceed $300,000. Because of the sum and issues involved, it is appropriate that leave to cross-appeal be granted. The primary judge ordered that with the exception of certain costs relating to the removal of the referee, the costs of the parties of these proceedings as assessed should be added together and that the parties should each be liable for one-third of those costs. In doing so he identified the relevant principles as follows: "26. First, of course is the overriding provisions of s 98 of the Civil Procedure Act 2005 and the rules fleshing out that section that costs are in the general discretion of the court subject to established guidelines. 27. Then, in Hamer v Giles (1879) 11 Ch D 942, 944, Jessel MR said: '... where there is no fault on either side, but the partnership accounts have to be taken in this Court, the costs of the action for taking the accounts from the beginning ought to be dealt with as all other costs of necessary administration, that is they must come out of the partnership assets. Of course, where an action for dissolution is rendered necessary by the misconduct of a partner ... the Court not only has jurisdiction, but is bound to exercise it, by making that partner pay so much of the costs as are occasioned by his misconduct.' 28. That passage has been applied on many occasions. Significantly for NSW it was applied by Powell J in Draft v Kupferwasser (1991) 23 NSWLR 236, 234 and by M McLelland CJ in Eq in Meekin Enterprises v Gersbach 6.8.1997 unreported BC9703425. 29. However, Powell J in Kupferwasser made it clear that the costs of taking accounts included the costs of adjudicating on disputed entries in the accounts. 30. In the Meekin case, the then Chief Judge in Equity quoted from and applied what appears in the 17 th edition of Lindley & Banks on Partnership 23-117 that: 'Where ... such proceedings are, in reality, commenced in order to obtain an adjudication on some disputed claim between the partners, the unsuccessful litigant will normally be ordered to pay the costs up to the date of trial.'" 110Having done so, he continued to consider the circumstances before him: "46. I do not consider that there is that much to be gained by a minute review of the proceedings. So far as the basic exercise before the referee was concerned, it was principally an administrative exercise. There were disputes to be resolved and there were regrettable conflicts between the parties and between the parties and the referee and these did increase the costs. 47. In particular there was the motion to remove the referee. This failed, but it is fair to say that the bringing of the motion and the matters that were discussed when considering it probably did enable a better report to be prepared than would otherwise have been the case. ... 51. My experience over many years is that dissolution of partnership suits involving accountants or solicitors tend to be very bitter battles. The present case was no exception. I do not consider that in the background of the present dispute, there was anything that could properly be said to have overstepped the bounds of hard fought dispute into the category of misconduct. 52. My judgment of [[2009] NSWSC 1160] in [140] and following proceeds on the basis that I favour the solution that each party bear and pay one third of the costs. There is nothing in the subsequent submissions which cause me to depart from this view." 111In their application for leave to appeal, Mr McInnes and Mr Hodgkinson contend that the primary judge's discretion miscarried for two reasons. First, it is said that for the purpose of considering whether he should apply that general rule, he should have characterised the proceedings for dissolution as rendered necessary by reason of the default or misconduct of Mr Old. Specifically, it is said that the primary judge only addressed "misconduct" in relation to the conduct of the litigation without regard to the underlying causes of action. Secondly, it is said that the primary judge did not have proper regard to the Offer of Compromise made on behalf of the defendants dated 22 June 2007 and an earlier "without prejudice" letter dated 24 March 2005. 112The first part of the second argument may be disposed of shortly. The Offer of Compromise is relevantly in the same form as the Offers made on behalf of Mr McInnes in the premium proceedings. It did not comply with r 20.26(2) and it could not by its terms operate as an informal Calderbank offer. 113The attack on the primary judge's exercise of discretion also must be rejected on the basis that no error has been identified in the exercise of that discretion. Contrary to the position as submitted, the primary judge considered the nature of the proceedings and of the disputes between the parties as to the settling of the partnership accounts. In those proceedings there were issues as to the identity of assets of the partnership and their value. Those assets in issue included plant and equipment and goodwill. There were also issues as to whether billings made after 30 June 2003 should be included in the accounts and claims by Mr McInnes and Mr Hodgkinson for costs incurred in "winding-up" the partnership. Finally, there were issues concerning employee entitlements and the recoverability of loans made by the partnership to companies related to the partners. 114The submission that the primary judge erred in not proceeding on the basis that Mr Old's conduct in removing files led to the dissolution of the partnership is rejected. The partnership was dissolved as a result of Mr Old's notice dated 28 May 2003. The files were removed after that date. 115The issue dealt with by the referee in relation to the removal of those files was that of compensation. On the pleadings as at November 2004, before the primary judge ordered that all issues be referred to the referee, Mr Old admitted that he had removed files and the principal issue was as to the compensation. Before the referee, Mr Old made no contentions as to the question whether there had been a breach of fiduciary duty: Referee's Report [6.3.1]. Mr Old's submission that this question had to be determined by the referee is not correct. 116The issue as to whether goodwill of the partnership subsisted after its dissolution, was an issue which arose as a result of the dissolution and the way in which the parties conducted themselves after that event. The fact that Mr Old's contention in that respect was ultimately rejected by the primary judge did not constitute misconduct or give the subject matter of that dispute a different characterisation than it was given by the primary judge. 117In their written submissions, Mr McInnes and Mr Hodgkinson also submit that the primary judge should have taken into account, when exercising the discretion as to costs, the "without prejudice" letter dated 24 March 2005 from Mr McInnes to Mr Old, which Mr Old rejected on 31 March 2005, and a further letter from White & McDonald, Solicitors, to Horowitz & Bilinsky, then acting for Mr Old, dated 18 May 2006. The primary judge did not err in not taking those letters into account as Calderbank letters. The first letter does not in its terms contain an offer which is sufficiently certain to be capable of giving rise to a binding agreement upon its acceptance. It concluded: "that leaves A$270,000 in the pot which roughly equates to a split of A$90,000 to each partner. After discussion, Hodgkinson and I have agreed jointly to offer you an additional sum of A$120,000 from these funds. This would mean you taking about A$210,000 from the available funds .... Obviously, this would involve the parties bearing their own costs to date and execution of a deed of settlement with appropriate releases and bars to further litigation between any of us or related entities." The letter was stated to be "without prejudice". It was not in the form of a Calderbank offer. 118The letter from White & McDonald dated 18 May 2006 did not take the matter any further. It did not contain any new offer. Nor did it make a Calderbank offer on the terms of the earlier letter. Instead, it stated that the earlier offer "was made in accordance with the principles in Calderbank v Calderbank " and that "if your client instructs you to dispute this please let me know by return and I will formally make the same offer again". The first statement could not convert what was not a Calderbank offer into one that was. The second statement foreshadowed the making of such an offer but no offer was subsequently made. 119Leave to cross-appeal against the costs order in the partnership proceedings should be granted and the cross-appeal should be dismissed.

Costs of the appeal proceedings 120In the appeal and cross-appeal in the premium proceedings, Mr Old has been unsuccessful. His appeal is to be dismissed and the cross-appeal on the costs order is to be allowed. In the circumstances, the appropriate order is that Mr Old pay Mr McInnes' costs of the appeal and cross-appeal and that there be no order as to the costs of Mr Hodgkinson. 121In the appeal and cross-appeal in the partnership proceedings, Mr Old has succeeded on one of the two issues in the appeal and the cross-appeal is to be dismissed. Oral argument on the issue as to whether there should have been an allowance in the accounts for goodwill occupied at least half of the time taken in this appeal. Mr Old failed on that discrete issue. In these circumstances there should be no order as to the costs of the appeal. Mr Old is, however, entitled to the costs of the cross-appeal.

Proposed orders 122The orders I propose in appeal No. 184482 of 2004 are as follows: (1)Order that the appeal be dismissed. (2)Grant leave to the first respondent to cross-appeal from Order 2 made by Young JA on 10 December 2010. (3)Order that the cross-appeal be allowed. (4)Order that Order 2 made by Young JA on 10 December 2010 be set aside. (5)Order that the cross-respondent pay the first respondent's costs of the proceedings in the Court below. (6)Order that the appellant pay the first respondent's costs of the appeal and cross-appeal. (7)Order that there be no order as to the costs of the second respondent of the appeal and cross-appeal. 123The orders I propose in appeal No. 187484 of 2004 are as follows: (1) Order that the appeal be allowed in part. (2) Order that Order 4(a) made by Young JA on 10 December 2010 be varied by amending the statement of account marked "A" in the column headed "Final Amount" by deleting the amount of $47,644 in respect of Mr McInnes and Mr Hodgkinson and the amount of -$95,288 in respect of Mr Old. (3) Order that Orders 4(c) to (f) made by Young JA on 10 December 2010 be varied to read as follows: (c) declares that the parties' entitlements to those funds are as follows: (i) Hugh Rudyard Hodgkinson: $104,432 (ii) Fraser Patison Old: $83,933 (iii) Kenneth John McInnes: $130,014 (d) declares that on the balance of the partnership's accounts, excluding interest: (i) Fraser Patison Old owes Kenneth John McInnes $22,193; (ii) Hugh Rudyard Hodgkinson owes Kenneth John McInnes $1,694; (e) declares that Fraser Patison Old is liable to pay interest up to judgment on 10 December 2010 pursuant to s 100 of the Civil Procedure Act as follows: (i) to Hugh Rudyard Hodgkinson from 1 July 2004: $20,948 (ii) to Kenneth John McInnes from 1 July 2004: $20,948 (f) the Court gives judgment: (i) for Hugh Rudyard Hodgkinson against Fraser Patison Old for $20,148; (ii) for Kenneth John McInnes against Fraser Patison Old for $43,141; (iii) for Kenneth John McInnes against Hugh Rudyard Hodgkinson for $1,694. (4) Grant leave to the respondents to cross-appeal from Order 5 made by Young JA on 10 December 2010. (5) Order that the cross-appeal be dismissed. (6) Order that there be no order as to the costs of the appeal and that the respondents pay the appellant's costs of the cross-appeal. (7) Grant liberty to the parties to apply to the Registrar within seven days of the date of these orders to vary Orders 2 or 3 above if they do not give effect to the decision in this appeal.

Amendments 19 April 2012 - Add Dean v Stockland Property Management Pty Ltd & Anor (No. 2) [2010 NSWCA 141 Amended paragraphs: Coversheet - Cases cited DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 19 April 2012

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