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[2017] VSC 265
Supreme Court of Victoria
2017-05-25
JUDD J
Original judgment source is linked above.
CONTRACT - Partnership - Remuneration of partner - Interest on capital - Actual terms - Implied terms - Limitation of Actions Act 1958 - Taking of accounts - Agreed period for accounting.
1 Bruce and Noel Uren are brothers. Bruce, the older brother, was born on 5 October 1945. Noel was born on 19 December 1948. Bruce is a finance broker. Noel is a farmer. Prior to its sale, the brothers were the registered proprietors, as tenants in common in equal shares, of farming land at Walkerville, Victoria. The farm, which was referred to as 'Walkerville' in the trial, comprised four titles. Settlement of the sale took place in March 2016, and the net proceeds paid into court. The dispute concerns the division of the proceeds between the brothers.
2 It was common ground that Walkerville was operated as a partnership between the brothers. The terms of the partnership were disputed. Noel claimed an entitlement to wages, as a partnership expense, commencing in 1974 when the brothers became owners in common. He also claimed interest on capital. The partnership was dissolved on 30 June 2015.
3 Disputes arose between the brothers, resulting in two proceedings commenced in this court. The first was commenced by Bruce as plaintiff in June 2015. By originating motion, he sought a declaration that the partnership was dissolved, and orders for the sale of partnership assets, the application of proceeds of sale and the adjustment of entitlements. In September 2015 Noel commenced proceeding S CI 2015 04786 against Bruce, Exclusive Finance & Leasing Pty Ltd (EFL), a company controlled by Bruce, and RMBL Investments Ltd, a finance provider and mortgagee of the farm. He alleged wrongdoing by Bruce in his management of partnership affairs, and claimed compensation. The proceeding commenced by Noel was discontinued on 18 September 2016.
4 By August 2015 the parties had reached agreement on dissolution of the partnership, and for the sale of partnership assets. An accountant, Russell Munday, was appointed to enquire into and prepare a report on respective entitlements. Mr Munday prepared a draft report dated 29 March 2016 and, following further submissions from the parties, prepared a final report which is dated 18 August 2016. In part, Mr Munday was directed to enquire into dealings and transactions of the brothers in respect of the partnership business from 1 July 1991.
5 The Munday report has largely been adopted by the parties, with only three issues remaining for adjudication by the court. The parties filed points of claim and defence, to identify the remaining controversies between them. A number of issues initially raised by Bruce were not pressed at trial. The three remaining questions may be stated as follows:
(1) Is Noel entitled to an adjustment in his favour, calculated by reference to unpaid wages as if a partnership expense, and if so, in what amount, and for what period?
(2) Is Noel entitled to an adjustment in his favour for interest calculated on capital advanced by him to the partnership; and if so, how much?
(3) Is Bruce entitled to an adjustment in his favour to reflect the amount of a deduction made by RMBL of $39,467.50 for its costs, made at settlement of the sale of Walkerville?[1]
6 By an amendment made at trial,[2] Bruce alleged that if the partnership agreement contained a term under which Noel was entitled to remuneration, by reason of s 5(1) of the Limitations of Actions Act 1958, Noel was precluded from recovering wages prior to 11 November 2010, being six years prior to the date of his points of claim.
7 After adjusting the capital account balances of the partnership as at 30 June 2015, Mr Munday concluded that the capital account balance for Bruce was $1,058,636, and for Noel, $679,035. Following further adjustments made for the financial year concluding 30 June 2016, the capital account balance for Bruce was $809,968, plus an allowance for interest earned by his company, EFL, charged to the partnership under an agreement dated 30 June 1999. The amount of the interest payable to EFL from 1999 brought the total entitlement of Bruce (and EFL) to $1,063,395. Following adjustments made in respect of Noel's capital account balance to 30 June 2016, Mr Munday assessed his balance at $291,624.
8 In his report, Mr Munday identified the following two items for further consideration:
(a) whether Noel was entitled to unpaid wages from the partnership;
(b) whether Noel was entitled to interest paid on capital.
These were two of the three issues for determination in the trial. The trial proceeded on the basis that should Noel fail in his claim for wages and interest, and Bruce fail in his claim for the RMBL legal costs, the apportionment made by Mr Munday, at paragraph 23.8 of his report, would stand.
9 A convenient starting point was the way in which the parties expressed their relevant contentions as points of claim, defence and counterclaim. The first adjustment sought by Noel was for remuneration. Noel pleaded:[3]
Particulars
The Remuneration for Work Term is to be implied from the following circumstances:
(a) Without the Remuneration for Work Term, the Partnership Business would, for Noel, be uncommercial, and thus the Partnership Agreement would, for Noel, be irrational.
(b) Had the Partnership Agreement not been formed, Noel could and would either have obtained employment either as a farmhand and earned a reasonable wage, or else would have earned a reasonable income by continuing to farm at his own farm located at Krowera.
(c) Bruce was able at all material times to earn a reasonable remuneration, in return for his own labours, as a bank officer and then self-employed mortgage broker.
(d) Each of these circumstances was known to each of Noel and Bruce when they entered into the Partnership Agreement.
The term is to be inferred from the following circumstances:
(a) In each of 2001, 2005 and 2007, Bruce acknowledged the Remuneration for Work Term, stating in loan applications made to RMBL Investments Ltd to obtain finance for the Partnership Business that Noel had an income of between $60,000 and $100,000 per annum.
(b) In April 2006, Bruce acknowledged the Remuneration for Work Term, causing a company he controlled, Exclusive Finance and Leasing Pty Ltd (EFL), to engage Noel as an employee on a salary of $60,000 per annum, in respect of his Work.
(c) From April 2006, Bruce acknowledged the Remuneration for Work Term, causing EFL to make superannuation contributions on behalf of Noel, in respect of his Work.
(d) Between 2008 and 2012, Bruce acknowledged the Remuneration for Work Term, causing an accountant to produce tax returns for Noel, declaring him to be employed by EFL as an administrative assistant on a salary of $60,000 per annum, even though Bruce knew this to be inaccurate.
10 By his points of defence and counterclaim, Bruce denied the remuneration claim. He relied on s 28 of the Partnership Act 1958, alleging the absence of any agreement for wages. Bruce also contended that post-contractual conduct was inadmissible. He relied on an agreement, made in 1994, to build a dwelling at Walkerville in which Noel would reside, free of rent and outgoings. Bruce also relied upon the fact that in 1974, when the brothers purchased the Walkerville property, Noel was living and working on the old family property at Krowera. He alleged that Noel continued to do so until 1993.
11 The second adjustment sought by Noel was a claim to interest on his capital contributions. He alleged:[4]
(a) between 1988 and 30 June 1998: approximately 6-7%;
(b) between 1 July 1998 and 30 June 2015: the "benchmark interest rate" under s 109N(2) of the Income Tax Assessment Act 1936 (Cth).
12 The claim for interest was also denied by Bruce, who contrasted the basis for Noel's claim with the formal loan agreement dated 30 June 1999, between EFL as lender, and Noel and himself as borrowers. Noel relied upon the same agreement to support his claim for interest.
13 By his counterclaim, Bruce sought five adjustments, only one of which was pressed by the conclusion of the trial. The remaining adjustment concerned an order for costs made against Noel in favour of RMBL. Bruce alleged:[5]
14 Noel was the youngest of four children. He had a sister Ruth, and brothers John and Bruce. The family lived on a property comprising about 230 acres on the Loch-Wonthaggi Road, Krowera in Gippsland, Victoria. That property was referred to in the proceeding as 'Krowera'. It had been farmed by Noel's father, Norman, and Norman's brother John, known as Jack, under the trading name 'Uren Brothers'. Norman and Jack each owned half of Krowera. They also owned Walkerville, a bush block on Buffalo-Waratah Road, Tarwin Lower, Gippsland. It comprised about 570 acres.
15 Norman died in 1961, and his wife, Ethelwyn, succeeded him as owner of his half interest in Krowera and Walkerville.
16 Following his father's death, Noel left school to assist his mother and his uncle Jack run the farm at Krowera. He was not paid a wage, but was provided accommodation, meals and some cash. Noel was about 13 or 14 at that time. Bruce remained at school.
17 In 1963 Noel's brother John died. At around the same time, Ethelwyn and Jack transferred ownership of the Walkerville property to Noel, Ruth and Bruce. Walkerville was still a bush block, and did not support any livestock.
18 In 1973 Noel's sister Ruth died, and her interest in the Walkerville property passed equally to Noel and Bruce. In 1974 Jack died, leaving his interest in Krowera to Noel. Thus, following Jack's death, Noel held a half interest in Krowera with his mother, and a half interest in Walkerville with Bruce. Noel continued to operate the Krowera property in partnership with his mother, trading under the name 'Uren Brothers', until her death in October 1991.
19 Ethelwyn was not actively involved in the partnership business from 1988. In that year she had moved into a nursing home in Korumburra. In the same year Noel and his mother sold part of the Krowera property (85 acres) and received about $220,000. With his half share, Noel invested in a property at Inverloch, and continued to farm the remaining 140 acres at Krowera. Noel later sold the Inverloch property and contributed the funds to the Walkerville partnership. Upon their mother's death, Bruce and Noel each acquired one half of her interest in Krowera. Thus, Noel owned three quarters, and Bruce one quarter. Krowera was sold in 1993, and the net proceeds contributed to the Walkerville partnership.
20 Until his mother's death, Bruce had no interest in the Krowera property. He had the advantage of completing his schooling. He then worked for a bank, and trained as an accountant.
21 During the trial, Bruce advanced the contention, through cross-examination and in submissions, that as a partner in Uren Brothers, operating the Krowera farm until its sale, Noel had derived a substantial benefit which militated against his claim for an implied agreement that he be paid wages out of the Walkerville partnership. The contention seemed to be based on no more than extrapolating from the fact that Krowera once supported Norman, Ethelwyn, Jack, Bruce, John, Ruth and Noel. In my opinion the contention that Noel derived a substantial benefit was unsupported by any evidence. There was no evidence of what profits were derived from the Uren Brothers partnership, if there were any. Noel said he received accommodation, food and some cash, but he did not receive a wage.
22 Bruce did not challenge Noel's evidence about the basis upon which he worked at Krowera, although argued that he was supported by Krowera until it was sold. Bruce also claimed that Noel took drawings from the Walkerville partnership bank account of amounts exceeding Noel's estimate of $10,000 per annum. Bruce contended that the partnership accounts did not record a salary for Noel, and alleged that Noel misused a Motorpass fuel card to buy personal items from service stations. Bruce also challenged Noel's claim for wages on the basis that Noel had never paid tax on wages.
23 These attacks by Bruce, directed to Noel's claim for an implied term that he be paid wages, were unpersuasive. Bruce later withdrew his allegation that Noel misused his Motorpass card. I accept Noel's evidence that the Motorpass card was used substantially for the purchase of fuel, and any private use was incidental and minimal. During his cross-examination of Noel, counsel for Bruce put to Noel that he had requested petrol station operators to fabricate invoices, disguising the purchase of groceries as fuel costs. In the absence of a sound foundation, allegations of dishonesty should not have been put to Noel. Nothing was produced that might have supported Noel's dishonest use of a Motorpass card. If that was not enough, counsel for Bruce suggested that Noel might have permitted someone else to use the Motorpass card to withdraw cash. There was no evidence of any such conduct, although counsel assured the court that all such allegations were put on instructions.
24 While provided with accommodation at Walkerville after 1994, following the sale of Krowera in 1993, Noel did not draw the equivalent of a wage or anything approaching a wage. I am satisfied that he lived frugally as a farmer, with no family to support, drawing only what was necessary for his basic living expenses. Mr Munday debited Noel's capital account with his drawings.
25 The attempt by Bruce to rely upon the absence of any wages recorded in partnership accounts was of little assistance other than to identify annual amounts allocated to Noel as 'drawings'. It was Bruce, or the accountant acting under his instructions, who prepared the accounts and income tax returns, and chose to characterise Noel's drawings as a debt to his capital account. Noel had no other potential source of income after 1993, whereas Bruce was, according to his evidence, a very successful finance broker.
26 It is not clear what, if any, income Noel had derived between 1974 and 1993. Financial documents prepared by or under the direction of Bruce cannot be relied upon to accurately reflect the true nature of relationships between the brothers, or of receipts, expenses or other payments of the partnership. Many were contrived to achieve a tax advantage for Bruce and EFL.
27 The partnership had, for many years, been employed by Bruce as a convenient tax minimisation vehicle for his personal benefit. He had arranged for 'fees' to be 'paid' to the partnership by EFL. This was a contrivance to reduce the taxable income of EFL, without a corresponding tax liability in the partnership, because it continued to trade at a loss. Bruce also paid fictitious 'wages' to Noel through EFL. The books of account were fabricated, at the direction of Bruce, to record wages which were never paid to Noel.
28 When Bruce asked Noel to sign a loan agreement with EFL, dated 30 June 1999, Noel did so. Bruce conceded that the loan agreement was prepared for the purpose of avoiding a deemed dividend from EFL, and consequential tax liability. Some capital contributions were made to the partnership by Bruce and through EFL. Bruce advanced the 1999 loan agreement to claim interest on capital contributions through EFL, as if made by a third party arm's length financier, lending to the partnership. At the same time, Bruce rejected Noel's claim for interest on his capital contributions.
29 Noel gave evidence that soon after his uncle Jack died, in about 1974, Bruce approached him and suggested they develop the Walkerville property to support livestock. It was necessary to clear bush and scrub, and buy livestock. Bruce contended that his contribution to the partnership was 'looking after the paperwork'. That may be so, but he did so in a manner that was self-interested and, in some instances, detrimental to Noel's interests.
30 Noel claimed that he started work clearing Walkerville in around 1974, with the assistance of contractors. There was disagreement between Noel and Bruce concerning the extent of Bruce's physical contribution to the clearing and farming activity at Walkerville. Bruce claimed to have made a very substantial physical contribution by working long hours on the farm at the end of his normal working day at the bank. Under cross-examination Bruce conceded that by 1974 he had moved to Lilydale where he lived for a number of years, then to Myrtleford and later Mildura. In the face of those concessions he modified his evidence to confine his physical work to weekends, claiming to have travelled long distances to Walkerville to work the farm.
31 Both brothers had a tendency to exaggerate their evidence. Having said that, I accept that Bruce did some work on the Walkerville property from time to time, but not to the extent he claimed. At best it was occasional. The substantive work was carried out by Noel, with the assistance of contractors. Until 1993 Noel also operated the Krowera farm, which would have occupied some part of his working week. I also accept that, for a farmer, a working week involves long days, with little distinction between week day and week's end.
32 In his draft report, Mr Munday noted, as an issue for further consideration, the absence of any salary or other compensation paid to Noel, apart from his accommodation. In his submissions to Mr Munday, Noel claimed an entitlement to wages. Bruce resisted the claim. Bruce's evidence concerning the extent of his involvement in clearing and other work on the Walkerville property was directed to that topic. So were his submissions concerning Noel's continuing involvement in the Uren Brothers partnership, and his misuse of the Motorpass card.
33 In his final report, Mr Munday noted the claim for wages as an item for further consideration. At paragraph 24 of his final report, Mr Munday noted the absence of any formal partnership agreement, and that Noel did not receive any compensation for his labour on the farm from 1991 to 30 June 2015. Noel was, however, provided with accommodation on the Walkerville property after Krowera was sold. Mr Munday calculated the value of the accommodation for the period at $160,680. Mr Munday did not purport to make any finding in relation to an entitlement to wages. He drew attention to s 28 of the Partnership Act 1958 which relevantly provides:
Rules etc. of partners when not subject to special agreement
The interest of partners in the partnership property and their rights and duties in relation to the partnership shall be determined subject to any agreement express or implied between the partners by the following rules:
...
(6) No partner shall be entitled to remuneration for acting in the partnership business.
...
34 Nevertheless, Mr Munday calculated wages under three scenarios - $20,000 per annum; $25,000 per annum; and $30,000 per annum respectively. If an adjustment is to be made, allowing wages to Noel, it would be in addition to the adjustments already made to take into account Noel's 'drawings', which have already been debited to his capital account.
35 The parties did not agree on the appropriate wage, in the event that the remuneration term was to be implied. They did, however, agree to the tender into evidence of the Pastoral Award 2010, under which a Senior Station Hand would receive, as at 2015, $30,000 plus superannuation, accommodation and meals. Mr Munday accepted that for the 2015 year an annual salary of $37,149 would have been reasonable. I was not assisted by calculations to reflect adjustments made on the basis of award rates over the preceding years. Having regard to the way in which this part of the case was presented by the parties, I am left with a rather crude mechanism for the assessment of the value of any entitlement to wages. As the award wage represents a wage in addition to the value of accommodation calculated by Mr Munday, no deduction should be made for the value of accommodation.
36 A report prepared by Richard Jackson, an agricultural consultant, calculated an entitlement to wages, insofar as they were due, by multiplying the current award wage by the number of years. Of course, in prior years, the award wages would have been lower. On the other hand, if wages were payable, unpaid wages would attract interest. It was perhaps for this reason that Mr Munday (and Mr Jackson) were content to multiply a fixed sum by the number of years. Thus, if a wage was payable in and after 1993, the amount due would be 22 x $37,149 = $817,278.
37 Bruce complained that the claim to wages was a recent invention because the allegation of an implied agreement to pay wages was first expressed in those terms in the points of claim, filed after the preparation of the final report. He did not suggest that the claim for wages was new. His complaint was that the basis for the claim was first expressed in the points of claim. In my view such a sequence is not particularly surprising, given the absence of a formal partnership agreement, and a direction by the managing judge that the parties formerly articulate the basis for further adjustments to the Munday report in Points of Claim and Defence.
38 Under cross-examination it was put to Noel that his income tax returns disclosed no wage paid to him. Noel said he was not aware of what his income tax returns contained. Accounts and income tax returns had been prepared by an accountant under instructions from Bruce. Noel was asked to sign documents each year. I accept Noel's evidence that he was not aware of the content of his income tax returns, or the extent to which the affairs of the partnership were manipulated by Bruce for his personal tax advantage, including the payment of fees and wages by EFL.
39 Noel claimed his entitlement to wages as a term implied from the nature of the relationship between the brothers, their conduct and the surrounding circumstances. The effect of such a term, if implied, would be to characterise his entitlement as a cost to the partnership, before any calculation of partnership profits. That is, as an expense of the business. Noel argued that such a term was to be implied as necessary to give business efficacy to the contract. In BP Refinery (Westernport) Pty Ltd v Shire of Hastings,[6] the Privy Council stated the principle, now generally applied, as follows:
Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.
40 The parties accepted that the application of these 'rules', in the context of informal agreements, requires a degree of flexibility. In Hawkins v Clayton,[7] Deane J observed that:
Care must be taken to avoid an automatic or rigid application of the ordinary cumulative criteria for determining whether a term should be implied in a written contract to a case where the contract is oral or partly oral or where it is apparent that the parties have never attempted to reduce their agreement to complete written form.
41 His Honour observed that in cases concerning the implication of a term into a formal contract, the insertion of an additional term effectively involves an alteration to what the parties had formally accepted as the complete record of the contract between them. That was not this case. There was no formal partnership agreement. The existence of a partnership agreement was to be inferred from the conduct of the brothers in their working relationship. The parties had probably never turned their minds to the need for legal definition to their relationship, save for the assumption that they were 'in partnership'. In Byrne v Australian Airlines Ltd,[8] the plurality observed in relation to informal contracts:
In those cases the actual terms of the contract must first be inferred before any question of implication arises. That is to say, it is necessary to arrive at some conclusion as to the actual intention of the parties before considering any presumed or imputed intention. And the test to be then applied was in a later case formulated by Deane J in these terms:
The most that can be said consistently with the need for some degree of flexibility is that, in a case where it is apparent that the parties have not attempted to spell out the full terms of their contract, a court should imply a term by reference to the imputed intention of the parties if, but only if, it can be seen that the implication of the particular term is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case. That general statement of principle is subject to the qualification that a term may be implied in a contract by established mercantile usage or professional practice or by a past course of dealing between the parties.[9]
42 Noel relied upon the imbalance in the contribution of labour made by the brothers. I am satisfied that Noel did the vast majority of the manual work required to clear Walkerville. He operated the farming business. He devoted his full time and attention to the Walkerville farming activity after the sale of Krowera in 1993. During the period 1974 to 2015, Bruce was a full-time employee of a bank until he commenced his finance broking business. He was not dependent on farming for his livelihood. On the contrary, the farm presented him with an opportunity to reduce his tax liability by diverting income into the unprofitable enterprise.
43 While it is true that Bruce made a contribution by 'doing the paperwork', I do not regard his contribution as comparable with, or in any way equivalent to, the full-time contribution of labour made by Noel after 1993. There are also other important contextual factors, such as differing capital contributions, the sources of funds for capital contributions, and the willingness of Bruce to introduce EFL as a financier and beneficiary of tax contrivances. Bruce always assumed that Noel was the farmer and would undertake the farming activity. There was no suggestion that Bruce would ever assume such responsibility.
44 Bruce resisted the implication of the remuneration term by contending that the brothers had agreed to work towards a common objective which did not require the implication of such a term in order to give efficacy to their agreement. That, and other submissions, were based upon an assumption of a conventional business partnership. This was not a conventional partnership.
45 The relationship between the brothers involved striking inequality from the outset, not confined to be unequal contributions of labour and capital. Noel was dependant on Bruce for his material needs, and Bruce assumed the responsibility of providing for Noel's needs. It is this dependency and assumption of responsibility which, together with the other contextual features, defines the terms of the business relationship.
46 Noel relied on post-contractual conduct by Bruce as consistent with the existence of such an implied term, or as inconsistent with its absence. The first item of conduct involved loan applications to RMBL, in which Bruce stated Noel's annual gross income to be variously $100,000 (application made in 2001); $75,000 (application made in 2005); and $60,000 (application made in 2007). The second item of conduct was the contrivance of Noel's employment by EFL on a salary of $60,000 per annum.
47 Bruce argued that subsequent conduct was inadmissible to establish an existence of an implied term. In Arthurson v Victoria,[10] Gillard J cautioned against the admission of such evidence:
Whilst it is accepted that a party may make an admission of law, it would indeed be a very rare case, that a court could admit into evidence a party's statements or conduct, on the question of whether or not the Court should imply a term into a contract. This must be so, because the implication of a term is the result of the presumed intention of the parties, and is a question of law. It follows that it is difficult to place any probative value on any statements or conduct. First, the party may have an erroneous view as to what the contract meant. Secondly, the party may have an erroneous view as to the effect of the contract. Thirdly, the admission of such evidence would not be permitted if it involved the question of construction, and the implication of a term is a question closely allied to the question of what a contract means. It would be difficult in practice, in most cases, to keep the questions separate. Finally, any such evidence would have to be clear and unequivocal, leading to a clear conclusion that it was the presumed intention of the parties.
In my opinion, as a matter of strict principle, the conduct of the parties subsequent to an alleged contract may be admissible to determine what the terms of the contract were, including an implied term. This would be because their conduct may establish the presumed intention of the parties at the date the contract was made. It must follow again, on principle, that one party to the agreement may make an admission which accords with the presumed intention of the parties. But in considering the evidence, it must be borne in mind that it is not admissible on the construction of the term. Although the evidence of an admission may be admissible, it would be a rare case that any weight could be given to the admission.
48 Bruce also relied on subsequent conduct, arguing that the failure by Noel to seek wages for some 40 years negated any attempt to imply such a term, because it was obviously unnecessary to give business efficacy to the partnership agreement. He relied upon the observation of Gyles J in Sydney City Council v Goldspar Australia Pty Ltd,[11] in which his Honour said:
I can see no difficulty in regarding subsequent conduct as relevant to the question as to whether a term is necessary to give business efficacy to the contract. Indeed, if a contract has been performed without adhering to, or without inconsistency with, the claimed term, without complaint or commercial difficulty, that would be powerful evidence that the term is not necessary. The law prefers facts to prophecies ... It would be odd to imply a term as necessary where such a conclusion would be contrary to the facts as they later appeared. If conduct may be relevant to negative the implication of a term as being necessary then it should also be relevant to support the implication of a term on the same basis.
49 When speaking of performance, as a factor bearing upon the implication of a term, the nature of the contract, and the term sought to be implied, necessarily inform the analysis. The arrangements between the brothers was informal. It was a familial relationship. Their business relationship arose out of inheritances, finding expression in the common ownership of Walkerville. Thus, to ask whether 'the contract has been performed without adhering to, or without inconsistency with, the claimed term, without complaint or commercial difficulty', is to assume terms of an existing contract which do not include a remuneration term.
50 At one point during his cross-examination, Noel was challenged that his claim for wages was a recent invention. He was asked, in the context of a different topic, when he had first turned his mind to the existence of an agreement in respect of wages in 1974, in relation to work on Walkerville. Noel responded, 'I can't remember that'. Eventually Noel said, 'Me and Bruce did have an agreement that I was getting wages there'. He said, 'It was an agreement just between the two of us'. Asked when the agreement was made, Noel suggested the 1970s or 1980s. When asked to explain the agreement, Noel said, 'I just took it for granted that he was going to be looking after it ...'. Eventually, when asked whether he wanted to change his affidavit, by adding evidence of an oral agreement in 1974, Noel said, 'Not really, no.' When it was eventually put to him that there wasn't an oral agreement about wages, Noel said, 'I just can't remember ...'.
51 Noel's case for remuneration did not depend on an express oral agreement, or any particular conversation. He was unsophisticated in financial terms. His education had been interrupted by his father's death. Questions couched in legal terms did not receive meaningful answers. Like his brother, Noel had a tendency to overstate his position, or provide an answer that he thought might be beneficial. His position was eventually clarified in an unresponsive answer to a question concerning the arrangement he had with his brother about drawings, he said:[12]
I would have thought all the years I put there working down there, that I would have been getting a wage, something would have been put away for me because I worked many days, a lot of hard work, and I would have thought there would have been something with him or with the accountant, would have taken consideration down the track that I would have to get some other earnings, some other wages or something.
52 This answer, and many others given by Noel, are consistent with assumptions he made rather than agreements made with his brother. He was dependent upon Bruce to look after his financial position, and Bruce was well aware of Noel's dependency. Noel said of their accountant and Bruce, 'Knowing that I'm doing all the work, and no-one works for nothing, there would've been an agreement somewhere put in there. I can't add much more to it.'
53 Before considering Noel's contention for an implied term, there is an anterior question. What were the actual terms of the business relationship between the two brothers?[13] Accepting the existence of a partnership, did it include, as a term, an entitlement to remuneration that was sufficiently defined to displace the operation of s 28(6) of the Partnership Act and corresponding obligations as fiduciaries?
54 It is true that an arrangement under which one partner is to be responsible for the conduct of a partnership business will not, of itself, import an agreement to remunerate a partner as an expense of the partnership.[14] While Noel did not rely upon that fact alone, it is a relevant factor and, in context, may become evidence supporting such a term.
55 A more potent contention advanced by Bruce to resist the implication of a remuneration term, was Noel's continuing operation of Krowera between 1974 and 1993. Bruce sought to confine the analysis to facts that existed in 1974, when the brothers became owners in common of Walkerville, and the clearing work commenced. During the years between 1974 and the sale of Krowera, Noel operated Krowera in partnership with his mother until her death. He lived at Krowera.
56 After Ethelwyn died, and Noel moved to Walkerville, the farming activity at Walkerville became the sole focus of Noel's life and work. He managed and operated the farm. By that time, Bruce had left the employ of a bank and had established himself as a successful finance broker, eventually trading through EFL. Save for the fact that his company was established in 1987, the evidence of Bruce's transition from bank accountant to finance broker was limited. In 2001, Bruce represented to RMBL that his income was $250,000. In 2005, he represented that it was $500,000.
57 An aspect of the relationship between the brothers, not fully explored during the trial, was the obvious imbalance between their education and worldly sophistication. Bruce presented as an astute businessman. He held himself out as Noel's guardian. On more than one occasion Bruce volunteered, in non-responsive answers, this aspect of their relationship. The following questions and answers are illustrative:
And why did EFL provide loans without an interest rate?---Because we had a partnership, and it's my brother and I had cared for my brother a lot and looked after him all his life and to continue on living - allowing him to continue on the farm, I put the money in. I could have invested this money in many, many other things, but I obviously felt committed to my brother, and I had a very big interest in that farm too.
You have run your mortgage broking business through it?---That's what Exclusive Finance & Leasing is.
And insofar as it has advanced necessary money to the partnership in your mind that's been precisely equivalent to you advancing it as an individual; that's correct, isn't it?---No, this has been more like a love and affection situation because, as I said, he is my brother and I was trying to keep him in business and I have had numerous conversations over a long, long period of time about the continual losses of this operation.
58 A more responsive answer was given to the following question:
Mr Uren, I want to suggest to you that you have treated your brother outrageously for at least the last 17 years. How do you respond to that?---Totally, totally, totally incorrect. I have fed, looked after my brother. I supplied him with motor vehicles. I bought his car. I paid the payments on the tractor. Every time I went down that farm I took him food. I bought him clothes. I cleaned the house. What more can I do? And I could get plenty of witnesses to that if you need them.
59 By his answers, Bruce acknowledged his responsibility for Noel's material needs. He understood that Noel was dependent on him. Noel's evidence also demonstrated a dependency on Bruce for financial advice and guidance. Noel believed Bruce would look after his interests.
60 The inequality was evident in the way Bruce managed Noel's financial affairs. Unfortunately, Bruce manipulated Noel's position to his own financial advantage. This factor added a layer of complexity to the relationship, and the analysis required to ascertain the actual terms of the partnership, and whether a remuneration term might be implied for the benefit of Noel. It might be argued that had Bruce turned his mind to the question of Noel's remuneration in 1974, or in 1993 after Krowera had been sold, he would not have agreed to such a term, or accepted that it was necessary.
61 While remaining sceptical about Bruce's motivations in his dealings with his brother, and dismayed by the extent to which he used the partnership for his own personal gain as a tax minimisation opportunity, I accept that he was deeply conscious of his responsibility to care for the material needs and security of Noel. He knew that Noel was at a disadvantage, depending on him for guidance and protection.
62 Walkerville was always an unprofitable farming enterprise. Bruce said so. After their mother had died, and Krowera sold, Noel put the whole of his capital into Walkerville and made it his life's work. To expect Noel to invest everything he had in Walkerville, and work for the partnership in a full-time capacity, depleting his capital with every drawing, would have been manifestly unreasonable, even unconscionable. Once Noel became dependent on Walkerville, and moved onto the property, the reasonable bystander, acquainted with the surrounding circumstances known to the parties, would have concluded that Noel would be remunerated at a reasonable rate of pay, as an expense to the partnership. I am persuaded that had Bruce turned his mind to the question of remuneration in 1993, he too would have reached the same conclusion. He would have wanted to protect the interests of his dependant brother, by ensuring that he was rewarded for his hard work on the farm, protecting his capital from rapid depletion if his basic living costs were to be treated as drawings against his capital alone.
63 The terms of an implied partnership may, of course, vary as time passes, just as the scope and extent of fiduciary obligations may vary depending on the circumstances. While the conduct of the brothers, to be assessed against commonly understood background circumstances, may not support an inference that their partnership agreement included the remuneration term while Noel was working Krowera, I am persuaded that such a term would have been reasonably inferred from their conduct and surrounding circumstances by 1993. Thus, it may seem somewhat artificial to approach the question of Noel's entitlement to remuneration as requiring the implication of a term. In Byrne v Australian Airlines Ltd,[15] the plurality drew attention to the distinction between 'actual intention' and 'presumed or imputed intention'. Referring to cases in which there was no formal contract, they said:
In those cases the actual terms of the contract must first be inferred before any question of implication arises. That is to say, it is necessary to arrive at some conclusion as to the actual intention of the parties before considering any presumed or imputed intention.
64 Furthermore, in the present case, with its very unusual features, the distinction between 'actual terms' and an implied term seems immaterial. Whatever approach is taken, it leads to the same conclusion. Applying the objective theory of contract to ascertain the 'actual terms of the contract', before there is any occasion to consider implied terms, leads to the conclusion that the brothers agreed that provision would be made for Noel's remuneration, as an expense to the partnership, by 1993.
65 An inquiry into the 'presumed or imputed intention', to assess whether the remuneration term should be implied into an existing agreement, leads to the same outcome. To ask whether such a term was necessary for the reasonable operation of the partnership[16] in 1993, or was it a term which the parties must obviously have intended[17] at that time, having regard to all the circumstances, compels the conclusion that a durable partnership between the brothers on reasonable terms depended on Noel receiving a reasonable income that would not have the effect of depleting his capital account, to the benefit of Bruce. While fairness will not ordinarily be a relevant consideration when assessing presumed or imputed attention, Bruce made it a consideration that was necessary for the reasonable operation of the partnership. He did so by his assumption of responsibility, recognising Noel's dependence on him for material needs, and future security.
66 If approached from the perspective of an objective observer, or the 'officious bystander', such a person would have considered it manifestly unfair if Noel's reward for his labour was to be paid out of his capital. Bruce knew that the farming operation was a loss making enterprise. I am persuaded that, once Krowera had been sold, had the brothers turned their minds to the question of whether Noel should be paid a living wage for his full-time work, as an expense to the Walkerville partnership, they would have responded, 'of course'. After all, Bruce would have been driven by his responsibility for the wellbeing of his dependant, anxious to protect his interests, which included his capital.
67 If, as I have found, a variation to the commercial relationship between the brothers took place around 1993, following the sale of Krowera, there is no need to consider the implication of the remuneration term. I have also found that the remuneration term ought to be implied, if not already a term of the partnership. Accordingly, it was unnecessary to rely upon subsequent conduct. In any event, I am not persuaded that any of the subsequent conduct relied upon by Noel is probative of the remuneration term sought to be implied. Such conduct involved fabrications by Bruce in loan applications, and tax avoidance contrivances. They do not assist Noel's case.
68 Noel's claim for interest was based upon an alleged conversation with Bruce in about 1988. Noel deposed:[18]
69 While the evidence given by Noel, of his discussion with Bruce about interest paid on capital contributed by Noel from the sale of Krowera, had the ring of truth, it related to the particular transaction then under consideration. The transaction did not proceed. Thereafter, Noel assumed that interest would be paid on capital loaned by him.
70 Counsel for Bruce challenged Noel's recollection of the agreement as a recent invention, suggesting that such an agreement was only advanced after the publication of the final Munday report. In the end, Noel said, 'So I would have took it for granted, Bruce being fair and reasonable would have told me these loans were bearing interest'.
71 I do not accept that Noel's evidence goes so far as to establish an oral agreement with Bruce that all contributions of capital would carry interest. Nevertheless, it is evidence of an occasion on which the topic arose and some agreement was reached in advance of a transaction that did not eventuate. The significance of the conversation, which I accept took place, was emphasised by the 1999 Division 7A agreement, as an example of another circumstance in which the parties turned their mind to the payment of interest. Those events suggest a willingness to acknowledge that, of course, interest is payable on capital contributions.
72 The inequity in the brothers' relationship, reflected in Noel's dependency on Bruce, and Bruce's acknowledgement of Noel's dependency, with the corresponding duty of support, is also a relevant contextual factor. Following the sale of Krowera, Noel's capital contribution to the partnership far exceeded that of Bruce. Moreover, Noel contributed all he had. When, in 1999, Bruce was confronted by the prospect that advances made through EFL might, in the absence of a loan agreement, be treated as if a dividend, he readily obtained the consent of Noel to a loan agreement. Thus, when a question of interest on capital arose, and the brothers turned their minds to the question, they agreed that interest would be paid. Had Noel raised the question of interest on his capital following the sale of Krowera, Bruce would probably have responded that, of course, he should be paid interest, and structured their affairs accordingly.
73 Having concluded that it was a term of the informal partnership agreement, from 1993, that interest would be paid on capital contributions by the partners, there remained a question as to how interest was to be calculated, and at what rate. Mr Munday provided assistance in that regard by calculating capital account balances for the period 1994 to 2016 in paragraph 25 of his report. I adopt his calculation as a suitable basis upon which to apply a rate of interest. The capital account balances do not include the advances made by EFL. Interest payable to EFL was dealt with separately. The Division 7A interest rate applied to the EFL advances is, in my view, an appropriate rate to apply to the account balances as between the partners from 1999. Because no such rate was applicable prior to 1999, Mr Munday applied the 1999 rate back to 1994. When compared with the term deposit and cash management rates applicable at the time, derived from data supplied by the Reserve Bank of Australia, the rate applied by the Australian Taxation Office was only marginally higher than the term deposit rate and substantially higher than the cash management rate. Because the rate applied by the Australian Taxation Office was the 'agreed' rate under the 1999 Division 7A agreement between EFL, Bruce and Noel, it is an appropriate rate to be applied and, in my opinion, a fair rate in all the circumstances.
74 The next question is whether interest ought to be compounded on the average opening and closing capital account differential in a given year, or calculated on a simple interest basis on the capital account differential. As Mr Munday noted at paragraph 25.10, any adjustment to compensate for interest on the capital account balances would be in addition to other adjustments made to the accounts in his report. If interest is to be calculated on a compounding basis, it would result in a debit to the capital account of Bruce in the sum of $376,643 and a corresponding increase in the capital account of Noel. If interest is to be calculated on a simple basis, it would result in a decrease in the capital account of Bruce in the sum of $63,822 and a corresponding increase in the capital account of Noel in the same amount. As I understand the calculation made by Mr Munday in paragraph 25.9 of his report, interest was compounded annually. I see no reason why interest, if it was due and not paid, should not be compounded at least annually. Accordingly, I accept his calculation such that an adjustment must be made by decreasing the capital account of Bruce by $376,643 with a corresponding increase in the capital account of Noel.
75 It was common ground that RMBL had wrongfully deducted the sum of $39,467.50 from the proceeds of sale of the Walkerville property. It was also common ground that Noel was ultimately responsible to meet his obligation under the costs order. Noel contended that at the time the money was withdrawn RMBL had no right to it because the costs had not been taxed. Therefore, both partners, Noel and Bruce, had a claim against RMBL to account to them for the sum withdrawn, but only Noel was obliged to pay the taxed costs, whatever they may be. Thus, argued Noel, no adjustment should be made to capital account balances until his liability had been properly ascertained.
76 While RMBL's solicitors had sent bills of costs to its client, notifying it of its rights to proceed to taxation, no such opportunity had been afforded Noel. A person liable for such costs (Noel) has a right to taxation. No such step had been initiated, as at the date of trial, although Noel stated his intention to exercise such a right. He claimed, however, that the partnership had a right to recover the amount wrongly deducted. Accordingly, he argued, the deduction of the amount by RMBL should not result in a debit to his capital account with the partnership, with a corresponding benefit to Bruce on the division of the fund in court.
77 Bruce relied on correspondence from Noel's solicitor, in which Noel's liability for the costs was admitted. There was no question that Noel was obliged to meet the costs order. The question is whether an adjustment should be made in favour of Bruce for the wrongful conduct of RMBL.
78 While RMBL may be obliged to account to the partnership for the money wrongfully deducted, no claim has yet been made by any partner for any such relief. I make no finding as to the likely outcome of any such application. Nor is it necessary to comment on the likely outcome of a taxation. All that is necessary to decide is whether the wrongful deduction of the amount should translate into an adjustment for that sum in favour of Bruce, to the detriment of Noel.
79 Submissions on this issue were not elaborate. It is not as if Noel permitted the amount to be deducted at settlement, or otherwise conducted himself in such a way as to act to the prejudice of Bruce. Noel objected to the deduction and proceeded to settlement under protest. He had little option but to take that course. But in the end, Noel is liable for the costs, whatever they may be. He could have asserted a right to have the funds restored, or for taxation. Noel had the ability to take steps to limit his liability. In these circumstances it would seem unjust to penalise Bruce for Noel's inactivity. Noel must suffer the adjustment sought by Bruce.
80 Section 5 of the Limitation of Actions Act 1958 provides:
(1) The following actions shall not be brought after the expiration of six years from the date on which the cause of action accrued -
(a) Subject to subsections (1AAA), (1AA) and (1A), actions founded on simple contract (including contract implied in law) or actions founded on tort including actions for damages for breach of a statutory duty;
(b) Actions to enforce a recognizance;
(c) Actions to enforce an award, where the submission is not by an instrument under seal;
(d) Actions to recover any sum recoverable by virtue of enactment, other than a penalty or forfeiture or sum by way of penalty or forfeiture.
...
(2) An action for an account shall not be brought in respect of any matter which arose more than six years before the commencement of the action.
...
(8) This section shall not apply to any claim for specific performance of a contract or for an injunction or for other equitable relief, except in so far as any provision thereof may be applied by the Court by analogy in like manner as the enactment corresponding to that provision was applied before the repeal of that enactment by the Limitation of Actions Act 1955.
81 Bruce contended that any entitlement Noel might otherwise have to reasonable remuneration was subject to a six-year limitation period, which would operate as a bar to any claim prior to 10 November 2010. That date is six years prior to the day on which Noel filed his points of claim in which he first expressed the basis for his claim.
82 Bruce submitted that s 5(1) applied to Noel's claim for remuneration because it was based on simple contract. He went on to contend that the claim fell outside the scope of the order for an account of partnership debts and liabilities as at 30 June 2015, following the dissolution of the partnership. Orders were made by Cameron J on 18 August 2015, pursuant to terms of settlement, which declared that the partnership was dissolved on 30 June 2015. An account was ordered in that proceeding, by consent, pursuant to the terms of settlement. Bruce drew a distinction between the assessment of capital contributions, which would extend beyond the limitation period, as far back as 1 July 1991, and Noel's claim for remuneration. He submitted that neither party chose to rely on the limitation period in relation to capital.
83 The appointment of Mr Munday to undertake the assessment included 'an account of all receipts, payments, dealings and transactions of the defendant and the plaintiff in respect of the partnership business' from 1 July 1991 to the present. Mr Munday was not inhibited in his inquiry by any qualification to the effect that he should not consider transactions or liabilities occurring, or which arose more than six years ago. For example, he made adjustments to loan accounts and allowed interest charges in favour of Bruce arising out of the 1999 loan agreement. He debited Noel's loan account with 'drawings' made over that period.
84 A claim had been made by Noel for wages over the period 1994 to 2015. In his final report, Mr Munday continued to deal with Noel's claim, setting it apart, with his claim for interest, as items for further consideration. There was no evidence of any objection by Bruce that further consideration of the question of remuneration would necessarily involve a consideration of claims that were statute barred. On 19 October 2016 Hargrave J ordered Noel to file points of claim and supporting evidence on his remuneration and interest claims. A corresponding order was made requiring Bruce to articulate any adjustment he sought to the assessment made by Mr Munday.
85 In his points of claim, filed 11 November 2016, Noel set out the basis for the remuneration and interest claims. This was the point from which, according to Bruce, the claim was made for the purpose of a limitation period. In his points of defence, Bruce did not raise a limitation defence. It was first raised in written submissions prepared on Bruce's behalf in anticipation of trial, and in proposed amended points of defence and counterclaim dated 7 March 2017.
86 Written submissions were filed by the parties on the application of a limitation period. Given the scope of the inquiry to be undertaken by Mr Munday, and the distinction drawn by Bruce between the remuneration claim and other adjustments not affected by any limitation period, the parties were requested to provide further submissions on the extent to which the terms of settlement and consequential orders might have resulted in a waiver of any right to raise a limitation period in respect of the work undertaken by Mr Munday, and consequential adjustments.
87 Noel submitted that Bruce had misconceived the nature of the proceeding before the court, and s 5(1) of the Limitation of Actions Act had no application. He submitted that the claim arose upon taking of an account of the affairs of a partnership which was a right in equity in aid of a partner's legal rights. The limitation period, according to Noel, applied in relation to the time within which an action for an account must be brought following the date of dissolution. As Bruce had commenced his proceeding for an account, well within the prescribed time from the date of dissolution, no question arose as to the ability of the party undertaking the inquiry to make adjustments in respect of transactions, whenever they took place.
88 The decision of the Full Court of the Supreme Court of Western Australia in Wheatley v Bower,[19] a case upon which Noel relied, seems at odds with the proposition for which he contended. It was held in that case that the equivalent provisions of the Western Australian enactment precluded a right to an account in respect of a debt in contract after the lapse of six years from when the cause of action arose. In the present case, the action for an account was initiated by Bruce in June 2015. Thus, but for the conduct of the parties in this proceeding, Noel and Bruce would have been precluded from bringing to account various claims relating to transactions earlier than six years prior to that date.
89 In supplementary submissions filed in response to the request from the court, Noel argued that Bruce had waived his right to rely upon the limitation period or was estopped from taking the point. Bruce argued that there could be no waiver because he did not have full knowledge of the claim made by Noel until after Noel filed his points of claim. Bruce argued that the scope of the anticipated accounting between the parties was confined to capital contributions, loans and expenditure. It was not concerned with a claim for wages arising out of an alleged contract entered into in 1974.
90 The terms of settlement between Bruce and Noel, attached to the order of Cameron J made 18 August 2015, expressed an intention that Mr Munday would conduct a full review of all receipts, payments, dealings and transactions of the brothers in respect of the partnership business from 1991. Having undertaken the inquiry, he would make the necessary adjustments in the partnership accounts. Thus, the parties expressly agreed to extend the period for the inquiry, and for consequential adjustments, beyond the period of six years prior to the commencement of the inquiry, or the commencement of the proceeding in which the inquiry was ordered. The parties did not distinguish between particular types of transactions or dealings. Noel has been found to be entitled to reasonable remuneration, as an expense to the partnership. Quite plainly, Mr Munday considered an inquiry into that matter to fall within the scope of his mandate. Noel's claimed entitlement arose out of dealings and transactions between the partners.
91 Accordingly, I find that, having expressly agreed to the scope of the inquiry, there is no occasion for one or other of the partners to now complain that the dealing, transaction or corresponding liability arose earlier than six years prior to the commencement of the proceeding or Noel's points of claim. By their agreement they may be taken to have expressly waived any right to limit the scope of the inquiry, including by raising a defence under the Limitation of Actions Act.
92 In the absence of agreement between the parties on the necessary adjustment to the loan balances ascertained by Mr Munday, I propose to refer the calculation of the adjustments to Mr Munday. I will hear the parties on further directions and costs.
[1] RMBL Investments Pty Ltd had provided financial accommodation to the partnership, secured by a mortgage over the Walkerville property. Noel had discontinued a proceeding against RMBL and a consequential costs order had been made against him.
[2] Paragraph 4AA of his Points of Defence.
[9] Hawkins v Clayton at 573 (emphasis added).
[10] (2001) 140 IR 188, 224.
[11] (2006) ALR 437, 498 [164].
[13] Byrne v Australian Airlines Ltd (1995) 185 CLR 410, 422.
[14] Keith Fletcher, The Law of Partnership in Australia (Lawbook Co, 9th ed, 2007) [3.150]; Kelly v Tucker [1907] HCA 40; (1907) 5 CLR 1.
[16] Hawkins v Clayton (1988) 164 CLR 539, 573.
[17] Liverpool City Council v Irwin [1976] UKHL 1; [1977] AC 239.
Uren
Uren [2017] VSC 265
(1977) 180 CLR 266
(1988) 164 CLR 539
(1995) 185 CLR 410
(2001) 140 IR 188
(1907) 5 CLR 1