Ryan v Rouen

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION YOUNG J Thursday 1 June 2000

1 HIS HONOUR: This is an unfortunate dispute between former partners of an old established firm of Sydney solicitors. The firm, Laurence & Laurence, is the successor of Charles Albert Laurence who was admitted to practice in 1867. The firm, at all material times, has practised at 182 George Street Sydney. 2 From 1 July 1993 until 17 July 1998, the plaintiff was a member of the partnership. He attained this status by executing a deed of assumption whereby he adopted the benefits and burdens of the partnership agreement of 22 September 1989.

3 This method of changing the membership of a partnership may cause legal problems as it is very difficult by such a deed to effectively novate contracts made by the partnership as previously constituted, but apart from the relevance it may have for one particular argument in this case, that form is of no significance. The parties proceeded in this case on the basis that by executing the deed of assumption the plaintiff became a partner as if he were a party to the partnership agreement of 22 September 1989. 4 The partnership agreement contained, inter alia, the following provisions: "5.8 Payment on Retirement or Death of Partner (a) Upon the retirement or death of a Partner the retiring Partner or the legal personal representatives of the deceased Partner shall sell and the remaining Partners shall purchase or cause to be purchased as at the date of retirement or death the Capital Units as calculated in Clause 5.8(c) of the retiring or deceased Partner in the Partnership. (b) In the event of any purchase occurring pursuant to Sub-clause (a) by the remaining Partners the remaining Partners shall take up the interest of the retiring or deceased Partner in the respective proportions that the remaining Partners hold the capital of the Partnership as at the date of such purchase PROVIDED HOWEVER that the remaining Partners may by Special Resolution resolve to take up that interest in some other proportions or to introduce a new partner to purchase and take up the interest of the retiring or deceased Partner. (c) Subject to Clause 5.8(d) the purchase price of each Capital Unit shall be the value of the Partner's Capital Account at the date of retirement or death divided by the total number of Capital Units held by that Partner at the date of retirement or death. For the purpose of this clause the value of the Insurance Benefit which relates to the retiring or deceased Partner shall be excluded when calculating the value of that Partner's Capital Account. (d) The payment of the purchase price of each Capital Unit in so far as it relates to the value of the Work in Progress component of the Partner's Capital Account shall for income tax purposes be deemed be assessable in the hands of the retiring or deceased Partner and deductable to the remaining Partners. ... 5.9 Interest on Capital Each Partner shall be entitled to interest on his Capital Purchase Account at the rate of ten per cent (10%) per annum or such other rate as may be decided by Special Resolution payable in arrears on the last days of March June September and December in each financial year. ... 14. (a) No Partner shall during a period of one calendar year after the date of his retirement act as a solicitor either directly or indirectly for or as a partner or an employee of any other legal practice carrying on business within twenty-five (25) kilometres of the General Post Office, Sydney which within that period acquires as a client any person who was a client of the Firm or the Partnership at any time during the three (3) years prior to that Partner's retirement from the Partnership. (b) Notwithstanding Clause 5.8(d) (sic), where the remaining Partners reasonably suspect that a retiring Partner may then be or may in the future be in breach the covenants set out in Clause 14(a) the remaining Partners may by Special Resolution resolve to pay such part only as the remaining Partners by their Special Resolution shall determine of the monies required to be paid to the retiring Partner pursuant to Clause 5.8 and upon payment of that amount the remaining Partners shall be deemed to have purchased the retiring Partners Capital Units pursuant to Clause 5.8." 5 The background to the plaintiff's retirement from the partnership was that the firm lost one of its major clients because that client decided to adopt a policy of doing most of its legal work in-house in the future. The economic effect of this decision appeared to have been that the firm's income would be substantially reduced. 6 In January 1998, the firm had six partners, namely the plaintiff and the five defendants. The fifth defendant has now ceased to be a partner so that at present there are only four partners. The plaintiff seems to have taken the view that without that major client the firm could only support four partners. He further took the view that if the available income had to be split six ways, he would not have sufficient moneys to provide for the lifestyle to which he had become accustomed. The evidence also shows that the plaintiff had done less work for the major client than the other partners. Two consequences flow from this: (1) that unless there was some rearrangement of work the plaintiff would be subsidising the other partners; and (2) that if the plaintiff left the firm and the clients for whom he was accustomed to act left the firm with him, the plaintiff would enjoy a greater income than if he had stayed with Laurence & Laurence. 7 In January 1998, the plaintiff commenced seeking another position with the assistance of Andrea Warnecke, a person experienced in finding suitable positions for solicitors. That search resulted in the plaintiff being offered a partnership in the firm Barker Gosling, which practises in Australia Square, Sydney. The plaintiff became a partner of Barker Gosling on 20 July 1998. 8 The plaintiff requested the defendants to pay out his capital account and capital purchase account with interest. However, on 10 August 1998 the other five partners unanimously passed the following resolution: "Resolved that as Peter Ryan has taken to Barker Gosling clients for whom the firm has acted contrary to the terms of the partnership deed and the partners reasonably suspect that Peter Ryan has breached the covenant set out in 14(a) of the partnership deed the remaining partners resolved to pay Peter Ryan $1.00 in full payment of moneys due to him. Carried unanimously." 9 The plaintiff commenced these proceedings on 4 November 1998. He amended his summons on 14 July 1999. The defendants filed a cross-claim on 10 March 1999 which was twice amended, the most recent being at the commencement of the hearing on 14 April 2000. 10 The partnership agreement provided for certain disputes to be dealt with by arbitration. However, after some interlocutory skirmishes, both sides agreed that all matters in dispute should be dealt with by the Court. 11 It seems to me that the issues raised by the claim and cross-claim can conveniently be dealt with under the following 14 headings, though some of the matters will require a deeper discussion than others:

(1) What was the nature of the plaintiff's interest in the partnership?

(2) Is clause 14(a) of the partnership agreement void as a Restraints of Trade? (I note there is no claim that the clause is void for uncertainty).

(3) Does s 4(1) of the Restraints of Trade Act 1976 affect the operation of clause 14(a), and if so, how? (There was no application made under s 4(3) of the Act).

(4) Does the doctrine of conventional estoppel have any effect, and if so, what, on the answers to questions (2) and (3)?

(5) Is it unconscionable for the plaintiff to assert that clause 14(a) is unenforceable?

(6) Did the plaintiff breach fiduciary obligations he owed to the defendants as particularised in the further amended cross-claim?

(7) Was the resolution of 10 August 1998 purportedly under clause 14(b) of the partnership agreement, valid and effective?

(8) Was clause 14(b) or the action taken thereunder void as a penalty?

(9) Is the plaintiff entitled to relief against forfeiture of the funds, the subject of the resolution of 10 August 1998?

(11) Should the defendants pay damages to the plaintiff, and if so, in what amount?

(12) Should the plaintiff pay damages to the defendants, and if so, in what amount?

(14) What is the result of the case including what orders should be made?

(1) What was the nature of the plaintiff's interest in the partnership? 12 Although I have set out the principal provisions of the partnership agreement, it is necessary to look at other provisions to see just what interest the plaintiff held in the partnership with Laurence & Laurence prior to his retirement. 13 The standard partnership agreement, if there be any such, involves a "partnership at will" which determines at the will of any of the partners and thereafter ceases to exist. Each partner makes a capital investment as agreed, and at the end of the partnership is entitled to his or her appropriate share of the capital that remains. 14 For many many years, solicitors' partnership agreements in Sydney followed this pattern. When one partner retired or died, there was a valuation of his or her share and the remaining partners paid the valuation to the retiring or deceased partner or his or her executors. 15 Whilst it is in existence, a partnership has goodwill. Goodwill "is a composite thing referable in part to its locality, in part to the way in which (the business) is conducted and the personality of those who conduct it, and in part the likelihood of competition, many (clients) being no doubt actuated by mixed motives in conferring their custom": Federal Commissioner of Taxation v Williamson (1943) 67 CLR 561. Goodwill is the attractive force which brings in custom: Inland Revenue Commissioners v Müller & Co's Margarine Ltd [1901] AC 217, 224. 16 With a solicitor's practice, part of the goodwill is represented by the name of the firm and its reputation, part of the goodwill is represented by the clients who consistently resort to the firm for advice and part of the goodwill is brought about from other factors. Traditionally, when one is valuing the goodwill of a solicitor's practice as one once had to do for death duty purposes if a partner should die during the course of the partnership, the valuation was usually about 18 months purchase of the gross annual takings or of profits of the partnership. As Rost and Collins Land Valuation and Compensation in Australia (Commonwealth Institute of Valuers Sydney, 1971) put it at pp 510-511: "In the case of practising solicitors and accountants, factors to be taken into account include the proportions of gross fees of a recurring and a non-recurring nature; also the number of clients and the type of clientele. Practices with a limited number of clients, even though earning substantial fees, would, other things being equal, have a lower value than those having a wider spread of clients yielding an equivalent amount in fees." 17 However, a purchaser buying the goodwill is really buying the super profit, that is, the profit over and above a reasonable return from the investment of capital, brought about by the likelihood that old clients will return to the firm and the reputation of the continuing partners to attract work over and above the likelihood of the hypothetical average solicitor's ability to attract work. 18 Conversely, what a retiring partner may be selling is the benefits of the firm name and reputation, the benefit of the continuing partners' reputation, and the benefit of clients who have consistently retained the firm continuing so to do. 19 There is settled law, so far as a partnership name is concerned, that unless there is agreement to the contrary, the name may be sold by the person charged with winding up the firm, in which case the former partners will not have the right to use it, or alternatively, once the firm comes to an end, then the goodwill can no longer exist; see Gray v Sladden & Stewart [1935] NZLR 35; Alcock v Robb (1978) 2 BPR 9,625. 20 There is, of course, no guarantee that clients of a firm will continue to retain that firm for their legal work. Some of the clients may well have their wills or other documents lodged with the firm for safe keeping, however, at least the early authorities show that there is no saleable goodwill in such a right; see Arundell v Bell (1883) 52 LJ Ch 537. Indeed, in Gray's case, Ostler J wondered at p 41 whether there was any saleable goodwill with a solicitor's partnership because "the business of a solicitor depends so absolutely upon personal trust and confidence in the ability and integrity of the person who conducts that business, that when he dies no-one would be prepared to pay much for the right to carry on the business in his name. The relationship between solicitor and client is of too personal a nature to be of saleable value ...". Gray's case was decided in 1934 in New Zealand, and involved a two man partnership. It is doubtful whether it is applicable to a modern multi-partner firm of solicitors in Sydney in the year 2000. 21 In Re Lazarus (1940) 11 ABC 249, 257 Lukin J said: "It has been argued by counsel for the respondents that there can be no goodwill attaching to a solicitor's business."

His Honour then indicated he had read the authorities and what was in the current edition of Halsbury and continued: "The older cases are certainly clear that no goodwill exists. But this idea seems to be not now accepted. I think I may take judicial notice of the fact that legal practices and the goodwill thereof are bought and sold every day in this community. I think it is generally accepted that goodwill attaches to a solicitor's business in the same way as to any other business." 22 The same view was taken by the NSW Court of Appeal in McFadden v Commissioner of Stamp Duties (1980) 11 ATR 1, 6, where Samuels JA with whom Mahoney JA agreed, said that whilst it might have been true in 1883 to say that there could be no goodwill of a solicitor's partnership, it was no longer true. See also Brown v Wyman [1975] Qd R 408, 417-418. 23 The goodwill of a solicitor's partnership is the super profit, that is, the profit that can be earned over and above the reasonable return from the investment of the capital by virtue of the special distinguishing features of the practice which makes people resort to that practice rather than go somewhere else. 24 Should one of the partners have become bankrupt, then it would be clear that the Trustee in Bankruptcy would be entitled to realize a share in the goodwill of the partnership. 25 However, for almost every other eventuality, the partnership agreement is so worded that the goodwill is only to be enjoyed by partners whilst they remain partners. I will deal with the provision in the partnership agreement shortly. 26 There is no doubt at all that it is competent for people to provide that they are not to get the full value of the goodwill of a business. Thus they may provide for an option to sell the goodwill to another person for a nominal sum and the value of the goodwill will be reduced accordingly; see Perpetual Executors & Trustees Association of Australia Ltd v Federal Commissioner of Taxation (Thomas' case) (No 2) (1955) 94 CLR 1. 27 In the instant case, the partnership agreement provides in clause 1.20 that the "net tangible value of the partnership" means at any relevant time the total of the partners' capital accounts and partners' current accounts as determined by the auditors. Partners' current accounts denote their share of income and nothing further need be said about this. Clause 1.24 defines "Partners' Capital Account" as meaning "The assets of the partnership (including but not limited to the written down value of the library, office machines and furniture, and all investments, cash at bank, trade debtors, cash on hand, unbilled disbursements and Work in Progress but excluding goodwill less all current and non-current liabilities) to which a partner is entitled pursuant to his Capital Units". The scheme of the partnership agreement was that when a person became a partner he paid an amount to the partnership and was issued with the appropriate number of capital units and at any time the persons entitled to share in the capital of the partnership held that capital (other than goodwill) in the proportion to the number of capital units held by them. 28 The evidence shows that when the plaintiff bought into the partnership he borrowed moneys from the National Australia Bank and the loan was serviced from his partnership income. 29 The consequence of clauses 1.20 and 1.24 is that apart from bankruptcy or some other extraordinary happening, a partner benefited from the firm's goodwill whilst he or she remained a partner, but could never obtain any cash sum for the benefit of that goodwill. 30 Although such a consequence may have been regarded in earlier years as bizarre, it is concomitant with the modern idea of a professional partnership which is a walk-in walk-out type of arrangement. 31 The question that arises, however, is how far can a restrictive covenant be taken to protect such goodwill? 32 In Fitch v Dewes [1921] 2 AC 158, the House of Lords had to deal with a case where a solicitor sought to restrain his managing clerk from being employed contrary to a restrictive covenant. The House of Lords had no difficulty in concluding that there was goodwill in the solicitor's practice which he was entitled to protect; see particularly Viscount Cave at p 168-9 where his Lordship said: "The practice to be protected is that of a solicitor, to which a goodwill is no doubt attached. It is manifest that a person employed in such a practice as managing clerk must in the course of his duties acquire a knowledge of the affairs, the documents and the disposition of the clients of the business such as to give him a special equipment which he could, if not restrained by contract, use in obtaining employment as their legal adviser and that in this manner the goodwill of the employer's business might be impaired and perhaps destroyed." 33 In Bridge v Deacons [1984] AC 705, the Privy Council had to deal with a restrictive covenant entered into by a former partner of a Hong Kong firm of solicitors. At 716 the Privy Council said: "...the partners in the respondent firm ... are the owners of the firm's whole assets, including its most valuable asset, goodwill. The appellant had owned a share of the assets while he was a partner, but he transferred his share to the continuing partners when he ceased to be a partner."

Their Lordships then asked whether it was reasonable for the respondent to obtain protection against appropriation by the appellant of any part of the goodwill. 34 The Privy Council thought it significant that at the time when the partnership agreement was entered into, not one of the partners would know whether he or she might be in the position of being a retiring partner. There were thus matters of mutuality to consider. I will return to this case later. 35 In Geraghty v Minter (1979) 142 CLR 177, there was a restrictive covenant in the partnership agreement between loss assessors. The partnership agreement contained a clause that the dominant partners would retain the right to use the firm's name but other parts of the goodwill remained with the partnership. The High Court held that even in these circumstances the interest in goodwill was sufficient to justify a restrictive covenant on a retiring partner. Each of the Judges stressed that goodwill cannot be realized independently of the business to which it attached (see also Inland Revenue Commissioners v Müller & Co's Margarine Limited supra at p 223). Although Mason J dissented on the facts, he said in a passage at 198 which was approved by the Privy Council in Bridge v Deacons: "In a partnership agreement the covenant is usually expressed to be given by the outgoing partner, whosoever he may be. In general his identity will not be known until the partnership is determined because the identity of the outgoing partner will depend on the manner and circumstances of the determination of the partnership. The fact that the covenant is entered into by each of the partners and may become binding on any of them, depending upon the events which happen, is a factor which is to be taken into account in assessing whether it is reasonable between the parties." 36 Although this discussion has been necessary in order to set the background to the core questions in this case, it is unnecessary to take this discussion any further.

(2) Is clause 14(a) of the partnership agreement void as a restraint of trade? 37 One always starts a case involving a restraint of trade with the prima facie proposition that all such restraints are void as against public policy unless they are reasonable: Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC 535, 565. As I said in Dalysmith Corporation (Aust) Pty Ltd v Cray Personnel Pty Ltd (14 April 1997, unreported) omitting authority: "The onus of proving that a restriction is reasonable is on the person seeking to enforce the covenant: the validity of the covenant is to be judged as at the date of the agreement imposing it: (however) one must remember that the court takes into account future possibilities which could then have been foreseen." 38 It is first necessary to construe clause 14(a) of the partnership agreement to see the extent of its operation. 39 The clause is a rather peculiar one in many respects. The first thing to note is that the restraint focuses not on having an office within 25 kilometres of the General Post Office, Sydney, but on carrying on business within that limit. Thus, one does not just work out where is the head office of the "other legal practice", but one asks whether the "other legal practice" carries on business within 25 kilometres of the GPO. It may well be, as is commonly the case, that a solicitor whose head office is in Dubbo, or Bathurst or Wagga will carry on business in the Sydney area by means of a rented office, or because of the work that is performed in the Sydney area. 40 Secondly, there is no mention of how one measures the 25 kilometres from the General Post Office. However, cases such as Mouflet v Cole (1872) LR 8 Ex 32 and Brendon Pty Ltd v Russell (1994) 11 WAR 280, suggest that one measures the 25 kilometres as the crow flies. 41 Thirdly, the clause does not read very satisfactorily as a matter of grammar. The word "for" after the word "indirectly" seems up in the air. At first blush the clause appears to restrict the former partner from acting as a solicitor for any person who was a client of Laurence & Laurence at any time within three years prior to retirement and also from being a partner or employee of another legal practice which acquires any such person as a client. However, whatever the ambit of the clause, the touchstone is a person who was a Laurence & Laurence client within three years prior to the plaintiff's retirement whether the plaintiff ever saw that client or not, whether the plaintiff solicited that client to come to the new firm or not, and whether the client knew or ought to have known that the plaintiff was now with the new firm. 42 The chosen touchstone at least, at first, appears to give a greater protection than is necessary to protect the goodwill of Laurence & Laurence. However, Mr Harrison SC for the defendants, strongly argued that this is not so. He put that one must bear in mind the principle of mutuality referred to in Bridge v Deacons. One must remember that in Bridge v Deacons, even though the practice was compartmentalised, a covenant preventing the retiring partner acting for any person who had during the period of three years thereto been a client of the partnership was held to be reasonable even though the partner concerned was working in the separate intellectual property department which was situated in a separate suite of offices on a different floor served by different lifts from the other's other departments. 43 Bridge v Deacons was considered by Bryson J in this Court in Brown v Cunich (1974) 16 ATPR (Digest) 46-117. In that case, the partnership deed, inter alia, contained a restraint of trade preventing a partner from canvassing or soliciting business from a person who was at any time during the partnership a client of the partnership. At p 53,549, Bryson J noted that the Privy Council in Bridge's case had declined to categorise covenants in partnership agreements as either falling within vendor and purchaser covenants or master and servant covenants and said: "The reasonableness of restrictions has to be addressed anew for each case in the light of the terms of the relevant restriction ... and the circumstances of the parties. A conclusion about reasonableness of a restriction in relation to Hong Kong cannot be applied directly to the operation of a restraint in New South Wales."

In view of the fact that each of the parties to the restraint was in an unusually good position to understand fully the significance of the arrangement that it had been freely entered into as part of an arrangement involving the payment of money for entry into the partnership, the restraints of trade were considered to be reasonable in the circumstances. 44 JD Heydon in the 2nd ed of the Restraint of Trade Doctrine (Butterworths, Sydney, 1999) at p 168 says: "Partnership restraints are often mutual, and this assists the conclusion that they are reasonable."

The learned author bases that view on the extracts from Geraghty's case and Bridge's case to which I have already referred. He then notes that the Privy Council in Bridge's case seemed not to give the same significance to the disinclination of the law to uphold covenants for the employees from dealing with persons who were customers of the firm but did not necessarily deal with the employees. However, he noted that a different approach had been taken in Canada and referred to Ernst & Young v Stewart (1993) 79 BCLR (2d) 70. 45 The Ernst & Young case involved a partner in the Vancouver office who was working in the insolvency section. He feared that the firm's emphasis on information technology meant that he would not be sufficiently appreciated and moved to another firm of accountants, Arthur Anderson & Co where he commenced to work up an insolvency division. The Ernst & Young partnership agreement contained a provision prohibiting retiring partners for one year providing to the public services similar to any of those provided by Ernst & Young from any premises within a radius of 50 miles of its Vancouver office. Edwards J examined various Canadian and United States cases, particularly Elsley v JG Collins Insurance Agencies Ltd (1978) 83 DLR (3d) 1 and Saloum v Thomas (1986) 12 CPR (3d) 251. 46 Edwards J applied the test which originally derives from Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269, 301 that one must: "ascertain what were the legitimate interests of the (remaining partners) which they were entitled to protect and then to see whether these restraints were more than adequate for that purpose."

That test had been applied also in Bridge v Deacons and in another case involving a lawyers' partnership, Saloum v Thomas . 47 I should apply this test. Before I do so, however, I should specifically deal with the submissions of Mr Harrison SC. Essentially he submits that the covenant in the present case is reasonable because:

(1) the agreement was a just and honest one made by people of equal bargaining power;

(2) it conferred mutual protection: the plaintiff had the benefit of the protection unless he were the retiring partner;

(4) it is not discriminatory: it was not directed against the plaintiff alone;

(5) the purpose was a proper purpose, namely, to prevent decimation of the client base;

(6) the geographical and temporal limits did not absolutely proscribe the plaintiff for acting for former clients;

(7) infelicities of framing should not destroy the covenant;

(8) the content of the covenant given and taken is linked in with clause 14(b). 48 These are proper matters to take into account but one must take a broad overview and consider the test which has been set out above. 49 Apart from the matters mentioned by Mr Harrison SC all of which have some basis in fact, there is the problem that:

(a) the partners only have a limited interest in goodwill;

(b) the covenant operates wider than is necessary to protect the remaining partners against what Mr Harrison SC terms "decimation of the client base";

(c) events that can happen quite by chance such as a person who on one occasion was a client of say Mr Rouen of Laurence & Laurence within three years of the relevant date by chance becoming a client of Mr Vuaran of Barker Gosling would trigger the operation of the restriction notwithstanding that in neither firm did the plaintiff have anything to do with the client. 50 I have looked at the previous cases and I have looked at the factors mentioned by Mr Harrison SC. It is important to remember the words of Dickson J when giving the judgment of the Supreme Court of Canada in the Elsley case at 5-6 where he said: "The test of reasonableness can be applied ... only in the peculiar circumstances of the particular case. Circumstances are of infinite variety. Other cases may help in enunciating broad general principles but are otherwise of little assistance. It is important ... to resist the inclination to lift the restrictive covenant out of an employment agreement and examine it in a disembodied manner, as if it were some strange scientific specimen under microscopic scrutiny. The validity, or otherwise, of a restrictive covenant can be determined only upon an overall assessment, of the clause, the agreement within which it is found, and all of the surrounding circumstances." 51 In all the circumstances of this case, particularly the three matters that I set out in opposition to Mr Harrison SC's list, it seems to me that the present covenant goes beyond adequate protection of the legitimate interests of the remaining partners. 52 Accordingly, unless the defendants can succeed in one or other of the submissions put up in succeeding paragraphs, the covenant must be considered to be invalid.

(3) Does s 4(1) of the Restraints of Trade Act 1976 affect the operation of clause 14(a) and if so, how? 53 The Restraints of Trade Act 1976 was passed so that reasonable restrictions on trade could be enforced notwithstanding that they were non-severable and expressed in such a way so that in sum total they exceeded what was reasonable. 54 There have now been a considerable number of decisions under the Act. One of the most recent is the decision of the Court of Appeal in Kone Elevators Pty Ltd v McNay (No 2) (1997) 19 ATPR 41-564. 55 As I understand the law, the basal approach to s 4(1) of the Restraints of Trade Act 1976 is as follows:

(i) look at the particular breach of the covenant about which the plaintiff complains;

(ii) determine whether that breach is of an act forbidden by the covenant, that is, that it is within the ambit of the covenant;

(iii) disregard the fact that the total ambit of the covenant may be too wide and so unreasonably in restraints of trade and ask whether the covenant so far as it would work a breach in the particular circumstances under complaint would be an unreasonable restriction;

(iv) if the answer to the previous question is that the restriction would not be an unreasonable restriction it is enforceable;

(v) the Court should consider the circumstances of the particular case and determine the validity of the restraint to the extent that it purports to operate in those circumstances: it is unnecessary to consider its purported operation in other conceivable sets of circumstances;

(vi) the Court cannot redraft the covenant. 56 These propositions follow from the cases commencing with Orton v Melman [1981] 1 NSWLR 583, 587 (from which proposition (v) is directly derived) up to the Kone case referred to earlier. I digested the relevant decisions in the Kone case at first instance reported in (1997) 19 ATPR 41-563 at p 43,827. 57 In the instant case the plaintiff is in fact the person restrained. The persons having the benefit of the covenant are content merely to forfeit the moneys otherwise payable to the plaintiff under clause 14(b) of the partnership agreement and do not seek any injunction. The cross-claim, however, does ask for a declaration that there has been a breach of clause 14(a) of the partnership agreement and there is a particular focus on the former clients of Laurence & Laurence which have now passed with the plaintiff to Barker Gosling listed in particulars (iv) to para 17 of the further amended cross-claim. 58 In broad terms it could be said that the prime thrust of the defendants' complaint is that the plaintiff has acted in breach of a restraint which at the very least prevents him from acting for a person who was a client of the plaintiff at Laurence & Laurence within three years of him seeking to be a partner at any other law office within 25 kilometres of Sydney. 59 If the covenant had been expressed in that way, would it have been unreasonable? In my view the answer to this question is "No". There does not appear to have been unequal bargaining power when the covenant was taken as there was in cases such as the Ernst & Young case where a young man was virtually told that he could join a partnership of top accountants on certain terms or not at all. 60 Furthermore, all the other indicia for a reasonable covenant are there if it were in that form. 61 The real problem is with the rule that the Court cannot rewrite the covenant. Although one could actually score through words and so produce a set of words which would amount to such a covenant, that would not be a proper application of the blue pencil rule: it would be like striking out the word "not" in the commandment "Thou shalt not commit adultery". 62 In A Buckle & Sons Ltd v McAllister (1986) 4 NSWLR 426, 434, Needham J said of s 4(1) that it did not operate to allow "the court to create a valid restraint out of an invalid one unless it can be done by a reading down process." However, as Kearney J said in Knogo Corp v Halligan (1984) 6 ATPR 40-060, the statute can be used to read down the area and time of the restriction and the Court can also read down the extent of the restriction. I discussed the various cases in this connection in Kone at first instance at 43,828. The Court of Appeal in Kone at 43,833, said that: "It is well recognised that the subsection does not allow the Court to remake the contract or a covenant in it."

It is clear from that case that the Court could read down a covenant which prevented a person from trading in milk or dairy produce by confining the covenant to milk produce, such as in Home Counties Dairies Ltd v Skilton [1970] 1 All ER 1227. 63 Particularly bearing in mind that on one scenario the defendants wish me to assess damages for breach, it seems to me that I must be able to read down rather than redraft the covenant to the extent to which it would be valid in restraint of trade bearing in mind the acts which the plaintiff has now committed. I cannot see how I can do this. 64 Accordingly, in my view, s 4(1) does not assist the defendants' case.

(4) Does the doctrine of conventional estoppel have any effect, and if so, what, on the answers to questions (2) and (3)? 65 All counsel acknowledge that one cannot have an estoppel in the face of a provision which is void as against public policy. That proposition is well established by the authorities; see for instance Brooks v Burns Philp Trustee Co (1969) 121 CLR 432, 444 and 482; Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (No 2) (1975) 133 CLR 331, 344 (PC) and Kenneth Allison Ltd v A E Limehouse & Co [1992] 2 AC 105, 126. 66 Mindful of this principle, Mr Harrison SC puts the proposition thus, there was a conventional estoppel that the clause was valid and that the plaintiff would be able to act for clients of Laurence & Laurence whilst he remained a partner only on the basis that he would not work for such clients in a new firm. The plaintiff voluntarily assumed the benefit of the clause so that when he sues he can be met with a defence in equity. To the extent to which the plaintiff assumes a bundle of rights he is estopped from denying the validity of the clause. 67 Ingenious as this argument is, it does not seem to me that it is correct. I can deal with the matter fairly summarily because to the extent that any part of this proposition is correct it would fall under the argument considered under heading (5) of these reasons. Conventional estoppel is a common law doctrine, the plaintiff in the instant case is seeking common law rights, and any estoppel at common law would, no matter how ingeniously it is phrased, fall foul of the principle that I have mentioned. Accordingly, the answer to this question must be "No".

(5) Is it unconscionable for the plaintiff to assert that clause 14(a) is unenforceable? 68 This question really sets up the essential matter raised under question (4) but raises it in a more orthodox way. 69 Mr Harrison SC points out that the defence is being used as a defensive equity to prevent the plaintiff unconscionably obtaining a common law right and that that is a traditional concern of equity. 70 The argument centres on the proposition that a person who takes a benefit of a contract as Mr Ryan did when he became a partner of Laurence & Laurence must, at least in equity, be affected by the burden. Mr Ryan knew that the intention of everyone was that he was not to work for old clients in a new firm after he left. He cannot take the benefit of the status and earnings that he had when a partner in Laurence & Laurence and not also take the burden. 71 The law of benefit and burden is not at all straightforward. Mr Harrison SC put to me the dictum of Bryson J at the end of his judgment in NSW Small-Bore & Air Rifle Association Inc v Commonwealth (22 July 1994, unreported) at p 49: "They cannot consume the sweet part of their dish and reject the sour part."

This, with great respect to counsel, is not very helpful in the instant matter because the circumstances in which his Honour uttered those words were completely different to the present. 72 The principle of benefit and burden was thoroughly considered by Megarry VC in Tito v Waddell (No 2) [1977] Ch 106 at 289 and following. His Lordship considered that there were at least three separate principles, viz:

(a) the principle of pure benefit and burden (sometimes called the Ocean Island equity);

(b) the conditional contract situation where taking the benefit under a deed whether a party or not was conditional upon the acceptance of the burden; and

(c) situations where a person took an assignment of a benefit under a document. 73 The principle of pure benefit and burden rests on a small number of cases and it has not had a very happy history, being repudiated by the House of Lords to a great extent in Rhone v Stephens [1994] 2 AC 310, 322 and confined almost to a class that is non-existent by this Court in Lucas v Mok (1983) 9 Fam LR 180, 184. In the latter case McLelland J said at 184 that the Ocean Island equity could not affect the situation between the original parties to a contract. That is the very case we have here. 74 In most cases of the application of a benefit and burden principle to a contract, the clue is to find whether, on the true construction of the contract, taking the benefit of the contract is conditional upon bearing the burden. Thus, in Halsall v Brizell [1957] Ch 169 as explained by Lord Templeman in Rhone's case at p 322, a landowner who had the benefit of a sea wall which protected his land from encroachment from the sea (which wall was built pursuant to a deed which cast upon the persons benefiting from the sea wall the obligation to pay a proportionate cost of its maintenance) had to accept the burden as the benefit was conditional on the burden. 75 However in Halsall's case the whole deed was void for perpetuities apart from other invalidating factors. As Upjohn J rightly said, that was really an end of the matter. There has been no case as far as I know where the principle of benefit and burden has been able to be used as an equity to fix the conscience of a person with complying with an invalid obligation. 76 It must be remembered too that although the defendants plead this as a defensive equity, a person who when met with a claim at law pleads a defensive equity is to be considered in the same plight as a plaintiff in equity: Perpetual Trustee Co Ltd v Pacific Coal Co Pty Ltd (1953) 55 SR (NSW) 495; NSW Rutile Mining Co Pty Ltd v Eagle Metal & Industrial Products Pty Ltd (1959) 60 SR (NSW) 495, 510. 77 In the instant case the defendants have not offered to do equity nor to give up their legal rights as a condition of any equitable relief. I will deal with the significance of these matters later. It must be noted that no-one ever asked them to do this, but the fact that they have not done it remains. 78 The other matter that needs be noted is that one cannot solve this sort of case by the use of slogans. The Bryson aphorism or the words "benefit and burden" or even the word "unconscionable" cannot solve the case. As has been pointed out time and time again, unconscionable is not a synonym for what in the idiosyncratic opinion of a single judge might be fair. To work out whether something is unconscionable one needs to look at the cases decided by Equity Judges over the centuries and consider whether the conduct now being impugned would, in the light of those authorities, be considered to be unconscionable; see Muschinski v Dodds (1985) 160 CLR 583, 616. 79 The principle of benefit and burden does not extend to allow a person to in effect revivify an invalid covenant merely because the other party may have taken some benefit under it. That really seems to be all the complaint is in the instant case.

(6) Did the plaintiff breach fiduciary obligations he owed to the defendants as particularised in the further amended cross-claim? 80 Clause 9 of the partnership agreement dealt with duties of fidelity between the partners. Paragraph 7 of the further amended cross-claim essentially alleges that the plaintiff is in breach of his fiduciary duties as specified in that paragraph. Apart from (a) and (h) to which the plaintiff specifically pleaded, paragraphs (b) to (g) were denied. No evidence was led on any of these nor were there any submissions made in respect of them. I have assumed that the matter is no longer an issue. I mention it because I did list what I thought to be the issues in the transcript and no-one has told me this is no longer an issue in the case. If I have misunderstood the position then I can hear further submissions, but my view would be that the way the case was conducted there is just no evidence to support the allegations.

(7) Was the resolution of 10 August 1998 purportedly under clause 14(b) of the partnership agreement, valid and effective? 81 I now turn to consider whether the resolution of 10 August 1998 under clause 14(b) was valid and effective. 82 The simple answer must be that as clause 14(a) was ineffective and as clause 14(b) can only operate conditionally where the remaining partners reasonably suspect a breach of 14(a), 14(b) can have no operation. Thus no resolution can be passed under 14(b). 83 Because of this it is not necessary to consider whether "reasonably suspect" means "suspect on reasonable grounds" or that reasonable persons in the position of the partners could reasonably have that suspicion or that the partners must in fact have had that suspicion as reasonable people or that it is sufficient that the partners merely state such suspicion in the resolution. 84 I should note that the reference in clause 14(b) to 5.8(d) is obviously erroneous: probably the reference is to 5.8(c). 85 There is another reason why the resolution could not be effective. Clauses such as 14(b) are often themselves void in restraint of trade. This is illustrated by cases such as Wyatt v Kreglinger & Fernau [1933] 1 KB 793; Bull v Pitney-Bowes Ltd [1967] 1 WLR 273; Tuit v Australian Mutual Provident Society [1975] 1 NSWLR 158 and Marshall v NM Financial Management Ltd [1995] 1 WLR 1461 and on appeal [1997] 1 WLR 1527. 86 It would seem to me that 14(b) is part of an invalid package consisting of the whole of 14 and 14(b) itself is an invalid restraint of trade.

(8) Was clause 14(b) or the action taken thereunder void as a penalty?

(9) Is the plaintiff entitled to relief against forfeiture of the funds, the subject of the resolution of 10 August 1998? 87 These two matters involving relief against penalty and relief against forfeiture may be dealt with together. In view of my answer to question (7) they really do not arise, but as they have been thoroughly argued, I should say something about them. 88 I have put the matters under two separate headings because part of the argument dealt with relief against penalty and the other relief against forfeiture. As Rossiter says in his book Penalties and Forfeiture (Law Book Company, Sydney, 1992), the two doctrines commenced in the same way but they diverged somewhere to the end of the 18th century partly because of the fact that by legislation and otherwise common law courts commenced dealing with penalties at first concurrently with equity and later exclusively from equity whilst equity continues to deal with relief against forfeiture. This has meant that relief against penalties is now a matter dealt with without any regard to equitable discretions, whereas relief against forfeiture depends on discretionary considerations. 89 The distinction between the two is often blurred as Rossiter points out at pp 196 and following. The present situation is in the blurred area because the loss of rights under 14(b) has something to do with penalties because it is an assessment of the loss for actual or future breach of 14(a). On the other hand, it has some connection with relief against forfeiture because what is being dealt with is the actual property of the plaintiff which is forfeited upon the resolution being made. Relief against forfeiture, as Rossiter points out, mainly because of the objections of Lord Eldon that it not extend too far, usually only extends to relief against the forfeiture of interests of property usually real estate and chattels real. Modern English cases suggest that the doctrine should not be extended, though modern Australian cases are not quite so firm about that proposition. Probably the better analysis is the analysis made in Tuit's case referred to in my answer to question (7) above, and that is to look at these clauses as restraints of trade and only if they pass that test to consider whether there is a relievable forfeiture. 90 If there is a penalty, then in the days when equity used to administer the law as to penalties, a plaintiff would get relief against the penalty provided that he or she consented to an issue of quantum damnificatus going to a court of law to establish the damages that were actually caused by the relevant breach. Now that relief against penalties happens at law this same consequence follows; see AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170. As I said in Pascoe-Webbe v Nusuna Pty Ltd (1985) 3 BPR 9620, 9624, it is an over-simplification of the law to say that a clause providing for a penalty is void. The penalty cannot be sued for, but there is no bar for an action for damages for actual breach. The penalty clause, however, puts a cap on the quantum of the damages which may be obtained: Public Works Commissioner v Hill [1906] AC 368. 91 Before dealing with the problem directly, I should note that in cases where the happening of a certain event does not involve a breach of contract there is support for the proposition that no question of penalty versus liquidated damages arises; see O'Dea v All States Leasing System (WA) Pty Ltd (1983) 152 CLR 359, 367 and cases there cited. Neither set of counsel considered that the present case fell into this category. 92 It may be that one can get around the problem that different rules apply to penalties and relief against forfeiture by adopting the underlying proposition set out in Holdsworth's History of English Law Vol 5, p 330, that there is an equitable principle "that it is not fair that a person should use his legal rights to take advantage of another's misfortune, and still less that he should scheme to get legal rights with this object in view." 93 If this is the rule to follow, Mr Harrison SC says that the misfortune of the plaintiff arises not from the clause but was energised by his own act in taking Laurence & Laurence's clients with him to Barker Gosling. Although there is some truth in that proposition, the truth must not mask the real problem that the plaintiff's property is being taken away no matter what the real effect of his breach of clause 14(a) is, which could be very minor or could be very major. 94 In PC Developments Pty Ltd v Revell (1991) 22 NSWLR 615, 627, Mahoney JA said that penalty provisions fall into three main groups:

(b) payments in terrorem to induce contractual performance; and

Although Mahoney J also dealt with the Revell case under the head of relief against forfeiture, it would seem that both he and the other Judge who formed the majority, Meagher JA, considered that the case was one of involving a penalty. The facts were that a purchaser had the right to enter upon property prior to completion. He entered upon the property and did a considerable amount of work. He then failed to complete the contract and the vendor terminated, forfeited the deposit and wished to retain the work done by the purchaser without compensation. At first instance Cohen J held that compensation was payable, but on appeal Mahoney and Meagher JJA held that there was no penalty and that the purchaser was not entitled to anything, Clarke J would have relieved the purchaser against forfeiture of the deposit under section 55(2A) of the Conveyancing Act 1919. 95 Both Mahoney and Meagher JJA held on the facts of the particular case that there was no penalty. 96 Clarke JA said at pp 645-6 that the position is different in a penalty action if a party seeks to use the penalty doctrine of the sword. That is the case before me. In such a case his Honour said: "The claimant must do equity. Not only must the forfeiture clause be of a penal nature it must also be unconscionable for the person who holds the forfeiture to have acted unconscionably." 97 Applying the tests set out in Webster v Bosanquet [1912] AC 394 (PC) and Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79, 86-88, it would seem to me that the present forfeiture is a penalty. It is not liquidated damages because the extent of the loss suffered by the continuing partners may bear no relation at all to the amount that is forfeited. 98 If the partners wish to recover a sum, they could prove their damages by any actual breach up to the amount forfeited. However, as the plaintiff says that the matter is a penalty he must show that it is unconscionable for the forfeiture to take place. I cannot see anything in the whole of the circumstances of this case which would make it unconscionable for the sum to be retained. 99 If the matter is to be dealt with by way of relief against forfeiture, it is clear on the authorities that outside the classic cases of relief against forfeiture, the person seeking relief must show that it is an exceptional case. I cannot see how the current case is an exceptional case. Accordingly, if this matter had been relevant, I would not have found for the plaintiff on the issues of penalty or relief against forfeiture. (10) Should accounts be taken between the parties? 100 Theoretically, accounts should be taken between the parties. However, as the partnership agreement specifies the amount of the capital account and the amount of the current account is ascertained this would be a waste of time. There should simply be an order that the defendants pay this sum to the plaintiff.

(11) Should the defendants pay damages to the plaintiff, and if so, in what amount? 101 As no damages flow from the retention of moneys and that is all that the plaintiff will recover, and as interest may be payable under the Supreme Court Act, no damages are payable from the defendants to the plaintiff.

(12) Should the plaintiff pay damages to the defendants, and if so, in what amount? 102 Likewise there does not appear to be any call for any damages to be paid the other way on what has been established in this case. (13) What order for costs should be made? 103 In my view the plaintiff has substantially succeeded. It would follow that the defendants should pay the plaintiff's costs of the proceedings. However, it may be that the defendants have something to say about costs and I should not make a final ruling until I have heard them if they wish to be heard. 104 As the judgment will only be for a small money sum, I have directed my mind as to whether the costs should be on the District Court scale, but my current view is that the issues involved in this case were of sufficient complexity and they involve officers of this Court so that it was proper that the proceedings should be brought in the Supreme Court and that the Supreme Court costs should apply.

(14) What is the result of the case including what orders should be made? 105 I will merely stand the matter over for short minutes. I envisage that the only orders that should be made are for a money sum to be paid to the plaintiff, for costs and for return of the exhibits. 106 In accordance with my usual practice, I will provisionally fix a day for the short minutes to be brought in. Thursday 15 June at 9.50 am is fixed, but if counsel contact my Associate no later than Friday of the previous week, the date can be arranged to a time that suits everyone. 107 Finally, might I express my appreciation to all the counsel involved in this case for their assistance in rather difficult propositions of law. ***************

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