Ryder & Anor v Frohlich & Anor

• 1- IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2314 / 03 RYDER & ANOR v FROHLICH & ANOR JUDGMENT 1 HIS HONOUR: The first-named plaintiff Mr Ryder is an investment banker. The second-named plaintiff, Protected Equity Investment Pty Ltd, (Protected) is a private company wholly owned by Mr Ryder's family trust. 2 The first-named defendant Mr Frohlich is also an investment banker and the second-named defendant, Coastal Capital Ltd (Coastal) is his family company - although, as will be seen, at relevant times Mr Ryder was a director, but not a shareholder. 3 By statement of claim filed on 11 April 2003 the plaintiffs (Mr Ryder and Protected) alleged they entered into a partnership with the defendants (Mr Frohlich and Coastal) in or about April 1999 whereby all the parties would "conduct an asset management business with respect to 'absolute return investments' " with assets of the partnership belonging to the four parties in equal shares. 4 It is alleged that the partnership agreement was oral and made between Mr Ryder on his own behalf and on behalf of Protected and Mr Frohlich on his own behalf and on behalf of Coastal. 5 The plaintiffs alleged that a hedge investment fund referred to as Coastal Magma Diversified Performance Fund (the "Diversified Fund") was created in or about June 2000 and that it formed part of the partnership business and has remained part of it to the present time. 6 They also alleged that in September 2002 another investment fund Coastal International Equity Fund (the "Equity Fund") was created and that it formed part of the partnership business and has remained so since that time. 7 In the alternative it is alleged that if the Equity Fund did not form part of the partnership business it was a business of the same nature as and competing with the business of the partnership without the consent of the plaintiffs in circumstances requiring the defendants to account for and pay over to the partnership all profits made by the defendants in that business (see s 30 Partnership Act 1892). 8 The plaintiffs alleged that it was an express term of the partnership agreement between all parties that the net revenue of the partnership business after commissions was to be distributed 50 percent to the plaintiffs and 50 percent to the defendants. It is alleged that the defendants have refused to permit the plaintiffs to receive their 50 percent of the net revenue of the partnership business and that on 14 February 2003 the defendants by letter repudiated the agreement by maintaining that the plaintiffs were not entitled to an equal share of the business. 9 The plaintiffs seek a declaration that the business known as the "Equity Fund" has since its creation formed part of the business of the partnership between the plaintiffs and defendants and or, in the alternative, that the defendants account to the partnership for profits made by them from the management of the Equity Fund. The plaintiffs also seek an order pursuant to s 35 of the Partnership Act that the partnership be dissolved, the business be wound up under the direction of the Court and that Mr Fiorentino appointed receiver and manager. 10 The defendants deny the partnership as alleged or at all. They do not admit that any concluded agreement was made between any of the parties but if there was a contract it was between Mr Ryder and Mr Frohlich and it was what was described as a "unincorporated joint venture agreement" and not relevantly a "partnership". 11 The defendants also allege that however the agreement be characterised (ie as a partnership or joint venture agreement and who were the parties to it) it was a fundamental term of the contractual relationship that Mr Ryder and Mr Frohlich would "contribute equally in terms of time and effort to the business". 12 The defendants allege that in early March 2001 Mr Ryder commenced fulltime employment with Salomon Barney Smith and that until the time his employment was terminated in or about October 2002 he never claimed to have had an equal entitlement to share in the profits made in the management of the Diversified Fund and, by his conduct, had waived any entitlement that he might otherwise have had and was estopped from asserting an entitlement as was made in the statement of claim. 13 The defendants deny that the Equity Fund formed any part of the business of the partnership or joint venture and deny that the management of it was relevantly management of the business of the same nature and competing with the management of the Diversified Fund. 14 In a further alternative it is alleged by the defendants that the agreement, if any, entered into between the plaintiffs and the defendants was varied on 2 March 2001 when Mr Ryder took up fulltime employment with Salomon Barney Smith with the consequence that thereafter neither plaintiff had any interest in the business beyond 50 percent of its value as at 2 March and that the plaintiffs or either of them were not entitled to a share of any revenue of the business (or be liable for any expenses) other than those attributable to subscribed funds to the Diversified Fund received before March 2001. Finally the defendants submit that any agreement in existence between the parties was terminated by the departure of Mr Ryder to take up fulltime employment. 15 The defendants also cross-claimed against the plaintiffs, claiming, in effect, that if there was an agreement between the parties and the defendants as claimed by the plaintiffs monies were owing by the plaintiffs to the defendants in an amount of $32,433. It was alleged that as at March 2001 the plaintiffs were liable to their share of the expenses being $60,766.37 less $16,515.32 paid and $11,817.57 being their 50 percent share of the revenue of the business up until that time. 16 After the proceedings commenced I was asked not to determined any issue concerning the monetary claims one party might have against the other other than making a determination as to liability. For example the defendants claim that the business, however characterised, was in fact worthless on 2 March 2001 which was the reason why Mr Ryder took other employment. However the plaintiffs deny that assertion. The parties agreed that if this matter has to be determined it will be determined by the Master in accordance with appropriate grounds being established for that to happen. 17 The first matter for determination is the characterisation of the legal relationship between all the parties or some of them and the terms of that relationship. Mr Young on behalf of the plaintiffs has submitted that all four parties formed part of the partnership entered into for the purpose of conducting an asset managed business with respect to "absolute return" investment. Mr McHugh on behalf of the defendants has submitted that there was no concluded agreement at all between any of the parties but if there were it was an agreement between Mr Ryder and Mr Frohlich and that in any event, it was a joint venture and not a partnership. 18 Mr McHugh has submitted that Mr Young should be bound by the way he conducted his case which was that all four parties were in partnership and if that case is not made out the claim should be dismissed. He has submitted that although a view may be open that the partners (or co-venturers) "were relevantly Mr Ryder and Mr Frohlich and not the four parties nominated by the plaintiffs" I should not make a determination concerning that matter beyond explaining why it is, if it be the fact, that I am not satisfied that the partnership is as the plaintiffs have submitted. 19 Mr McHugh points to the circumstance that the onus is on the plaintiffs to establish the relevant partnership relationship and if they have not done so their case should stand dismissed. There is, in my view, some substance in this submission. Mr Young's case was not put on any alternative basis (other than with respect to the status of the Equity Fund which can be ignored for present purposes). His case was that there was a partnership between Mr Ryder and Protected on the one hand and Mr Frohlich and Coastal on the other. He did not seek to make any alternative case. 20 As will be seen I have concluded that there was a legal relationship between Mr Ryder and Mr Frohlich but not a partnership between Mr Ryder and Protected on the one hand and Mr Frohlich and Coastal on the other and that I have formed that conclusion largely because Mr Ryder himself referred to the circumstance that there were two "partners" (ie Mr Frohlich and Mr Ryder) and an arrangement which allowed either one of them to "substitute" their corporate entity as they pleased. 21 However, as it seems to me, although Mr McHugh has claimed that it would be unfair to determine any issue other than that posed for determination in the circumstances of this case I think it appropriate not only to give reasons why, if a legal arrangement existed, it was not between the four parties as alleged by the plaintiffs but also to make a finding as to whether a legal relation existed between any of the parties and the terms of that arrangement with, if appropriate, consequential relief. 22 The second matter for determination is having identified the legal relationship between persons in 1999 and 2000 what was the effect of Mr Ryder's departure to take fulltime employment in circumstances where, on any view of the matter, he could not render the same services in terms of time and effort as he had rendered previously - bearing in mind that Mr Ryder's contribution was skill, experience and expertise together with a liability for certain expenses. 23 Mr Frohlich and Mr Ryder agreed in early 1999 to create what has been referred to as an "absolute return" investment fund and to attract subscribers to it. As was explained to me "absolute return" investment funds are those that are managed in a way that ensures that movements in the equity bond or property markets do not substantially influence the return on investment. 24 Before turning to these issues I make findings concerning the credit worthiness of Mr Ryder and Mr Frohlich because there is a significant conflict in the oral evidence as to the parties to and terms of any arrangement. In particular Mr Ryder claims and Mr Frohlich denies that the third draft of what he referred to as the "joint venture" was the basis of the arrangement and that it was a partnership involving all four parties. There is also a dispute between the parties concerning the amount of time and effort Mr Ryder and Mr Frohlich were to contribute to the arrangement. 25 Mr Ryder became a non executive director (and not a shareholder) of Coastal. Coastal was the "responsible entity" within the meaning of s 601FA on the Corporation Law having the management of the Diversified Fund which was established in about June 2000. 26 In March 2001 the Diversified Fund was not profitable. Mr Ryder took up fulltime employment with Salomon Barney Smith. It was Mr Frohlich's case, that Mr Ryder, although remaining a director of Coastal, simply walked out of the arrangement when he took on fulltime employment elsewhere. 27 Mr Frohlich has maintained that however the arrangement be characterised both he and Mr Ryder came under an obligation to contribute equally in terms of time and effort to the business the subject of the arrangement and that that is what happened until March 2001 when Mr Ryder decided to take fulltime employment elsewhere. The Diversified Fund was not then profitable notwithstanding the efforts made by Mr Frohlich and Mr Ryder. 28 It was in Mr Ryder's interest, as he thought, to deny that equality of time and effort was a term of the arrangement and to downplay what his and Mr Frohlich's activities had been with respect to the arrangement up until March 2001 - ie he was reluctant to concede that he had worked the number of hours alleged by Mr Frohlich. 29 Initially Mr Ryder rejected the suggestion put to him in cross-examination that he had required of Mr Frohlich from the outset that both parties would contribute equally in terms of time and effort. Later he was compelled to concede he was wrong. He also initially rejected the suggestion that words in a recital of a draft document viz that he and Mr Frohlich had agreed to work together reflected any part of the agreement between them. Again he later conceded that that had indeed been a term of the agreement. 30 Mr Ryder's concessions referred to above derive not from a reflection that he might have been mistaken but because he was confronted with an email in which he made it clear that what he wanted was an arrangement of equality "as to time and money". He also denied in cross-examination that he told Mr Frohlich he was "fed up" with his earlier partner because he would not contribute equally in terms of time and effort. Later he had to concede his evidence was incorrect because it contradicted an earlier email he had sent to Mr Frohlich. 31 Mr Ryder was also anxious to advance a case that he was relevantly a partner of Coastal. Indeed he produced a CV dated November 2000 in which he had referred to himself as "a partner". This was the only CV he produced. Later it turned out that he had created a number of CVs only one of which used the word "partner" and that was the one he produced. Moreover he had not sent the CV he produced to any prospective employer. In the other CVs extracted from the disk which was later tendered in evidence he referred to himself as a director of Coastal (which was true) - one of which was sent to a prospective employer. 32 In cross-examination he denied that Mr Frohlich had had a heart attack in later 2001 believing his complaint to have been "a pinched nerve or something". Later he had to agree that he knew Mr Frohlich had a heart attack and indeed he had used the words "heart attack" himself in earlier correspondence. 33 He also claimed that when he lost his job with Salomon Barney Smith he denied he had had a conversation with Mr Frohlich concerning whether he would take legal proceedings against that company. In evidence Mr Ryder said he had left on good terms and denied, in terms, that he had ever contemplated suing Salomon Barney Smith after he had lost his job. Later he had to concede that that evidence was wrong.

34 At all times Mr Ryder appeared to have a firm understanding of the direction he wished his evidence to go and that any facts or circumstances inconvenient to that course were denied or ignored by him. 35 Neither Mr Frohlich nor Mr Ryder are practising lawyers and neither had legal advice prior to exchanging draft agreements concerning what they were proposing to do in 1999 and 2000. The first draft agreement refers to five parties (the four plaintiffs together with another proposed party "Harbour Fund"). None of the drafts were ever finalised. However aspects of them are relevant in the determination of the agreement ultimately concluded. For example that Mr Frohlich and Mr Ryder would both work together to establish a fund and obtain subscribers for it and would contribute equally in terms of time and effort. 36 In evidence Mr Ryder conceded that, in effect, the arrangement (to use a neutral term) was between Mr Frohlich and himself and that the business (again to use a neutral expression) of the arrangement was to advise selected clients interested in "absolute return" investment funds. 37 On behalf of the defendants Mr McHugh has submitted that I should not characterise the arrangement as a partnership involving Mr Ryder and Protected on the hand and Mr Frohlich and Coastal on the other. He has also submitted that even if there were relevantly an arrangement between Mr Ryder and Mr Frohlich it was not a partnership. Mr McHugh has submitted that the indicia of partnership was absent. For example there was no joint property and no joint liability and the parties did not mutually indemnify each other. 38 However, as it would seem to me, the arrangement entered into and which resulted in the establishment of the Diversified Fund was relevantly a partnership within the meaning of the Partnership Act 1892 in which partnership is defined as "the relation which exists between persons carrying on business in common with a view of profit". 39 I reject the submission that the partners of the partnership included Coastal and Protected. Mr Frohlich and Mr Ryder carried on the business of establishing the Diversified Fund and advising Coastal with respect to it. 40 Protected was not part of the business nor was Coastal otherwise than it (Coastal) was the responsible entity of the Diversified Fund. The circumstance that the draft refers to a "joint venture arrangement" does not deny, in law, the characteristic of a "partnership". On one view of the matter all partnerships are joint ventures although, of course, not all joint ventures are partnerships. 41 Accordingly I reject the plaintiffs' claim that there was a partnership consisting of the plaintiffs and the defendants. I find that there was a partnership between Mr Ryder and Mr Frohlich and the partnership business was the establishment of a "absolute" fund and attracting subscribers to it. I also find that both Mr Ryder and Mr Frohlich contributed equally in terms of time and effort and that as a result of Mr Ryder taking up fulltime employment with Salomon Barney Smith Mr Frohlich then had to work 80 hours per week. 42 As at March 2001 the Diversified Fund had not made a profit and hence there was no revenue to share between the parties. It was because of this that Mr Ryder decided to take fulltime employment with Salomon Barney Smith at a salary which he claimed at the time he believed to be about $500,000 per year. Thereafter and although Mr Ryder remained a director (but not an executive director and not a shareholder) of Coastal and attended to some "compliance" meetings he really contributed nothing more to the business. He made a contribution by way of presentation to the AvSuper on 23 March 2001 but, as he agreed, he was under no obligation to do it. He played no part in the establishment of the Equity Fund or in attracting subscribers to it. After he left, the Diversified Fund became more profitable because of additional subscribers but this had nothing to do with any contributions from Mr Ryder. 43 The question I must determine then is what effect Mr Ryder's departure to work fulltime for Salomon Barney Smith had on the partnership between him and Mr Frohlich. 44 Mr Young on behalf of Mr Ryder has submitted, as I would understand it, that because Mr Frohlich did not in March 2001 then and there, in terms, tell Mr Ryder that he was in breach of a fundamental and essential condition of the contractual arrangement I should hold that the partnership continued until such times as Mr Frohlich, in terms, accepted Mr Ryder's repudiation. A consequence of that argument was that while Mr Ryder remained employed with Salomon Barney Smith (or any other employer) working fulltime and earning $500,000 per year but remaining a director of Coastal (and probably after he ceased being a director) he would be entitled to half the net profits generated by the work done by Mr Frohlich. 45 That Mr Ryder was in no position to contribute to the venture as he had previously done is demonstrated by the circumstance that he has agreed that his estimated hours at Salomon Barney Smith were about 50 to 60 hours per week and that on an odd "difficult week" he might "put in very long hours, more than 50 to 60".

46 Mr Ryder estimated he spent between one and one and half hours a week in discharge of his obligations as a director of Coastal. Mr Frohlich's evidence is that Mr Ryder has overstated his involvement with Coastal and I accept his evidence. 47 At the present time Mr Ryder's case is that he (or he and Protected) is entitled to the profits of managing the "absolute return" funds which include the Diversified Fund and the Equity Fund. It is not, in my opinion, without significance that until Mr Ryder commenced proceedings against Mr Frohlich (and Coastal) he never thought he had an interest in anything other than the Diversified Fund. For example he knew of the proposal to establish the Equity Fund as early as March 2002 and not, as he has said, in November 2002 and after he had lost his job with Salomon Barney Smith.

48 Due to Mr Frohlich's efforts investment capital in the Diversified Fund rose from $4 million as it was in March 2001 when Mr Ryder left to a little over $30 million at the present time. Another person is now doing the work Mr Ryder would have done had he remained and he spends approximately 35-36 hours per week. It appears that the Equity Fund has captured a number of investments. I have not dealt with these matters beyond finding that Mr Ryder took no part in the additional subscribers to the Diversified Fund or the establishment of the Equity Fund and subscribers to it. I have found he contributed equally with Mr Frohlich to the establishment of the Diversified Fund and to attracting subscribers to it until March 2001. 49 Mr Ryder has denied that taking fulltime employment with Salomon Barney Smith had the consequence that the arrangement he had with Mr Frohlich was thereafter at an end. As I have said he attempted to downplay his pre-departure contribution and that evidence is rejected. It is also not without significance that after his employment with Salomon Barney Smith was terminated in or about October 2002 he offered to return to the business with Mr Frohlich "if you want me to". That evidence does not sit comfortably with his assertion that he had merely moved from a fulltime partner to a part-time partner. 50 Mr Frohlich was cross-examined extensively by Mr Young concerning what he said and did when Mr Ryder told him he was leaving on 2 March 2001 to take up fulltime employment with Salomon Barney Smith. He agreed he did not say "I terminate this joint venture". He said he considered that it was self-evident that the joint venture had terminated because he (Mr Ryder) "had bailed out and gotten a job". 51 It was submitted by Mr Young that although Mr Ryder had, on any view of the matter, put it out of his power to contribute to the partnership business I am bound in law to conclude that because Mr Frohlich did not then and there say to Mr Ryder in effect "you are breaching an essential term of our arrangement and I accept your repudiation" the partnership continued on until, presumably, Mr Frohlich did just that. Support for that submission is said to derive from Photo Production Ltd v Securicor Ltd [1980] AC 827 and Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500. These cases were concerned with what has been referred to as the discarded doctrine of fundamental breach in its application to exclusion clauses in contracts. In Securicor the House of Lords rejected the doctrine of fundamental breach which appeared to have been adopted by it in Swiss Atlantic Société d'Armement Marine SA v N V Rotterdamsche Kolen Centrale (1967) 1 AC 361. In Darlington Futures the High Court referred to its past authoritative decisions that the approach to be adopted when construing exclusion and limitation clauses did not depend upon a doctrine of fundamental breach. But in my respectful opinion neither Securicor nor Darlington Futures preclude Mr Frohlich in the present proceedings from maintaining that Mr Ryder by his conduct in March 2001 put an end to the agreement.

52 In Chitty on Contracts it is said "A renunciation of a contract occurs when one party by words or conduct evinces an intention to perform, or expressly declares that he is or will be unable to perform, his obligations under the contract in some essential respect. The renunciation may occur before or at the time of performance ……Short of such an express refusal or declaration, however, the test is to ascertain whether the action or actions of the party in default are such as to lead a reasonable person to conclude that he no longer intends to be bound by its provisions. The renunciation is then evidenced by conduct …. Even a deliberate breach, actual or threatened, will not necessarily entitle the innocent party to treat himself as discharged, since it may sometimes be that such a breach can appropriately be sanctioned in damages. If the contract is entire and divisible, that is to say, if it is expressly or impliedly agreed that the obligation of one party is dependant or conditional upon complete performance by the other, then refusal to perform or declaration of inability to perform any part of the agreement will normally entitle the party in default to treat himself as discharged from further liability ( Chitty on Contracts 28th ed pars 25-017). 53 In the present case Mr Ryder by his conduct put it out of his power to perform an essential and fundamental term of the agreement he had with Mr Frohlich. It is not merely that he undertook some work inconsistent with what he was obliged to contribute to the partnership. What he did was to put it out of his power entirely to perform his obligations. 54 I think the observation of Holroyd J in Jorgensen v Boyce (1896) 22 VLR 408 are apposite to the present case. His Honour referred to a working partnership between a plaintiff and a defendant to mine for gold - a type of relationship relevantly not dissimilar to the relationship between Mr Frohlich and Mr Ryder. 55 The learned Judge said: "The plaintiff went away on 3 November 1894 and Neils Jorgensen also went away on 24th November saying that the prospects were not good enough and that he could not stop. What then was the plaintiff to do. His partner had gone, and that partner's substitute had also gone. Was he to work the claim alone, incurring all the toil, risk and expense without any chance of having it shared by his partner - while, if he got any gold, he would have to save half for the m an who did nothing? In my opinion the plaintiff ceased to be a partner when he ceased to do his share of the work either by himself or by his brother and it seems extraordinary to me that he should now come forward and ask for a share of the proceeds." 56 My conclusions are therefore that the partnership between Mr Ryder and Mr Frohlich came to an end on 2 March 2001 notwithstanding that Mr Ryder remained a non-executive director (but not a shareholder) of Coastal. As is seen he did nothing to advance the business other than to attend sme compliance meetings and to a presentation shortly after he left which he himself has admitted he was under no obligation to do. 57 In these circumstances it is unnecessary for me to deal with the submission concerning the Equity Fund. It was not part of the partnership business because it did not come into existence until after Mr Ryder had left and the partnership was dissolved. Probably it would be characterised as an absolute investment fund but whether it relevantly competed with the Diversified Fund is not a matter I have to decide. Evidence has been presented to the effect that the two funds attract different investors. The Equity Fund is confined to international investors and is directed to equity markets whereas the Diversified Fund has a wider range of investments and attracts retail as well as institutional investors. It is submitted that the Diversified Fund is an absolute return fund in what has been described as a "narrow sense" whereas the Equity Fund is an absolute return fund in a "broader sense". I accept Mr Young's submission that they were absolute return funds and that had the Equity Fund not been in existence the Diversified Fund might have attracted institutional subscribers that otherwise went to the Equity Fund and that although the greater number of investors in the Diversified Fund are what are referred to as retail investors most of the funds subscribed have come from institutional investors. 58 It would not follow, I think, that because both Funds could be described as "absolute return" funds and that there may be some common pool of investors they would necessarily be the same nature and in competition with each other. But however that may be I do not have to decide that matter because as I have concluded the partnership was dissolved on 2 March 2001 and at that time both parties went their own way. The Equity Fund was not established until almost 18 months later and it was the result of Mr Frohlich's own efforts. 59 The final question for determination is what order I should make. Bearing in mind the way this matter has been dealt with and the way I was asked to approach the question of liability I would remit this matter to the Master to determine or to take accounts as at March 2001 as to the entitlements of Mr Frohlich and Mr Ryder. Mr Frohlich's case is that at that time the Diversified Fund having only approximately $4 million worth of investment was not profitable and only became so after he obtained more subscribers much later in the year and, he says, of course, that the Equity Fund had no input from Mr Ryder at all. However Mr Young on behalf of Mr Ryder disputes that the business was worthless in March 2001 - his submission being, I think, that even although it was not then making a profit the investments it had had the potential to generate profits and hence had a value. 60 My conclusions are as follows:

1. There was no legal agreement to which Coastal, Frohlich, Ryder and Protected were parties either as a joint venture or in partnership.

2. I declare that a partnership did exist between Mr Frohlich and Mr Ryder an essential and fundamental term of which was that each would contribute equally in terms of time and effort to the establishment of the Diversified Fund and for subscribers for it.

3. I further declare that the conduct of Mr Ryder in March 2001 had the consequence that thereafter the partnership was dissolved.

4. The matter should be remitted to the Master to determine as at the date of dissolution of the partnership (being March 2001) whether monies were owing to Mr Ryder referable to the value of the business at that date and whether Mr Ryder owed monies to Mr Frohlich - being those referred to in the cross-claim to which I have already referred but have not, at the request of the parties, determined.

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