Miras v Hogan [1998] ACTSC 73 (29 July 1998)

Last Updated: 13 October 1999

Miras v Hogan [1998] SCACT 73 (29 July 1998)

CATCHWORDS

PARTNERSHIP - Oral partnership agreement - Terms of agreement never reduced to writing - Dispute as to terms of agreement - Proposed joint venture agreement - Fiduciary relationship - Breach of fiduciary duty - Equitable relief - Dissolution of partnership by the Court.

Birtchnell v Equity Trustees, Executors & Agency Co Ltd [1929] HCA 24; (1929) 42 CLR 384

Helmore v Smith (1886) 35 CD 436

Cutts v Holland [1965] Tas SR 69)

Lucas v Lucas [1962] Qd.R. 205

Partnership Act 1963, s.40(1)(d)

Higgins and Fletcher, The Law of Partnership in Australia and New Zealand (7^th Ed) LBC Information Services 1996

CONTRACT - Oral partnership agreement - Breach of contract - Equitable relief sought by both parties.

Cheshire & Fifoot's Law of Contract, (7th Australian Ed), Butterworths 1997

EQUITY - Equitable remedies

No. SC 444 of 1998

Coram: Master T Connolly

Supreme Court of the ACT

Date: 29 July 1998

IN THE SUPREME COURT OF THE )

) No. SC 444 of 1998

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: MICHAEL MIRAS

Plaintiff

AND: JOHN WILLIAM HOGAN

Defendant

ORDER

Judge Making Order: Master T Connolly

Where Made: Canberra

Date of Order: 29 July 1998

THE COURT DECLARES THAT:

1. The partnership be dissolved.

THE COURT ORDERS THAT:

1. The parties are given leave to be heard on the question of the form of the final Order consistent with giving effect to my reasons, and on the question of costs.

1. This is an application for orders for the dissolution of a partnership and consequential orders. Such an application would not normally be within my jurisdiction as Master, but the parties sought and obtained an order from Justice Crispin on 17 July that I may exercise the jurisdiction of the Court in this matter.

2. It is common ground that the applicant and the respondent formed a partnership at a meeting on 28 May 1998 with a view to jointly acquiring and subsequently developing an airport property near Cooma in New South Wales. The partners were successful at an auction for the sale of the property on 30 May 1998 and obtained the property on a bid of $302,000. A deposit of $30,200 was paid. The contract of sale stipulated that the contract be completed 93 days after the contract was signed on 30 May 1998. The terms of the partnership agreement were never reduced to writing.

3. It is also common ground that the partnership has now irretrievably broken down, and both parties seek the relief of an order of the Court dissolving the partnership. The only partnership property is the deposit paid on the contract, and the entitlement to proceed to execute the contract of sale on the property. Both parties agree that the normal general rule in relation to the dissolution of a partnership, which is that, in the absence of a provision to the contrary in the partnership agreement, all partnership property should be sold, should not apply here, and the court should instead exercise its discretion to make an order that one of the parties be entitled to proceed alone to purchase and develop the property as a sole proprietor after paying out the other party's contributions to the deposit. Each party argues that the other was in default of their obligations at law and equity, and that accordingly the Court should make an order in their favour allowing them to complete the sale.

4. It is perhaps not inappropriate to observe at the outset that this is an unfortunate matter, in that it has required the intervention of the Court, and the inevitable expense that will follow, to resolve a dispute which has arisen between two persons who, on the evidence, have been friends and acquaintances for some 20 years. However, it is apparent that this matter could not be settled otherwise than by litigation.

5. The applicant, Mr Miras, is a Canberra businessman and restauranteur, who operates a restaurant at Mawson. The respondent, Mr Hogan, is a Canberra businessman and pilot, who operates an aviation business based at Canberra airport. They have known each other for a long time, but have never before been involved in a business relationship.

6. Mr Hogan became aware some time in April 1998 that the Snowy Mountains Hydro Electric Authority was proposing to place the Authority's former airport on the market. This property, known as the Polo Flat Airport, comprised Lot 14, Airstrip Road, Cooma, and will hereafter be referred to as the property. He formed the view that this might be an attractive proposition, and obtained the contract documentation relating to the sale, which was to be by public auction on the premises on Saturday 30 May 1998.

7. The respondent approached the plaintiff at his restaurant on Thursday 28 May and proposed that they engage in a joint venture, as equal partners, in the purchase and development of the property. Mr Hogan said in his affidavit that he did not have available funds to pay a deposit which he thought would be in the vicinity of $20,000, and so he decided to approach Mr Miras. He says that he telephoned the plaintiff and gave him some information about the property and what he thought were its development prospects, and explained that he would need someone else to be involved. He says that he said words to the effect

"Would you like to join in a joint venture as equal partners to purchase the property."

The plaintiff essentially agrees with this.

8. The plaintiff and the defendant held a meeting that evening at the restaurant in the presence of Mr Vong, who is an accountant for both parties, and who acted as an accountant and financial adviser for this venture. The versions of what happened at this meeting vary. Mr Miras said that Mr Vong advised that the property would be a great purchase at $100,000, but that they should not go much beyond $200,000. Mr Hogan seems to agree that this was the general tenor of Mr Vong's advice. Mr Miras says that Mr Vong said that Mr Miras had adequate funds to cover his share, but that Mr Hogan's position was not so clear, as his financial statements had not been prepared. Mr Vong confirmed this version of the conversation. Mr Hogan says that he said that his funds were limited at the moment, and that Mr Miras replied with words to the effect

"Don't worry about that as I have plenty of funds available to cover the deposit."

9. The partners and Mr Vong had another meeting at a coffee shop at Dickson on the Friday evening, and on the Saturday they attended the auction. There was apparently one other serious bidder, and the bidding reached $302,000 when the partners were declared the successful bidders.

10. Despite forming the joint intention to enter into a partnership agreement to purchase a property whose value was expected to reach and possibly exceed $200,000, and to subsequently develop and deal in this land, the partners at no time committed their agreement to writing. Indeed, had they done so, it is most unlikely that they would have become involved in this litigation. There are two conflicting versions of the terms of the partnership. The plaintiff says that it was a partnership in equal terms, where the parties would jointly and equally fund the purchase and development of the property. The plaintiff says that when the deposit fell due on the fall of the hammer at the auction, he produced his chequebook and wrote a cheque for the full amount of the deposit, in the sum of $30,200, with the full expectation that before the cheque was cleared his partner would contribute his half of the funds. The defendant says that it was a partnership in equal terms, but that Mr Miras agreed that Mr Miras would provide the full deposit and Mr Hogan would only be called on to provide his half of the funds on settlement.

11. On Sunday 31 May a further meeting occurred at Mr Miras' restaurant, involving the partners and Mr Vong. Mr Miras says that Mr Vong told them they had paid too much for the property, and that he said that his share was covered. He says that Mr Hogan did not say anything about his share. Mr Hogan says that Mr Vong was concerned at the price and the consequent debt levels on the property. Mr Vong says that at that meeting he expressed concern at the price paid. He says that Mr Miras said that he could cover his share of the deposit cheque, and he says that Mr Hogan said words to the effect that

"I could get the money early in the week."

12. On Monday 1 June the partners flew to Cooma and inspected the property. Mr Miras says that it appeared to him that Mr Hogan was worried about his share of the finance for the purchase, but that he had enough for his share. Mr Hogan says that at this inspection he suggested to Mr Miras that they start negotiations with interested parties but that Mr Miras said that he was in no hurry and had plenty of security against which to borrow.

13. Mr Miras says that that evening he received a phone call from his bank manager to advise that his cheque had been presented for payment and that it had to be cleared before 10 am the next morning. There were insufficient funds available. Mr Miras says that he tried to contact Mr Hogan to collect his half share of the deposit to ensure that there were sufficient funds. He was unable to contact Mr Hogan, and tried again the next morning. He then spoke with Mr Hogan's partner, Mr Banks, and says that he said to him words to the effect

"Tell John that he has to come down with his money before 10 o'clock because if we can't deposit the funds the deposit cheque will not be passed by the bank."

14. He says that Mr Banks agreed to pass on this message. Mr Banks was not called to deny this conversation.

15. Mr Miras said that Mr Hogan came to his restaurant at 9.30 am and gave him two cheques plus cash totalling $4,014.86 and said words to the effect that that was all he had. Mr Miras said that he told the defendant that that was not enough, but as they only had about 15 minutes he withdrew some of his own funds from his business account to cover the deposit cheque. He said that he said to the defendant words to the effect

"I have covered the cheque but it has left me without funds to draw on to operate my business and that you have to bring me your share straight away."

16. Mr Hogan says that the message which he received was that he should attend at the bank with Mr Miras and bring all the funds he could, as Mr Miras only had $25,000 available. To the extent that Mr Hogan's recollection of the message he says he received from his partner Mr Banks is different from the message that Mr Miras says that he left, I make the observation that Mr Banks was not called, and I am entitled to draw from that the inference that his evidence would not have assisted Mr Hogan's case.

17. Mr Hogan says that he told Mr Miras all the funds he could produce at such short notice was the $4,014.86, and that Mr Miras said that would be enough and the bank manager would cover the rest. He agrees that Mr Miras complained that by having to transfer funds from his business account to cover the deposit he was inconvenienced, but says that Mr Miras expressed regret at having depleted funds by recently purchasing a car.

18. I note that Mr Hogan does not say that he was at all surprised at this call for funds. As his version of the agreement was that Mr Miras would provide the deposit and he would only have to contribute at settlement, Mr Miras' urgent call for, on Mr Hogan's version, all the funds he could provide, could well have been expected to provoke a response that this was not consistent with what Mr Hogan says was the terms of the agreement. On Mr Miras' version of the agreement and conversation, however, the call for Mr Hogan's half of the deposit is entirely explicable before cheque clearance.

19. The partners then proceeded to Cooma together to meet with Council officials and to consider development of the land. They also met with a neighbouring business, an abattoir, to discuss potential commercial use of the land by the abattoir.

20. A meeting was arranged on 4 June at the offices of Barker Gosling Solicitors where Mr Power was to take instructions on behalf of both partners to set up a company for the purchase and development of the property. Mr Miras says that at this meeting Mr Hogan was pushing for an immediate sell off of the property. Mr Hogan says that Mr Miras was vague at the meeting about what he wanted to do. Mr Miras says that Mr Power told the partners to come back when they had agreed amongst themselves what they wanted to do. Mr Miras says that as they left the meeting he again asked the defendant for his share of the deposit. Mr Hogan says that as they left the meeting Mr Miras said that he was concerned about the smell from the neighbouring abattoir, and said that he wanted nothing to do with the place, and said that Mr Hogan could have it by himself, and that he would leave his deposit until settlement and that Mr Hogan could then pay him back.

21. Mr Miras says that at this point, after what he says were repeated requests for Mr Hogan to contribute his half of the deposit, he lost faith in Mr Hogan, and feared that Mr Hogan would not be in a position to come up with his half of the deposit and the eventual purchase amount. He says that he consulted Mr Vong. Mr Vong says that Mr Miras told him of the failed meeting with Mr Power at which it had been proposed to set up a company with equal shares. Mr Vong says that he said words to the effect

"No way, he hasn't paid his money, I will incorporate a company with shares to issue in accordance with the ratio of contributed funds."

22. Mr Miras instructed Mr Vong to proceed accordingly, and on 6 June he delivered to Mr Hogan a document entitled "Notification of Process". This document proposed that a company would be set up to proceed with the purchase and development of the property, and that the company would have shares issued in the proportion of the capital which the partnership had contributed to the project by way of the deposit - that is that Mr Miras would hold 28,050 shares and Mr Hogan would hold 3,950 shares. I note that this amounts to 32,000 shares, whereas the deposit amount was in fact $30,200, and that the proportion does not precisely represent Mr Hogan's capital input, which was $4,019.86.

23. Mr Hogan rejected this proposition, and on 10 June wrote to Mr Vong saying that

"your statement does not represent a fair and equitable resolution of the respective rights and interests of the parties involved and portrays an extremely biased position which is totally unacceptable. Your "Notification of Process" is rejected. The Polo Flat project was my project, which I invited Mr Miras to join, not as majority shareholder but on equal terms. Mr Miras did not bid at the auction, I did, and it is my signature that appears on the purchase agreement as the successful bidder. Mr Miras signed the document as witness to my signature."

24. It is most unfortunate that in this, the first written exchange between the two partners - I will call it that even though Mr Hogan's letter was directed to Mr Vong - the respective positions of the partners was not set out clearly, or at all. It is Mr Miras' claim that the partnership agreement provided for equality of contribution, and that Mr Hogan repeatedly failed to make good on demands to contribute his half share of the deposit monies. This failure, on Mr Miras' case, amounts to a breach which entitles me to dissolve the partnership and order that Mr Miras be free to refund the small contribution made by Mr Hogan and proceed alone with the purchase. Mr Hogan says that the partnership was an equal partnership but with the provision that Mr Miras would contribute the deposit money, and so the notification of process amounted to a unilateral revocation of the partnership, and entitles me to grant the same relief, but in favour of Mr Hogan. There is no reference in the documents to the question of demands for deposit monies or agreement that one party will bear a disproportionate burden of the financial risk.

25. Mr Hogan says that he heard nothing further from Mr Miras or Mr Vong, and on 13 June prepared a "Position Statement" which he faxed to Mr Miras. He then phoned Mr Miras, who said that he needed three days to consider the document. This document proposed that the partners continue to jointly own the property, and contained the clause:

"Prior to settlement, the unfunded amount of the capital required to secure the property shall be determined together with the stamp duty owed. To this amount shall be added the sum of $22,170.28 which is the excess amount contributed to the deposit by Mr Miras above that which was contributed by Mr Hogan. Mr Miras shall be refunded the $22,170.28 and the new nett amount shall be borrowed by Messrs Miras and Hogan and funded jointly. Alternatively Mr Hogan shall refund to Mr Miras $11,085.14."

26. Mr Hogan says that he left the matter for a few days, and then visited Mr Miras at his restaurant. He says that Mr Miras said that he needed time and that Mr Hogan had not provided him with half of the deposit. Mr Hogan says that this was the first time that Mr Miras had asked him for half of the deposit. He says that he then offered Mr Miras the money but that Mr Miras refused, saying

"I now have my own accountant and my own lawyer, and I don't want your money."

27. Mr Miras denies that any money was offered and rejected. He says that he again asked for the deposit, and denies that Mr Hogan said that this was the first such request. Mr Delly, the plaintiff's brother in law, says that he was sitting at the next table, and heard the plaintiff raise his voice during a meeting with Mr Hogan that day and say words to the effect

"John I need the rest of the money now, we need the balance of the money now."

28. On 19 June Mr Miras' solicitor wrote to Mr Hogan. The wrong address was used, but the letter was sent by fax, and Mr Hogan agreed that he had received it. This letter made the allegation that

"I am instructed that following the auction and repeated requests by Mr Miras for your financial contribution towards the deposit, you finally provided him with two cheques (made payable to you and endorsed for payment to Metaxass Pty Ltd) in the sum of $4,014.86."

29. Again, it is regrettable that this letter does not expressly state the allegation that the partnership agreement required equal contribution of capital, but it does go on to propose again the establishment of a company to take the project forward with the shares issued in accordance with the capital contributions, or alternatively a buy out of Mr Hogan's share.

30. Mr Hogan did not reply to this letter, and said that he contacted his solicitor for advice. Mr Hogan says that he visited Mr Miras at his restaurant on the afternoon of Sunday 5 July 1998. Mr Hogan says that he wanted to resolve the matter without going to court, and says that Mr Miras refused to enter into meaningful negotiations. He says that he again offered to pay him an equal share of the deposit, and that this was rejected with Mr Miras saying

"I have some other funds now and am OK to operate."

31. Mr Hogan says in the next paragraph of his affidavit of 9 July 1998 that Mr Miras then said words to the effect

"It is your fault I cannot operate."

32. I note the inconsistency between a claim that Mr Miras said he could not operate and a claim that Mr Miras rejected an offer of the half share of the deposit because he had other funds and was "OK to operate".

33. Mrs Miras filed an affidavit which refers to this meeting. She said

"My husband said to John Hogan words to the effect that `come up with the money, I have asked you before and you come in here and say talk to me, what can I talk to you! Bring the rest of the money and we sit down and talk'. John Hogan then stood up and said to my husband words to the effect that `alright Mike if that's what you want I'll see you in court'. John then left the restaurant and I have not seen him or heard from him since."

34. Mrs Miras was available outside the court, and was to be called by the plaintiff until the defendant, through his counsel, stated that he did not require Mrs Miras for cross examination. I must take this to acknowledge that her statement can be taken to be true and stands uncontradicted. On this basis, I must find that her version of events supports her husband's version, and is inconsistent with the defendant's version that he again offered payment which was rejected.

35. Even without the presence of this uncontradicted evidence, I find having regard to all of the evidence that I prefer the version of events put forward by the plaintiff, which is supported by the accountant Mr Vong and is consistent also with the evidence of Mr Delly and Mrs Miras. This version of events is also consistent within itself and with the financial circumstances of Mr Miras as outlined by his accountant. I do not accept that Mr Miras ever rejected an offer for payment of the funds by Mr Hogan. I find that the partnership agreement was an agreement for an equal partnership in the purchase and development of the property, with an obligation on each party to contribute equally. This is the most obvious starting point for such an agreement, and the type of arrangement which Mr Hogan says was the agreement, where one party would agree to take all of the capital risk up to settlement, would require some external corroboration. I find also, by accepting the evidence of Mr Miras and Mr Vong, that the plaintiff made repeated requests for Mr Hogan to comply with the agreement and contribute his half of the deposit money, and Mr Hogan repeatedly failed to do this, up to and including the meeting of 5 July. Mr Vong was confused about the date of the 28 May meeting, which he put in June, but I do not consider this to reflect adversely on his general credibility.

36. Mr Hogan's version of events is internally inconsistent. He claims that Mr Miras at the 5 July meeting rejected his offer of his share of the deposit saying that he had funds, and then complained of being unable to operate his business. He claims that after the meeting with Mr Power on 4 June Mr Miras wanted to back out of the project (on the unusual terms that Mr Miras would allow his funds to continue to provide the deposit until settlement). This claimed desire to abandon involvement is quite inconsistent with all of Mr Miras' subsequent behaviour, where he sought to obtain a majority ownership of the project, and now seeks relief by way of the ability to proceed as the sole purchaser.

37. Counsel for Mr Hogan argued that, even if I was to find against him on the facts, I should still find in his favour on the question of law. He argued that, even if the agreement was in terms that required Mr Hogan to contribute half of the deposit amount, his failure to do so did not amount to a breach of the contract as time was not of the essence, and that his failure did not entitle Mr Miras to in effect unilaterally rescind the agreement by issuing the Notification of Process. He argues that this document, and Mr Miras' admission that he has continued with his own efforts to redevelop the property without consulting Mr Hogan, amounts to bad faith by Mr Miras, and that as a matter of equity the court should find against Mr Miras and order that Mr Hogan be able to proceed to complete the purchase in his own name, subject to paying Mr Miras out at settlement.

38. Counsel for Mr Miras argued that, if I found the facts to be essentially as set out by Mr Miras, which I have done, it should follow that I would find that Mr Hogan has failed to comply with his obligation under the partnership agreement, and further that his continual failure to supply his share of the deposit funds after repeated requests amounts to a breach of a partner's obligations of good faith. Accordingly, she argued that as a matter of equity the court should find against Mr Hogan and order that Mr Miras be able to proceed to complete the purchase in his own name, subject to any payment to Mr Hogan of his share of the deposit, which she argued should be offset by expenses which Mr Miras has incurred in the project to date.

39. I am satisfied that the partnership agreement to purchase and develop the property required the parties to contribute equally to the purchase expenses, which included the deposit due on the fall of the hammer. I note that a partnership agreement for the express purpose of acquiring land or an interest in land does not come within the statutory provisions which require contracts in respect of land to be evidenced in writing. (Higgins and Fletcher, The Law of Partnership in Australia and New Zealand, Seventh Edition at 91). As this matter demonstrates, however, it is clearly a most unwise procedure to commit to a partnership agreement for such a purpose without evidencing the terms in writing.

40. As the relationship between the parties was, by common consent, a partnership (the terms of which I have found to have required an equal contribution to the expenses of the venture), it follows that the fiduciary obligations of a partnership existed between the parties. The fiduciary obligations between partners are of prime importance, and are stressed in the authorities and the textbooks.

"The relation between partners is, of course, fiduciary. Indeed, it has been said that a stronger case of fiduciary relationships cannot be conceived than that which exists between partners. `Their mutual confidence is the lifeblood of the concern. It is because they trust one another that they are partners in the first instance; it is because they continue to trust one another that the business goes on.' (per Bacon VC in Helmore v Smith (1886) 35 CD 436 at 444)"

per Dixon J in Birtchnell v Equity Trustees, Executors & Agency Co Ltd [1929] HCA 24; (1929) 42 CLR 384 at 407.

41. In the circumstances of the present case the failure of the defendant to honour his obligation to contribute his half of the deposit must amount to a significant breach of the fiduciary obligation, notwithstanding its legal effect as a breach of contract. As the relief sought by both parties in this matter involves a question of equity, it seems that it is unnecessary to analyse what effect this conduct has as a matter of contract law, although as I have found the term of the agreement to be that the partners would contribute equally to the deposit, which falls due on the fall of the hammer, this would seem to be an agreement the performance of which on time is reasonably to be implied, and so failure to produce the deposit share could amount as a question of contract law to a breach of an essential term and so repudiation by Mr Hogan. (Cheshire & Fifoot's Law of Contract, seventh Australian edition, 21.14).

42. Failure to contribute to the venture by way of contributing the full share of the deposit amounts in my view to a breach of the fiduciary relationship sufficient to justify a declaration that the partnership be dissolved. This is so both as a matter of law (e.g. Cutts v Holland [1965] Tas SR 69) and by operation of the Partnership Act 1963. Section 40(1)(d) of that Act provides that the court may order that a partnership be dissolved where

"...a partner in a firm -

(i) wilfully or persistently commits a breach of the partnership agreement; or

(ii) otherwise so conducts himself in matters relating to the business of the firm that is [sic] not reasonably practicable for the other partners to carry on the business in partnership with him."

I note in passing that the print of the Partnership Act appears to have deleted the word "it" which appears in the equivalent clause in the Partnership Act of other states and is necessary to make sense of the provision.

43. I am satisfied that the defendant's conduct fits this criteria. I do not find the contrary argument, that excuses the defendant's failure to commit his required funds on the basis that the provision requiring equal contributions is not one where time is of the essence of the agreement, and says that the plaintiff's conduct in seeking to form a new arrangement with the defendant which reflects the reality of their respective capital contributions is itself a breach of the partnership agreement which would justify dissolution, convincing.

44. Having found that there is conduct which justifies a declaration that the partnership should be dissolved, I must turn my attention to the appropriate order. The parties agreed that this is not a case where the normal consequence of a dissolution would be appropriate. They agree that I should be guided by Gibbs J in Lucas v Lucas [1962] Qd.R. 205 where His Honour said at 209:

"There is no doubt that the general rule is that, in the absence of provision to the contrary in the partnership agreement, on the dissolution of a partnership all the property belonging to the partnership shall be sold. However, the court, in ordering a sale, has a discretion in the exercise of which it will determine the mode of sale most beneficial to the parties."

45. The only asset of this partnership is the deposit on the sale. The parties were agreed that, as the sale must proceed by 30 August 1998 under the terms of the contract, a forced sale of the rights contained in this asset would not be viable. They agreed that I should find, as Gibbs J did in the Lucas case, that

"The present case seems to me to be one of those exceptional cases in which it is proper to depart from the ordinary course"

(at 212) and make an order which would permit one of the parties to proceed with the purchase of the property.

46. It follows from my findings that I would favour the making of an order that would allow the plaintiff to proceed with the purchase. Counsel suggested that I should make my findings available on the question of dissolution of the partnership and then hear the parties on the form of the final order consistent with giving effect to my reasons, and this I will now do.

I certify that this and the fourteen (14) preceding pages are a true copy of the Reasons for Judgment herein of the Master, Mr T Connolly.

Associate:

Date: 29 July 1998

Counsel for the Plaintiff: Ms J Godstchalk

Instructing Solicitors: Les Klekner

Counsel for the Defendant: Mr R J Arthur

Instructing Solicitors: Bernard Collaery & Associates

Dates of hearing: 23 July 1998

Date of judgment: 29 July 1998