Laidlaw v Hillier Hewitt Elsley Pty Ltd [2009] NSWCA 44 (12 March 2009)

Last Updated: 1 June 2009

NEW SOUTH WALES COURT OF APPEAL

CITATION:
Laidlaw v Hillier Hewitt Elsley Pty Ltd [2009] NSWCA 44
This decision has been amended. Please see the end of the judgment for a list of the amendments.

FILE NUMBER(S):
40840/07

HEARING DATE(S):
09/09/08

JUDGMENT DATE:
12 March 2009

PARTIES:
Joanne Lee Laidlaw (Appellant)
Hillier Hewitt Elsley Pty Ltd (First Respondent)
Paul Joseph Hewitt (Second Respondent)
Edwin Hillier (Third Respondent)
Scott Peter Elsley (Fourth Respondent)

JUDGMENT OF:
Beazley JA Macfarlan JA Handley AJA

LOWER COURT JURISDICTION:
Supreme Court

LOWER COURT FILE NUMBER(S):
5977/04

LOWER COURT JUDICIAL OFFICER:
Rein J

LOWER COURT DATE OF DECISION:
6 July 2007

LOWER COURT MEDIUM NEUTRAL CITATION:
Laidlaw v Hillier Hewitt Elsley Pty Ltd [2007] NSWSC 727

COUNSEL:
A Bell SC, P Bolster (Appellant)
M Ashhurst (Respondents)

SOLICITORS:
Verekers Lawyers (Appellant)
Hewitts Commercial Lawyers (Respondents)

CATCHWORDS:
CONTRACT - Negotiations between solicitors subject to contract - whether informal arrangement by parties themselves intended to be immediately binding
PARTNERSHIP - Winding up - Negotiations between solicitors subject to contract for agreed winding up - informal arrangement between parties themselves for division of the firm's goodwill - whether intended to be immediately binding

LEGISLATION CITED:


CATEGORY:
Principal judgment

CASES CITED:
ABC v XIVth Commonwealth Games (1988) 18 NSWLR 540
Barrier Wharfs Ltd v W Scott Fell & Co Ltd [1908] HCA 88; (1908) 5 CLR 647
Baulkham Hills Private Hospital Pty Ltd v G R Securities P:ty Ltd (1986) 40 NSWLR 631
Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153
Brogden v Metropolitan Railway Co (1876-77) 2 App Cas 666
Carruthers v Whitaker [1975] 2 NZLR 667 (CA)
Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523
F & G Sykes (Wessex) Ltd v Fine Fare Ltd [1967] 1 Lloyds Rep 53
Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1977] EWCA Civ 3; [1978] QB 574 (CA)
Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR at 11,117
Love & Stewart v S Instone & Co (1917) 33 TLR 475
Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353
Pagnam Spa v Feed Products Ltd [1987] 2 Lloyds Rep 601 (CA)
Popat v Shonchhatra [1997] EWCA Civ 1966; [1997] 1 WLR 1367 (CA)
Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149
Senanayake v Cheng [1966] AC 63
Sinclair Scott & Co v Naughton [1929] HCA 34; (1929) 43 CLR 310
Stephenson v Dwyer [2008] NSWCA 123
Didymi Corp v. Atlantic Lines and Navigation Co Inc (The Didymi) [1989] 2 Lloyds Rep 108
G R Securities v Baulkham Hills Private Hospital (1986) 40 NSWLR 631
Vroom BV v Fosters Brewing Group Ltd [1994] VR 32

TEXTS CITED:
RC I'Anson Banks (ed), Lindley & Banks on Partnership (Great Britain: Sweet & Maxwell, 18th ed, 2002), 275-6, 518

DECISION:
ORDERS
(a) Appeal allowed in part.
(b) Order the first respondent to pay the appellant’s costs of the appeal.
(c) Set aside declarations and orders 1 to 3 and 8 to 10 made on 24 July 2007.
(d) In lieu thereof, order that the proceedings be remitted to the Equity Division to make a further determination as to the parties’ entitlements to the goodwill of the partnership and to make such further orders including as to costs at first instance as it considers appropriate.



JUDGMENT:

- 27 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40840/2007

BEAZLEY JA

MACFARLAN JA

HANDLEY AJA

Thursday 12 March 2009

Joanne Lee LAIDLAW v HILLIER HEWITT ELSLEY PTY LIMITED
(ACN 003 965 651) and Ors

Catchwords

CONTRACT - Negotiations between solicitors subject to contract - whether informal arrangement by parties themselves intended to be immediately binding.

PARTNERSHIP - Winding up - Negotiations between solicitors subject to contract for agreed winding up - informal arrangement between parties themselves for division of the firm's goodwill - whether intended to be immediately binding.

Headnote

The parties were formerly partners in an accounting firm carrying on practice in Cessnock. The partnership was dissolved by notice from the appellant on 31 March 2004. Disputes arose and the appellant commenced proceedings for a winding up by the Court on 18 January 2005. By the end of the trial in July 2007 the parties had reached agreement on all issues other than goodwill and plant and equipment.

The parties had been negotiating, subject to contract, through their solicitors since May 2004. The Judge found that in July they themselves made and performed a separate and informal agreement for the division of the firm's goodwill by allocating certain clients and their files to the appellant which was binding on her. He also dismissed the appellant's claim to charge the respondents with more than the auction value of the firm's plant and equipment it had retained. On appeal:

Held

(1) The Judge's decision on the value of the plant and equipment was correct;

(2) (By majority) The informal arrangement in July 2004 for the handing over of the files of certain clients to the appellant was only provisional, entered into in anticipation of a contract to be formed by an exchange of deeds, and did not create an immediately binding contract for the division of the firm's goodwill.

Orders

(a) Appeal allowed in part.

(b) Order the first respondent to pay the appellant’s costs of the appeal.

(c) Set aside declarations and orders 1 to 3 and 8 to 10 made on 24 July 2007.

(d) In lieu thereof, order that the proceedings be remitted to the Equity Division to make a further determination as to the parties’ entitlements to the goodwill of the partnership and to make such further orders including as to costs at first instance as it considers appropriate.

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40840/2007

BEAZLEY JA

MACFARLAN JA

HANDLEY AJA

Thursday 12 March 2009

Joanne Lee LAIDLAW v HILLIER HEWITT ELSLEY PTY LIMITED
(ACN 003 965 651) and Ors

JUDGMENT

1 BEAZLEY JA: I agree with Macfarlan JA.

2 MACFARLAN JA: I have had the advantage of reading in draft the judgment of Handley AJA and gratefully adopt his Honour’s description of the factual circumstances giving rise to this appeal. I agree with his Honour’s conclusion as to the plant and equipment issue and with the reasons he gives for that conclusion. I respectfully disagree with his Honour’s conclusion as to the goodwill issue. I turn therefore to express my own views on that matter.

3 The critical question which arose in connection with the goodwill issue was the identification of the basis upon which the client files and associated chattels referred to in the without prejudice letter from the appellant’s solicitors of 1 July 2004 were handed over by the first respondent to the appellant later in July. The evidence of Ms Turner, the appellant’s solicitor, established that this occurred on or about Monday, 19 July 2004.

4 Handley AJA’s view is that the conduct of the parties on that day in transferring the files (and associated chattels) brought into existence and substantially performed a contract for division of the client base of the firm in satisfaction of the appellant’s rights to its goodwill. This reflects the substance of the primary judge’s view also.

5 The decision of the House of Lords in Brogden v Metropolitan Railway Co (1876-77) 2 App Cas 666 establishes that the conduct of parties may give rise to a contract. It was made clear however that the character and circumstances of the conduct must indicate unambiguously that the parties intended to contract. For example the Lord Chancellor said about the conduct in question in that case that “no explanation can be given of it unless it refers to the contract in question” (at 678) and that the conduct was “referable in my mind only to the contract ...” (at 680). Lord Hatherley spoke in similar terms about the conduct:

“It does establish a course of action on the part of the Plaintiffs of such a character as necessarily to lead to the inference on the part of the Defendants that the agreement had been accepted on the part of the Plaintiffs, and was to be acted upon by them; and they did act upon it accordingly” (at 686).

6 Likewise, Lord Selborne said that “it appears to me that every single circumstance points quite unequivocally to this agreement” (at 689).

7 In Empirnall Holdings Pty Ltd v Machon Paull [1988] 14 NSWLR 523, McHugh JA (with whom Samuels JA agreed) said in relation to conduct held to give rise to the contract in question in that case that “it is not an acceptable conclusion that Machon offered to perform the work on some basis other than that contained in the written document” (at 535F-G). He went on to indicate why other explanations of the conduct were not open.

8 In Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153 Ipp AJA (with whom Mason P agreed) said, citing Lord Hatherley in Brogden, that “for conduct to amount to implied acceptance of an offer, it must be ‘of such a character as necessarily to lead to the inference on the part of the Defendants that the agreement had been accepted on the part of the Plaintiffs, and was to be acted upon by them’” (at [162]).

9 Not only must the conduct point to the existence of a contract but it must point to the existence of the contract in the terms alleged in the proceedings. As stated by McHugh JA in Empirnall:

“The ultimate issue is whether a reasonable bystander would regard the conduct of the offeree, including his silence, as signalling to the offeror that his offer has been accepted” (at 535).

10 In this case, the evidence bearing directly upon the basis of the handover was very limited. First, as Handley AJA points out in [30], Mr Hewitt described it in evidence as having occurred “in response to” the appellant’s solicitor’s letter of 1 July. This evidence was to my mind of limited significance as it was conclusory in form and did not describe any relevant communication which occurred between the parties.

11 Secondly, there occurred on Friday 16 July the telephone conversation between the appellant’s solicitor and the first respondent’s solicitor referred to by Handley AJA in [46]. Ms Turner’s uncontested evidence as to that conversation was that it included words to the following effect:

“Me: ‘Phil, did you get that deed I emailed to you yesterday? We accepted some of your amendments. Do you have instructions about this yet?’

Mr Hewitt: ‘Not yet. My clients have instructed me that there are some issues with GST that they are looking into. I’ll get back to you about that.’

Me: ‘Okay. Jo is concerned about the clients on her proposed list as they may become dissatisfied. She is keen to collect the files of the clients she will be looking after so they don’t go elsewhere.’

Mr Hewitt: ‘I’ll get instructions about that.’” (Blue Appeal Book 4D-J).

12 Thirdly, there is the facsimile sent later that day by the appellant’s solicitor and, fourthly, there is the conversation which occurred on Monday 19 July between the appellant’s solicitor and the first respondent’s solicitor. Both of these are referred to by Handley AJA (see [47]-[49]).

13 In my view, the handover of the client files and other chattels on 19 July did not give rise to a contract in terms of the 1 July 2004 letter, in its original form or as amended. One possible explanation for what occurred was, as the primary judge held was the case, that the parties impliedly agreed to bring into existence a contract as to the division of goodwill. However, to my mind an equally available explanation for what occurred was that the parties, and in particular the appellant, intended that the clients in question should be serviced by the appellant pending conclusion of the contractual negotiations between the parties, lest the goodwill of the former partnership associated with them be lost or diminished. As the appellant submitted, what occurred on 19 July “had a commonsense practical motivation of minimising the prospect that goodwill would be lost through clients leaving, especially in circumstances where the First Respondent was complaining about the ‘burden’ of maintaining the client base” (as to that complaint, see the appellant’s solicitor’s letter of 22 June 2004, para 7). This objective might have been achieved by either an interim or a permanent assumption of the servicing role by the appellant. The evidence did not exclude the former as being what was intended.

14 True it is that neither party said that the servicing by the appellant of the files from 19 July was to occur on an interim basis only but neither was it said that the transfer of the files would conclude contractual arrangements as to division of goodwill. As was said by Giles JA (with whom Hodgson and Campbell JJA agreed) in Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149, “businessmen not uncommonly act upon an anticipated contractual relationship prior to the contract” (at [117]). As indicated above, here there was a particular reason why this might occur.

15 I see it as important that the initial request for the handing over of the files was made by the appellant’s solicitor in the very same telephone conversation, that is, that of 16 July, in which the first respondent’s solicitor indicated that he did not yet have instructions as to the appellant’s proposed amendments to the draft deed and said that there were “some issues with GST” which his clients were “looking into”. This was no doubt a reference to clause 9 of the draft deed which dealt with the topic of GST. There was no suggestion in that conversation, nor in any other communication prior to the handover of 19 July, that the draft deed which had been the subject of negotiations was no longer contemplated to be executed. Indeed, the conversation of 16 July demonstrated a continuing intent of the parties to contract by means of a deed setting out the terms of their bargain. That conversation further demonstrated that not only had the proposed deed not been executed but also that the contents of the draft deed were not yet the subject of agreement between the parties. It was not a case of the goodwill being only a subsidiary aspect of the matters dealt with in the draft deed. If that had been the case an agreement outside the deed as to division of goodwill and a contemplation that a deed would still be executed might have been able to stand together. However, the division of goodwill was a, and arguably the, principal subject of the draft deed. The contention that the parties concluded a contract as to division of goodwill by transferring the files is in my view inconsistent with their continued intention to seek to agree the terms of, and execute, a deed in light of the fact that the division of goodwill figured so prominently in the then current draft of the deed.

16 A written request for the handover of the partnership files which the appellant intended to service was made later on Friday 16 July 2004, by the facsimile of that date from the appellant’s solicitor to the first respondent’s solicitor. The facsimile showed a continuing contemplation on the part of the appellant of the execution of a deed and did not suggest either expressly or impliedly that the handing over of partnership files would obviate the need for a deed. There was reference in the conversation between the solicitors on Monday 19 July to the collection of the client files but no elucidation of the basis upon which that was intended to occur.

17 Handley AJA has pointed out in [60]-[63] that the reference in the appellant’s solicitor’s letter of 16 July to the collection by the appellant of “the partnership files of the clients she will service ...” reflects the wording of the appellant’s solicitor’s letter of 1 July which spoke of the appellant taking over “the service of the clients of the Partnership set out in Schedule 2 to this Deed” as part of the appellant’s offer to contract as to the division of goodwill. I do not consider that this reference indicates that the parties were intending to make a contract as to division of goodwill on 19 July, as distinct from joining in the performance of an act in anticipation of the later making of such a contract (see the reference above to the dictum of Giles JA in Sagacious Procurement). The communications between the solicitors of 16 and 19 July to my mind point towards an intent on the part of the parties still to contract by means of the execution of a deed, the terms of which had not yet been agreed, and to do so notwithstanding that client files were to be handed over. In my view it can at least be said that the handing over of the client files (and associated chattels) was equivocal conduct which did not point sufficiently clearly, in the manner required by Brogden and later authorities, to an intent to conclude a contract by that conduct.

18 The primary judge in [56] saw the files as having been handed over either to facilitate the appellant maintaining the files pending sale to a third party or “on a permanent basis if that was how entitlement to goodwill was to be dealt with”. He took the view that the latter was the case and said that his view was reinforced by the fact that chattels comprising office furniture and a computer were delivered with the files. With respect, I do not see that these were the only possibilities. I regard the handing over of the files to the appellant for her to service them pending conclusion of the contractual arrangements which were contemplated to provide for her to retain the files permanently as a sensible explanation for what occurred which was not excluded by the evidence. The fact that the computer and furniture were handed over was not inconsistent with the handover occurring on this basis because the appellant’s offer letter of 1 July had said these were necessary for her to have in order to “service the List”.

19 The primary judge attached some significance to the fact that the appellant sent a pro forma letter to the clients to whom the files related, telling them that she had taken over the files. This apparently occurred on or about 26 September 2004 as that is the date of the pro forma letter in evidence. This was however over two months after the handing over of the files and the parties had in the meantime been continuing their negotiations as to the terms of the draft deed without a successful outcome. The fact that the letters were sent only after negotiations had become protracted in my view precludes their despatch being regarded as supportive of the first respondent’s characterisation of the handover of files in mid-July. Indeed, on one view the fact that such letters were not sent soon after the handover occurred might be seen to favour the appellant’s position.

20 I should add in relation to the primary judge’s reasons that the first respondent contended on the appeal that the appellant had not at first instance attached significance to the telephone conversation of 16 July which assumes importance in the reasons I have given above. The references given by the appellant in response to that submission demonstrate that indeed little reference was made to that conversation before the primary judge. Nevertheless I do not see any reason, nor was any reason suggested, why the appellant should not be able to place reliance upon that conversation on appeal.

21 For the reasons I have given, my view is that the appeal should be allowed as to the goodwill issue. As the plant and equipment issue was very much a subsidiary issue in terms of the time occupied on appeal, my view is that the appellant’s success on appeal on the goodwill issue should entitle her to her costs of the appeal.

22 I propose the following orders:

(a) Appeal allowed in part.

(b) Order the first respondent to pay the appellant’s costs of the appeal.

(c) Set aside declarations and orders 1 to 3 and 8 to 10 made on 24 July 2007.

(d) In lieu thereof, order that the proceedings be remitted to the Equity Division to make a further determination as to the parties’ entitlements to the goodwill of the partnership and to make such further orders including as to costs at first instance as it considers appropriate.

23 HANDLEY AJA: This is an appeal from the decision of Rein AJ in a partnership suit. On 1 July 1999 the appellant became a 50% partner in Hillier Hewitt Elsley, an accounting firm which then carried on practice at Cessnock. The other partner was Hillier Hewitt Elsley Pty Limited a company owned by those individuals in equal shares. The appellant paid $230,000 to acquire her share in the partnership. The other partners carried on another accounting practice at Belmont where the appellant was not involved.

24 On 24 February 2004 the appellant gave notice that she wished to resign from the partnership. It became common ground that this was not a retirement on 26 weeks notice under cl 20 of the partnership agreement and that the partnership was dissolved on 31 March that year.

25 In May the appellant commenced as Group Management Accountant with NIB Health Funds but resigned in July to resume private practice on her own account.

26 The partnership agreement provided in cl 24 that if the partnership was terminated the assets should be sold and a general account taken and it provided for the application of the proceeds.

27 The appellant’s notice of 24 February generated extensive correspondence, initially between the parties, and then between their solicitors. Ultimately on 18 January 2005 the appellant commenced proceedings for the winding up of the partnership which provoked a cross-claim which sought to enforce an agreement made in July 2004 for the distribution of the assets in the winding up.

28 The proceedings came on for hearing before Rein AJ in July 2007. The parties were then at issue over goodwill, work in progress, employee entitlements, plant and equipment and debtors. During the hearing the parties were able to reach agreement on everything except goodwill and plant and equipment.

29 Rein AJ set out the history of the negotiations between the solicitors from 19 May 2004 onwards and found in para [66] that the parties had entered into an agreement on the terms of a letter of 1 July 2004 from the appellant’s solicitors to the first respondent’s solicitors subject to a variation in respect of an advance of $30,000 to be made to the appellant.

30 The dispute as to the plant and equipment, the bulk of which was retained by the continuing partner, related to its valuation. It was common ground that its sale value at auction was $25,000, but the appellant argued that the higher written down value in the last partnership accounts should be adopted. The judge held that this was no indication of the market value and adopted the auction figure.

31 Dr Bell SC, who appeared with Mr Bolster for the appellant, challenged both findings and claimed that the value of the appellant’s share of goodwill and of the retained plant and equipment as at 31 March 2004 should be determined by an associate judge.

Goodwill

32 The relevant correspondence commenced with a letter from the respondent’s solicitors of 19 May 2004 (Blue 201) which suggested that the gross fees (clients) of the former partnership and those the respondent wished to retain should be identified. At that stage the parties were contemplating that half of the total fees would be sold for the appellant’s benefit and the other half would be retained by the first respondent (the respondent).

33 The appellant’s solicitors responded positively on 24 May (Blue 203) with some qualifications, which were substantially accepted by the respondent’s solicitors on 25 May (Blue 205). On 7 June the respondent’s solicitors sent a break-up of the “fees” in two schedules, those to be retained by the respondent (“Paul’s” fees) (Blue 207-8) and the appellant’s allocation (Blue 209). The former totalled $390,204 exclusive of GST, the latter $414,847 on the same basis (Blue 249, 245).

34 On 11 June the appellant’s solicitors in a letter of that date (Blue 214) stated that the appellant believed “the schedule contained a number of material omissions” and the proposed allocation of fees was unfair and did not represent a 50/50 split. On 17 June (Blue 218) they wrote enclosing a spreadsheet prepared by the appellant “pointing out what she regards as errors and misdescriptions in the list”. The spreadsheet is not in evidence.

35 Arrangements were then made for a without prejudice meeting with a view to resolving these differences and this was held, together with the solicitors, on 21 June.

36 On 22 June the appellant’s solicitors wrote (Blue 221) following the failure of the parties to reach overall agreement on the division of the client base. The letter recorded general agreement on a number of subsidiary matters.

37 The without prejudice letter from the appellant’s solicitors of 1 July (Blue 227) adopted a new approach “regarding our client’s entitlement to goodwill in the partnership”. The appellant offered to “take over the service of clients on her clients’ list as prepared by HHE for the meeting on 21 June (the list) ... excluding the Cessnock and Kurri Masonic Retirement Villages and Sundry Tax clients (valued by your client at $100,000)”.

38 The letter identified a number of requirements of the appellant to enable her “to service” her list, including the clients’ files, all electronic records, her former computer, two desks, a credenza, three filing cabinets and a payment of $30,000 by 31 July “as an advance on our client’s entitlement under cl 24 of the partnership agreement”.

39 On 2 July Miss Turner from the appellant’s solicitors was told by the respondent’s solicitor that he anticipated instructions to accept the offer and “wrap up [the matter] with a Deed” (Blue 229). On 8 July the respondent’s solicitors in a faxed transmission (Blue 230) agreed in principle except that payment of the $30,000 was to be subject to funds being collected by 31 July.

40 The following day Miss Turner was told by the respondent’s solicitor that there should not be a problem with the $30,000 but “we’ll need to get the Deed in place first” (Blue 3,231). She was not cross-examined about this. The respondent’s solicitor did not recall this part of the conversation (Blue 5) and the judge accepted the evidence of the appellant’s solicitor para [53], [54] and [58].

41 On 13 July the appellant’s solicitor sent a draft deed by fax (Blue 232), and asked for the lists of clients to be sent to them for “the preparation of Schedules 1 and 2 to the Deed”, and for Goanna Print to be added to the appellant’s list. Clause 3(b) of the draft (Blue 235) provided for the respondent “to retain the service of the clients ... in Schedule 1”, and sub-cl (c) provided that the appellant “in full satisfaction of [her] entitlement to goodwill will take over ... the service of the clients ... in Schedule 2”. This echoed the letter of 1 July in which the appellant offered to “take over the service of the clients” in her list (Blue 227).

42 The respondent sent the client lists by email to the appellant’s solicitors that day (Blue 243).

43 On 14 July the respondent’s solicitor's redraft sent to the appellant’s solicitor did not change cl 3(b) and (c) (Blue 253). He appended to cl 9 dealing with GST the question “Isn’t this a going concern sale?” but did not change the clause.

44 On 15 July the appellant’s solicitor sent a further draft with a letter stating that the appellant agreed to the amendments incorporated in that draft.

45 The clients in Schedule 1 of that draft to be retained by the respondent now included the Masonic Villages and the tax clients with a total attributed value of $534,598. The attributed value of the clients to be retained by the appellant in Schedule 2, including Goanna Print, was $331,046. The difference of some $200,000 was apparent once the lists were read with those supplied on 7 and 9 June, and it was caused by the removal of clients from the appellant’s list at her request.

46 On 16 July, a Friday, the appellant’s solicitor spoke to the respondent’s solicitor (Blue 4,273) who said that he did not have instructions on the amendments sent on 15 July and his clients had “some issues with GST they are looking into”. The following conversation then occurred:

Miss Turner: “Jo [the appellant] is concerned about the clients on her proposed list as they may become dissatisfied. She is keen to collect the files of the clients she will be looking after so they don’t go elsewhere.”

Mr Hewitt: “I’ll get instructions about that”.

47 At 4.00pm that day, after this conversation (Blue 4), the appellant’s solicitor sent a fax with a draft of the joint letter (Blue 272) to be sent to the appellant’s clients. It referred to the dissolution of the partnership and stated “we have agreed on which clients would be best serviced by each of us”. The fax referred to the letter “to the clients to be taken over by [the appellant]”, (Blue 271a) and continued:

“Our client is keen to collect the partnership files of the clients she will service from the Cessnock office so that she may commence working on their matters on 20 July 2004. Please obtain instructions from your client regarding arrangements for our client to attend the Cessnock office to collect the files.”

48 On the following Monday, 19 July, the appellant’s solicitor was told by the respondent’s solicitor (Blue 4,274):

“Our clients have already made arrangements between them for [the appellant] to go and collect files from the firm today. She has also picked up the equipment she requested, as well as a chair.”

49 The respondent’s solicitor agreed that this was said (Blue 35). There was no relevant cross-examination. Although the arrangements for the collection of the files were made by the appellant with Mr Paul Hewitt on behalf of the respondent, she did not give evidence about what was said then or when the files and the other chattels were collected on the Monday.

50 Mr Paul Hewitt gave limited evidence on this issue (Blue 39). He said that in or about July 2004 “in response to” the appellant’s solicitors letter to his solicitors of 1 July “I caused ... to be released to [the appellant] the files and chattels referred to in that letter, gave her access to the firm’s computer, and took the other steps he there referred to”. He was not cross-examined about this. This was important evidence because in the letter of 1 July the appellant’s solicitor had proposed that she take over the “service” of the clients in her list in satisfaction of her entitlement to goodwill.

51 The judge concluded para [66]:

“In my view objectively the parties ought be construed as having entered into an agreement, the essential terms of which were set out in the letter of 1 July, and varied by agreement that the $30,000 was to be advanced on exchange of deeds.”

52 He then held in para [67] that the division of the files was intended to deal with the partners’ entitlements to goodwill on a final basis.

53 Dr Bell SC relied on two important factual matters in support of his argument that the judge was in error in finding that a concluded informal contract was made when the files and other chattels were collected by the appellant.

54 The first was the statement by the respondent’s solicitor on 9 July that the parties would “need to get the Deed in place first” reiterating his earlier statement on 2 July about “wrapping up the matter with a deed”. These reinforced the ordinary presumption that the negotiations between the solicitors were “subject to contract”.

55 The second was the statement by the respondent’s solicitor on Friday 16 July that there were “some issues with GST that [the respondent] was looking into”. The judge did not refer to this evidence and Dr Bell submitted that this omission invalidated his finding.

56 The judge found in para [66] that the consensus between the solicitors emerging on 13, 15 and 16 July “coupled with a request for the files (and implicitly for the equipment)” pointed to “an invitation to proceed ... notwithstanding that not all the terms had as yet been agreed ... which objectively was agreed to”.

57 On 20 July (267-8) the respondent’s solicitors said that the partnership would be liable for GST of $30,000 - $40,000 on a supply to a partner. The correspondence and exchange of drafts dragged on until 26 October without agreement being reached.

58 Dr Bell opened his submissions to this Court by speaking to a written summary of his key propositions which, slightly edited, was as follows:

“1. A contract may come into existence through conduct: Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523, 535; Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153, 177-9.

2. The conduct is to be viewed in the light of the surrounding circumstances and in the commercial context in which the dispute arose: ABC v XIVth Commonwealth Games (1988) 18 NSWLR 540,584.

3. The conduct must be of such a character as necessarily to lead to an inference that an agreement has been made and its terms: Empirnall (1988) 14 NSWLR at 535; Brambles (2001) 53 NSWLR at 195.

4. It is an error to suppose that merely because something has been done there is a contract in existence which has thereby been partly performed: Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR at 11,117.

5. Business people not uncommonly act on an anticipated contractual relationship prior to the contract being formed: Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149 para [117].

6. Subsequent conduct is admissible to determine whether a contract has been entered into: Sagacious (above) paras [69], [99]-[106]

7. Subsequent correspondence showing that the parties continued in negotiation negatives a concluded contract: Barrier Wharfs Ltd v W Scott Fell & Co Ltd [1908] HCA 88; (1908) 5 CLR 647; Sagacious (above) para [104].

8. The retention of lawyers supports the view that the parties intended to contract through formal documentation: Carruthers v Whitaker [1975] 2 NZLR 667 CA, 671.

9. It is one thing for the parties to settle what are to be the terms of an agreement, if it should be made, and quite another to make that agreement: Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647, 650 .

10. The use of the words “in principle” ordinarily requires a conclusion that there will be no binding contract until formal contracts are executed and exchanged: Baulkham Hills Private Hospital Pty Ltd v G R Securities P:ty Ltd (1986) 40 NSWLR 631, 636; Stephenson v Dwyer [2008] NSWCA 123 at paras [106], [126], but this will not be so in every case: Baulkham Hills (above) at 628.

59 These propositions are settled law and were not challenged by Mr Ashhurst, counsel for the respondent. Dr Bell also submitted that the files were handed over on a provisional basis to enable the appellant to service those clients and preserve that part of the firm’s goodwill. Although the parties acted in the confident expectation that a contract would be made they should not be understood as intending to make a contract then and there.

60 Dr Bell relied on the conversation of 16 July (Blue 4) when the appellant’s solicitor said that the appellant was concerned that her proposed clients might become dissatisfied, and she was keen to collect the files of the clients “she will be looking after so they that don’t go elsewhere”.

61 Her solicitor’s letter later that day (Blue 271a) referred to the files of the clients “she will service”. Counsel suggested that this “service” was akin to the “maintenance” of these “fees” (the clients) by the respondent after the appellant left the practice on 17 May when their sale to a third party was contemplated (eg letter 19 May Blue 201).

62 This submission overlooks the conventional meaning for the expression “service of the clients” which both solicitors adopted. The letter of 1 July (227) made a “proposal regarding our client’s entitlement to goodwill ... Our client will take over the service of the clients on her list ...”. as the basis for a final settlement of the goodwill issue. This is confirmed by the draft Deeds of 13, 14 and 15 July, which contained cl 3(c) in these terms:

“... in full satisfaction of [the appellant’s] entitlement to Goodwill under the Partnership Agreement on the dissolution of the Partnership:

(i) [the appellant] will take over and [the respondent] will hand over the service of the clients of the Partnership set out in Schedule 2 to this Deed.”

63 The reference in the letter of 16 July to the collection of “the partnership files of the clients [the appellant] will service” did not indicate that this would be on an interim or provisional basis. It is fully explained by the appellant’s wish to commence working on the files on 20 July.

64 Dr Bell also relied on the objections to the fairness of the proposed allocation of clients raised by the appellant’s solicitors on 11 and 16 June (214, 216), and in the spreadsheet they sent to the respondent’s solicitors on 17 June (218).

65 The appellant’s complaints were discussed at the without prejudice meeting on 21 June and were referred to in her solicitors’ letter of 22 June (221). They were not raised in their letter of 1 July (227), although this sought adjustments to the lists which appeared to favour the respondent.

66 The appellant’s statement of claim pleaded (Red 4) that on or about 21June the respondent represented to the appellant that the allocation of the clients in the two lists was a 50% split calculated on a fee basis. The statement of claim further alleged (Red 4-5) that the lists were inaccurate in that:

“(a) Client values attributed to the clients that were to be kept by the first defendant were below their actual value;

(b) Client values attributed to clients of the plaintiff exceeded their actual value;

(c) Clients were missing from the list;

(d) It was inconsistent with fees earnt by the partnership in previous years.”

67 These allegations of innocent misrepresentation were denied in the defence and were not pursued at the trial. If established they would have entitled the appellant to rescind the agreement for the division of the goodwill found by the trial judge: Senanayake v Cheng [1966] AC 63.

68 The only evidence from the appellant in support of these allegations was (Blue 28) that when she read the lists sent to her on 7 June she was “immediately concerned” about the errors and omissions. Dr Bell disclaimed any reliance on misrepresentation (T45) but said that the appellant was dissatisfied with the division of the client base (T7, 32, 33, 33-4, 42, 45-7).

69 The position adopted by the appellant and her solicitors between the offer of 1 July (227) and the collection of the files on 19 July was that she was willing to accept the clients in what became Schedule 2 to the draft Deed, subject to the amendments referred to in the letters of 1, 13 and 15 July, in satisfaction of her “entitlement to goodwill in the partnership”.

70 Dr Bell’s legal propositions, quoted above, establish that the negotiations between the solicitors did not give rise to a binding contract. They were subject to a Deed being entered into and nothing that passed between them altered that fact. There was no binding contract on the evening of 16 July.

71 The inability of the solicitors to bring a binding contract into existence did not prevent the parties from doing this. The Court has been given very little information about their direct dealings between the afternoon of 16 July and the hand over of the files and other assets on 19 July. There is no evidence of any express agreement, or even of an assertion by the appellant, that the files were only being accepted on a provisional basis, without prejudice to her right to claim a more favourable division of the firm’s client base later.

72 This evidentiary gap must be evaluated in the light of the acceptance by the appellant and her solicitors of the list of clients to be retained by her which, adjusted as agreed, showed a value which was approximately $200,000 less than that shown in the respondent’s list.

73 As I have already held, the communications in July up to the 19th evidenced the then willingness of the appellant to accept a transfer of the clients on her list as amended in satisfaction of her entitlement to goodwill. The appellant must have received the files for all the clients on her list because she has never complained otherwise.

74 Partners can agree on a distribution in specie of the assets of the partnership, in whole or in part, in total or partial satisfaction of their rights on a winding up, subject to the rights of creditors. They are also free to agree on the valuation of particular assets and liabilities. This is what has happened in relation to work in progress, debtors, and employee entitlements. It was not suggested that such partial distributions or agreements were legally ineffective in the absence of an overall agreement or settlement.

75 The relevant principles are summarised in Lindley & Banks on Partnership 18th ed, 2002 at pp275-6, and p518:

“Where it is intended that the partnership assets will be divided between the partners in specie this fact should be clearly stated ... Some assets are obviously more susceptible of division than others. Goodwill, expressed in terms of client connection, is a case in point, as Lord Lindley observed in a passage written in relation to solicitors’ partnerships, but which is equally applicable to firms carrying on business in other spheres:

‘... as between the solicitors themselves, it is competent for them to agree that, if they dissolve partnership, the clients of the old firm, and all their deeds and papers, shall be divided amongst the partners and such an agreement will be enforced.’”

76 The authors state at page 518:

“... in the absence of some other agreement (express or implied) all the members of an ordinary partnership have identical and equal interests in its assets and ... no partner is entitled, without the concurrence of all his co-partners, to insist that a particular asset is vested in him either during the continuance of the partnership or following its dissolution.”

This principle was applied in Popat v Shonchhatra [1997] EWCA Civ 1966; [1997] 1 WLR 1367 CA, 1372.

77 Dr Bell relied heavily on his propositions 4 and 5 above para [38] to support his submission that the conduct of the partners of 19 July did not establish the existence of a binding contract for the division of the client basis of the firm.

78 In Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153-178 Heydon JA quoted the following from a judgment of McHugh JA:

“... it is an error to suppose that merely because something has been done then there is therefore some contract in existence which has thereby been executed. ... Nevertheless, a contract may be inferred from the acts and conduct of parties as well as or in the absence of their words. ... The question in this class of case is whether the conduct of the parties, viewed in the light of the surrounding circumstances shows a tacit understanding or agreement. The conduct of the parties, however, must be capable of proving all the essential elements of an express contract.”

79 Similarly in Sagacious Procurement v Symbion Health Ltd [2008] NSWCA 149 at para [117] Giles JA said:

“The billing and payment consistent with the April letter is material, but business men not uncommonly act upon an anticipated contractual relationship prior to the contract.”

80 The conduct of the parties on 19 July, when understood in light of the letter of 1 July and the subsequent communications between the solicitors, demonstrated their intention that the handing over of the files was to be a final division of the client base of the firm, in satisfaction of the appellant’s rights to its goodwill.

81 So understood the conduct of the parties that day brought into existence and substantially performed a contract for such a division. A somewhat analogous situation arose in Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1977] EWCA Civ 3; [1978] QB 574 CA, 590 where Lord Denning MR said:

“At the trial it was submitted on behalf of Ogdens that there was no express contract because Ogdens had never signed that charterparty. The letter of 10 April 1974 said ‘subject to contract’ ... and here no contract was ever signed. The judge rejected that contention and it was not renewed before us. It is plain that when the barges were delivered and accepted there was a concluded contract on the terms of the charterparty.”

82 Conduct in apparent performance of a contract, if one existed, is capable of being cogent evidence of its existence. In F & G Sykes (Wessex) Ltd v Fine Fare Ltd [1967] 1 Lloyds Rep 53 Lord Denning said at 57-8:

“In a commercial agreement the further the parties have gone on with their contract, the more ready are the Courts to imply any reasonable term so as to give effect to their intentions. When much has been done, the Courts will do their best not to destroy the bargain. When nothing has been done it is easier to say that there is no agreement between the parties because the essential terms have not been agreed. But when an agreement has been acted upon ... we ought to imply all reasonable terms so as to avoid any uncertainties.”

83 This passage was cited with approval by Bingham LJ in Didymi Corp v. Atlantic Lines and Navigation Co Inc (The Didymi) [1989] 2 Lloyds Rep 108, 114; and by Ormiston J in Vroom BV v Fosters Brewing Group Ltd [1994] VR 32, 71, 85.

84 The issue there, which arose two years after the parties had commenced performance, was whether a written contract for a term of five years was void for uncertainly. That is not the issue here, but in some respects this is a stronger case for the application of the principle. The handing over of the files on 19 July substantially performed the parties arrangements for the division of the goodwill. The appellant was also entitled to continuing access to the firm’s computer to service her clients and this was allowed without objection for some months thereafter.

85 The negotiations between the solicitors continued, but the principal difficulty, the treatment of GST, did not affect the arrangements for the division of the firm’s client base and related matters.

86 In Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622, 628 McLelland J said:

“There is in reality a fourth class of case additional to the three mentioned in Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353], as recognised by Knox CJ, Rich J and Dixon J, in Sinclair Scott & Co v Naughton [1929] HCA 34; (1929) 43 CLR 310, 317 namely: “... one in which the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms.’ Their Honours referred to the speech of Lord Loreburn in Love & Stewart v S Instone & Co (1917) 33 TLR 475, 476 where his Lordship said that:

‘It was quite lawful to make a bargain containing certain terms which one was content with, dealing with what one regarded as essentials, and at the same time to say that one would have a formal document drawn up with the full expectation that one would by consent insert in it a number of further terms. If that were the intention of the parties, then a bargain had been made, nonetheless that both parties felt quite sure that the formal document would comprise more than was contained in the preliminary bargain.’”

87 The judgment of McLelland J was affirmed by this Court (1986) 40 NSWLR 631.

88 In my judgment the arrangements between these parties for the division of the firm’s client base fell within the fourth class identified by McLelland J.

89 These principles were applied in Pagnam Spa v Feed Products Ltd [1987] 2 Lloyds Rep 601 CA, 619-20 where Lloyd LJ said:

“(4) ... the parties may intend to be bound forthwith even though there are further terms still to be agreed or some further formality to be fulfilled (see Love & Stewart v Instone per Lord Loreburn at p476).

(5) If the parties fail to reach agreement on such further terms, the existing contract is not invalidated unless the failure to reach agreement on such further terms renders the contract as a whole unworkable or void for uncertainty ... there is no legal obstacle which stands in the way of the parties agreeing to be bound now while deferring important matters to be agreed later. It happens every day when parties enter into so-called ‘heads of agreement’ ... the fact that the terms yet to be agreed were of economic significance would not prevent a contract coming into existence forthwith if that is what the parties intended ... The parties continued with their negotiations after the confirmatory telex of Feb 1. But that is not really an indication at all. Once one accepts that the parties are in law capable of making what I will call an interim agreement, it was only to be expected that they would continue negotiating the terms that remained without delay. This is what they did.”

90 The principles which apply where the parties have been negotiating through their solicitors are still relevant where the parties themselves are alleged to have entered into a binding contract. Nevertheless, in my judgment, they apply with diminished force, especially when a consensus has already been reached on what is capable of being is regarded as a severable subject matter.

91 For these reasons, which differ slightly from those of the trial judge, I would uphold his decision that the parties entered into a contract on 19 July 2004 for a final division of the goodwill of the firm.

92 Since preparing the above I have had the benefit of reading the judgment of Macfarlan JA. I agree with his view (paras [15]-[16]) that on 16 and 19 July 2004 the parties contemplated that they would execute a deed which would cover all aspects of the winding up of their partnership. However, in my opinion this did not prevent them legally or factually from entering into a more limited contract in the meantime.

93 I also accept the binding force of the authorities Macfarlan JA refers to in paras [5]-[9] of his reasons. However, with respect, I view the conduct of the parties on 19 July as unequivocal. The files were handed over to be “serviced” and the parties told us what they meant by this.

94 Former partners can enter into partial agreements dealing with particular assets or settling particular issues in the winding up of their partnership without, at that stage, having to resolve all contentious questions or reach an overall settlement.

95 In this case a clear consensus had emerged as to the division of the goodwill and in my opinion their conduct giving practical effect to that division was unequivocal and as such it gave rise to and then fully performed a contract dealing with that limited but important subject matter. The parties left other outstanding matters to be dealt with in a future deed bringing their contract on 19 July within the fourth class that has been identified.

Plant and equipment

96 The nature of this dispute has already been referred to para [10]. The prima facie right of the partners under cl 24 of the Partnership Agreement, when the partnership is terminated, is for the assets of the firm to be sold. The parties have not agreed on any other course, but they have agreed that the plant and equipment would realise $25,000 if sold at auction. The respondent is prepared to pay this amount for the plant and equipment, or more accurately to allow it in account.

97 The adoption of this value will avoid the costs and risks of an auction and it follows that there is no point in ordering an actual sale. Indeed the appellant did not ask for this but asked that the value of the equipment be determined by an associate judge.

98 Although the plant and equipment may have a special value to the respondent the appellant has no right under partnership law to compel the respondent to pay more for it than anyone else. The written down or depreciated value of the plant and equipment in the books of the partnership is no indication of its actual value at the date of termination.

99 At that date the plant and equipment was held by the partnership under leases from financiers which were later paid out from partnership funds. These leases were liabilities of the partnership which had to be discharged in the winding up. As a result of these payments the partners became the owners of the plant and equipment and there is no reason on the evidence for thinking that the leases were worth any more to the partnership before they were paid out.

100 In my judgment therefore the appellant’s challenge to the Judge’s finding on this issue also fails, and the appeal must therefore be dismissed with costs.

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AMENDMENTS:


29/05/2009 - Pursuant to the provisions of Uniform Civil Procedure Rule 36.17 and with the consent of the parties, the Court has corrected orders (b) and (c). - Paragraph(s) Coversheet, [22]

29/05/2009 - Correction to headnote - Paragraph(s) Headnote


LAST UPDATED:
29 May 2009