Bartier Perry Pty Ltd v Paltos

[2021] NSWCA 158

Court of Appeal

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:

Bartier Perry Pty Ltd v Paltos [2021] NSWCA 158

Hearing dates:

6–7 April 2021; last written submissions 5 July 2021

Date of orders:

3 August 2021

Decision date:

03 August 2021

Before:

Payne JA at [1];
White JA at [261];
McCallum JA at [262]

Decision:

(1)   Bartier Perry’s motion dated 19 March 2021 seeking to lead fresh evidence is dismissed;

(2)   Appeal allowed;

(3)   Set aside orders 2 and 5 made by Rothman J on 1 December 2020 (including the undertaking offered as a condition of making order 2) and in lieu thereof order:

(a)   Bartier Perry to pay damages to Mr Paltos in the amount of $942,777;

(b)   Bartier Perry to pay Mr Paltos’ costs of the proceedings on the ordinary basis;

(4)   No order as to costs of the appeal with the intention that the parties pay their own costs of the appeal;

(5)   Cross-appeal dismissed;

(6)   Cross-appellant to pay the costs of the cross-respondent of the cross-appeal.

Catchwords:

NEGLIGENCE – professional negligence – solicitors – where appellant law firm was retained to advise the respondent as to his rights in a family law partnership – whether appellant failed to give competent advice to the respondent about the manner and circumstances of the exercise of a put option granted by a put and call option agreement forming part of the partnership documents – breach of retainer and concurrent duty of care

NEGLIGENCE – professional negligence – causation – factual causation – where respondent would have exercised put option had he been properly advised of his rights – where failure to give competent advice caused loss

CONSUMER LAW – misleading or deceptive conduct – professional advice – where a dangerously incomplete statement of the respondent’s rights was misleading and deceptive in that it was apt to mislead the respondent into believing that his legal rights were ineffective

CONTRACTS – implied terms – terms implied in law – necessity

CONTRACTS – implied terms – terms implied in fact – necessary to give business efficacy

CONTRACTS – construction – interpretation – calculation of purchase price under formula prescribed in a put and call option agreement

APPEALS – damages – where primary judge awarded damages and required an undertaking as to repayment pending the outcome of related proceedings – whether primary judge erred in not assessing damages on a lump sum basis once and for all – whether this Court should itself determine the damages payable on a lump sum basis – approach for correct assessment of damages

Legislation Cited:

Civil Liability Act 2002 (NSW), ss 5D, 5E

Civil Procedure Act 2005 (NSW), ss 56, 98, Part 6

Competition and Consumer Act 2010 (Cth), s 82, Sch 2 ss 18, 236

Evidence Act 1995 (NSW), s 91

Income Tax Assessment Act 1997 (Cth), s 118-37

Partnership Act 1890 (UK), s 38

Supreme Court Act 1970 (NSW), ss 23, 63, 75A

Taxation Administration Act1953 (Cth), Part IVC

Trade Practices Act 1974 (Cth), s 82

Uniform Civil Procedure Rules 2005 (NSW), rr 42.1, 51.53

Cases Cited:

Adeels Palace Pty Ltd v Moubarak (2009) 239 CLR 420; [2009] HCA 48

Arundell v Bell (1883) 52 L J Ch 537

Australian Executor Trustees (SA) Ltd v Kerr [2021] NSWCA 5

Blatch v Archer (1774) 1 Cowper 63; (1774) 98 ER 969

Bostik Australia Pty Ltdv Liddiard (No 2) [2009] NSWCA 304

BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266; [1977] UKPCHCA 1

Bridge v Deacons [1984] AC 705

Burchell v Wilde [1900] 1 Ch 551

Byrne v Australian Airlines Ltd (1995) 185 CLR 410; [1995] HCA 24

Carazi Pty Ltd v Blow Dry Bar Franchising Pty Ltd (in liq) (No 2) [2015] NSWSC 108

Castlemaine Tooheys Ltd v Carlton & United Breweries Ltd (1987) 10 NSWLR 468

Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605; [1998] HCA 42

Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; [2014] HCA 32

Commonwealth v Amman Aviation Pty Ltd (1991) 174 CLR 64; [1991] HCA 54

Council of The City of Botany Bay v Michos [2013] NSWCA 244

Doherty v Liverpool District Hospital (1991) 22 NSWLR 284

Doppstadt Australia Pty Ltd v Lovick & Son Developments Pty Ltd (No 2) [2014] NSWCA 219

E K Nominees Pty Ltd v Woolworths Ltd [2006] NSWSC 1172

Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 3) (1998) 30 ACSR 20

Fitch v Dewes [1921] 2 AC 158

Fox v Percy (2003) 214 CLR 118; [2003] HCA 22

Geraghty v Minter (1979) 142 CLR 177; [1979] HCA 42

Great Wall Resources v O’Sullivan [2009] NSWCA 119

HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54

James v Surf Road Nominees Pty Ltd (No 2) [2005] NSWCA 296

Johnson v Perez (1988) 166 CLR 351; [1988] HCA 64

Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281; [1995] HCA 4

Liverpool City Council v Irwin [1977] AC 239

Malec v JC Hutton Pty Ltd (1990) 169 CLR 638; [1990] HCA 20

March v E & MH Stramare Pty Ltd (1991) 171 CLR 506; [1991] HCA 12

McAllister v Richmond Brewing Co (NSW) Pty Ltd (1942) 42 SR (NSW) 187

Mellersh v Keen (No 2) (1860) 28 Beav 453

Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (1991) 33 FCR 1; [1991] FCA 758

Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388; [2004] HCA 3

Old v McInnes and Hodgkinson [2011] NSWCA 410

Page v McKensey [1995] NSWCA 351

Page v McKensey (Supreme Court (NSW), Windeyer J, 17 December 1993, unrep)

Paltos v Bartier Perry Pty Ltd [2020] NSWSC 705

Paltos v Bartier Perry Pty Ltd (No 2) [2020] NSWSC 1706

Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625; [1981] HCA 3

Polkinghorne v Holland (1934) 51 CLR 143; [1934] HCA 28

Potts v Miller (1940) 64 CLR 282; [1940] HCA 43

Rabelais Pty Ltd v Cameron (1995) 95 ATC 4552

Re David and Matthews [1899] 1 Ch 378

Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] NSWCA 443

Ryder v Frohlich [2004] NSWCA 472

Ryder v Frohlich [2006] NSWSC 833

Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; [1994] HCA 4

Smith v Everett (1859) 27 Beav 446

Sobell v Boston [1975] 2 All ER 282

SRSC v Beaumont [2004] NSWSC 164

Thames Cruises Ltd v George Wheeler Launches Ltd [2003] EWHC 3093

Todorovic v Waller (1981) 150 CLR 402; [1981] HCA 72

Trego v Hunt [1895] 1 Ch 462

Turner v TR Nominees Pty Ltd (1995) 31 ATR 578

Tyco AustraliaPty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333

Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603; [1998] HCA 38

Walton v Illawarra [2011] NSWSC 1188; (2012) 28 BCL 202

Wardley Australia Ltd v Western Australia (1992) 175 CLR 514; [1992] HCA 55

Wilson v Williams (1892) 29 L R Ir 176

Texts Cited:

R I Banks, Lindley & Banks on Partnership (20th ed, 2020, Thomson Reuters)

Category:

Principal judgment

Parties:

Bartier Perry Pty Ltd (Appellant)
Dennis Paltos (Respondent)

Representation:

Counsel:
J Emmett SC with H Grace (Appellant)
I R Coleman SC with C D Freeman (Respondent)

Solicitors:
YPOL Lawyers (Appellant)
Polczynski Robinson (Respondent)

File Number(s):

2020/361939

Publication restriction:

Nil

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Common Law

Citation:

[2020] NSWSC 705; [2020] NSWSC 1706

Date of Decision:

9 June 2020; 1 December 2020

Before:

Rothman J

File Number(s):

2017/301216

HEADNOTE

[This headnote is not to be read as part of the judgment]

In 2010, Mr Paltos established a family law practice in partnership with Mr Milevski (the Partnership) by the execution of a Heads of Agreement, a Deed of Agreement of Partnership Terms and a Put and Call Option Agreement. In December 2015, Mr Paltos suffered two strokes and was unable to work for an extended period. There arose a dispute about the Partnership. In February 2016, Mr Paltos formally retained Bartier Perry Pty Ltd (Bartier Perry) to advise him “with regard to [his] Partnership in Paltos Milevski and in relation to the demands being made by [his] partner”.

Sometime prior to 18 April 2016, Bartier Perry advised Mr Paltos that Mr Milevski could terminate the Partnership and suggested that Mr Paltos offer to sell 20% of the Partnership to Mr Milevski or dissolve the Partnership himself. Mr Milevski commenced proceedings and, on 21 April 2016, the Supreme Court made orders by consent for the dissolution of the Partnership and appointment of Receivers. An account was ordered but those proceedings have yet to be heard. Mr Paltos filed separate proceedings against Mr Milevski and the Receivers appointed to the Partnership (the Partnership Proceedings). The Partnership Proceedings have also not been heard. In the Partnership Proceedings, Mr Paltos is seeking payment of significant sums “on account of goodwill” of the Partnership and payment “on account of work in progress”.

On 5 October 2017, Mr Paltos commenced proceedings against Bartier Perry seeking damages for breach of contract, negligence, and for misleading and deceptive conduct for its alleged failure properly to advise Mr Paltos about his rights to exercise a put option granted by the Put and Call Option Agreement. Mr Paltos successfully opposed the motion by Bartier Perry for those proceedings to be heard at the same time and by the same judge as the Partnership Proceedings. The Partnership Proceedings have been adjourned repeatedly on Mr Paltos’ application pending determination of his claim against Bartier Perry.

The put option was relevantly exercisable by a partner who was suffering “total and permanent disablement” within the meaning of the Put and Call Option Agreement. The primary judge held that Bartier Perry was liable to pay Mr Paltos damages of $1,411,707. It was common ground at the trial, however, that a deduction would need to be made from that amount for any amounts comprising “any calculation on account of goodwill” of the Partnership and any payment “on account of work in progress” of the Partnership at the date of its dissolution achieved in the Partnership Proceedings. This was because, on the hypothesis that Mr Paltos had exercised the put option, neither goodwill of the Partnership nor work in progress of the Partnership would have been payable to Mr Paltos.

The primary judge, however, did not make a deduction of the amount payable to Mr Paltos on account of goodwill of the Partnership and any payment on account of work in progress. Instead, the primary judge accepted an undertaking from Mr Paltos to “repay” to Bartier Perry amounts representing the goodwill of the Partnership and work in progress as at the date of dissolution, if those amounts were subsequently obtained by Mr Paltos in the Partnership Proceedings.

The principal issues on appeal concerned whether the primary judge erred:

1. in finding that Bartier Perry breached its duty of care and retainer (ground 1);

2. in finding that Bartier Perry engaged in misleading or deceptive conduct in contravention of s 18 of Sch 2 to the Competition and Consumer Act 2010 (Cth) (Australian Consumer Law) (ground 2);

3. in finding that the Put and Call Option Agreement contained an implied term to the effect that the obligations arising from an exercise of the put option could not be defeated by the dissolution of the Partnership (ground 3);

4. in holding that any breach of Bartier Perry’s duty of care or retainer, or any misleading or deceptive conduct, was causative of the relevant loss (ground 4);

5. in calculating damages under the Put and Call Option Agreement (ground 5); and

6. in accepting the undertaking instead of assessing damages once and for all on a lump sum basis (ground 6).

The Court (Payne JA, White and McCallum JJA agreeing) held, allowing the appeal in part:

1. The advice given by Bartier Perry to Mr Paltos that the Put and Call Option Agreement did not apply to him “yet” or “at this time” was not sufficient to discharge its obligation to provide competent legal advice. A reasonably competent solicitor in the position of Bartier Perry would have advised Mr Paltos that if he remained unable to work in the Partnership after six months he could exercise the put option to require Mr Milevski to purchase his 70% interest in the Partnership: [67], [76]-[77], [80], [83]-[86] (Payne JA); [261] (White JA); [262] (McCallum JA).

2. The advice given by Bartier Perry to Mr Paltos was misleading and deceptive, in that it was a dangerously incomplete statement of his legal rights and was apt to mislead him about the nature of those rights: [88], [90]-[92] (Payne JA); [261] (White JA); [262] (McCallum JA).

3. On the proper construction of the Put and Call Option Agreement, the put option survived the dissolution of the Partnership. It was unnecessary to imply a term to that effect in law or fact: [97]-[100] (Payne JA); [261] (White JA); [262] (McCallum JA).

4. The primary judge was correct to find that, had Bartier Perry advised Mr Paltos between 13 and 19 April that if he continued to be incapable of carrying out his usual duties as a partner until 23 June he could have exercised the put option, Mr Paltos would likely have exercised the put option: [113], [119] (Payne JA); [261] (White JA); [262] (McCallum JA).

   Civil Liability Act 2002 (NSW) s 5D; Australian Consumer Law s 18, applied.

5. The primary judge was correct to reject Bartier Perry’s construction of the calculation of the “Purchase Price” for the purposes of the Put and Call Option Agreement: [137] (Payne JA); [261] (White JA); [262] (McCallum JA).

6. The primary judge erred in accepting the undertaking rather than making a final award of damages. The qualifications to the general principle that common law damages are to be assessed on a lump sum basis once and for all did not apply in this case. Given the length of time since the dissolution of the Partnership and the fact that Mr Paltos had successfully opposed hearing this matter together with the Partnership Proceedings, this Court should determine damages rather than order a re-trial: [147], [158], [165] (Payne JA); [261] (White JA); [262] (McCallum JA).

7. Bartier Perry bore the onus of proving the value of Mr Paltos’ claim for an allowance for the net value of the Partnership assets on the taking of accounts. That was a benefit Mr Paltos would derive by reason of Bartier Perry’s breach and one he would not have enjoyed if he had exercised the put option: [175]-[176], [202], [205] (Payne JA); [261] (White JA); [262] (McCallum JA).

   Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (1991) 33 FCR 1; [1991] FCA 758 at 17; Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333 at [255], [264]; Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] NSWCA 443 at [44], [53], applied.

8. Having regard the all of the evidence, the value of the Partnership’s goodwill was $957,000. The correct methodology to determine Mr Paltos’ damages insofar as they related to future hypothetical events was one based on the possibilities and probabilities of those events, namely, the outcome of Mr Paltos’ claims for goodwill and work in progress in the undetermined Partnership Proceedings. The appropriate percentage was 70%: [154]-[155], [202], [233] (Payne JA); [261] (White JA); [262] (McCallum JA).

   Malec v JC Hutton Pty Ltd (1990) 169 CLR 638; [1990] HCA 20, applied.

9. The value of the Partnership’s goodwill ($957,000) should be reduced by 70% (Mr Paltos’ share) and 70% again (the appropriate Malec v Hutton percentage). Subtracting that amount ($468,930) from $1,411,707, Mr Paltos was entitled to damages of $942,777: [235] (Payne JA); [261] (White JA); [262] (McCallum JA).

Judgment

1. PAYNE JA: Mr Paltos, the respondent, was admitted as a solicitor in 1979 and specialised in family law. In 2010, he commenced to practise in partnership with Peter Milevski in a practice styled “Paltos Milevski Family Lawyers” (the Partnership). When the Partnership was established three documents were executed, namely, a Heads of Agreement, a Deed of Agreement of Partnership Terms and a Put and Call Option Agreement.

2. On 23 December 2015, Mr Paltos suffered two strokes and was hospitalised. Mr Paltos was unable to return to work in any capacity for a period of time after he suffered the strokes.

3. On 15 February 2016, Mr Milevski wrote to Mr Paltos signalling a dispute about the Partnership. The next day, 16 February 2016, the appellant, Bartier Perry Pty Ltd (Bartier Perry), was retained to act for Mr Paltos. On 29 February 2016, a formal retainer was executed, which described the services to be provided by Bartier Perry as including “advising [Mr Paltos] with regard to [his] Partnership in Paltos Milevski and in relation to the demands being made by [his] partner”. In discharge of that retainer, Mr Paltos dealt principally with Mr McCaffery from Bartier Perry and, less frequently, with a Mr Creais.

4. Sometime prior to 18 April 2016, Bartier Perry advised Mr Paltos that Mr Milevski could terminate the Partnership and suggested that Mr Paltos offer to sell 20% of the Partnership to Mr Milevski or dissolve the Partnership himself.

5. On 18 April 2016, Mr Milevski commenced proceedings in the Supreme Court against Mr Paltos, seeking dissolution of the Partnership. On about the same date, Bartier Perry ceased to act for Mr Paltos.

6. On 21 April 2016, the Supreme Court made orders by consent including orders that the Partnership be dissolved and Receivers appointed. The claim for an account sought in those proceedings was adjourned and has yet to be heard in the Equity Division (the Account Proceedings). In separate proceedings, which are to be determined before the claim for an account is resolved, Mr Milevski seeks payment of $461,476.30 said to be owing by Mr Paltos. Those proceedings will be heard together with Mr Paltos’ cross-claim in which he is seeking from Mr Milevski, among other things, an amount representing 70% of the value of the Partnership assets as at 21 April 2016, by reason of Mr Milevski having allegedly taken over the Partnership from the Receivers without paying for the goodwill of the Partnership (the Partnership Proceedings). Damages from the Receivers by reason of their conduct of the receivership are also apparently to be sought.¹ Multiple hearing dates have been vacated and the proceedings were last before the court in June 2021. Despite opposing the application by Bartier Perry to have the present matter heard at the same time as the Partnership Proceedings because at that time Mr Paltos asserted there were no overlapping issues, it appears that Mr Paltos has successfully had those proceedings adjourned on the basis that the outcome of his case against Bartier Perry is material to the outcome of those proceedings. On 30 June 2021, a judge in the Partnership Proceedings made the following orders:

“1.   I make the orders in the Short Minutes of Order initialled by me and dated today.

SHORT MINUTES OF ORDER

1.   The proceeding including the Receivers’ Notice of Motion filed 9 August 2019 scheduled for mention at 9.30am on 2 July 2021 be vacated.

2.   The proceeding including the Receivers’ Notice of Motion filed 9 August 2019 be stood over for mention at 9.30am on 2 September 2021.

3.   Costs be reserved.

4.   Liberty to apply on 3 days’ notice.

THE COURT NOTES THAT:

The solicitors for the Defendant will notify the Plaintiff and the Receivers if final orders in Supreme Court of New South Wales, Court of Appeal Proceeding No 2020/00361939 are pronounced and will seek to relist the matter for mention at an earlier date if practicable.”

7. On 17 August 2016, Mr Paltos lodged a Notice of Intention to Engage in Legal Practice with the Law Society of New South Wales under the name “Paltos Family Lawyers Pty Ltd”, although as it transpired Mr Paltos was unable to work as a solicitor until December 2016. In December 2016, Mr Paltos returned to practise as a solicitor, albeit at a much-reduced capacity than he had enjoyed before his strokes.

8. On 5 October 2017, Mr Paltos commenced proceedings against Bartier Perry seeking damages for breach of contract, negligence, and for misleading and deceptive conduct arising from essentially the same conduct; that is, its alleged failure properly to advise Mr Paltos about his rights to exercise a put option granted by the Put and Call Option Agreement. As I have said, an application by Bartier Perry for those proceedings to be heard and determined at the same time as the Partnership Proceedings was rejected. Accordingly, the present appeal comes before this Court before the Partnership Proceedings have even commenced to be heard. I will return in detail to the complexities created by this state of affairs, particularly as regards the damages appeal.

7. In Paltos v Bartier Perry Pty Ltd [2020] NSWSC 705 and Paltos v Bartier Perry Pty Ltd (No 2) [2020] NSWSC 1706, Rothman J held that Bartier Perry was liable to pay Mr Paltos damages of $1,411,707 for breach of its duty of care, retainer and s 18 of Sch 2 to the Competition and Consumer Act 2010 (Cth) (Australian Consumer Law) because it had failed properly to advise Mr Paltos of his rights to exercise the put option under the Put and Call Option Agreement. The primary judge’s award of damages was subject to an undertaking being given by Mr Paltos to pay to Bartier Perry certain components of any damages he received from the Account Proceedings and the Partnership Proceedings (together the Equity Proceedings). The undertaking was in the following terms:

“The plaintiff, Dennis Paltos, undertakes to pay to the defendant, Bartier Perry Pty Ltd, any amount received or allowed to him in proceedings brought by Peter Milevski, being proceedings 2016/118930 and 2017/246841, confined to amounts received or allowed by or to the said Dennis Paltos in any calculation on account of goodwill, if any, of the Paltos/Milevski Partnership or on account of work in progress, if any, in the said partnership at the date of its dissolution.”

10. As I have explained, Mr Paltos has sought from Mr Milevski in the Partnership Proceedings payment of an amount representing 70% of the value of the Partnership assets (including goodwill and work in progress) as at 21 April 2016. It is common ground in the present case that the quantum of damages payable by Bartier Perry to Mr Paltos must be reduced by the amount Mr Paltos is entitled to recover from Mr Milevski for the goodwill of the Partnership and work in progress as at the date of dissolution of the Partnership. This state of affairs raises obvious and significant issues about the assessment of and quantum of damages in the present case to which I will return.

Decision of the primary judge

The first judgment

11. The principal facts found by the primary judge may be summarised thus:

1. on 23 December 2015, Mr Paltos suffered two strokes and was hospitalised. He had not returned to work as at 21 April 2016;

2. on 15 February 2016, Mr Milevski wrote to Mr Paltos regarding the Partnership and, the next day, 16 February 2016, Bartier Perry commenced acting for Mr Paltos;

3. Bartier Perry was aware that Mr Paltos had suffered strokes when they were engaged on 16 February 2016. Bartier Perry was aware throughout the time they were retained that Mr Paltos continued to suffer many symptoms as a consequence of those strokes;

4. sometime prior to 18 April 2016, Bartier Perry advised Mr Paltos that Mr Milevski could terminate the Partnership and suggested that Mr Paltos try to sell 20% of the Partnership to Mr Milevski or dissolve the Partnership himself;

5. on 18 April 2016, Mr Milevski commenced proceedings in the Supreme Court against Mr Paltos, seeking dissolution of the Partnership. On about the same date Bartier Perry ceased to act for Mr Paltos. On 21 April 2016, the Court made orders, by consent, that the Partnership be dissolved and Receivers appointed. It is Mr Paltos’ case in the Partnership Proceedings that shortly thereafter Mr Milevski took over the assets of the Partnership without paying the Receivers for the goodwill of the Partnership;

6. at all relevant times during Bartier Perry’s retainer Mr Paltos was, in fact, unable to carry out any duties in the Partnership and if this remained the case in June 2016 he would be totally and permanently disabled within the meaning of the Put and Call Option Agreement;

7. Bartier Perry owed Mr Paltos a duty of care and were retained to advise him of his rights under the Put and Call Option Agreement;

8. Bartier Perry breached its retainer and duty of care and engaged in misleading and deceptive conduct by failing properly to advise Mr Paltos about his right to serve a put option notice on Mr Milevski and thereby enliven his rights under the Put and Call Option Agreement; and

9. on or about 21 April 2016, pursuant to orders of the Court the Partnership was dissolved.

12. The document at the heart of Mr Paltos’ case was the Put and Call Option Agreement. The essence of that case was simple. Mr Paltos alleged that, acting competently, Bartier Perry should have advised him that if he remained unable to work in the Partnership for a period of six months he would at that time, but for a limited period only, be able to exercise the put option granted by the Put and Call Option Agreement. Competent advice would have been that exercise of the put option may be financially advantageous to Mr Paltos and that he should seek accounting advice about that question. Acting competently, Bartier Perry should have advised Mr Paltos that the put option arguably survived the dissolution of the Partnership.

13. Mr Paltos’ case was that if he were given that advice he would have served a put option notice. He would in that event have been entitled to be paid in accordance with the formula in the Put and Call Option Agreement. As he was not given that advice, he failed to exercise the put option in time and that valuable right was lost. Mr Paltos claimed that Bartier Perry, in contract, tort and under s 18 of the Australian Consumer Law, was liable to compensate him for that loss.

14. As the terms of the Put and Call Option Agreement are at the heart of this case, I will set out its relevant terms at some length. Clause 2.4 of the Put and Call Option Agreement provided:

“2.4 Condition Precedent to Grant of the Options

The Call Options and Put Options are granted under this Deed subject to the occurrence of the Trigger Event in respect of the Owner and Incoming Partner”.

15. “Trigger Event” was defined in cl 1.1 as follows:

“‘Trigger Event’ means the death or total and permanent disablement of an Owner or Incoming Partner”.

16. “TPD” was defined in cl 1.1 of the Put and Call Option Agreement as follows:

“‘TPD’ means total and permanent disablement of an Owner or Incoming Partner and:

a)   If there is an Insurance Policy in place in respect of an Owner or Incoming Partner, TPD has the meaning given in that Insurance Policy;

b)   If there is no Insurance Policy in place in respect of an Owner or Incoming Partner, TPD means the existence of circumstances where, because of injury or illness, the Owner or Incoming Partner has not been able to carry out their usual working activities in their usual occupation for a period of six consecutive months”.

17. The following relevant terms were defined in cl 1.1 of the Put and Call Option Agreement:

“‘Business Entity’ means the legal partnership practice of Paltos & Co. however constituted

‘Business Interests’ means the form of a particular Owner or Incoming Partner’s equity interest in the Business Entity including any associated entities

‘Completion Date’ means the later of:

a)   The date that is 30 days after the date on which the respective Call Option or Put Option is exercised; or

b)   Such other date as the parties unanimously agree to be the date on which the transfer of Business Interests as contemplated by this Deed is completed

‘Exiting Owner’ means the Owner or Incoming Partner who has exercised either a Put Option granted to him under the terms of this Deed or has been served with an Option Notice exercising a Call Option granted by him under this Deed

‘Insurance Policy’ means a policy of life insurance that is identified in columns 3 and 4 in Schedule D under which a sum insured is payable to an Owner or Incoming Partner subject to the occurrence of a Trigger Event in respect of the person nominated in column 1 of Schedule D.

‘Market Value’ means the amount calculated in accordance with Schedule C and where there is a dispute as to the application of this formula then the Market Value is the value of the Business Interests as determined by an accountant appointed by the President of the Institute of Chartered Accountants for New South Wales and:

a)   they are to be instructed to value the Business Interests using the formula set out in Schedule C;

b)   no discount or uplift is to be applied merely because:

i)   the number of Business Interests being transferred is a minority holding or is a majority holding or is neither a minority holding nor a majority holding;

ii)   the Business Interests being transferred are not being transferred with all of the other Business Interests; and

c)   their decision is that of an expert not an arbitrator and their valuation is binding on the parties

‘Option Exercise Period’ means the 30^th day after the following days:

a)   in the event of the death of an Owner or Incoming Partner – the date of the death;

b)   in the event of the TPD of an Owner or Incoming Partner – the date that the TPD event (as defined in the Insurance Policy) occurred or, if there is no such Insurance Policy in place, the date on which the Principal has not been able to carry out their usual working activities for a period of six consecutive months

‘Purchase Price’ means in relation to Business Interests that are transferred in accordance with this Deed, the amount calculated in accordance with the following formula:

[A% x B] – C

Where

A =   the percentage that the Business Interests held by the Exiting Owner bears to the total of all business interests of that class;

B =    the Market Value of all Business Interests;

C =    the amount of the sum insured received by the Related Insurance Owner of the Insurance Policy (if any) in respect of the Owner or Incoming Partner who suffered the Trigger Event,

provided that, if the application of this formula equals zero or a negative number then the Purchase Price is $1.00

‘Put Option’ means the option granted under clause 2.2 of this Deed by an Ongoing Owner to an Exiting Owner which may be exercised by an Exiting Owner”.

18. The exercise of the put and call options was dealt with by cll 5.1 and 5.2 which provided:

“TERMS OF TRANSFER OF BUSINESS INTERESTS

5.1   Sale Transaction Terms

Upon the exercise of a Call Option or a Put Option in accordance with clause 3.1, the terms on which the Exiting Owner’s Business Interests are to be transferred to the Ongoing Owner are as follows:

a)   the Ongoing Owner must pay to the Exiting Owner the Purchase Price in consideration for the transfer by the Exiting Owner of the Exiting Owner’s Business Interests;

b)   if there is more than [one] Ongoing Owner that is the purchaser of the Business Interests, then those Ongoing Owners will purchase the Business Interests of the Exiting Owner and pay the Purchase Price in the same proportion among them as represents the Market Value of their respective Business Interests;

c)   completion of the sale and purchase of the Business Interests must take place on or before the Completion Date at such place as the Owner who first exercises the Call Option or Put Option specifies in the Option Notice;

d)   all documents that evidence ownership of the Business Interests must be delivered by the Exiting Owner to the Ongoing Owner upon the payment of the Purchase Price;

e)   an Owner or Incoming Partner who has suffered TPD is prohibited from holding any office or any other management role in any Business Entity and must resign from holding any such offices or roles within seven (7) days of the Trigger Event being determined as having occurred;

f)   for as long as any Internal Debt Amounts remain outstanding those debts will, from the Completion Date, carry an annual interest charge calculated at the prevailing bank overdraft interest rate for the bank with which the Business Entity that owes the debt holds the majority of its accounts and with that interest charge being calculated on a daily basis.

5.2   Release by Ongoing Owner

Where the options granted under this Deed have been exercised and the transfer of Business Interests as contemplated by this Deed has been completed then the Ongoing Owner must:

a)   indemnify the Exiting Owner from and against all actions, claims, demands, notices, losses, damages, costs or expenses for which that person may become liable in respect of the Business Entity and which arise after the Completion Date (including any guarantees and the like that may have been provided by any such person, but only to the extent to which such guarantee has not been called upon or otherwise exercised prior to the exercise of the Call Option or Put Option under this Deed);

b)   as soon as reasonably practicable after the Completion Date do all things and sign all documents necessary:

i)   to procure the release of any assets of the Exiting Owner with respect to debts of the Business Entity;

ii)   to release any guarantees or personal covenants given by the Exiting Owner with respect to debts of the Business Structure”.

19. At the trial a great deal of evidence was led about Mr Paltos’ medical condition during the period of the Bartier Perry retainer. The primary judge spent some time analysing that evidence and identifying the circumstances in which the put option was exercisable.

20. As is clear from the passages quoted above, the condition precedent to the exercise of, relevantly, the put option, was the “occurrence of the Trigger Event in respect of the Owner”. “Trigger Event” was defined to mean “the death or total and permanent disablement of an Owner or Incoming Partner”.

21. “TPD” was a defined term the construction of which was controversial before the primary judge. The essential debate at the trial was whether the definition required proof of “total and permanent disablement of an Owner” in addition to proof of the matters in (a), which addressed the case where there was an “Insurance Policy”, or (b), where there was no “Insurance Policy”. The primary judge concluded that the definition did not require proof of “total and permanent disablement of an Owner” in addition to proof of the matters in (a) or (b) of the definition.

22. The primary judge’s preferred construction was that the Trigger Event occurs at the end of six months of disablement, being in this case Mr Paltos’ inability to perform his usual working activities in the Partnership for a period of six consecutive months:

“[243]   On my preferred construction, the Trigger Event occurs at the end of six months of disablement. On the only other reasonable construction, it occurs, relevantly, at the happening of the injury that causes disablement. If, as I hold, the Trigger Event occurs at the conclusion of the six-month period, and the grant of the option, as distinct from its exercise, requires the Trigger Event, then the Put and Call Option Agreement would have little use, unless there were an implied term to the effect of that pleaded. Further, if the subjection operated in any other more fundamental way, it would not be a ‘subjection’ but a negation of the grant of the option.

[244]   In my view, the subjection to clause 2.4 and the terms of clause 2.4, read with the other provisions, operates so that the Put and Call Option Agreement grants the options, but makes it clear that the exercise of the options is conditioned on the occurrence of a Trigger Event. …”

23. His Honour was apparently of the view that the existence of the implied term (explained below) was potentially important as otherwise the dissolution of the Partnership might destroy the right. Senior Counsel for Bartier Perry accepted that his Honour’s alternative finding at [367], that on the proper construction of the Put and Call Option Agreement the right to serve a put option notice survived the dissolution of the Partnership, was correct.

24. On the contingent basis that the right to serve a put option notice did not survive the dissolution of the Partnership, however, the primary judge found that the Put and Call Option Agreement contained an implied term to the effect that:

“[260]   The proposition, claimed in [11A] of the Further Amended Statement of Claim is simply that: if the Put Option is exercised, and has not lapsed, requiring the Ongoing Owner to purchase the interest in the Partnership, that obligation is not capable of being defeated by the dissolution of the Partnership or any other step that would disentitle the Exiting Owner, who has the right to exercise the put option, from benefiting from the terms of the Put and Call Option Agreement. That is precisely the point, cited with approval in Peters (WA) v Petersville, from Shepherd v Felt & Textiles of Australia Ltd.”

25. The primary judge concluded that Mr Paltos was suffering “total and permanent disablement” within the meaning of the Put and Call Option Agreement as at the date six months after he first suffered a stroke. He would have been entitled to serve a put option notice under the Put and Call Option Agreement at that time.

26. By that time, however, Bartier Perry’s retainer had been terminated. The critical issue about liability was whether it had been shown that during the currency of its retainer a reasonably competent solicitor in the position of Bartier Perry would have given Mr Paltos advice that if he remained unable to work in the Partnership after six months he may be able to exercise the put option.

27. The primary judge found that a reasonably competent solicitor in the position of Bartier Perry should have, at least following the deterioration of Mr Paltos’ medical prognosis on about 13 April 2016, given Mr Paltos advice that if in June 2016 he remained unable to carry out his usual working activities in the Partnership he may be able to issue a put option notice under the Put and Call Option Agreement requiring Mr Milevski to pay him for his 70% share of the Partnership by reference to the formula in Schedule C to the Put and Call Option Agreement.

28. The primary judge accepted that prior to 13 April 2016 Bartier Perry was not negligent in failing to give that advice because of Mr Paltos’ strongly expressed desire to return to carrying out his usual working activities in the Partnership as soon as possible. The primary judge found, however, that by 13 April 2016 it was obvious to Bartier Perry that:

1. Mr Paltos was by that time prepared to give up the whole of his interest in the Partnership;

2. Mr Paltos had previously had no insight into the degree to which he was disabled;

3. Mr Paltos was suffering from a medical condition that prevented him from working in the Partnership and was getting worse; and

4. Barter Perry had not provided advice to Mr Paltos about the issues arising under the Put and Call Option Agreement.

29. There was a limited controversy on the appeal about the advice that the primary judge did find that Bartier Perry had given about the exercise of the put option. It was common ground that the advice given was brief. Mr McCaffery said words to Mr Paltos to the effect of “the put options do not help [you, Mr Paltos]”. The principal controversy was whether Mr McCaffery went on to qualify that statement by saying words to the effect of “at present because there is a six-month requirement in relation to your disability”, “yet” or “at this time”. It is not precisely clear which, if any, version of those qualifying words the primary judge accepted had been said:

“[308]   The other two additional Partnership Documents, as earlier mentioned, were sent to Mr McCaffrey on 17 February 2016. While Mr McCaffrey attests to the fact that he recollects that he advised to the effect that the Put Options do not help the plaintiff ‘at present because there is a six-month requirement in relation to your disability’, that conversation or advice is not, in those terms, accepted. But little turns on it. That which was put to the plaintiff, at one stage of cross-examination, was that the words ‘yet’ or ‘at this time’ were used and that the plaintiff was aware that there was a six-month period to which the Put and Call Option Agreement referred.” (Footnotes omitted.)

30. Despite the rejection of Mr McCaffery’s evidence about the qualifying words in this passage, it appears from his Honour’s discussion of breach that his Honour accepted, at least on a contingent basis, that the advice given to Mr Paltos by Mr McCaffery included qualifying words such that the Put and Call Option Agreement “did not apply yet or at this stage”.

30. Even assuming that the qualifying words had been uttered, the primary judge found that a cursory reading of the Put and Call Option Agreement should have revealed to Bartier Perry that up to 30 days after Mr Paltos had been unable for six consecutive months to undertake his usual activities in the Partnership because he had suffered a stroke, there existed an opportunity for him to exercise the put option by serving an option notice. After 30 days, the option would lapse.

31. The primary judge accepted that Mr Paltos had made known to Bartier Perry his “continuing strident desire to return to his practice”. Although Bartier Perry, through Mr McCaffery, was aware of the significant limitations in Mr Paltos’ capacity to determine what was in his best interests, it was not negligent for Bartier Perry to follow those instructions for the majority of the time they were retained.

32. The primary judge found that the position changed dramatically on 13 April 2016, when Mr Paltos’ medical condition had, according to the contemporaneous medical evidence, deteriorated significantly, and Mr Paltos had indicated to Bartier Perry that he was now prepared to give up all of his interest in the practice. His Honour found:

“[336]   As at 13 or 14 April 2016 at least, the defendant, through Mr McCaffrey, was under an obligation to advise the plaintiff of his rights under the Put and Call Option Agreement and the process that was required to institute that procedure. The procedure was not complicated. All that was required was for an Option Notice to be served on Mr Milevski, at the appropriate time.

[337]   As at 13 and 14 April 2016, the plaintiff’s health was significantly worse; his instructions were to transfer his 70% interest in the Partnership to Mr Milevski; and he was facing the dissolution of the Partnership. The defendant was not retained in the litigation and did not appear in the litigation between the plaintiff and Mr Milevski.

[338]   While I would consider that a prudent solicitor would have advised the plaintiff fully on his rights under the Put and Call Option Agreement from the very outset of the relationship, I have found that, while ever the instructions were that the plaintiff was to return to his practice, it was not negligent or a breach of duty for the defendant not to advise on those issues at that point in time. However, once those instructions changed in the manner that they did, at least as early as 13 and 14 April 2016, that situation altered dramatically.

[339]   Further, given that it was necessary for the defendant to have construed the Put and Call Option Agreement from the very earliest time that the relationship between the plaintiff and the defendant arose, that information should have been readily available and acted upon immediately. Not to do so was to fail to provide information upon which the plaintiff could decide the course of action he could have taken. Further, put in other terms, the defendant’s obligation was to assist the plaintiff in defining the most beneficial means of achieving the objective that, by 13 and 14 April 2016, the plaintiff had decided upon.

[340]   As at 13 and 14 April 2016, the defendant should have advised the plaintiff that he had available the serving of an Option Notice, either immediately or shortly, under the Put and Call Option Agreement, the effect of which would have been to require Mr Milevski to purchase his shares at the Completion Date, which, if the Option Notice were to have been served on 14 April 2016 (or 15 April 2016), would have been, in accordance with the earlier described construction of the Deed, on 16 May 2016 and, otherwise, by 22 July 2016.”

34. For essentially the same reasons as in relation to the breach of contract and negligence findings, the primary judge found that Bartier Perry had engaged in misleading and deceptive conduct by adverting to the put option contained in the Put and Call Option Agreement, but failing to explain that if Mr Paltos’ disability persisted for six months he would be entitled to serve a put option notice and may be financially much better off as a result.

35. The next question to which a significant amount of the trial and a large part of the appeal was directed was the causation issue; whether, had Bartier Perry given Mr Paltos the advice about the possible exercise of the put option described at [14]-[18] above, Mr Paltos would have served on Mr Milevski a put option notice under the Put and Call Option Agreement in June 2016.

36. The primary judge found that if he had been given the advice by Bartier Perry about the possible exercise of the put option at [14]-[18] above, Mr Paltos would have served a put option notice on Mr Milevski during the period the notice would have been effective:

“[367]   The question that then arises is what effect the non-service of the Option Notice had on the rights of the plaintiff. Plainly, the Put Option was granted on 29 June 2010 and provided for the service of the Option Notice, whereupon the rights of the plaintiff would have included the ability to insist on Mr Milevski purchasing his interests at the agreed calculation and, in my view, would have survived any dissolution of the Partnership.

[368]   However, the Option Notice was not served and, it would seem, that right has now been lost. Under the Put & Call Option Agreement, because the Option Notice was not served within the Option Exercise Period, the right has lapsed. 

[369]   Given the predominant concern of the plaintiff as to money and the desire, as from 13 April 2016, to have Mr Milevski purchase the entirety of the plaintiff’s interest in the Partnership, the Court accepts as accurate the evidence of the plaintiff that, if he had been advised of the ability to take advantage of the Put Option, he would have done so.

…

[377]   I continue to accept that if the plaintiff were to have been aware of those matters, which he was not, he would have exercised the Put Option by serving, at the appropriate time, an Option Notice. The appropriate time, in this alternative preferred construction, was between 23 June 2016 and 22 July 2016 (or, perhaps as a result of the weekend 25 July 2016).

…

[387]   An Option Notice was not served at all. I accept that if the plaintiff were to have known of his capacity to serve the Option Notice, he would have done so. As earlier stated, the Option lapsed on or about 22 July 2016.

…

[411]   The defendant had available to it the Put and Call Option Agreement. On any reasonable and available understanding of the law on the survival of Options, expressed, as in this Agreement, to survive, inter alia, death, the Options would and could be utilised, regardless of the dissolution of the Partnership. Such a protection or right of the plaintiff in his Partnership was fundamental to the task of advising the plaintiff. The defendant did not so advise and misled or deceived the plaintiff that there were no rights of which he could avail himself, once the Partnership had been dissolved. He suffered loss as a result of the misleading or deceptive conduct.” (Footnotes omitted.)

37. The primary judge concluded that Mr Paltos had demonstrated that he suffered a loss by reason of not issuing a put option notice to Mr Milevski. That was because his Honour accepted that on the correct construction of the Put and Call Option Agreement Mr Paltos was entitled to be paid an amount calculated in accordance with Schedule C to that agreement, despite Mr Milevski resisting making such a payment. Mr Duggan, an expert accounting witness called by Mr Paltos, calculated the value of the Partnership on the basis prescribed by the Put and Call Option Agreement as $2,016,724 and the purchase price of Mr Paltos’ interests as 70% of that amount, $1,411,707. His Honour accepted that calculation and rejected a submission that the calculation of the amount payable under the put option by Mr Duggan involved double counting. That matter is the subject of ground 5 of the appeal and I will address the complexities raised by that issue when dealing with that ground.

38. The primary judge accepted that Mr Paltos was seeking the payment of amounts by Mr Milevski in the Partnership Proceedings which, if recovered, would reduce the amount of the damages payable by Bartier Perry. The amount Mr Paltos was seeking, as I will explain in greater detail when dealing with ground 6 of the appeal, was an amount representing 70% of the value of the Partnership assets (including goodwill and work in progress) as at 21 April 2016. As I have said, the Partnership Proceedings in which those payments are sought have not yet been heard.

39. Bartier Perry submitted that as Mr Paltos had chosen to conduct this case against his legal advisors separately from and prior to resolution of the underlying disputes about the Partnership, the primary judge was obliged to assess Mr Paltos’ damages now. Bartier Perry submitted that it was common ground between the parties at the trial that 70% of a figure between $879,434 and $1,026,007 calculated by Ms Rebecca Conoulty, the expert accountant Mr Paltos relies upon in the Partnership Proceedings, was the correct calculation of 70% of the value of the Partnership assets (including goodwill and work in progress) as at 21 April 2016. Bartier Perry submitted that this amount should be deducted from $1,411,707.

40. The primary judge recognised that some allowance needed to be made for the fact that Mr Paltos was claiming in these proceedings to have suffered loss of $1,411,707 in circumstances where, simultaneously, he was claiming in the Partnership Proceedings to have suffered a loss of over $600,000 which he accepted, if awarded, would reduce the damages recoverable from Bartier Perry. In the principal judgment, the primary judge considered the issue this way:

“[431]   It was submitted, by [Mr Paltos], that the difficulty associated with double counting the damage could be overcome by an undertaking that the plaintiff repay the defendant any amount received as a consequence of the proceedings in Equity. The difficulty with that course, left to its own devices, is that it deprives the plaintiff of any incentive to proceed with the litigation, or defend the litigation, in the Equity Division. Further, the repayment should not be confined to any award, but to any amount calculated to be the value of the plaintiff’s interest in the Partnership, less any amount allowed for the value of the guarantee.

[432]   This was one of the reasons that I had hoped that the Equity Division proceedings would have concluded by the time it was necessary to publish these reasons. Such an event was not to be.

[433]   In the circumstances, an undertaking of the kind submitted must be provided before any damages will be ordered. The foregoing undertaking must be to the effect that any amount received by or payable to Mr Paltos, as a result of the Equity proceedings involving him and Mr Milevski, must be paid to the defendant in these proceedings.

[434]   Further, the Court requires an undertaking that the defendant in these proceedings will have all rights of subrogation to the rights and remedies belonging to the plaintiff in relation to the proceedings against Mr Milevski. An undertaking that the plaintiff will consent to such subrogation, if the defendant so requests it, will be required before any order for damages issues.”

41. The primary judge did not make orders but gave the parties an opportunity to make further submissions about the orders to be made.

The second judgment

42. On 1 December 2020, the primary judge delivered judgment in Paltos v Bartier Perry Pty Ltd (No 2) [2020] NSWSC 1706 (the second judgment).

43. As to the undertaking issue, the primary judge said:

“[44]   The issues of subrogation and the repayment undertaking, suggested by the Court in the First Judgment, relate to, in the latter case, any amount received by way of goodwill in the Partnership Proceedings. In relation to the subrogation, it relates to what otherwise might be payable under the provisions of clause 5.2 of the Put and Call Option Agreement.

[45]   A difficulty in terms of the minute, foreshadowed in the First Judgment and adumbrated by the Court in the course of the hearing on the minute of the order, is that the amount allowed for goodwill in the Partnership Proceedings, together with the repayment of any guarantees or amounts underpinning a guarantee paid by the plaintiff, will be offset by the debts owed on account of overdrawing and other matters. In those circumstances, if the overdrawing and other debts are a greater amount than the Court in the Partnership Proceedings values the goodwill of the Partnership, no amount would be awarded to the plaintiff as a result of the Partnership Proceedings.

[46]   On the other hand, if the amount of overdrawing is deducted from that which is payable pursuant to any damages assessed on the basis of the realisation of the Put and Call Option Agreement and its exercise, then the plaintiff will be paid that amount twice.

[47]   None of the foregoing relates to the value of the option once exercised in so far as it deals with the value of the Partnership for the purpose of the exercise of that option. Last, the Court’s attempt to overcome the plaintiff receiving the goodwill or credit for the goodwill as well as the value calculated under clause 5.1 of the Put and Call Option Agreement, and the attempt to ensure that the defendant is not prejudiced by being required to offset the amount of damages payable by the plaintiff for the amount of overdrawing, led the Court to suggest the undertaking and the subrogation that is identified in the First Judgment.

[48]   Nor does the foregoing affect the reasonableness of the offer of $1.4 million and whether that results in a true compromise. That amount excludes any recompense for the return of the guarantee, which on the above analysis was appropriate. But the comparison between the offer and the judgment needs to include both costs and interest. Once interest, even up to the date of offer, is included, the offer is significantly better for the defendant.

[49]   Ultimately, the Court could have, more easily, awarded the judgment of $1.4 million, which had been shown to be owed and required an undertaking to repay any amount attributed to the goodwill of the Partnership in the Partnership Proceedings. The difficulty, contemplated by the Court, with that approach would have been that it may have been open to the plaintiff to settle the Partnership Proceedings (or arrange with Mr Milevski for them to be run) on the basis that the Court would determine goodwill at a very low figure and a consequential lower figure for the debt from overdrawing and otherwise.

,,,

[52]   The difficulty then arises that, if the Court, in these proceedings, ordered subrogation of the rights of the plaintiff in the Partnership Proceedings, or required an undertaking in or to that effect, the defendant in these proceedings could conduct the Partnership Proceedings in a manner that sought unreasonably to agitate matters that were consistent with its interests, but not those of the plaintiff.

[53]   If the defendant, on subrogation, was indemnified of its cost by the plaintiff in these proceedings, they could run issues and points that were, at best, only arguable. Further, the converse applies. The defendant could settle or run the Partnership Proceedings on an arrangement that the ‘value’ of the partnership would be optimised and the debts to the partnership increased accordingly.

…

[95]   Lastly, the undertaking as to the repayment will not refer to amounts received by Mr Paltos from the Partnership Proceedings. It will refer to the payment to Bartier Perry of the amount, if any, assessed as the proportionate goodwill of the Partnership, and, if there be none assessed, the proportionate value, if any, of work in progress utilised to the advantage or benefit of Mr Paltos in assessing what, if any, amounts he is, as a consequence of the Partnership Proceedings, to pay or to receive.”

44. It will be necessary to address, in detail, his Honour’s reasons on the topic of the undertaking when addressing ground 6 of the appeal. I will return to that topic then.

45. His Honour also gave consideration to claims for additional relief made by Mr Paltos which are the subject of the notice of cross-appeal. As those claims are detailed and somewhat convoluted, I will address them when dealing with the notice of cross-appeal.

46. Finally, the primary judge made an award of indemnity costs on the basis of an offer of compromise in the amount of $1.4 million. If Bartier Perry enjoy success in this appeal in reducing the amount of the damages award below $1.4 million it follows that the award of indemnity costs from the date of that offer must also be set aside.

47. His Honour made the following orders:

“UPON THE PLAINTIFF PROVIDING AN UNDERTAKING IN THE FOLLOWING TERMS:

The plaintiff, Dennis Paltos, undertakes to pay to the defendant, Bartier Perry Pty Ltd, any amount received or allowed to him in proceedings brought by Peter Milevski, being proceedings 2016/118930 and 2017/246841, confined to amounts received or allowed by or to the said Dennis Paltos in any calculation on account of goodwill, if any, of the Paltos/Milevski Partnership or on account of work in progress, if any, in the said partnership at the date of its dissolution.

THE COURT ORDERS:

(1)   Judgment in the proceedings for the plaintiff;

(2)   The defendant shall pay the plaintiff the sum of $1,411,707;

(3) Pursuant to the terms of s 100 of the Civil Procedure Act 2005 (NSW) the defendant shall pay interest on the aforesaid judgment sum from 22 July 2016 until the date of judgment at the rate prescribed in Supreme Court Practice Note SC Gen 16;

(4) Pursuant to the terms of s 101 of the Civil Procedure Act 2005 (NSW), the defendant shall pay post-judgment interest at the prescribed rate;

(5)   The defendant shall pay the plaintiff’s costs of the proceedings up to and including 28 February 2018 on the ordinary basis and on and from 1 March 2018 on an indemnity basis.”

Grounds of appeal

48. Bartier Perry advanced six grounds of appeal. It contended that the primary judge erred:

1. in finding that Bartier Perry breached its duty of care and retainer (ground 1);

2. in finding that Bartier Perry engaged in misleading or deceptive conduct in contravention of s 18 of the Australian Consumer Law (ground 2);

3. in finding that the Put and Call Option Agreement contained an implied term to the effect that “if the Put Option is exercised, and has not lapsed, requiring the Ongoing Owner to purchase the interest in the Partnership, that obligation is not capable of being defeated by the dissolution of the Partnership or any other step that would disentitle the Exiting Owner, who has the right to exercise the put option, from benefiting from the terms of the Put and Call Option Agreement” (ground 3);

4. in holding that any breach of Bartier Perry’s duty of care or retainer, or any misleading or deceptive conduct, was causative of the loss for which Mr Paltos sought damages (ground 4);

5. in finding that Mr Paltos suffered loss and damage and in the quantification of the damages found (ground 5); and

6. in proposing that the Court accept the undertaking referred to in the second judgment at [96] instead of assessing damages once and for all as a lump sum on the basis of the evidence before the Court (ground 6).

Application to lead fresh evidence

49. Bartier Perry sought to adduce evidence on the appeal which was submitted to be fresh evidence arising after the hearings by the primary judge. The evidence was contained in the affidavit of Timothy Randolph Price sworn on 19 March 2021 and its exhibit marked “TRP-1” comprising:

1. Law Society of New South Wales “find a lawyer” details for Mr Paltos dated 11 March 2021;

2. a copy of a historical company extract for “Paltos Family Lawyers Pty Limited” dated 11 March 2021;

1. Paltos Family Lawyers LinkedIn homepage screenshots dated 10 March 2021 which state the following:

“… We are a boutique firm specialising in divorce, family law and de facto marriage cases. … Dennis … has worked in the legal profession for almost 40 years as a litigation lawyer. … To get in contact with Dennis so that we can assist you please email us … or call us …”;

4. Paltos Family Lawyers Facebook page screenshots of posts dated 10 February (apparently in 2021) to a similar effect;

5. Waleys & Waleys [2020] FCCA 841 (delivered on 27 April 2020), which records the following at [59]:

“Also a part of exhibit A7 is a print of an email from the Father addressed his then-solicitor, Mr N, who appeared for him at Court on [25 September 2017]. That email includes the following:

• I just called Paltos …”; and

6. Jamison & Jamison [2018] FCCA 2528 (delivered on 16 August 2018), which records that Paltos Family Lawyers were the solicitors for the applicant in those proceedings.

50. Bartier Perry submitted that the Facebook and Linkedin posts confirm that Mr Paltos has returned to practise as the principal solicitor at Paltos Family Lawyers and, at the very least, establish that Mr Paltos considers himself cognitively capable of working as a solicitor and has retained his commitment to returning to practice. It was submitted that the judgments in Waleys and Jamison also establish that Mr Paltos returned to practice and did some legal work in the business named “Paltos Family Lawyers”. It was submitted that the judgments, when viewed in light of the more recent social media posts, underscore Mr Paltos’ ongoing and unwavering commitment to return to practice.

51. Where the evidence relates to matters occurring after the trial, there is no requirement to show special grounds to justify its reception: Supreme Court Act 1970 (NSW), s 75A(9) (“subsection (8) [which requires special grounds] does not apply to evidence concerning matters occurring after the trial or hearing”). Nevertheless, in exercising the statutory power to admit fresh evidence regard must be had to the nature of the proceedings and the general public interest in the finality of litigation: Doherty v Liverpool District Hospital (1991) 22 NSWLR 284 at 296; Great Wall Resources Pty Ltd v O’Sullivan [2009] NSWCA 119 at [28]-[30]; Council of The City of Botany Bay v Michos [2013] NSWCA 244 at [33].

52. Bartier Perry are correct that the material sought to be tendered on the appeal is fresh in that it was not available in 2020 at the time of the hearings before the primary judge. At its highest, however, this fresh evidence shows what was already apparent from the primary judgment itself, namely that after the relevant period in which Mr Paltos could have exercised the put option, he returned to practise as a solicitor, albeit on a much more limited basis than before he suffered the strokes. As I will explain, there is no longer an issue in this case about whether, in order to exercise the put option, Mr Paltos needed to demonstrate that he was totally and permanently disabled, in the sense that he was no longer able to work as a solicitor in the future. The primary judge rejected that construction of the Put and Call Option Agreement and Bartier Perry did not appeal from that finding.

53. Bartier Perry submitted that the evidence is relevant to establishing that Mr Paltos continued to practise law after the expiration of the notional Option Exercise Period and, by extension, believed that he was mentally capable of so acting. The evidence was said to undermine the primary judge’s conclusion (at [314]) that Mr Paltos “was suffering from a condition that prevented him from working and was getting worse” as it indicates that his condition did in fact improve to the point at which he was able to return to practice. This, however, was understood by the primary judge who made a finding (at [12]) that in August 2016, Mr Paltos lodged a Notice of Intention to Engage in Legal Practice with the Law Society of New South Wales under the name Paltos Family Lawyers Pty Ltd and in December 2016, he returned to practise as a solicitor. The fresh evidence confirms those findings but takes the matter no further.

54. Bartier Perry also submitted that the evidence confirms the primary judge’s finding that Mr Paltos was committed to returning to practice. It was submitted that this bears upon the question of whether Mr Paltos would have sought to exercise the put option if he had been properly advised in relation to it. I do not agree.

55. This submission is based upon a misconception about the proper operation of the Put and Call Option Agreement. As I have already said, the primary judge found that the correct construction of the Put and Call Option Agreement was that the Trigger Event occurs at the end of six months of disablement, being in this case the inability on the part of Mr Paltos to perform his usual working activities in the Partnership for a period of six consecutive months. None of this fresh evidence goes anywhere near to establishing that Mr Paltos can now perform his usual working activities in the Partnership, let alone that he could at the time he was legally able to exercise the put option.

56. To the extent that Bartier Perry seek to rely on this evidence as a “roadblock” warranting a finding relevant to causation that, although incorrect as a matter of law, Mr Paltos may have thought that he could not exercise the put option lest he be forbidden from ever practising as a solicitor in the future, that was a matter well and truly litigated before the primary judge on the basis of abundant material that Mr Paltos strongly desired to return to practise as a solicitor and by the time of the trial had done so to a limited extent. This evidence adds nothing material to the abundant evidence which was before the primary judge on that topic.

57. Given the nature of the proceedings, the extensive findings already made on this subject, the peripheral relevance of the material and the general public interest in the finality of litigation, I would exercise the Court’s discretion to reject all of the fresh evidence and dismiss Bartier Perry’s notice of motion.

Application of the Civil Liability Act and the Competition and Consumer Act

58. Despite the provisions of the Civil Liability Act 2002 (NSW) and the Competition and Consumer Act being central to the resolution of the present case, a striking feature of these proceedings is the absence of any real references to those legislative provisions by the parties before the primary judge or in this Court.

59. The consequences are that, for the purposes of the appeal, virtually all of Bartier Perry’s complaints are concerned with the construction of the Put and Call Option Agreement and findings of fact made by the primary judge. The exception is ground 6, which complains about a matter of principle in the ascertainment of Mr Paltos’ damages. Even in that case, however, the provisions of the Civil Liability Act and the Competition and Consumer Act were barely addressed.

Ground 1 of the appeal – breach of duty of care and breach of retainer

60. Ground 1 of the appeal involves four separate, but overlapping, challenges to the primary judge’s findings of fact about Mr McCaffery’s advice to Mr Paltos about the Put and Call Option Agreement. Bartier Perry submitted that on a correct understanding of the facts it had discharged its obligation properly to advise Mr Paltos about the manner and circumstances of exercise of the put option granted by the Put and Call Option Agreement.

61. I have concluded that this ground must fail. This is because, on the assumption most favourable to Bartier Perry about what Mr McCaffery on behalf of Bartier Perry told Mr Paltos about the manner and circumstances of exercise of the put option, Mr Paltos was nevertheless entitled to succeed in his case that Bartier Perry breached its retainer and the concurrent duty of care.

62. Before descending into the detail of Bartier Perry’s complaints about factual findings, it is first necessary to address submissions made on behalf of Mr Paltos which asserted that in order to succeed on this ground Bartier Perry was required to demonstrate that factual findings made by the primary judge must be shown not to have been “open”:

“COLEMAN:   Our submission is that not only were the findings reasonably open, but that they were abundantly underpinned by not less than 25 contemporaneous file notes and/or emails of the defendant in the Court below – and I’ll take your Honours to it – the cross-examination of the solicitor who was advising the respondent at the relevant time. We submit other than this Court in effect sidestepping the requirement that an appellant demonstrate that a finding of fact wasn’t reasonably open, whether one has regard to some of the more colourful formulations of the test that emerged from the authorities or not, if one takes the more bland proposition not reasonably open, we submit on none of these issues can it be shown that the findings of his Honour are vulnerable.”

63. As was made clear during oral address, that submission cannot be accepted. In a case such as the present, where s 75A of the Supreme Court Act applies, the Court is conducting a rehearing. A judgment of this Court is required both on the facts and the law. In relation to demeanour-based credit findings, as explained in Fox v Percy (2003) 214 CLR 118; [2003] HCA 22 at [22]-[28], appellate restraint is required. Nevertheless, as the High Court went on to explain in Fox v Percy:

“[29]   … Finality in litigation is highly desirable. Litigation beyond a trial is costly and usually upsetting. But in every appeal by way of rehearing, a judgment of the appellate court is required both on the facts and the law. It is not forbidden (nor in the face of the statutory requirement could it be) by ritual incantation about witness credibility, nor by judicial reference to the desirability of finality in litigation or reminders of the general advantages of the trial over the appellate process.”

Ground 1(a)

64. The primary judge made the following finding about Mr McCaffery’s advice to Mr Paltos:

“[310]   On 23 February 2016, as noted earlier in these reasons, the defendant, through Mr McCaffrey, noted the plaintiff’s present incapacity which, in the view of the defendant, was ‘likely to continue partially for indefinite period’ and noted or asked whether there was ‘permanent disablement of the plaintiff for the purposes of the [Put and Call Option Agreement]’. It then refers, albeit in abbreviations, to the six-month period; the option period; and then the 30 days. It cannot be the situation, given the content of that note, that Mr McCaffrey (and necessarily the defendant) did not read and seek to construe the Put and Call Option Agreement. What the defendant did not do was formally construe the Put and Call Option Agreement and it did not advise the plaintiff of any such construction.”

65. Bartier Perry submitted that the primary judge erred in finding that Mr McCaffery did not “formally construe” the Put and Call Option Agreement or advise Mr Paltos about his construction of that agreement. It was submitted that his Honour’s finding was contrary to Mr McCaffery’s evidence, admissions made by Mr Paltos in cross-examination, the objective evidence and other findings in his Honour’s judgment.

66. Bartier Perry submitted that the Court should find that in late February 2016, Mr McCaffery construed the Put and Call Option Agreement and correctly advised Mr Paltos that the put option did not assist him at that time because before it could be exercised there was a six-month requirement in relation to his disability.

67. It may be that by finding that Mr McCaffery did not “formally construe” the Put and Call Option Agreement, all that his Honour was saying was that Bartier Perry did not construe the Put and Call Option Agreement in the strict sense of not accurately interpreting and finding its correct meaning. As I will explain, that finding was correct. If, however, the finding made by the primary judge that Mr McCaffery did not “formally construe” the Put and Call Option Agreement intended to convey that Bartier Perry did not look at the Option Agreement at all, this was an overstatement of the position. As I will explain, however, I do not think that even if the finding should be understood as intended to convey that Bartier Perry did not look at the Option Agreement at all it affects his Honour’s overall conclusion that Bartier Perry failed to give Mr Paltos competent advice about his rights under the Put and Call Option Agreement. That is, I accept that Mr McCaffery read the Put and Call Option Agreement and sought to understand its terms, sufficient to warrant the description that he “construed” it, at least in that limited sense. I also accept that it is likely that Mr McCaffery said to Mr Paltos that the Put and Call Option Agreement did not apply to him “yet” or “at this time”. In context, the oral advice by Mr McCaffery was likely to have included some reference to the time dimension of the exercise of the option. Mr McCaffery’s advice was not, however, in the circumstances and having regard to the terms of Bartier Perry’s retainer, sufficient to discharge its obligation to provide competent legal advice to Mr Paltos about his rights against Mr Milevski as regards the Partnership. I will return to this subject shortly.

Ground 1(b)

68. Bartier Perry next submitted that the primary judge erred in finding that by 14 April 2016 Mr Paltos was prepared to give up the whole of his interest in the Partnership. It was submitted that, at that time, Mr Paltos retained a “strong and passionate desire” to return to work and believed that desire “would be fulfilled or might be fulfilled” in the future. It was submitted that even though Mr Paltos was willing to transfer his interest in the Partnership to Mr Milevski, he was not prepared to do so in a way that would prevent him from being able to work again, which (so the written argument asserted) would have occurred if he tried to invoke his rights under the Put and Call Option Agreement.

69. Whilst I accept that on 13-14 April 2016 Mr Paltos continued to harbour a desire to return to work as a solicitor when he was able to do so, the primary judge’s finding that by 13 April Mr Paltos was prepared to give up, by which the primary judge meant transfer, the whole of his interest in the Partnership, was plainly correct.

70. The contemporaneous documents and unchallenged findings of the primary judge make clear that on 14 April 2016 Mr Paltos had agreed in principle to the transfer of his interests in the Partnership to Mr Milevski, “by whatever mechanism”, and that his current condition prohibited him from getting back to work as soon as he had expected:

“[179]   On 14 April 2016, Mr McCaffrey wrote to Mr Harris referring to Mr Paltos’ deteriorating health condition over the past 24 hours, which was preventing Mr McCaffrey from obtaining detailed instructions, particularly upon the 32 items that had been sent to Mr McCaffrey.

[180]   Nevertheless, Mr McCaffrey restates that Mr Paltos was agreeable in principle to the transfer of his interests to Mr Milevski, by whatever mechanism, and that his current condition prohibited him from getting back to work as soon as he had expected. Mr McCaffrey also questioned the extreme haste with which Mr Milevski apparently wanted the matter resolved. Fifteen minutes later, Mr McCaffrey confirms with Mr Paltos the terms of his email to Mr Harris and suggests that the other side would see the claim of deteriorating health as a pretext for delay.

[181]   On 15 April 2016, Mr Howell emailed Mr Paltos, with a copy to Mr McCaffrey, raising the possibility of appointing a financial guardian because of Mr Paltos’ health.

[182]   There can be little doubt that the contemporaneous notes and correspondence corroborates the view of Dr Lianos, Dr Breen and Dr Miller. Mr Paltos’ executive functioning was significantly impaired. He was visibly and obviously impaired.” (Footnote omitted.)

71. It is one thing to conclude that Mr Paltos would seek to practise as a solicitor in the future. Plainly he did. It is a quite different thing to find that Mr Paltos would be prepared to transfer the whole of his interest in the Partnership. There is no inconsistency in the two states of mind or decisions made by Mr Paltos. As I have explained, the primary judge’s finding that Mr Paltos did not need to be “totally and permanently disabled” in addition to meeting the description in clause (b) of the definition of “TPD” was not challenged by Bartier Perry on appeal. Whilst it is correct that Mr Paltos would not have been permitted to solicit clients of the Partnership if he had exercised the put option, Bartier Perry’s submission that having exercised the put option Mr Paltos could never work as a solicitor again is untenable.

Ground 1(c)

72. The primary judge drew the following conclusions:

“[316]   Regardless of whether or not one takes the view expressed by the Court as to the construction of TPD, or as to the construction of total and permanent disablement, at least as at 14 April 2016, and in my view, on the basis of the evidence in this case, well before that time, Mr McCaffrey was and, if not should have been, aware that there was at least an arguable, if not overwhelming, view that the plaintiff was totally and permanently disabled within the meaning of the Put and Call Option Agreement.

…

[320]   But the plaintiff’s lack of insight into his capacity must have been obvious and, on the evidence before the Court, was obvious. Further, whether or not the plaintiff had insight and whether or not Mr McCaffrey was entitled or required to go behind the plaintiff’s statements as to his not wanting to give up the Partnership, as at 13 April 2016, at the latest, Mr McCaffrey and the defendant were aware that Mr Paltos was willing to give up his entire interest in the Partnership and was suffering a total and permanent disablement, or was aware of the facts that, if the defendant’s mind considered those facts, would inevitably, or more likely than not, lead to that conclusion.”

73. Bartier Perry submitted that the primary judge erred in finding that by at least 14 April 2016 Mr McCaffery was aware, or should have been aware, that Mr Paltos was totally and permanently disabled within the meaning of the Put and Call Option Agreement. There were said to be three problems with his Honour’s finding:

1. first, as at 14 April 2016, Mr Paltos could not have been totally and permanently disabled within the meaning of the Put and Call Option Agreement because he had only suffered his stroke four months earlier, whereas the definition of “TPD” required that he be unable to carry out his usual working activities in his usual occupation for a period of six consecutive months. At most, he may have been totally and permanently disabled in two months’ time;

2. secondly, the medical evidence from the time does not support his Honour’s finding; and

3. thirdly, in February Mr McCaffery believed it was possible that Mr Paltos would be able to return to work.

74. Bartier Perry invited the Court to find that Mr McCaffery believed that there was a real prospect that Mr Paltos “may not” be totally and permanently disabled for the purposes of the Put and Call Option Agreement when the Option Exercise Period notionally would have commenced on 23 June 2016. It was said that, in light of the medical evidence available at the time, it was not unreasonable for him to hold this belief.

75. Bartier Perry is correct that as at 14 April 2016, Mr Paltos could not have been totally and permanently disabled within the meaning of the Put and Call Option Agreement and the primary judge erred in so concluding. As I will explain, however, I do not think that it affects his Honour’s overall conclusion that Bartier Perry failed to give Mr Paltos competent advice about his rights under the Put and Call Option Agreement.

210. Both parties accepted that R I Banks, Lindley & Banks on Partnership (20^th ed, 2020, Thomson Reuters) expresses a proposition relevant to determination of the present question thus:

“if one partner in fact manages to secure the benefit of the firm’s goodwill for himself, he can be compelled to account for its value, but such value will naturally reflect the fact that he and the other partners would be entitled to set up business in competition with the notional purchaser [Smith v Everett (1859) 27 Beav. 446; Mellersh v Keen (1860) 28 Beav. 453; Re David and Matthews [1899] 1 Ch. 378]”. (Footnotes included.)

212. In Smith v Everett (1859) 27 Beav 446 and Mellersh v Keen (No 2) (1860) 28 Beav 453, Sir John Romilly MR held that in the case of a partnership that was dissolved on the death of one of the partners and the surviving partner continued to carry on the business and thus obtain the benefit of the goodwill, a share in the goodwill formed part of the estate of the deceased partner if the goodwill had any value at all having regard to the right of the surviving partner to carry on business in competition: see Smith v Everett at [452]. In Mellersh v Keen his Lordship said at [455] that in determining the value of goodwill the question is:

“What it would have produced, if it had been sold in the most advantageous manner and under such circumstances that it would have produced the largest sum for all the parties interested?”

213. In Re David and Matthews [1899] 1 Ch 378, Romer J said at 383 that the goodwill should be valued on the footing that if the business were sold the surviving partner would be at liberty to carry on a rival business but could not use the name of the partnership and would not have the right to solicit the old customers of the firm.

214. Relatively few implied restrictions are imposed on a vendor of goodwill, so that a valuable partnership business may, in practical terms, be unsaleable and, thus, worthless to anyone but a former partner who wishes to acquire it. Goodwill may have no value independently of the partnership premises or the firm name. Lord Lindley pointed out that:

“It is only so far as the goodwill has a saleable value, that it can be regarded as an asset of any partnership …”. ^[18]

18. Peek v Derry (1887) 37 Ch D 541 at 591, per Cotton LJ.

215. The current editor of Lindley & Banks takes the view that, as a statement of principle, this goes too far. Although goodwill is unmarketable, it clearly exists as an asset: at [10-227]. The editor suggests that Lord Lindley perhaps meant that unsaleable goodwill must be ignored for accounting purposes: citing Wilson v Williams (1892) 29 L R Ir 176, where the goodwill of a stockbroker’s business was excluded from the accounts for this reason. Although it was once suggested that the goodwill of a solicitor’s practice has no value (see Arundell v Bell (1883) 52 L J Ch 537), this is clearly not the present position: see Sobell v Boston [1975] 2 All ER 282; Bridge v Deacons [1984] AC 705; Burchell v Wilde [1900] 1 Ch 551; Fitch v Dewes [1921] 2 AC 158 at 168 per Lord Cave.

216. In Thames Cruises Ltd v George Wheeler Launches Ltd [2003] EWHC 3093 at [43], Peter Smith J expressed the view at [43] that it was unlikely (but not impossible) that a partnership at will would have developed “any sizeable goodwill value because of the ability of the partners of the dissolved firm to compete subsequent to dissolution”. Lindley & Banks suggests that the position would be the same on the dissolution of a partnership for a term, absent any applicable express restriction: at [10-227]. Goodwill generated by the efforts of the partners will, in the normal course, be a partnership asset: at [10-228].

217. In the event of a general dissolution (i.e. one involving a full-scale winding up), the goodwill must normally be sold, unless the partners agree otherwise (and unless the goodwill is valueless or otherwise inherently unsaleable): at [10-229]; see fn 1101.

218. Lindley & Banks explains that if the firm’s business and its associated goodwill ceases to exist on dissolution, there will be nothing to realise. In Ryder v Frohlich [2006] NSWSC 833 (see further [2004] NSWCA 472), the business consisted of the provision to a company of the services of the two partners. One partner abandoned the partnership and the business, by definition, ceased to exist. It was not possible to go back to the position which existed prior to the dissolution for valuation purposes: at [10-229].

219. Section 38 of the Partnership Act 1890 (UK) contemplates that the members of a dissolved firm will complete any unfinished business but will not take on any new work. The editor of Lindley & Banks says that it is self-apparent that, if no new work can be taken on, the value of the firm’s goodwill will be swiftly dissipated unless (exceptionally) a forced sale can be secured on or shortly following the dissolution date: at [10-230].

220. If one partner secures the benefit of the firm’s goodwill for him or herself, he or she can be compelled to account for its value, but such value will naturally reflect the fact that he or she and the other partners would be entitled to set up business in competition with the notional purchaser: at [10-230]. It may be impossible for any partner to demonstrate that the goodwill has no saleable value until the partnership affairs have been fully wound up: at [10-231].

221. A partner’s ability to carry on a competing business in the same locality may, for all practical purposes, represent a sufficient deterrent to prospective purchasers to render the goodwill unsaleable: at [10-233]. In cases where the death of a partner results in the dissolution of the partnership, if the personal representatives of the deceased partner do not seek to force a sale of the partnership assets and are content to receive the value of his or her share as at the date of death, a payment will only fall to be made in respect of goodwill if it has a marketable value: at [10-233]. However, goodwill is often of little or no value on a dissolution (i.e., where the valuation is on a “break up” basis): at [36-53].

222. Lindley & Banks explains that where goodwill does have a value, the actual method of valuation will be determined by the size of the business and the type of goodwill involved. All of the circumstances must be considered before it is possible to determine which method will be appropriate in a given case: at [36-59].

223. In Mellersh, a partnership was dissolved with the effect that one partner would obtain exclusively the benefit of the goodwill and be made accountable for it. The Chief Clerk calculated the value of the goodwill on the principle that:

“the goodwill might have been sold together with the leasehold interest in the house and premises in which the partnership business was carried on, and which formed part of the assets of the partnership, and that the purchaser of the business would have had the possession of the house and premises, and that the books of the partnership would have been handed over, and the accounts of the customers of the partnership transferred to such purchaser, and that the customers would have been informed of such transfer, and that such goodwill was worth one year’s purchase of the net annual profits of the banking business, calculated on an average of the three years ending on the 31st day of December 1858”.

224. The Master of the Rolls, Sir John Romilly, held that the Chief Clerk came to the right conclusion. The Master of the Rolls considered that the Court was bound to ask “[w]hat [the goodwill] would have produced, if it had been sold in the most advantageous manner and under such circumstances that it would have produced the largest sum for all the parties interested?” It was held that:

“It is clear that this goodwill ought not to have been sold in such a manner as to have enabled the Plaintiffs to obtain, for themselves exclusively, the banking business, which they had previously carried on with the Defendant, and to get all the accounts of the customers of the firm transferred to them before the goodwill was sold. It ought to have been sold at the time of the dissolution, of which the Plaintiffs gave only a fortnight’s notice … if … they had advertised that, on the 31st of December, the goodwill would be sold, explaining what the goodwill would be … it is … very probable that some joint stock banking company would have thought it worth their while to get some footing in that, which, although not a populous, is still a very thriving place … it is also probable that the Plaintiffs might have thought it more advantageous for them to buy the goodwill than to have allowed competition in the town. If all this had taken place, so as to create that species of competition, and as the Plaintiffs had no other house of business ready at that time, it is very possible that the goodwill might have sold for a good deal more than the amount found by the Chief Clerk.”

225. In affirming the Chief Clerk’s certificate, Sir Romilly concluded that the goodwill might have been sold, and might have produced something considerable:

“although it is quite true that if, when the Plaintiffs continued the business and all the accounts of the customers of the old firm had been transferred to the new, the goodwill had been put up for sale by auction, nobody would have given a penny for it, yet it is quite consistent with the other view of the case.

I do not see in what way the Chief Clerk could have come to a conclusion of what it would have produced, except by taking the average of three years’ annual profits.”

226. These principles have been accepted in New South Wales. In Page v McKensey (Supreme Court (NSW), Windeyer J, 17 December 1993, unrep), Windeyer J valued the goodwill of a partnership of chartered accountants. After dissolution the defendants continued to use the business name and “to all intents and purposes continued the partnership business”. Windeyer J accepted the defendants’ valuation evidence that the value of the name without covenants was $150,000 and treated that as the value of the goodwill. His Honour rejected the plaintiff’s valuation evidence, which was assessed on the basis of the sale of a going concern with full covenants including restraint covenants. His Honour summarised the principles as follows:

“On a dissolution of partnership the value of assets must be determined at the date of dissolution having regard to the terms of any agreement among the partners. Here there were no such terms. It follows that goodwill must be valued on the basis that it could be purchased by an outsider or one or more of the former partners. Any outside purchaser of goodwill would take into consideration the facts that:

a.   the former partners would be free to practise in the immediate vicinity;

b.   the former partners would be free to deal with any former clients, and free to make their new circumstances known, but not free to solicit former clients of the dissolved partnership.

c.   the former partners would be free to take over any existing files of the dissolved partnership if the clients so wished and fees for work to the date of dissolution were paid to the old firm.

d.   the former partners would not be free to use the name of the former partnership or a name so close to it that it would be likely to be confusing or to mislead people to think it was a continuation of the old partnership.

… Former partners purchasing goodwill would do so with knowledge of these matters and their likely effect on outside buyers.

Thus while the value of goodwill is a question of fact in all cases it is a question to be determined within and in accordance with the principles I have set out. Differences in partnership history, size, areas of work and other matters will of course influence the value of goodwill.”

227. On appeal, the appellant did not challenge the correctness of Windeyer J’s statement of the method by which goodwill is valued: Page v McKensey [1995] NSWCA 351.

228. Page v McKensey was cited with approval in Old v McInnes and Hodgkinson [2011] NSWCA 410 at [87] (Meagher JA, Beazley and Giles JJA agreeing). That case relevantly concerned the question of whether a partner was entitled to have the value of goodwill brought to account in the dissolution of the partnership.

229. As a matter of principle the task in assessing damages here is to determine on the evidence before the primary judge what the prospects were of Mr Paltos obtaining on the taking of an account the sum claimed by Mr Paltos in the Partnership Proceedings on account of goodwill and then discounting that opportunity for the uncertainties of litigation.

230. There appears to be much to be said for the proposition that in substance the business of the Partnership was transferred to Mr Milevski (as Ms Conoulty assumed). As Lord Romilly said in Mellersh in relation to the business there in question (a banking business), had the receivers advertised the business of the practice as being for sale with all that that entailed, including the right to use the partnership name and to approach the clients to solicit their continued business free from constraint that either of the partners could themselves solicit the clients, a considerable sum could be realised. Indeed, it is possible that Mr Milevski could have bid to purchase the business in order to retain the clients.

231. On the other hand, the position the Receivers now patently adopt, that no Partnership assets were transferred to Mr Milevski and thus no amount is payable for goodwill, is also arguable.

232. The peculiar circumstances of this case, however, give rise to a real difficulty. Bartier Perry asserts, based on Mr Paltos’ own evidence and submissions, that the assumptions and conclusions of the Conoulty report are to be preferred. Mr Paltos makes no real submission in opposition to acceptance of the Conoulty report, other than to refer to later reports not in evidence and to urge care in protecting Mr Milevski’s and the Receivers’ rights. Each of these submissions I reject as essentially irrelevant to the present task.

233. Although both parties were apparently content to proceed on the basis that the Court should approach this question on the balance of probabilities, the correct approach, as I have discussed, was that explained in Malec v Hutton of assessing the percentage probability or possibility of the relevant event. Doing the best I can, that percentage is 70%. That is because the essential submissions made by Bartier Perry about this question were, subject to irrelevant qualifications, accepted by Mr Paltos. To recap:

1. the JNP report has been prepared consistently with the relevant principles and on the basis of correct assumptions. Ms Conoulty agrees with the methodology, reasoning and basis of value adopted in the JNP report. This Court would accept the JNP report’s valuation of $860,902 to $1,065,371;

2. the Wiese report incorrectly concludes that no goodwill was transferred to Mr Milevski on the basis of the assumption that “it is unreasonable to assume the existence of partnership goodwill” and “partnership goodwill did not transfer to Mr Milevski”;

3. the following factors identified by Ms Conoulty ought to have led Mr Wiese to conclude that Mr Milevski acquired substantially the same business such that the goodwill was transferred:

1. first, all the Partnership’s 146 open client files were transferred to Mr Milevski;

2. secondly, five of the Partnership’s former employees immediately started working for Mr Milevski;

3. thirdly, the Partnership’s practices, procedures, manuals and precedents were all transferred to Mr Milevski; and

4. fourthly, the Partnership’s website and telephone number diverted to Mr Milevski;

4. the evidence does not support Mr Wiese’s finding that Mr Milevski retained the Partnership’s former clients because of his “personal goodwill” which he presumably acquired as a result of his “name and personal standing” with the Partnership’s clients. The correct approach would have been to reduce the valuation of the Partnership’s goodwill to take account of any personal goodwill attributable to Mr Milevski, as Ms Conoulty has done, rather than writing it off entirely;

5. Mr Wiese’s apparent assumption that all partnership goodwill is “personal goodwill” or worthless does not follow from the principles enunciated in Page v McKensey;

6. Ms Conoulty adopted “fair value” as the appropriate measure of the assets transferred to Mr Milevski. Her report is detailed, well-reasoned and clearly explained. The assumptions on which her report was prepared appear to be correct. The Conoulty report was essentially unchallenged expert evidence; and

7. this Court would accept the JNP valuation of $860,902 to $1,065,371 and Ms Conoulty’s valuation of $879,434 to $1,026,007 as the best evidence of the value of the Partnership goodwill that Mr Milevski acquired.

234. As I have said, Mr Paltos after being given a separate chance to make considered written submissions on this topic did “not necessarily dispute the propositions” set out at (1)-(7) above.

235. It follows that the award of $1.41 million to Mr Paltos was excessive. There was no response of substance or by reference to evidence in this case to Bartier Perry’s submission that “[t]his Court would find that the value of the Partnership’s goodwill was $957,928”. A deduction of 70% of that figure (rounded down to $957,000) is appropriate. 70% (Mr Paltos’ share) of that figure is $669,900. 70% (the appropriate Malec v Hutton percentage) of that amount is $468,930. This is the amount I would deduct from the award of $1,411,707. Mr Paltos is thus entitled to an award of damages of $942,777 from Bartier Perry.

236. In circumstances where the basis of the award of indemnity costs was based solely on an offer by Mr Paltos to settle for $1.4 million, it follows that the award by the primary judge of indemnity costs should also be set aside.

Notice of cross-appeal

237. Regrettably, determining the subject matter of the cross-appeal and the relief sought by the cross-appellant proved an elusive task.

238. The amended notice of cross-appeal filed on 6 April 2021, the first day of the appeal hearing, sought the following relief:

“1.   [Cross] Appeal allowed.

2.   The cross-respondent [Bartier Perry] indemnify the cross-appellant [Mr Paltos] from and against all actions, claims, demands, notices, losses, damages, costs or expenses for which the cross-appellant may become liable in respect of the partnership styled Paltos Milevski Family Lawyers and which arise after 21 April 2016 (including any guarantees and the like that may have been provided by any such person, but only to the extent to which such guarantee has not been called upon or otherwise exercised prior to 21 April 2016).

3.   The cross-respondent pay the cross-appellant’s costs.”

239. The findings of the primary judge on this topic were set out at [91]-[93] of the second judgment:

“[91]   The plaintiff also seeks, pursuant to the terms of clause 5.2 of the Put and Call Option Agreement, an indemnity from and against all actions, claims, demands, notices, losses, damages, costs or expenses for which the plaintiff may become liable in respect of the Partnership. In the terms sought, such an indemnity would indemnify the plaintiff against any orders made against the plaintiff in the Partnership Proceedings. The terms of clause 5.2(a) of the Put and Call Option Agreement require the partner to indemnify the outgoing partner in those respects.

[92]   But the objectively determined construction of clause 5.2(a) is not to indemnify the Exiting Owner (Mr Paltos) for past losses and the like. It is to indemnify for future claims or losses. As proposed, the draft Short Minutes would require the defendant to indemnify Mr Paltos against the claim by Mr Milevski.

[93]   Given the dissolution of the Partnership in April 2016, before the indemnity would otherwise have operated, the plaintiff’s damage as a result of not possessing the indemnity would relate only to claims made after July 2016 relating to issues that arose prior to 2016. There is no evidence of any such issue and the plaintiff has failed to show damage, in this respect, arising as a result of the defendant’s negligence or a need for an order of this kind.”

240. The terms of cl 5.2(a) of the Put and Call Option Agreement are set out above at [18]. The only substantive relief sought by the cross-appeal tracks carefully the terms of cl 5.2(a).

241. Somewhat surprisingly, given the reliance upon cl 5.2(a) of the Put and Call Option Agreement in the notice of cross-appeal, the following exchange occurred early during the course of oral argument on the cross-appeal:

“PAYNE JA:   Take us through cl 5.2(a), because it seems that [cl 5.2] (b) might – well, do you rely on (a) or (b) for this point?

COLEMAN:   As I understand it, we rely on (b).”

242. Considerable argument followed about the ways in which it was submitted that cl 5.2(b) of the Put and Call Option Agreement might somehow be engaged on the facts here.

243. After lengthy exchanges with the Court about possible difficulties with the application of cl 5.2(a) to the facts of this case, the following exchange occurred:

“McCALLUM JA:   I’m confused, your ground in the amended cross-appeal echoes the language of 5(a).

COLEMAN:   Would your Honour excuse me. Yes, your Honour is absolutely right and that’s the document we filed and that’s what we’re stuck with and I can’t change that.”

244. No application was made to amend the notice of cross-appeal to rely on cl 5.2(b) or any other clause.

245. Having identified the indemnity provided by cl 5.2(a) as the subject matter of the cross-appeal, the following exchange occurred:

“WHITE JA:   Is there any evidence that anyone, or Mr Milevski I suppose, has claimed that Mr Paltos is liable in respect of a liability which arises after July or August or indeed at any time after 21 April 2016?

COLEMAN:   I don’t understand that to be the case.

WHITE JA:   What would be the point of the order in terms of the relief sought in the cross-appeal?

COLEMAN:   There wouldn’t be.”

246. A clearer acknowledgment of the inappropriate nature of the relief sought in the amended notice of cross-appeal is difficult to envisage.

247. Despite this clear abandonment of the only relief sought by the cross-appeal, in supplementary written submissions dated 13 April 2021, Mr Paltos submitted that the Court should make the following orders:

“(a)   The appellant’s appeal is dismissed;

(b)   The respondent’s cross-appeal is allowed and the existing undertakings provided by the respondent discharged and in lieu thereof the Court makes the following orders:

(i)   verdict and judgment for the respondent against the appellant in the sum of $1,411,707 together with interest continuing until the date of payment.

(ii)   a declaration that the appellant indemnify the respondent from and against all actions, claims, demands, notices, losses, damages, costs or expenses for which the respondent may become liable in respect of the partnership styled Paltos Milevski Family Lawyers (the Partnership) and which arise after 21 April 2016 (including any guarantees and the like that may have been provided by any such person, but only to the extent to which such guarantee has not been called upon or otherwise exercised prior to 21 April 2016) such amount to be determined upon the taking of accounts in the [insert details] Equity Proceeding.

(iii)   an order that the appellant pay to the respondent, or if the respondent has not paid the sum of $515,000 to the Partnership, to the Partnership on behalf of the respondent, an amount equal to the liabilities incurred by the respondent with respect to the debts of the Partnership for which he may become liable [Put and Call Option Agreement cl 5.2(b)(ii))] such amount to be determined upon the taking of accounts in the 2016/00118930 Equity Proceeding;

(iv)   leave be granted to the respondent to quantify:

(A)   the costs and expenses for which the respondent has become liable in respect of the Partnership; and

(B)   the amount of the liabilities incurred by the respondent with respect to the debts of the Partnership for which the respondent may become liable,

upon the taking of accounts in the Equity Proceeding;

(c)   the Court notes that the appellant may by prior agreement with the respondent pay to it the costs and expenses for which the respondent has become liable in respect of the Partnership and the liabilities incurred by the respondent with respect to the debts of the Partnership and be subrogated to the rights of the respondent in the Equity Proceeding.”

248. The submissions accompanying these suggested orders were barely comprehensible. Those submissions travelled far outside the limited grant of leave to make submissions that was afforded to the parties. The parties were granted leave to file short notes on: (a) “what … is being claimed by Mr Paltos in the accounting exercise [apart from goodwill] and what, if anything, is conceded”; and (b) whether there are any cases “wherein an assessment of damages, something like this undertaking, has been a part of the mechanism meant to reflect that assessment”, being the undertaking that was required by the primary judge at [98] of the second judgment.

249. In circumstances where Senior Counsel for the cross-appellant has accepted that there is no evidence of any claim that Mr Paltos is liable in respect of a liability which arises at any time after 21 April 2016 and conceded that there was no point in any order of the kind sought on the notice being made, no basis has been shown for the making of the order sought in the amended notice of cross-appeal.

250. Even more troublingly, the relief sought in proposed orders (b)(iii) and (iv) was inconsistent in material respects with the amended notice of cross-appeal, particularly by reason of the references to cl 5.2(b)(ii) which formed no part of the cross-appeal. As I have said, no leave to further amend the amended notice of cross-appeal was sought. If such leave were sought, in the circumstances in which this issue was litigated on the appeal, I would refuse leave. Proposed order (b)(iv) appears to be a completely new form of order in place of the undertaking offered which was the subject of ground 6 of the appeal. No notice of contention or notice of cross-appeal was filed seeking such relief and if the submissions filed beyond the leave granted are intended to comprise such an application, I would refuse it. It is simply too late in these proceedings for such a fundamental change to be proposed, without notice and outside the framework of the appeal and the cross-appeal.

251. Finally, in the submissions filed on the subject of damages addressed at [164(4)] above, the solicitors for Mr Paltos repeated submissions made about cl 5.2 of the Put and Call Option Agreement. It was submitted that:

1. Mr Paltos’ damages under cl 5.2 have already been identified. Those losses will be quantified in the Account Proceedings and not any damages claim;

2. as a result of Bartier Perry’s negligence, Mr Paltos has forever lost the right to compel Mr Milevski to pay the amount calculated in accordance with Schedule C to the Put and Call Option Agreement of $1,411,707;

3. any Malec v Hutton assessment should not impact the $1,411,707 of damage proven by Mr Paltos. Assuming that the arguments raised by Bartier Perry in the proceedings below were raised by Mr Milevski in a hypothetical scenario in which Mr Paltos had exercised the put option, he would have been unsuccessful;

4. Mr Paltos has lost something of value and lost what he would have received at the time he would have received it, because he would have succeeded against Mr Milevski. In defending the Partnership Proceedings, Mr Paltos cannot, and has forever lost the right to, argue that cl 5.2 applied; and

5. if successful in the hypothetical proceeding involving Mr Milevski (had the put option been exercised), Mr Paltos would have either had the benefit of a costs order or those costs would have formed part of the indemnity set out in cl 5.2 of the Put and Call Option Agreement.

252. Those submissions must be rejected, essentially for the same reasons I have just given. Dealing with each I conclude:

1. the claim sought to be advanced by Mr Paltos’ solicitors under cl 5.2 was not pleaded or conducted below and formed no part of the appeal;

2. the lost right to compel Mr Milevski to pay the amount calculated in accordance with Schedule C to the Put and Call Option Agreement of $1,411,707 is at the heart of the damages calculation but does not have any bearing on the cross-appeal or the extent to which Bartier Perry have proven that amounts representing goodwill and work in progress should be deducted from that sum;

3. No deduction is being made on a Malec v Hutton basis of the assessment of $1,411,707 under cl 5.1;

4. whilst, in theory, Mr Paltos has lost something of value in losing the right to argue that cl 5.2 applied, he has failed effectively to plead or prove that this right had any value; and

5. Mr Paltos has failed to prove that the indemnity set out in cl 5.2 of the Put and Call Option Agreement had any value to him.

253. No notice of contention or notice of cross-appeal was filed seeking relief under cl 5.2 of the kind now asserted by Mr Paltos. Again, it is simply too late in these proceedings for such a fundamental change to be proposed, without notice and outside the framework of the appeal and the cross-appeal. As I have said at [178], Annexures 1 and 2 to Mr Paltos’ submissions dated 28 June 2021 must be rejected. I accept Bartier Perry’s submission that Annexure 1 should be ignored. The Annexure summarises a claim based on cl 5.2 of the Put and Call Option Agreement which was not pleaded or conducted below. I also accept that the evidentiary basis for Annexure 2 is not before this Court and thus the Annexure is not relevant.

254. The cross-appeal must be dismissed with costs.

Costs of the appeal

255. Section 98 of the Civil Procedure Act confers on the Court a wide discretion with respect to costs. Under r 42.1 of the UCPR, the general rule is that the Court is to order that costs follow the event. The “event” may be characterised in more than one way. Generally the “event” refers to the result of the claim or counterclaim, as the case may be, and may be understood as referring to the practical result of a particular claim: Doppstadt Australia Pty Ltd v Lovick & Son Developments Pty Ltd (No 2) [2014] NSWCA 219 at [15] (Ward, Emmett and Gleeson JJA). Where there has been a mixed outcome in the proceedings, and it is appropriate to entertain the process of apportioning costs as between different issues in the proceedings, in general such an exercise will be carried out on a relatively broad brush basis, and largely as a matter of impression and evaluation by the Court: Doppstadt at [19]; James v Surf Road Nominees Pty Ltd (No 2) [2005] NSWCA 296 at [36]; Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 3) (1998) 30 ACSR 20 at 22.

256. The relevant principles for the determination of costs on an issue-by-issue basis were stated in Bostik Australia Pty Ltd v Liddiard (No 2) [2009] NSWCA 304 at [38] (Beazley, Ipp and Basten JJA):

“•   Where there are multiple issues in a case the Court generally does not attempt to differentiate between the issues on which a party was successful and those on which it failed. Unless a particular issue or group of issues is clearly dominant or separable it will ordinarily be appropriate to award the costs of the proceedings to the successful party without attempting to differentiate between those particular issues on which it was successful and those on which it failed: Waters v P C Henderson (Aust) Pty Ltd (Court of Appeal, 6 July 1994, unreported).

•   In relation to trials it has been said that it may be appropriate to deprive a successful party of costs or a portion of the costs if the matters upon which that party was unsuccessful took up a significant part of the trial, either by way of evidence or argument: Sabah Yazgi v Permanent Custodians Limited (No 2) [2007] NSWCA 306 at [24]. A similar approach is adopted on appeal.

•   If the appellant loses on a separate issue argued on the appeal which has increased the time taken in hearing the appeal, then a special order for costs may be appropriate which deprives the appellant of the costs of that issue: Sydney City Council v Geftlick & Ors (No 2) [2006] NSWCA 374 at [27].

•   Whether an order contrary to the general rule that costs follow the event should be made depends on the circumstances of the case viewed against the wide discretionary powers of the court, which powers should be liberally construed: State of New South Wales v Stanley [2007] NSWCA 330 at [18] per Hislop J (with whom Beazley and Tobias JJA agreed).

•   A separable issue can relate to “any disputed question of fact or law” before a court on which a party fails, notwithstanding that they are otherwise successful in terms of the ultimate outcome of the matter: James v Surf Road Nominees Pty Ltd (No 2) [2005] NSWCA 296 at [34].

•   Where there is a mixed outcome in proceedings, the question of apportionment is very much a matter of discretion and mathematical precision is illusory. The exercise of the discretion depends upon matters of impression and evaluation: James v Surf Road Nominees Pty Ltd (No 2), citing Dodds Family Investments Pty Ltd v Lane Industries Pty Ltd (1993) 26 IPR 261 at 272.”

257. The present case is one where the various issues dealt with were severable and it is appropriate to entertain the process of apportioning costs as between different issues in the proceedings. Such an exercise will be carried out on a relatively broad brush basis.

258. Whilst the appellant succeeded, and would ordinarily be entitled to costs, the appellant has achieved complete success on only one issue; damages. The respondent was successful on all other issues.

259. To reflect the relative success of the parties on the severable issues I would order that there be no order as to costs with a view to each party paying their own costs of the appeal. For abundant clarity, that order is intended also to apply to the reserved costs of Bartier Perry’s notice of motion filed on 21 December 2020.

Conclusion and orders

260. For the foregoing reasons I propose the following orders:

1. Bartier Perry’s motion dated 19 March 2021 seeking to lead fresh evidence is dismissed;

2. Appeal allowed;

3. Set aside orders 2 and 5 made by Rothman J on 1 December 2020 (including the undertaking offered as a condition of making order 2) and in lieu thereof order:

1. Bartier Perry to pay damages to Mr Paltos in the amount of $942,777;

2. Bartier Perry to pay Mr Paltos’ costs of the proceedings on the ordinary basis;

4. No order as to costs of the appeal with the intention that the parties pay their own costs of the appeal;

5. Cross-appeal dismissed;

6. Cross-appellant to pay the costs of the cross-respondent of the cross-appeal.

261. WHITE JA: I agree with Payne JA.

262. McCALLUM JA: I agree with Payne JA.

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Endnotes

Decision last updated: 03 August 2021