Bromhead & Ors v Graham

[2007] NSWCA 257

New South Wales

Court of Appeal

CITATION:	Bromhead & Ors v Graham [2007] NSWCA 257
HEARING DATE(S):	21 August 2007
JUDGMENT DATE:	21 September 2007
JUDGMENT OF:	Beazley JA at 1; Giles JA at 2; Santow JA at 6
DECISION:	(1) Respondent's cross-appeal dismissed; (2) Noting the orders made by consent on 21 August 2007, thus obviating the orders sought under para 3 of the Amended Notice of Appeal, appeal allowed to the extent only that the proceedings be remitted to an Associate Justice for assessment of the damages in accordance with the reasons of this Court; (3) The respondent to pay 95 per cent of the costs of the appeal and cross-appeal.
CATCHWORDS:	PARTNERSHIP - dissolution of partnership - whether notice of intention to dissolve was given - whether dissolution terminated employee's employment - employee's covenant not to canvass clients - did so - whether injunction to restrain further breach of covenant - dissolution of partnership does not necessarily terminate employment - did not do so on facts of this case - injunction agreed without admissions - inquiry into damages to be held.
LEGISLATION CITED:	Partnership Act 1892 (NSW) Restraints of Trade Act 1976 (NSW)
CASES CITED:	Brace v Calder [1895] 2 QB 253; Briggs v Oates [1991] 1 All ER 407; Rose v Dodd [2005] ICR 1776.
PARTIES:	Stephen Bruce Bromhead - First Appellant/Cross-Respondent John William Walker - Second Appellant/Cross-Respondent Michael Noel Crozier - Third Appellant/Cross-Respondent Ian James Graham - Respondent/Cross-Appellant
FILE NUMBER(S):	CA 40435/07
COUNSEL:	R F Margo SC & T Leibman - Appellants/Cross-Respondents G Lindsay SC & J T Johnson - Respondent/Cross-Appellant
SOLICITORS:	Walker Smith Solicitors - Appellants/Cross-Respondents Stacks Forster Pty Ltd - Respondent/Cross-Appellant
LOWER COURT JURISDICTION:	Supreme Court
LOWER COURT FILE NUMBER(S):	SC 2352/07
LOWER COURT JUDICIAL OFFICER:	Gzell J
LOWER COURT DATE OF DECISION:	14 June 2007
LOWER COURT MEDIUM NEUTRAL CITATION:	Bromhead v Graham [2007[ NSWSC 609

CA 40435/07
SC 2352/07

BEAZLEY JA
GILES JA
SANTOW JA

FRIDAY 21 SEPTEMBER 2007

Stephen Bruce BROMHEAD and Others v Ian James GRAHAM

Judgment

1 BEAZLEY JA: I have had the benefit of reading in draft the judgment of Giles JA and of Santow JA. I agree substantially with the reasons of Santow JA and with the orders he proposes. However, I consider that it is not appropriate to determine the question whether there has been a dissolution of the partnership. In this regard, I agree with Giles JA.

2 GILES JA: The issues in the appeal and cross-appeal are described in the reasons of Santow JA, which I have had the advantage of reading in draft. It is unfortunate that, being better placed than most to appreciate the evils of litigation, the parties have found it necessary to engage in these proceedings.

3 The parties argued the central issue as one of repudiation of the employment contract by reason of the dissolution of the partnership. I question whether repudiation is the correct conceptual basis for termination of the contract of employment, but it is not necessary to depart from the parties’ approach.

4 I agree with Santow JA, for the reasons given by his Honour, that dissolution of the employing partnership does not necessarily terminate the employment of employees and, if there were a dissolution of the appellants’ partnership, that it did not terminate the respondent’s employment. I would add that, approaching the matter as one of repudiation, even if the dissolution of the partnership were a repudiation of the contract of employment (which it was not), the repudiation was not accepted. Returning the office keys upon request and obtaining a reference were readily explicable by the period of leave ending in contractual termination of employment, and the respondent received and retained payment of his leave loading and other entitlements. This was not acceptance of a repudiation.

5 For a number of reasons, I would prefer not to decide whether or not the partnership was dissolved. There is force in Santow JA’s reasons for holding that it was: in particular, that Messrs Walker and Bromhead established their own businesses from the beginning of April 2007 is a significant indicator that what passed between them and Mr Crozier was notice of an intention to dissolve the partnership as from 31 March 2007. However, dissolution or no dissolution of the partnership fell for determination when, for forensic reasons, the three partners had cause to join in denying dissolution, and on incomplete evidence of what passed between Messrs Walker and Bromhead and Mr Crozier at the end of March 2007. If it is not necessary that a finding be made, it should not be made, the question should be left for final decision if and when it is necessary.

6 Decision is not necessary in the present case. Dissolution of the partnership can be assumed for its consequences to the respondent’s employment. If the partnership was dissolved then, in the absence of agreement to the contrary (of which there was no direct evidence) the partners would continue the partnership business for the purposes of winding up the partnership; the basis for the assessment of damages would be the same whether or not there was dissolution.

7 I agree that the declaration sought by the appellants should not be made. Whether new matters or continuation of existing matters was for the benefit of the partnership or the former partnership should be determined in the inquiry into damages, on evidence and submissions directed to that question. The primary judge’s observations at [67]-[68] of the judgment were incidental to his decision, and do not foreclose the matter. It is to be hoped that the parties can arrive at a resolution without the potentially considerable diversion of their time and incurring of expense which an inquiry into damages could entail.

8 Although the respondent offered at the trial to submit to injunctive relief, the offer was qualified and its acceptance would not have removed the need for the appellants to establish, for the purposes of their claim to damages, that the respondent breached the restraint in the employment agreement. The restraint remained in contention, at the trial and on appeal. I do not think that there is occasion to depart from the primary judge’s order as to the costs below, including that they be paid forthwith. No error has been shown in the primary judge’s view that the appellants substantially won on fundamental issues discrete from the relief claimed, or in the exercise of his discretion whereby the costs were payable forthwith.

9 I agree with the orders proposed by Santow JA.

10 SANTOW JA:

INTRODUCTION
By leave, these proceedings constitute now both an appeal and cross-appeal. Though there are some peripheral issues, the central issue is whether a senior employee (the respondent) of a legal partnership (the appellants) ceased to be bound by a covenant not to compete, by reason of:

(a) the dissolution of the partnership that employed him;

(b) that dissolution predating his receiving the four week’s notice intended to terminate his contract of employment; and

(c) that earlier dissolution thereby constituting a repudiation of his employment contract.

Each of (a), (b) and (c) is contested.

11 The appellants are the three partners of the law partnership Walker Smith Solicitors incorporating JA Vaughan & Co Forster (“the Firm”). They were Stephen Bruce Bromhead, John William Walker and Michael Noel Crozier. The respondent is Ian James Graham (“the employee”) a senior employee of that law partnership now employed by a competitor firm Stacks Forster Pty Limited.

12 It is not in dispute that, following Mr Graham being given one month’s notice of termination of his employment on 3 April 2007, during the Easter weekend (6-9 April 2007) Mr Graham telephoned nine clients of Walter Smith, who subsequently became clients of Stacks Forster Pty Limited, and told them he had left. If Mr Graham were then bound by his contract of employment, as the primary judge, Gzell J, determined he was, this would have undoubtedly contravened his employment agreement (cl 20.3).

13 While these proceedings sought leave to appeal and a concurrent hearing, the respondent submitted that leave was in any event not required as the orders made by the primary judge were clearly final, notwithstanding that damages were to be assessed by an associate justice. Leave to the extent required was granted.

14 Mr Graham by cross-appeal challenges the determination of the primary judge, that he was then bound by his employment contract and in particular by this covenant not to compete. The restraint of trade covenant was a twelve month restraint, held by the primary judge to be valid save to the extent it exceeded six months. That determination was not challenged, but only whether the contract of employment had been repudiated by earlier dissolution of the partnership, so as to cease to bind Mr Graham when he solicited the Firm’s clients.

15 The respondent submits as follows:

(a) even if Mr Graham had received four week’s notice of termination of his employment as required by the employment contract were it on foot, the partnership had earlier been terminated by two of the partners giving notice to the third partner Mr Crozier of their intention to dissolve the partnership;

(b) that notice of termination was given in conformity with s32(c) of the Partnership Act 1892 (NSW) (“the Act”), so as to be a valid notice having the effect of immediate termination;

(c) the effect of such termination of the partnership, being an unwritten partnership at will, was to repudiate the relevant employment contract;

(d) such repudiation was accepted by Mr Graham; and

(e) the consequence was that such repudiation operated as a defence to the covenant in restraint of trade, entitling Mr Graham to treat it as at an end (as he had by accepting the repudiation) so that he ceased to be bound by that covenant; Brace v Calder [1895] 2 QB 253.

16 The appellants take issue with each of these steps. They submit that the primary judge was correct in concluding that the partnership was not dissolved. This was because a consensual termination was at all times proposed by the first two appellants to the third appellant. Accordingly, when a deed of dissolution was submitted to Mr Crozier for his approval so as to give effect to that consensual termination and when Mr Crozier did not approve it, this meant that the requirements for such dissolution in s32(c) of the Act were not satisfied. As the trial judge so found,

(a) Mr Graham remained in the employ of the partnership during the one month notice period required under the employment contract;

(b) such notice was validly given in conformity with that contract, so that

(c) Mr Graham was bound by cl 20.3 of the employment contract not to solicit clients for his new employer and had contravened that provision.

17 The appellants submit that even if there were a termination of the partnership as of a date prior to notice of termination of the employment contract being received by Mr Graham, that did not constitute a repudiation of his employment contract by the appellants so as to render the contract no longer binding. Nor, it was submitted, was there any acceptance of a repudiation by Mr Graham in the various ways alleged by the appellants. These consisted of his return of office keys to the first appellant and his receipt of a reference under the letterhead of a different firm name to that under which the three appellants had practiced.

18 It was submitted by the appellants that an employee of even a terminated partnership can continue in employment during the winding up of the partnership, reliance being specifically placed on s38 of the Act conferring continuing authority on the partners for the purposes of winding-up.

19 On appeal, the three appellants first challenged the primary judge’s denial of injunctive relief, where the primary judge concluded that damages was an adequate remedy. The appellants’ concern was as to enticement of other clients than the nine earlier identified. However, the respondent subsequently consented, without admissions, to orders by way of injunction being made at the conclusion of the appeal. These were in similar, though not identical, terms to those offered in paragraph 1 of the offer of 4 June 2007 (at Spiral Volume or “SP”, 467). These orders now expire on 27 October 2007. They cover the six months duration of the competitive restraint, were it applicable. I consider these orders essentially reflect the substance of cl 20.3 of the employment contract restraint. The respondent is thereby restrained, until that date on his own account and on behalf of others from approaching, canvassing, soliciting, interfering with or enticing away any person, firm or client as listed in the affidavit of the first appellant, other than nine identified clients. As to those nine it had at trial been conceded that damages were an adequate remedy.

20 The appellants had earlier taken issue with what they construed as a finding in [67] of the judgment. It was that from 1 April 2007 new matters from, and new work done on, existing files of clients of the Firm were for the benefit, not of the partnership as such, but for the individual partner performing the services. Issue was also taken with the finding (Judgment [68]) that there was no continuing confidential information or client connection the damage to which could not be compensated adequately by an award of damages, so far as concerned clients other than the nine clients.

21 In aid of that challenge, the appellants seek a declaration in the following terms:

“Declare that client connections of the claimants’ partnership remained after 31 March 2007 an asset and goodwill of that partnership and that consequently:

(a) further work done on then existing files of, or new matters or referrals from, the nine clients of the claimants’ partnership whom the opponent persuaded to transfer to his current employer, Stacks Forster Pty Limited, would, but for those transfers, have been for benefit of the claimants’ partnership; and

(b) further work done on then existing files of, and new matters or referrals from, all other clients of the claimants’ partnership continued after 31 March 2007 and will continue to be for benefit of that partnership

unless and until the claimants otherwise agree in the course of the winding up of the partnership or its goodwill is sold to a third party.”

22 The first part of the declaration, that in para (a), was said to be needed to assist the Associate Justice to whom the primary judge referred the assessment of damages in relation to the nine clients.

23 As to the costs below, the cross-appellant contends that the discretion of the primary judge miscarried. The trial judge had ordered costs below be paid forthwith, rather than reserve them until damages had been determined. The cross-appellant submitted that whether, and to what extent, the burden of costs would be imposed upon one or other parties to the proceedings, was best and more appropriately dealt with at the final conclusion of the proceedings after any assessment of damages by an Associate Justice. The cross-appellant therefore seeks that the cost orders made by the primary judge on 22 June 2007 be set aside and the cross-respondents (appellants) be ordered to pay the costs of the proceedings at first instance and on appeal.

SALIENT FACTS

24 The respondent was an employed solicitor with the legal firm JA Vaughan & Company, Forster, the goodwill of which was purchased by another firm, Walker Smith Solicitors. Subsequent to the purchase the latter firm changed its name to Walker Smith Solicitors incorporating JA Vaughan & Co Forster. The respondent became an employee of the Firm and became over time the public face of the Firm, with a high profile in the local area.

25 Their partnership agreement was oral (Judgment [39]) so as to constitute a partnership at will.

26 Mr Crozier had become ill in about February 2007 and his practice plans were uncertain; Judgment [10]; evidence at SP 1, 243 and White folder (“WF”), 50.25-54; WF, 51.1-9.

27 The trial judge found that, having met their accountant on 28 March 2007, Messrs Walker and Bromhead decided that the appellants’ partnership should be dissolved, and they drew up a deed of dissolution (“the Deed”); Judgment [9]. Mr Crozier appears to have been discharged from hospital on Thursday, 29 March 2007; WF, 50.25-35. He thereafter has continued to work on some firm files.

28 Messrs Bromhead and Walker discussed the contents of the Deed with Mr Crozier in the last week of March 2007, and they signed the Deed in the expectation that it would be executed by Mr Crozier; Judgment [10].

29 Mr Crozier did not then execute the Deed but he made “other proposals as to the way in which assets, including client files, should be distributed”; Judgment [10] (and see also at [32] and [42]). Whether these steps gave rise to dissolution of the partnership by the two parties giving notice in terms of s32(c) of the Act to Mr Crozier of their “intention to dissolve the partnership” is a matter of dispute. The appellants contended that it did not dissolve the partnership, as the intention was to have a consensual termination. Reliance is placed on the terms of the Deed and the way it was proffered for approval by Mr Crozier to execute.

30 On or about 1 April 2007 Mr Walker set up a new business in the premises that had been occupied by the appellants at Taree under the name of Walker Smith Solicitors, Taree; Judgment [16]. At and from the same time, Mr Bromhead used the premises formerly used by the appellants in Forster and set up a new business under the name Walker Smith Solicitors, Forster; Judgment [16].

31 The respondent’s employment with the Firm was terminated. Whether this was by termination pursuant to a termination right in his contract, or by repudiation accepted by the respondent, is central to the present dispute. The respondent was informed in a letter from the partnership to him dated 30 March 2007, but which he only had handed to him on 3 April 2007, that the partnership of the Firm had been dissolved effective 31 March 2007, and that he was to take four weeks of annual leave from 2 April 2007 until 27 April 2007, his last day of employment (he actually had already taken six days). The respondent, it was stated, would be paid all outstanding entitlements. The substantive terms of the respondent’s employment contract are in a document dated 12 October 2005 (SP 1, 200-209), whose continuance after its initial 12 months had been agreed orally.

32 The respondent’s contract of employment with the Firm contained a restrictive covenant in the form of a non-solicitation provision. It had been the subject of earlier negotiation and modification in agreeing to accept employment rather than being simply imposed. The relevant clause was clause 20.3 (reproduced at Judgment [2]). It was not disputed that the respondent had breached the terms of clause 20.3 if still binding (see Judgment [4] for details).

33 The appellants at trial sought to enforce by injunctive relief both clause 20.3, as well as a further provision in the respondent’s employment contract prohibiting the respondent from disclosing confidential information (the latter is no longer relevant). The appellants also sought damages and an accounting for any remuneration to which the respondent had become entitled in breach of his fiduciary duties “while an employee”, by reason of the transfer of clients of the partnership to the respondent’s new employer as at the time of trial, namely Stacks Forster Pty Ltd.

34 Reliance is placed by the appellants on the issue to Mr Graham by Mr Bromhead on 4 April 2007 of a reference dated 3 April 2007 (SP 1, 209) as said to demonstrate the fact that the appellants’ firm had ceased operation as a business. Reliance is also placed on Mr Bromhead’s request to Mr Graham for surrender of his office keys on 4 April 2007.

35 The winding up of the partnership is continuing and is anticipated to take at least 18 months.

The judgment of the primary judge
Repudiation of employment contract

36 The statement as to dissolution in the termination letter was not consistent with the employment contract and employment relationship ending as at 31 March 2007, as the letter clearly specified 27 April 2007 as the end date; Judgment [11]-[12].

37 The direction in the termination letter to take annual leave did not constitute a repudiation of the respondent’s employment contract; Judgment [15].

38 The issuing of a reference letter for the respondent on letterhead not of the Firm, but of the first appellant’s new firm, did not constitute a repudiation of the respondent’s employment contract; Judgment [18].

39 The first appellant’s request that the respondent return his keys to the Firm’s premises did not constitute a repudiation of the respondent’s employment contract; Judgment 19-20, 22.

40 The payment of the respondent’s leave loading and other entitlements, and the acceptance of that payment by the respondent, is not consistent with an alleged earlier repudiation of his employment contract; Judgment [21].

Dissolution of partnership

41 The partnership was not dissolved by virtue of the Deed, both because the deed was not accepted by the third appellant (Mr Crozier), and by failing the test of the Deed being tantamount to a notice by the first and second appellants to the third appellant of the dissolution of the partnership; Judgment [39]-[41].

Breach of fiduciary duty

42 The respondent remained in employment until 27 April 2007, and thus was in breach of still current fiduciary duties, which he breached by canvassing clients of the Firm before 27 April 2007, for which there should be an inquiry as to damages; Judgment [45]-[47].

Public policy

43 Clause 20.3 was not a permissible restraint on competition and against public policy; Judgment [48]-[49]. However, a six month restraint, as opposed to the 12-month period stipulated under clause 20.3, would provide an adequate protection of the client connection of the Firm; Judgment [51]-[53].

Restraints of Trade Act 1976 (NSW), s4(3)

44 The evidence established that the first appellant and the respondent negotiated the terms of the restraint of trade under the respondent’s employment contract (the first appellant’s evidence having been preferred on crucial points; Judgment [61]). The respondent succeeded in having the restraints reduced to a point with which he agreed. There was no evidence that the first appellant took advantage of any inferior bargaining power of the respondent. There was no evidence of a manifest failure on the part of the first appellant to attempt to make the restraint a reasonable one. The prerequisite for an order under s4(3) of the Restraints of Trade Act 1976 (NSW) had not been established; Judgment [62].

Discretion to refuse injunctive relief

45 The circumstances did not justify injunctive relief. There was no continuing confidential information or client connection the damage to which could not be compensated adequately by an award of damages. No injunctive relief was granted against the respondent or Stacks Forster Pty Ltd, the firm for which he now works; Judgment [63]-[68].

DISPOSITION

46 I start with what I have earlier described as the central question in this appeal.

47 That central question expressed with more particularity is in two parts:

(a) whether the appellants dissolved their partnership on or about 31 March 2007 or 1 April 2007 notwithstanding that:
(i) the process of winding-up the partnership business and distributing partnership assets continued thereafter, and

(ii) the termination was according to the appellants to be a consensual one and the third appellant, Mr Crozier, did not agree to the terms of the proposed Deed;

(b) whether, if the partnership was then dissolved, prior to notice being given to terminate the respondent’s employment, the appellants repudiated their employment contract with the respondent and, in the events that happened, the respondent accepted that repudiation with the result that the respondent was not bound by the covenant not to compete in that employment contract.

48 For reasons which I will elaborate, I consider that:

(a) the partnership was dissolved, but

(b) this did not have the effect of rendering the respondent no longer bound by the employment contract in the circumstances that obtained.

49 In order for the partnership to have been dissolved prior to the letter intended to terminate his employment being received on 3 April 2007 the partnership that had to be dissolved pursuant to s32(c) of the Act. It provides as follows: “Subject to any agreement between the partners, a partnership is dissolved: (c) if entered into for an undefined time by any partner giving notice to the other or others of the partner’s intention to dissolve the partnership”.

50 Section 32 then provides that “the partnership is dissolved as from the date mentioned in the notice as the date of dissolution, or, if no date is mentioned, as from the date of the communication of the notice.”

51 In that context it is important to distinguish between the signification by notice of an intention to dissolve the partnership on the one hand and the matters that pertain to the winding-up of the partnership, many of which may require detailed negotiations subsequently. That is recognised by s38 of the Act where the partners are conferred a continuing authority for the purposes of winding-up to bind the firm and so that “the other rights and obligations of the partners continue, notwithstanding the dissolution, so far as may be necessary to wind-up the affairs of the partnership, and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise”. While the rest of Division 4 of the Act particularly Part 2 reduces the scope for dispute or the need for detailed negotiation on how the winding-up is to be carried out, it is nonetheless the case that there could be a number of matters requiring to be worked out in practice. The partners in the present case demonstrated that by their own courses of action with Mr Walker setting up a new business in Taree and Mr Bromhead at Forster while Mr Crozier was recovering from his illness though joining in the appellants’ proceedings against Mr Graham.

52 The question here is whether in the events that happened, Messrs Bromhead and Walker by their actions in relation to Mr Crozier indicated, not an intention to dissolve the partnership, but rather an intention to see if they could all agree consensually to dissolve the partnership and then, only, to dissolve it as agreed. As between Messrs Walker and Bromhead there may well have been a communication of their intention to dissolve the partnership. But that could not suffice unless it were also communicated to the third partner, Mr Crozier, and not conditioned on his consent.

53 To answer this question, one needs to look more closely at the evidence.

54 The logical starting point is the Deed, being a deed of dissolution. It was an annexure to Mr Bromhead’s first affidavit dated 19 April 2007, to which paragraph 19 makes reference. The appellants in their chronology disavow statements in the first and second of Mr Bromhead’s two affidavits, suggesting that the partnership had been dissolved. This disavowal was on the basis that “those statements were counter-factual and were corrected by further affidavit before the interim injunction was returned; they were not read and were struck at the hearing”. Reference is made to the primary judge accepting Mr Bromhead’s explanation that they were errors that occurred because his first affidavits were prepared in conditions of great haste and urgency; Judgment [27]-[30]. The affidavits before this Court strike out those portions that are there referred to but leave in the undoubted fact that the Deed, before being presented to Mr Crozier, had been signed by both Mr Bromhead and Mr Walker. In the unstruck-out portion of the second affidavit, para 8, it is noted that Mr Crozier is not currently practising as a solicitor due to illness. Turning to the Deed (SP, 217) Recital C states that “the parties have agreed that the partnership shall cease and be dissolved from the date set out in the Schedule (‘the dissolution date’) subject to the provisions contained in this agreement.” The dissolution date in the Deed was 31 March 2007.

55 The provisions of the Deed then deal with how the winding-up is to proceed, introduced by clause 1. It provides that, “the parties hereby with effect from the dissolution date determine and dissolve the partnership so far as the partners are concerned”. The detailed provisions for winding-up contemplate that Mr Walker and Mr Bromhead would continue to practice from the offices at which they now base their respective practices. Provision is made for the use of the respective names Walker Smith Solicitors and “JA Vaughan & Co”. Both Mr Walker and Mr Bromhead were able to use the name Walker Smith Solicitors and Mr Bromhead as well was to be able to use the name J A Vaughan & Co (clause 3).

56 There are the usual provisions for Messrs Walker and Bromhead to collect all the assets of the former partnership discharging all debts and settling all accounts, instituting any actions to enforce payments (clause 5). There are other consequential matters including that the partners would be entitled to equal portion of assets remaining and contributing equally to any shortfall, all consequences entirely consistent with a conventional winding-up of a partnership. Not only is there no evidence to suggest that the partners conducted the winding-up in any different fashion. Such evidence as there is points to the winding-up proceeding as contemplated in the Deed. That of course could not be determinative, as it is possible that Mr Crozier might have agreed to this later. But it does not support the proposition that the two signing parties, Messrs Bromhead and Walker, intended to qualify or condition their intention to dissolve the partnership on Mr Crozier’s consent, as distinct from having Mr Crozier approve the detailed mode of winding-up.

57 Mr Bromhead describes what happened in presenting the Deed to Mr Crozier in these terms (third affidavit of Mr Bromhead dated 24 April 2007, para 9 in SP, 253):

“9. I refer to paragraph 19 of my first affidavit and Annexure SBB-7 to that affidavit, which is the Deed of Dissolution signed by the second plaintiff and me. During the last week of March 2007, the second plaintiff and I met with the third plaintiff. We discussed dissolution of the partnership by agreement between us and went through the proposed Deed of Dissolution. At that meeting, I had conversation with the third plaintiff to the following effect:


I said: ‘We want to dissolve the partnership amicably on terms agreed by all of us. John and I are happy to sign these terms. Will you sign too, Mick?’

He said: ‘I would like to take the Deed away and think before signing anything.’

58 It was clear that at that point there had been a communication of the intention of Messrs Bromhead and Walker to dissolve the partnership whilst at that time expressing a willingness to do so on terms to be agreed by all three. There was no suggestion that Messrs Bromhead and Walker would only intend to dissolve the partnership if Mr Crozier agreed to the terms. Rather the inference properly to be drawn was that, if there was no agreement on the terms, contrary to expectation (see below), there would be further negotiation. Thus paragraphs 10 and 11 of Mr Bromhead’s affidavit noted as follows:

“10. The second plaintiff and I then signed the Deed. On the basis of the discussion between the three of us, I believed that the Deed would soon be signed by the third plaintiff and arranged to set up a separate law firm to take over the Foster part of the practice as contemplated by the Deed. The second plaintiff similarly set up a separate law firm to take over the Taree part of the practice. I referred in my second affidavit to the third plaintiff’s illness. He became ill in about February this year and his practice plans were still uncertain at the time of our discussions referred to in paragraph 9 above. He had however indicated that he wanted to take over some client files and deed packets of the partnership and I expected that that would occur .

11. As it has turned out, however, the third plaintiff has not signed the Deed and has made other proposals as to the way in which the assets of the partnership, including its client files, should be distributed . Accordingly, the plaintiffs remain in negotiation as to the basis upon which the partnership’s net assets will be distributed between them.” [emphasis added]

59 As para 11 states, the appellants “remain in negotiation as to the basis upon which the partnership’s net assets will be distributed between them”. But there is no suggestion that the intention to dissolve wholly depended upon reaching agreement on that matter or indeed on any other.

60 When one refers to the transcript of Mr Bromhead’s evidence below, Mr Bromhead denies that the Deed that he was signing “would determine and dissolve the partnership”; see T, 34.44-.51. Subsequent answers, after referring to the earlier affidavits as having been prepared in tremendous haste, had Mr Bromhead insist that “the intention at all times was for the three of us to come to an agreement about what was going to happen”; T, 35.1-.4.

61 Subsequent questions and answers disavowed the first affidavit and second affidavit insofar as it acknowledged that the partnership was dissolved on and from 31 March 2007, as having been said by mistake; see T, 35-6.

62 Finally, Mr Bromhead says “we intended to come to an agreement between the three of us. The three of us had to come to an agreement about what was going to happen and in anticipation of that John Walker continued managing the files in Taree and I continued managing the files for the clients in Forster”; T, 36.42-.44. Mr Bromhead then makes clear that they had anticipated and believed that they would come to an agreement with Mr Crozier (T, 36.52-.57). But there was no suggestion that no intention to dissolve the partnership could arise until they first determined whether Mr Crozier would agree to the proposed mode of winding-up. Rather the actions of Mr Bromhead and Mr Walker were consistent with their having a present intention, conveyed to Mr Crozier, to wind up the partnership in accordance with the arrangements set out in the Deed of Dissolution. They were negotiating on the details of winding-up. They never expressed their communication of intention to terminate to Mr Crozier in terms that made that expressed intention dependent upon agreement as to the terms on which that would take place. This is borne out by the fact that the Deed was submitted to Mr Crozier already signed by the two partners. Moreover their subsequent actions demonstrated that they considered the partnership at an end and they intended to proceed more or less along the lines of the Deed itself, even if the ultimate division of net assets remained for further negotiation as part of the winding-up process.

Conclusion

63 The partnership was dissolved on 31 March 2007 taking that date from the Deed and certainly by 1 April 2007 and before the communication of the notice to Mr Graham on 3 April 2007 intending to terminate his contract of employment.

Effect of dissolution of the partnership upon Mr Graham’s employment – was there a repudiation of the employment agreement accepted by Mr Graham with the consequence that Mr Graham was not bound by the competition restraint in clause 20.3?

64 In the event that dissolution did not constitute a repudiation of the contract of employment, it could not be doubted that the Notice of Termination under the contract conformed to its requirements for termination in clause 20.1.6. It provides as follows:

“20.1.6 The Partners may terminate the contract for any reason other than those specified in clauses 20.1.1, 20.1.3, 20.1.4 and 20.1.5 provided the Partners shall give one month’s notice or, in the absence of notice, the payment in lieu thereof of all salary and benefits as though the notice period had been worked.”

65 Clause 20.3 then provides as follows:

“20.3 Upon termination of employment for any reason the employee shall not approach, canvas, solicit, interfere with or entice away any person, firm or company client of the firm of Walker Smith Solicitors and JA Vaughan and Company. The employee shall not solicit work from clients nor shall the employee act on behalf of any Walker Smith Solicitors and JA Vaughan and Company clients for a period of twelve months after the termination of the employment.”

66 I would not draw any distinction between the expression “terminate the contract” and the expression “termination of employment for any reason” as they appear in the various subclauses of cl 20. Reference to the various subclauses of cl 20, all of which appear under the heading “Terminating the Agreement with Notice” do not indicate any basis for distinguishing between the two situations. Logically, termination of the employment contract must terminate the employment.

67 Nor is there any basis for argument that the letter of termination failed to provide the relevant payment in lieu of the one month’s notice, merely because the benefits did not take into account that Mr Graham had already had six days annual leave, so that the payment was greater than required. Clearly it was open to the partners to determine that they would not require him to work during the one-month period. That again could not prevent clause 20.1.6 having been validly triggered by the notice given to Mr Graham on 3 April 2007 by the letter. Nor is the letter somehow ineffectual because it referred to the partnership being already dissolved, given the effect of what had earlier occurred.

68 Turning now to the effect of the dissolution of the partnership upon the employment contract, reliance is placed by the respondent upon the proposition that the covenantee under the employment agreement, by dissolving the partnership thereby repudiated that employment agreement. That repudiation was accepted by Mr Graham handing back his keys and requesting a reference. This he was given under the letterhead, not of the Firm, but Mr Bromhead’s new letterhead. It is then said that on the authority of Brace v Calder [1895] 2 QB 253 (and see also Briggs v Oates [1991] 1 All ER 407) the dissolution of the partnership had the result of providing a complete defence. The contract could be treated as at an end once the repudiation was accepted.

69 There are however, as I explain, difficulties in that reasoning. They are brought out in the later decision in Rose v Dodd [2005] ICR 1776, a decision of the English Court of Appeal which, though on distinguishable facts, doubted the general rule that the dissolution of the employing partnership brings automatically a contract of employment with the partnership to an end.

70 In Brace v Calder (supra) the facts are important. The plaintiff had agreed with the defendants, a firm consisting of four partners, that he should serve them in their business for a term of two years. Before the two years had expired, two of the partners retired and the two other partners continued to carry on business. As Lord Esher MR explained, when the plaintiff was invited to serve the new firm he made clear that the new firm were not the masters he had contracted to serve and, being entitled so to do, he declined to serve them, bringing an action in damages for wrongful dismissal.

71 Clearly enough there was a contract to serve for a fixed period of two years. But as Rigby LJ said, “A contract to serve four employers cannot without express language be construed as being a contract to serve two of them. … the dissolution of the partnership operated as a dismissal of the plaintiff not authorised by law.” (at 263). But importantly, Rigby LJ added “The clause as to dismissal on a month’s notice not having been acted upon, the plaintiff cannot recover as liquidated damages the unpaid part of his salary for the two years’ term.”

72 Here, in contrast, the clause as to dismissal on a month’s notice was acted upon, albeit after the dissolution but before winding up had been completed.

73 In Briggs v Oates, there was similarly no attempt to use the termination clause but simply a dissolution of the partnership that employed, there the defendant.

74 In any event, Rose v Dodd points to a qualified approach in answering the question whether the dissolution of a partnership repudiates the employment contract. It is true that Rose v Dodds was not a case involving the voluntary dissolution of a partnership. Rather it involved intervention by the Law Society under its statutory powers on the ground of suspected dishonesty; that is to say “a dissolution of a solicitors partnership resulting from an intervention” making the carrying on of the partnership business thereafter unlawful. Nonetheless, the reasoning in that case, drawing as it did upon dissolution of a partnership by analogy, is directly applicable, insofar as it makes clear that there is no longer any general rule of dismissal of employees on the dissolution of a partnership. This is clear from the qualifications on any such rule, set out [48] to [54] in the judgment of Mummery LJ:

“[48] In our view, the general rule of dismissal of employees on the dissolution of the partnership is qualified in a number of ways. Section 38 of the Partnership Act 1890 is relevant. It provides that:

'After the dissolution of a partnership the authority of each partner to bind the firm, and the other rights and obligations of the partners, continue notwithstanding the dissolution so far as may be necessary to wind up the affairs of the partnership, and to complete transactions begun but unfinished at the time of dissolution, but not otherwise.'

[49] Lindley & Banks on Partnership (18th edn, 2002) p 718 (para 25-02) contains a helpful discussion of the general rule in the light of the continuation of partnership provisions in s38:

'It has been decided that a general dissolution will terminate the contracts of employment of all the firm's employees, thus inevitably leading to claims for unfair dismissal or redundancy payments. This result is surprising: if the partnership continues for the purposes of the winding up, it is difficult to see why those contracts should not continue until the winding up is complete and the continuation partnership finally comes to an end. On the other hand, a technical dissolution brought about by the death, retirement or expulsion of a partner is unlikely to have the same effect, provided that the partnership continues in existence.'

[50] In 16 (1B) Halsbury's Laws (4th edn reissue) the impact of the dissolution of a partnership on employees is stated in qualified terms:

'600. Dissolution of a partnership Whether a change in the composition of the partnership employing the employee affects the contract of employment depends on the express or implied intention of that contract. The death of one of the partners terminates the contract if that contract is sufficiently related to the personal conduct of the deceased partner, but not if the actual composition of the partnership is not of such importance. A change of partners may or may not operate as a wrongful dismissal, depending on the circumstances and the intent of the contract, but a major change entailing the dissolution of the partnership normally so operates. If, however, the employee continues to work for the newly constituted firm, that may constitute a waiver of his common law rights; and, in such a case, the employee's continuity of employment is expressly preserved by statute'.


[51] Chitty on Contracts (29th edn, 2004) vol II, p 1050 (para 39-172) states that: ' Dissolution of partnership . A dissolution of partnership of employers may operate as a wrongful dismissal.' (A footnote adds that it may not do so where there is no fundamental disruption to the work of the partnership, such as where one partner among a number retires or dies.)

[52] In our view, where there is a dissolution of a solicitors' partnership resulting from an intervention, it is necessary to consider the particular facts of each case before deciding whether the contracts of employment with the partnership have terminated. Relevant factors include the circumstances of the dissolution, the terms of the particular employment contract and the acts of the parties. In principle there is no reason why all contracts of employment with the partnership should necessarily become unlawful and terminate automatically as a result of the carrying on of the practice of the partnership becoming unlawful, or why they should be frustrated on the occurrence of an event, which may only temporarily interrupt the performance of an obligation to work. See Tarnesby's and Chelsea and Westminster Area Health Authority (Teaching) [1981] ICR 615 (para 36 above).

[53] A contract of employment is not necessarily terminated by the dissolution of a partnership on the happening of an event, such as intervention and the suspension of a practising certificate, which makes the carrying on of the business of the partnership unlawful. General contractual principles need to be applied to the circumstances of the particular case. Thus, if, on the dissolution of a partnership, it becomes impossible or unlawful for the employee to do any of the work which he is employed to do, the contract of employment may come to an end either by frustration or by a repudiatory breach of contract entitling the employee to treat the contract as at an end.

[54] If, however, the facts are that, notwithstanding the dissolution of the partnership, the parties intend to keep the contract alive and to continue it while steps are being taken to challenge the intervention or to transfer the practice to another firm as a going concern, there is no reason for the contract of employment to terminate automatically. Even if the partnership is dissolved, contracts of employment may continue after the date of dissolution, if the parties so wish, for the limited winding up purpose of the continuation partnership.”

75 Relating these qualifications to the present case, there is no suggestion that the dissolution of the partnership effected on or about 31 March 2007 made it “impossible or unlawful for the employee to do any of the work which he is employed to do” immediately thereafter. To the contrary, s38 of the Act confirmed the continuing authority of partners for the purposes of winding-up the partnership. Indeed the actions of the partners was precisely directed to that end.

76 It was also the case that the termination letter, while not requiring Mr Graham to do any work, did contemplate continuance of his employment during the four week’s annual leave on 2 April 2007 “until your last day of employment the 27th April 2007”; SP, 210. There was no suggestion that Mr Graham took issue with that stipulation, even though he did in fact accept employment with a competing firm. Effectively, he was free to do so but without there being any waiver of the requirements of clause 20.3, expressed as it was to continue after the termination of his employment.

Conclusion

77 Thus, in considering relevant factors including the circumstances of the dissolution, the terms of the particular employment contract and the acts of the parties, I do not consider that Mr Graham’s employment contract was repudiated. Rather the contract of employment continued after the date of dissolution to 27 April 2007, being the period during which Mr Graham approached clients of the Firm in breach of clause 20.3, to become clients of his new employer.

REMAINING ISSUES

78 It follows from the earlier conclusions that Mr Graham was bound by his employment contract and breached it in the circumstances I have described, giving rises to damages to be assessed by an Associate Justice.

79 The appellants took issue with whether, contrary to the primary judge’s determination at [67] to [68], an injunction should have been granted, pointing to what the appellants contend was an inconsistency of approach to the exercise of the primary judge’s discretion as to remedy.

80 It was conceded that damages were an adequate remedy in respect of the nine clients who had transferred to Stacks Forster Pty Ltd. But it was submitted that damages were not an adequate remedy in respect of the remaining 119 or so clients with whom Mr Graham dealt with in the preceding 18 months of his employment and of whom it was apprehended might be a target to Stacks Forster Pty Ltd.

81 No doubt the primary judge was influenced by the fact that Messrs Walker and Bromhead had set up their new business at Taree and Forster. His Honour observed that “the partners do not seek retainers from their clients with respect to new matters and new work done on existing files are to the account of the individual performing the services”; Judgment at [67]. Reference is made to the new firms taking up that business. The primary judge goes on to conclude that “there is no continuing confidential information or client connection damage which cannot be compensated, adequately, by an award of damages”; (Judgment at [68]).

82 This question, even if answered as the trial judge does, is effectively rendered moot by the injunction to which the appellants have consented in the orders to which I have earlier made reference. I would myself doubt that, with respect, injunctive relief was not available in the circumstances. Those circumstances envisage some 18 months or so for winding-up the business of the partnership during which maintaining confidential information and the ongoing client connection would be of considerable importance. However, that question does not now require to be answered.

83 There does however remain the question of the declaration sought by the appellants.

84 I do not consider that such a declaration is necessary given the terms of this judgment. The Associate Justice in determining the damages is in a position to take into account the reasoning of this Court. Moreover, there are difficulties in the precise terms of the declaration, particularly if clients of the Firm would become clients, not of the Firm during the course of its winding-up, but of the new businesses carried on in Taree and Forster by the two appellants, Messrs Bromhead and Walker. It is best to leave those matters to the detailed working out of damages to the extent that these questions arise.

85 The final matter is that of costs. I consider that the appellants (as cross-respondents) have succeeded in the cross-appeal, being as was acknowledged the central question for determination in these proceedings (see para 7 of the opponent’s summary of argument in reply dated 20 August 2007). However, there were some peripheral issues dealt with in this appeal, being those referred to immediately above. I consider that taking these matters into account, the appellants should be awarded 95% of the costs of these appeal proceedings. I also consider that the primary judge’s order for costs in relation to the costs below should not be disturbed, concluding as I do that the appellants were entitled to injunctive relief and the fact that it was proffered during the appeal does not alter that result.

OVERALL CONCLUSION

86 I would propose orders as follows:

(1) Respondent’s cross-appeal be dismissed.

(2) Noting the orders made by consent on 21 August 2007, thus obviating the orders sought under para 3 of the Amended Notice of Appeal, the appeal be allowed to the extent only that the proceedings be remitted to an Associate Justice for assessment of the damages in accordance with the reasons of this Court.

(3) The respondent to pay 95% of the costs of the appeal and cross-appeal.


**********