Fullston v Swincer & Ors No. Scgrg-98-213 Judgment No. S6783

[1998] SASC 6783

FULLSTON  V  SWINCER & ORS

Judge Burley

By paragraph 9 of the order made in this action on 4 June 1998, it was directed:-

“That the issue of the validity and enforceability of clause 19 of the partnership agreement dated the 8th day of August 1980 be set down for hearing as a preliminary matter and that, pursuant to Rule 55.11(u) of the Supreme Court Rules, this matter be given an early hearing date.”

The preliminary matter referred to came on for trial before me on 8 July 1998.  On that occasion Mr Slattery appeared on behalf of the plaintiff and Mr Barnett for the parties described in the heading as “the second defendants”.  The determination of the preliminary matter did not involve the first defendant and there was no appearance for him.

For the purposes of the trial of the preliminary point the following facts were agreed:

(1)... The plaintiff and Joycelyn Betty Fennell (deceased) conducted business in partnership with each other pursuant to a written Partnership Agreement.

(2)... The parties described as the second defendants are the daughters and executors of the estate of Joycelyn Betty Fennell (deceased).

(3)... Joycelyn Betty Fennell died on 14 November 1996.  (It is common ground that the partnership was dissolved by virtue of the death of Joycelyn Betty Fennell.)

(4)... That as at 14 November 1996 the assets of the partnership included the land described in paragraph 8 of the statement of claim and other land, plant, machinery and stock-in-trade.

A copy of the Partnership Agreement was admitted by consent as Exhibit P1.  Clause 19 of the Agreement is as follows:-

“19... If any partner shall die during the continuance of the said partnership the surviving partner shall have an option (to be exercised within one calendar month after the death of the deceased partner) to purchase the share of the deceased partner in the capital and assets of the business (such purchase to take effect as from the date of the death of the deceased partner) on the following terms:-

(a).... the purchase price shall be the net value after providing for the debts and liabilities of the partnership of the deceased partner’s share in the partnership as at the date from which the purchase is to take effect and in determining such value goodwill shall not be taken into account.  If the parties shall be unable to agree as to the value of the deceased partner’s share the same shall be ascertained by two independent licensed valuers one to be appointed by either party or by an umpire to be appointed by the two valuers.  If either party shall fail to appoint a licensed valuer within 14 days after being called upon so to do the valuer appointed by the other party may proceed to make a valuation alone.  The cost of such valuation shall be paid by the parties to this agreement in equal portions of the total cost of the valuation.

(b)... the purchase price shall be paid by the surviving partner by equal quarterly instalments over a period of 5 years or such lesser time as may be mutually agreed upon the first of such instalments to be paid at the expiration of three calendar months from the date as from which the purchase is to take effect.

(c)... payment of the purchase price as aforesaid shall be secured by the bond of the surviving partner who shall also enter into a covenant to indemnify the personal representatives of the deceased partner from the debts engagements and liabilities of the partnership both existing and future.”

......... The plaintiff claims to have exercised the option which he contends was conferred by Clause 19.  There is a dispute between the parties as to whether or not Clause 19 is a valid and effectual provision in the Partnership Agreement.  The defendants contend that Clause 19 is ineffective because any contract created by the exercise of the option contravenes a statutory provision and because it is uncertain.  These are the points which must be decided on the trial of this preliminary matter.

......... The defendants contend that if the plaintiff were to exercise the option conferred by Clause 19, there would come into existence a contract for the sale and purchase of real property which contravened the provisions of Section 6(1) of the Land and Business (Sale and Conveyancing) Act 1994 (“the Act”). That section is as follows:-

“6(1)A contract for the sale of land or a business that provides for the payment of part of the purchase price of the land or business (except a deposit) before the date of settlement is void.”

The defendants argue that because Clause 19(b) of the Partnership Agreement provides that the purchase price was to be paid by equal quarterly instalments over a period of five years, or such lesser time as may be mutually agreed upon, the contract for sale and purchase constituted a sale by instalments which was expressly prohibited by Section 6(1) of the Act. That being the case, Clause 19, to the extent that it purports to confer an option upon the surviving partner, could not be a valid and effectual clause in relation to a disposition of real property because, once it was exercised, a void contract would be created.

It was common ground that settlement meant the occasion (in respect of a contract for the sale and purchase of land) when the balance of the purchase price, after the prior payment of a deposit, is tendered in exchange for a transfer in registrable form of the fee simple in the property.  Mr Barnett argued that if a contract fails to provide for a settlement date then the law will imply one:  Hall v Busst (1960) 104 CLR 206. However, if Section 6(1) of the Act applies, the ordinary implication cannot arise in this case because the option anticipated a contract that would enable payment of the purchase price by instalments. If the law were to imply that settlement would take place at some time during or after the payment of the instalments, the implication of such a term would immediately create a void contract. Such a result would be absurd. It might be said to be equally absurd that the law would imply that the settlement was to take place prior to the payment of the first of the instalments because that would mean that the vendor of the real estate will have conveyed an indefeasible title to the land to the purchaser without having received any payment therefor. Such an approach was expressly disavowed by Mr Barnett when he informed me that he did not put a submission that the contract is void for uncertainty because the parties did not specify a settlement date [T68]. Because these difficulties arise only if Section 6(1) of the Act applies, I think it appropriate to deal with that point first.

It was argued by the plaintiff that Section 22 of the Partnership Act took the resultant contract for sale and purchase of land out of the ambit of Section 6(1) of the Act.

Section 22 of the Partnership Act is as follows:-

“22... Where land or any interest in land has become partnership property, it will, unless the contrary intention appears, be treated as between the partners (including the representatives of the deceased partner) as personal and not real estate.”

It was common ground that the real property the subject of the action was partnership property within the meaning of Section 22 of the Partnership Act.

Mr Slattery argued that because the contract resulting from the exercise of the option was between a surviving partner and the personal representatives of a deceased partner, and because the subject matter of the contract created on the exercise of the option was real property which was partnership property, it was to be treated as personal property. He then argued that Section 6(1) of the Land and Business (Sale and Conveyancing) Act 1994 referred to a contract for the sale of land and consequently did not affect a contract created by the exercise of an option under Clause 19 of the Partnership Agreement because it was to be treated as a dealing in personal property.

The effect of Section 22 has been dealt with in a number of text books, including the Law of Partnership in Australia and New Zealand, Higgins and Fletcher, 6th Edition, at p142 et seq. The Partnership Act in South Australia is based on one of the several Acts of the Parliament of the United Kingdom passed in the late 19th Century purporting to be a codification of the law at the time of the passing of the Act. Prior to the introduction of the United Kingdom equivalent of Section 22 of the South Australian Partnership Act, the position in equity as to partnership property was that it was treated as personalty because at common law, a deceased person’s real property passed direct to the heir-at-law and was not an available asset for the payment of the debts of the deceased. Because unlimited liability was and remains an essential characteristic of a partnership, equity applied the doctrine of conversion to partnership realty to ensure that it was available to meet the partnership obligations. In Duckett v Collector of Imposts [1927] VLR 457 the Full Court of the Supreme Court of Victoria said (at 466):

“The fact is, we think, that ‘land’ being partnership property must for many purposes, at all events for most statutory purposes, continue to be regarded as land, though as between partners and their representatives, as to accounts, dealings, succession on death, etc, it may be regarded as otherwise.”

The defendants argued that Duckett’s case meant that Section 22 of the Partnership Act did not apply to the real property the subject of the contract which arose on the exercise of the option contained in Clause 19.

The plaintiff relied upon the New Zealand decision of Brannigan v Brannigan [1954] NZLR 858 where it was held that the exercise of an option by one partner to purchase a deceased partner’s share in the partnership “land” was not a transaction with regard to land which required the consent of the Court under the Servicemen’s Settlement and Land Sales Act 1943 (NZ). It was held that, as the dealing was between a partner and the personal representatives of a deceased partner, the land must be regarded as personalty.

It was put by Mr Barnett that Duckett’s case could not be reconciled with the approach taken by Turner J in Brannigan, but I disagree. It is important that the doctrine of conversion, in its statutory form, should apply to dealings between partners and the personal representatives of a deceased partner so that the surviving partners might acquire partnership property. Just as the doctrine of conversion altered the ability of an heir to take real property directly because in equity the real property was treated as personal property, so may the specific nature of Section 22 displace the operation of a section such as Section 6(1) of the Act which would otherwise place a considerable fetter upon partners to deal with partnership property. The latter section was enacted well after the enactment of Section 22 of the Partnership Act and in light of the state of the law at that time. The state of the law was that for partnership purposes real property was to be regarded as personal property. There is nothing to indicate from the terms of Section 6 of the Act that the legislature intended to alter the position as between partners. The section certainly does not do so specifically and I do not think it is open to me to hold that the section does so implicitly.

Nor do I consider that Duckett’s case espouses a principle to the contrary. The Victorian Full Court held that a revenue statute applied as if the subject matter of the transaction were real property. That does not create a fetter upon a dealing with partnership realty which would be at odds with the provisions of Section 22 of the Partnership Act. The learned authors of the Law of Partnership in Australia and New Zealand (supra), at p144, were of the view that the New Zealand decision was “reconcilable” with Duckett’s case. In all of those circumstances, I am of the view that Section 6(1) of the Act can have no application in light of the provisions of Section 22 of the Partnership Act.

It follows that the argument of the defendants that the contract created by the exercise of the option is void cannot succeed because the contract is only rendered void if Section 6(1) of the Act applies.

The second basis of attack by the defendants was that Clause 19 was void for uncertainty.

Mr Barnett argued that Clause 19 did not fix a price.  He contended that the mechanism for fixing a price was fatally flawed because, like the clause considered by Powell J in Van der Waal v Goodenough [1983] 1 NSWLR 81, further agreement by the parties was required before the appropriate price could be fixed. Whilst I accept, with respect, that the clause dealt with by Powell J in Van der Waal required further agreement from the parties before it became effective, I do not consider that the method of fixing the price as provided for in Clause 19(a) of the Partnership Agreement must suffer the same fate.

In Van der Waal the agreement did not provide for the appointment of a valuer for the purposes of carrying out the valuation which formed part of the calculation of the purchase price.  In this case Clause 19(a) includes the following:-

“If the parties shall be unable to agree as to the value of the deceased partner’s share the same shall be ascertained by two independent licensed valuers one to be appointed by either party or by an umpire to be appointed by the two valuers.  If either party shall fail to appoint a licensed valuer within 14 days after being called upon so to do the valuer appointed by the other party may proceed to make a valuation alone...”

Mr Barnett submitted that in the event that the individual valuers appointed by either party did not agree as to value, there was no mechanism which required them to appoint an umpire and consequently there was yet further agreement for the parties to deal with such an eventuality.  I disagree with that submission.  It is a common part of commercial practice to require experts or arbitrators, where they disagree, to appoint an umpire who shall have the final say.  It could not, in my view, be suggested that such a clause was void for uncertainty in that there was no mechanism fixed for the independent experts to arrive at an agreement as to whom would be appointed as umpire.  Consequently, in my view, the defendants’ assertion that Clause 19 was void for uncertainty must fail.

For the above reasons, I hold that Clause 19 of the Partnership Agreement is valid.  That does not mean that there has been an effective exercise of the option by the plaintiff.  Whether there has been depends on a number of factors, not the least of which is whether, at the date of dissolution, there was anything to buy by way of exercise of the option.  If the liabilities of the partnership exceeded the value of its assets it might well be argued that there was nothing in existence which could be the subject matter of a contract created by the exercise of the option, given that the calculation of the “purchase price” is based on an unexpressed assumption that the purchaser would have to pay a sum of money.