Goudberg v Herniman Associates Pty Ltd
[2007] VSCA 12
•22 January 2007
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No. 3772 of 2005
| DIRK EVERT GOUDBERG | |
| Appellant | |
| HERNIMAN ASSOCIATES PTY LTD (ACN 087 409 363) | Respondent |
---
JUDGES: | MAXWELL P, NEAVE JA and KELLAM AJA |
WHERE HELD: | MELBOURNE |
DATE OF HEARING: | 22 January 2007 |
DATE OF JUDGMENT: | 22 January 2007 |
MEDIUM NEUTRAL CITATION: | [2007] VSCA 12 |
---
PARTNERSHIP – Partnership Act 1958 (Vic) s5 definition of “partnership” – whether persons “carrying on a business” – whether activities preparatory to commencement or setting up of a business – no business yet in existence.
---
| APPEARANCES: | Counsel | Solicitors |
For the Appellant | Mr T R Messer | Moores Legal |
For the Respondent | Mr A D Robertson | Henderson & Ball |
MAXWELL P:
Before I deliver judgment, it is important to say that the delivery of judgment at the conclusion of argument is in no sense to be taken as signifying that counsel's oral submissions have not been listened to. On the contrary, the submissions have been very carefully listened to and they have been of considerable assistance.
That we are able to deliver judgment is only possible because we have had good quality written submissions in advance from both sides and a very detailed written decision from the Tribunal. Written submissions enable this Court to give careful thought to the issues in advance. That is an important vindication of the time and expense which parties invest in those written submissions.
The oral argument is nevertheless vitally important. It enables any provisional views formed on the basis of the written submissions to be tested with counsel. In the process, those views are refined or reconsidered or – quite often – discarded.
This appeal raises a short question concerning the phrase “carrying on business” in the definition of “partnership” in s.5 of the Partnership Act1958 (Vic). The question arises in the following context.
The Victorian Civil and Administrative Tribunal made a finding that in September 2000 an agreement was entered into between the respondent (“Herniman”), and one William Leslie Williams (“Williams”), for the provision of architectural services. The Tribunal found that, at the time that contract was made, Williams was in partnership with the appellant, Goudberg. On that basis Goudberg was held to be jointly liable with Williams for unpaid fees due to Herniman under the contract.
The proceeding in VCAT was instituted by Herniman. The firm claimed against Williams and Goudberg amounts totalling more than $186,000 for unpaid fees, unbilled work and labour, loss of profit and interest. In the end the Tribunal held that Williams and Goudberg were jointly liable to pay to Herniman something in excess of $55,000.
This appeal is brought (by leave) by Goudberg alone. Williams is not a party. Unlike the Tribunal, we have only one issue to decide, that is, whether as at September 2000 Williams and Goudberg were, in the language of s 5 of the Partnership Act, "persons carrying on a business in common with a view of profit."
With great respect to the learned Vice-President of the Tribunal, I consider that the appeal must be allowed. I respectfully agree that Williams and Goudberg were acting in common at all relevant times, and were acting with a view to profit. But it was not reasonably open to the Tribunal, in my opinion, to conclude that as at September 2000 Williams and Goudberg were carrying on a business. That being so, the contention that they were partners must fail.
In Pioneer Concrete Services Ltd v. Galli,[1] the Full Court of the Supreme Court drew a clear distinction between activities which constitute the carrying on of a business and activities which are preparatory to the commencement or setting up of a business. The same distinction was drawn by the English Court of Appeal in Keith Spicer Ltd v. Mansell,[2] where things done "with a view to a company carrying on business" were characterised as merely preparatory for that event.
[1][1985] VR 675
[2][1970] 1 All ER 462
In my opinion, nothing done by Williams and Goudberg in the period leading up to September 2000 could be regarded as constituting the carrying on of a business. Quite simply, there was no business in existence. Plainly, there was a plan in existence for the establishment of a business. But by September 2000, when Herniman was engaged, all that Williams and Goudberg had done was to undertake preliminary investigations, in the nature of feasibility studies and demographic surveys, and exploratory trips to the United States.
The business concept was clear enough. It was fully and clearly described by the Tribunal, in the following terms:
“This entire dispute centres upon a scheme or project conceived by Williams which involved the conversion of the dining areas of certain hotels, particularly, at least originally, in Sydney, into what could be described as franchised eateries. Applebee’s have a very large chain of franchised family restaurants in the United States of America. Williams has a background in various endeavours, including property development, and has also been a hotelier and has conducted liquor stores.
Based on his experience, he formed the view that hotels, and particularly hotels in the area of Sydney, make very little income from the dining facilities which they are obliged to provide. They gain far more revenue from sources such as poker machines. Apparently, for some hotels, the provision of dining facilities, whilst necessary and required, is almost a nuisance. Accordingly, Williams conceived the idea of introducing into selected hotels a chain of franchised restaurants.
The hotels would be selected on the basis of a number of factors, including market research results, demographics, and the capacity of the individual dining area to seat something approaching 200 diners. The physical layout of the hotel, its kitchen, and dining areas would also be of significance, particularly bearing in mind that the facilities would have to be altered so as to comply with the established pattern of the appearance of these franchised eateries. In addition to being able to cater for the large number of diners mentioned, the exteriors of the dining areas would have to be altered so as to conform with the franchise model, and thus be readily identifiable. The concept of similarity of appearance, presentation, and even menu, of food franchising chains is one that is quite well known.
Williams formed the view that there would be advantages all round in relation to this idea, which I shall refer to as ‘the project’. At least some hoteliers would welcome it and would receive a financial benefit from it. The proposed arrangement would involve no payment of rent by the restaurateur. It should be an attractive proposition to an established and appropriate franchise chain seeking to expand into Australia. There was the prospect of large financial rewards for the person or entity setting up such a scheme. Accordingly, Williams proceeded with it, and ... it was in the furtherance of the project that Williams involved Goudberg, that they made several trips to America, and that Williams met with and engaged Herniman, which provides architectural services.”[3]
[3]Reasons [5] - [6].
As at September 2000, Williams’s “scheme or project” was simply that. It was a business concept which, if realised, might be very lucrative. Mr Herniman himself acknowledged under cross-examination that September 2000 was "very early days."[4] He acknowledged that the project would only "get off the ground" if Applebee’s, the American franchising chain, gave its approval.[5] As at September 2000, the relationship with Applebee’s was at a very early stage; indeed, the decision had only just been made by Williams and Goudberg that Applebee’s was the preferred franchising operation with which they proposed to link up for the Australian business.
[4]T 51.
[5]T 52.
According to Mr Herniman's evidence, when the first discussion took place in or about September 2000, Williams was "talking about a number of options"[6] for realising his idea. Williams’s preference, according to Mr Herniman, was to have an American franchised operation.[7] But it had not even been decided at that time whether the proposed business would operate under its own brand name or under an established brand.[8] As Mr Herniman said in evidence, the letter of 13 September 2000, which the Tribunal found constituted the agreement, was a letter confirming the intention of Williams and Goudberg to retain Herniman,[9] rather than confirming an engagement effective immediately.
[6]Ibid.
[7]Ibid.
[8]Ibid.
[9]Ibid.
According to Mr Herniman’s evidence, his firm was “prepared to undertake a certain amount of preliminary work to assist [Williams and Goudberg] to get the project happening."[10] He went so far as to say that the firm had been prepared as at September 2000 to work on a speculative basis "in the expectation that the project would get off the ground."[11] None of these answers given in cross-examination was the subject of any elaboration or qualification in re-examination by counsel for Herniman.
[10]T 53 (emphasis added).
[11]Ibid (emphasis added).
Examination of the engagement letter of 13 September 2000 makes it unambiguously clear, in my opinion, that Williams had merely sketched out for Herniman how he, Williams, envisaged the business being established. This is what Herniman said in his letter to Williams:
"We confirm that we have been discussing your setting up of a chain of cafes or restaurants around Australia shortly, probably under the name ‘Applebee’s’. We confirm that you intend to use Herniman Associates Pty Ltd to carry out the architecture and interior design part of the work. At the moment you anticipate carrying out a pilot of three and that this will be extended to 88."
In the course of 2000, in the period leading up to the engagement of Herniman, Williams and Goudberg had made two trips to America. On the first of these there were discussions described by Williams in evidence as "quite positive."[12] Following that visit, Williams made a decision "to pursue this idea of bringing a restaurant chain to the hotels in New South Wales."[13] For his part, Goudberg confirmed in evidence that the first trip was purely exploratory. They visited a variety of restaurant chains and –
"tasted food, looked at the [kitchens], looked at how things were served, how they were prepared and how they were offered to us and at what price. ... This was part of the market research if you like."[14]
[12]T 129.
[13]Ibid.
[14]T 209-10.
On the second trip, Williams and Goudberg went back to Applebee’s but also went to a number of other restaurants "to make sure we had the right one."[15] It was only after the second trip that Williams and Goudberg confirmed that Applebee’s was the chain with which they wanted to deal. It was after the return from that second trip that Williams started making inquiries of architects, one of whom was Herniman.
[15]T 130.
In cross-examination of Williams, counsel for Herniman described these activities as "feasibility investigations", as indeed they were[16]. The cross-examination of Goudberg was to similar effect. Counsel for Herniman put to Goudberg that as at 2000 there was "a long way to go in this project but it could be a very successful and profitable enterprise."[17] The next question from counsel for Herniman was in these terms:
"And you had the view with Mr Williams and you had offered your services to him on the basis that if all that took place, you were going to have equity in the venture." (emphasis added)
The case for Herniman was thus conducted on the basis that the realisation of the project was some way into the future.
[16]T 156.
[17]T 204.
According to Goudberg's affidavit, it was not until early 2002 that Williams considered the concept was finally "taking practical shape." This evidence was not challenged. There simply was no factual contest about these matters.
It was not until early 2002 that the corporate vehicle for the project (Industry Food Services Pty Ltd) was incorporated. Williams said in evidence,
"We were going to use a company structure, a venture capital company structure where we had to raise money to operate the company. … It was always a company that was going to be involved because I had to raise venture capital. No venture capitalist would give Les Williams a cheque. They would give a company a cheque because it had an agreement with Applebee’s or an intended agreement with Applebee’s."[18]
[18]T 129-130.
As the evidence showed, no agreement was ever reached with Applebee’s and no venture capital was ever obtained. Self-evidently, neither of those foundations of the business was in place as at September 2000. Indeed, finance was still being sought as late as September 2002. There was correspondence before the Tribunal between Williams and the Mortgage Investment Corporation of Australia Pty Ltd, in which the company made a proposal in these terms:
"to seek equity funds, investor/venture partners on behalf of Les Williams in conjunction with Industry Food Services Pty Ltd. The purpose of these funds is to enable Industry Food Services Pty Ltd to introduce seed capital into their companies and to complete all stages of the company development."
The period between September 2000 and June 2001 was substantially concerned with negotiations with Applebee’s. In January 2001, Williams and Goudberg were writing to Applebee’s, setting out their proposal. The letter addressed a whole range of issues, all of which remained unresolved as at January 2001, including the size of the fee payable to Applebee’s and whether the Australian franchising operation would extend across Australia or be confined to a particular area or areas. In the event, following another visit to America by Williams and Goudberg, this time accompanied by Herniman, Applebee’s withdrew from the project on 30 June 2001.
It is apparent from the reasons for decision and from the transcript that the issue to which greatest attention was devoted in the Tribunal hearing was whether Williams and Goudberg were acting "in common." It is that issue to which almost all of the Tribunal’s findings of fact relevant to the question of partnership[19] were directed. As I have said, I respectfully agree with the Tribunal’s conclusion that the two were acting together, and with the reasons given for that conclusion.
[19]Reasons [140].
The focus of attention on that issue may have reflected a perception on the Herniman side that it would be enough to show the existence of a partnership if it could be established that Williams and Goudberg were acting together in a commercial project. As Mr Herniman himself said in cross-examination, his allegation was that Williams "retained us on behalf of the project which included Williams, Goudberg and other companies."[20] While it can properly be said that Williams and Goudberg had embarked on a project, it is quite another thing to say that at the relevant time (September 2000) they were carrying on a business.
[20]T 65 (emphasis added).
The Tribunal dealt with the question of carrying on business in these terms:
“In relation to whether or not Williams and Goudberg were carrying on a business, basically I agree with the submissions made by [counsel for Herniman]. I have borne in mind the arguments advanced by [counsel for Goudberg] to the effect that the project was, at all relevant times, no more than an idea conceived by Mr Williams and a considerable distance from being a business carried on within the meaning of the definition contained in s.5 of the Partnership Act. This has given me considerable pause for thought, and in particular I am conscious of the observations of the Full Court of the Supreme Court of Victoria in Pioneer Concrete Services Ltd v Galli 1985 VR 675.
However, when the facts of the present case are examined, I am of the view that the present situation differs significantly from that in Pioneer. The facts in this case reveal that the project was considerably more advanced than that in Pioneer. In my opinion, to adopt the wording used by the Full Court, the activities alleged could be characterised as the preparatory stages of setting up an identifiable business. By the time the work the subject of this claim had been performed in early 2002, Williams and Goudberg were claiming that they were leasing one site (Pagewood). A business entity (which was apparently to manage the project) was in existence, and it had been requested that all invoices be forwarded to it. I agree that the existence of such an organising entity in which both Williams and Goudberg had shares does not militate against the existence of a partnership which is otherwise “carrying on the business”. The partnership had been in existence for a considerable time. It then brought into existence a corporate entity to manage the project, and to which it was requested invoices would be forwarded. After some consideration, I am of the view that the work being performed by Williams and Goudberg could not be described as entirely exploratory or preparatory but, given the commitments into which they had entered and the work actually carried out, could be described as ‘carrying on a business’.”[21]
[21]Reasons [142].
The Tribunal had made the only findings which were open on the evidence about the activities undertaken up to September 2000, namely, that Williams and Goudberg had commenced doing market research and demographic surveys, made two trips to America in furtherance of the project, and taken an important decision in furtherance of the project, namely, that Applebee’s provided the best franchise model.[22] But with great respect, on no reasonable view could those matters constitute the carrying on of a business. Nor could they be characterised as “the preparatory stages of setting up an identifiable business”. As the Full Court said in Galli:
“ ... [B]efore the business gets under way, those preparatory acts cannot be characterised as constituting or forming part of a business; nor can the participants be described at that stage as carrying on ... a business.”[23]
As I have pointed out, the business had not “got under way”. Indeed, as at September 2000, there was no prospect of a business coming into existence in the short-term, not least because there was no finance available and no franchise arrangements been entered into with any franchise company.
[22]Reasons [140].
[23][1985] VR 675 at 706.
The last sentence of the Tribunal’s reasons (set out in para [22] above) refers to "the commitments into which they had entered and the work actually carried out". It appears that the Tribunal may have had in mind matters which occurred subsequent to the engagement of September 2000. I refer in particular to the earlier phrase “By the time the work the subject of this claim had been performed in early 2002 ...”. While subsequent events may sometimes shed a retrospective light on whether a business was being carried on at an earlier time, this is not a case where the subsequent events can alter the characterisation of the state of affairs as at September 2000. Finally, I respectfully disagree with the Tribunal’s view that this case is stronger than Galli. In my view, the steps taken in the present case towards the establishment of a business were even more preliminary than was the case in Galli.
Mr Robertson for Herniman advanced, with all reasonable tenacity, the proposition that it was sufficient that these two men were working together with a view to profit, that is, with a view to converting the idea of a restaurant franchise into reality. He argued that the process of developing the concept, including the investigations that took place in 2000, constituted the carrying on of a business. For
the reasons already given, that argument must be rejected.
There is clear authority that a partnership can be established for the purposes of a single transaction. In National Insurance Company of New Zealand Ltd. v. Bray[24], the New Zealand Supreme Court held that a partnership did exist where a number of individuals formed a syndicate and signed an agreement for the purchase and development of, and dealing with, a particular property. Smith J. said in relation to that agreement that the only reasonable inference was the members of the syndicate were carrying on business in common with a view to profit:
"[T]he property was being bought by several persons (a) for the purpose of dealing with it in a commercial way pursuant to the decisions of the majority and (b) with the intention that each of them should be liable for losses or entitled to profits according to the ratio fixed."[25]
[24][1934] NZLR 67.
[25]At 69.
The present case would have been entirely different if, for example, by September 2000 commercial arrangements had been entered into with a particular hotel, such that the business was either up and running or about to be. There would then have been a quite different question for determination.
For these reasons, the appeal must be allowed.
NEAVE J.A.:
I would also allow the appeal for the reasons given by Maxwell P.
KELLAM A.J.A.:
The learned Deputy President in a most comprehensive and thorough judgment gave careful consideration to the evidence before him. The issue on appeal is whether the finding by the Deputy President that a partnership was in
existence, is correct as a matter of law.
Section 5 of the Partnership Act 1958 defines partnership as being "a relationship which subsists between persons carrying on a business in common with a view of profit." As Higgins and Fletcher in The Law of Partnership[26] state, the statutory definition is framed in "deceptively simple language that has given rise to many problems with interpretation." The facts of this case support that contention.
[26]LBC 1996 at 23.
The finding of the Deputy President that Williams and Goudberg were acting in common with a view to profit, appears to me to be based soundly upon the evidence. However, and indeed as his Honour made clear, the real difficulty before him related to the issue of whether the parties were carrying on a business. His Honour found that the activities of Goudberg and Williams could be characterised as the preparatory stages of setting up an identifiable business. He found that the work being performed by Williams and Goudberg could not be described as entirely exploratory or preparatory. He distinguished the factual circumstances in this case from those of Pioneer Concrete Services v Galli. I am unable to draw the same distinctions, and I respectfully agree with the President, and for the reasons given by him, that the evidence before the Tribunal was insufficient to establish that Williams and Goudberg were carrying on a business.
One may well have sympathy for the respondent, who it would appear entered into business arrangements with Williams which proved to be most unhappy. The learned Deputy President's findings about the unsatisfactory nature of much of the evidence given before him by Williams, and for that matter to a degree by Goudberg, appear to me, to be justified. Nevertheless, the issue before us is a discrete one. It is simply the question of whether as a matter of law a partnership between Williams and Goudberg existed. I respectfully agree with the President that upon the most favourable view of the evidence before the Deputy President of the Tribunal there was no basis upon which a finding could be made that the activities of Williams and Goudberg were other than those of an exploratory, and perhaps in their minds hopefully, preparatory nature. Their activities in conducting market research, travelling to the United States and negotiating with Applebee cannot be described as being the carrying on or conducting of a business at the time that they entered into arrangements with Herniman. Accordingly and for the reasons given otherwise by the learned President, I agree with the course proposed.
---
0
0