L&H New Developments v MYR Investments Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT
LIST A

S CI 2012 02002

L & H NEW DEVELOPMENTS	Plaintiff
v
MYR INVESTMENTS PTY LTD	Defendant

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JUDGE:	DALY AsJ
WHERE HELD:	Melbourne
DATES OF HEARING:	20 and 21 February, 22-26 April, 3 and 13 May 2013
DATE OF JUDGMENT:	12 December 2013
CASE MAY BE CITED AS:	L&H New Developments v MYR Investments Pty Ltd
MEDIUM NEUTRAL CITATION:	[2013] VSC 689

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JUDGMENT

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PARTNERSHIP — Order for the taking of accounts — Whether a development project was undertaken in partnership — Whether a party bound by reason of the signing of a director’s declaration in the partnership accounts to the statement of assets and liabilities in those accounts— Contract and accord and satisfaction

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APPEARANCES:

Counsel

Solicitors

For the Plaintiff

Mr P Corbett SC

Hall & Wilcox

For the Defendant

Mr G L Meehan with

Ms R Sweet (22-26 April, 3 and 13 May 2013) and
Mr L. Wirth (20 and 21 February 2013)

Cyngler Kaye Levy Lawyers

HER HONOUR:

Background and introduction

The plaintiff, L&H New Developments Pty Ltd (“LHND”) and the defendant, MYR Investments Pty Ltd (“MYR”) (together, “partners”), and their related entities have been involved together in the property development business since 1999. Since at least 2011, the partners have been in dispute regarding the respective partner’s entitlements, and in particular, the size of the respective partner’s loan balances in the accounts of the partnership. They were also in dispute as to whether the affairs of the partnership ought to be wound up, and the remaining assets of the partnership, being properties in Hastings, Mordialloc, and Croydon, be sold. This dispute culminated in LHND issuing a proceeding in the Commercial Court in April 2012.

On 17 August 2012, Almond J ordered, by consent that, among other things, a number of questions regarding the financial affairs of the partners be referred to an associate judge, following which an account was to be taken of all of the partnership dealings and transactions between the partners from the date of the commencement of the partnership to the date of the partnership’s dissolution, being 26 March 2012.

LHND was incorporated in 2002. The shareholders are Louis and Hannah New. The defendant, MYR, is an entity controlled by Moshe and Yvonne Furman. Moshe Furman has been active in the construction and the property development industry for a number of decades. Mr New and Mr Furman met in the late 1960s after Mr Furman arrived in Australia. Mr Furman is related by marriage to Mrs New, and the New and Furman families have socialised together regularly over the years.

In or about 1999, Mr New and Mr Furman agreed to conduct two joint ventures to develop residential properties, both in Charman Road, Beaumaris (“Charman Road”). The arrangements between the parties were governed by written joint venture agreements, which in one project was between Ovid Nominees Pty Ltd and Furlap Pty Ltd, and between Overleigh Pty Ltd and Furlap Pty Ltd in the other project. In both cases, the land was purchased by Ovid or Overleigh, entities controlled by Mr New. Entities associated with Mr Furman provided the construction and project management services for the projects, and the parties agreed that the profits of the projects would be shared equally between them. As well as providing the land, Mr New also arranged financing for the development of the properties, and his accountants, Green & Sternfeld, provided the accounting services for the projects.

In August 2002, the parties completed the purchase of a property at Poath Road, Hughesdale (“Poath Road”), which was ultimately developed and subdivided into five residential units. This property was purchased by LHND and MYR as tenants in common in equal shares. There was no written agreement between the parties regarding the Poath Road project, but the project was accounted for by Green & Sternfeld in the same manner as the Charman Road developments, that is, as if LHND owned the property, arranged financing for the development, and paid the expenses, and entities associated with Mr Furman provided construction and project management services. The question of whether the Poath Road project was conducted by the parties as a joint venture, or was the first project of the partnership between LHND and MYR, is an issue in dispute between the parties.

It is common ground that the remaining development projects undertaken by the parties were conducted as a partnership. In November 2003, LHND and MYR entered into a contract to purchase a property as tenants in common in Hastings, which was settled in 2004. At around this time, Green & Sternfeld registered L & H New Developments Pty Ltd and MYR Investments Pty Ltd as trustee for the M & Y Furman Family Trust as a partnership with the Australian Taxation Office (“ATO”), with the date of the commencement of the partnership business nominated as 19 February 2004.[1] The next property purchase was completed in December 2004, being a property in Mordialloc. This property was purchased by MYR on behalf of the partnership, and the parties executed a formal partnership deed in relation to this project. A formal partnership deed was also prepared for the next property, at Caulfield South, which was purchased by Mr New, but the deed was never executed. No deed was prepared or executed by the parties for a property purchased at Croydon, which was purchased by the partners as tenants in common.
[1]Exhibit “RL-1”, tab 12 to the affidavit of Robert Lebovits affirmed 7 December 2012.

The following developments were undertaken by the New and Furman interests between 1999 and 2009:

(a)121 Charman Road, Beaumaris: three residential units;
(b)200 Charman Road, Beaumaris: five residential units;
(c)24 Poath Road, Hughesdale: five residential units;
(d)97-101 McDonald Street, Mordialloc: 19 residential units;
(e)109 High Street, Hastings: one three level commercial building;
(f)7 Takapuna Street, Caulfield South: three residential units; and
(g)4 Hewish Road, Croydon: three warehouses.

Green & Sternfeld provided the accounting services for each of the projects referred to above. As with the Charman Road projects, an entity controlled by Mr Furman, Furman Constructions Pty Ltd (“Furman Constructions”), provided the construction and project management services for the projects. The responsibility for arranging financing for the projects remained with Mr New. He arranged for LHND to be the borrower under various commercial bill facilities from Westpac Banking Corporation (“Westpac”), secured by mortgages over the properties and guarantees from MYR (except in the case of the Charman Road projects). The amount of the liability to Westpac rose and fell according to the commercial activities of the partnership, increasing to fund construction and other development expenses, and decreasing as the sale proceeds of completed projects were applied to retire debt.

While it appears that there may have been some dispute in or around 2004 regarding Mr Furman’s profit entitlements pursuant to the Charman Road projects, the relationship between the parties appeared to proceed smoothly until 2009. In 2009, Mr Furman approached Mr New and expressed concern about the accounting of the affairs of the partnership. Then, while the scope of the extent of the investigation is in dispute, Mr Furman’s accountants, Lowe Lippman, and Green & Sternfeld engaged in an extensive dialogue over the months between April 2009 and December 2010, when Mr Furman signed the director’s declaration in respect of the partnership accounts for the 2008–2009 financial year (“2009 accounts”). However, shortly afterwards, the disputes between the parties escalated.

LHND alleges that in January 2011 that there was an agreement between Mr New and Mr Furman to sell the remaining partnership properties and wind up the affairs of the partnership, but that Mr Furman reneged upon this agreement and refused to sell the properties. There were also disputes between the parties regarding the accounting for rental income received from partnership properties by Mr Furman. By mid‑2011 Mr Furman was once again raising concerns about the validity of the partnership accounts.

On 18 March 2011, Mr Lebovits of Green & Sternfeld sent Mr Furman an email enclosing certain documents and requesting certain documents be provided by Mr Furman and Furman Constructions to enable preparation of draft accounts for the 2009–2010 financial year (“2010 accounts”). There was further correspondence between Green & Sternfeld, Lowe Lippman, and Mr Furman regarding preparation of the 2010 accounts over the course of the following months. On 26 May 2011, Mr Furman met with Mr Lebovits, following which Mr Lebovits sent the following email to Mr Furman (copied to Messrs Saltzman and Rathner of Lowe Lippman):

I refer you to our meeting last night wherein certain allegations of double‑dipping and appropriation of funds advanced by the bank were again questioned by you. May I remind you that Lowe & Lippmann under the supervision of Gideon Rathner rigorously investigated all the monies that were advanced by the bank and how those funds were appropriated by the Partnership. Your request of me last night was the subject of the long and tedious investigation initiated by you and brought to an amicable conclusion prior to your signing‑off on the 2009 Financial Statements.
In our conversation yesterday you indicated your willingness to make an offer on Hastings and that you would be no longer interested in obtaining a unit at Mordialloc in part satisfaction of your loan account. I ask that you put your proposals in writing for Mr New to consider.
Finally, would you please advise me in writing as to why you refused to sign‑off on the 2010 Financial Statements so that I can refer this matter to Mr New for comment.

Further correspondence took place between Green & Sternfeld and Lowe Lippman over the course of the following month. On 19 June 2011, Mr Saltzman of Lowe Lippman wrote to Mr Lebovits, ostensibly in respect of the draft 2010 accounts, but raising the following general concerns and queries regarding the accounting for the partnership as a whole:

(a)how the difference between the bank funding for the Hastings project and the construction costs for the project were accounted for;
(b)where the GST refunds paid to the partnership during the construction phase of the projects were credited to, whether they were correctly treated in the partnership accounts, and why GST refunds had been paid to LHND;
(c)what a “separate cheque book” for the partnership was used for and queries regarding specific payments to LHND;
(d)why the balance of the LHND loan account was so high given that there was also a sizeable debt due to Westpac;
(f)he criticised the manner in which the profits from the Charman Road developments were accounted for by LHND;
(g)he criticised the way in which the partnership accounts were prepared on an “englobo” basis, rather than a project‑by‑project basis;
(h)he demanded that action be taken to have Westpac refund overcharged penalty interest to the partnership; and
(i)he asserted that there was a conflict between Green & Sternfeld’s role as accountant for the New interests with its role as accountant for the partnership.

It was clear by the end of June 2011 that the relationship between Mr Furman and Mr New had deteriorated to the point of no return. On 27 June 2011, Mr Lebovits sent the following email to Mr and Mrs New (later copied to Messrs Saltzman and Rathner):

We wish to advise you that Yvonne and Moshe Furman met with the writer yesterday afternoon, making the following demands, threats and accusations:
1.The profit from the joint venture of Charman Road is to be paid to Moshe & Yvonne Furman immediately (not just represented in their loan accounts).
2.The share of profit from Takapuna/Poath Road. Mr Furman alleges that Mr New has collected all the profits, therefore L & H New Developments needs to give MYR Investments Pty Ltd 50%.
3.There has to be an immediate refund of GST paid into L & H New Developments Pty[L]td account against invoices from Furman Constructions Pty Ltd (Mr Furman alleges that L & H New Developments are not entitled to this GST).
4.Mr Furman alleges that there is a conflict of interest for Green & Sternfeld as they are the accountants for the Partnership, and he is not satisfied with Doug Black’s figures.
5.Mr Furman alleges all GST amounts paid to L & H New Developments Pty Ltd must be returned to the Partnership.
6.Mr Furman advised that there are still outstanding building fees with respect to the projects.
7.Mr Furman claims that Mr New has put no monies into the project and that Mr New is a very good juggler (of figures), recycling monies.
8.Mr Furman claims that all the loan accounts in the Financial Statements are incorrect.
9.Mr Furman alleges that Gideon Rathner did not do the investigation properly.
10.Mr Furman alleges that Mr New has no right to write out cheques and emphasized yet again that Mr New recycled all the monies.
11.Mr Furman has taken the Hastings Project in isolation and believes the construction costs, together with the cost of land, to be approximately $1,600,000.00 He is perplexed and cannot understand why $2,230,000.00 was borrowed for this project. (Please note that we have provided an explanation for this and that he has rejected the accuracy of our working papers.)

If the above demands will not be met by L & H New Developments Pty Ltd, Mr & Mrs Furman have threatened to go to the Australian Taxation Office, the Institute of Chartered Accountants and appoint a lawyer to represent them.

Further correspondence took place between Green & Sternfeld and Lowe Lippman between June 2011 and September 2011, with no resolution being reached.

On 16 September 2011, LHND’s solicitors, Hall & Wilcox, sent two letters to Mr Furman. The first letter was in relation to MYR’s letting of unsold units at the Mordialloc property, which was alleged to be contrary to an agreement reached at a meeting between Mr New and Mr Furman in January 2011 that the units would be sold. This letter also demanded that MYR account for all of the rental income received by it from the Mordialloc units. The second letter alleged further wrongful conduct on the part of MYR and Furman Constructions, including:

(a)failure to provide information to Green & Sternfeld to enable them to finalise the 2010 accounts;
(b)unreasonably delaying the execution of refinancing documents for the Mordialloc property, resulting in approximately $100,000 in penalty interest being charged to the partnership;
(c)unauthorised letting of the Mordialloc units;
(d)unreasonably delaying the approval of the 2009 accounts; and
(e)the making of various unfounded and false assertions during the meeting between Mr Furman and Mr Lebovits on 27 June 2011, such assertions being repeated and implied in the subsequent correspondence from Lowe Lippman.

Such conduct was alleged by LHND to be a breach of MYR’s contractual and general law obligations to LHND, and evidenced a breakdown in the relationship of mutual trust and confidence between LHND and MYR. Accordingly, LHND contended that the partnership should be dissolved.

Correspondence ensued between Hall & Wilcox and Mills Oakley (MYR’s former solicitors) over the remainder of 2011 and into 2012, to no productive end. Further, in 2012, Lowe Lippman in correspondence with Green & Sternfeld commenced re‑agitating the complaints raised by Mr Furman and Lowe Lippman in 2011 regarding the partnership accounts, again, to no productive end.

On 6 April 2012, LHND issued this proceeding, seeking declarations as to the date of dissolution of the partnership, and, by way of a summons dated 13 July 2012, the appointment of a receiver to the partnership. On 17 August 2012, Almond J made orders by consent (“17 August orders”) which, among other things:

(a)noted certain undertakings given by the parties regarding the assets, liabilities, revenue and expenses of the parties;
(b)declared that the partnership was dissolved on 26 March 2012;
(c)ordered that the business and affairs of the partnership be wound up;
(d)referred the proceeding to an associate judge to determine a number of preliminary questions;
(e)ordered that upon determination of the preliminary questions an account be taken of the affairs of the partnership from the date of commencement of the partnership;
(f)ordered that upon determination of the accounts, further orders would be made so as to determine the liability of the partners, and the amount, if any, payable upon the taking of accounts and orders for the payment of such amounts; and
(g)dismissed LHND’s application for the appointment of a receiver (save that the undertakings given by LHND were made reserving LHND’s rights to renew its application to appoint a receiver to the partnership).

A number of preliminary hearings were held during the latter part of 2012, during the course of which the list of preliminary questions was settled, and directions given for the hearing of evidence and argument regarding the determination of the first four questions, being:

(a)the date from which the parties carried on the partnership;
(b)the identity of the property developments which were conducted by the parties pursuant to the partnership;
(c)whether the Westpac bill facility in the name of LHND is or ought to be a liability of the partnership and whether the interest expense payable thereon is an expense of the partnership; and
(d)whether MYR is bound by the partnership accounts for the financial years ending 30 June 2003 to 30 June 2009.

Directions were made for the filing and service of statements of facts and contentions and affidavit evidence in relation to each of these questions, and the hearing commenced on 20 February 2013. The first two days of the hearing were primarily consumed by the parties’ openings and dealing with objections to the admissibility of evidence, and the matter was adjourned for further hearing on 22 April 2013. While the matter stood adjourned, several developments took place. LHND made a successful application to amend its statement of facts and contentions in relation to question (d). MYR opposed the application to amend, but withdrew its appeal against the orders made allowing the proposed amendments, while reserving its rights to re-agitate the matters raised in opposition to those amendments at the final hearing. Also in the intervening period, MYR commissioned a report from Grant Thornton, forensic accountants, regarding what were said to concern substantial errors in the accounting of the partnership (“Grant Thornton report”), which was only filed and served on the eve of the resumed hearing on 22 April 2013.

On the resumption of the hearing on 22 April 2013, counsel for MYR apologised for the late delivery of the report, and submitted that, given the cost to his client of commissioning the Grant Thornton report, the significance of the accounting errors identified by the report, and the significance of those errors to the case advanced on behalf of his client, he felt compelled to apply for an adjournment. Given the length and detail of the report, and the necessity for LHND to have sufficient time to respond, acceding to such an application would have necessitated an adjournment of some months, in the context of the hearing having already been adjourned from February 2013, with consent orders having been made seven months previously. A further adjournment was vigorously resisted by counsel for LHND, and he submitted that I should not permit MYR to rely upon the Grant Thornton report.

During the course of submissions, I formed the view that the Grant Thornton report was not relevant to the determination of questions (a) and (b). However, it would be relevant to questions (c) and (d) if, based upon the lay evidence and submissions advanced by LHND, I formed the view that MYR was bound by the 2009 accounts. By way of example, if I were to find that, by signing the 2009 Accounts, Mr Furman on behalf of MYR had made a representation as to MYR’s belief in the accuracy of the accounts, which LHND had relied upon to its detriment, then the issue of whether there were material errors in the accounts which disadvantaged MYR may well be relevant to the question of whether it would be unconscionable for MYR to be estopped from relying upon its rights as a partner to seek a full accounting of the affairs of the partnership from its inception.

Alternatively, if I were to find that the 2009 accounts were an “account stated”, MYR would be bound by those accounts, unless it could demonstrate that there was some evidence of fraud, or that there were serious errors in the accounts. Again, the Grant Thornton report may well be relevant to the determination of whether there were serious errors in the accounts. The hearing proceeded on that basis, and there was limited, if any, discussion about the accuracy or otherwise of the 2009 accounts. The Grant Thornton report was not tendered in evidence and I have not read it since my very cursory review when it was first filed.

Over the course of time the issues between the parties narrowed somewhat. In relation to questions (a) and (b), the real issue in dispute was whether the Poath Road development was the first project to be conducted by the partnership, or whether this development was conducted prior to the partnership’s commencement of the partnership. The answer to this question would determine the partnership’s commencement date.

In relation to question (c), it was conceded by MYR that the development of the various partnership projects had been financed by the Westpac bill facilities, and, to the extent that the facilities were drawn down and interest paid for the legitimate purposes of the partnership, the outstanding debt and interest expenses should be shown as liabilities and expenses of the partnership. The issue in dispute is whether all of the funds raised by the Westpac bill facilities have been utilised for partnership purposes, and whether there has been “double counting” in favour of LHND: that is, whether the draw downs from the Westpac bill facility have not only been recorded as a liability of the partnership, but have also been recorded as capital contributions by LHND, thus inappropriately inflating the balance of LHND ‘s loan account within the partnership accounts. The resolution of this issue is inextricably bound up with the determination of question (d): if MYR is found to be bound by the 2009 accounts, then it will be held to be bound by the treatment of the Westpac bill facilities within those accounts.

The question of whether MYR is bound by the 2009 accounts, or, more accurately, the amounts of the assets and liabilities of the partnership, including the amounts said to be owing to Westpac, LHND, MYR and Furman Constructions is of material significance to the process of the taking of accounts as contemplated by the 17 August orders. By June 2009, the business activity of the partnership had substantially diminished, in that most of the development projects had been completed and sold, and the remaining partnership properties were few in number and subject to tenancy arrangements. Accordingly, the task of completing the accounts for the 2010, 2011, 2012 and 2013 financial years would be relatively straightforward, if it is accepted that the balance sheet in the 2009 accounts is the proper starting point for the taking of an account. All that would be required is for the asset values to be updated, rental income recorded, offset by bank interest and property management expenses. Much of this work has probably already been done by Green & Sternfeld.

On the other hand, if the parties were required to undertake a full reconstruction of the accounts of the partnership, whether from 2002 or 2004, or even earlier, this would potentially be an expensive and time consuming process. An indication of the potential scale of this undertaking can be gleaned from the time taken and costs incurred during the course of the review referred to in paragraph 9 above, being approximately eighteen months in duration and costing $170,000 in accountants’ fees.

While the correspondence between the accountants and solicitors over recent years and the preliminary questions raise a number of issues, a number of them go to matters of “form”, that is, the manner in which various matters have been recorded in the partnership accounts, or concern disputes over sums of money (say, for rentals received from partnership properties) which are relatively small (in the context of the hundreds of thousands of dollars in legal costs which must have been spent by the partners to date during the course of this proceeding). The real commercial issue in dispute between the parties concerns the quantum of the loan balances of the respective partners and their related entities. The final version of the 2009 accounts shows that the partnership had total assets of $5,250,357.14, and liabilities of $5,369,153.93, with the partners having a negative equity in the partnership of $59,398.38 each. The bulk of the partnership’s liabilities were made up of borrowings, with $2,230,000 owed to Westpac, $1,974,829.27 to LHND, and a total of $688,194 to Furman Constructions. Accordingly, if the partnership had been wound up as at 30 June 2009, the proceeds of the sale of the partnership assets would have been sufficient to pay out Westpac, trade creditors, and the bulk of the loan accounts, with no profits available for distribution between the partners, and thus, there would be a substantial imbalance between the funds going to LHND and those going to the Furman interests.[2] Given that the practice of Green & Sternfeld in relation to the partnership accounts was to effect adjustments to the partner’s entitlements by varying the balances of the loan accounts in the partnership accounts, the commercial focus of the parties, and in particular, Mr Furman, has been the balance of the loan accounts. However, despite some efforts on my part, I have been unable to ascertain the extent to which Mr Furman says LHND’s loan account balance is overstated, and Furman Construction’s is understated. That is unfortunate, given the fact that this hearing has consumed nine court sitting days, not taking into account the various directions hearings before Almond J. Apart from a somewhat throwaway line during the course of submissions that the Furman interests are owed “millions”, Mr Furman’s inability, or unwillingness, to provide even an estimate of the amount said to be owing to MYR and/or Furman Constructions over and above the amounts recorded in the 2009 accounts makes it extremely difficult for either the parties or the Court to assess the proportionality of this litigation, that is, to assess whether the amounts at stake are commensurate with the legal costs and court resources which have been devoted to this exercise.
[2]The draft 2010 accounts show little change in the relevant loan balances.

The following people gave evidence on behalf of LHND:

(a)Mr Louis New, a director of LHND and the principal of the New interests;
(b)Mr Robert Lebovits, a principal of Green & Sternfeld, the accountants for Mr New’s family and companies, and the accountants for the partnership;
(c)Mr Doug Black, an accountant employed by Green & Sternfeld; and
(d)Mr Perry Rosenbaum, a solicitor who was retained by the partnership during 2009 in relation to the subdivision of the Mordialloc property, as well as the subsequent sale of units developed at the Mordialloc property.

All of LHND’s witnesses, save for Mr Rosenbaum, attended the hearing, and were cross‑examined.

The following witnesses were called to give evidence on behalf of MYR:

(a)Mr Moshe Furman, the director of MYR and Forman Constructions;
(b)Mr Stephen Moulton, a solicitor, who attended the auction and purchased the Poath Road property on behalf of the New and Furman interests;
(c)Mr Mark Saltzman, a principal of Lowe Lippman, accountants, who has primary conduct of the accounting requirements of the Furman interests;
(d)Mr Gideon Rathner, a principal and insolvency specialist with Lowe Lippman, who, at Mr Saltzman’s suggestion, was retained by Mr Furman to review the financial affairs of the partnership over the course of 2009 and 2010; and
(e)Ms Martha Pham, a part-time bookkeeper employed by Mr Furman until 2010.

MYR also tendered a further report by Grant Thornton regarding the financial aspects of the Poath Road development. This report merely summarised the available financial information regarding the purchase of the property, the financing of the purchase price and development costs, and the sales proceeds and rental receipts. The report made no conclusions of any real substance. Given that it was not referred to in either party’s submissions, I can infer that its contents do not meaningfully assist the parties and the Court in determining:

(a)whether or not Poath Road was a partnership project; or
(b)whether Green & Sternfeld’s accounting for the Poath Road project was accurate in substance (rather than in form, given that it had initially been accounted for in the books of LHND).

LHND also subpoenaed a file held by Bendigo & Adelaide Bank Ltd (“Bendigo Bank”), which provided financial accommodation to Mr Furman’s interests in recent years, and called two bank officers to give evidence regarding certain documents upon the file. These documents and this evidence was primarily, but ultimately tangentially, relevant to the question of whether MYR was bound by the 2009 accounts.

Finally, MYR subpoenaed the file of Mr James McCarthy, a solicitor who acted for the LHND and MYR interests for the purchase, subdivision, and sale of the Poath Road property. The documents from his file were tendered without objection, and Mr McCarthy was not required to give oral evidence.

Questions (a) and (b)

The parties agree that the following projects were partnership projects:

(a)109 High Street, Hastings;
(b)7 and 7A Takapuna Road, Caulfield South;
(c)97–103 McDonald Street, Mordialloc; and
(d)49–53 Hewish Road, Croydon.

As indicated above, the only issue in dispute is whether the Poath Road development was a partnership project. MYR accepts that the onus is upon it to establish that the Poath Road development was carried out by the parties in partnership. In its statement of facts and contentions in relation to this question, MYR submitted as follows:

(a)between 1999 and 2001 the principals of the parties, Mr Louis New and Mr Moshe Furman conducted two joint venture projects developing properties owned by entities associated with Mr New in Charman Road, Beaumaris;
(b)in 2001 Mr New and Mr Furman verbally agreed to change the structure of their business dealings to become a partnership in equal shares, in order to provide for the longevity of their business relationship, and to facilitate the entry of Mr New’s son into the property development business;
(c)Mr New and Mr Furman agreed that the profits from Charman Road joint ventures would be used as an initial capital contribution to the partnership;
(d)in February 2002, Mr New incorporated LHND to represent the New interests in the partnership, and at around the same time, Mr Furman nominated MYR to represent the Furman interests in the partnership;
(e)in February 2002, the partnership purchased the Poath Road property, which after settlement of the purchase in August 2002, was registered in the names of the parties as tenants‑in‑common;
(f)the purchase of the Poath Road property was financed in part by loan funds secured by LHND, which was secured by a mortgage over the Poath Road property, and supported by a limited guarantee by MYR, and in part from the profits of the Charman Road projects;
(g)subsequently, five townhouses were developed on the site, which were progressively sold by the partnership between 2005 and 2008; and
(h)some expenses for the Poath Road development were paid for from the partnership bank accounts, and rents received from unsold units were paid into the partnership bank account.

In response, LHND submitted as follows:

(a)LHND and MYR entered into a partnership in or after November 2003, initially for the purpose of jointly undertaking the acquisition, development and sale of the Hastings property, and with a view to acquiring and developing further properties;
(b)the Poath Road property was developed and accounted for as a separate joint venture between the parties;
(c)the partnership’s application for an Australian Business Number (“ABN”) identified the date of the commencement of the partnership as 19 February 2004, which was also the date of the purchase of the Hastings property, and was approximately 20 months after the acquisition of the Poath Road property;
(d)the partnership’s ABN was registered on 19 February 2004, the partnership was registered for GST on 1 April 2004, and the partnership was issued with a tax file number on 29 April 2004;
(e)the Poath Road development was separately accounted for in the books of LHND, and LHND’s balance sheet as at 30 June 2003 reflected:
(i)‘works in progress’ in the sum of $789,454.04, correlating with the value of the Poath Road development at that time; and
(ii)nil ‘equity in partnership’;

(f)Mr Furman signed the 2009 accounts, which did not include the Poath Road development within the scope of the partnership;
(g)in relation to the entries in the partnership journals for the financial year ending 30 June 2006, which were relied upon by MYR to support its contention that the Poath Road development was a partnership project, LHND stated:
(i)the inclusion of some ‘development costs’ in the sum of $14,567.27 in respect of the Poath Road development was made in error, and was corrected by the inclusion of a $14,568.10 ‘gross loss’ as reflecting the ‘Closing Works In Progress’ in the financial statements, the effect of which was to share the loss on an equal basis as between LHND and MYR;
(ii)the receipt of some rents in respect of the Poath Road development was a result of rents being incorrectly paid into the partnership bank account at the direction of MYR, resulting in those rents being recorded in the partnership’s cash receipts journal, and was corrected by treating those rents as an asset of the partnership in the financial statements, the effect of which was that the rental income was accounted for equally as between LHND and MYR; and
(iii)no development costs in respect of the Poath Road development were included in the financial statements or ledgers of the partnership for any other financial year.

MYR accepts that the Poath Road development was accounted for in the books of LHND in the same manner as the Charman Road projects. However, MYR submitted it was apparent from the evidence that the reason why Green & Sternfeld accounted for the project in this way was because Mr Black of Green & Sternfeld mistakenly believed that LHND was the sole purchaser of the Poath Road property by reason of him having been given a document headed “Statement of Adjustments” which mistakenly referred to LHND as being the sole purchaser.[3] Rather, the evidence of Mr Furman regarding his conversation with Mr New, the purchase of Poath Road in the names of both parties as tenants‑in‑common, and the provision by MYR of guarantees for the financing of the project all pointed to a conclusion that the Poath Road development was conducted in partnership.
[3]See exhibit “DB-1” to the affidavit of Douglas Black affirmed 7 December 2012.

The applicable legal principles governing the determination of whether two or more persons carrying on business together are doing so in partnership or pursuant to some other relationship are concisely and accurately summarised in the written submissions prepared by MYR, as follows (omitting footnotes):

(a)section 5 of the Partnership Act 1958 (Vic) defines “partnership” as “the relation which subsists between persons carrying on a business in common with a view of profit”;
(b)the burden of proving the existence of a partnership lies with the party alleging its existence;
(c)a partnership is a contractual relationship the existence of which is determined according to what the parties are considered (objectively) to have intended, and their conduct towards one another during the course of a business;
(d)the question of whether a partnership exists is a mixed question of fact and law. The court must look at all the circumstances in making its determination. If the partnership agreement is not in writing, there must be substantial evidence of the activities of the partners and how they reflect an agreement to form a partnership;
(e)evidence of conduct following the asserted commencement date is also admissible on the question of whether a contract subsisted from that date;
(f)there are some classic indicia of partnership behaviour. These include:
(i)carrying on of a business;
(ii)acquiring property as co-owners (if the assets are part of the business that the parties are carrying on in common);
(iii)sharing of profits and losses; and
(iv)requiring approval of other partners to transfer interests in the partnership;

(h)these stand in contrast to the classic indicia of a joint venture, which include:
(i)the provision of capital by one party alone;
(ii)the provision of other services by another party alone; and
(iii)different methods of calculation of return on investment for different parties; and

(i)a business will be regarded as carried on “in common” if “it is operated either by or on behalf of all persons who are alleged to be partners”. There is no rule that a partnership will not exist prior to the commencement of a business. The critical point, at least with respect to conduct preparatory to the trading of the business, is whether the activity is carried out with a view of profit.

In my view, MYR has established that the Poath Road property was purchased and developed pursuant to a partnership between LHND and MYR. There is, of course, evidence that points to a contrary conclusion, in particular, registration of the partnership with the ATO in 2004, well after the purchase of the Poath Road property, the treatment of the Poath Road development in the accounts of LHND and MYR, and the failure of Mr Furman to object to the accounting treatment of Poath Road over time, including during the period in 2009 and 2010 when Lowe Lippman were reviewing the affairs of the partnership. However, the preponderance of the evidence supports a conclusion that, after the completion of the Charman Road developments, the parties agreed to form a partnership for the purpose of purchasing, redeveloping and selling properties, and that the treatment of the Poath Road development in the accounts of the respective parties was a mistake on the part of Green & Sternfeld. The reason why none of the parties or their representatives queried or protested the accounting treatment of the Poath Road development was because Green & Sternfeld’s adjustment of the partnership accounts to reflect each party’s entitlement to the profits made on the Poath Road project meant that neither party was financially advantaged or disadvantaged by the lack of recognition of Poath Road as a partnership property. It is significant that the question of whether Poath Road was a partnership property or not assumed no significance until 2012, when MYR referred to Poath Road being a partnership property in its defence and counterclaim filed on 10 May 2012. Indeed, throughout the course of the parties’ business relationship Mr Furman expressed, from time to time, much more concern about accounting for the profits from the Charman Road developments than about his entitlements from the Poath Road developments.

Returning to the question of whether a partnership was formed at the time of or prior to the purchase of the Poath Road property, I note that most of the evidence about this matter was not particularly controversial: the dispute between the parties is really about what conclusions can be drawn from the evidence. Also, while I have some serious reservations regarding the credibility of some of Mr Furman’s evidence, the evidence he gave regarding his conversation with Mr New regarding the establishment of the partnership was not seriously disputed or undermined.

In his affidavit sworn on 25 January 2013, Mr Furman deposed as follows:

Once the first Charman Road sales were made, in approximately late 2001 or early 2002 I asked Mr New what was going to happen from this point forward. Mr New said that he wanted to establish an ongoing property development business with me. In this context, Mr New said that he wanted to establish an ongoing property development business into which, in time, he could bring his son, Chesky (also known as Harry), who was a lawyer working at a city law firm. He said that in order to provide longevity, he wanted to create a partnership so that there was a substantial business that Chesky could eventually join, which would enable him to leave the law. I said to Mr New that I had no problem with this, and agreed to establish a partnership with him.
Mr New and I went on to discuss financing developments of the partnership, and agreed that we would use profits made on the Charman Road developments as working capital to help finance the acquisition of properties. For this reason, I did not insist on a distribution from the Charman Road sales, despite the terms of the JV agreements.
From this time onwards, Mr New and I talked in terms of being “partners” and “in partnership”. Mr New would say to me from time to time that “it is very important to have trust in a partnership”, with which I agreed.
Mr New and I did not have a deed drawn up to reflect our arrangements, unlike the Charman Road developments. This did not concern me, as we had got along well during the Charman Road developments, and I had previously been in partnership with people whom I trusted without drawing up a partnership deed. I agreed with Mr New that his accountants would deal with the details and accounting of the partnership.

In response, Mr New in his affidavit of 18 February 2013 deposed as follows:

…. I recall that in around late 2001 or early 2002 I had a conversation with Mr Furman during which I said to Mr Furman that I wanted to continue undertaking property developments with him, and that I was looking to bring my son, Harry, into that business at some time in the future.
…. I have spoken with Mr Furman at various times in terms of us being “partners” and “in partnership”. I do not recall at any time speaking with Mr Furman in terms of being “partners” or “in partnership” with him in relation to the Poath Road development.”

Further, at paragraph 39 of his 25 January 2013 affidavit, Mr Furman deposed as follows:

Shortly after my conversation with Mr New in late 2001/early 2002 regarding the partnership … I found a potential development site at 24 Poath Road, Hughesdale. I recommended to Mr New that we acquire it and told him the details of the auction. Mr New agreed to the purchase, but requested that we not bid on the property in person because the auction was on a Saturday. Mr New’s objection to our attendance at the auction was based on the fact that the auction was to occur on the Sabbath, and religious Jews are not supposed to conduct business on this day, and even if I bought it as his partner, he considered that it would reflect poorly on him.
As a result of Mr New’s request, I gave instructions to Mr Stephen Moulton, a lawyer of my acquaintance, who had expertise with religious Jewish clients.

In response, Mr New deposed as follows:

Prior to the auction in February 2002 at which the Poath Road property was purchased I had a conversation with Mr Furman during which we discussed that Mr Moulton would purchase the Poath Road property as nominee for [LHND].

In his reply affidavit, Mr Furman denied that he had agreed that Mr Moulton would purchase the property as nominee for LHND alone.

In his affidavit sworn on 8 April 2013, Mr Moulton gave evidence that he believed he was purchasing the property on behalf of both the New interests and the Furman interests. He confirmed this evidence in the course of his cross‑examination at trial.[4]
[4]T 336, 5-8; T 337, 25-27.

In his affidavit of 25 January 2013, Mr Furman deposed at some length as to the tasks he undertook with respect to the development and management of the Poath Road projects, including hiring architects and land surveyors, attending at VCAT to deal with planning objections, arranging for the subdivision of the land, and engaging a real estate agent to let out the properties while they remained unsold. While this uncontested evidence is not conclusive of the matter, it is consistent with MYR being an active partner in the business, rather than Mr Furman being just the builder.

Both Mr New and Mr Furman were somewhat vague in their evidence under cross‑examination regarding the events of 2002. The most that could be gleaned from Mr New’s evidence at trial is as follows:

(a)he originally believed that LHND purchased the Poath Road site in its own right,[5] but he accepted that he signed various documents produced from the McCarthy file which showed both LHND and MYR as purchasing the land as tenants in common;[6]
(b)while he said that LHND was incorporated for the purpose of conducting property developments generally, he agreed that LHND did not embark upon any projects other than those conducted with MYR;[7] and
(c)he believed that the profits from the Poath Road development were reinvested in the Hastings project.[8]

[5]T154, 14-16.

[6]T156, 20-28.

[7]T163, 11-13.

[8]T165, 24-26.

The effect of Mr Furman’s oral evidence was that he instructed both Mr Moulton and McCarthy’s solicitors to act on behalf of his interests and Mr New’s interests in purchasing Poath Road.[9] He nominated MYR as the purchaser on the advice of his accountants.[10] He had no knowledge of whether accounts were prepared for MYR and whether the Poath Road project was accounted for in the accounts of MYR.[11] He agreed that MYR made no contribution to the purchase price of Poath Road.[12]
[9]T282, 11-13, 26-28.
[10]T242, 1-3.
[11]T247, 18-19; T251, 17-21
[12]T246, 16-20.

Messrs Lebovits and Black from Green & Sternfeld and Messrs Saltzman and Rathner from Lowe Lippman gave some evidence regarding the accounting for Poath Road. Mr Black gave evidence that at some time between December 2001 and January 2002 he was instructed by Mr New to set up a special purpose vehicle for the purpose of engaging in property development with Mr Furman.[13] The only document he reviewed regarding the purchase of the Poath Road property was the Statement of Adjustments which led him to erroneously conclude that LHND was to be the sole proprietor of the land at Poath Road.[14] He never produced any separate accounts for the Poath Road joint venture.[15]
[13]T168, 5-8.
[14]T169, 29-31.
[15]T173, 1-3.

Mr Lebovits conceded under cross‑examination that his conclusion that the Poath Road development was conducted as a joint venture was at least in part based upon his assumption that Poath Road was purchased by LHND alone.[16]
[16]T179, 4-7.

LHND relied upon a letter from Mr Saltzman to Mr Black dated 11 August 2003 (“2003 letter”)[17] to support its conclusions that the Poath Road development was conducted as a joint venture. The text of the 2003 letter is reproduced below:
[17]Exhibit “DB-1” to the affidavit of Douglas Black affirmed on 7 December 2012.

Dear Doug
RE: FURMAN AND NEW JOINT VENTURES
As previously discussed with Pam Dickson, your client Mr Louis New has entered into a new joint venture (JV) with our client, Mr Moshe Furman, for the development of the property at 24 Poath Road Hughesdale.
You advised that Mr Furman was conducting this enterprise through MYR Investments Pty Ltd and that, unless you were advised otherwise, you would treat this JV arrangement for tax purposes in the same manner that you had treated the previous arrangements – that is, to treat the purchase and sale of the property as that of Mr New for the purposes of the Goods & Services Tax (GST), and for Mr Furman to separately report for the construction costs under his GST registration. You then calculate the profit on the sale on the basis of the information you have, together with that provided by Mr Furman of the relevant construction costs. The profit is then brought to account on a 50/50 basis by Mr New and Mr Furman.
In previous JV arrangements, the property purchase has been registered in the name of Mr New or one of his entities. To date, we have not seen any documentation to indicate whether this is the same with the Poath Road development. Assuming it is, the only apparent entitlement that the Furman group would have to any proceeds from the sale of the property would be on the basis of some service or other supply that it had made to the registered owner. Moshe would therefore be required to pay GST on the “profit share” he receives. To maintain equity between them, Mr New would need to pay an additional amount to Moshe to cover the GST, which he would then claim back again (and for which a tax invoice would need to be issued).
We are not sure whether or not this has been the procedure in the past. If it has, then there is a proper final matching of GST paid and input tax credits in each of Mr New and Mr Furman’s groups. If it has not, even though the correct amount of GST has been paid between the two entities over the life of the development project, our client is at risk of a GST audit on two bases:
·input tax credits have been claimed for expenses incurred in the project, but there is no corresponding GST liability in the entity claiming the credits – this may be assessed as a risk by the ATO.
·the “profit share” may be assessed as income from carrying on an enterprise on which GST should have been paid.

It is therefore our preference for the JV to be registered as a partnership for GST purposes, and for all of the GST transactions to be brought to account through this entity.
We would be pleased to discuss this matter with you further, at your earliest convenience.

Despite the final paragraph of the letter, the evidence suggests that Mr Black did not reply to this letter, no action was ever taken in response to Mr Saltzman’s proposal, and Mr Saltzman’s proposal was not discussed with either of Mr Furman or Mr New.

Mr Saltzman in his evidence confirmed that the MYR accounts prepared in 2003 and 2004 did not show any interest in any partnership involving the Poath Road development.[18] He knew at least by 2009, that the Poath Road development had been accounted for in the accounts of LHND.[19] He accepted that the invoice prepared by him and rendered by Furman Constructions Pty Ltd dated 31 July 2006 in respect of construction and management services for Poath Road[20] had been addressed to LHND alone.[21] He gave evidence that he did not discuss the contents of the 2003 letter with either Mr Black or Mr Furman.[22]
[18]T407, 5-21.
[19]T424, 11-13.
[20]Exhibit “RL-1” (tab 11) to the affidavit of Robert Lebovits sworn 7 December 2012.
[21]T416, 16-19.
[22]T420, 2-6; T421, 5-7.

Mr Rathner did give some evidence regarding the Poath Road development, but apart from him acknowledging that the Poath Road project, along with the Charman Road projects, were identified separately from the agreed partnership projects in some documents he reviewed and during the course of a meeting with Messrs Lebovits and Black on 11 March 2013,[23] his evidence was more relevant to the accuracy of the accounting for the Poath Road development rather than the legal characterisation of the relationship between the parties.
[23]T490, 28-31.

There were a number of significant differences between the manner in which the parties conducted the Charman Road developments, and the Poath Road development, which supports a conclusion that the Poath Road project was conducted by the parties in partnership. First, Mr New incorporated a special purpose vehicle to represent his interests in his commercial undertakings with Mr Furman prior to the purchase of the Poath Road property. Secondly, the property was purchased by both parties as tenants in common. Thirdly, Mr New and Mr Furman discussed the financing of the properties, and, while LHND was the primary borrower, MYR provided a guarantee for the full amount of the facility, which did not occur in the case of the Charman Road developments. The solicitors engaged to conduct the sales of the properties and the real estate agents involved in selling and letting the properties were engaged by both parties, as evidenced by the correspondence. Fourthly, the partnership bank account was opened on 19 May 2005, shortly before the parties sold the first lot of the now developed and subdivided Poath Road property, but after the purchase by the partnership of the properties at Hastings, Caulfield South, Mordialloc, and Croydon.

The lack of a written partnership deed for the Poath Road development and the accounting treatment of the Poath Road development does not significantly detract from a conclusion that the Poath Road development was conducted in partnership. In relation to the lack of a written partnership agreement, it could equally be said that the absence of a written joint venture agreement was significant, as both of the Charman Road developments were conducted pursuant to written joint venture agreements. Further, the only admitted partnership properties for which formal partnership agreements were prepared (only one of which appears to be executed) were for the properties at Mordialloc (of which MYR was the sole registered proprietor) and Caulfield South (where Mr New was the sole registered proprietor). The remaining admitted partnership properties (Hastings and Croydon) were purchased by the parties as tenants in common, and the arrangements with respect to those properties were undocumented (as was the case with the Poath Road property). This indicates that the parties only felt the need to document their agreement in circumstances where the legal title to the relevant property was vested in only one of the parties to the joint venture or partnership, such that it would be desirable to reflect the other party’s equitable interest in the relevant property.

As for the accounting treatment of the Poath Road development, it is apparent that Green & Sternfeld, quite reasonably, thought that the Poath Road development was a joint venture between the parties. After all, the Statement of Adjustments provided to them erroneously showed LHND as the sole purchaser of the property, as was the case with the Charman Road properties. The evidence regarding what Mr New told Mr Lebovits regarding the commencement of the partnership is a little unclear, but it is apparent from the affidavit of Mr Lebovits affirmed on 7 December 2012 that not long before of the incorporation of LHND that Mr New and Mr Lebovits discussed Mr New and Mr Furman having an ongoing commercial relationship for the purpose of undertaking property developments.

I agree with counsel for MYR that the 2003 letter does not conclusively demonstrate that the Poath Road development was conducted as a joint venture. The letter merely demonstrates that Mr Black had not received any instructions that the Poath Road development was to be conducted as a partnership, and that unless he was instructed otherwise, he would treat the project for GST purposes in the same manner as he had treated the Charman Road projects. In the letter, Mr Saltzman pointed out some potential difficulties for Mr Furman’s entities of that approach: not a financial disadvantage as such, but the potential for the arrangement to attract the interest of the ATO. The letter recommended that the joint venture be registered as a partnership for tax purposes, and for all GST transactions to be brought to account through this entity.

There is no evidence that either Mr Black or Mr Saltzman sought or received any instructions from their clients in relation to this issue, and it appears that the matter fell by the wayside, at least until the following year, when the partnership was registered. In the end, in the absence of any evidence of any instructions regarding the matter, the accountants’ opinions regarding the legal relationship between the parties is only of tangential relevance. The accounting treatment of the Poath Road property simply reflects a reasonable misunderstanding by Green & Sternfeld of the ownership of the Poath Road property.

A review of the documentary evidence provides some further support for MYR’s contentions that Poath Road was a partnership project. The Lowe Lippman correspondence file[24] includes a file note which records an internal meeting between Mr Saltzman and two others on 16 January 2004, which includes the following notes:
[24]See exhibit “MS-2” to the affidavit of Mark Saltzman sworn on 30 January 2013.

· Poath Road: just started → not a JV, just a p/ship

· 50%/50% p/ship

· Furman is builder

· Liability in both names: BOM

· If extra money needed → L&H New

· Construction cost + builder fee on p/ship ITR

· Builder/Furman Constructions Trust → use this entity for claiming/paying GST for the p/ship

While this note does not provide conclusive evidence identifying Poath Road as a partnership project, it is consistent with the evidence of Mr Furman and the other indicia of partnership, and its contemporaneous nature has considerable probative value. Presumably, the discussion would only have taken place if Mr Saltzman or one of his staff had received express instructions from Mr Furman to that effect, and this was not a period when there was any conflict, or apparent positioning for advantage between the parties, such that there was any reason for Mr Furman to misrepresent the true position to his financial advisors.

Mr Saltzman’s understanding that the Poath Road project was a partnership project is also reflected in a letter sent by him to Mr Furman on 21 July 2006,[25] enclosing a draft tax invoice for project management fees (including labour and materials and GST) for $1,100,000. While he refers to the invoice being drawn “in favour” of LHND, and queries whether the agreement between Furman Constructions and LHND was oral or written, the draft invoice originally prepared by him shows that it was addressed to both LHND and MYR. Finally, the invoice prepared by Ms Pham on behalf of Furman Constructions for $224,180.00 dated 30 June 2008[26] which is described as being in respect of management construction fees, but is most likely referable to the profit share on the Poath Road project, was addressed to both LHND and MYR.
[25]Exhibit “MS-2” to his 30 January 2013 affidavit.
[26]Exhibit “RL-1”, tab 23 to the affidavit of Robert Lebovits of 7 December 2012.

One question arises: if Poath Road was really a partnership property, and therefore the partnership accounts were incorrect insofar as they did not recognise Poath Road as an asset of the partnership, then why was this issue not raised by Mr Furman, Mr Saltzman or Mr Rathner on his behalf prior to 2012? In my view, the answer to that question is that the characterisation of the commercial relationship between the parties in relation to the Poath Road development was not of any particular concern to Mr Furman and his advisors, provided that Green & Sternfeld could demonstrate that Mr Furman’s entitlements to the profits of the Poath Road development were either paid out to him or were otherwise recognised as a capital contribution by him to the partnership. Without any disrespect intended to Mr Furman, it is apparent from the correspondence between the parties and their advisors that Mr Furman is primarily concerned with ensuring he and his entities receive what they are entitled to receive, and to maximise those entitlements, regardless of how the entitlements are characterised in an accounting sense. In my view, the question of the classification of the Poath Road development has only been agitated in the context of the wider dispute between Mr New and Mr Furman, where it is very much in the interests of Mr Furman to criticise Green & Sternfeld’s accounting for the affairs of the parties, and the validity of the 2009 accounts in particular.

Similarly (and again with no disrespect to those concerned), apart from the 2003 letter, the parties’ advisers were clearly not terribly concerned about the legal characterisation of the parties’ relationship with respect to the Poath Road project. Apart from the 2004 file note referred to above, there is no evidence that they received or sought instructions from their respective clients about the status of the relationship, and, in the absence of any dispute between the parties regarding their respective financial entitlements with respect to the Poath Road project, there was no pressing need, if any, to do so.

When Mr Rathner of Lowe Lippman conducted his review of the partnership’s financial affairs in 2009 and 2010, he reviewed all of the projects undertaken by Mr New’s and Mr Furman’s entities in joint enterprise, including the Charman Road projects and the Poath Road projects. As a result, adjustments were made to the partnership accounts both in Mr Furman’s favour in the case of the Charman Road projects and in respect of unpaid construction costs, and adversely in the case of the Poath Road project, where it was agreed that the builder, Furman Constructions, had been overpaid. Again, the legal characterisation of the relationship was not of particular, if any, concern to Mr Rathner.

In the written opening submissions filed and served on behalf of MYR, MYR contended that:

MYR was significantly disadvantaged by this accounting treatment because:
(a)there is no recording of any interest of MYR in Poath Road in the 2003 and 2004 accounts of LHND;
(b)the asset … is treated entirely as an asset of LHND and there is no recognition of any impairment to record Furman interests, however those interests might have been described.
…

The result of these, and other, accounting errors is the creation of Partnership accounts do (sic) not correctly record the Partner’s equity and loan account positions. The whole of the subsequent accounts are based upon this flawed beginning.

MYR relies upon the evidence of Mr Saltzman to support its criticism of the accounting treatment of Poath Road. In his affidavit sworn on 30 January 2013, Mr Saltzman rejects Mr Lebovits’ contention that there was no disadvantage to MYR by accounting for the Poath Road project in LHND’s books of account, and stated:[27]
[27]At paragraphs 66 to 68 of his 30 January 2013 affidavit.

… it was entirely to the disadvantage of MYR for the following reasons:
(a)there is no recording of any interest of MYR in Poath Road in the 2003 and 2004 accounts of LHND;
(b)the asset (Poath Road) is treated entirely as being an asset of LHND and there is no recognition of any impairment to record Furman interests, however those interests might have been described;
(c)the 2004 balance sheet of LHND refers to a liability to MYR in the amount of $206,473 and I note that this amount corresponds exactly to the Furman interests, however those interests might have been described;
(c)The 2004 balance sheet of LHND refers to a liability of MYR in the amount of $206,473, and I note that this amount corresponds exactly to the Furman interests’ disputed profit entitlement arising from the 200 Charman Road project, as calculated by Doug Black in his schedule …
(d)It remains unexplained why the profit share entitlement of Furman Constructions came to be treated as an entity in the accounts of LHND so as to create a liability owed by LHND to MYR, whilst there was a failure to bring into the books of the Partnership that amount as an original capital contribution by MYR, notwithstanding that it seems to be conceded that the joint venture participants profit share would be so applied.

Ultimately, there has been a failure to properly account for the Charman Road projects and the Poath Road profit share and instead:
(a)a loan account has been created in the name of Furman Constructions; and
(b)the LHND loan account has been reduced by the corresponding amount.

I recognise that the calculation of these amounts, in particular, the Charman Road and Poath Road profit shares, are disputed by Mr Furman, but it is the incorrect accounting treatment which, even allowing for the figures, creates a Partnership account which is not a true reflection of the Partners’ equity and loan account position.

With respect, none of the evidence advanced on behalf of MYR supports the proposition that the manner in which the Green & Sternfeld accounted for the parties’ respective entitlements in respect of the Charman Road and Poath Road projects led to any entity controlled by Mr Furman being materially, or at all, financially disadvantaged by the accounting treatment of the Poath Road development. The fact that MYR’s joint ownership of the Poath Road property was not recognised in the accounts of LHND is neither here nor there. The Poath Road property has been developed and the units sold, the Westpac bill facility has been paid out, and the profits have been shared equally. MYR was registered on the title of the Poath Road property, and joint ownership of Poath Road has never been a matter of either consequence or dispute. In terms of the parties’ entitlements to profits, apart from unsubstantiated assertions by Mr Furman, the best evidence is that:

(a)the dispute between Mr Furman and Mr New regarding the Charman Road projects was compromised by the addition of $40,000 to the balance of MYR’s loan accounts in the 2009 accounts, with a correspondent reduction to LHND’s loan account balance, as evidenced by an email from Mr Lebovits to Mr Rathner dated 1 November 2010 and the revised version of the 2009 accounts;
(b)Green & Sternfeld provided an accounting for the Poath Road development in a handwritten schedule prepared by Green & Sternfeld on 30 June 2008 recording the net sales, other income, costs, and profits associated with the Poath Road development.[28] A copy of this document was faxed by Lowe Lippman to Green & Sternfeld on 8 August 2008 with the notation “agreed by MF”. Mr Furman gave evidence that this was not his handwriting, and that he never agreed with these calculations. Mr Lebovits gave evidence it was not his handwriting.[29] Mr Rathner believes that it might be his handwriting, but this is unlikely, given the date of the document. Some weeks later, Green & Sternfeld received a tax invoice from Furman Constructions claiming the amount of the profit share plus GST; and
(c)in correspondence between Mr Lebovits and Mr Rathner during the course of Mr Rathner’s investigations in 2009 and 2010 Mr Lebovits explained the calculations and accounting treatment undertaken by Green & Sternfeld with respect to the Charman Road and Poath Road developments, Mr Lebovits explained to Mr Rathner[30] that these profits were accounted for in the books of LHND as a liability to Furman Constructions. In his letter of 4 May 2009, Mr Lebovits stated as follows:
All profits made by Furman Constructions Pty Ltd in respect of Charman Road and Poath Road have been summarised and forwarded to your office. The amount owed to Furman Constructions Pty Ltd is reflected as a loan account in the books of L & H New Developments Pty Ltd. If you prefer we could reflect this loan in the partnership accounts.

[28]Exhibit “RL-1”, tab 22 to the affidavit of Robert Lebovits affirmed on 7 December 2012.

[29]Paragraph 37 of his affidavit affirmed on 7 December 2012.

[30]Exhibit “RL-1”, tab 31 to the affidavit affirmed by Robert Lebovits on 7 December 2012.

As Mr Lebovits received no response to this letter, he prepared a draft of the 2009 accounts reflecting this proposal, which involved

(a)extinguishing this loan balance (which reflected the profit share referable to the Charman Road projects and the Poath Road projects of $430,653.00) in the LHND accounts;
(b)disclosing this loan balance in the partnership’s accounts as a loan owing by the partners to Furman Constructions; and
(c)reducing the balance of LHND’s loan account in the partnership’s accounts by the same amount ($430,653.00).

This was confirmed by Mr Lebovits in his letter to Mr Saltzman dated 24 August 2009, where he enclosed, among other things:

A full historical record of Loan Accounts made by L & H New Developments to the Partnership. Please note that monies owed to Furman Constructions Pty Ltd in respect of profits earned on the Poath Road and Charman Road projects have now been recorded in the books of the Partnership.

On 13 October 2009, Mr Rathner, in the course of his review of the partnership’s financial affairs, wrote to Mr Lebovits requesting, among other things:

that you detail the date and the amount of the payment of the profits arising from the following three projects.
-121 Charman Road
-198-200 Charman Road
-Poath Road

Mr Furman has been unable to recollect to identify (sic) receipt of the profit distributions of these projects.

On 5 November 2009, Mr Lebovits replied as follows:

1.With respect to 121 Charman Road, Mr M Furman received $80,000 on the 21^st February, 2002 as full payment of his share of profit. Mr M Furman has personally acknowledged receipt of this amount.
2.With respect to 200 Charman Road, Mr M Furman was entitled to a profit of $206,473 which was agreed to by him and confirmed by Lowe Lippmann in May 2003. This amount was initially recorded as a Sundry Creditor in the books of Ovid Nominees Pty Ltd (The New Family Trust) and subsequently transferred to L & H New Developments Pty Ltd and represented as a Loan Account owing to Myr Investments Pty Ltd. The profit was used to assist in the finance of the Poath Road project.
3.With respect to Poath Road, Mr M Furman agreed to his share of profit being $203,800 plus GST. An invoice no. 75 was raised by Furman Constructions Pty Ltd to reflect this profit. The amount of $224,180 was recorded as a loan to MYR Investments Pty Ltd in the books of L & H New Developments Pty Ltd. The total amount of $430,653 to MYR Investments Pty Ltd was as at 30^th June, 2009 transferred from the books of L & H New Developments Pty Ltd to the books of the partnership.

There was further correspondence between Mr Rathner and Mr Lebovits regarding the accounting for the Poath Road development in 2010. Mr Lebovits and Mr Rathner’s correspondence in respect of Mr Rathner’s review of the financial affairs of the partnership made reference to the Poath Road project on 25 January 2009, 18 February 2010, 19 February 2010, 11 March 2010, 13 April 2010, 3 May 2010, 4 June 2010, 12 July 2010, 30 July 2010, 20 August 2010, and 26 August 2010. Information was exchanged regarding the construction costs, interest charges, other project expenses, the net profits, and the payments to Furman Constructions associated with the Poath Road project.

On 4 June 2010, Mr Rathner, in a letter to Mr Lebovits, referred to profit and loss schedules provided to him on 3 May 2010, and queried two items, being an interest charge of $36,842 and another payment of $23,000. It is apparent from emails sent from Mr Rathner to Mr Lebovits on 23 August 2010 and 26 August 2010 that the parties had agreed that Furman Constructions had been overpaid $53,403 in respect of construction costs, which was to be set-off against amounts said by Furman Constructions to be under-payments in respect of other partnership projects. A file note of Mr Rathner’s dated 2 September 2010 records a telephone conversation between him and Mr Lebovtiz. The file note records:

Agree Poath, Hastings, Hewish – as per email 26/8.

I have not been able to locate any further express reference to the Poath Road project in the correspondence between Mr Rathner and Mr Lebovits. However, to the extent that it is relevant, there was further discussion regarding the accounting for the Charman Road project. Ultimately, an adjustment was made to the 2009 accounts reflecting an agreement reached during a telephone conversation between Mr Rathner and Mr Lebovits on 27 October 2010. In regard to the latter, Mr Lebovits deposed as follows:

During this conversation, Mr Rathner said to me words to the effect that Mr Furman would agree to the profit related loan balance disclosed as owing to [Furman Constructions] in the second draft of the 2009 accounts provided there was an adjusted increase of $40,000 made to that balance to reflect additional amounts Mr Furman claimed were owing to [Furman Constructions] in relation to the Charman Road development.

The loan account balances of both Furman Constructions and LHND in the final 2009 accounts reflected these adjustments.

MYR’s evidence in support of its contention that the accounting for the Poath Road project disadvantaged MYR was, at best, equivocal. I have already commented upon Mr Saltzman’s evidence. In his affidavit sworn on 17 April 2013, Mr Furman deposed, in summary:

(a)the notation on the Poath Road schedule dated 30 June 2008, (with a fax heading showing that it had been transmitted by Green & Sternfeld on 8 August 2008) “Agreed by MF” was not his handwriting, and he never agreed with those calculations;
(b)the invoice by Furman Constructions for the profit share for the Poath Road project requested by Mr Black in 2008 was not prepared by him. He deposed that Ms Pham did approach him at around that time and requested that he raise an invoice of this amount, but he did not understand what it was for, and Ms Pham did not state to what the invoice specifically related; and
(c)he disagrees with Green & Sternfeld’s accounting treatment of the profits of the Charman Road developments. Green & Sternfeld recorded $206,473.00 in the books of LHND as a loan to MYR. Mr Furman deposed:
I was not aware of this transaction and accounting, and was not asked for my consent to the transaction. I do not now, and have never, agreed that this figure accurately represents my share of the Charman Road profits. My agreement, following discussion with Mr New, was that the Charman Road profits were to be contributed as working capital and not represented as a liability owing to my interests.

Taking the last of the above matters first, the above statement by Mr Furman is somewhat disingenuous. There was no suggestion that Green & Sternfeld were required, at least as at 2004, to seek Mr Furman’s consent as to how they accounted for the various matters, or any indication that they ever did. Further, it is difficult to see how there was any material detriment to Mr Furman’s interests in having his entities entitlements recorded as a liability of LHND rather than as a capital contribution by MYR to the partnership. If Mr Furman still seriously disputes whether his entities received the profits from the Charman Road developments, that is a matter for a claim by Furman Constructions under the two joint venture agreements (although there may be limitations issues associated with any claim) but it is not a matter which warrants the reconstruction of the partnership accounts. No party has ever contended that the Charman Road projects were conducted as part of the partnership. In any event, Mr Furman’s claim that Furman Constructions had not received its full profit entitlements in relation the Charman Road developments was compromised in the course of Mr Rathner’s review of the partnership’s financial affairs in 2009 and 2010.

In relation to the question of whether Mr Furman authorised the issue of the invoice for the partnership profits on the Poath Road project it is apparent from the coincidence of the figures in the invoice with the handwritten schedule annotated with “Agreed by MF” referred to at paragraph 79(a) above that the sum of $224,180 was recorded as being owing to the Furman interests as a half share of the profits made on the Poath Road development, and that someone apart from Mr Lebovits had annotated the schedule to signify Mr Furman’s acknowledgment of the accuracy of that amount.

Accordingly, while I am satisfied on the balance of probabilities that the Poath Road project was conducted as a partnership project, I am not satisfied that MYR suffered any material detriment by reason of Green & Sternfeld’s accounting treatment of the Poath Road development. Accordingly, I do not agree that my findings regarding the legal characterisation of the parties’ relationship with respect to the Poath Road project should, of itself, cause the partnership accounts to be re‑opened should I find that MYR is otherwise bound by the 2009 accounts.

Questions (c) and (d)

In its amended statement of facts and contentions filed on 15 March 2013 and its written submissions, LHND contended that MYR is bound by the partnership accounts for the financial years ending 30 June 2004 to 30 June 2009, on the basis that:

(a)MYR agreed to be bound by the statement of assets and liabilities and profit and loss statement contained in those accounts and the methodology contained therein as evidenced by the correspondence between Mr Lebovits and Mr Rathner between August 2010 and December 2010;
(b)alternatively, MYR represented and warranted to LHND that the accounts presented fairly the partners’ financial position as at 30 June 2009;
(c)LHND provided valuable consideration for the warranty given in that it:
(i)caused the partnership to lodge a tax return for the period ending 30 June 2009 based upon the agreed income statement;
(ii)entered into a further business finance agreement on behalf of the partnership with Westpac dated 11 August 2011;
(iii)signed the financial accounts for the partnership for the period ending 30 June 2010;
(iv)agreed that the partnership pay the fees and expenses of Lowe Lippman in respect of the review undertaken by Mr Rathner that resulted in the execution of the consolidated accounts.

and as such, MYR is therefore bound by the 2009 accounts;
(d)MYR entered into an accord and executed the 2009 accounts in satisfaction of any cause of action it may have as to the parties’ loan account balances and the assets and liabilities of the partnership as at 30 June 2009;
(e)alternatively, MYR is estopped by its conduct from asserting that the accounts did not fairly present the partners’ financial position as at 30 June 2009;
(f)alternatively, an account was stated by LHND and MYR in respect of the debts, claims and demands of the partners; and
(g)alternatively, MYR should be precluded by the exercise of the court’s equitable jurisdiction upon ordering the taking of partnership accounts from departing from the assumptions and methodology adopted in those accounts, including the identity of the assets and liabilities of the partnership as at 30 June 2009.

In response, in its “Contentions of Fact” dated 26 October 2012, and its “Contentions in Reply” dated 17 April 2013, MYR submitted as follows:

(a)to the extent that LHND’s contentions are put forward pursuant to the amendment allowed on 13 March 2013, the 17 August orders amount to final relief in the proceeding, and the amendments constitute an attack on that final relief;
(b)the various claims and matters raised by LHND (as summarised in paragraph 83 above) have merged in the 17 August orders by reason of res judicata, or, at the least, LHND is prevented from now raising them by an Anshun estoppel;
(c)the 2009 accounts contain significant errors;
(d)there was no agreement by LHND and MYR to be bound by the statement of assets and liabilities, the profit and loss statement, and the methodology contained in the 2009 accounts;
(e)Mr Furman’s signature on the director’s declaration in the 2009 accounts did not constitute a warranty or representation by MYR;
(f)none of the matters relied upon by LHND constitute good consideration for the warranty, and in any event, LHND has not alleged that it relied upon any warranty or representation;

(d)Mr Furman’s position was that if the investigation “went Gideon Rathner’s way” he did not want to pay Green & Sternfeld’s fees. Mr Lebovits did not accept this position;
(e)Mr Furman wanted the partnership to pay Lowe Lippman’s fees for the Rathner review;
(f)Mr Furman believed that Mr New had been using funds advanced under the Westpac bill facilities for his own purposes. Mr Lebovits responded that Mr Saltzman had told him in July 2009 that he was satisfied with the LHND loan account and Mr Rathner had conducted a full review; and
(g)Mr Lebovits was aware that monies were outstanding to Furman Constructions, but that Mr Rathner was conducting a full analysis, following which Mr Lebovits and Mr Rathner would amicably resolve any outstanding matters.

Accordingly, as at June/July 2010, the following matters were in dispute between the parties:

(a)Furman Constructions’ entitlement to profits from the development of the Charman Road projects;
(b)the amount outstanding in relation to construction costs ($372,824 according to Lowe Lippman, compared with $123,785 according to Green & Sternfeld’s letter of 12 July 2010); and
(c)payment of Green & Sternfeld’s and Lowe Lippman’s fees by the partnership.

By 16 September 2009, an agreement had been reached between the parties in respect of the amounts said to be owing to Furman Constructions, being $276,284, which included GST and the reimbursement of the deposit paid by Mr Furman for the Croydon property. By 27 October 2010 the parties had reached agreement with respect to Mr Furman’s claim that he had been underpaid $65,140 in respect of his profit share for Charman Road. Mr Furman’s claim was compromised with an adjustment in his favour of $40,000. Also by that date, it was agreed that the sale proceeds of partnership properties would be applied to pay both Green & Sternfeld’s and Lowe Lippman’s outstanding fees. The only issue which remained outstanding was whether the remaining sale proceeds should be applied to the LHND loan account alone, until the balance was equal to that of Furman Constructions, or whether there should be a proportional reduction of the loan balances, in accordance with Mr Furman’s position. Ultimately, Mr Furman’s position prevailed, although it is not entirely clear when the parties agreed upon that particular issue. In all probability, that agreement was reached prior to Mr Furman signing the 2009 accounts.

Accordingly, Mr Furman’s signing of the 2009 accounts represented his acknowledgement that the process of investigation and negotiation agreed to be undertaken in 2009 was complete, and that the various claims made by him and on behalf of his related entities had been compromised with Mr New and his entities.

The conduct of Mr Furman in signing the 2009 accounts assumes particular significance, not because it in itself constituted the agreement between the parties, but because it signified that the process of investigation and negotiation regarding the financial entitlements of the parties had reached its conclusion, and there remained no outstanding disputes between them in that regard. Along the way, as well as making the necessary adjustments to the loan accounts to reflect the compromises by the parties, other agreements were made and performed: that is, an agreement regarding the application of the sales proceeds of partnership properties, and the execution by Mr Furman of the rollover documentation for the Westpac bill facility once he was satisfied that Mr Rathner had conducted a full verification of drawdowns, interest and fee payments on the bill facilities, and had reconciled these with the partnership and LHND accounts. These agreement were both put into effect in February 2011 with the sale of one of the Croydon properties, the disbursement of the proceeds of that sale in accordance with the agreement, and the execution of the Westpac bill facility secured over the properties at Hastings and Croydon.

In reaching the conclusion that Mr Furman was bound by the 2009 accounts by reason of a series of agreements, as evidenced by conversations between him and Mr New, the correspondence between the accountants, the successive adjustments made to the 2009 accounts to give effect to the compromise of Mr Furman’s claims, and the application of the sale proceeds of the Croydon property in February 2011, I accept that I have departed from the traditional “offer/acceptance/consideration” analysis of contract formation. However, while I acknowledge that this framework for determining whether the parties have reached an agreement (or agreements) still has its place, it is apparent from the authorities that a more “global” approach to negotiations between parties may to be adopted in order to determine whether objectively and having regard to the totality of dealings between the parties, they should be considered to have entered into a contractual relationship without enquiring too closely into the formalities of offer and acceptance.[134]
[134]see Maxitherm Boilers Pty Ltd v Pacific Dunlop Ltd [1998] 4 VR 559 at 567.

In Vroon BV v Fosters Brewing Group,[135] Ormiston J, while emphasising that offer and acceptance was the primary mode of ascertaining the existence of a contract, was prepared to conclude that the existence of a contract may be evidenced otherwise than by offer and acceptance, and referred to the American Restatement of Contracts, Second 22(2), which states:

A manifestation of mutual assent may be made even though neither offer or acceptance can be identified and even though the moment of formation cannot be determined.

[135][1994] 2 VR 32, 79-83.

Also, it should be noted, in relation to whether, objectively speaking, the parties intended by their words and conduct to be legally bound by a particular position, that where the parties are in a commercial relationship and are negotiating about important matters, the onus of establishing that there is an intention to enter into a legally binding contract might be more readily discharged than might ordinarily be the case.[136]
[136]see Shahid v The Australian College of Dermatologists [2007] FCA 693, [298]-[308], Edwards v Skyway Ltd [1964] 1 WLR 349, Toyota Motor Corp Aust Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106, at 177.

Finally, it should not be disregarded that, while the correspondence, discussions and negotiations between Mr Lebovits and Mr Rathner were largely courteous and amicable, these discussions and negotiations were initiated by, and took place in the context of a dispute between the parties, in particular, in the context of Mr Furman complaining that the accounts of the partnership did not adequately recognise his entities’ claims to the assets of the partnership. While, at the initial stage of the investigation process, those claims were vague and unparticularised, it is apparent from the letter from Mr Saltzman to Mr Lebovits dated 28 April 2009 that there was a dispute, or a potential dispute between the parties regarding the payment of GST refunds for the Caulfield South project being paid into the bank account of LHND. Indeed, the letter stated as follows:

We have instructions to demand that these accounts be repaid to the Partnership bank account within 7 days.
Failing which, we advise that the matter will be reviewed further for appropriate action.

It was in the context of this correspondence that Mr New and Mr Furman met in mid 2009, and, at Mr New’s urging, Mr Furman agreed that his concerns should be left to the accountants to resolve. In effect, the purpose of Mr Rathner’s retainer was not merely to investigate the partnership’s financial affairs, but also to particularise and verify the claims able to be made by Mr Furman’s entities against the partnership, such that they could be reviewed by Green & Sternfeld, and agreed, rejected, or compromised between Mr Furman and Mr New. And that was precisely what in fact occurred, and, by reason of the manner in which the parties, through the accountants, agreed that these matters would be recorded, that is, by adjustments to the parties’ loan accounts, Mr Furman’s signing of the 2009 accounts signified his acknowledgement of the various agreements that had been made along the way.

It is well accepted that a compromise of a claim, or settlement of a dispute, amounts to valuable consideration, even in circumstances where no proceeding has been issued or expressly threatened.[137] Indeed, the current case could be considered to be a classic case of “accord and satisfaction”, whereby Mr Furman, on behalf of Furman Constructions, promised to abandon any claim it may have against the partnership in respect of, among other things, construction and management fees, in exchange for adjustments being made to the partnership loan accounts. That no actual cash changed hands is irrelevant, as it is clear that the parties had agreed upon the mechanism by which Furman Construction’s claims would be adjusted to reflect the compromise between them.
[137]see Seddon NC and MP Ellinghaus Cheshire & Fifoot’s Law of Contract, Ninth Australian Edition (2008) at [4.24].

By seeking to re-agitate the issues investigated and determined during the course of the Rathner review from mid 2011 to the current day, Mr Furman has resiled from his agreement with Mr New that the process agreed between them would result in a final position with respect to the parties’ respective entitlements to the assets of the partnership. Of course, it is not necessary for a party to establish any loss to assert or prove a breach of contract. Given that such a breach has occurred, it is arguably not the role of the Court to facilitate or endorse such a breach in the exercise of its powers, including its powers under its jurisdiction with respect to the taking of accounts, in the absence of any vitiating conduct on the part of the party asserting a breach.

Ultimately, the assertions made on behalf of MYR that Mr Rathner did not conduct a full and comprehensive review of the partnership’s affairs are not made out, and are in fact directly contradicted by the evidence. No credible evidence was led to identify what Mr Rathner did not do, that he ought to have done in order to satisfy himself as to the accuracy of the 2009 accounts. There was no credible evidence about what information Mr Rathner did not receive from Green & Sternfeld in order to effectively carry out his retainer. The issues raised on behalf of MYR in the correspondence from mid 2011, and in the pleadings and particulars in this proceeding, were shown to be without foundation, and appear to have been agitated in order to advance Mr Furman’s position in negotiations with Mr New. The cooperation of Lowe Lippman in that process, given what they knew, or ought to have known regarding what occurred in 2009 and 2010 is regrettable, and does not reflect well on the professionals involved. In particular, the claims made on MYR’s behalf in 2011 and 2012 that the accountants at Lowe Lippman did not know that there was a separate loan account balance in the partnership’s accounts for both Westpac and LHND at the time Mr Furman signed the 2009 accounts was particularly disingenuous.

One thing that ought to be kept in mind when assessing the nature, process and outcome of the Rathner review was that, while the task of examining the partnership’s affairs was slow and laborious, it was not particularly conceptually complicated. What might be described as the “components” of the partnership’s business are few in number and readily ascertainable. The main inputs of the business are land (the cost of which is easily identifiable), construction costs (the knowledge of which was in the domain of Mr Furman’s entities, not Green & Sternfeld or Mr New), interest costs and fees associated with the Westpac bill facilities, which were subject to exhaustive review by Mr Rathner, and other sundry development expenses (professionals’ fees, open space contributions, the cost of conducting VCAT proceedings and so on). The financial details of the “outputs” of the business, being the net sale proceeds of the units developed on the project, or, in the case of unsold properties, rental receipts, are also readily ascertainable. The only matter which seems more complex than the others is the question of GST, but that was an issue that Mr Furman was well and truly alert to in 2009, and was also the subject of exhaustive review by Mr Rathner.[138] Therefore, it is difficult to see how a capable and thorough professional such as Mr Rathner could have not identified, or have been misled by, discrepancies in the partnership’s accounts of a material nature.
[138]Queries and issues regarding GST were raised in letters from Lowe Lippman to Green & Sternfeld on 6 February 2009, 28 April 2009, 4 May 2009, 23 October 2009, 16 November 2009, 21 December 2009 and 19 February 2010, and were also referred to in letters from Green & Sternfeld to Lowe Lippman on 17 April 2009, 29 April 2009, 24 August 2009, 28 August 2009, 29 September 2009, 23 November 2009, and 8 December 2009.

Mr Saltzman in his affidavit criticised the manner in which Green & Sternfeld prepared the partnership accounts as being on an “en globo” basis rather than a project by project basis with the implication that this was what was necessary in order to obtain a full understanding of the affairs of the partnership. However, that criticism lacks substance, in that the partnership accounts are merely the net result of the different partnership projects, and Mr Rathner gave evidence that he conducted a full review of the construction costs, interest payments, and GST in respect of each individual project. There was no suggestion by either Mr Saltzman or Mr Rathner that they were confused by, or did not understand the accounting for the partnership by reason of it being on a year by year basis (which would be necessary for taxation purposes in any event) rather than a project by project basis.

Accordingly, I have concluded that each of LHND, MYR and Furman Constructions are “bound” by the statement of assets and liabilities in the 2009 accounts, either on the basis that Mr Furman’s signing of the 2009 accounts evidenced his agreement to the process agreed by him and Mr New regarding the ascertainment of the financial entitlements of their respective entities and an acknowledgement that that process had been finalised, or on the basis that there had been an accord and satisfaction. In relation to the latter, the matters which were the subject of the “accord” were the claims by Furman Constructions in respect of outstanding construction and management fees on the partnership projects (including Poath Road), and the profit share on the Charman Road projects. The “satisfaction” of these claims was Mr New’s instructions to Green & Sternfeld to make certain adjustments to the 2009 accounts to reflect the compromises achieved in respect of those claims.

At first glance, it might be difficult to reconcile my findings that Poath Road is a partnership property with my finding that MYR is contractually bound to accept the validity of the 2009 accounts. However, as indicated in paragraph 65 above, it was apparent that Mr Furman was far more concerned about the financial outcomes rather than the accounting treatment of the various development projects. As such, in relation to the treatment of the Poath Road property, provided that Furman Constructions had been paid the amount due to it for construction and project management services, and MYR had either been paid its profit share or the profits were reflected in the accounts of the partnership, I doubt that Mr Furman would have been terribly concerned as to whether or not the partnership accounts identified Poath Road as a partnership project.

It is apparent from the exchange of correspondence between Green & Sternfeld and Lowe Lippman that Mr Rathner investigated the accounting for Poath Road, and Mr Furman had agreed that Poath Road had been properly accounted for (in an accounting sense, rather than a legal sense). That would have been required by Mr Furman regardless of whether Poath Road was a partnership project or a joint venture project. Indeed, Mr Furman appeared to be far more concerned about investigating the financial affairs of the Charman Road projects rather than the Poath Road project.

The financial outcomes for the parties in respect of Poath Road did not differ according to whether Poath Road was a partnership project or a joint venture project. Each party was entitled to a half share in the profits of the project once completed. The only material difference was that the parties’ profits from the Charman Road developments were used as a capital contribution to the project, and MYR gave a guarantee to secure financing from Westpac.

Accordingly, while the partnership accounts for the 2004 to 2008 financial years were “wrong”, in that they did not record the Poath Road property as an asset of the partnership, this does not mean that the 2009 accounts are inaccurate, such that the inclusion of Poath Road as a partnership property warrants the complete unravelling of the partnership accounts. First, by 30 June 2009, the Poath Road properties had all been sold, and the Westpac bill facilities had been discharged (the Westpac bill facility in respect of Poath Road was discharged on or about 13 August 2007 from the proceeds of the sale of unit 3, and the proceeds of sale of the final unit were deposited into the partnership bank account on or about 27 June 2008). Secondly, as noted above, Mr Furman was satisfied that the profits of the Poath Road development had been properly accounted for. Accordingly, there is no utility in ordering that the accounts be reconstructed to reflect the inclusion of Poath Road as a partnership property, and no basis for not drawing a conclusion that there had been no agreement between the parties with respect to the 2009 accounts.

As I have found that there was a concluded agreement between Mr New and Mr Furman, it is not strictly necessary for me to make findings with respect to the other matters relied upon by LHND, being that:

(a)by reason of Mr Furman’s signing the 2009 accounts MYR represented and warranted to LHND that the accounts presented fairly the partners’ financial position as at 30 June 2009;
(b)MYR is bound, by reason of the matters set out in (a) above, by the 2009 accounts as a matter of contract or by reason of a conventional estoppel;
(c)alternatively, an account was stated as at 30 June 2009 in respect of the debts, claims and demands of LHND and MYR as partners; and
(d)alternatively, the Court in the exercise of its equitable jurisdiction should be precluded from departing from the identity of the assets and liabilities of the partnership as at 30 June 2009.

I should indicate, however, that, in respect of LHND’s claims that MYR is estopped from departing from any representation or warranty made by Mr Furman by reason of his signature upon the director’s declaration in the 2009 accounts, the submissions made on behalf of MYR in that regard, in particular, regarding the absence of any evidence that LHND relied upon or suffered any meaningful detriment in relying upon any such representation, have considerable force. Further, I am doubtful as to whether the extent of any general equitable discretion with respect to the taking of accounts is sufficiently broad to deny MYR its rights as a partner to seek a full accounting of the affairs of the partnership in the absence of any binding agreement or estoppel.

However, a significant matter remains to be determined, being the consequences of my ruling on 22 April 2013 that the hearing of the evidence in relation to question (d) would proceed, with the relevance of any errors in the accounts to remain for consideration if I determined that, on the basis of the lay evidence, MYR was prima facie “bound” by the 2009 accounts.

It appears to me that, having found that MYR is bound by the 2009 accounts, then the relevance of any errors in the accounts depends upon the basis upon which I have found it was so bound:

(a)if I found there was an agreement between the parties, supported by consideration, regarding the validity of the 2009 accounts, or, an accord and satisfaction between the parties with respect to any claims between them as evidenced by the signing of the 2009 accounts (as I have done), I would need to determine whether there was any conduct on the part of the parties, and in particular LHND, which would vitiate the agreement. I note that no such vitiating conduct was advanced by MYR in its Statement of Facts and Contentions. However, I accept that I have approached this enquiry on the basis that the parties are not bound by their Statements of Facts and Contentions as if they are pleading;
(b)if I was to find that, prima facie, MYR was estopped from resiling from the 2009 accounts, the existence of errors in the accounts, and the magnitude of any such errors would be relevant to the question of whether it would be unconscionable for MYR to resile from any representation made by it to LHND by signing the 2009 accounts. MYR contends that if there are significant errors in the 2009 accounts which materially affected MYR’s entitlements under the partnership, then it would not be unconscionable to rely upon the errors;
(c)if I was to find that MYR was foreclosed from reopening the 2009 accounts by reason of an account stated, the legal position is that, in the absence of a settled account (whereby there has been an actual payment from one party to another pursuant to an account stated), a party would be entitled to seek to reopen the accounts in the event of fraud, or significant errors, such that the question of the existence and magnitude of any errors in the accounts would be relevant; and
(d)if I were to accept, as contended for by LHND, that the Court, in exercising its power to take accounts, has a general discretion in equity to determine that it would not re‑open the 2009 accounts, then the existence of material errors in the accounts would be relevant to the exercise of any discretion based upon equitable grounds.

I have found that, on the basis of the evidence, that MYR is contractually bound by the 2009 accounts. I have made that finding in the absence of any evidence of any errors in the accounts (save for the amount of approximately $78,000 conceded by Mr Lebovits at paragraph 115 above). I accept the submissions made by counsel for MYR that the failure of MYR to identify or even refer to any errors in the accounts in cross‑examination and in its submissions does not offend the rule in Browne v Dunn. MYR was entitled to rely upon my ruling of 22 April 2013, following which MYR quite reasonably refrained from adducing evidence and cross-examining witnesses regarding alleged errors in the accounts. Accordingly, MYR is not precluded from continuing to assert the existence of errors in the 2009 accounts by reason of the manner in which it conducted the hearing as contended for by counsel for LHND.

The difficulty that arises is as follows: given that I have found that LHND, MYR and Furman Constructions are contractually bound by the 2009 accounts, and any conduct by MYR or Furman Constructions which purports to resile from those accounts amounts to a breach of contract, what relevance, if any, does the possible existence of errors in those accounts assume? I have accepted that any material errors would be relevant to determining whether it would be, in the event that there was a basis for finding an estoppel, unconscionable for Mr Furman to resile from any representation constituted by his signing of the 2009 accounts. Similarly, if I were to find that there was an “account stated”, any evidence of errors would be grounds for submitting that those accounts ought to be re‑opened, or would be relevant to the exercise of any residual equitable discretion, if such a residual discretion exists.

Accordingly, if it emerged from the evidence that Mr Furman’s conduct in signing the 2009 accounts may give rise to equitable relief in favour of LHND, evidence of the existence of any material errors in the 2009 accounts, such that the amounts in the loan account balances of either partner or Furman Constructions should be substantially different than that shown in the 2009 accounts would be relevant to the exercise of my discretion regarding the conduct of the accounting for the partnership from now on. I agree that it would be incongruous for MYR to be bound in equity to erroneous accounts.

However, it is not immediately apparent how any material errors in the 2009 accounts can be relevant to the consequences of my finding that there is a concluded agreement at law between Mr New and Mr Furman, on behalf of their respective corporate entities, supported by valuable consideration, whether by way of accord and satisfaction, or otherwise.

Indeed, in circumstances where I have made a finding that the parties have reached an agreement, or, perhaps more accurately, a compromise, with respect to the assets and liabilities of the partnership, there appears to me to be a powerful argument that, regardless of any errors in the accounts, and in the absence of any vitiating conduct such as deceit or duress (none of which appears to be apparent from the evidence), the Court should not exercise its equitable discretion upon the taking of an account to permit a party to resile from a binding agreement. However, given that the hearing proceeded in circumstances where MYR was not required or permitted to rely upon its expert evidence which it contends demonstrates substantial errors in the partnership’s accounts, I will seek further submissions from the parties as to the consequences of my finding of the existence of an agreement which is binding at common law. I should indicate that I would be very unlikely to be persuaded that MYR should be permitted to resile from that agreement in circumstances where the identified “errors” were merely matters of form (in the manner of the affidavit evidence and correspondence emanating from Lowe Lippman) rather than errors which would materially affect the loan balances of the parties as at 30 June 2009.

Accordingly, I will seek further submissions from the parties, in relation to whether I ought, given my findings that MYR is contractually bound by the statement of assets and liabilities in the 2009 accounts, and the basis upon which it is so bound, whether any evidence upon which MYR would wish to rely in respect of alleged errors in the partnership accounts would be relevant to the final determination of question (d), and, if it is not relevant, whether there would be any utility in permitting MYR to rely upon that evidence.

Finally, during the course of the submissions made on behalf of counsel, I did query whether there had been sufficient evidence adduced by the parties to enable me to determine any of the other preliminary questions. While there was no agreement as to that matter, as a result of my findings, I believe that the following questions can be answered, as follows:

(f)Whether
(1)…
(2)the sum of $85,225.00, paid by the partnership under direction of authority dated 25 February 2011 to Green & Sternfeld, was a sum properly and actually incurred by the partnership:
Yes.

(3)Whether the fees paid by the partnership to Lowe Lippman Accountants for invoices 129533 for $65,913.75 and 140557 for $25,762.55 were fees properly and reasonably incurred by the partnership:
Yes, pursuant to the agreement between LHND, MYR and Furman Constructions with respect to the finalisation of the 2009 accounts

(g)Whether:
(1)any monies were paid to the plaintiff by the Australian Tax Office as GST credits payable to the partnership and referable to partnership projects (excluding amounts paid to Westpac account 033 000 232 232:
Yes.

(h)If the Westpac Banking Corporation bill facility is not a liability of the partnership and the interest expense payable thereon is not an expense of the partnership, whether the plaintiff is entitled to interest pursuant to section 28(3) of the Partnership Act 1958 on advances made by the plaintiff to the capital of the partnership:
Not applicable.

(i)Whether the defendant should be liable to pay penalty interest and any charges that have accrued on the Westpac Banking Corporation bill facility by reason of any failure on the part of the defendant or its director Mr Furman to provide further security and/or a guarantee to Westpac for that facility.

In relation to question (i), while I am prepared to hear further argument on the matter, my preliminary view is that, given that Mr Furman’s position that Westpac was seeking excess security for the Westpac bill facility ultimately found favour with Westpac, Mr Furman’s conduct in refusing to execute any facility which sought unnecessary security to be provided does not appear to have been excessively unreasonable. Similarly, Mr New and Green & Sternfeld went to considerable efforts to attempt to persuade Westpac to refund the penalty interest charged to the partnership. Accordingly, my preliminary view is that the penalty interest should be treated as an ordinary expense of the partnership.

[2013] VSC 689

12 December 2013