Mark Lawler Architects Pty Ltd v Rod Seymour Pty Ltd
[2013] NSWSC 1697
•11 November 2013
Supreme Court
New South Wales
Medium Neutral Citation: Mark Lawler Architects Pty Ltd v Rod Seymour Pty Ltd [2013] NSWSC 1697 Hearing dates: 11 November 2013 Decision date: 11 November 2013 Jurisdiction: Equity Division Before: White J Decision: Parties to bring in short minutes of order in accordance with reasons
Catchwords: PARTNERSHIP - accounting between partners - agreement to make adjustment to billings accounting if one partner's contribution to gross billings fell below a certain proportion - construction of agreement - method of quantifying additional contribution by one partner - whether additional contribution should be included in gross billings for determining proportions of contribution to billings - relevant financial years to consider Category: Principal judgment Parties: Mark Lawler Architects Pty Ltd (Plaintiff)
Rod Seymour Pty Ltd (Defendant)Representation: Counsel:
G B Carolan (Plaintiff)
E A Walker (Defendant)
Solicitors:
Bilbie Dan Solicitors and Attorneys (Plaintiff)
McDonald Johnson Lawyers (Defendant)
File Number(s): 2012/97946
Judgment
HIS HONOUR: The issue raised in these proceedings concerns the basis for taking accounts following the dissolution of a partnership between the parties. The plaintiff and the defendant were the partners of a firm known as Seymour Lawler Architects from 14 September 1998 to 30 June 2009. It is common ground that the partnership was dissolved as at 30 June 2009 and a declaration will be made by consent accordingly.
A document entitled "Partnership Heads of Agreement" was signed on 12 August 2004. It recorded that from 1 July 2000 the partnership equity and profits were to be distributed in the proportions of 75 per cent to the defendant, Rod Seymour Architects Pty Ltd, and 25 per cent to the plaintiff, Mark Lawler Architects Pty Ltd. It was a term of the Partnership Heads of Agreement that:
"Partners Work
All architectural work undertaken by the partners will be conducted within the partnership except for the partners['] projects in which they have a financial interest. For partners['] private projects in which they have a financial interest there will be a separate fee agreement negotiated for each project which will not have any fee factored in for the principle [sic] of the partner provided the overall practice fees are maintained. In relation to these projects the partnership will have the right of first refusal to carry out the project, architectural and documentation work. Partners will not engage in any paid architectural work outside of the partnership."
From about April 2006 Mr Lawler conveyed to Mr Seymour concerns he had that Mr Seymour was concentrating on his own private development projects. Mr Lawler contended that this was to the detriment of the partnership. He had two concerns that he made known. First that as a result of Mr Seymour's concentrating on his own private developments, his billings would decline, and secondly that the partnership was doing architectural work in connection with those projects at less than the full rates that would be charged to other clients.
On 18 August 2007 a meeting was held between Mr Lawler and Mr Seymour that was also attended by a Mr David Farley, an accountant for Mr Lawler, and by a Mr Stephen Lambourne who was the accountant for the partnership. It is common ground that at that meeting an agreement was reached between Mr Seymour and Mr Lawler that addressed these issues. What is in dispute is the effect of the agreement that was reached and there are some differences of expression of the terms of that agreement. The agreement was oral. It was not subsequently reduced to writing, although Mr Lambourne sent a letter to the parties on 14 May 2008 on which Mr Seymour relies as setting out Mr Lambourne's understanding of the agreement reached.
Mr Farley has, it seems, the least recall of the details of the meeting and what was agreed at that meeting. He said, in substance, that when Mr Lawler voiced his concern about Mr Seymour's spending a lot of his time concentrating on his own private development projects to the apparent detriment of the partnership, Mr Seymour responded by saying that there was nothing to discuss, that he would maintain his billings at the levels he had billed in the year before, and that he would be able to maintain his billings whilst also carrying out work on his private projects. Mr Farley deposed that there was discussion about Mr Seymour's using staff and partnership resources to work on his private projects and he recalls that some agreement was reached in relation to how the work done by members of staff of the partnership were to be charged at a reduced rate. He recalled that Mr Lawler said words to the effect of:
"I am still concerned there needs to be a mechanism or a method for making an adjustment between the partners if Rod is unable to maintain his billings at the level of the previous year (the year preceding the 2007 financial year), because I believe the partnership is already starting to see the effects of Rod concentrating on his own private projects in that he is not sending as many month end bills out."
He deposed that Mr Seymour responded by saying words to the effect:
"I am telling you there will be no problem with me maintaining my billings at the prior year's level, if not higher."
Mr Lawler's version of the meeting was considerably more detailed. He deposed that Mr Lambourne said words to the effect that they were meeting to talk about how they could resolve an issue about compensating the partnership for work Mr Seymour was doing on his private projects. According to Mr Lawler, Mr Lambourne asked him to confirm that his concern about that issue came from about June 2006. Mr Lawler said that his concern really came from about April 2006 onwards, but they could take June 2006 as a starting point. Mr Seymour said that he was entitled to use the office and staff in respect of his projects as he wished. But after some further discussion, according to Mr Lawler, the following conversation occurred:
"I said: 'Rod, there needs to be compensation to the partnership for the resources and time that are going into your private projects. The people working on your projects are partnership employees, working from desks and using computers owned by the partnership, and these costs have already been or are being paid by the partnership.'
Rod said: 'Do you mean to tell me that I have to write a cheque to Mark in order to do work on my own projects?'
Lambourne: 'Yes and the reason is that the partnership has already paid the costs associated with overheads and staff wages for work done on your projects. This goes back 12 months or longer. The normal way in a partnership, this happens in accounting partnerships for example, is the work is paid for but done by the practice for the principal at a discounted rate.'
I said: 'Why should there be a discount? Those staff, and Rod himself, could be using that time to be working on full paying matters for clients.'
Lambourne: 'Because he is a principal in the business and needs to get recognition for that. What do you think on this David.'
Farley: 'I agree a partner in a business should be entitled to a discount on the full rate.'
Lambourne: 'I think if Rod was charged 80% of the full whack, that would be reasonable - a 20% discount. If this was applied, 80% would definitely cover the practice's costs.'
I said: 'But that discount means the profit on those jobs is reduced or done away with altogether, yet at the same time Rod is busy with his own projects and not putting his time into the practice, or getting work in, meaning a corresponding drop-off in his billings. I know for example that Rod now isn't sending out as many month-end accounts. This is what I'm concerned about. We also need to remember it's not like Rod is actually paying anything at the moment for his private work to be done by the partnership either and there is a large debt unpaid and accruing.'
Rod said: 'I will be able to maintain my current billings at historical levels whilst at the same time working on these personal projects of mine. There will not be a problem.'
Lambourne: 'Ok, so the way it is to work to address your concerns Mark, is that Rod will receive a 20% discount on work the practice does on his own private projects, but only if he maintains his billings at historical levels. The split of the profits in the partnership by reference to the partnership agreement is 75 Rod/25 Mark. Looking at the billings for the year prior to where Mark's concerns kick in the billing ratio is in accordance with a 75% Rod/25% Mark ratio. How about we use that ratio as the benchmark for working out if there needs to be compensation back to the partnership?'
I said: 'That's all fine Steve, but my concern is by Rod focussing on his private work, his billings will decline and therefore the overall partnership income will decline. I've said this over and over.'
Rod said: 'Mark, I give you my personal undertaking to make up any shortfall difference to the practice if my billings dip due to me concentrating on my private projects, but let it be said I don't see my billings dropping at all.'
Lambourne: 'Well it's a two-fold test. Firstly overall billings need to be benchmarked against the 2005/2006 historical figure, and if not adjustments need to be made to gross up the annual turnover figure, and after that the 75/25% ratio is applied, and we then work out if there needs to be any compensation to the partnership. Gentlemen, are we both happy with that arrangement?'
I said: 'Yes.'
Rod said: 'Yes.'"
The recollection of Mr Seymour of the meeting and that of Mr Lambourne is not I think materially different, at least not in relation to the main point of discussion, although there are differences in expression. Mr Seymour said that the discussion was as follows:
"Mr Lambourne said words to the effect:
'This meeting has been arranged to discuss the nature of the current partnership agreement in place at present and whether any modifications to that agreement are necessary in light of the circumstances that prevail now and are likely to continue.'
Mark Lawler said words to the effect:
'Rod is spending time on his own projects and I am concerned that this is distracting Rod's attention from other projects.'
I said:
'Over the entire history of the SLA Partnership my billings have been in excess of my profit share. Yes I have been spending time on some of my projects recently, but that was always disclosed to Mark Lawler before the formation of the Partnership that that is where I wanted to head in the future, and that one of the reasons I proposed the idea of the Partnership to Mark Lawler in 1998 was to free up some of my time so that I could spend time on my projects, and at the same time have someone in the office to help keep an eye on the day to day running of the office.'
Mark Lawler said words to the effect:
'yes, but you are spending a large amount of office time recently on your projects.'
I said:
'I work all hours of the day and week on SLA work. You work your 9 to 5.30 time in the office. I don't work like that. I work all sorts of hours, both in the office and outside the office. The proof of my effectiveness has been the record of my billings since the start of the partnership and the many awards my projects have won.'
Mark Lawler said:
'Yes, but you are spending a lot of time recently on your projects in the office as well as using staff time on those projects. You should pay the full staff time charge out rate for the time that staff spend on your projects.'
I said:
'I have always indicated that staff working on my projects would be billed to those projects. The full charge out rate is rarely achieved by other projects in the office, and in the circumstances it is fair and reasonable to charge staff time on my projects at a slightly lesser rate, because the SLA Partnership has no risk in doing this work, since time sheets are being kept for all salaried staff time. The full staff charge out rate is over two and a half times the actual salary paid to those staff by SLA. SLA would still make a good profit on my jobs, even at the slightly reduced rate.'
Mark Lawler said:
'You should pay the full SLA charge out rate. There is no reason that you should not.'
Mr Lambourne said:
'It is not uncommon that in similar situations in other professional businesses, that an owner or partner might be charged a lesser rate for their own matters than general clients might pay.'
Mr Lawler said:
'Rod should pay the full rate.'
I said:
'That is not fair or reasonable, especially in the circumstances where I carried the firm in terms of billings and financing for the majority of the history of the entire SLA Partnership.'
After further discussion,
Mr Lambourne said:
'I think it is reasonable that Rod be charged 80% of the standard staff charge out rate for staff time spent on Rod['s] jobs, and that Rod's own time spent on his jobs is not counted, but that if Rod's billings fall below the 75% of gross SLA Partnership billings anticipated by the current Partnership Agreement signed in July 2000, then there should be an adjustment in the capital accounts of the Partners to adjust for this.'
I said:
'I am happy with that.'
Mark Lawler said:
'OK.'"
Mr Lambourne said that the discussion was as follows:
"6. To the best of my recollection this meeting was attended by Rodney Seymour, Mark Lawler, David Farley who I know to be an accountant from Lawler Partners and myself. I recall that there was a discussion about the fact that Rodney Seymour was using resources of the firm for his own work and words to the following effect were said:
Rod Seymour said:
'I don't work 9 to 5. I work 7 days a week and the proof is in my billings which are still there.'
Mark Lawler said:
'You are using a lot of our staff and the practice should get something for it.'
Rod Seymour said:
'Steve, what would be fair? How much should the staff be charged to the practice at?'
I said:
'I think that if staff were billed to your projects at 80% of the usual rate then that would be more than fair and there would even be some profit in it. As the partnership is 75% Rod and 25% Mark it would be fair that the 80% should apply on the basis that Rod's fees are maintained at 75% of the total billings in accordance with the partnership equity. If Rod's fees drop below 75% of total billings there should be an adjustment to the billings to Rod's private work to reflect this.'
Rod Seymour said:
'I am okay with that.'
Mark Lawler said:
'I am also OK with that.'"
Thus it was common ground that there was discussion as to how the partnership would bill Mr Seymour for his private projects and it appears that that discussion also led into a discussion as to Mr Seymour maintaining his billings at 75 per cent of total billings and that there would be an adjustment if his billings fell below the 75 per cent level. There are differences between the parties as to how that adjustment should be made. But so far as the evidence about what was said at the meeting is concerned, the differences seem to be whether or not the adjustment should be made by increasing billings on Mr Seymour's projects, or by his otherwise contributing to the billings of the partnership, or by there being an adjustment to the partners' capital accounts. For reasons which will be given shortly I do not think that these differences denote any real difference in the substance of the matter.
At the date of this meeting the partnership accounts for the year ended 30 June 2007 had not been finalised. The evidence of both Mr Lawler and Mr Seymour was to the effect that the financial statements for any one year were concluded about six or seven months after the end of that financial year.
On 14 May 2008 Mr Lambourne wrote to the parties as follows:
"Dear Rod and Mark,
I refer to our recent meeting in relation to the Seymour Lawler work in progress and invoicing for the 2 Dudley Road project.
As previously agreed between yourselves invoicing for this project was to be based on 80% of normal staff rates with no recovery for Rod's time on the proviso that Rod's billings do not fall below 75% of total billings.
Set out below is a summary of billings for the period 1 July 2004 to 30 April 2008 which indicates that Rod's billings have been 73.26% of total billings.
Summary of Billings:
Total
Rod
Mark
2004/2005
1,019,863
813,374
206,307
2005/2006
1,123,515
851,306
271,788
2006/2007
931,066
626,402
304,550
2007/April 2008
610,239
408,135
202,053
$3,684,683
$2,699,217
$984,698
73.26%
26.72%
The work in progress and interim billings for the 2 Dudley Road project as at 30 April 2008 are as follows:
2 Dudley Road Pty Limited
Work in Progress @ 30 April 2008
Apply 80%
$361,463
Less: Billed 2006/2007
289,170
Balance Billed 2007/2008
120,000
$169,170
As you can see the work in progress as at 30 April 2008 was $361,463. Applying the 80% agreed invoicing total billings to date should be $289,170. After allowing for the $120,000 that has already been paid there is a balance to be billed to 30 April 2008 of $169,170. I note that I have included both the $120,000 and the $169,170 in the summary of billings set out above.
Based on this analysis Rod's billings are 1.74% below the targeted 75% and as such there should be an additional invoicing for the 2 Dudley Road project for Rod's time of $64,113 calculated as follows:
$3,684,683 x 1.74% = $64,113
..."
Two issues arise in relation to that letter. The first is one of methodology. The second concerns the period of time to which regard should be had in deciding whether Mr Seymour's billings fell below the level of 75 per cent of total billings, and if so, by what amount.
The issue of methodology is the first real issue that divides the parties. Mr Lambourne had determined that the total billings for the four periods set out in the letter totalled $3,684,683 of which Mr Seymour's proportion was 73.26 per cent. He then said that there should be an additional invoicing for the 2 Dudley Road project (which was one of Mr Seymour's private developments) of 1.74 per cent of the figure of $3,684,683. Thus, he said the amount of additional invoicing should be $64,113. But if an additional billing of $64,113 had been raised at the relevant time, the total billings would not have been $3,684,683. They would have been $3,748,796. If that additional invoice had been raised at the relevant time Mr Seymour's total billings would have been $2,763,330 (using Mr Lambourne's figures ($2,699,217 plus $64,113)). A contribution of $2,763,330 would be only 73.71 per cent of the increased billings of $3,748,796. Mr Lambourne calculated the required additional invoice of $64,113 by treating that additional invoice as increasing Mr Seymour's proportion of billings, but not changing the total level of billings said to be $3,684,683. That could only be done by notionally reducing the amount of Mr Lawler's billings by the same amount of $64,113. To maintain a proportion of 75 per cent and 25 per cent, Mr Seymour would have to bill three times the billings of Mr Lawler, and if he did not, he would have to make up the difference between his actual billings and three times Mr Lawler's billings.
The issue of methodology was helpfully summarised in the opening submissions of counsel for the defendant who posited an hypothetical example as follows:
"Partnership gross billings = $150,000
Proportion billed by Lawler = $50,000
Proportion billed by Seymour = $100,000
Plaintiff's method
Lawler billings ($50,000) x 4 = Nominal gross partnership billing figure ($200,000)
$200,000 less sum billed by the Partnership ($150,000) = $50,000
$Shortfall in billings attributable to Seymour to be contributed to Partnership income by the defendant = $50,000
Defendant's method
Gross sum billed by Seymour ($100,000) ÷ Partnership gross billings ($150,000) = 67%
Shortfall in Seymour billings (75% - 67%) = 8%
8% x Partnership gross billings ($150,000) = $12,000
Shortfall in billings attributable to Seymour to be contributed to Partnership income by the defendant = $12,000"
There is a rounding in the figures under the heading "Defendant's method". When corrected, the shortfall in Seymour billings on the hypothetical example would be 8.33 per cent which would be $12,500 as a proportion of partnership gross billings. That sum of $12,500 is of course one-quarter of the shortfall in gross billings that would be required to be made up were Mr Seymour to bill three times the billings of Mr Lawler. Because the adjustments are being made after the expenses of the relevant financial period have been incurred, the additional contribution to be made by Mr Seymour pursuant to the agreement of 17 August 2007 would represent profit. He is entitled to three-quarters of the profit. The methodology described under the heading "Defendant's method" if applied to calculate the adjustments to be made to the parties' share of profits is equivalent to the methodology described under the heading "Plaintiff's method" by which a calculation is made as to how much additional revenue Mr Seymour is required to contribute pursuant to the agreement. At least that is so on a pre-tax basis and on the assumption that expenses are unchanged.
Mr Seymour said that what he and Mr Lawler agreed to was a statement by Mr Lambourne that relevantly was as follows, namely that:
"If Rod's billings fall below the 75% SLA Partnership billings anticipated by the current partnership agreement signed in July 2000 then there should be an adjustment in the capital accounts of the partners to adjust for this."
The appropriate adjustment in the capital accounts of the partners is the adjustment reflected in the methodology under the heading "Defendant's method" provided that the methodology is applied to the statement of profits in the capital accounts of the partners and not to revenue. This is on the assumption that the partners' entitlements to profits is as stated in the partnership agreement and restated in the meeting of 18 August 2007.
This is also consistent with Mr Lambourne's version of the agreement that was made, namely that, "if Rod's fees drop below 75% of total billings there should be an adjustment to the billings to private work to reflect this". That was said in the context that as Mr Seymour was entitled to 75 per cent of the equity and profits, and Mr Lawler to 25 per cent, the billings should reflect that proportion. The way to achieve that is not by applying the methodology in Mr Lambourne's letter of 14 May 2008, but either by Mr Seymour's contributing the difference between his actual billings and the billings that would be three times Mr Lawler's billings, or by adjusting the profits in the partners' capital accounts in the way indicated above.
The second issue that arises from the letter of 14 May 2008 is the aggregation of figures from the 2004-05 financial year to April 2008 in determining the extent of the shortfall in Mr Seymour's billings below 75 per cent. Assuming the accuracy of the figures stated in the letter, in the 2004/2005 year Mr Seymour's billings were a little under 80 per cent of total billings, and in the 2005/2006 year they were a little below 76 per cent. On the other hand, on Mr Lambourne's figures Mr Seymour's billings for the 2006/2007 financial year were about 67.3 per cent of total billings and in the ten months to April 2008 were approximately 66.9 per cent of total billings. Clearly, if regard were had only to the latter two periods, the amount of the shortfall would be substantially greater than the figure of 73.26 per cent calculated in the letter of 14 May 2008.
At the meeting of 17 August 2007 the parties did not expressly deal with the question of the period of time over which the calculation of the 75 per cent proportion should be carried out. It seems to me that the parties were speaking prospectively, albeit that part of what was in prospect was the finalisation of the 30 June 2007 accounts. That seems reasonably clear on Mr Lawler's evidence where he deposed that the 75/25 per cent ratio should be applied after billings had been benchmarked against the 2005/2006 historical figures. He was not shaken on that evidence. On the other hand, it is probable that there is an inevitable degree of reconstruction in his account of the conversation.
Mr Farley also suggested that the adjustments would be applied prospectively. He said that Mr Lawler introduced the subject by proposing that there needed to be a mechanism for making an adjustment if Mr Seymour were unable to maintain his billings at the level of the previous year, being the year preceding the 2007 financial year.
Mr Seymour and Mr Lambourne also spoke in the same vein. Mr Seymour said there would need to be an adjustment if his billings "fall below" the 75 per cent of gross partnership billings and Mr Lambourne said that there should be an adjustment if Mr Seymour's fees "drop below" 75 per cent of total billings. That suggests that 75 per cent of total billings was to be a benchmark and that if in the future Mr Seymour's fees dropped below what was 75 per cent of total billings in any financial year, then an adjustment would need to be made. If the calculation of the period for Mr Seymour's fees was to be based upon the timeframe going back to 2004/2005 or even earlier (assuming that his proportion of fees billed exceeded 75 per cent in earlier periods as well), then one could well have the situation that Mr Seymour's fees dropped below 75 per cent of total billings in any year without there needing to be an adjustment. I do not think that the parties contemplated that. If they did, one would expect it to have been a matter that would have been expressly addressed at the meeting.
Mr Lawler was cross-examined upon his failure to object to Mr Lambourne's letter of 14 May 2008 which departed from what he says was his understanding of the agreement reached in August 2007. There was no written response to that letter. I can assume that Mr Lawler signed off on financial statements or tax returns for the year ended 30 June 2007, which on the evidence before me would have taken place about the end of 2007 or early 2008. However, it is not clear how the matters dealt with at the meeting of 18 August 2007 were dealt with in the 30 June 2007 accounts. Mr Lambourne said that he prepared the "financials" for the partnership for the years ending 30 June 2008 and 30 June 2009 on the basis that Mr Seymour's billings were to be 75 per cent of the total billings of the practice. He did not say on what basis the accounts to 30 June 2007 were prepared. There were in evidence accounts for the partnership for the year ended 30 June 2008 which included the prior financial year figures. However, I have not been able to ascertain from those accounts how the agreement of 18 August 2007 was reflected in them. The figures for both financial years for professional fees rendered and for the differences in opening and closing work in progress do not appear to reconcile with the figures for billings which appear in other correspondence. The financial statements state that the partners' shares of profits were in different proportions to the ratio of 75 per cent and 25 per cent. On my calculations for the year ended 30 June 2007 and 30 June 2008 the profit share of Mr Seymour or his trust reflected in the financial statements was 64.3 per cent and 59.1 per cent respectively and the profit share of Mr Lawler or his trust was 35.7 per cent and 40.9 per cent respectively. This raises a possibility that there has been some adjustments to the parties' capital accounts, that is, to their profit shares in respect of the adjustments to billings, but the evidence is not clear about that. There may be other reasons for those figures which are not revealed in the evidence.
Mr Lawler said that at the time he received the letter of 14 May 2008 he was confused by it, but at that time he was without an accountant. He also said that the accountancy practice whose services he had used was undergoing changes. I understood him to say that there was a quick turnover of individuals handling his affairs, and that he was seeking a smaller firm more attuned to the size of his practice than his existing accountants. In the absence of any clear statement as to how the accounts for the year ended 30 June 2007 were prepared which would show a clear acceptance by Mr Lawler of the basis for adjustments outlined in Mr Lambourne's letter of 14 May 2008, I do not think that Mr Lawler can be said to have acquiesced in that methodology. In any event, the methodology does not accord with the evidence as to what was agreed at the meeting of 18 August 2007. There is not and could not be any claim for an estoppel based upon Mr Lawler's having delayed in disputing the methodology in the letter of 14 May 2008.
The question arose again in August and September 2009. On 11 September 2009 Mr Lawler's new accountant, Mr Ramsay, asserted a basis for making adjustments which is in accordance with the case put forward by the plaintiff.
A third issue which arises from the evidence of Mr Lambourne is whether adjustments are to be, in effect, capped to the amount that would be charged to Mr Seymour's projects if staff were billed at their usual rates, rather than at 80 per cent of those rates. According to Mr Lambourne, what he said was that the figure of 80 per cent of usual staff rates would apply on the basis that Mr Seymour's fees were maintained at 75 per cent of the total billings, but if they dropped below that figure there should be an adjustment to the billings to Mr Seymour's private projects to reflect "this". There is an ambiguity in the last part of this passage as to whether any adjustment would be confined to increasing the staff's usual charging rates from 80 per cent to 100 per cent.
No such possible limitation, or cap, on an adjustment appears in either Mr Lawler's affidavit or Mr Seymour's affidavit. In particular, Mr Seymour said that what was agreed to was that if his billings fell below 75 per cent of gross partnership billings, then there should be an adjustment in the capital accounts of the partners to adjust for this. Again there is some ambiguity because that passage was introduced, according to Mr Seymour, by Mr Lambourne referring to the reasonableness of Mr Seymour being charged 80 per cent of the standard staff charge out rate and by Mr Seymour's own time not being charged.
But whilst those are matters that explain the motivation for there being an agreement about adjustments being made if Mr Seymour's billings fell below 75 per cent of gross billings, the language used does not suggest that adjustments to the invoices to Mr Seymour's private projects should be the sole source from which adjustments could be made. This is consistent with the partnership agreement signed on 12 August 2004 that provides that "for partners' private projects in which they have a financial interest there will be a separate fee agreement negotiated for each project which will not have any fee factored in for the [principal] of the partner provided the overall practice fees are maintained". The parties were discussing adjustments if Mr Seymour's billings fell below 75 per cent of gross billings against the background that not only standard staff charge out rates might need to be adjusted back to 100 per cent, but that fees for the partner's own time, that is fees for Mr Seymour's own time, might need to be charged if that was needed to maintain "overall practice fees".
In the absence of more explicit language, I do not think that there was a cap or a limit on the adjustments to be made if Mr Seymour's billings fell below 75 per cent of gross billings.
The plaintiff initially sought a declaration that:
"... the partnership agreement between the plaintiff and the defendant dated 12 August 2004 was varied on or about 17 August 2007 such that from 1 July 2007 the defendant would contribute to the partnership income any shortfall in billings attributable to Mr Rod Seymour that fell below 75 per cent of the partnership's gross billings."
The defendant indicated that it would consent to a declaration in those terms. The difficulty with the declaration sought initially by the plaintiff lies in the ambiguity of the expression "partnership's gross billings". If that expression simply meant the actual gross billings, then the declaration initially sought by the plaintiff would accord with the defendant's construction of the agreement of 17 August 2007 and not the plaintiff's. The plaintiff's position is that such "gross billings" would include the contribution the defendant would be required to make.
The plaintiff filed an amended summons and sought the following relief:
"1. A declaration that the partnership agreement between the plaintiff and the defendant dated 12 August 2004 was varied on or about 17 August 2007 such that from 1 July 2006:
a. That it would be a requirement of the partnership from 1 July 2006 onwards that Mr Seymour's and Mr Lawler's billings be maintained in a 75% Seymour/25% Lawler ratio;
b. If this was not achieved the notional billings of the partners each year would be adjusted to reflect the 75% Seymour/25% Lawler billing ratio of the partners;
c. The fees to be charged for architectural work performed by staff of the partnership on Mr Rod Seymour's private projects would be discounted by 20 per cent on the firm's normal charge-out rate, provided Mr Seymour maintained his billings at the agreed 75/25 ratio;
d. The defendant would contribute to the partnership income any shortfall in billings attributable to Mr Rod Seymour that fell below 75 per cent of the partnership's gross adjusted billings."
Having regard to the way in which the plaintiff put its case and to my conclusion about the absence of a cap on the adjustments, there would be no utility in making the declaration in paragraph 1c. of the amended summons. I have found that the effect of the agreement of 17 August 2007 is that where Mr Seymour's billings fell below 75 per cent of partnership billings, he was required to contribute a sum which when added to other partnership billings would bring his share of adjusted partnership billings including his contribution to 75 per cent. On the assumption that all of that contribution would be profits and that there has been no variation to the parties' entitlements to sharing profits, other than as reflected by the agreement of 17 August 2007, then an equivalent statement is to say that where Mr Seymour's billings fell below 75 per cent of partnership billings, that is to say the partnership's actual billings in any one financial year, he was to contribute the difference to the plaintiff's share of partnership profits. That should be an equivalent statement if all of the contribution is profit, at least on a pre-tax basis.
I think the appropriate declaration to make is the first, namely that where, from or after financial year ended 30 June 2007 to the financial year ended 30 June 2009, the defendant's billings fell below 75 per cent of partnership billings the defendant is required to contribute a sum which when added to actual partnership billings would bring his share of adjusted partnership billings, including his contribution, to 75 per cent.
I direct that the parties bring in short minutes of order at a convenient time consistent with these reasons.
Decision last updated: 19 November 2013
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