Mirco Bros Pty Ltd v Palermo Nominees Pty Ltd
[2005] WASC 190
MIRCO BROS PTY LTD -v- PALERMO NOMINEES PTY LTD [2005] WASC 190
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2005] WASC 190 | |
| Case No: | CIV:1963/1999 | 1 - 3, 6 - 10 & 13 - 15 DECEMBER 2004 | |
| Coram: | COMMISSIONER BRADDOCK SC | 26/08/05 | |
| 49 | Judgment Part: | 1 of 1 | |
| Result: | Plaintiff's claim dismissed Judgment for defendant on counterclaim | ||
| B | |||
| PDF Version |
| Parties: | MIRCO BROS PTY LTD (ACN 008 831 294) PALERMO NOMINEES PTY LTD (ACN 008 871 618) |
Catchwords: | Partnership Disputed oral terms of partnership Managing partner Duty of care Due skill care and diligence Accounts and information |
Legislation: | Partnership Act, s 34(5) |
Case References: | Australian Securities Commission v Gallagher (1994) 11 WAR 105 Cragg v Ford (1842) 62 ER 889 Noyes v Crawley (1878) 10 Ch D 31 Palermo Nominees Pty Ltd & Anor v Broad Constructions Services Pty Ltd & Anor, unreported; SCt of WA; Library No 980202; 17 April 1998 R v Hurt (1954) 1 WLR 1309 Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384 Commonwealth of Australia v Amann Aviation (1990) 174 CLR 64 Gerrard v Slamar [2004] WASCA 253 Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 MS Fashions Ltd v Bank of Credit & Commerce International SA (in liq) [1993] Ch 425 Nocton v Lord Ashburton [1914] AC 932 Olympic Holdings Pty Ltd v Lochel [2004] WASC 61 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 Westrac Equipment Pty Ltd v Gendredge (Aust) Pty Ltd [2003] WASC 251 Wilson v Carmichael (1904) 2 CLR 190 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
- Plaintiff
AND
PALERMO NOMINEES PTY LTD (ACN 008 871 618)
Defendant
Catchwords:
Partnership - Disputed oral terms of partnership - Managing partner - Duty of care - Due skill care and diligence - Accounts and information
Legislation:
Partnership Act, s 34(5)
Result:
Plaintiff's claim dismissed
Judgment for defendant on counterclaim
(Page 2)
Category: B
Representation:
Counsel:
Plaintiff : Dr P R MacMillan
Defendant : Mr M J Buss QC & Mr A Metaxas
Solicitors:
Plaintiff : Mackinlays
Defendant : Arthur Metaxas & Co
Case(s) referred to in judgment(s):
Australian Securities Commission v Gallagher (1994) 11 WAR 105
Cragg v Ford (1842) 62 ER 889
Noyes v Crawley (1878) 10 Ch D 31
Palermo Nominees Pty Ltd & Anor v Broad Constructions Services Pty Ltd & Anor, unreported; SCt of WA; Library No 980202; 17 April 1998
R v Hurt (1954) 1 WLR 1309
Case(s) also cited:
Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384
Commonwealth of Australia v Amann Aviation (1990) 174 CLR 64
Gerrard v Slamar [2004] WASCA 253
Malec v JC Hutton Pty Ltd (1990) 169 CLR 638
MS Fashions Ltd v Bank of Credit & Commerce International SA (in liq) [1993] Ch 425
Nocton v Lord Ashburton [1914] AC 932
Olympic Holdings Pty Ltd v Lochel [2004] WASC 61
Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387
Westrac Equipment Pty Ltd v Gendredge (Aust) Pty Ltd [2003] WASC 251
Wilson v Carmichael (1904) 2 CLR 190
(Page 3)
1 COMMISSIONER BRADDOCK SC: In around 1989, the plaintiff and defendant companies formed a partnership for the purposes of acquiring and running the Rockingham Beach Resort Hotel. The directors of Mirco Bros Pty Ltd ("Mirco") were Pasquale Mirco, known as Peter, and Vincenzo Mirco, known as Vince. The directors of Palermo Nominees Pty Ltd ("Palermo") were Vito Palermo, known as Vic and Gaetano Palermo, known as Guy. The four brothers were good friends. They had done business together in the past. Vic Palermo is the godfather of Peter Mirco's son Martin and Guy Palermo is the godfather of Peter's son, Stephen. This action arises out of that partnership and involves various claims for unpaid or overpaid fees between the partners and various other claims arising out of the conduct of the defendant.
The Background
2 In 1987 the Rockingham Beach Resort Hotel was on the market. It comprised the hotel, with bars and restaurant, 22 motel units, a bottle shop, a service station which was leased to third parties, and eight small shops which were similarly leased. The brothers discussed acquiring the business together. At that time Mirco had other business interests in which they were actively engaged. Palermo had other interests, and had just sold a previous venture. The brothers discussed how the Rockingham Beach Resort Hotel might be acquired and run. Ultimately, they came to an agreement. It was not in contention but that they agreed to purchase the Rockingham Beach Resort Hotel as a partnership between the two companies, that they separately finance the acquisition of their half shares and that following the purchase, the defendant company would manage the business of the partnership, for a fee. The arrangement was based upon the relationship and trust between the respective brothers. There were no documents recording the terms of the agreement, no partnership deed, no letters confirming the arrangements and no minutes of any meetings.
3 The hotel was purchased in early 1988, following which Vic and Guy Palermo managed the business on behalf of the partnership. In 1994 the partnership decided to develop the site, improving various of its attributes and also constructing a nightclub. The issues which now fall for determination arise out of the terms of the arrangement to manage the hotel, Mirco claiming that Palermo has been overpaid and Palermo counterclaiming for fees unpaid. Mirco alleges breaches by Palermo of the duties owed by it as manager, with consequential claims for financial loss. In summary, Mirco says that the initial fee agreed was $60,000 per annum and that this fee was increased to $70,000 per annum in 1992.
(Page 4)
- Palermo says the initial agreed fee was $100,000 per annum, which was then increased, at about the end of the financial year 1991, to $120,000 per annum. The balance of the dispute arises out of circumstances that unfolded during the redevelopment of the premises, in particular, the nightclub.
4 In 1993 and 1994, the redevelopment involved the engagement of architects and builders, planning, decisions and disruptions. Both parties were engaged to differing extents in this process. In about April of 1994, a Mr Christopher Arrell was engaged as "operations manager" for the hotel. Vic Palermo was particularly involved in the management aspects of the development of the nightclub. A Mario Madaffari was engaged as the disc jockey for the nightclub. On 14 October 1995 the nightclub opened for business. All four brothers and various other family members attended the opening night. There were problems with the quality of the sound in the nightclub. There was a dispute as to whether all four brothers were aware of this on that night. In November 1995, a Nathan Head was engaged to attempt to remedy the sound problems. In December 1995 the partnership, acting by the Palermo brothers, employed an Ian Harwood as a technician, also with a view to improving the sound quality and managing technical aspects of the sound and lighting in the club. In about March 1996 the sound system in the club was replaced. It does not appear that any of these measures significantly improved the quality of the sound. It was not controversial that, in the first six months, the efforts made towards improving the sound were directed towards addressing problems with the size, quality and positioning of the speakers and other aspects of the sound generation system.
5 On about 23 March 1996, a birthday party was held at the hotel for Julie Palermo, a daughter of Guy, who had turned 21 the week before. Both the Mirco brothers and the Palermo brothers and their respective families attended the birthday party. On about 26 March 1996, Allan Frederick Herring, an acoustic engineer, attended the hotel and carried out an assessment of the internal acoustic quality in the nightclub. He subsequently detailed his findings in a report dated 9 April 1996. His opinion, in summary, was that the poor acoustics were caused by a lack of sound absorptive surface treatments within the main space of the nightclub. He recommended that sound absorptive treatment be applied, mainly to the ceiling but also to the other hard surfaces in the club. The poor acoustics were due to the reverberation times of sound frequencies within the club.
(Page 5)
6 In his written report, he detailed the type of treatments appropriate. It is significant that Mr Herring had previously been involved in the construction phrase of the nightclub, when he had been called upon to advise specifically in relation to "noise breakout", in order that the nightclub could comply with the requirements of the City of Rockingham to operate as a nightclub. His then concern was with the containing of noise rather than the quality of the sound within the building. He had previously reported on 4 January 1994 to the architect in relation to noise breakout, which report also included a reference to the necessity to consider sound absorptive properties to control reverberation times within the space. At some stage in April and May 1996 the defendant caused certain materials to be attached to the walls, where accessible, in an attempt to improve the acoustics.
7 On 21 May 1996 a further party was held at the hotel, on this occasion to mark the 18th birthday of Mark Palermo, Guy's son. Family and friends also attended this event. There is a dispute as to which event Peter Mirco attended. There is no dispute that on one of these occasions there was a conversation between Peter Mirco and Vic Palermo. The precise terms of this conversation are in dispute, but it is not disputed that Vic Palermo asked Peter Mirco to put further funds into the business, which Peter Mirco declined to do and in the process insulted Vic Palermo.
8 The application of absorptive material to the walls apparently affected some improvement in the sound quality, but not a great deal. It was considered by the Palermos that the sound problem was having a damaging effect upon the popularity and patronage at the nightclub.
9 In August 1996, Vic Palermo sought legal advice about the rights of the partnership against various parties, including the architect and the builder, Broad Construction Pty Ltd ("Broad"). In September, Vic Palermo was advised that Broad was liable for the defective acoustics and discussions with Kari Rumnukainen, the managing director of Broad ensued. At that time the partnership was indebted to Broad under the project management agreement, in the sum of $115,356 plus interest, together with a further $37,263, due as a retention payment. Broad advised that they would charge $42,000 to install an acoustic ceiling. Negotiations to persuade Broad to remedy the sound problem at Broad’s expense continued, but were unsuccessful. A writ was filed against Broad on 24 December 1996 seeking damages, including damages for loss of profits due to the poor acoustic in the nightclub.
(Page 6)
10 Following the exchange at the birthday party, on whichever occasion it occurred, the relationship between Peter Mirco and Vic Palermo was not good. In dispute between the parties is the extent to which Peter Mirco was informed of the litigation, the problem with the acoustics and the efforts made to remedy that problem. The ceiling in the nightclub was not insulated or treated in the manner recommended by Mr Herring until November 1997. At that time, the Palermos, together with staff employed by them, acquired the necessary materials and physically affixed these materials to the nightclub ceiling surfaces. This required dismantling the lighting and other equipment suspended below that ceiling. This necessitated the closure of the nightclub for a period, the precise extent of which is in dispute, but somewhere between five days and two weeks. The precise period is not material. Vic Palermo states that he was unable to deal with the problem prior to that time as the cash flow of the business was not sufficient to meet the expected costs of engaging a third party to do the work, neither did he wish to close the club for any period longer than the usual four days between weekends.
11 The action against Broad went to trial in the Supreme Court on liability on 17 November 1997. Justice Parker found for the partnership against Broad: Palermo Nominees Pty Ltd & Anor v Broad Constructions Services Pty Ltd & Anor, unreported; SCt of WA; Library No 980202; 17 April 1998. The issue of damages remained to be determined. It was ultimately settled in November 2001.
12 By the end of 1997, the relationship between the parties had deteriorated to the extent that both parties had engaged solicitors resulting in correspondence, some of which is of significance. Mr Anthony Hayes Douglas-Brown was appointed as a manager of the hotel business with authority to run it and sell it on behalf of the partners. On 17 June 1998 the defendant wrote a letter demanding payment of outstanding fees by the plaintiff. This did not occur. On 12 May 1999 it was agreed between the parties that the defendant would sell its interest in the hotel to the plaintiff for a sum of $2.8 million. Completion of that sale was effected on 13 August 1999. On 30 August 1999, the plaintiff issued the writ which commenced this action. On 27 March 2000 the defence and counterclaim of the defendant was filed. Upon the completion of the sale of the business, the parties agreed to place in a trust account certain funds in relation to the unresolved claim between them. Ultimately the claim against Broad was settled by Mr Douglas-Brown, on the basis of the partnership being released from its liability to pay all sums outstanding to Broad, plus a payment by Broad to the partners of $10,000. For the
(Page 7)
- purposes of this action, the parties agree that the benefit at that time of that settlement to the partnership was $258,261.
The Pleaded Case
13 The plaintiff's claim in relation to fees under the arrangement for management of the hotel is contained in the following paragraphs of the further re-amended statement of claim filed on 26 October 2004:
"5.4 That in consideration of the defendant managing the Business the defendant would be paid out of profits a fee of $60,000.00 per annum ('the Agreement').
…
12. During or about 1992 the plaintiff and the defendant varied the Agreement in that the management fee payable from the profits of the Business pursuant to the term of the Agreement referred to in paragraph 5.4 was to be increased to $70,000.00 per annum.
Particulars
(a) The variation was oral.
(b) The plaintiff was represented by Pasquale Mirco and the defendant by Vito Palermo.
13. During or about early 1994 the Agreement was further varied in that the defendant could at its discretion discharge its obligations to provide management services pursuant to the term referred to in paragraph 5.3 by employing a manager to carry out all or part of those services provided that the fee paid from the profits of the Business for the provision of such services was not to exceed the agreed sum of $70,000.00.
Particulars
The plaintiff repeats the particulars to paragraph 12."
(Page 8)
- caused the partnership to overpay the defendant in the sum of $357,112. The figures taken from paragraphs 14 and 15 are set out below:
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15 In relation to the financial years ending 1995, 1996 and 1998 the sums stated as paid include sums paid for services provided by Arrell, Calabrese, Stephen Palermo, Mario Madaffari and Tony Tricario. The financial years ending June 1997 and June 1998 showed a loss.
16 In response to this claim the defendant pleaded that the sum originally agreed was $100,000 per annum rising to $120,000 per annum in about May or June of 1991 for the year commencing 1 July 1991. The defendant denied par 13 of the statement of claim and said further:
"8.1 it was an implied term of the defendant's appointment as manager of the Business that the defendant had authority to engage and dismiss employees as the defendant saw fit;
8.2 in about 1994 the plaintiff by Pasquale Mirco agreed with Vito Palermo that the defendant as manager would engage a hotel manager to be employed by the Partnership to provide services to the Business in view of the increased demands that redevelopment of the bottle shop, service station and nightclub would make on the defendant's directors."
17 The defendant went on to plead:
(Page 9)
- "9. Paragraph 14 of the statement of claim is admitted save to deny that the persons designated by the plaintiff as 'managers' were managers performing the defendant's functions as manager. Those persons were employees or subcontractors of the Partnership who provided their services to the partnership Business."
18 In the counterclaim the defendant pleaded:
"37. In the period from 1 July 1988 to 30 June 1998 the defendant's entitlement to management fees and the monies paid in respect of those fees were as follows:
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(Page 10)
- 38.2 Time was not of the essence in respect of the payment of the management fees unless and until the defendant demanded payment as pleaded in paragraph 38.1 above.
38.3 The defendant had authority to pay itself amounts from Partnership funds in respect of the management fees.
38.4 To the extent that the defendant did not pay itself amounts from Partnership funds in respect of the management fees, the Partnership did not become obliged to pay the balance of the management fees unless and until the defendant demanded payment as pleaded in paragraph 38.1 above.
38.5 The defendant did not make demand on the Partnership for the payment of any management fees until 17 June 1998 in a letter from the defendants [sic] solicitor to the plaintiffs [sic] solicitor.
38.6 The Partnership has failed to pay the amount demanded by the defendant or any amount in that at all material times the plaintiff has refused to permit the Partnership to pay the amount demanded or any amount.
38.7 The plaintiff is obliged to pay the defendant one half of the unpaid management fees including interest thereon."
19 Thus four issues are raised:
1. What was the original rate agreed?
2. When was it increased?
3. To what was it increased?
4. Were the fees payable "out of profits"?
20 The plaintiff further pleaded that:
"17. In or about 1994 and at the business premises the Agreement was further varied in that:
(a) the plaintiff and the defendant were to cause a nightclub to be constructed on the Business premises ('the Nightclub'); and
(Page 11)
- (b) the defendant's duties pursuant to the term of the Agreement pleaded in paragraph 6 were on its completion to include management of the Nightclub."
21 The plaintiff pleads a number of matters going to the claim that the defendant was responsible for a loss of profit to the nightclub by reason of failing to remedy the acoustic problem. The relevant paragraphs are:
"19. From the time the Nightclub opened for business, excessive reverberation occurred within the Nightclub.
20. In or about October 1995, the defendant engaged 'Viscosity Man' to advise on the cause of the reverberation and its solution.
21. The defendant did not notify the plaintiff or any advice given by 'Viscosity Man'.
22. In or about December 1995, the defendant engaged Ian Harwood to advise on the cause of the reverberation and its solution.
23. The defendant did not notify the plaintiff of any advice given by Ian Harwood.
24. In or about March 1996 the defendant engaged Allan Herring of Herring Storer to advise on the cause of the reverberation and its solution.
25. On or about 26 March 1996, Allan Herring advised the defendant that sound absorptive materials should be affixed to the internal surfaces of the Nightclub to remove or reduce the reverberation.
26. The defendant did not notify the plaintiff of the advice given by Allan Herring.
27. In or about August 1996, the defendant obtained legal advice that Broad Constructions, the builder of the nightclub, was responsible for the excessive reverberation.
28. The defendant did not notify the plaintiff of that advice.
(Page 12)
- 29. In or about August 1996, the defendant made demand upon Broad Constructions to remedy the excessive reverberation. Broad Constructions denied liability and offered to remedy the excessive reverberation if the plaintiff and the defendant paid to it the sum of $42,000.00.
30. The defendant did not notify the plaintiff of the matters pleaded in paragraph 29.
31. The defendant did not, in or about August 1996, call upon the plaintiff to share with the defendant to equally meet the cost of remedying the excessive reverberation in the Nightclub nor did the defendant cause the excessive reverberation to be remedied.
32. Notwithstanding the facts referred to in paragraphs 20 to 29 the defendant failed until November 1997 to cause the excessive reverberation in the Nightclub to be remedied.
33. In or about November 1997 the defendant at the expense of the business caused the excessive reverberation in the Nightclub to be remedied.
34. By reason of the facts referred to in paragraph 33 the defendant breached the terms of the Agreement referred to in paragraphs 6 and 17 in that it failed in managing the Nightclub to exercise due skill, care and diligence in that the defendant:
(a) was from October 1995 aware that there was a problem with the acoustics in the Nightclub.
(b) was from October 1995 aware that rectification of those acoustic characteristics was necessary for the proper conduct of the Nightclub.
Particulars
The defendant by its Vic Palermo instructed Peter Jones of Multifix shortly after the opening of the Nightclub on 14 October 1995, to take remedial action to rectify the poor acoustics in the Nightclub.
(Page 13)
- (c) was pursuant to the facts referred to in paragraph 25 from on or about 26 March 1996 aware that the poor acoustics in the Nightclub were caused by excessive reverberation.
Particulars
The defendant was on or about 26 March 1996 so advised orally by Allan Herring such advice being confirmed by letter from Allan Herring to the defendant dated 9 April 1996.
- (e)[sic]failed pursuant to the facts referred to in paragraph 29 in August 1996 [sic] to avail itself of the opportunity to remedy the excessive sound reverberation in the Nightclub.
Particulars
(i) failed to inform the plaintiff of the excessive sound reverberation in the Nightclub;
(ii) further, failed to inform the plaintiff of the remedial work necessary to reduce the excessive sound reverberation in the Nightclub;
(iii) further, failed to inform the plaintiff of the cost of the remedial work necessary to reduce the excessive sound reverberation;
(iv) further, if the partnership did not have funds available to meet the cost of the necessary remedial work, failed to inform the plaintiff of that fact;
(v) further, if the partnership did not have funds available to meet the cost of the necessary remedial work, failed to call upon the plaintiff to assist with the cost of remedying the excessive sound reverberation;
(Page 14)
- (vi) had the plaintiff been aware of the excessive sound reverberation in the Nightclub the plaintiff would have been prepared to take such steps and/or make such contribution whether financial or otherwise as was reasonable required of the plaintiff as a partner in the Business to rectify the problem.
- (f) continued to fail or neglect until November 1997 to take any or any adequate steps to rectify the excessive sound reverberation in the Nightclub.
…
- 36. By reason of the excessive reverberation not being remedied by August 1996 and being allowed to continue from September 1996 through to November 1997, the Business, through its Nightclub, had a reduction in its custom and trade and by reason thereof and by reason of the facts referred to in paragraph 35 sustained a loss of profit."
22 In its defence the defendant admits that there was excessive reverberation in the nightclub, but pleads that the defendant was not aware and could not reasonably have been aware of that prior to 26 March 1996. The defendant admits engaging the various parties named and states in effect, that in each case the plaintiff was informed of the action taken. Specifically, it is pleaded that the defendant forwarded to the plaintiff a copy of Mr Herring's report on or about 10 April 1996. The defendant pleads that similarly the plaintiff was informed of the legal advice received. The defendant pleads that the partnership was indebted to Broad and unable to pay the amount owed or the $42,000 quoted by Broad to fix the acoustics to the ceiling.
23 In relation to the allegation that it did not call upon the plaintiff to share the cost of remedying the problem the defendant pleads:
"25. Paragraph 31 of the statement of claim is denied. On or about 20 April 1996 (at the hotel) and 27 November 1996 Vito Palermo verbally requested Pasquale Mirco or Vince Mirco that the Plaintiff join with the defendant to contribute additional capital to the Partnership in order to rectify the reverberation problem and the plaintiff
(Page 15)
- declined to make any contribution. The second discussion was confirmed in the defendant's letter to the plaintiff dated 27 November 1996. In or about April of 1996 the defendant covered the walls of the nightclub with sound absorptive material in accordance with Herring's advice. In about mid to late September of 1996 the defendant commenced installation of acoustic panels on the perimeter of the nightclub ceiling. Further, the defendant denies that it was under any obligation to call upon the plaintiff to make contribution to meet the cost to rectify defective work."
24 Further the defendant says:
"26.2 the defendant was unable prior to November of 1997 to remedy the reverberation problem by reason of the following matters:
(a) until Herring's advice on 26 March 1996 the defendant was under the misapprehension based on the advice of Harwood and others that the cause of the problem was the type of sound amplification equipment installed in the nightclub which the Partnership then replaced;
(b) in April of 1996 the defendant acted immediately to implement Herring's advice by installation of curtains and fabric on walls to reduce the extent of reverberation;
(c) after receipt of Herring's advice the defendant in April and November 1996 sought from the plaintiff additional capital which the plaintiff declined to contribute to rectify the problem;
(d) the ceiling of the nightclub was difficult to access due to the installation of computer controlled lights suspended from the ceiling which would have to be removed and replaced in order to access the ceiling. This could not be done within the 4 days of a week when the nightclub did not trade and so would cause the closure of the nightclub for about 2 weeks. The defendant believed that if the light grid was dismantled after
(Page 16)
- re-assembly a technician [would be required] to re-program the computer which controlled the lighting system would have to be brought to Perth from Italy;
- (e) the defendant was reasonably concerned that closure of the nightclub would reduce the income of the Business at a time when the Business was already operating without adequate working capital;
(f) from August to November 1996 the defendant with the plaintiff's agreement had attempted until about 20 November 1996 to negotiate with Broad in order to secure its agreement to meet the costs of rectification and abandon its (Broad's) claim for about $115,356; interest thereon (as referred to in paragraph 23 above) and any further claims including for the retention fund of $37,263 payable on 10 October 1996 which was not achieved;
(g) after the failure to achieve a compromise with Broad the plaintiff and the defendant agreed to issue proceedings against Broad, again, in the hope that this would procure a compromise whereby Broad would meet the cost of rectification and abandon its (Broad's) claims as set out in (f) above;
(h) by October of 1997 the defendant in the exercise of its management responsibility made the judgment that the trading at the nightclub was so poor that there was no alternative to its closure and the defendant undertaking the rectification work with the employees of the Partnership in order to minimise the cost so far as was possible;
(i) at all times after October 1995 the Partnership was indebted inter alia to Broad for $115,356 and interest thereon at 11% per annum from 22 December 1995, $37,263 and interest thereon at 11% from 10 October 1996 and to the
(Page 17)
- defendant for a loan to the Partnership of $64,085."
25 Therefore, in relation to the reverberation problem, the issues joined between the parties were:
1. Whether the defendant informed the plaintiff of the sound problem, the necessary remedial work and its cost;
2. whether the defendant informed the plaintiff the partnership did not have funds available to meet the costs;
3. whether the defendant called upon the plaintiff to assist with the cost of remedying the problem;
4. whether the plaintiff would have been prepared to contribute if asked;
5. why the defendant did not take action until November 1997;
6. whether there was a loss of profit.
26 A separate allegation against the defendant is a breach of duty to exercise due skill care and diligence concerns an alleged failure to take stock of alcohol and beverages in the nightclub and calculate, monitor and determine profits. This was denied by the defendant.
27 Further the plaintiff alleged:
"37. Further, pursuant to s39 of the Partnership Act 1895 (WA) the defendant was bound to render to the plaintiff true accounts and full information of all things affecting the partnership between the plaintiff and the defendant.
38. In breach of that obligation, the defendant has failed or refused to provide to the plaintiff true accounts and full information of all things affecting the partnership between the plaintiff and the defendant.
Particulars
(a) The plaintiff repeats the facts referred to in paragraphs 16 and 19 to 31 inclusive, and the particulars to paragraph 35."
(Page 18)
- "39. Further, pursuant to the facts pleaded in paragraph 5 the defendant owed a fiduciary duty to the plaintiff to work to conduct itself in relation to the partnership affairs with honesty, integrity and fairness."
29 It was also separately alleged that there was a breach of fiduciary duty by reason of the overpayments, the failure to remedy the acoustic problem, the failure to take stock and calculate profits properly. These allegations were denied.
30 The further allegations pleaded rely upon the same factual scenario as the alleged breach of the agreement in relation to the fees payable, and the alleged breach of the duty owed by the defendant in carrying out managerial duties.
31 The plaintiff addresses the matters raised concerning the position in relation to the appointment of managers, as follows:
"1. As to paragraph 8 of the second further re-amended defence and re-amended counterclaim ('defence and counterclaim') the plaintiff:
(a) denies that the engagement of a manager was made with the plaintiff's approval as pleaded;
(b) says that at the time the plaintiff first became aware of the manager's engagement the manager had already been engaged;
(c) says that in or about early 1994 Pasquale Mirco on behalf of the plaintiff objected to Vito Palermo on behalf of the defendant to the engagement of the manager and Vito Palermo stated that the manager's salary was being paid from the defendant's management fee and would not be charged to the Business which Mirco accepted;
(d) denies that it was an implied term of the defendant's appointment as manager of the Business that the defendant had the authority to engage employees as the defendant saw fit to carry out the defendant's management responsibilities save and unless those employees
(Page 19)
- were paid from the defendant's management fee; and
- (e) denies the further allegations in paragraph 8 of the defence and counterclaim."
32 An issue was the extent of the defendant's duties as manager and its alleged delegation of those duties from about 1994. In answer to a request made by the defendant of the plaintiff for particulars of the defendant's obligations as manager and the management services to be provided, the plaintiff's solicitors referred to a document described as "Your client's proposal for the duties of managing directors and operations managers" and a letter written by the defendant to the plaintiff on 28 January 1998. The document "proposed duties of managing directors" arose out of discussions initiated by the partnership accountants, Bird Cameron, as to a proposed re-organisation of the business. During the course of that process the documents referred to by the plaintiff's solicitors in the letter of 25 November 2004 were produced. These matters were the subject of evidence. The letter of 28 January 1998 in the relevant paragraph stated:
"In our agreement as managing partners it was resolved that any matter relating to the proper functioning of the Hotel complex will be Palermo Nominees' responsibility, including rent collection, disputes and leases documentation for all lettable areas. The day to day management of the Hotel bars restaurant accommodation, bottle shop, nightclub and the vacant land in Spearwood."
33 It is clear from the evidence given for both partners that, at the time of entering the partnership and agreeing that the defendant company through its directors Vic and Guy Palermo would manage the business, no specific duties as managers were described, no specific limitations on those duties were set, and no limitations on their powers as managers were expressed.
34 The plaintiff denied being informed about various actions taken by the defendant in addressing the acoustic problem and denied being informed in relation to the Broad litigation. Specifically, the plaintiff denied being requested to contribute capital to rectify the reverberation problem in the nightclub and alleged that a letter dated 27 November 1996 was only received by the plaintiff from the defendant on 28 January 1998 under cover of another letter of that date. The plaintiff specifically
(Page 20)
- alleged that the reverberation in the nightclub ought to have been rectified by August 1996.
35 The plaintiff asserts that any management fees claimed by the defendant to be owing for a period prior to 22 March 1994 are barred by s 38 of the Limitation Act1933, as having accrued outside the six year limitation period. This flows from the alleged term pleaded that the management fees were payable at the end of the year to which they related. In the alternative, the plaintiff claims that the defendant is estopped from claiming the payment of unpaid management fees based upon an allegation that the plaintiff had received the impression that all fees had been paid, had assumed that all fees during the period 30 June 1989 to 30 June 1998 had been paid and that the defendant had induced the plaintiff to adopt the assumption. The plaintiff claimed to have relied upon the assumption in preparing the accounts of the plaintiff's business and causing its income tax returns to be prepared. The plaintiff pleads out the estoppel by alleging that the assumption or expectation was false, that the defendant knew the plaintiff would or intended the plaintiff to act in reliance upon the assumption or expectation and then claims that the plaintiff will suffer detriment if the assumption or expectation is not fulfilled. The particularised detriment was:
"Had the plaintiff been aware that the defendant was entitled to further management fees for the years ending 30 June 1989 to 30 June 1998 the plaintiff's income tax expense or the income tax benefit derived from losses would have been reduced or increased as follows."
36 The plaintiff claims for each year that there would have been a reduction in the income tax payable for all years except the year ending 30 June 1997, when a small increase is pleaded. It is alleged that it would be unconscionable for the defendant to depart from the assumption and thus the claim is made that the defendant is estopped from asserting liability in the plaintiff to pay the defendant the management fees claimed.
37 In the alternative, the plaintiff further claimed that should the defendant be entitled to unpaid management fees they should be calculated pursuant to the plaintiff's alleged agreement that they were to come only out of profit and set out a calculation in that regard.
38 In answer to the limitation point, the defendant pleaded that time only commenced to run under s 38 of the Limitation Act 1935 upon the date of termination of the partnership, being either 13 August 1999, upon
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- the completion of the contract for sale of the defendant's interests in the hotel, or in November 2001 when the final settlement with Broad was concluded.
Plaintiff's Application to Amend
39 At the conclusion of the trial, counsel for the plaintiff applied to amend the plaintiff's pleadings in relation to par 34(f) of the statement of claim to delete the particulars to that subparagraph. Those particulars refer to the particulars provided at par 34(e) [par 21 above] and repeat them in their entirety. If the particulars were deleted, the allegation in par 34(f) would be an allegation that the defendant failed to exercise due skill care and diligence in the management of the nightclub by failing or neglecting until November 1997 to take any or any adequate steps to rectify the excessive sound reverberation in the nightclub. The application did not propose to substitute any further particulars in regard of par 34(f). Consequently, the effect of the amendment would be to cause an allegation to stand in the statement of claim of failure or neglect, without specifying what steps should have been taken. Such an application at such a late stage in the proceedings, if necessary to the plaintiff's case, had the potential to be significantly prejudicial to the defendant. The fact that the pleading was not enlightening, by repeating the particulars to the previous subparagraph, does not improve the logic of the situation. The pleading in par 34 does not state in terms that the defendant should have done what the defendant ultimately did only some 15 months sooner nor does it suggest any other steps that should have been taken, except by reference to Broad's offer, to pay that company to remedy the problem.
40 The proposed amendment does not do anything to clarify or bring the pleading into accordance with the evidence, or any argument advanced for the plaintiff, in order that the defendant may more specifically address the case. For that reason, coupled with the lateness of the application, the application to amend par 34(f), by deletion of its particulars, is refused.
The Issues
41 Essentially, the major issues between the parties may be summarised as:
1. The terms of the management agreement as to the payment of the defendant and any variations of that agreement leading to any sums owing between the parties for unpaid or overpaid fees.
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- 2. Whether the defendant's failure to rectify the acoustic problem in the nightclub prior to November 1997 constituted a breach of a term of the management agreement described as a duty to exercise reasonable care, skill and diligence.
3. Whether the term implied in the management agreement should be reasonable care, skill and diligence or reasonable diligence.
4. Whether the defendant failed to do adequate stocktaking in the nightclub.
5. Whether the defendant failed to keep the plaintiff properly informed in relation to the management fees, the acoustic problem and the stocktaking.
6. Whether the alleged failure to provide information as to fees, acoustic problem and stocktaking amounts to a breach of fiduciary duty.
7. At what point in time was there a breach of the management agreement in relation to any fees unpaid, for the purposes of the Limitation Act 1935?
8. Whether the defendant is estopped from claiming payment of alleged fees due from the partnership by virtue of an alleged assumption made by the plaintiff that the fees had been paid.
42 The determination of most of these issues depends upon findings of fact to be made from the evidence, principally the evidence of Peter Mirco, for the plaintiff and Vic Palermo, for the defendant. Much of the evidence at trial, outside of the bare chronological facts, went to the assessment of the evidence of the two principal protagonists and to their credibility.
The Witnesses for the Plaintiff – Peter Mirco
43 Peter Mirco was the managing director of the plaintiff company and the principal actor in the events for the plaintiff. His history indicated that he had been a shrewd, hardworking businessman. He appeared in the witness box to be quite argumentative, volatile and at times defensive. For example, he was not happy to confirm that he was a successful businessman, a matter of degree and opinion, apparent to some extent from the documents of his own company, and a matter of no great significance. By his account his company and Vic Palermo's company
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- had entered into an agreement, the matter being discussed at a meeting at which all four brothers were present, at which there had been only a little discussion of the rate of pay applicable to the defendant for management of the hotel. His evidence was the initial rate was $60,000 to be paid out of profits. He gave no evidence of any discussion of the precise duties to be carried out by the defendant company and no evidence of an agreement for the Palermos to employ "so-called managers". In fact he said, under cross-examination:
"The agreement was for the Palermos to run the hotel, ok? There was no agreement for Palermo to employ many of the so called 'manager' which is just a word, the word used, as a manager. These are just purely people who work in the hotel. If you call a girl that runs a restaurant a manager, then I don't know what you refer to as manager or what other people refer to as managers, but a manager of a hotel runs the hotel totally. He doesn't have tenure as the manager. There's only one manager for an operation of a hotel."
"No, they were not to employ managers. They'd employ staff, not managers. If they employed a manager to run the hotel that would come out of the – what do you call it – management fees. We got to make sure that we understand what a manager is."
45 The plaintiff's case was that the employment of any other "managers" was only to be on the basis that their fees were derived from the fee payable to the defendant. It emerged that this plea was derived only from Peter Mirco's evidence that on a particular occasion he attended the hotel and met Mr Arrell, asked him who he was, was told that he was the hotel manager, at which point Mr Arrell asked him what he was doing behind the bar. This led to a heated discussion with Vic Palermo. It was alleged that during the course of this discussion Vic Palermo said to Peter Mirco that he should not worry about it because the fees would come out of Palermo's fees. That was the extent of the direct evidence said to found the pleading. The particular incident was denied by the defendant. Peter Mirco himself did not call that exchange an "agreement". He called it a disagreement. It appears to be the only contemporaneous communication between the plaintiff and the defendant on this aspect.
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46 There were a number of argumentative exchanges in cross-examination in relation to the word "manager" with both Peter Mirco and Vic Palermo. This gave a very strong impression that the matter had been the subject of intense disagreement between the parties for a considerable period of time. It is a futile argument.
47 The third edition of the Macquarie Dictionary defines a manager as "one who manages" or "one charged with the management or direction of an institution or business". Relevantly, the fifth edition of the Shorter Oxford Dictionary describes a manager as "a person whose office it is to manage an organisation, business establishment or public institution, or part of one, a person with a primarily executive or supervisory function within an organisation …". Manager is no term of art. It is in very general use. No doubt the precise meaning on any particular occasion depends upon context. Section 34(5) of the Partnership Act provides that each partner may manage the partnership business. In this case, the only specific agreement in the formation of the partnership was that the defendant was to run the business for the partnership for a fee. Otherwise, the parties' relationship is governed by the Partnership Act. There is no allegation that the defendant did not do the job of managing or running the hotel. The evidence clearly is to the contrary.
48 It was common ground that the defendant was involved significantly in the development of the hotel in 1993 to 1994. The plaintiff was involved to some lesser extent. Peter Mirco gave evidence of attending the meetings between architects, builders and other interested parties in the construction of the nightclub. He did not attend all meetings, and it emerged from the evidence that he ceased to do so for a period of time, in circumstances where he felt that his views were not to be listened to.
49 The hotel still required to be run at the same time as the nightclub development required to be supervised. It was in this context, I accept, that Chris Arrell was employed as "operations manager". He only provided a job description so entitled, subsequent to his engagement. Peter Mirco stated in evidence that he envisaged that the partnership could and would employ staff. In an operation of any substance, it is clear that a number of people of various levels of responsibility will be required to be employed. Some of these may be given "titles". Some of these may involve the word manager. None of this detracts from the defendant's role, as between the partners, of "management" of the hotel. There is no suggestion that Vic and Guy Palermo were not fully engaged in the business of the partnership. The definition of the "management duties" and the identities of those otherwise employed to provide services to the
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- partnership in the running of the hotel, are of no assistance in resolving the dispute as pleaded. In fact, the lack of logic of Peter Mirco's stated position is illustrated well by considering the completely untenable proposition that the employment of the disc jockey and "nightclub manager" should be treated as a deduction from the defendant's fee.
50 In relation to the acoustic problem, Peter Mirco, in his evidence-in-chief stated:
"I do not recall ever been made aware of any such advice with respect to problems with the sound or the construction of the nightclub or any legal advice until after I found out about the litigation commenced against Broad which was in or about October 1997."
- He denied seeing a letter from the defendant to the plaintiff dated 10 October 1996 until after October 1997. He stated that the first he knew of the partnership having any problems, "particularly money problems" was at Guy's daughter's 21st birthday party.
51 Initially he placed this occasion in late 1996 or early 1997 "a few weeks before I received a letter from the Palermos claiming for extra management fees". Whilst giving evidence-in-chief, he was asked whether he knew specifically when the occasion was and he answered: "It was in '97, early '97". Later, during the course of the trial it emerged that Julie Truglio, formerly Palermo, turned 21 in March of 1996 and a party was held for her on the 23rd of that month in that year. It was also proved that in the same year, in May, there was a celebration also at the hotel for Mark Palermo. The letter referred to by Peter Mirco was undisputedly dated 9 June 1997, which Peter Mirco acknowledged receiving at or about that time.
52 Peter Mirco recalled that on the occasion he was describing, there was a conversation between himself and Vic Palermo in which Vic said to him that there was a need to put more money into the business. He said that he was not advised why more money was needed and reacted with shock and surprise saying, "you must be joking, the place is full you've got a queue of people outside and you are telling me you need more money to keep the place going". Peter Mirco stated that he then said: "I might look stupid but I'm not stupid". To which Vic replied: "Are you accusing me of stealing"? Peter responded: "If the cap fits, wear the bastard". Vic is alleged to have replied as Peter was walking away: "This is going to cost you".
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53 Under cross-examination, Peter Mirco said that he was not willing to put money into the partnership because he believed the partnership had money. It was put to him that he was not willing to put money into the partnership because he did not trust Vic Palermo and he replied. "It was not a matter of trust, it was a matter of money being there". He agreed however that he did not trust Vic Palermo after the night of the 21st birthday party stating "No. I have no choice". He reiterated that he was not willing to put money into the partnership because there was "money in the hotel" and because "the business was making money and because the nightclub was booming". He later agreed that he was not prepared to contribute capital whilst the Palermos remained as managers stating "not unless we had control of the funds or had a say in the way the funds were spent". Later, after solicitors were instructed, a letter was sent from the defendant's solicitors to the plaintiffs seeking a contribution for repairs to the fabric of the building, which went unanswered. In relation to that matter, Peter Mirco also stated he would have contributed money to repairs if someone else was in control of the funds.
54 When asked whether he attended the opening night of the nightclub in October of 1995, he stated "Yes, I believe I did". He denied that he was aware of any problem with the sound in the nightclub on that occasion. He denied receiving a report in November of 1995 from the manager of the nightclub, Vincent Ashcroft, which made reference to the sound problems. He said that he rarely went to the nightclub after the opening night: "I never went for a long, long time". When asked why he stated that: "because I wasn't in agreeance with the way the design was, I wasn't in agreeance with most of the stuff that was built". It was put to him that he resented the fact that his advice (in relation to the sound systems) had not been accepted and stated "yes, it had been completely neglected". When it was put to him that he was not interested in knowing about the nightclub anymore he stated, "Well no I was not going there and wasn't being told". When he was asked whether he was interested in finding out he stated, "It wasn't a matter of not being interested, I wasn't being told". He also said that he did not go there because he was not welcome there.
55 In assessing Peter Mirco's history of these events, I find it of significance that he gave no coherent account as to the breakdown of the personal and business relationship between himself and Vic Palermo. He denied that the relationship had deteriorated earlier, in 1993. He accepted that he must have received a letter from the defendants in about August 1993, which amongst other things in referring to the deterioration of the relationship stated: "I suspect it is because of Peter's inability to accept
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- the fact that Vic and Guy are not liars and cheats as stated by Peter in one of his drunken rages in front of my brothers, Raz, Steve and members of the hotel staff". Peter Mirco in evidence denied ever calling them cheats or liars in front of anybody. He said that he just did not recall the letter. He effectively said that until the nightclub incident he had no problems with trusting the Palermos but after that he did not trust them. He further said that after that matters were placed in the hands of his lawyers.
56 Peter Mirco accepted that he saw, read and considered the financial statements of the partnership each year, when they had been prepared by the partnership accountants, Bird Cameron. He signed those accounts as did his brother on behalf of the plaintiff. He denied that there had been any instruction given to Mr Blythe of Bird Cameron not to accrue any outstanding management fees.
57 Peter Mirco did not have any recollection of receiving a number of other significant items of correspondence in 1996. He was cross-examined significantly in relation to the pleadings, and more specifically in relation to earlier minutes of the statement of claim. There were inconsistent versions in relation to the agreement between the plaintiff and the defendant as to the management of the hotel between December 1999 and November 2004. He did not really explain how these errors might have come about. He stated that he had always told his solicitors that the management fee was to be paid only out of profits to the business, which was not reflected in the earlier versions of the statement of claim. He stated that he had dealt with a number of different solicitors over the time period. When asked whether he had ever told anybody that in about 1988 he had agreed with the Palermos that the management fee would be $70,000 per annum he stated in reply "No, I did not, but I believe that my lawyers made a mistake in writing things down. Because there was a change of lawyers that was picked up by me. That was a mistake. It was a typing error in the lawyer's office". This answer pre-empted the cross-examination. When asked whether he thought there was a document stating that in 1988 he agreed orally that the management fee was $70,000 he stated: "No. The figure would be $60,000 not $70,000 that was a mistake made by the lawyer which I brought to his attention". He was unable to say who the lawyer was that he was dealing with at the time. He maintained that he told Mr Mackinlay from the outset that the management fee was $60,000 in 1988 and that he told him that the fee was later increased to $70,000.
58 He confirmed that he had only ever stated that the fee was payable after profits. He significantly had no recollection of seeing various other
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- documents, and gave no coherent account of how the errors were detected. The letter of 9 June 1997, in which the defendants set out formally the amounts they claimed owing in management fees, he said he believed he had received in about mid-June of 1997. He said that he did not contact Vic Palermo but took the letter straight to his lawyer. He could not recall that he sent a letter in reply nor that the solicitor sent any letter in reply. When asked whether he had given any instructions in relation to the letter he said: "No, the instructions were given to him back after the – what you call it – exchange of words at Palermo's 21st". When again asked whether he gave instructions about the letter, he stated: "I gave instructions to my solicitors to find ways of making sure that the Palermos were removed as hotel managers". He said that that was the limit of his instructions. When asked whether he followed up on his instructions to see whether his solicitor was doing what he asked him to he stated, "Yes. I was in contact regularly".
59 Further letters dated 29 January 1998 from the defendant's solicitor to the plaintiff, dated 18 February 1998 from the defendant's solicitor also to the plaintiff and dated 27 February 1998 also to the plaintiff went unanswered. The last Peter Mirco believed had been received through Mr Mackinlay. It was addressed to the plaintiff company's. A further letter concerning the fabric of the hotel was sent on 31 March by Mr Metaxas to Mirco direct. Although a response dated 7 April 1998 from Mackinlay and Co was sent to Mr Metaxas, it advised simply that the Mircos were away and a response would shortly be formulated. None of the correspondence received substantive written response. His manner of dealing with these matters was curious.
Vince Mirco
60 Vince Mirco confirmed that in late 1987 or early 1988, there had been a conversation between the four brothers at which an agreement to purchase and run the hotel had been effected. Vic Palermo had initially sought $80,000 for himself and his brother to run the hotel and that Peter had responded that that was too much and that a husband and wife team would run a hotel for around $60,000, which was the figure that was then agreed. Vince Mirco denied that there was any conversation about unpaid management fees in his presence in the context of the annual accounts. He also denied that he was informed of the appointment of an acoustic consultant to assess the problems in the nightclub in November or December of 1995. He stated that he had only been to the nightclub four of five times for social reasons after the opening that he had met with the Palermo's at the hotel several times over a period of around 12 months up
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- until the relationship between the Mirco's and the Palermos broke down. He said he used to meet with Vic and Guy for lunch when he was passing through. He said there was approximately six or eight lunches in the 12 months after the nightclub was built. At a few of the lunches he said that he recalled it being mentioned that they required money for the business because it was running at a loss and there was not enough trade to pay the interest at the bank. He said that he would tell them to talk to Peter. He said he did not discuss noise problems with either of the Palermo brothers. He only recalled once overhearing a conversation about noise problems when Vic attended at his premises at which time Vic was in conversation with another man about echo sounds occurring in the club. He said that this was the last time he saw Vic and it was in or around November 1996.
61 He denied seeing any of the correspondence from the Palermos until preparing for trial. He said that he never got involved with the Rockingham Hotel as he was running the other Mirco business. He said that his brother Peter was responsible for the Mirco brothers' interest in the partnership and that he did not discuss issues with his brother about the hotel. He remembered attending one or two meetings in connection with the redevelopment at the hotel but otherwise he left everything to Peter, including the decision making in relation to these proceedings. He said that he wrote out the draft of his witness statement the month before the trial. He said he did not discuss the writing of the statement with his brother Peter.
62 He admitted discussing "every now and again" the dispute between Palermo and Mirco. He understood the difference of view in relation to the management fees. He denied having any knowledge of a noise problem in the nightclub in late 1995 nor hearing anything about it during 1996, until the conversation between Vic and his friend that he overhead. He said he did not communicate this to his brother. He denied signing any correspondence in relation to the matter, until confronted with a letter signed by himself on 11 December 1997. He remembered attending a birthday party, and it was put to him it was a birthday party for Guy Palermo's daughter, but he could not remember the date. He confirmed that relations between Peter and Vic broke down on or shortly after the birthday party because Peter had told him that. In fact he said that Peter said "something did not add up". Vince said he did not get involved in this. He said he did not want to know about it. He said that he had subsequently told his brother that the Palermos had said the business required more money and his brother had said he would take care of it.
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63 When asked whether the management fee was to be paid as an expense or out of profits, he stated: "The $60,000 was to be paid as wages so there's no mention out of the expense or out of the profit". He had no significant recollection otherwise of the original terms agreed, and under specific cross-examination stated: "I never recall that meeting". When asked about his brother nominating their accountants he stated, "No, no I wasn't there. I never heard that meeting". He had no recollection of any meeting concerning an increase in the management fee. Vince Mirco appeared to be an amiable man with heavily accented English who gave the overall impression of really not being involved in the Rockingham Hotel venture at all.
Other Witnesses for the Plaintiff
64 Kari Rummukainen was the managing director of Broad. His company had been sued by the partnership. He presented as a straightforward witness and professional man. His evidence was led in support to the proposition that Peter Mirco knew nothing of the "Broad" litigation, prior to a conversation between him and Mr Rummukainen. I do not accept the proposition that the fact that Mr Rummukainen told Mr Mirco certain things necessarily proves that Peter Mirco did not know the facts conveyed prior to that conversation. Other inferences might be drawn, not the least that Peter Mirco may well have wished to derive information from Mr Rummukainen without giving away what he did know. I am not prepared to draw any inference in relation to what Peter Mirco did or did not know at the time of the conversation from this evidence. Mr Rummukainen did confirm that Vic Palermo endeavoured to settle the case with him, unsuccessfully.
65 Christopher Arrell, was employed by the defendant as "operations manager" in the hotel in 1994. He confirmed that he was employed initially at a rate of $45,000 per year and later at $50,000 and said he had a demanding role in the hotel. He confirmed also that Vic Palermo had a different role. There were over 50 staff at any one time employed at the hotel. The plaintiff relied upon his evidence as to the circumstances of his engagement. He said that he was not interviewed by Peter Mirco as alleged by Vic Palermo. He confirmed Peter Mirco's account of an encounter after Mr Arrell was employed which precipitated a dispute between Peter Mirco and Vic Palermo.
66 Colin Arthur Blythe was an accountant at RSM Bird Cameron until he retired in November 2003. His firm had previously provided accountancy services to Mirco and was involved with the partnership
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- operation of the Rockingham Hotel from around early 1988 and thereafter. His firm compiled the profit and loss statements for the partnership, from financial data presented to him by the Palermos. Mr Blythe confirmed the accounts which were contained in the trial documentation. Mr Blythe had no recollection of any conversations or instructions in relation to unpaid management fees. This is hardly surprising considering the passage of time. He confirmed that whilst all other expenses were treated on an accrual basis in the accounts, the management fees were treated on a cash basis. He acknowledged that there would be tax consequences for the defendant had the fees unpaid been treated otherwise. He was obviously aware of the year in which there was no management fees paid to the defendant. He did not otherwise have an explanation for the variation in management fees. Under cross-examination, he accepted that he may have had an expectation that there had been an equitable settlement, but said that he was unaware of any details or whether that was a reality. He confirmed that, had that been the case, the effect of the settlement should have been brought into account for tax purposes. He explained the structure of the Mirco Bros unit trust, for which Mirco Bros Pty Ltd was the corporate trustee. He explained how income flowed from the unit trust to family trusts and from there to a corporate entity called Highland Pty Ltd. This structure resulted in the rate of tax principally applicable in each of the years under consideration to any income derived from the partnership being the rate of tax applicable in Highland Pty Ltd. The trusts were each discretionary trusts and the other beneficiaries were members of the Mirco brothers' families.
67 Mr Blythe had been asked to perform calculations for the purpose of demonstrating the differential in tax liabilities had the management fees alleged to be outstanding actually been paid resulting in variations to the income of the partnership and thereby resulting in income variations in the individual partners. He confirmed that the calculation paid no regard to the reality of the beneficiaries' situation. His evidence was that in most cases the distribution was made on the basis of a fixed amount being paid to the wives of the directors of the company and that any balance then flowed to the corporate entity. His calculations did not relate to income tax paid by Mirco but a tax paid by Highland Pty Ltd.
68 Mr Blythe had no recollection of any conversations in relation to the accrual of unpaid management fees but confirmed that there were no accruals. He confirmed that had there been any unpaid management fees he would have had to have specific instructions from the partners in
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- relation to the treatment of such accruals because of the income tax consequences.
69 Allan Frederick Herring was called to proved that he gave advice in relation to the external and internal sound in relation to the nightclub at various times, and he produced his reports. He had no independent recollection of any discussion with Vic Palermo on 26 March 1996.
70 Other witnesses confirmed that they were engaged to provide technical assistance. Their evidence was not controversial.
71 Mario Madaffari was the disc jockey who became a manager of the nightclub in partnership with Tony Tricario. He gave evidence that he conducted stock takes on a monthly basis, was unclear as to precisely what form of documents these were recorded on but confirmed that the overall figures were recorded in a large green account book which was subsequently tendered in evidence.
72 Richard Brown Kagi became involved with the Rockingham Hotel under the management of Mr Douglas-Brown when, as a self-employed accountant, he was asked to perform a financial review of the partnership operating the complex. He was asked to review the accounting system and the records of the business. He attended the hotel and obtained certain information from Guy and Vic Palermo on 27 May 1998 and a couple of days later. He had prepared a report critical of the operation of the defendants. From his discussions with Vic Palermo, he said that it appeared that they were exercising a high degree of internal control over the hotel operations. He was critical that he was unable to check the defendants gross profit percentage for the nightclub and stated that the reason for this amongst other reasons was a lack of regular accurate stock take records. He was subsequently provided with stock take sheets for the nightclub. He outlined a number of deficiencies in the computerised stock control system and stated that the Palermos told him they were not doing regular accurate stock takes. He asserted initially that all information was from Vic and Guy Palermo, he conceded that he really only spoke with Vic Palermo. He gave evidence in relation to the incentive arrangement that existed with Mr Tricario, Mr Madaffari and the profit projections that had been prepared in that regard. He prepared various documents from the historical data which he obtained from the hotel and confirmed that there were two clerks working in the hotel office. His evidence was directed towards the calculation of the profits of the nightclub. He took over a system that was previously in operation which he did not appear to approve of. There was a lot of generally negative comment, but very little
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- focus upon the specific record keeping of the nightclub. He was not able to give any evidence as to the manner in which the nightclub was run, or whether the records had any bearing upon or prejudice to the nightclub's success.
73 Mr Douglas-Brown was also specifically separately instructed to compromise the litigation with Broad. He did various calculations for loss of profit. He compared the period of time from August 1996 to November 1997, where the plaintiff alleged that the failure to remedy the acoustic system led to a loss of profits to the partnership with the figures for the succeeding 14 months. He described his figures as a "self proving model". His evidence only went to compare the figures for the two periods. He gave no evidence as to the cause of the lower figures although he believed that the sound problem was a factor. He knew there was an issue about unpaid fees between the partners, but had no discussion with them about it and did not consider it was his role to deal with the problems. He confirmed the basis of the settlement with Broad being a set-off of their outstanding payments due under the construction contract plus interest and $10,000.
The Defendant's Witnesses – Vic Palermo
74 Vic Palermo clearly had the leading role in the defendant company's management of the hotel business. He presented as a careful, if initially nervous witness. It was clear from his demeanour, as it was from Peter Mirco's that this dispute was a very deep and personal one for them.
75 He confirmed that an agreement to run the hotel was established in discussions between himself, his brother, Peter Mirco and his brother on an informal basis in later 1987 or early 1988. He confirmed that it was agreed that the Palermo brothers should manage the hotel due to their availability and said that he requested a management fee of $50,000 each for himself and his brother Guy. His evidence was that there was no haggling about this; that Peter Mirco agreed to it as being "reasonable" and only insisted that the accounts of the partnership be done by his accountant Colin Blythe, with whom Peter had been dealing for a long time. He stated that there was never any agreement that the fees would only come out of profits. There was no discussion as to when the fee would be paid at that time or at any time thereafter.
76 Following the purchase of the hotel he and his brother Guy took over as managers working on a fulltime basis. Initially the financial records were maintained manually until a computer based system was purchased. At the end of each financial year his evidence was that the hotel staff and
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- himself would provide Bird Cameron with cheque butts, bank statements and coded data for the production of the necessary accounts. He said that he met with Colin Blythe from time to time in relation to the financial statements. He said that they did not draw the whole of their management fees payable in each year, but only drew from time to time what the hotel could afford to pay. He says there was a discussion between himself, his brother, Peter Mirco and Vince Mirco in the latter half of 1988 to the effect that they would only draw what could be afforded and the accounts would not show the unpaid portion, otherwise Palermo would end up paying tax on money it had not received. His evidence was that either Peter or Vince agreed to that.
77 In May or June of 1991 Vic Palermo said that he met with his brother, Peter and his brother to discuss the management fee, by which time he felt it was appropriate for there to be an increase. He put this to the Mirco brothers. He stated that Peter agreed that the workload entitled them to an increase which was quantified as $60,000 per Palermo brother and that Peter agreed. He confirmed the unpaid fees as set out in the counterclaim as being accurate.
78 There were no regular meetings of the partners. He gave evidence that the Mirco brothers did attend at the hotel on an ad hoc basis. He gave evidence that there was regular telephone communication between himself and Peter Mirco in relation to issues affecting the business. In the initial stages of the hotel business all cheques had to be signed by a representative of each member of the partnership. To effect this he would visit the Mirco premises every so often. Subsequently the frequency of these visits reduced due to the introduction of electronic transfers.
79 He confirmed that he and his brother managed the hotel, hired and fired staff, ordered stock and did whatever was needed. He confirmed that Mr Arrell was employed in April 1994 when he was about to go overseas and the nightclub development was in train. His evidence was that the appointment of an operations manager was discussed with Peter Mirco and he had told Peter Mirco that he could not manage the hotel and the redevelopment and somebody was required to help Guy especially when Vic was away. He advertised the position and stated that Peter and he interviewed and selected Mr Arrell. Mr Arrell was paid through his own proprietary limited company, as were Mr Tricario and Mr Madaffari through their company, at their request.
80 He denied that there was any agreement that Mr Arrell was to be engaged on the basis of Palermo alone paying his salary. Other fees were
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- paid to other parties, including an entity formed by another Palermo brother, Steve and a relative, Calabrese. This was an arrangement of convenience. In relation to the redevelopment and the nightclub, his evidence was that it was simply assumed that the defendant would extend its management over the nightclub and there was no specific agreement in relation to this with the plaintiff. His evidence was that it was taken for granted. Peter and Vince Mirco had some involvement during the development phase and attended some of the meetings. Vic's recollection was that Peter Mirco was always angry when he attended the hotel.
81 After the nightclub opened, he confirmed that the sound was of concern. He detailed all the steps that he took prior to March 1996 to attempt to address the problem. There was no dispute about this. It appears that initially everybody was under the impression that the problem was being caused by underpowered amplification and other matters concerning the equipment that had been installed. It was only in March 1996 that Allan Herring was brought in to assess the situation. There is no dispute but that in an early report Mr Herring had foreshadowed a problem in relation to the surfaces in the nightclub and now advised that the problem of reverberation was caused by the hard surfaces and the reflective effect on the acoustics. Vic Palermo's evidence was that he faxed Mr Herring's report to the Mirco brothers shortly after he received it without a cover sheet or letter. He also said that he spoke to Peter Mirco by telephone shortly after telling him that he thought it was Broad's fault.
82 Vic Palermo recalled a conversation with Peter Mirco, which he placed at Guy's son Mark's 18th birthday, in May 1996. He says that, in effect, he asked Peter to put more money into the business in order that the acoustics might be fixed. There is no dispute as to Peter's response which was to the effect there were a lot of people waiting to get into the nightclub so why should he need to put in more money? Vic’s evidence was that he asked for money on that night because by that stage he had been advised by Mr Herring an acoustic ceiling was needed and that this would entail considerable expense. He also gave evidence that he was insulted by something said by Peter Mirco on that night.
83 Vic Palermo said that they did fix some softening materials to the walls after the advice of Mr Herring, but had insufficient cash flow to install the acoustic ceiling. He expected this to cost at least $30,000. They tried renaming and relaunching the club in October 1996 but this did not prove successful. In August 1996 he sought legal advice and was advised in September that the builders were to blame. Negotiations
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- followed which were not successful in resolving the issue. His evidence was that after he received the legal advice he spoke to Peter Mirco. He endeavoured to persuade Kari Rummukainen to fix the problem and pay damages and that in November 1996 he discussed commencing proceedings against Broad with Peter or Vince Mirco. His evidence was that Peter agreed that the writ should be issued. He said he again asked for money to put into the business in order that the ceiling could be fixed. He said he wrote on 27 November 1996, enclosing a copy of a letter from Broad. He said that at this stage Peter told him that Mirco brothers were unable to put the money in because they had some issues with the tax department.
84 After proceedings were commenced, Broad would not do any work to rectify the problem with the ceiling. Vic Palermo said that the hotel was not generating sufficient cash to fund the expense. There were figures produced to show the balance on each of the three operating accounts of the business. They were not overdrawn. From a superficial point of view it appeared that there was cash flow from which other expenses might be met. The business also had significant capital repayments to their financiers in the relevant years and ongoing interest payments. For this reason, Vic Palermo was reluctant to close the club, even for a short period of time. It was not disputed that to do the necessary work to the ceiling required a greater time than the days the nightclub was closed between weekends. There was some discussion as to the precise length of time it ultimately took to affect the work, but nothing turns on this.
85 In the end, the Palermos and the staff physically did the work of affixing absorptive sound materials to the ceiling, which included having to raise and lower the lighting and other technical works, in October 1997, by which time Vic Palermo's evidence was that trade in the nightclub had become so poor that there was no alternative but to address the problem. He also took the opportunity of doing some general upgrading works to improve the appearance of the premises. The total cost of materials was around $14,000. He said that the shortage of working capital was in part due to the fact that the redevelopment of the property was underfinanced and cash flow moneys were spent on the redevelopment and upon the Broad litigation. There is no doubt that at the relevant time the business had significant liabilities, not all of a current operational character and significant capital commitments to meet.
86 Vic Palermo admitted that he overstated his case in his letter of 9 June 1997 in that, in two instances, he increased to $140,000 the amounts due. His explanation for this was that "we deserved it". There
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- were other issues raised at this period including matters concerning vehicles, which are not now relevant. Vic Palermo also wrote to the plaintiff on 8 December 1997, summarising various recent events and problems.
Guy Palermo
87 Guy Palermo presented as a practical, "hands on" individual, who was not particularly concerned with the financial side of the business. He confirmed that he left such matters to his brother. He looked somewhat worried, and had problems with his eyesight which were a difficulty for him in the witness box. He stated that he had little to do with Mr Kagi, when he was engaged, and confirmed that fees to Palermo were not paid because of a cash flow problem. He confirmed that the responsibility for that was his brothers. On the initial agreement, he said that he and his brother had discussed what they would want from managing the business before the meeting with the Mircos. His brother did the talking at the meeting. He recalled having a conversation with Mr Blythe about unpaid fees, but could not recall when that might be. The effect of the conversation was that there was no point in unpaid fees being shown in the accounts which the Palermo brothers would have to carry through to their accounts and pay tax on.
88 His son, Mark and daughter Julie gave evidence to confirm their respective dates of birth and their birth certificates were produced.
89 The third brother, Steve Palermo was a much younger man, effectively an employee of the operation, who worked under the supervision of his brothers and at times, Mr Arrell.
90 Mr Harwood was a straightforward technical man, employed to sort out the lights, sound and computing aspects of the nightclub. He physically helped clad the ceiling. He found it difficult to work out how to re-programme the lights. He was imprecise as to the length of time the club was shut for the purposes.
Credibility
91 The plaintiff’s case on the overpaid management fees is dependent almost entirely upon the evidence of Peter Mirco. Vince Mirco's evidence was that the initial fee was $60,000, but otherwise his involvement in the hotel business and the arrangements was, on his own evidence, slight. He did not corroborate the claim that the agreement was for a fee to be paid "out of profits". Rather he described the sum as "wages". On the crucial
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- issues at the original meeting, bearing in mind his lack of participation at later stages, his uncertainty as to content of the discussion in terms other than the fee, indicates to me that little weight can be attached to his claimed specific recollection. I do not consider that he was necessarily seeking to mislead, but the passage of time, the heat of the conflict and family loyalties cause me to be unable to accept his accuracy.
92 I have grave reservations about the reliability of Peter Mirco as a witness. His presentation in the witness box was of a man unable to give much detail of the significant history. These are matters in which he had an intense interest. His remoteness from his account was telling. At times he displayed extremely odd deficiencies of memory, which might otherwise be construed as evasive. The notable inconsistencies in the earlier versions of the statements of claim significantly undermine any confidence I might have in his final account. His inability or unwillingness to explain the discrepancies save by stating that his solicitors made a mistake, stretch the bounds of credulity. If it was his case that he had been so repeatedly misunderstood by those engaged to advance his interests, one would have expected a degree of outrage and an account of the nature or origins of the misunderstandings. His inability to place in time, after all the preparation involved, the occasion upon which the relationship with the Palermos "fractured" is also remarkable. At the outset of his evidence he stated that the occurrence was in early 1997. He was clearly a year out in his recollection. In these circumstances, I cannot rely upon his recollection as to whether it was March or May or which birthday celebration it involved. His failure to explain how it came about that the relationship fractured, coupled with his acceptance of receipt of the letter in 1993, which not only indicates that there were prior problems but made serious allegations about his conduct, both serve to undermine a sense of reality in his evidence. The letter of 1993 gives a glimpse of a longer estrangement from Peter's point of view as does the incidental comment made by Vic that Peter was "always angry" when he attended the project meetings.
93 Certain aspects of his evidence were entirely inconsistent with his history as a businessman, such as not considering that he was in partnership for profits and losses, because "they did not talk about losses" and the illogical position he adopted in relation to the employment of staff, versus managers, quoted in par 44 above. The suggestion that his partner would readily agree that Mr Arrell should be employed on the basis that the Palermos, not the business, paid his fees or wages defies belief.
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94 Mr Arrell was employed on $45,000, rising to $50,000 per year, in 1994, as part of a package, set out in his letter of appointment, including fuel, accommodation and food for himself and his wife. This rate of pay does not render it inherently unbelievable, as the plaintiff suggested, that the defendant's fee in 1988 should be set at a rate which would provide an income of $50,000 each for the fulltime employment of Vic and Guy in the management of the hotel.
95 The plaintiff's failure to respond to correspondence, Peter Mirco's uncertainty as to instructions given, to whom the correspondence was directed, failure categorically to state the plaintiff's position on the main issue at the outset, the further fact that the earlier minutes of statement of claim contained other serious allegations which were abandoned, according to Peter Mirco without his instructions, result in my inability to accept his evidence as reliable or accurate. At certain points in his cross-examination I suspected that he may have been covering up for significant memory deficits, beyond those that might be normally encountered when speaking of events a number of years before.
96 I cannot accept at face value that he had so little recollection of events concerning the hotel between the opening of the nightclub in October 1995 and November 1997.
97 In assessing issues of credibility in relation to the main witnesses, I have had particular regard both to the passage of time and the intensity of feeling between these parties.
98 To succeed the plaintiff must establish, on the balance of probabilities, that the rate agreed was initially $60,000 raised to $70,000 in 1992, that the rate was payable only out of profits and thirdly that the rate was to cover any ‘management fees’ paid to any third party. All the above issues are almost entirely dependent upon the evidence of Peter Mirco, upon which I find I am unable to rely and thus the plaintiff has not discharged the onus on this issue.
Counterclaim
99 The evidence of the defendant, principally that of Vic Palermo, as to the circumstances leading up to the formation of the partnership is substantially in agreement with that of the plaintiff. The critical issue, on the counterclaim, is whether the defendant has established the terms upon which the managing partner was to be paid. Vic Palermo's evidence was that the figure initially agreed was $100,000, which he said the Mirco brothers accepted without haggling. Given the relationship between Peter
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- and Vince Mirco and Vic and Guy Palermo at the time, it is not to my mind exceptional that such an arrangement should be reached without any substantial bargaining. I do not consider the matter can be determined simply upon an approximation of what might have been a reasonable wage for a hotel manager at that time. The fact that Mr Arrell was employed in 1994 for a specific sum, in my view, is not particularly persuasive. It is more significant that this was an agreement between parties who in 1987/1988 had an existing business and personal relationship such that they would together consider embarking on a venture including the acquisition of substantial property without feeling any need to record their dealings in any permanent form.
100 I accept the evidence of Vic Palermo that the rate agreed in 1987/1988 was $100,000 payable to the defendant company as an expense of the partnership. I accept that the terms of engagement were not limited except by the requirement initially that a representative of both the partner companies signed cheques. I accept that in relation to unpaid fees, the Palermos determined not to take from the partnership funds sums in excess of those they believed the partnership could handle from its cash flow. I accept that they would have indicated this to their partners. In that regard I prefer the evidence of Vic Palermo and his brother to the Mirco brothers. The evidence of Mr Blythe was not of particular assistance in general terms, but his evidence that he would have required instructions as to how to deal with unpaid management fees, and the fact that those fees were not recorded lends support to the proposition advanced by Vic and Guy Palermo that, at a meeting with Mr Blythe in relation to the preparation of the company accounts at an early stage in the business, Mr Blythe was instructed not to record accrued unpaid fees due to the defendant company. I do not accept Peter Mirco's assertion that fees might have been taken "in kind". Apart from my views already set out on his evidence, this assertion was too vague a general assertion on such a substantial issue.
101 The fact that the defendant company had not been paid the fees agreed at the rate of $100,000 per annum was apparent on each occasion that the partners signed the profit and loss statements prepared by Mr Blythe. In the financial year ending June 1995, no management fees were paid to the defendant company. In the financial year ending June 1996, $90,000 is shown as being paid to the defendant company. In earlier years the payments significantly fell short of even the sum alleged to be the fee by the plaintiff. This is not a matter likely to have gone noticed by the directors of the partners.
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102 I entirely reject the suggestion that there was any agreement that any person employed by the partnership, whose job description title might have contained the word "manager", should have been paid by the Palermos. Again I have am unable to rely upon Peter Mirco as a witness on this. In addition, taking account of the size of the operation, coupled with the development of the premises and the construction of the nightclub in 1993/1994, the partnership must have required to employ increasing assistance, at increasingly responsible levels. I accept that, even prior to the redevelopment, there were negotiations between the partners to increase the level of the management fees. I accept the evidence of Vic Palermo to the effect that the fee was increased from $100,000 to $120,000 per annum with effect from the financial year ending 30 June 1992.
103 Generally, in matters of credibility, I found Vic Palermo to be the more believable and reliable witness. Justified criticism was made of his letter of 9 June 1997, in which he inflated the fees claimed to $140,000, but taking into consideration the relationship between the parties at that stage, and his frank admission that he was wrong in making that claim, I do not consider that it undermines the essential cogency of his evidence.
104 The other major criticism of Vic Palermo's evidence stemmed from his assertion that Peter Mirco was involved in interviewing Mr Arrell when he was recruited. I do not accept this part of Vic Palermo's evidence, for two reasons. Firstly, Mr Arrell only describes meeting Peter Mirco after his engagement, and secondly, it is inconsistent with Peter Mirco's level of involvement with the partnership business. However, I view this evidence in the context of the distorted dispute about the engagement of "managers" that appears to have played such a part in the argument between the partners.
105 I therefore conclude that the allegations set out in the counterclaim confirmed by Vic Palermo specifying the unpaid fees at $517,404 owed by the partnership to the defendant are made out. Thus, subject to the issues raised by the plaintiff in its defence to counterclaim the plaintiff owes half of that sum, $258,702, to the defendant.
The Nightclub Acoustics
106 The plaintiff's claim is that the defendant breached the contract between the plaintiff and the defendant for the management of the hotel business by failing to rectify the acoustics problem in the nightclub in a timely fashion thereby causing a loss to the partnership by reason of the decline in custom in the nightclub.
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107 At the outset, on the pleadings, there was an issue between the parties as to the nature and extent of the duty owed by the defendant to the plaintiff under the contract. The plaintiff pleaded that the duty was one of "due care, skill and diligence" whilst the defendant claimed that the standard owed was one of "due diligence". The defendant relied upon the authority of Cragg v Ford (1842) 62 ER 889 at 891 and drew an analogy with the duty owed by a director of a corporation: see Australian Securities Commission v Gallagher (1994) 11 WAR 105 at 114 – 116.
108 The defendant's argument was that the defendant's officers namely Vic Palermo and Guy Palermo did not hold themselves out as having any particular background in the hotel industry, or any particular expertise or skill, but undertook to manage as partners and businessmen the business venture jointly entered into by the partnership.
109 The issue was what, if any term was to be implied in the circumstances. The plaintiff argued that the term should be implied as a matter of law or on the basis that it was reasonable, obvious and necessary to give efficacy to the agreement. The plaintiff denied the analogy with a company director was apt but drew the analogy with a company director who contracts to provide specific services to the company. The plaintiff argued that the defendant was required to exercise the standard of care appropriate given the nature of the relationship between the parties and the subject matter of the agreement and that that standard was that of an adequate hotel manager.
110 An implied term in these circumstances is to be judged at the date of the formation of the contract, barring any express agreements subsequently. In this case it was not suggested there was any express agreement as to the standard of care at all. I am inclined to the view that, in these circumstances, the standard to be implied would be the care and skill to be expected of a businessman, with business experience and some knowledge of the liquor trade, as the defendant had to the plaintiff's knowledge previously owned a bottle shop, rather than that of a professional hotel manager. Both the plaintiff and the defendant knew that the defendant was not experienced in the hotel management field, but it is not necessary on the facts of this case to decide the point.
111 The plaintiff in effect conceded in closing submissions that the issue was one of diligence rather than any question of care and skill in relation to the alleged failure to remedy the acoustics. Looked at another way, the issue is the nature of the alleged breach, which in this case was failure to take steps to rectify the sound reverberation problem at an earlier stage. It
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- was not suggested that the defendant had or should have had any particular skills in the recognition or rectification of this problem. The issue was the management judgment made by the defendant. It was not disputed that the defendant obtained proper professional advice.
112 The period claimed for damages for loss of profits was from August 1996 to November 1997. The plaintiff acknowledged that between the opening of the nightclub in October 1995 and the consultation with Mr Herring in March 1996 and his subsequent written advice in April 1996, the defendant did not have sufficient knowledge of the nature of the problem to do anything other than what was done. The plaintiff acknowledged that a reasonable period of time was to be allowed for the rectification, once Mr Herring's advice was given. The plaintiff acknowledged that in consequence of Mr Herring's advice, the defendant took certain steps to attach sound absorptive materials to the walls.
113 When the situation became untenable in November 1997, the defendant and his employees personally affixed the required materials to the ceiling. The defendant's response to the claim is that it could not have acted sooner due to the fact that there was insufficient cash flow in the business to expend funds of the order quoted by Broad during the relevant period, that the plaintiff had failed to contribute additional finance for the purpose when requested to do so and that Vic Palermo, in the difficult cash flow situation then affecting the business, did not wish to close the nightclub for any period whilst the works were being effected.
114 I accept that the defendant was on the horns of a dilemma in relation to the reverberation acoustic problem. It is not disputed that until Mr Herring's advice was received, the defendant had been under a misapprehension that the problem was caused by the amplification equipment. Numerous steps had been taken by the defendant to address this aspect of the matter. The defendant also attempted ad hoc measures following Mr Herring's advice which were patently insufficient. Meanwhile the defendant was attempting to negotiate a settlement with Broad, which, if successful could have redeemed the situation.
115 I find that to fix the problem the defendant knew that it would need to close the nightclub during usual operative nights, although Vic Palermo could not have been in a position to know with precision how long it might take to effect the works. I accept that the defendant believed there would be significant difficulty in reassembling and reprogramming the lighting and other technical systems after the work was done. I accept that Vic Palermo reasonably believed that the partnership did not have
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- sufficient funds to contemplate either paying for the work to be done or a further reduction in the cash flow by closing the club. The evidence of the actual cash situation coupled with the partnership’s significant financial liabilities convinces me that this was a reasonable view. The final steps taken by the defendant were a matter of desperation, and whilst the plaintiff appeared to rely upon the relative modest amounts that the materials then cost to purchase, the defendant, in my view rightly, argued that it was not obliged physically to resolve the problem in the way that it ultimately did.
116 It is therefore not hard to see why the situation seems to have reached a state of almost paralysis. Other efforts to raise the popularity of the venue were unsuccessful. It remains unclear what the plaintiff alleges the defendant should have done apart from those matters particularised in 34(e).
117 Because of those matters, much turned upon the quality of communication or lack of it between the plaintiff and the defendant. I have already indicated my view of Peter Mirco's reliability as a witness in relation to the terms of the agreement. I accept that there was contact between Vic Palermo, Guy Palermo, Peter Mirco and Vince Mirco in the relevant period after the opening of the nightclub. It was not contact of a formal or necessarily predictable kind but I accept on Guy Palermo's evidence there were visits to have some cheques signed. I also accept that Peter Mirco and Vince Mirco visited the hotel intermittently. I accept that there would have been conversations about the business on such occasions. I accept that the Mircos enquired as to how the business was faring on such occasions. I find inconceivable the suggestion by the plaintiff that there was no comment made about the ongoing acoustic problems in the nightclub. I accept the evidence of Vic Palermo that he told one or other of the Mirco brothers what was being done. I do not consider that the letter of 8 December 1997 to the plaintiff which contained various information detracts from this, but was written in the context of the parties' last meeting being heated and not resolving anything.
118 It is not in dispute that there was a discussion at a birthday celebration at the hotel in 1996. I do not accept Peter Mirco's evidence as to when it occurred, or that there was no mention of the acoustic problem. In this regard, I prefer the evidence of Vic Palermo that the event was the second party in May 1996. There is no evidence to suggest that Peter Mirco had not been invited to the later occasion. It is of course not critical when such a request was made. The fact is that, in May or March,
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- the problem had been an ongoing one for some six months or more, and whether the precise nature of the remedial action was known would not necessarily exclude a request, prior to Mr Herring's advice, for an injection of cash for the purposes of the business and the sound problem. However, on balance, I find that the specific request occurred after the written report was provided by Mr Herring.
119 I accept the evidence of Vic Palermo that documents of importance were faxed to Mirco from the hotel pursuant to a general instruction to that effect. I am not able to accept that the Herring report was necessarily faxed to Peter Mirco by Vic Palermo as described by Vic Palermo at or about the time the report was received. Vic Palermo's evidence in this regard was not satisfactory and I do not believe that he would remember it, without the benefit of a cover sheet or some contemporaneous document to confirm or enliven his recollection. There was undoubtedly a delay in sending the report to Broad and the records presented were not in such order as would show that invariably materials were promptly distributed.
120 I do however accept that Mirco was informed of what was occurring in general terms. I place no reliance upon Peter Mirco when he says that he did not know or receive information. Specifically, I find that the defendant did call upon the plaintiff to assist with the cost of remedying the problem at the birthday celebration and subsequently in a letter dated 27 November 1996. The evidence in relation to this latter document was curious. Peter Mirco was very quick to say that he had not received this letter at the time. This stood in stark contrast to his uncertainty about receipt of other correspondence. His evidence was that he received it together with other correspondence at a later time, under cover of a letter dated 28 January 1998. Although this was the plaintiff's position, no allegation was put to Vic Palermo that he had backdated the letter, or created it for the purposes of the proceedings. Given my views expressed already in these reasons as to the reliability of Peter Mirco's memory, and the impression he gave in evidence in relation to this letter, I am satisfied that it was sent at or about the time that it was dated.
121 Peter Mirco was clear in passages that have already been quoted that he would not have contributed further funds, because the relationship between the plaintiff and the defendant had broken down at that point. He did not trust the Palermos, I accept that not only did he refuse to contribute funds, he insulted Vic Palermo, on his own evidence implying that Vic Palermo had not been honest in his conduct of the partnership business. It is hardly surprising, after this, that the relationship did not
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- recover, but I accept that Vic Palermo endeavoured to continue the operation in a business-like fashion.
122 The allegations set out in par 34(e) of the statement of claim have not been proved. The allegation in par 34(f), a repetition of the allegation in par 34(e), extending over the entire period from August 1996 to November 1997, is not made out either.
123 I do not consider that there was any lack of diligence by the defendant in the circumstances that the defendant found itself in by virtue of the partnership finances and the exigencies of running the hotel and nightclub. Considerations of the partnership's circumstances are different from considerations of mitigation of loss, as would have bearing in the litigation against Broad. I accept the evidence that the takings from the nightclub did not significantly reduce until after Christmas of 1996. I accept that there were considerable difficulties in judging at what point it would be appropriate to consider closing the nightclub and I accept that there was not sufficient cash flow for a responsible manager to pay for this additional expense without confidence that further capital would be available, due to the significant other liabilities that the partnership was due to meet. I accept that the self help remedy was taken out of desperation, that the defendant's directors were not obliged personally to act in this way and that the defendant did so in the best interests of the partnership.
124 Care and skill do not necessarily come into play where the question is one of making a hard management decision. The plaintiff did not seek to pursue this distinction as relevant to the determination of the issues actually raised by the plaintiff's case. I accept that the defendant did some early work, informed the plaintiff of the situation in general terms and of the litigation with Broad, and asked for funds. Accordingly, the plaintiff's claim for breach of the management contract leading to a loss of profit fails.
125 It is unnecessary therefore to consider the proper calculation of the alleged loss of profit.
Failure to Render True Accounts and Provide Full Information
126 The allegations pleaded at pars 37, 38 and 39 of the statement of claim rely essentially on the same facts canvassed in relation to the alleged overpaid fees, acoustics and stock taking. There is no allegation that the defendant was otherwise dishonest in its dealings with the plaintiff or lacked fairness or integrity. The plaintiff has not established
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- the facts alleged with regard to the fees or the failure to remedy the acoustics.
127 The alleged failure to provide accounts is related to the management fees as particularised. The alleged lack of information concerns the nightclub acoustics. I have found that the defendant informed the plaintiff of relevant matters. The final allegation was amended during the course of the trial from an allegation of a failure "to work for the common advantage of the partnership", to the allegation of failing to conduct itself with honest, integrity and fairness. I do not consider that the allegation is more than an alternative to the principal claims made, which have failed on the facts.
128 There was evidence that stocktaking was done from Mr Madaffari who worked in the nightclub. This aspect was not pressed at the conclusion of the trial. There was no link established between alleged failures to keep records and loss allegedly sustained. Accordingly, these allegations also fail.
Limitation
129 This issue arises due to the success of the counterclaim.
130 The question is at what point time started to run. The plaintiff claims that in each case the breach occurred at the end of the financial year in question, and that thus anything prior to 1994 cannot be recovered: Limitation Act, s 38.
131 This matter may ultimately be disposed of relatively simply. Questions of breach, appropriation, and the like might have been relevant had the manager been a third party employee or contractor. The essence of this action is that the defendant was in a partnership, with the plaintiff. The term for payment of a management fee was an integral part of the partnership agreement, although it was spoken of at times during these proceedings as if it were something separate from the partnership agreement.
132 Partners are not generally considered to be debtors and creditors between themselves during the currency of their partnership: R v Hurt (1954) 1 WLR 1309 at 1311 – 1312; Noyes v Crawley (1878) 10 Ch D 31. Accordingly, until such time as there is a settlement between the partners or the partnership is wound up, any specific amounts due and owing from one partner to the other do not crystallise and time does not commence to run. This partnership came to an end, save for the final resolution of the
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- Broad litigation, upon the plaintiff buying the defendant's interest in the hotel, completion of which transaction occurred on 13 August 1999. It was at that point that the parties made provision for the disputed funds to be held in trust. I find that this is the time at which the partnership determined. The management and conclusion of the Broad litigation had been contracted to Mr Douglas-Brown to conclude. Litigation between the partners commenced by writ on 30 August 1999. The defence and counterclaim was filed on 27 March 2000.
133 Accordingly, recovery of the sums claimed by the defendant is not prevented by statutory time limits.
Estoppel
134 The plaintiff claims that the defendant is estopped from recovering the unpaid management fees by virtue of the defendant's conduct, and that it would be unconscionable for the defendant to insist now upon payment of those sums. There is no foundation for this claim. Firstly, I have found that the agreement was as stated by the defendant. Necessarily, the plaintiff knew the position. Secondly, neither Peter nor Vince Mirco said at trial that they assumed that the fees had all been settled, by whatever means, and neither did the plaintiff at any stage in correspondence assert that it had been mislead. The actual position as to management fees was recorded in the accounts of each financial year, which were presented for signature by the parties. There is no room for any species of estoppel in this situation. It is not necessary to consider the nature of the alleged detriment, the increase of the plaintiff's income tax bill, for lack of the expense of management fees.
Conclusion
135 The defendant has established its counterclaim for management fees unpaid during the currency of the partnership in the sum alleged by the defendant to which the plaintiff must contribute one half.
136 The orders I would propose to make are:
1. That the plaintiff's claim be dismissed.
2. That there be judgment for the defendant as follows:
(i) the partnership is indebted to the defendant in the sum of $517,404;
(ii) the plaintiff pay the defendant $258,702;
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- (iii) the plaintiff pay the defendant interest on the sum of $258,702 at 6 per cent per annum from 14 August 1999 until judgment pursuant to s 32 of the Supreme Court Act;
(iv) plaintiff pay the defendant's costs.
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