Noss v Smith; Smith v Noss

[2004] NSWSC 538

CITATION:	Noss v Smith; Smith v Noss [2004] NSWSC 538 revised - 02/07/2004
HEARING DATE(S):	8/12/03, 9/12/03, 10/12/03, 12/12/03, 8/06/04, 9/06/04, 11/06/04
JUDGMENT DATE:	24 June 2004
JUDGMENT OF:	Gzell J
DECISION:	Work in progress of each party introduced to partnership as assets of equal value. Receiver's report rejected. Accounts and inquiry to be conducted by Master. No causal connection established between alleged misrepresentations and entry into partnership. No additional loss or damage from alleged breach of fidcuciary duty. Proceedings on both sides otherwise dismissed.
CATCHWORDS:	PARTNERSHIPS - Dissolution and Winding Up - Whether work in progress of each party introduced as partnership assets of equal value - Partners retention of files after dissolution - Receiver's report based on sample of files - Whether report should be accepted or an account and inquiry taken by Master - Whether parties liable to damages for misleading or deceptive conduct by misrepresentation inducing each to enter into partnership under the Fair Trading Act 1987, s 68(1) - Whether any additonal loss or damage arose from alleged breach of fiduciary duty
LEGISLATION CITED:	Fair Trading Act 1987
CASES CITED:	Wardley Australia Ltd v Western Australia (1992) 175 CLR 514
PARTIES :	Stephen Thomas Frere Noss - Plaintiff in Matter 1101/01 Bronwyn Smith - Defendant in Matter 1101/01 Bronwyn Smith - Plaintiff in Matter 3697/01 Stephen Thomas Frere Noss - Defendant in Matter 3697/01
FILE NUMBER(S):	SC 1101/01; 3697/01
COUNSEL:	Mr C A Sweeney QC with Mr W Hodgekiss for Mr Stephen Thomas Frere Noss Mr P R Graham QC for Ms Bronwyn Smith
SOLICITORS:	Stephen Noss & Associates Versace McKenzi Lawyers

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

GZELL J

THURSDAY 24 JUNE 2004

1101/01 STEPHEN THOMAS FRERE NOSS v BRONWYN SMITH
3697/01 BRONWYN SMITH v STEPHEN THOMAS FRERE NOSS

JUDGMENT

1 On 1 October 2000, Bronwyn Smith and Stephen Thomas Frere Noss entered into partnership as solicitors. It was dissolved on 30 November 2000. A receiver and manager was appointed. The parties differed as to the treatment of work in progress. The receiver drew up accounts of the partnership on alternative bases. Ms Smith accepted the receiver’s figures. Mr Noss did not. He said the figures grossly underestimated the value of work in progress.

2 In the proceedings instituted by Mr Noss an order was sought that a Master take accounts of and inquire into the dealings, assets and liabilities and respective interests of the parties in the partnership. Ms Smith submitted that I should determine which of the receiver’s alternatives was appropriate and adopt his figures. However, if that course was not appropriate, Ms Smith did not oppose the taking of accounts and the making of an inquiry by a Master.

3 In the proceedings instituted by Ms Smith, damages were sought under the Fair Trading Act 1987 for alleged misleading or deceptive conduct by Mr Noss constituted by representations made by him prior to the formation of the partnership. By way of cross claim in those proceedings Mr Noss alleged that Ms Smith made false or reckless representations that induced him to enter the partnership and he thereby suffered loss and damage. He also claimed that Ms Smith’s conduct in terminating the partnership and thereafter constituted breaches of fiduciary duty and he sought an order that an account be taken of her dealings in breach of fiduciary duty and that an inquiry be held as to the amount of damages suffered. The matters were heard together and evidence in one was evidence in the other.

4 A great deal of evidence was adduced on both sides attributing blame to the other party. In the end most of the evidence is irrelevant to my determinations.

5 There was no written partnership agreement. The first issue I must determine is how work in progress was to be treated by the partners. The second issue is whether the receiver’s figures with respect to his appropriate alternative analysis should be accepted or whether an inquiry should be held by a Master and the accounts taken by him. The third issue is whether misrepresentations were made by Mr Noss and, if so, whether an inquiry should be held by a Master as to the loss or damage sustained by Ms Smith. The final issue is whether Ms Smith made misrepresentations or was in breach of fiduciary duty in terminating the partnership and in her dealings with respect to it thereafter and whether a Master should inquire into any loss or damage sustained by Mr Noss.

6 Those issues do not, in my view, require me to consider which party was at fault in the breakdown of the relationship that led to the termination of the partnership. Nor, it seems to me, need I determine who it was who initiated the idea of a partnership. I may set the evidence on those issues aside.

7 Ms Smith’s practice was almost exclusively devoted to NRMA matters. Her retainer was to conduct litigation in the small claims division of the Local Court for motor vehicle property claims, typically involving disputes concerning repair costs, hire car costs and consequential loss. Fees were only payable at the conclusion of each matter. The maximum fee was $500. No fee was payable if the matter settled on the issue of a letter of demand. Ms Smith was required to pay court filing fees of $56 per matter to be recouped with other disbursements at cost at the conclusion of each matter.

8 There were a number of discussions about the terms of the partnership. Initially it was to commence on 1 September 2000. It was agreed that this date should be put back to 1 October 2000. Mr Noss said it was agreed that he would assume responsibility for whatever the level of his overdraft was at the commencement of the partnership excluding any partnership expenses that may have been paid from the account. It was agreed that each should retain their existing debtors at the commencement of the partnership. It was agreed that filing fees paid by Ms Smith prior to the partnership for NRMA matters should be reimbursed when fees were paid by NRMA to the partnership. It was agreed that the parties should be equal partners. It was agreed that fees received would be split 50/50.

9 Mr Noss said he discussed the question of work in progress with Ms Smith before they entered into partnership. He told Ms Smith that if they were to go forward with a partnership they were going to need the work in progress of his firm and her work in progress to be able to make applications for significant overdraft or factoring facilities. He said he asked Ms Smith what she thought about work in progress being treated as an equal contribution by both of them even though her work in progress was potentially significantly higher than his. Ms Smith said she did not have a problem with that and was happy to do it. Mr Noss said that this matter was discussed on more than one occasion. He said that since neither of them time costed, they would have to cost up each of their files if they were to determine the value of work in progress at the commencement of the partnership. Ms Smith said that need not be done. She said they were going to put everything in as equal partners. That was the only way it could happen. She understood and that was what they were going to do.

10 Victoria Kay Rydstrand lived with Mr Noss as if his wife. She said that in the period leading up to the formation of the partnership Mr Noss had told her that he and Ms Smith were to be equal partners and they were each putting their work in progress together in the partnership.

11 Ms Smith said there was no conversation about work in progress. She thought about it and assumed that her work in progress as at 30 September 2000 would remain hers, but she did not raise the topic with Mr Noss. Ms Smith said the agreement was that work in progress during the partnership would be divided equally but that was all. Ms Smith agreed that there was no arrangement that there should be any adjustment to the partner’s capital accounts to reflect any disparity in the value of their respective work in progress on commencement of the partnership.

12 In his preliminary report the receiver recorded that Ms Smith had stated to him that pre-partnership work in progress was to be included in the partnership accounts but later she said that pre-partnership work in progress was not included as a partnership asset. In cross examination she said she could not recall having told the receiver that pre-partnership work in progress was a partnership asset.

13 The weight of the evidence supports the view that the partners were to contribute their work in progress as partnership assets treated as of equal value.

14 The evidence does not support an adjustment to capital accounts to reflect any disparity in value of the respective works in progress. Ms Smith did not cost up her files upon the formation of the partnership in order to quantify the work in progress she said remained her asset. One would have expected some attempt to quantify or agree upon a value for opening work in progress if each was to be credited with its value by the partnership. If Ms Smith thought she was to retain her work in progress one would have expected her to mention it to Mr Noss at some stage before the termination of the partnership.

15 Ms Smith agreed in cross examination that it was fundamental to her that when the partnership was paid by NRMA, she would be reimbursed for filing fees paid by her on pre-partnership files. It is difficult to conclude that Ms Smith’s work in progress did not become an asset of the partnership in such circumstances. If Ms Smith was to retain the full benefit of the work in progress on her pre-partnership files she could be expected to have remained liable for the costs of creating value in those files. At the least one would have expected only a partial refund of initial costs. To be reimbursed the entirety of the filing fees attributes the cost entirely to work in progress generated in the partnership to the exclusion of any work in progress generated by Ms Smith before its commencement.

16 Furthermore, if work in progress during the partnership was to be equally divided between the partners, the files upon which that work in progress was generated would be expected to be partnership assets. And an equal partnership suggests that the assets were held in equal shares.

17 The receiver’s preliminary report and the evidence of Ms Rydstrand support the evidence of Mr Noss and are at odds with the evidence of Ms Smith.

18 I reject Ms Smith’s claim that the pre-partnership works in progress of the parties were not included as partnership assets. I find that the agreement between the parties was that the work in progress of each was to be introduced to the partnership, that they were to be equal partners and the work in progress was to be treated as being of equal value.

19 Following the dissolution of the partnership, Ms Smith retained the NRMA files and Mr Noss retained other files. Receipts of fees from those files by each party were banked to their respective accounts.

20 The receiver calculated the work in progress taken by Ms Smith on the termination of the partnership from a sample of 200 NRMA files selected at random. He placed a value of $373,200 on this work in progress. He put a figure of $238,800 on Ms Smith’s work in progress on NRMA files at the beginning of the partnership and thereby concluded that the value added to the files in the two month period of the partnership was $134,400.

21 It was put to Ms Smith in cross examination and not controverted by her or her counsel that in the period from the dissolution of the partnership to October 2003, Ms Smith banked approximately $4.7 million in fees generated from NRMA files and claimed to be entitled to a further $0.8 million, giving a total for the period of $5.5 million.

22 While some of those fees might have been generated from new files received by Ms Smith after the termination of the partnership, a great deal of them will be attributable to the partnership.

23 There are two reasons for this. First, test cases ultimately resolved by the Court of Appeal in NRMA’s favour were pending and the Local Court was not setting down matters for trial. Furthermore, there was a low percentage of settlements while the test cases were pending. This meant that few fees were payable by NRMA and the value of the partnership lay in relatively high levels of work in progress. The receiver concluded that Ms Smith only rendered tax invoices totalling $29,747.71 during the period of the partnership.

24 Secondly, it was not until after the termination of the partnership that NRMA agreed to pay on an interim basis for work done on files. So soon as this occurred, Ms Smith sent tax invoices to NRMA for the work that had been done on files up to the termination of the partnership.

25 The low level of settlements during the partnership period also meant that there was no need to discount to any great extent work in progress for the prospect of settlement upon a letter of demand when no fee was payable by NRMA.

26 In my view the charge of approximately $5.5 million for fees on NRMA files in the 35 month period following the termination of the partnership when compared with billings of approximately $30,000 during the partnership raises serious doubts that work in progress on NRMA files was worth only $373,200 when the partnership was dissolved and only $134,400 was added to the value of those files during the life of the partnership.

27 Ms Smith said she had no idea of the value of her work in progress when she entered the partnership. Yet she said she thought the figure of approximately $135,000 for the generation of work in progress during the partnership was a reasonable estimate. I reject that evidence.

28 I reject the submission made on Ms Smith’s behalf that there is no need for accounts to be taken or an inquiry to be held because the court should accept the figures determined by the receiver. In my judgment Mr Noss has made out his claim to an order that a Master take accounts and inquire into the dealings and transactions of the partnership, its assets and liabilities during the two month period of its existence.

29 Ms Smith alleged that Mr Noss made a number of representations to her prior to their entering into partnership. It was her case that had she known the representations were false or made recklessly she would not have entered into partnership with Mr Noss and would not have sustained the loss or damage of sharing the profits from the NRMA files with Mr Noss.

30 Ms Smith said that Mr Noss told her he had been a partner in Kemp Strang solicitors. Mr Noss said he believed he was a partner of Barraket Kemp & Strang for a short period. He said he received a salary and not a share of profits. He told Ms Smith that he established a suburban office for Barraket Kemp & Strang at Burwood. It was put to Mr Noss that he was not a partner in the firm. His name did not appear in the Law Almanac as a partner. Mr Noss denied the suggestion. The evidence went no further.

31 I found the evidence of both Mr Noss and Ms Smith to be unsatisfactory. When confronted with the Law Almanac, Mr Noss volunteered for the first time that he received a salary from Barraket Kemp & Strang. The suggestion that he was a salaried partner struck me as an opportunistic response and raised doubts in my mind as to his evidence.

32 However, while I found Mr Noss’s explanation unsatisfactory, there was no direct evidence that he was not a salaried partner. In my view Ms Smith did not establish that the statement was false.

33 In one of Ms Smith’s affidavits she swore that had she known that the representations, including the representation of membership of the Barraket Kemp & Strang partnership, were false she would not have entered into partnership with Mr Noss. I reject that evidence with respect to the partnership representation. Mr Noss was admitted to practice in 1974 and after being employed by Laws & Dean and, initially, by Barraket Kemp & Strang, he became a partner in Noss & Howitt, Palmer Jordain Noss & Howitt and in Williams Palmer Noss and the principal of Central Law.

34 There was no evidence from Ms Smith explaining how she was influenced by the assertion that after employment with Barraket Kemp & Strang, Mr Noss became for a short period of time a salaried partner. Even if the assertion was false, it does not appear to me to be likely that it had any influence upon Ms Smith’s decision to go into partnership with Mr Noss. He had been in practice for many years as a partner and as a sole practitioner. If for a brief period of his practice he was a salaried employee of Barraket Kemp & Strang rather than a partner, it made little difference to his experience.

35 The Fair Trading Act 1987, s 42(1) provided that a person should not, in trade or commerce, engage in conduct that was misleading or deceptive or was likely to mislead or deceive. I am not satisfied that Mr Noss made the representation that he was a partner of the solicitor’s firm and am not satisfied that he was in breach of that provision. Furthermore, s 68(1) provided that a person who suffered loss or damage by conduct of another person that was in contravention of s 42(1) might recover the amount of the loss or damage by action against the other person or against any person involved in the contravention. The use of the word “by” in that provision connotes causation (Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 525). There was no specific evidence that Ms Smith relied upon the representation to her detriment.

36 Ms Smith alleged that Mr Noss told her that Central Law had received instructions in new matters each of which he expected would generate professional fees in excess of $100,000. Mr Noss denied making any such representation. He accepted that had he said so it would have been untrue. Ms Smith said that Mr Noss had made this assertion on two or three occasions prior to July 2000.

37 I am not satisfied that, had such statements been made, they played any part in inducing Ms Smith to enter partnership with Mr Noss. Ms Smith had to find assistance in handling the thousands of files that arrived from NRMA and she had to find a way to finance the payment of filing fees of $56 per matter. She initially rejected the idea of a partnership with Mr Noss but changed her mind after a weekend visit to the Blue Mountains and was thereafter anxious that the partnership should be established as quickly as possible.

38 In August 2000 Ms Smith asked Ms Rydstrand why Mr Noss was stalling and what was stopping him from going ahead with the partnership. She asked Ms Rydstrand to talk to Mr Noss and convince him to go ahead. Ms Smith denied that she had this conversation with Ms Rydstrand but Ms Rydstrand was not cross examined on this basis. I have no reason to reject her evidence.

39 There was no evidence that the urgency with which Ms Smith approached the formation of the partnership once she decided that it should go ahead was in any way related to representations as to the size of Mr Noss’s practice. Nor was there any evidence as to how the alleged representations played a part in her decision. In the absence of evidence of her decision making process, I conclude that Ms Smith failed to overcome her onus of establishing a causal connection between the alleged representations and her decision to enter partnership.

40 Ms Smith alleged that Mr Noss told her he had extensive experience in developing commercial legal practices and had built considerable goodwill in his name. Mr Noss denied he made such a representation but said had he done so it would probably have been true. This allegation falls into the same category as those discussed above. I am not satisfied that the representation, if made, played any part in Ms Smith’s determination to enter into partnership.

41 Ms Smith alleged that Mr Noss told her Central Law had gross earnings of between $200,000 and $300,000 per annum and that the partnership would have gross earnings of between $200,000 to $300,000 from clients introduced by him. Mr Noss’s tax returns for the years ended 30 June 1998 to 30 June 2000 were in evidence. They revealed annual fees between approximately $133,000 and $187,000.

42 Mr Noss agreed that he made the representation and said it was true. He said his tax returns had nothing to do with his gross fees. I do not accept that evidence. The income tax returns showed the figures as total business income from which business expenses were deducted. However, for the reasons discussed above I am not satisfied that Ms Smith placed reliance upon the representation in making her decision to enter into the partnership.

43 Ms Smith alleged that Mr Noss told her he had an overdraft facility of $50,000 that would be available for use by the partnership and would be substantially undrawn. Mr Noss agreed that he represented to Ms Smith that he expected his overdraft to be right down when the partnership commenced. He agreed it was not but said that was not his fault.

44 Ms Smith alleged that Mr Noss told her he was on the board of a Sutherland Shire newspaper that carried advertisements for Central Law free of charge and the newspaper would carry advertisements for Noss & Smith Partners, Lawyers free of charge.

45 Mr Noss denied he said he was on the board of a Sutherland newspaper. He said he told Ms Smith that a newspaper carried advertisements for Central Law free of charge and he said that if the partnership worked for them on a contra basis they would carry advertisements for the firm free of charge. He denied he gave an unqualified assurance that this would happen. He said it was a small newspaper that could not afford to do things for nothing.

46 Finally, Ms Smith alleged that Mr Noss told her that he did not have any outstanding claims against him in his capacity as a solicitor. Mr Noss said that he told Ms Smith of an outstanding claim. It was put to him that that was untrue and he denied it.

47 With respect to all the representations Mr Noss was alleged to have made, I am of the view that Ms Smith failed to establish a causal connection between them, if made, and her entry into partnership with Mr Noss. In my view it is insufficient for the purposes of the Fair Trading Act 1987, s 68(1) simply to assert, as Ms Smith did, that had she known that all the representations were false, or that Mr Noss did not have reasonable grounds for making the representations, or a majority of them, she would not have proceeded to enter into the partnership. The effect the representations had on Ms Smith needed to be analysed to enable the court to form a view as to the reliance placed on them by her.

48 In my judgment Ms Smith has failed to establish any entitlement to the relief claimed in her amended statement of claim.

49 By his amended cross claim, Mr Noss made counter allegations of misrepresentations by Ms Smith. He alleged she told him she had overdraft facilities of $90,000 and $20,000 that would be available to the partnership to fund disbursements and other expenses. He alleged that the representations were false because the facilities were due to expire in the near future.

50 Mr Noss alleged that Ms Smith told him there were no liabilities of Smith Partners other than $80,000 and minor outstanding accounts. He alleged that to be a false representation.

51 Mr Noss said Ms Smith told him that the cash flow of her firm was sufficient to pay accounts and conduct the NRMA work other than paying filing fees and service fees. He alleged that representation to be false.

52 Mr Noss alleged that Ms Smith failed to inform him that there were delays in obtaining hearing dates for NRMA matters that would seriously affect the cash flow of the partnership.

53 Mr Noss alleged in his pleading that he relied upon the representations in entering into the partnership and thereby suffered loss and damage.

54 A similar analysis applies to this part of Mr Noss’s case as applies to the case of Ms Smith. There was no direct evidence from Mr Noss as to the effect the alleged misrepresentations had in his decision to enter into partnership with Ms Smith.

55 Furthermore, the account of the partnership to be taken by a Master will include fees received by Ms Smith after the dissolution of the partnership attributable to work in progress during the partnership together with any outstanding work in progress when the account is taken. The same will apply to the receipt of fees by Mr Noss and any remaining work in progress attributable to the partnership. That exercise is likely to return to Mr Noss income in excess of that which he was earning before he entered into the partnership. If that is so, he suffered no loss or damage as a result of the alleged misleading or deceptive conduct.

56 In his amended cross claim, Mr Noss also alleged that Ms Smith terminated the partnership for improper personal financial advantage and was thereby in breach of fiduciary duty. His case was that Ms Smith knew prior to her termination of the partnership that NRMA would allow interim billing and she brought the partnership to an end in order that she might take the full benefit of the interim tax invoices she rendered immediately following her termination of the partnership.

57 Ms Smith denied knowledge that NRMA would accept interim billing before she terminated the partnership. She said the next day she spoke with a person she knew at NRMA and obtained permission to interim bill.

58 It was submitted on Ms Smith’s behalf that the partnership, being one at will, could be terminated by either party at any time and there was no supervening fiduciary duty which disentitled her from taking that course, regardless of her motivation.

59 I do not have to decide this issue because if the accounts are taken so as to include fees received by both parties subsequent to the dissolution of the partnership attributable to its activities and account is taken of any residual partnership work in progress held by each party, there is no additional loss or damage attributable to the alleged breach of fiduciary duty as counsel for Mr Noss conceded, in my view, correctly.

60 The consequence is that Mr Noss is not entitled to any of the relief claimed in his amended cross claim.

61 I will hear the parties on the appropriate terms of the orders for the taking of accounts and any inquiry by the Master and the orders otherwise dismissing the proceedings. I will hear the parties on costs. I direct the parties to bring in short minutes of orders reflecting these reasons.

**********

Last Modified: 07/05/2004