Old v Hodgkinson; Old v McInnes

[2009] NSWSC 1160

CITATION:	Old v Hodgkinson; Old v McInnes [2009] NSWSC 1160
HEARING DATE(S):	14/08/08; 23/02/09; 24/02/09; 26/02/09 and on the papers
JUDGMENT DATE :	3 November 2009
JURISDICTION:	Equity Division
JUDGMENT OF:	Young JA
DECISION:	Rulings as to how accounts should treat goodwill and costs of winding up.
CATCHWORDS:	PARTNERSHIP [8]- Agreement in principle for partnership with additional partner- agreement never materialized- whether additional partner entitled to remuneration. PARTNERSHIP [37]- Winding up- series of partnerships- how goodwill to be treated- how costs of referee to settle accounts to be paid. - RESTITUTION [22]- Quantum meruit- where no contract but understanding between parties that a party will be reasonably remunerated for providing benefit to the other party- where partner in partnership at will received share of profits on basis that other partners thought he would pay for the goodwill of the former partnership under an anticipated contract- whether use of goodwill to produce income is benefit.
LEGISLATION CITED:	Civil Procedure Act 2005, ss 56, 57, 58, 59, 60 Partnership Act 1892, s 40
CASES CITED:	Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101 Aon Risk Services Australia Pty Ltd v Australian National University [2009] HCA 27; 82 ALJR 951 Atwood v Maude (1868) LR 3 Ch App 369 Australian Securities and Investments Commission v Atlantic 3 Financial (Aust) Pty Ltd [2004] QSC 133 Automatic Fire Sprinklers Pty Ltd v Watson [1946] HCA 25; 72 CLR 435 Brenner v First Artists' Management Pty Ltd [1993] 2 VR 221 Burns Philp Investments Pty Ltd v Dickens (No 2) (1993) 31 NSWLR 280 Clifton v Palumbo [1944] 2 All ER 497 Computer Machinery Co Ltd v Drescher [1983] 1 WLR 1379 First Church of Christ, Scientist, Brisbane v Ormlie Trading Pty Ltd [2003] QSC 351 Ford v Perpetual Trustees Victoria Limited [2009] NSWCA 186 Hamer v Giles (1879) 11 Ch D 942 Independent Grocers Co-Operative Ltd v Noble Lowndes Superannuation Consultants Ltd (1993) 60 SASR 525 Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 Meekin Enterprises v Gersbach (NSWSC, MH McLelland CJ in Eq, 6 August 1997, unreported) Moray v Lane (NSWSC, Allen J, 26 February 1993, unreported) Muschinski v Dodds [1985] HCA 78; 160 CLR 583 Najjar v Haines (1991) 25 NSWLR 224 Pavey & Matthews Pty Ltd v Paul [1987] HCA 5; 162 CLR 221 Pit v Cholmondeley (1754) 2 Ves Sen 565; 28 ER 360 Re Reiter Brothers Exploratory Drilling Pty Ltd (1994) 12 ACLC 430 Schreiber v Dinkel (1886) 54 LT 911 Sinclair v Rankin (No 2) (1908) 10 WAR 126 Symphony Group plc v Hodgson [1994] QB 179 Thompson v White (2006) 13 BPR 24,537 Tito v Waddell (No 2); Tito v Attorney-General [1977] Ch 106 Toyota Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106 Venetian Nominees Pty Ltd v Conlan (1998) 16 ACLC 1653 Yeoman's Row Management Ltd v Cobbe [2008] 1 WLR 1752
PARTIES:	1063/04: Fraser Patison Old (P) Hugh Rudyard Hodgkinson (D1) Kenneth John McInnes (D2) 4064/04: Fraser Patison Old (P) Kenneth John McInnes (D1) Hugh Rudyard Hodgkinson (D2) Andrew Hugh Jenner Wily (Referee)
FILE NUMBER(S):	SC 1063/04; 4064/04
COUNSEL:	R D Marshall and B A Arste (P) J Glissan QC and M Condon (D) T Hale SC (Referee)
SOLICITORS:	Horowitz & Bilinsky Solicitors (P) Griffith Nicholson Lawyers (D) McLachlan Chilton (Referee)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

YOUNG JA

Tuesday 3 November 2009

1063/04 – OLD v HODGKINSON
4064/04 – OLD v McINNES

JUDGMENT

1 HIS HONOUR: This is, hopefully, the final episode of a dispute amongst three former partners who practise as patent attorneys.

2 I need to set in context the dispute and the core points to be covered in these reasons.

3 I endeavoured to have the issues between the parties settled by a referee, Mr Andrew Jenner Wily, one of the Official Liquidators. The reasoning behind this decision is set out in my decision of 3 December 2004 coded [2004] NSWSC 1202.

4 For completeness I should cite my subsequent judgments in these sets of proceedings. I gave two judgments dealing with procedural matters which are uncoded, one on 17 August, 2005 and the other on 20 May, 2008. I gave reasons for declining to adopt the referee’s approach to goodwill on 9 July 2008 (coded [2008] NSWSC 697).

5 On 24 February this year I gave reasons in draft on the question of the referee’s costs. I intended, as the transcript of 23 February discloses, to produce a final version at the end of the then current argument. This did not occur partly because some parties wished to make additional submissions. I will refer to the draft as “the referee’s costs judgment”.

6 Paragraph 70 of that judgment noted that, because of lapse of time some submissions might have been overlooked and I invited the parties to tell me if that had occurred.

7 Further submissions were made which I deal with later in these reasons. However, it is alleged by some that some of these submissions go beyond dealing with omissions and miscalculations and seek to re-examine what was already decided in the referee’s costs judgment.

8 What I consider to be the correct methods of procedure is to deal with the live issues argued on 23 February 2009 and following, then consider the submissions in respect of the referee’s costs judgment and then state in final form the referee’s costs judgment.

9 The “live” motions currently before me include motions to enforce or reject parts of the referee’s report delivered on 19 March, 2007. For the record, in 1063 of 2004 I have before me the notice of motion of Mr Old filed 31 October 2007 re adoption/variation of the referee’s report, amended notice of motion by Mr Old of 16 May 2008 and further motion by Mr Old filed 12 February 2009 for part rejection of the referee’s report.

10 In 4064 of 2004, I have the notice of motion of Mr Old of 31 October 2007 for adoption of the referee’s report, notice of motion by Messrs Hodgkinson and McInnes for adoption/rejection of the report and notice of motion of Mr Old of 17 February 2009 for amendment of pleadings.

11 The following facts are taken from the referee’s report and which I believe are not in dispute

12 On or about 1 May 2000, Messrs Old (“FPO”) and Hodgkinson (“HRH”) entered into partnership under the name Hodgkinson and Old trading as Hodgkinson & Co (“HRH & Co”). Prior to that date, Mr Hodgkinson had been a sole practitioner.

13 FPO paid HRH $500,000 for a half share in HRH’s practice.

14 On or about 1 July 2000, Mr McInnes (“KJM”) joined the partnership as a salaried partner. The partnership was thereafter known as “Hodgkinson Old & McInnes” (“HOM”).

15 In December 2001, FPO commenced proceedings against HRH and KJM for dissolution of the HRH & Co partnership (proceedings 5771/2001). The court declared on 7 December 2001, that that partnership was dissolved from 3 December 2001.

16 As from 1 July 2002 the three men were members of a new partnership, KJM now being a one third equity partner. This partnership was known as “Hodgkinson Old & McInnes” (“HOM2”).

17 None of the partnerships referred to were the subject of any executed partnership agreement.

18 HOM2 was dissolved on or about 30 June 2003.

19 About the time of the dissolution of HOM2, FPO removed and retained the client files principally those on which he had been working and HRH and KJM took control of the remainder of the HOM2 files.

20 The new entity conducting business for FPO was the Fraser Old & Sohn Unit Trust (FOT).

21 The new entity conducting the business of HRH and KJM was a partnership trading as Hodgkinson & McInnes (“HMI”) and, subsequently, Hodgkinson McInnes & Pappas (“HMP”).

22 The present tranche of the proceedings commenced on 23 February 2009 and continued through to 26 February 2009. Mr R D Marshall and Ms B A Arste appeared for FPO, Mr J Glissan QC and Mr M Condon appeared for HRH and KJM. For simplicity, I may refer to FPO as “the plaintiff” and the other two gentlemen as “the defendants”.

23 On 26 February, 2009 Mr Zwar, solicitor, appeared for the referee. He sought and obtained time to make written submissions in respect of the referee’s costs judgment.

24 The matters that I need to determine are:

1. (In 1063 of 2004) should the court reject the referee’s decision that FPO should be liable for $149,931 for a breach of fiduciary duty on the basis that such amount is calculated by reference to a goodwill value?

2. (In 4064 of 2004) should FPO be permitted to amend his statement of claim to include:

(a) additional particulars of the formation of the contract; and
(b) an alternative claim in quantum meruit?
And, if leave to amend is given, should such claims be allowed taking into account KLM’s defences?


3. Whether I should make any adjustment to the costs I allowed the referee in my February 2009 judgment.

4. I will then publish the referee’s costs judgment in final form.

5. Finally, I will conclude with reference to the orders that need to be made.

25 1. In their amended cross-claim of 12 November 2004, the defendants pleaded in paragraphs 23–25 that FPO had, before the termination of the HOM2 partnership, abstracted part of the goodwill of that partnership to himself and in paragraphs 32-33 that FPO had obstructed the winding up of that partnership.

26 Paragraph 37 of the cross-claim alleged that these activities were in breach of contract or fiduciary duty and sought damages or an account of profits.

27 In his report, paragraph 2.3, the referee found breach of fiduciary duty.

28 The referee considered that the amount of equitable compensation for this breach to be taken into account when adjustments were made included $142,931 being the amount of goodwill of the HOM2 partnership which the referee held had been taken over by FPO. The referee reached this figure after valuing the goodwill at $909,580.

29 The only question for me is whether the equitable compensation should or should not include goodwill.

30 In my judgment [2008] NSWSC 697, I said that as goodwill had no existence except as an adjunct to the relevant business, the referee was not justified in including it in the partnership accounts.

31 FPO says that it should follow that the adjusted goodwill factor in the figure allowed for equitable compensation also should not be allowed.

32 In my view this conclusion does not follow. Part of the damage by FPO’s breach of fiduciary duty occurred whilst the HOM2 partnership was still in existence. The mere fact that, on dissolution it ceased to exist does not mean that at the time of the breach of duty it had no value.

33 However, the breach occurred very close to the obvious finish of the partnership. Some discount should have been made in the value of the goodwill abstracted because of the chances of its becoming valueless in any event.

34 There was little argument put on this proposition. Doing the best I can I consider that one-third should have been discounted for this chance.

35 The referee should thus have taken a goodwill factor of $95,288.

36 2. Proceedings 4064 of 2004 commenced in the District Court as 3269/03. The plaintiff is FPO and the defendant KJM.

37 The statement of liquidated claim claimed $123,815 for debt since May 2003 being monies owing for the purchase of one-third of the plaintiff’s half interest in a partnership. Particulars were given that the plaintiff relied on a Memorandum of Understanding dated 18 July 2002 (referred to hereafter as “the MOU”) and a conversation of May 2003 in which conversation KJM acknowledged the debt.

38 FPO’s draft further amended statement of claim pleads in paragraphs 5-10:

“5. On about 1 July 2002 the First Defendant on the one hand agreed with the Plaintiff and the Second Defendant on the other that the First Defendant would pay an amount of money (‘the purchase price’) to join the Plaintiff and the Second Defendant in partnership in a new firm of patent and trademark attorneys to be called ‘Hodgkinson Old McInnes’ (‘the Agreement’).
Particulars of the Agreement
(a) The Agreement, as far as it is expressed, is partly oral and partly in writing. So far as it is in writing, it is evidenced by a document signed by the parties and dated 18 July, 2002 entitled ‘Memorandum of Understanding’ and as far as it is oral it arises from a conversation had between the parties on 23 February, 2002 at the firm’s offices during a meeting with Sam Beasley and as set out in paragraph 6 of the Plaintiff’s Affidavit sworn 1 August , 2008 and filed in proceedings number 1063 of 2004 such conversation also confirmed in the minutes of meeting typed up by Mr Beasley and found at Exhibit ‘KJM-2’ to the Affidavit of Mr McInnes sworn 14 September, 2004 and signed on the last page by the parties.
(b) The amount to be paid by the First Defendant to the Second Defendant and the Plaintiff equally was an amount calculated in accordance with the provisions of clause 5 of the Memorandum of Understanding;
(c) The commencement date for the partnership was 1 July 2002;
(d) The partnership was a partnership determinable at will.
6. On about 29 May 2003 the Plaintiff gave notice of the dissolution of the partnership with effect from the end of 30 June 2003.
7. Pursuant to clause 5 of the Memorandum of Understanding the First Defendant was to pay an amount equal to about $400,000.00 to the Second Defendant and the Plaintiff equally.
8. In breach of the Agreement the First Defendant has not paid any amount to the Plaintiff due pursuant to clause 5 of the Memorandum of Understanding.
9. In breach of the Agreement the First Defendant has not paid any amount to the Second Defendant due pursuant to clause 5 of the Memorandum of Understanding.
10. In the alternative, and in the event that the Agreement is found to be void for any reason including uncertainty, the Plaintiff claims in quantum meruit against the First Defendant.”

39 Paragraph 10 was only added when the motions commenced before me on 23 February 2009. Its inclusion is said to have been prompted by the amendments to the defence in 2007. It was resisted by the defendants. However, I indicated that I would allow it on the basis that once all the relevant facts were before the court, I would permit the defendants to reopen or otherwise counter any element of surprise.

40 The proposed amendment claims that on or about 1 July 2002, KJM agreed to join the other parties in partnership and would pay the plaintiff an amount of money for so joining. The contract was said to be partly oral and partly in writing. The oral part was said to be at a meeting of 23 February, 2002 and the agreement was evidenced in the MOU. The claim was for $200,000.

41 However, in submissions, the claim was put a little differently. Rather than relying solely on the conversation of 23 February 2002, FPO alleged that a contract can and should be inferred from the conduct of the parties that KJM pay for his entry into the HOM partnership as an equity partner.

42 FPO says that the contract arose on 1 July 2002 whereby it was agreed that:

(a) KJM was accepted as an equity partner;
(b) KJM would pay FPO and HRH for entry into the partnership;
(c) payment was to be:
(i) calculated in accordance with the “fair dinkum” profit formula, such expression having a meaning that is reasonably able to be determined; and
(ii) subject to a vendor finance regime with repayments being made over 10 years, the first 2 years being interest only with interest being charged at the NAB prime rate.

43 There are 21 defences to the claim as originally framed, though, needless to say, there is overlap. Essentially they are, apart from denials:

(a) the MOU was signed as a representative of Dafuzu Pty Ltd and not otherwise;
(b) the MOU was not intended to have contractual effect;
(c) the MOU is void for uncertainty;
(d) the MOU is vitiated by misrepresentation;
(e) the MOU has been rescinded;
(f) the MOU was subject to an unfulfilled precondition that FPO would act responsibly in the partnership;
(g) the MOU was subject to an unfulfilled precondition that the contemplated trust deed in some form or other would come into effect;
(h) on its true construction, FPO was only to receive the money if the trust deed came into effect;
(i) on its true construction the money was only payable if the partnership subsisted for ten years, which did not occur;
(j) the only monies due and payable (if any) was the first year’s interest on the subject sum.

44 The additional defences foreshadowed to the amended claim are:

(k) KJM did not receive any benefit;
(l) if there was any benefit received it was received by someone other than KJM (I assume Dafuzu is meant);
(m) it would not be just nor conscionable to allow a restitutionary claim in the circumstances;
(n) change of position.

45 The pleadings covered such wide ground that I would almost be justified in just dealing with the case on the basis that the plaintiff makes all available claims to the money and KJM raises all possible defences.

46 The only hesitation I have about treating the matter this way is that the plaintiff has never pleaded that his claim is in equity for the unconscionable retention of profits on the basis that KJM was an equity partner without paying for “his share in the partnership”. As it could be argued that this claim was in the ring, I thought it best to advise counsel of the possibility of such a claim being considered and seek further submissions if counsel considered it necessary. My Associate did this.

47 Counsel took time to reply, but this was understandable in the circumstances.

48 Mr Marshall and Ms Arste made submissions that should I find no contract or “quasi contract”, I would be entitled to find for FPO on the windfall equity discussed by Deane J in Muschinski v Dodds [1985] HCA 78; 160 CLR 583 at 619-621.

49 Counsel put that, having been admitted into HOM and thereafter having received the benefit of being an equity partner, it would be unconscientious for KJM to retain the benefit received without paying the premium.

50 KJM’s version of the circumstances under which KJM became an equity partner appear from KJM’s affidavit of 17 December 2008 and the cross examination thereon.

51 KJM says that on 7 December 2001, he accepted a long standing offer to take up an equity partnership with FPO and HRH. He says that on that day he decided against his previous thoughts to go and live in Spain and instead act as an honest broker between HRH and FPO.

52 7 December 2001 was also the day on which consent orders were made in the first lawsuit between HRH and FPO (see [15] above).

53 KJM says that he was only interested in a partnership structured as a unit trust. This was a prerequisite to further negotiations.

54 On 23 February 2002, a meeting was held at which Mr Sam Beasley of FMRC Legal took the chair. All three parties were present. The meeting lasted about six hours. The meeting was apparently held for two principal reasons. First, to discuss the admission of KJM as an equity partner and secondly to consider problems that then existed between HRH and FPO.

55 The minutes of the meeting record 11 resolutions. Only the first four are relevant to the present issues. They are as follows:

“ Resolution 1 – Future Business Structure
1.1 To explore the use of a unit trust as the vehicle for the business structure in the future
KJM is to
Obtain a Unit Trust document for discussion
Distribute the Cropper Parkhill Trust and the KMI Holdings Trust
Distribute copies of Spruson’s employment contracts
FPO is to provide copies of the Megalong Trust
1.2 The Trust Deed is to be supported by a ‘Policy Manual’ which would be an indexed manual of policies agreed and minuted at partners meetings.
Resolution 2 – Profit sharing

2.1 It was agreed that the profit of the firm is to be distributed in proportion to the share/unit holding.
2.2 A Partner may elect to take their share of profits in different forms (salary, superannuation, etc) provided they are tax-deductible and cash flow is evenly maintained or as otherwise agreed by the unit holders from time to time.
Resolution 3 - goodwill
3.1 There is continued agreement that the firm accepts the concept of goodwill.
3.2 Goodwill is to be calculated as twice the average ‘fair dinkum’ profit over the last three years.
Resolution 4 – Ken McInnes’s entry to the partnership
4.1 Agreed in principle Hugh Hodgkinson and Fraser Old will sell one-third interest equally to Ken McInnes to result in one third each.
4.2 The conditions of entry are to be negotiated no later than the 28 ^th of February, 2002.”

56 FPO says in his affidavit of 1 August 2008, that he said to KJM at the meeting of 23 February:

“As you know, Hugh and I have adopted the Spruson & Ferguson formula for entry and exit from the firm. That also goes to any partial sale. By that I mean Hugh and I accept that goodwill is to be included as an asset of the firm and that goodwill is to be calculated at the time of each transaction on the basis of twice the average of ‘fair dinkum’ profit over the last three years. By ‘fair dinkum’ profit I mean the accounting profit augmented to take in amounts taken in a tax beneficial way, rather than profit drawing, for example motor vehicle leases. Unfortunately, I am not able to give you a buy-in figure at the moment, because the accounts are still up in the air and unresolved. In regard to terms, Hugh and I would be happy to allow you to pay the purchase price over 10 years by quarterly instalments. You would need to pay interest on that. I do not think we should have a fixed rate like they have at Sprusons. My suggestion for the interest rate would be the prime rate of the firm’s banker, the NAB. As the payments would be made quarterly, the interest rate could be calculated at the beginning of each quarter. As to timing, it would be best to commence on 1 ^st July this year.”

57 The reference to “Sprusons’ or ‘Spruson & Ferguson” is to a leading firm of patent attorneys with which all parties were familiar.

58 FPO says that HRH said that he agreed and that KJM said:

“That is alright by me. I would be happy to buy equity from you two on that basis. However, I would like to think a bit more about the interest rate, if I could.”

FPO says that, later, KJM told him the interest rate was accepted.

59 However, KJM says that there was little discussion as to the term “fair dinkum profits” and that the major topic was whether there should be any goodwill at all. He says that he thought that the details would be worked out in future discussions and that as at 23 February 2002 he had no idea as to what profits were earned by the actual partnership as opposed to associated enterprises.

60 KJM agreed in cross-examination that the concept plan was that he would need to pay some money for his trust or himself to become an equity partner in the business.

61 The partners had each formed a trust to handle some of their business affairs. HRH’s trust is known as the Hodgkinson Unit Trust, the trustee being Rakobit Pty Ltd, FPO’s trust is the Megalong Trust, KJM has a trust whose trustee is Dafuzu Pty Ltd.

62 The concept being considered at the relevant time was that a unit trust would be set up by deed and that that unit trust be the vehicle through which the practice would be conducted and in which each “partner” would have an equal number of units.

63 A draft trust deed was produced on 25 June 2002 with the intention that it would operate from 1 July 2002. However, the draft was not acceptable to HRH who feared being outvoted.

64 Each of the parties was to put $100,000 capital into the partnership. KJM or an entity associated with him duly deposited his $100,000.

65 FPO went overseas in July 2002 and the parties understood that details about their relationship would be dealt with on his return about 3 August. KJM was also overseas for substantial periods in the second half of 2002.

66 The three parties signed a memorandum of understanding (“MOU”) in connection with their new partnership. The MOU bears date 18 July 2002, however FPO says that he signed it on a later date, probably early August 2002.

67 The MOU relevantly provides as follows:

“ Relationship between Hugh Hodgkinson (HRH), Fraser Old (FPO) and Ken McInnes (KJM) on and from 1 July 2002, in respect of the business entity known as Hodgkinson Old McInnes (HOM):
1. The partnership between HRH and FPO in HOM ceased on 30 June 2002;
2. HRH, FPO and KJM agreed that on and from 1 July 2002 they would form an equal partnership at will, to continue until execution of a Trust Deed to regulate the activities of a business carried on in the name HOM;
3. In the event that a Trust Deed was not executed promptly, the partnership at will would continue until the execution of the Trust Deed;
No agreement has been made as to what would occur if no Trust Deed was executed. As at today’s date, 18 July 2002, a draft Deed has been prepared but not finalized or executed. The terms of material provisions have not yet been finalized;
4. Each of HRH, FPO and KJM agreed prior to 30 June 2002 to contribute, and on or about 2 July 2002 in fact contributed, the sum of $100,000 by way of working capital;
This sum totalling $300,000 was placed into a bank account newly opened with National Australia Bank, in the name of Hodgkinson Old McInnes UT. The contributions were in anticipation of the execution of a Trust Deed;
5. In respect of goodwill, KJM agreed prior to 30 June 2002 to pay an amount to HRH and FPO equally being one third of a sum representing twice the average profit over the last 3 years of HOM and its predecessor in business HRH & Co – an amount expected to be in the vicinity of $300,000-$400,000;
The terms of the payment were to be spread over 10 years, the first 2 years to be interest only at a nominated bank rate. Thereafter, the annual repayments were to comprise equal capital repayments and simple interest;
6. Agreement was reached prior to 30 June 2002 that no payment was required from KJM for the fixed assets and undertakings of the partnership carried on in the name HOM (whether owned directly by HRH and FPO, or by Rakobit);
No agreement was made orally or in writing as to the basis of HOM’s occupancy of premises at 20 Alfred Street Milsons Point. However it was agreed that the business HOM would continue to pay the rent of the tenant Rakobit (reviewed as at 30 June 2002) direct to the Landlord monthly. The first payment due in advance for the period commencing 1 July 2002 was paid out of the new HOM/UT bank account;
7. In respect of creditors and debtors of the pre 30 June 2002 partnership it was agreed:
7.1 That work in progress to 30 June 2002 would be billed to the greatest extent possible (by agreement debit notes were prepared up to 7 July 2002), and that those billings when paid would be divided equally between HRH and FPO;
7.2 That HRH and FPO would be responsible for creditors up to and including 30 June 2002, confined to those creditors who had rendered their bill by that date;
8. Prior to 30 June 2002 Rakobit (Trustee for the Hodgkinson Family Trust – HRH and CLH trustees) employed all HOM staff and owned or leased the majority of equipment;
It was agreed that subsequent to 30 June 2002 staff be paid out of the new HOM/UT bank account and this in fact occurred on the first pay date, namely 16 July 2002 (at this stage solely funded by the contributions of $300,000 referred to in paragraph 4).
It was also agreed that Rakobit’s involvement in the day to day business of HOM would cease and be paid out of the HOM/UT account so that all liability to Rakobit in respect of its prior provision of services to HOM would cease.
It was agreed that Rakobit would become a unit holder in the proposed trust if HRH so required;
9. Other pertinent matters of agreement, if any, should be incorporated.
Dated 18 July 2002 ”

(It was signed by all three partners).

68 No such unit trust deed was ever drafted or executed following the MOU.

69 However it is clear that there was at least a partnership at will between the parties as from 1 July 2002.

70 FPO was cross-examined on the shifting basis of his claim in contract. At first the claim was made that the contract was in the MOU, later the February 2002 meeting is brought into the picture and, indeed, in cross-examination, FPO asserted that that is when the contract was made.

71 On 2 July 2002, FPO wrote a letter to HRH. The letter was in handwriting on the letterhead of the Megalong Trust. Its text was as follows:

“Dear Hugh,
You will recall that on 1 ^st May 2000 I paid you $500,000 for a half share in your then practice H R Hodgkinson & Co.
In our discussions before that date I said to you that I was prepared to pay a goodwill figure of twice the profit averaged over 3 years as this was the basis on which the goodwill of my former firm (and your father’s and half brother’s firm) had been calculated over many years. You said that I should discuss financial matters with your internal accountant Ms Di Chisholm.
Ms Chisholm told me in early 2000 that the turnover of your firm was $3,000,000 pa and that the profit was $500,000 pa. On that basis I paid the $500,000.
You will recall that after several months I came to you and pointed out that if we were supposed to each be earning a profit share of $250,000 pa this approximated to drawings of $20,000 per month each. However, the drawings had at that time (and since) been nowhere near this amount. This discussion lead to Stephen Guthrie’s visit to Ms Chisholm’s home. At that time you did not challenge my assumption of an income of $250,000 pa each.
Arising from our discussions as to valuation of goodwill for the admission of a further equity owner of the practice and the proposed unit trust, you have agreed to the ‘twice profit averaged over 3 years’ formula.
You now have before you figures prepared by Stephen Guthrie which show the calculated goodwill value at various different dates. These figures clearly show that the goodwill of the firm at both June 1999 and June 2000 was just under $800,000. So I should have paid approximately $400,000 not $500,000.
In my view I have been mislead as to the value of the business I was buying into.
If you are prepared to discuss this matter with me, I have a proposed solution which would at least save you having to write a substantial cheque at this time.
I am particularly concerned that at our discussions at the solicitor’s office yesterday morning relating to the draft unit trust deed, you appear to have gone back on topics which I had thought were previously agreed.
If you do not agree with the above calculations, I propose that the matter be mediated to avoid continuing litigation.
Please reply within 7 days.”
(Signed F P Old)

72 Mr Old was strongly cross-examined on that letter. He was taxed with the fact that the letter merely mentioned “profit” as the focus for the calculation of goodwill not calculated profit or “fair dinkum profit”.

73 The first question to tackle is whether there was any contract or whether everything was dependent on the contemplated trust deed being executed.

74 KJM denies the conversation that FPO says took place on 23 February 2002. However, the minutes which were signed by all parties disclose that something like what FPO says he said must have been said.

75 However, the words were said during negotiation and the parties contemplated further documentation. I would not infer that they constituted a binding agreement.

76 The MOU does not use the term “fair dinkum” profit, merely “profit”.

77 I do not consider that this is vital. The word “profit” is a nebulous term and it may very well be construed in the circumstances of this case as “fair dinkum” profit as that appears to be the way in which all parties were accustomed to think of profit.

78 What is significant about cl 5 in the MOU, however, is that it recites that KJM has already prior to 30 June 2002 agreed to pay an amount to FPO of one-sixth of the average profit over the then past three years.

79 As I have noted, FPO’s grounds for saying that there was a contract have shifted over the years.

80 In their final submissions, FPO’s counsel opted for saying that this was one of those cases where the court may not be able to find a definite offer and a definite acceptance, but, when one looked at all the facts and circumstances, the parties must have reached a binding contract. They cite the decision of the Court of Appeal in Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 at 11,117-8.

81 This was wise because, as the evidence abstracted above shows, the precise terms of the contract, if there be a contract, keep changing albeit in minor, though significant, respects.

82 It must be remembered too that the mere fact that parties come to a common mind on the key terms of their bargain may well be insufficient in the circumstances for the court to find that they have entered into a contractual regime.

83 The reason for this was explained by Lord Greene MR in giving the judgment of the English Court of Appeal in which Finlay & Morton LJJ agreed in Clifton v Palumbo [1944] 2 All ER 497 at 499:

“When parties are beginning to negotiate a transaction of this magnitude it is common experience—and, indeed, it is only business—to find that the first thing they begin to think about is the price…. The use of the word ‘agree’ in such a context may or may not involve a contractual result…. if you say that the price has been agreed when the contract is being negotiated, you do not use the word ‘agree’ in the sense that any binding contract has been entered into. All you mean is that a particular element in the contract you are negotiating has been decided.”

84 Again, authorities have pointed out that agreements in principle are not binding contracts. The unreported judgment of Philippides J in First Church of Christ, Scientist, Brisbane v Ormlie Trading Pty Ltd [2003] QSC 351 at [16] [BC 200306174] collects a series of observations on the nature of the agreement in principle which justify the summary in the previous sentence.

85 Of course, there can be cases where parties have been held to be in a contractual regime even though some aspects of their contract have not yet been settled; see eg Toyota Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106 at 178; Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101 and Thompson v White (2006) 13 BPR 24,537 at 24,556-7 [100].

86 No-one argued that this unusual situation had arisen in the instant case.

87 In his written submissions, Mr Condon points out a number of matters concerning the obligation of KJM to pay for goodwill which go to show that the parties never reached the stage of entry into a binding contract. The most significant of these were:

“(1) the remarks of the plaintiff at the partners’ meeting of 30 October 2002 that purchase of goodwill was still one of the outstanding issues for the unit trust;
(2) discussions at partners’ meetings even as late as 9 February 2003 about Capital Gains Tax if there was an out and out transfer of goodwill.”

88 In the present case, the circumstances, including those outlined above and most particularly the fact that the end in view was a unit trust regime which never came into being and the adjustments constantly being made by further discussions, lead me to the view that the parties never reached the stage of entering into a contractual regime in which KJM was to pay the other partners a premium.

89 Of course, the parties did enter into a partnership contract governing their partnership at will. However, that was a contract which is oral and basic, though it is fleshed out by the terms of the Partnership Act 1892, but does not provide any contractual right to the plaintiff to obtain a premium.

90 Because I do not find a relevant contract, it is not necessary for me to delve into detail as to whether the contract on KJM’s part was not made by him, but by Dafuzu. However, if it be relevant on appeal, I do not find that any contract was made by Dafuzu.

91 In coming to this view, I bore in mind that courts normally look for some strong indication that a contract ostensibly made by a person is in law being made on behalf of a related corporate party. I see no material in the evidence presented that would enable me to find that the alleged contract was made with Dafuzu. The only flavour of this possibility is that Dafuzu was to be the entity that would be the primary beneficiary of one third of the units in the head trust. This is not enough to establish the proposition.

92 I now turn to the claim in quantum meruit. The term is Latin and merely means “as much as it is worth” showing that the court’s main task, if the proper preconditions are established, is to assess what is reasonable remuneration for the work done or the like.

93 Quantum meruit is of two types. Type A is where there is a contract between parties whereby Y is to do something for Z, but either the remuneration Y is to receive is not specified or the specified formula fails. Type B is where Y does something for Z without any contract, but under circumstances where both Y and Z understand that Y will be reasonably remunerated.

94 Type A Quantum Meruit is often called contractual quantum meruit. Type B is often called Quasi-Contractual quantum meruit or quantum meruit under restitutionary principles.

95 If this is a case of quantum meruit, it is a case of type B.

96 Mason, Carter and Tolhurst, Restitution Law in Australia, (LexisNexis, Sydney, 2^nd ed 2008) at [914] note that whilst once type B quantum meruit claims were based on a fictional implied contract to pay, nowadays the court looks for circumstances to show that it was unjust for the defendant to receive or retain the benefit without rewarding the plaintiff.

97 The most common case of type B quantum meruit is where Y does work for Z’s benefit as was the situation in the seminal case of Pavey & Matthews Pty Ltd v Paul [1987] HCA 5; 162 CLR 221. However, the cause of action extends beyond this situation to all cases where Y provides benefit to Z on the understanding that Y would be remunerated or that Z accepted the benefit on that basis whether or not the services have any marketable end product; see Mason, Carter and Tolhurst, op cit at [935] and cases there cited.

98 Of course, if there is a contract between the parties, one cannot consider type B quantum meruit (see Mason et al at [909] based on authority such as Automatic Fire Sprinklers Pty Ltd v Watson [1946] HCA 25; 72 CLR 435 at 450).

99 Again, one must be very wary of employing a restitutionary cause of action where the parties have failed to make a contract where there was no impediment to them so doing; see eg Ford v Perpetual Trustees Victoria Ltd [2009] NSWCA 186 at [132].

100 Analogously, one cannot rely on equitable estoppel merely because one failed to reduce an understanding into an enforceable contract: Yeoman’s Row Management Ltd v Cobbe [2008] 1 WLR 1752.

101 The strongest way for the plaintiff to assert this cause of action is to say that KJM was paid one-third of profits of the partnership for one year and that the only reason that the plaintiff and HRH consented to this happening was because they understood that KJM would, in due course, become bound to pay for one third of the goodwill of the former partnership over ten years. Thus, there has been free acceptance of an incontrovertible benefit and it is just that KJM pay for it as much as it was worth.

102 Mr Condon pointed out that the only proposal about KJM acquiring goodwill was on the basis that he would pay for it over a ten year period with interest only in the first two years. This indicates that: (a) it was never any of the parties’ intentions that the whole “purchase price” of the goodwill would be due and payable after one year; and (b) that the parties had in mind a partnership which would last for at least ten years.

103 Thus, it is put that KJM never received the benefit of the class of goodwill over which the negotiations were being held. Indeed, he never received any transfer of goodwill.

104 Paragraph 10 of the further amended statement of claim is a bald assertion of quantum meruit. It is difficult to describe the claim for using the goodwill to produce income as a quantum meruit.

105 Indeed this is not a case of someone acquiring property or tangible benefit where it is just that he or she pay for it. he only benefit which KJM received was to be treated as an equity partner using the goodwill of the previous firm. I do not consider it a case of quantum meruit at all.

106 It is not the law that a person who receives a benefit during negotiations for a contract which negotiations do not reach their intended fulfilment is necessarily bound to pay for benefits received in anticipation of the contract.

107 In the present case, it was in the interests of all parties that the partnership business be continued while the negotiations were continuing. KJM paid a $100,000 contribution to capital and it was understood that he would be working as a partner and would receive one-third of the profits. There is nothing for the principle of quantum meruit type B to latch upon.

108 I might note the decision of the Western Australian Full Supreme Court in Sinclair v Rankin (No 2) (1908) 10 WAR 126 where a claim in quantum meruit for work done in reliance of the grant of a partnership was dismissed on principle.

109 A possible way out of this difficulty for KJM is to rely on the equity of windfall.

110 The present situation has great similarities to the case where a partnership continues to trade with the share of capital contributed by a former partner. That situation is partially dealt with by s 40 of the Partnership Act.

111 It must be noted that s 40 by its terms only applies to a partnership for a fixed term and the present case is dealing with a partnership at will. Nevertheless, as Lindley & Banks on Partnership (Sweet & Maxwell, London 1995) say in their 18^th ed (ch 25), this section so far as the field it covers is concerned represents the main thrust of the old authorities.

112 Before delving into this area, I should note that the standard text books on partnership (Lindley & Banks op cit [25.07] and Higgins & Fletcher, The Law of Partnership in Australia and New Zealand (Thomson Legal Asia Pacific, Sydney, (2007)) 9^th ed pp 261-2 [7.105]) say that one must not only distinguish between a premium and a contribution to capital (in the former the new partner pays the continuing partner, in the latter the payment is to the new firm), but there is also a distinction between a premium and a purchase of part of the goodwill. The distinction is between an amount to be let into the partnership and the value of an asset of the partnership.

113 However, whilst Mr Condon pointed out this distinction, he did not make any point of it. Mr Marshall submitted that the purchase of goodwill in the instant case must be treated as a premium.

114 In the case where the new partner had good cause for grievance about the continuing partner retaining the premium even though the partnership folded soon after the payment was made, equity applied principles that it is unconscionable to retain a windfall.

115 An instance of this principle is Atwood v Maude (1868) LR 3 Ch App 369 where there was a solicitors’ partnership for seven years. The plaintiff paid a premium, yet after two years, the other partner dissolved the partnership. The court returned a proportionate part to the plaintiff.

116 This case was considered by the High Court in Muschinski v Dodds at 620, where Deane J explained the decision by saying:

“…the principle operates in a case where the substratum of a joint relationship or endeavour is removed without attributable blame and where the benefit of money or other property contributed by one party on the basis and for the purposes of the relationship or endeavour would otherwise be enjoyed by the other party in circumstances in which it was not specifically intended or specially provided that the other party should so enjoy it.”

117 I should state here that the evidence indicates to me and I so find that the partnership did make a net profit in the financial year 1 July 2002-30 June 2003.

118 What evidence I have on the way profits were drawn suggests that they went to KJM rather than to Dafuzu.

119 In one sense, this case is the reverse to the usual fact situation in that KJM has enjoyed the right to the profits due to an equity partner, yet has not paid what was expected in order to gain those profits.

120 Again, this case could be tagged as an instance of the Ocean Island Equity (Tito v Waddell (No 2); Tito v Attorney General [1977] Ch 106 at 289 et seq) that in certain situations equity affixes a person who takes the benefit of a transaction with bearing its burden.

121 As I noted earlier, Mr Condon for HRH and KJM made further submissions in reply making strong protest against the court considering any equitable restitutionary claims on two grounds: (a) they were not pleaded; and (b) they would be doomed to failure.

122 FPO’s recent written submissions do not assert that this claim was pleaded nor is any amendment sought, nor is there any reason given as to why this alternate way of looking at the claim was not put forward earlier.

123 In my view, although the claims are widely framed, there is no hint of a claim in equity among them.

124 Mr Condon refers to the recent High Court decision in Aon Risk Services Australia Pty Ltd v Australian National University [2009] HCA 27; 83 ALJR 951 where the Court made it clear that cases are not to be delayed by late amendments even if costs are paid, but that the court must consider whether there is a sufficient reason consistent with a just resolution of the dispute to allow a change in position or amendment.

125 Although I am always reluctant to shut out an available argument, it seems to me that in the light of the provision of the Civil Procedure Act 2005, sections 56 and following and the guidance given in the Aon case, I should not entertain this equitable claim.

126 However, if I did entertain it, the claim should fail. This is not a case where there is a windfall in the sense of the term in Muschinski v Dodds. Deane J made it clear that the windfalls of which he was speaking were the classic situations covered by authorities in equity over the centuries many of which were mentioned in his judgment.

127 Generally speaking, at common law, if a person does work or spends money before there is a binding contract with regard to it, he or she cannot recover: Schreiber v Dinkel (1886) 54 LT 911 at 912 (CA) per Cotton LJ.

128 There are exceptions, such as where there is an implied preliminary contract or where a quantum meruit claim lies. In the latter case the court must consider whether it should infer that the parties have expected that the plaintiff will be remunerated or reimbursed should the contract not materialize: see Mason et al at [1033] and [1233]. See also Independent Grocers Co-operative Ltd v Noble Lowndes Superannuation Consultants Ltd (1993) 60 SASR 525.

129 A person is no more entitled in equity to recover a benefit given to another during negotiations for a contract which fails than he or she is at law, unless there are special factors involved.

130 Furthermore, Mr Condon is correct in saying that the windfall principle only applies if the project to be is aborted without relevant fault on the part of the plaintiff in equity. Here FPO was at fault in and about the termination of the partnership by removing files and by actively preparing to trade in competition with the partnership whilst the partnership was still current.

131 In case this matter should go further, I should say what adjustment I would have made had I found for FPO on this point.

132 The quantum of the benefit is the amount actually received by KJM as an equity partner over and above what he would have earned as a salary partner or interest on the value of the goodwill used to produce that surplus income.

133 As there is insufficient information before me to calculate the profit, I will use the interest method. The goodwill was thought to be between $200,000 and $300,000, so that FPO’s share would be $125,000 taking a midway figure. The referee valued FPO’s goodwill when he entered the partnership at $142,931. It thus seems to me that I should take a figure of $140,000 as a rounded approximation, take 10% for one year which produces a figure of $14,000 for equitable compensation.

134 3. The referee has now retained new solicitors. These solicitors have said that the referee was not given sufficient indication of the need to support his account.

135 I do not accept those submissions. The referee was represented by senior and junior counsel and a solicitor and the written submissions of the other parties before the hearing in August 2008 made it quite clear that reliance was being placed on authorities such as the decision of Allen J in Moray v Lane (NSWSC, 26 February 1993, unreported, BC9303682) that the mere listing of persons who performed the work, the hours worked by each and the amounts claimed may not be sufficient to establish the referee’s claim.

136 As noted above, the invitation was not to relitigate the question of the referee’s fees, but to pick up matters which may have been overlooked.

137 Thus, I do not propose to make any adjustment on the basis of material now put forward on behalf of the referee.

138 Mr Marshall and Ms Arste say that one such matter is the proper apportionment of the referee’s costs.

139 In my February “Referee’s Costs Judgment” I said that I think that the way in which I had apportioned matters between Pink section and Blue section has probably meant that further apportionment was probably not worth considering. However, I was willing to hear further submissions on this if anyone wished to do so at their own risk as to costs (vide [215] of the present judgment).

140 Plaintiff’s counsel say that the principle laid down in Hamer v Giles (1879) 11 Ch D 942 means that, ordinarily each of the partners must bear one-third of the costs of winding up including the referee’s fees.

141 Plaintiff’s counsel submit that the proper way of apportioning the fees is for 80% of the fees to be paid as to one-thirds each and the loser of the premium proceedings should pay the other 20%.

142 In the light of my approach to the premium proceedings, this formula needs adjustment. The plaintiff succeeded in the premium proceedings by a side issue, having had his two principal bases for succeeding rejected and being awarded a fraction of his claim.

143 In my view, there should be no costs of the premium proceedings.

144 Adjusting the plaintiff’s formula means that the referee’s costs should be shared one-third by each partner.

145 Mr Condon says that the plaintiff is attempting to reargue the matter already decided and should not be permitted to do so. Further, he says that the principle in Hamer v Giles only applies where the costs are not attributable to the fault of a partner (see eg Meekin Enterprises v Gersbach (NSWSC, MH McLelland CJ in Eq, 6 August 1997, unreported).

146 I agree with the second part of the submission: that is why I employed the word “ordinarily” above.

147 Whether I should re-examine the matter or not, my view is that the approach I took previously was correct in the circumstances of the present case.

148 4. I must now provide final reasons on the issue of the referee’s costs. What follows is essentially a revised version of the draft judgment of February 2009, omitting formal parts. Section A refers to questions of principle, Section B deals with particular items in the referee’s bill and Section C deals with costs.

149 The arguments in respect of the referee’s costs were heard by me on 14 August 2008, Mr R D Marshall and Ms B A Arste appeared for Mr Old, Mr Miles Condon appeared for Mr McInnes and Mr Hodgkinson (the defendants) and Mr T Hale SC appeared for the referee.

150 As Mr Marshall reminded me, the formal processes before the Court were:

(a) the defendants’ document entitled “Points of Defence in Referee’s Disputed Claim for Costs” filed on 22 May 2007 which is, in fact, an application despite its title;

(b) the referee’s document entitled “Court Appointed Referee – Reply to Points of Defence” dated 31 May 2007;

(c) the plaintiff’s (Old’s) notice of motion of 31 October 2007 prayers 6 and 7;

(d) the defendants’ amended notice of motion of 16 May 2008.

151 The reference was made in December 2004. Unfortunately, for reasons which are not necessary to go into at this stage, the report was not delivered until 19 March 2007. Also unfortunately, there was no order made as to the basis of the referee’s fees. The fees must, accordingly, be approached on a quantum meruit basis.

152 Mr Wily, the referee, is a senior partner of a firm of chartered accountants whose practice includes a considerable amount of insolvency work. His published charge out rates are a partner at $479 an hour, manager $327 an hour, senior clerk $182 an hour, secretary word-processing operator $128 an hour, typist $85 an hour and junior $64 an hour.

153 As I understand the argument, no challenge was made to those charge out rates.

154 The challenges that were made were in seven categories (later in this judgment referred to as “the seven complaints”) which can be summarised as:

(1) The referee had not given sufficient details to justify his charges;

(2) The referee wrongly used the unit charging method to cost his time;

(3) The referee had charged for internal conferences between various members of his staff;

(4) The referee had charged the parties for what were really his own expenses;

(5) Work was allegedly done by more highly qualified officers than necessary;

(6) The referee was too slow at performing various mundane tasks; and

(7) It was improper to charge for secretarial/postal matters.

155 Mr Wily gave evidence that the method of charging in his firm was that there was an electronic recording system and that staff entered during the same day or shortly thereafter, how they spent their time and briefly what they had spent their time doing. The charges were split into units of six minutes, ie 10 per hour. The print-out shows that there is relatively little detail. For instance, on 11 December 2006 Mr Wily charged 8 units ($383.20) marked “letters and discuss with Neil”, Neil being his partner Neil Newbould.

156 It is very difficult for a judge to decide on the quantum of the Receiver’s fees. The costs assessors’ system for solicitors’ fees ensures that a person who is very experienced in the industry rates that are charged by responsible practitioners in the field and the amount of time it would take a practitioner of good standing to do the task, enables the costs assessor to moderate a solicitor’s bill relatively quickly. Judges do not have that expertise.

157 There have been a few decisions of superior courts in the last few decades where attention has been directed to the relevant considerations when a court is performing this sort of exercise. I will endeavour to distil some of the principles.

158 (i) The standard method of proceeding in taking of accounts is that the accounting party must file accounts and then there can be surcharges and falsifications. A surcharge occurs where a party seeks to charge the accounting party with an amount beyond that in respect of which the accounting party admits a receipt. A falsification is where a party alleges an item in the account is erroneous in amount or otherwise. With a surcharge, the onus is on the surcharging party; with falsifications the onus is on the accounting party: Pit v Cholmondeley (1754) 2 Ves Sen 565; 28 ER 360. In the instant case all the objections come within the category of falsification; see eg Burns Philp Investments Pty Ltd v Dickens (No 2) (1993) 31 NSWLR 280 at 288.

159 (ii) However, the present type of exercise does not require the Court to deal with the matter in quite the same detailed way as in an action for account: Symphony Group plc v Hodgson [1994] QB 179 at 193; Venetian Nominees Pty Ltd v Conlan (1998) 16 ACLC 1653 at 1657 (per Kennedy and Ipp JJ in the Western Australian Full Supreme Court).

160 (iii) The Court does not necessarily strictly observe all the rules of evidence on its inquiries into costs: Venetian Nominees at 1657 following Computer Machinery Co Ltd v Drescher [1983] 1 WLR 1379 at 1385.

161 (iv) The referee bears the onus of establishing that his remuneration is fair and reasonable: Venetian Nominees at 1658.

162 (v) The mere listing of persons who performed the work, the hours worked by each and the amounts claimed may not be sufficient to establish the referee’s claim: Re Reiter Brothers Exploratory Drilling Pty Ltd (1994) 12 ACLC 430; Venetian Nominees at 1658 and Moray v Lane.

163 In Moray’s case, Allen J viewed with disdain an itemised bill which merely allocated units of time for work without giving details of the time spent. His Honour compared this with a traditional bill of costs. He said at 3:

“The proper times have to be shown. It may well be that the defendants will have difficulties in that respect because of their self serving system of unit charges. So be it. They have brought that upon themselves. Time charging is a common place method of charging in matters these days and if they adopt a system which does not permit them to say how much time was in fact spent, on their own heads are the consequences.”

164 (vi) If the hourly rate is not agreed, then the rate of remuneration commonly accepted in the industry should be applied, but in so doing, the Court must have regard for the standing of the person performing the services, the difficulty of the task and the degree of imagination and creativity involved; see Brenner v First Artists’ Management Pty Ltd [1993] 2 VR 221 at 263.

165 (vii) A referee is appointed by the Court on the basis that he or she expects to be paid a reasonable remuneration and the Court has an obligation to see that that occurs.

166 Mr Hale for the referee says there is an eighth rule, and that derives from the decision of the Court of Appeal in Najjar v Haines (1991) 25 NSWLR 224. That was a case where a party to a reference sought, in his appeal from a judge’s decision adopting the referee’s report, to join the referee as a party to seek costs against him. The Court of Appeal held that a referee had immunity from suit. Mr Hale says the case is authority for the proposition that it is not to be allowed that a party to a reference is able to later challenge the referee and cross-examine him. I do not consider the case goes that far. I allowed cross-examination of the referee in the instant case. The rule is that the referee must justify his fees and there is no way in which the Court can adjudicate on that matter unless the referee gives evidence and his evidence is tested.

167 Under the fourth of the rules set out above, the referee has to establish his claim. However, this does not mean that the referee needs to show that his exact claim is made out in every respect. To take an example in the instant case, there is an instance where the referee has charged two units, ie $95, for reading a letter. This indicates that he spent somewhere between 6 and 12 minutes in doing so. When he read the letter out loud in Court it took 20 seconds. The Court obviously has to find that his claim for $95 is not made out, but some allowance needs to be made for reading the letter.

168 It is rather difficult to know exactly how to approach this sort of problem. However, it seems to me that it is more likely to be productive to deal with it by: (A) first, dealing with matters of principle under the headings of seven complaints; (B) then dealing with the amounts; (C) then dealing with the question of apportionment.

SECTION A

169 (1) and (2) of the above list of complaints can be dealt with together, that is, are the referee’s accounts in sufficient detail and is the unit charging method the appropriate way of billing?

170 The classic statements on the adequacy of accounts by professional people derives from the traditional solicitors’ bill of costs. This requires sufficient detail to be put into the bill so as to enable the taxing officer to be able to judge whether or not the charge is justified.

171 Many modern bills of professional people do not meet this criteria. A basal question for the Court is whether it should say that the old method was just too time-consuming and has been abandoned by professional people generally, or whether to say that it is still absolutely necessary that if a person is going to justify their costs, they must be able to have sufficient material to do so.

172 Some of the entries are obviously in insufficient detail to be able to work out what was happening. For instance, on 5 September 2006, Mr Newbould charged $479, namely one hour against which is put “prepare for directions hearing; read court rules; agenda etc.” Mr Wily on 6 September charged $574.80 for “dealing with court judgment issues”. Neither notation is sufficient to know what really happened, what work was done by the accountant concerned.

173 Where there is insufficient information to enable a reviewer to determine what work the accountant actually did for the charge, then prima facie that entry is inadequate.

174 The unit method of charging is now quite common. It also does not matter too much that a telephone call might take four minutes, yet the client is charged for one unit, ie six minutes, because it does take some time to readjust the mind from the telephone call to the work that the accountant was previously doing before the call took place.

175 However, most fair unit charging systems work on the nearest unit basis, that is, that if a telephone call takes 10 minutes, it is charged as two units; if it takes 14 minutes it is charged at two units.

176 The system that the referee seems to have used is that if something takes 6½ minutes it is charged as two units rather than one unit.

177 In Australian Securities and Investments Commission v Atlantic 3 Financial (Aust) Pty Ltd [2004] QSC 133; BC200402436, Mullins J had to review an accountant’s bill in the winding up of a managed investment scheme.

178 Her Honour looked at the unit charging system at [56] and following and noted that the system used by those accountants had an “unders and overs” policy, so that if tasks took less than three minutes no charge was made, three to nine minutes one unit, 10 to 15 minutes two units etc.

179 Her Honour said at [58]:

“Provided the result of the time recording is an accurate reflection of the time actually spent in working on the matter, charging by reference to time recording equates with charging for the time spent in doing the work. Again, it is not a matter of looking at each item in which the time taken for undertaking the work was rounded up to the nearest six minute unit … but looking at the overall effect of the systems employed by the accountants for recording and charging of time.”

180 Accordingly, were I satisfied that the unit charging system had been used responsibly, I would not have made any adverse comment about it. However, there was one instance where a letter which took 20 seconds to read in Court was charged as two units. This just could not be justified. There are other situations where one wonders about the charge. For instance, on 26 May 2005, Mr Newbould had charged $479 merely marked “brief on job from Walt” and on 29 June, $718.50 “handover from Walt”. In August, Mr Newbould charged over $3,000 for “read affidavits”. Without more, this is just quite insufficient.

181 That of course, leads me on to another thought. Prima facie, only the most inefficient person takes seven hours to read the affidavits in proceedings. Most lawyers are able to read the most complicated sets of affidavits within two hours. Even allowing for the fact that Mr Newbould was an accountant, not a lawyer, seven hours spent reading affidavits seems excessive and one might wonder why it was Mr Newbould who was spending all this time rather than either Mr Wily, or alternatively a junior officer who could précis the affidavits for Mr Wily.

182 However, the fact, if it be fact, that the referee chosen by the parties is inefficient and slow or even incompetent, is really to be laid at the feet of the parties. The referee is not to be denied a fee for work which he or she actually did even though some other person might have done it in half the time.

183 (3) There are a number of charges for conferences between members of Mr Wily’s staff or with members of Mr Wily’s staff and Mr Wily.

184 Mr Wily is the referee and it is Mr Wily who has to make the decisions and do the work. However, if every step in the process was done by Mr Wily personally at $475 an hour there would be just cause for complaint. Accordingly, it is reasonable that the work that can be done by a less qualified person and less expensive person be so done. However, this is subject to a couple of exceptions.

185 The principal exception is that a skilled officer is liable to do things in the fraction of the time of an unskilled officer. Accordingly, it is quite appropriate for a skilled person to charge for doing work in one hour when it may well be that if an unskilled person was doing it, even though that person would be charging at a lower rate, it might take them three or four hours to do it.

186 The second exception is that if a person at a lower rate does the job, then it may be that time had to be spent by the person at the lower rank informing the referee of his or her provisional views so that time is charged for such a conference, again meaning that the final bill is greater.

187 The Court requires common sense to be used in this and the matter is not merely judged by hindsight. However, where one sees numerous instances of comparatively simple work being done by a person at the highest charge out rate without there being any apparent justification then the cost may well be disallowed.

188 It is difficult to justify internal conferences. The person who was appointed the referee was Mr Wily. In principle, he is the person who should be doing the work, though if the work can be done by a person at a lesser charge out rate efficiently, and that even with the debriefing conference with the person of lower ranking, money will be saved, so be it. However, there is no justification for a person at the higher charge out rate giving the matter to a partner at the same rate to do the work and then also charging a debriefing fee.

189 (4) There is no doubt that a referee may consult lawyers to a limited extent if he or she has real doubts about a matter arising during the reference.

190 Normally a referee will first tell the parties his or her problem and obtain further submissions on the point of concern before obtaining that advice.

191 I appreciate that, in the present case, it was often difficult for the referee to obtain assistance or information from the parties.

192 Despite that, the referee is not entitled to charge the parties with the cost of extensive consultations with lawyers without their express consent.

193 In the instant case, the referee’s bill contains some charges which are clearly him seeking legal advice as to his own personal position. There are also items with too little detail to be allowed such as “Conf.leon” (Leon being the referee’s solicitor).

194 I have disallowed much of the claims for time spent with the referee’s own lawyer.

195 (5) I have already touched on the matter of work allegedly done by a more highly qualified person than necessary when dealing with (1) and (2) and I do not consider that there is much more that I can say.

196 (6) The allegation is that work was done too slowly. I have already adverted to the problem that, so far as reading affidavits is concerned, excessive time appears to have been taken. However, there is very little evidence as to what sort of time a reasonably competent person would have taken. There is probably an expectation that the referee and his staff would act as a reasonably competent person would have acted. However, as I said earlier, to a great degree the parties have got to take the referee as they find him.

197 I believe these are all the general principles that I can raise under this head and will have to deal with particular matters when dealing with amounts.

198 (7) It is alleged that various improper secretarial and postal matters have been charged. A typical example is 17 August 2006 where a woman charged $46.40 for “typed memo for file re today’s court hearing”. Another is 9 October 2006 “prepared letter to solicitors $23.20”. Then 10 October “corrections to letter $23.20”.

199 It seems to me that it is not possible to deal with these matters in globo. Basically, where secretarial staff are engrossing material which needs to be sent to a party or to the Court, the charge should be allowed. Where the secretarial charge is to prepare some internal memorandum the question is debateable, where the secretarial person is preparing a document for the referee’s own solicitors to advance his case for payment, then almost certainly it is not allowable.

200 The referee’s bill contains at the end (pp 16-25), a series of disbursements for photocopying and printing and postage. There were also some “Cabcharge” disbursements. There is precious little detail as to what this is. It would seem that where there is some detail such as a photocopying report, that prima facie, the charge is acceptable. Where there is no such detail, the fee should not be allowed. However, it seems to me that a fair way of proceeding is to total up the balance of the disbursements for photocopying and allow, say, 40%. On this basis, dealing with the latter part of pp 16 to the end, the total so-called disbursements are $5,696. Of those, clearly allowable are photostatting the report on 19 and 20 March 2007 which appears to be to the nearest dollar $1,306 plus the searches. This makes $1,337; 40% of the balance is $1,744 so that, of the $5,696, the Court would allow $3,081.

201 Other matters that come within this category will have to be dealt with in section B of these reasons when I deal with individual items.

SECTION B

202 It is now a matter of looking through the individual items on pp 1-16 of Mr Wily’s bill. Unfortunately, the items are not numbered. However, I will refer to them by first denoting the page, then the item on that page so that for instance Mr Shell’s telephone attendance on solicitor for the plaintiff on 10 February 2005 being the third item on page 1 will be referred to as “Item 1/3” and so on.

203 I do not propose to go through every item with full reasons. First, this would be out of proportion to the value of the matter. Secondly, the reasons are really those in section A of this advice, except when further comments are added. Prima facie I have split the matters into five sections which I have headed Red, Blue, Green, Pink and Orange. These mean as follows:

Red – disallowed; Blue – chargeable against Mr Old only; Green – chargeable against Messrs McInnes and Hodgkinson only; Pink – allowed as against all; Yellow – related to goodwill; Orange – other.

204 However, these provisional classifications will have to be reviewed in Section C. It just complicates matters if I have to deal with both of them in the one section.

205 Items 1/1 to 1/3 appear to be matters solely between Mr Old and the referee and accordingly, are in section Blue. Item 1/4 appears to be preliminary work. It is unclear what the references are. There is a telephone attendance on an accountant. There are really not enough details to allow the item but 50% of it probably should be allowed in Green doing the best I can. 1/5 is Green. 1/6 is probably allowable as a necessary internal conference. 1/7 appears allowable, thus 1/5 to 1/7 should be Green, 1/8 appears to be Blue, 1/9 is again a combined item of an internal memo plus reviewing accounts. Again, it would seem that probably half should be allowed as Green. 1/10 appears to be okay as Green, 1/11 is something that does not appear to be a matter for the parties and so should be Red. 1/12 is an internal conference. It should not all be allowed. It has not been demonstrated that it is something which has reduced general costs. Probably 10% should be allowed as Green.

206 Item 1/13 – the item involves 4.2 hours. It involves some work which is clearly Green looking at the statements, the draft accounts and telephone attendance on solicitors, then there is a item “reading case law”. This has not been demonstrated to be necessary. The referee being a professional insolvency practitioner should be aware of the general case law. We do not know how much the time for reading the case law occupied. I suppose doing the best I can I should allow 70% of that total as Green. 1/14 and 1/15 would seem to be internal matters. 1/16 is doubtful but I suppose I should allow it. 1/17 “research partnership book” for $196.20 is self education and 1/18 “collate pleadings” is again something which does not appear to be chargeable to the parties.

207 On page 2, again 2/1 is an internal matter which is not allowed. I have then gone through the rest of pp 2-16 and marked the copy which is attached to the affidavit of M J Chapman of 20 August 2007 with a colour as indicated above. What I have described on page 1 is typical of the rulings I have made on the other pages unless I make particular mention of something.

208 A significant number of the matters which I have marked in Red fail because there is just insufficient material to show whether they are properly chargeable or not.

209 For instance, 2/9 is a charge for Neil Newbould “reading affidavit and reading file”. It would seem that this item is only charged because one officer left the employ of the referee and one of his partners took over the matter. This is not something which should be charged to the parties.

210 I do not propose to go through the other 15 pages of the bill. In many cases there are just inadequate details to make a firm pronouncement, but the items are often so trivial that one has just got to make one’s best guess.

211 There are various cases where the Receiver has charged for working out how much he reckons he is owed and I cannot see how that is chargeable to the parties. There are a number of situations where he has charged for collating documents. Again, without more, it is hard to see that if the documents were not properly collated in the first place when they were received in a file in an orderly manner, why a charge should be made for collating them later. Items such as the final item on page 13 “$1,197.50 work on contentions” is rather vague, but I have allowed that particular one, but not every one of that nature.

212 In addition to the colour coding I gave earlier, as I have gone through the bill, I have marked Yellow those matters which refer to goodwill which is a matter that is going to be dealt with shortly.

213 Apart from the so-called disbursements with which I have already dealt, the Receiver claimed $209,520.80. On my markings, I have got the following totals:

Green to be allowed generally $108,824.70;

Blue to be charged against Mr Old $8,755.80;

Pink to be charged against Messrs Hodgkinson and McInnes $11,675.40;

Orange which should be charged against both sides $5,700.10;

Yellow which may need to be considered further $5,061.50, but for present purposes should be split equally;

The balance approximately $66,000 is Red which is disallowed except that I feel to be fair I should allow 20% of this to cover overheads.

214 On my calculations this means that Mr Old should pay the referee $74,740 and Messrs Hodgkinson and McInnes $79,820.

SECTION C

215 The affidavit of Mandy Jayne Chapman of 20 August 2008 suggests that the costs of and incidental to the reference have been increased by the action commenced by the defendants (ie Hodgkinson and McInnes) to remove the referee. I would agree that these costs should be borne by Messrs McInnes and Hodgkinson. As Ms Chapman points out, the referee has not calculated separately these costs. I think that the way in which I have apportioned matters between Pink section and Blue section has probably accounted for most of the problem and that the costs involved in being more precise would not, in view of the doctrine of proportionality, be worth considering. However, I am willing to hear further submissions on this if anyone wishes to do so at their own risks as to costs.

216 The only other matter is, as I understand it, that the amount already paid on account of costs should be more appropriately distributed so that the plaintiff Mr Old should be credited with a further $8,333.33, and the corresponding debit made against Messrs Hodgkinson and McInnes. This appears to me to be correct, but I must confess I do not have sufficient backup material at my disposal to make a final ruling on the matter and accordingly it should stand over until the short minutes are brought in.

217 5. Both the plaintiff and the defendants have proffered sets of Short Minutes. For reasons already given, the basis of the plaintiff’s draft orders has not been adopted in these reasons.

218 The answers to the matters requiring determination as set out in [24] are, in summary:

1. Yes: substitute $95,288.

2. No.

3. No.

4. Herewith.

5. Stand over for short minutes to be brought in.

219 The defendants’ draft is as follows:-

“1. The Court determines the Referee’s fees and disbursements to be $154,385.75.
2. [Insert any order consequent upon the judgment delivered in the ‘Premium’ proceeding and adjust following orders accordingly]
3. The amount in item 1 is to be paid as between the plaintiff, on the one hand, and the defendants jointly on the other, as follows:
3.1 Plaintiff $75,728.58 (49%)
3.2 Defendants jointly $78,657.18 (51%)
4. The Court notes that the plaintiff has paid the Referee $102,482.71.
5. The Court notes that the defendants jointly paid the Referee $90,000.
6. The Court notes that the parties have, in addition, jointly paid the Referee $50,000 from the partnership bank account the funds in which are owned equally – ie $16,666.66 each.
7. The Court orders the Referee to refund to the parties the following sums:
7.1 Plaintiff $43,420.79
7.2 Defendants jointly $44,676.14
plus interest at Supreme Court rates.”

220 In view of the present reasons and in the light of the complexity of the matter generally, I believe it is preferable for the defendants’ short minutes to be updated and thus I consider that the only order I should make is to stand the two sets of proceedings over for short minutes to be brought in.

221 I will provisionally fix Wednesday 25 November 2009 at 9:15am for the short minutes. This is on the assumption that I will not need more than 30 minutes to make any necessary rulings. However, if any of the lawyers consider that this might not be the case or should this time not suit all counsel, provided my Associate is contacted by the end of the previous week, some other time can be arranged.

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