Paltos v Milevski

[2023] NSWCA 7

Court of Appeal

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

Paltos v Milevski [2023] NSWCA 7

Hearing dates:

21 September 2022

Date of orders:

10 February 2023

Decision date:

10 February 2023

Before:

Macfarlan JA at [1];
Kirk JA at [72];
Basten AJA at [73]

Decision:

(1)   Dismiss the appeal, with costs. 

(2)   Dissolve the stay granted on 15 August 2022, of the judgment and orders below.

(3)   Order that the sum of $25,000 paid by the appellant by way of security for costs of the appeal be released to the respondent. 

Catchwords:

PARTNERSHIPS AND JOINT VENTURES —winding up of two person solicitors’ partnership — many partnership assets transferred by receivers to new firm established by one former partner — held that goodwill not transferred as no continuity of business — in any case, goodwill claim erroneously based on assumption that hypothetical purchaser would have benefit of broad non-compete covenant by former partners

Cases Cited:

Admiral International Pty Ltd [2022] NSWCA 277

Alcock v Robb (1978) 2 BPR 9625

Bartier Perry v Paltos [2021] NSWCA 158

Chia v Ireland [2000] SASC 47

Commissioner of Taxation v Murry (1998) 193 CLR 605; [1998] HCA 42

Geraghty v Minter (1979) 142 CLR 177; [1979] HCA 42

Inland Revenue Commissioners v Muller & Co’s Margarine Ltd (1901) AC 217

McFadden v Commissioner of Stamp Duties (NSW) (1980) 11 ATR 1

Old v McInnes and Hodgkinson [2011] NSWCA 410

Page v McKensey (Supreme Court of New South Wales, 17 December 1993)

Placer (Granny Smith) v Thiess Contractors [2003] HCA 10; (2003) 77 ALJR 78

Ryder v Frohlich [2004] NSWCA 472

Commissioner of State Revenue (WA) v Placer Dome Inc (2018) 265 CLR 585; [2018] HCA 59

Trego v Hunt (1896) AC 7

Walker v Martin (unreported, 23 December 1993)

Woolworths Group Ltd v Gazcorp Pty Ltd [2022] NSWCA 19

Category:

Principal judgment

Parties:

Dennis Paltos (Appellant)
Peter Milevski (Respondent)

Representation:

Counsel:
Q Rares / N Bailey (Appellant)
C D Wood SC (Respondent)

Solicitors:
Tsolakis Solicitors (Appellant)
Harris Friedman Lawyers (Respondent)

File Number(s):

2022/126858

 Decision under appeal 

Court or tribunal:

Supreme Court

Jurisdiction:

Equity

Citation:

[2022] NSWSC 261

[2022] NSWSC 437

Date of Decision:

14 March 2022

Before:

Parker J

File Number(s):

2016/118930

HEADNOTE

[This headnote is not to be read as part of the judgment]

In 2000 Mr Dennis Paltos started his own law firm, Paltos & Co, Solicitors. Mr Peter Milevski was initially employed as a law clerk and then as a solicitor in 2003. In 2010 they commenced a partnership and signed several documents which enabled Mr Milevski to purchase a 30% interest and provided that on the death or total and permanent disablement of one of the partners, the other partner would be entitled to purchase that partner’s interest.

In December 2015 Mr Paltos suffered several strokes and was hospitalised. He ceased to attend the practice and was unable to undertake legal work. Mr Milevski took over supervision of his files. In January 2016 Mr Milevski discovered that Mr Paltos had made substantial unauthorised withdrawals of partnership funds and owed the partnership a significant amount of money. Both parties retained solicitors but were unable to reach agreement as to their ongoing relationship.

On 18 April 2016 Mr Milevski commenced proceedings to wind up the partnership. On 21 April 2016 Sackar J ordered that the partnership be dissolved and wound up under the direction of Court-appointed receivers, that the receivers realise the value of the partnership assets including goodwill, that accounts be taken, and that either party be permitted to purchase partnership assets. Although the receivers were authorised to carry on the partnership business, they were unable to do so as they were accountants, not lawyers. The receivers formed the view that they had to make arrangements very quickly for the ongoing carriage of the firm’s matters in order to best secure recovery of debts and works in progress. They terminated the employment of all but one of the existing staff, seven of whom were subsequently employed by Mr Milevski who had since incorporated Milevski Family Lawyers Pty Ltd (“MFL”). The receivers transferred almost all files of the partnership to MFL on the basis that it would account to the partnership for fees relating to any work done before the partnership dissolution. Precedents and procedural documents held by the partnership were also delivered to MFL. The partnership telephone number was transferred to MFL, and for a limited period, its website was also diverted to MFL.

A creditor of the partnership, Westpac Banking Corporation, brought debt recovery proceedings against Mr Paltos and Mr Milevski. As well, Mr Paltos claimed against the receivers for breaches of fiduciary duty in transferring assets to MFL without requiring proper payment for their value. He also sued his former solicitors for negligent advice given in connection with the disintegration of the partnership. The latter claim was resolved by this Court in its decision dated 3 August 2021 (Bartier Perry Pty Ltd v Paltos [2021] NSWCA 158).

Parker J of the Equity Division delivered judgment in the partnership proceedings on 14 March 2022 ([2022] NSWSC 261) and made consequential orders on 8 April 2022 ([2022] NSWSC 437). As most of the calculations with respect to partnership assets and liabilities were agreed, the primary issue in dispute concerned Mr Paltos’ claim for his percentage interest of the value of the goodwill which he contended had been acquired by Mr Milevski through the receivers. Mr Paltos’ case was based on the expert evidence of an experienced forensic accountant, Ms Conoulty, whose valuation reflected the fact that the practice when conducted by MFL “would no longer enjoy the income generated by Mr Paltos”. The primary judge found that Ms Conoulty’s valuation failed to take into account “the possibility of competition [with a purchaser of the practice] from Mr Milevski (and Mr Paltos, in due course)”. His Honour found that the appropriate enquiry was “what the asset would have fetched if sold on the open market” and that Ms Conoulty was not entitled to have regard to the “special value” to Mr Milevski of the practice by reason of his familiarity with the business and its clients. His Honour stopped short of finding in favour of Mr Milevski on the additional basis that the goodwill had not been transferred to him. This additional basis was the subject of Mr Milevski’s Notice of Contention on appeal.

Mr Paltos appealed to this Court on a single ground: “The Court [at first instance] failed to properly determine (and award) the value of the goodwill / business / intangibles due to Mr Paltos.”

The Court (Macfarlan JA; Kirk JA and Basten AJA agreeing) held, dismissing the appeal:

1. As to whether Mr Milevski acquired the partnership practice’s goodwill, the Court found that the goodwill had not been transferred to MFL: [55]. It held that goodwill is inseparable from the business to which it adds value and that continuity of the business is a necessary condition for the existence of goodwill: [41]–[42]. Continuity requires that the business be conducted in substantially the same manner and by substantially the same means that have in the past attracted custom: [41].

Commissioner of Taxation v Murry (1998) 193 CLR 605; [1998] HCA 42; Inland Revenue Commissioners v Muller & Co’s Margarine Ltd [1901] AC 217; and Geraghty v Minter (1979) 142 CLR 177; [1979] HCA 42 considered.

1. In the present case, the partnership’s custom had been generated and maintained by the reputations of its two partners: [43]. At least by the date of the Court’s order for the dissolution of the partnership in April 2016, Mr Paltos and Mr Milevski were no longer practising together: [44]. There was then no continuity of the business because the partnership had been brought to an end by the parties’ conduct and/or the Court’s order for its dissolution: [45]. The assets that were acquired by Mr Milevski did not carry with them a right to conduct the former partnership’s business even though they may individually have had some value: [47], [53].

   Commissioner of Taxation v Murry (1998) 193 CLR 605; [1998] HCA 42; Old v McInnes and Hodgkinson [2011] NSWCA 410 referred to.

2. Although not necessary to be determined given the conclusion at 1, the Court held that the primary judge was correct in finding that the valuation of the goodwill relied on by Mr Paltos was flawed,: [57], [60]. Ms Conoulty’s valuation proceeded on the erroneous assumption that the purchaser of the goodwill of the partnership would have the benefit of covenants by former partners not to compete with the purchaser: [59]. This assumed a broader protection than what is supported by the authorities. That protection is limited to a prohibition on solicitation by the former partners. The concept of solicitation in this context is narrowly confined to the conduct of a person who “specifically directly appeals to those who are customers of the previous firm”: [60]. The valuation was therefore flawed because it did not take into account that a hypothetical third party purchaser would not have the benefit of an express covenant against competition with the previous partners: [62]. Moreover, the valuation was flawed because Ms Conoulty erroneously directed her attention to what the assets were worth to Mr Milevski, rather than considering what a third party purchaser might have paid for them: [65].

Trego v Hunt [1896] AC 7; and Page v McKensey (Supreme Court of New South Wales, 17 December 1993) considered.

JUDGMENT

1. MACFARLAN JA: This is an appeal by Mr Dennis Paltos against a judgment of Parker J of the Equity Division delivered on 14 March 2022 (Milevski v Paltos [2022] NSWSC 261) and consequential orders that his Honour made on 8 April 2022 (Milevski v Paltos (No 2) [2022] NSWSC 437). The orders were made in the course of taking accounts in proceedings relating to the winding-up of a solicitors’ partnership between Mr Paltos and Mr Peter Milevski. The appeal is founded upon the following single ground:

“The Court failed to properly determine (and award) the value of the goodwill / business / intangibles due to Mr Paltos.”

2. For the reasons given below, I consider that this ground should be rejected, both for the reasons given by the primary judge and for an additional reason advanced by Mr Milevski in his Notice of Contention that his Honour ought to have made the finding, that he said he was inclined to make, that the goodwill of the solicitors’ partnership was not at any relevant time transferred to Mr Milevski.

THE FACTUAL CIRCUMSTANCES

3. Mr Paltos commenced practice as a solicitor in 1979, starting his own firm, “Paltos & Co, Solicitors” in 2000. Mr Milevski was initially employed as a law clerk and then from October 2003 as an employed solicitor.

4. On 29 June 2010 Mr Paltos and Mr Milevski signed three documents, being a Heads of Agreement, a Deed of Agreement of Partnership Terms and a Put and Call Option Agreement. The last of these provided for Mr Milevski to purchase a 30% interest in the practice of Paltos & Co for the total consideration of about $232,000, payable in three tranches over a two-year period.

5. That agreement also provided that on the death or total and permanent disablement of one of the partners, the other partner was entitled to purchase that partner’s interest. This was achieved by put and call options involving a sale at “market value”, which was to be the weighted average figure for one year’s earnings of the practice multiplied by 3.4.

6. The new partnership commenced trading, apparently on 1 July 2010, with a new name (“Paltos Briggs, Family Lawyers”) being adopted in January 2011 and the name “Paltos Milevski Family Lawyers” being adopted in 2014.

7. The partnership was profitable, with net profit for the financial years ending 30 June 2012 to 30 June 2015 being between $785,000 and $1,014,000.

8. Mr Paltos was hospitalised as a result of strokes that he suffered on 23 December 2015. Although he was able to communicate, he ceased to attend the practice and was unable to undertake legal work. Mr Milevski accordingly took over the supervision of his files.

9. Mr Milevski gave uncontested evidence that in January 2016 he discovered that Mr Paltos had made substantial unauthorised withdrawals of partnership funds for his own purposes, with the result that instead of his capital account with the partnership being in credit, as was Mr Milevski’s account, Mr Paltos owed a significant amount of money to the partnership.

10. Thereafter, Mr Milevski retained his current firm of solicitors, Harris Friedman, to act on his behalf in relation to the partnership business and Mr Paltos retained the firm of Bartier Perry. Communications took place between these firms but no agreement was reached, leading to Mr Milevski commencing the present proceedings for the winding up of the partnership on 18 April 2016. After urgent hearings before Sackar J, his Honour made orders on 21 April 2016, dissolving the partnership, ordering that it be wound up under the direction of the Court and appointing receivers and managers (the “Receivers”) of the partnership business. The Receivers were authorised to carry on the partnership business but as they were accountants, not lawyers, they were not able to do so. The orders directed that the partnership assets, including its goodwill, be realised by the Receivers and that either partner be at liberty to purchase any partnership asset from them. In addition, the usual form of order for the taking of accounts was made.

11. Prior to the orders being made, Mr Milevski had incorporated Milevski Family Lawyers Pty Ltd (“MFL”), through which he proposed to practise on his own account. Subsequently, in this Court, he belatedly sought by his Notice of Contention to assert that Mr Paltos’ claim against him should fail because only Mr Milevski’s company, and not Mr Milevski himself, received assets from the original firm and from early 2016 conducted a separate legal practice. As Mr Paltos contended, Mr Milevski should be, and is, precluded from taking this point as it was not taken before the primary judge and, if it had been, Mr Paltos may have been able to call evidence to address it.

12. MFL’s office was on Castlereagh St, Sydney, not far from the partnership practice’s Pitt St office. On dissolution of the partnership, Mr Paltos’ companies, which owned the Pitt St premises, resumed occupation of them by arrangement with the Receivers. Mr Paltos had earlier indicated his intention to conduct his own family law practice when he recovered from his strokes and, subsequently, he did.

13. Soon after their appointment, the Receivers formed the view that they “had to make arrangements very quickly for the ongoing carriage of the [firm’s] matters in order to best secure recovery of debtors and work in progress”. One of them, Mr Geoffrey Davis said in evidence:

“If I did not make any arrangements for the ongoing carriage of the matters, the clients would direct the transfer of the matter to another law firm. In that scenario, our ability to recover debtors, work in progress and any value attached to the files would be impaired (noting that the solicitor’s lien attached to files in respect of fees owing to the Partnership). There was also a risk that failure to appear at court for clients over the next few days could expose the clients to costs orders against them, and the partners to the potential for increased liabilities and negligence actions.”

14. At about this time the Receivers also terminated the employment of all but one of the existing staff, resulting in Mr Milevski employing some seven employees of the previous partnership and assuming their unpaid employee entitlements. The Receivers also transferred almost all of the active (and archived) files of the partnership to MFL on the basis that it would account to the partnership for fees relating to any work done before the partnership dissolution.

15. Most of the deed packets held by the partnership were also delivered to MFL, as was its “practice manual”, comprising precedents and procedural documents. The partnership telephone number was transferred to MFL and also, for a limited period, its website was diverted to MFL. The business name “Paltos Milevski Family Lawyers” was not however taken over or used by either former partner.

16. The complicated litigious history that then ensued is described in detail by the primary judge. It is sufficient for present purposes to note that a creditor of the partnership, Westpac Banking Corporation, brought debt recovery proceedings against Mr Paltos and Mr Milevski, that Mr Paltos sought to claim against the Receivers for breaches of fiduciary duty in transferring assets to MFL without requiring proper payment for their value and that Mr Paltos sued Bartier Perry, his former solicitors, for damages for negligent advice given in connection with the disintegration of the partnership. The claim against Bartier Perry was finally resolved by the decision dated 3 August 2021 of this Court in Bartier Perry Pty Ltd v Paltos [2021] NSWCA 158.

17. The hearing of the proceedings before the primary judge for the taking of the partnership accounts occupied 5 days in February 2022 with judgment being delivered on 14 March 2022.

18. Most of the Receivers’ calculations as to the partnership assets and liabilities were agreed, the remaining matter in dispute being Mr Paltos’ claim for 70% (that being his percentage interest in the partnership) of the value of the goodwill of the partnership that he contended had been transferred to Mr Milevski. His claim in this respect was for 70% of $723,640, being $506,548.

19. His Honour summarised as follows the extent of the agreement between the parties at the conclusion of the hearing before him:

“It remains necessary to determine the dispute as to the intangible value (if any) of the practice assets transferred to MFL. But all other issues about the value of assets taken over by the parties, and the quantum of the partnership liabilities discharged by them, have been resolved. There is also now no dispute about the state of the partners’ capital accounts as at the date of dissolution. The parties have also agreed on the current quantum of the unsatisfied partnership liabilities, and the partners’ responsibility inter se for those liabilities.”

THE JUDGMENT AT FIRST INSTANCE

20. The primary judge noted that Mr Paltos’ case on the goodwill valuation issue was based on the expert evidence of Ms Rebecca Conoulty, an experienced forensic accountant.

21. His Honour quoted the following description that Ms Conoulty gave of the way in which family law practices ordinarily acquire work:

“… family law practices are generally not supported by recurring clients. Client relationships are typically initiated by referrals from a variety of sources including but not necessarily in order of significance, commercial and other solicitors, previous clients, accountants, financial advisers, a practitioner’s personal network and human resources departments. Some work is also derived from advertising and promotions and free seminars ...”.

22. His Honour also noted that Ms Conoulty’s evidence was based on the premise that, subject to some exceptions, “Mr Milevski carried on substantially the same business within [MFL] as was previously operated” by the partnership. She said that this was due to the continuity of the files, staff, procedure manual, telephone number and internet presence. Later, his Honour said that the most important of the “exceptions” that Ms Conoulty stated was that Mr Paltos did not participate in MFL’s business and noted also that the MFL practice operated out of different premises.

23. Ms Conoulty’s preferred method of valuation was capitalisation of maintainable earnings, involving the application of a multiple to an estimate of future maintainable earnings of the partnership business based on its previous earnings. Ms Conoulty made an adjustment to reflect the fact that when conducted by MFL the practice “would no longer enjoy the income generated by Mr Paltos”. Her valuation on this basis produced a range of $667,975 to $779,304.

22. As an alternative, Ms Conoulty undertook an “asset-based valuation” attributing value to the individual “Transferred Assets” amongst which she included the staff, the practice’s files (both current and archived), the procedure manual and equipment such as the leased photocopier.

23. His Honour then turned to a detailed consideration of the law relating to goodwill in a partnership context, referring to the decision in Trego v Hunt [1896] AC 7 as the key decision. His Honour said that prior to Trego v Hunt “[t]he existing law of restraint of trade had already firmly established that the vendor of a business had the right, unless an express covenant to the contrary was given, to set up immediately in competition with the purchaser” but noted that in Trego v Hunt, Lord Herschell at 20-21 said that a departing partner could nevertheless be restrained from soliciting the firm’s customers. His Lordship described the partner who could be subject to such a restraint as one who “specifically and directly appeals to those who were customers of the previous firm”.

24. The primary judge also relied on the decision of Windeyer J in Page v McKensey (Supreme Court of New South Wales, 17 December 1993) in which Windeyer J said:

“On a dissolution of partnership the value of assets must be determined at the date of dissolution having regard to the terms of any agreement among the partners. Here there were no such terms. It follows that goodwill must be valued on the basis that it could be purchased by an outsider or one or more of the former partners. Any outside purchaser of goodwill would take into consideration the facts that:-

a.   the former partners would be free to practise in the immediate vicinity;

b.   the former partners would be free to deal with any former clients and free to make their new circumstances known, but not free to solicit former clients of the dissolved partnership;

c.   the former partners would be free to take over any existing files of the dissolved partnership if the clients so wished and fees for work to the date of dissolution were paid to the old firm.

d.   the former partners would not be free to use the name of the former partnership or a name so close to it that it would be likely to be confusing or to mislead people to think it was a continuation of the old partnership.

… Former partners purchasing goodwill would do so with knowledge of these matters and their likely effect on outside buyers.”

27. In that case, after one partner (Mr Page) left the accounting partnership, the remaining five partners continued to trade under the firm name. Mr Page’s claim to a portion of the value of the goodwill of the partnership failed (so far as is presently relevant) because the valuation on which he relied erroneously assumed that any purchaser of the partnership business would have the benefit of covenants by the remaining partners not to compete with the purchased business.

28. The primary judge said that Windeyer J’s statement of principle had been cited with approval in subsequent decisions of this Court (his Honour was referring to Old v McInnes and Hodgkinson [2011] NSWCA 410 at [87] and Bartier Perry Pty Ltd v Paltos at [228]) and then concluded:

“141   In my view, there is no relevant distinction between the facts of this case and the facts of Page. It is true that Mr Paltos, at the time of dissolution, was temporarily incapable of conducting legal practice. But there was no legal obstacle to his doing so, and Mr Paltos was vigorously foreshadowing that he would be doing that very thing. He did in fact subsequently take up practice on his own account. There would have been no reason for a purchaser not to take into account the possibility of Mr Paltos resuming practice in due course.

…

146   In these proceedings I am not conducting an account of profits based on some breach of duty by Mr Milevski. I am valuing an asset of the partnership at a particular date. That can only mean asking what the asset would have fetched if sold on the open market on that date. That is the approach specified in Page…”.

29. His Honour accordingly concluded that Ms Conoulty’s valuation was conducted on an incorrect basis because she did not take into account “the possibility of competition from Mr Milevski (and Mr Paltos, in due course)”.

30. His Honour also rejected Ms Conoulty’s view that she was entitled, in valuing the goodwill of the partnership, to have regard to the “special value” to Mr Milevski of the partnership practice, because of his association and familiarity with the business and its clients. His Honour said that, instead, the question was “what the asset would have fetched if sold on the open market” on the relevant date and that Mr Paltos was “[not] entitled to insist that Mr Milevski pay more for [the practice] than it was worth to a third-party purchaser in a competitive bidding process”.

31. His Honour identified further, separate, difficulties that he saw with Ms Conoulty’s valuation and then turned to “an even more fundamental objection” to the valuation, being Mr Milevski’s contention that no goodwill of the partnership practice had in fact been transferred to MFL, his counsel having submitted as follows:

“Counsel pointed out that following dissolution of the partnership Mr Milevski was not subject to any restraint in acting for clients of the partnership practice (and nor was Mr Paltos). The practice name was not transferred to him. The employees were not chattels who could properly be described as assets of a business (as they were described by Ms Conoulty and by counsel for Mr Paltos). The diversion[s] of the telephone number and website were temporary.”

32. His Honour then referred to the definition of goodwill given by the majority of the High Court in Commissioner of Taxation v Murry (1998) 193 CLR 605 at 623; [1998] HCA 42 in the following passage at [45]:

“Once goodwill as property is recognised as the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means which in the past have attracted custom to the business, it follows that a person acquires goodwill when he or she acquires that right or privilege.”

33. The primary judge then said that although substantially the whole of the partnership business infrastructure was transferred to MFL, “by far the most important element in the business was the conduct of legal work for clients” and referred to counsel’s submissions that the former partners were not subject to any ongoing restraint on competition.

34. As to whether the partnership business was transferred to MFL or whether it was terminated, his Honour observed:

“182   There were of course only two partners; and Mr Paltos was the founder of the firm and its senior partner. It may be argued that the loss of the ability to require him to devote his efforts to the conduct of the practice, and not to compete with it, itself represented such a substantial change that the Murry test of business continuity was not satisfied.”

35. His Honour added:

“184   … Even though there was no agreement between the partners to go their separate ways, the practical reality was arguably that they did so.

185   In these circumstances, I am inclined to think that counsel for Mr Milevski was correct in submitting that the goodwill of the partnership practice was not transferred to MFL. But in view of the conclusions I have already reached it is not necessary to make a final decision on this point”. (Emphasis added.)

36. His Honour’s decision to stop short of finding in favour of Mr Milevski on the additional basis that the partnership business was not transferred to MFL is the subject of Mr Milevski’s Notice of Contention.

37. The primary judge then considered, and rejected, Ms Conoulty’s “asset-based” valuations.

38. For these reasons, his Honour concluded that Mr Paltos had not established that he was entitled to be credited in the taking of accounts with any sum representing the acquisition by Mr Milevski of any goodwill of the partnership. His Honour added that “[t]he result is unfortunate for Mr Paltos, given that his damages were docked by almost $500,000 [in this Court’s decision referred to in [16] above] for the value of intangible assets which I have now found to have had no value” and continued:

“196 … But the Court of Appeal judgment [in the Bartier Perry proceedings (see [2021] NSWCA 158)] repeatedly emphasised (at [160(1)], [171], [177]) that the way in which the issues have been presented to the Court for decision was the product of forensic choices made by Mr Paltos.”

DETERMINATION OF APPEAL

39. Mr Paltos’ case on appeal is that in substance Mr Milevski acquired, through the Receivers, the whole business of the pre-existing firm of Paltos Milevski Family Lawyers, including its goodwill, and that as a result Mr Paltos is entitled, in the taking of the partnership accounts, to be credited with 70% of the value of the firm’s goodwill (the percentage being Mr Paltos’ share of the partnership, the remainder being Mr Milevski’s share). He contends that Ms Conoulty’s evidence properly assessed the value of that goodwill but in any event there was other evidence on which the primary judge could, and should have, relied to assess that value. In particular, Mr Paltos submitted that inferences as to the goodwill’s value in April 2016 should have been drawn from the documents signed by Mr Paltos and Mr Milevski in June 2010 when Mr Milevski was admitted to the partnership (see [4] above) and from the partnership’s subsequent earnings history.

The Notice of Contention ground – whether goodwill was transferred to Mr Milevski

40. I turn first to Mr Paltos’ proposition that in or about April 2016 Mr Milevski acquired the partnership’s goodwill. This is put in issue by Mr Milevski’s Notice of Contention.

41. As appears from [32] above, goodwill is “the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means which in the past have attracted custom to the business” (Murry at [45]; Commissioner of State Revenue (WA) v Placer Dome Inc (2018) 265 CLR 585 at 607; [2018] HCA 59 at [71]). As the plurality in Placer Dome Inc pointed out, the concept of custom is central to goodwill and custom may have a number of different sources, varying in type from one business to another (at [63]–[64]). Moreover, “goodwill is inseparable from the business to which it adds value” and is not something that can be “dealt with separately from the business with which it is associated” (Murry at [16] and [22] citing Inland Revenue Commissioners v Muller & Co’s Margarine Ltd [1901] AC 217 at 235 and Geraghty v Minter (1979) 142 CLR 177 at 181; [1979] HCA 42, respectively).

42. It follows from these principles that continuity of the business is necessary for its goodwill to continue to exist. To repeat what was said in Murry (see [41] above), if goodwill is to continue to subsist, the business must continue to be conducted “in substantially the same manner and by substantially the same means that have in the past attracted custom to the business”.

43. In a case, as here, of a two-partner solicitors’ firm one would ordinarily expect, in the absence of evidence to the contrary, that its sources of custom would principally be the names and reputations of its two partners. There was no evidence suggesting that that was not so in relation to Mr Paltos’ and Mr Milevski’s partnership and that expectation is consistent with what Ms Conoulty said about how family law practices generally attract custom (see [21] above). In particular, there was no evidence to suggest that Paltos Milevski Family Lawyers attracted custom because, for example, of the eminence of particular employed solicitors or the partnership’s use of any of its other “assets” which came into MFL’s possession, or under its control (see [46] below). The Court is left then with the compelling inference that the partnership’s custom had been generated and maintained by the names and reputations of Mr Paltos and Mr Milevski.

44. At least by the date of the Court’s order in April 2016 dissolving the partnership, the partners no longer practised together and the business name Paltos Milevski Family Lawyers ceased to be used by either. Mr Milevski did not thereafter purport to be practising under the name of the previous partnership, nor is there any evidence that he used Mr Paltos’ name or reputation to advance MFL’s business. Instead, Mr Milevski used only his own name in the name of his firm and practised at different premises. For his part, Mr Paltos was incapacitated and did not therefore practise using the partnership name or Mr Milevski’s name. Moreover, Mr Paltos “vigorously” asserted that he intended, when able, to practise under his own name, as he in fact subsequently did.

45. The partnership business was, in these circumstances, brought to an end by the parties’ conduct and/or the Court’s order for its dissolution (see Ryder v Frohlich [2004] NSWCA 472 at [135]; Woolworths Group Ltd v Gazcorp Pty Ltd [2022] NSWCA 19 at [91]-[96]). There was thus no continuity of the business that might have resulted in the preservation of its goodwill, with the consequence that that goodwill ceased to exist and there was no goodwill of the partnership that Mr Milevski acquired and for which he had to give credit on the taking of the partnership accounts. I add that Mr Paltos does not make any claim against Mr Milevski on the basis of any breach of any fiduciary or other duties by Mr Milevski. It is not therefore relevant, at least for present purposes, to enquire as to the reasons for the termination of the partnership.

46. On appeal, Mr Paltos did not put any persuasive arguments to justify the proposition, at least implicit in his case, that the partnership business, including its goodwill, continued after the partnership’s winding up and was, or had been, acquired by Mr Milevski. Mr Paltos simply asserted that Mr Milevski acquired “practically the whole business” and referred to Mr Milevski acquiring the following “assets”:

“10.1   145 of the 149 open files of the partnership;

(The trial judge found that those files were worth over $1.3m in billables after they were taken by Mr Milevski for his new firm.)

10.2   “All apart from a handful of deed packets held by the partnership practice”;

(Those deed packets (numbering over 1000) contained, for example, wills, powers of attorney, loan agreements, certificates of title, mortgage deeds, pre-nuptial agreements and so forth, which often promised future / follow-on work.)

10.3    the partnership’s phone number;

10.4    the partnership’s website (by redirecting it to Mr Milevski’s new firm);

10.5    the partnership’s practice manual (containing hundreds of precedents etc);

10.6    the computer server and all computerised records of the partnership;

10.7    all of the staff of the partnership”. (References omitted.)

47. Unable to be included in this list, because they were clearly not acquired or used by Mr Milevski, were the important “assets” comprising the partnership’s firm name, Mr Paltos’ name, and the offices from which the partnership had operated. Without Mr Milevski using, or at least having a right to use, those sources of custom, it could not be said that Mr Milevski acquired the business, including its goodwill. As Stephen J said in Geraghty v Minter at 190–191, in relation to a loss assessor’s business whose only customers were insurance companies, “[m]uch of the custom must tend to be personal to the person or persons actually doing the work of loss assessing, just as it would be were barristers organised into firms” and beyond goodwill associated with individuals, goodwill “must very largely reside in the firm name…”.

48. In listing the partnership assets said to have been acquired by Mr Milevski without seeking to identify whether their acquisition carried with it the right to conduct the former partnership’s business, Mr Paltos neglected to adhere to the direction given by the majority in Murry at [30] that “[c]are must be taken to distinguish the sources of the goodwill of a business from the goodwill itself”. Their Honours continued:

“30   … [Goodwill] must be separated from those assets and revenue expenditures of a business that can be individually identified and quantified in the accounts of the business… To the extent that the law provides remedies for the protection of a severable asset of a business which is also a source of its goodwill, the right to the remedies arises from the legal properties of the asset and not from the existence of goodwill in the business.

…

31   It follows that the sale of an asset of a business does not involve any sale of goodwill unless the sale of the asset is accompanied by or carries with it the right to conduct the business.”

49. The same issue was addressed as follows by Meagher JA (with the concurrence of Beazley and Giles JJA) in Old v McInnes and Hodgkinson:

“88   Mr Old argued that Mr McInnes and Mr Hodgkinson had the benefit of the goodwill of the HOM partnership business because they continued, after the dissolution of that partnership, to use a number of the sources of the goodwill to that partnership. That argument does not take into account the distinction between goodwill, which attaches to a business and cannot be dealt with separately from the business with which it is associated, and the sources of that goodwill, which may be assets of the business which are not themselves elements of the goodwill: Federal Commissioner of Taxation v Murry [1998] HCA 42; (1998) 193 CLR 605 at [22], [24], [30]. The sale of an asset of a business which may itself be a source of the goodwill of the business does not involve any sale of goodwill unless the sale of the asset is accompanied by or carries with it the right to conduct the business. That is because goodwill is the right or privilege to conduct a business in substantially the same manner and by substantially the same means as have attracted custom to it: Federal Commissioner of Taxation v Murry at [23], [31], [45].

89   Here, the partners did not agree to sell the right or privilege to conduct the business of the HOM partnership. Nor was there any agreement between the partners that any of them should have exclusive use of the old firm name or the right or privilege to conduct a business in that name: cf Geraghty v Minter (1979) 142 CLR 177 at 193-194. To the extent that a number of the assets of that business which were sources of its goodwill were acquired or used by Messrs McInnes and Hodgkinson, Mr Old was entitled to have the value of those assets brought to account in the winding-up of the partnership. The value of those assets would usually take account of their potential use which is an attribute of the asset and not an element of the goodwill: Federal Commissioner of Taxation v Murry at [33], [51]. To the extent that they thereafter might be said to have generated goodwill, this would be goodwill attaching to the new business conducted by the "Hodgkinson & McInnes" partnership.”

50. In that case, three persons carried on business as patent and trademark attorneys under the firm name Hodgkinson Old & McInnes. Following the dissolution of the partnership, an issue arose on the taking of accounts as to whether “an adjustment as between the partners should be included in the accounts for the partnership as at 30 June 2002 for the value of the goodwill of the HOM partnership upon the basis that the business continued to be conducted after 30 June 2003, in part by the entity Fraser Old & Sohn Unit Trust [in which Mr Old, one of the previous partners, was involved] and as to part by the Hodgkinson and McInnes partnership [in which the other two previous partners were involved].” Mr Old relied on the decision of the Full Court of the Supreme Court of South Australia in Walker v Martin (unreported, 23 December 1993) and as Meagher JA said:

“82   … It was argued that as in Walker v Martin ‘for all intents and purposes the business continued to operate in the hands of Mr Hodgkinson and Mr McInnes as it had’ during the earlier partnership… In support of that argument a number of sources of the goodwill of the HOM partnership business were identified and described as retained by Messrs Hodgkinson and McInnes. They included the premises, telephone number, fax number, email address, post office box number, approximately 30 experienced staff, active patent and trademark files, promotional material which was almost identical and the opportunity to renew patents and trademarks attaching to the files which had been retained. It was said that the fact that the new business was taking advantage of these sources of goodwill confirmed that the goodwill itself had been retained or appropriated at least to a significant extent.”

51. Meagher JA referred also to the rejection of this argument by the primary judge in Old v McInnes and Hodgkinson (Young CJ in Eq) and his Honour’s conclusion that the partnership business had come to an end, relying on observations of Needham J in Alcock v Robb (1978) 2 BPR 9625 at 9630. One of these observations was that “[i]f… the former partners decide to give up the business and go their separate ways, it seems to me that they destroy the goodwill of that business”. Meagher JA accepted that this was what had occurred in the case before him. He distinguished Walker v Martin on the basis that in that case there was evidence that patients of the medical partnership there under consideration were informed that the business of the partnership was to continue notwithstanding changes in the identity of the partners. The decision in Chia v Ireland [2000] SASC 47, also relied on by Mr Paltos in the present appeal, is distinguishable on a similar basis. In that case there was what Williams J, who gave the leading judgment, described as only a “technical dissolution” involving one partner leaving and the business continuing to be conducted by the remainder.

52. In contrast, in Old v McInnes and Hodgkinson the partners agreed, to use the words of Needham J in Alcock v Robb, “to give up the business and go their separate ways”. Likewise, in the present case, the conduct of the parties and the intervention of the Court and of the Receivers had the same consequence – the business was “given up” and the parties went their “separate ways”, destroying the goodwill of the business.

53. Consistently with Murry and Old v McInnes and Hodgkinson, some of the “assets” of the partnership that Mr Paltos alleged that Mr Milevski acquired (see [46] above) may individually have had some value. That value might take account of their “potential use” but only because it would be an “attribute of the asset” and not “an element of the goodwill” (Old v McInnes and Hodgkinson at [89] – see [49] above)

54. On appeal counsel for Mr Paltos made it clear in oral argument that his case was not that value should have been attributed to individual “assets” in that list but that it was dependent upon establishing the proposition referred to above in [39] that Mr Milevski acquired “the whole business”, with the result that he acquired the goodwill and needed to account for its value. I have addressed, and rejected, that case above.

55. For these reasons the primary judge’s “inclination” to think that the goodwill of the partnership practice was not transferred to MFL was well-founded and the orders that his Honour made were justified on that basis. I therefore uphold the Notice of Contention ground.

56. Before leaving that issue, I should refer to this Court’s decision in Bartier Perry Pty Ltd v Paltos to which the primary judge referred (see [38] above). In that case, the Court was concerned with proceedings brought by Mr Paltos against his former solicitors for damages for negligence. In its decision the Court proceeded on the assumption, contrary to what I have found above, that the business of the partnership, including its goodwill, was transferred to Mr Milevski. The Court however emphasised at [177] that its judgment would not have any bearing on questions to be litigated in the present proceedings because of the different parties involved. The soundness of that proposition is confirmed by the fact that all parties in that case proceeded on the assumption that that transfer of goodwill to Mr Milevski did occur (see [180] and [207]). There was therefore no protagonist for the contrary view advanced, and accepted, in this case.

The appeal ground – Ms Conoulty’s valuation

57. In light of my conclusion above on the Notice of Contention ground, the appeal against the primary judge’s orders fails and it is unnecessary to consider the soundness or otherwise of the ground advanced in the Notice of Appeal. Nevertheless, I state my views on the ground as follows.

58. As earlier noted, the primary judge rejected the valuation of goodwill upon which Mr Paltos relied, being that of Ms Conoulty, and concluded that there was no other acceptable evidence before him to enable the value of the goodwill that Mr Paltos alleged that Mr Milevski acquired to be determined.

59. The primary judge’s principal reason for rejecting Ms Conoulty’s valuation was that it proceeded upon the assumption, erroneous in his Honour’s view, that the purchaser of the goodwill of the partnership, as Ms Conoulty hypothesised, would have the benefit of covenants by the former partners of the business not to compete with that purchaser. Such a covenant, if reasonable in its duration and extent, is a valid means of protecting the goodwill of a business acquired by a purchaser (see Geraghty v Minter at 191).

60. The primary judge did not err in finding that Ms Conoulty’s assumption was incorrect in light of the principles (see [25] and [26] above) stated in Trego v Hunt and Page v McKensey. On this issue, Mr Paltos emphasised that, where a business and its goodwill are sold, former partners may be restrained from soliciting the firm’s customers. However, as is clear from the speech of Lord Herschell in Trego v Hunt, the concept of solicitation is a narrow one because it is confined to the conduct of a person who “specifically and directly appeals to those who are customers of the previous firm” (see [25] above). As Windeyer J pointed out in Page v McKensey, former partners would nevertheless be able effectively to compete with a purchaser including by practising in the immediate vicinity (see [26] above).

61. In oral argument Mr Paltos went further in relying on this Court’s decision in McFadden v Commissioner of Stamp Duties (NSW) (1980) 11 ATR 1 to assert that the hypothetical purchaser would in fact be protected against competition from the previous partners and that Ms Conoulty was accordingly correct to assume (without addressing the point) that such protection would exist. That decision does not however support the existence of such a broad protection. The Court in that case proceeded upon the basis that a purchaser would be protected to the extent described in Trego v Hunt, but did not suggest that the protection would be greater. Samuels JA referred to protection “against conduct by the vendors which would tend to depreciate what he has bought” and in this regard to “rules which forbid subsequent solicitation or unfair competition” (at 6). His Honour had earlier described the “unfair competition” to which he referred as carrying on business “in the [previous] firm name or in any other way likely to conduce to the belief that the business ‘was the same as, or a continuation of, the partnership business’” (at 4). Mahoney JA’s observations (at 8-9) were to similar effect.

62. It follows that Ms Conoulty’s primary basis of valuation was flawed because there was nothing in it to suggest that she had taken into account that a hypothetical purchaser would not have the benefit of any express covenant against competition with the previous partners and that any other protection that would be provided by the law would be limited in the manner described in Trego v Hunt. One would expect those circumstances to be of critical importance to a purchaser but there was no evidence from either Ms Conoulty nor any other source of what a purchaser would be prepared to pay in light of them.

63. Although in oral argument on appeal Mr Paltos appeared to eschew reliance on Ms Conoulty’s “asset-based” valuations (see [37] and [54] above), such reliance was arguably evident in his written submissions. As a result, I make the following comments in relation to those valuations.

64. The principal “assets” that Ms Conoulty referred to were the active files that MFL acquired and subsequently worked on to generate fees. Ms Conoulty used the amount of the fees so generated as a basis for calculating a value of the files for which Mr Milevski should account. As the primary judge however correctly pointed out, fees later earned from the clients to whom the files related were not an accurate guide as to what a third party purchaser might have been prepared to pay for the files because it was, as it ought to have been, entirely open to the clients to keep Mr Milevski as their solicitor (rather than use the purchaser) or to seek legal services elsewhere. In these circumstances a third party purchaser would be unlikely to have bought the rights to the files in the expectation that it would earn the same amount in respect of the files as Mr Milevski did.

65. Similarly, Ms Conoulty’s approach was flawed in respect of the other main “assets” (for example, the partnership’s staff, archived files, practice manual and precedents) because she directed her attention to what those items were worth to Mr Milevski, in terms of what work or expenses their acquisition saved him, rather than considering what a third party purchaser might have paid for them.

66. Similar considerations answer Mr Paltos’ reliance on other evidence before the primary judge to attempt to prove the value of the partnership’s goodwill.

67. First, the fact that Mr Milevski paid a substantial sum to join Mr Paltos in partnership in June 2010 does not assist Mr Paltos on this question because one of the terms agreed between them was that if one of them wanted to “exit the partnership he will agree to enter into a reasonable non-compete or restraint of trade agreement mutually acceptable to both parties”. Thus the goodwill that Mr Milevski acquired was protected and therefore presumably retained significant value. In the circumstances that occurred, no such restraint was entered. There was no claim in this matter for breach of contract.

68. Secondly, the Put and Call Agreement also entered into in June 2010 between Mr Paltos and Mr Milevski provided for substantial sums to be paid on the exercise of options in relations to interests in the partnership but the options were only able to be exercised in the event of the death or total and permanent disablement of one of the partners. If such an event occurred, the value of the remaining partner’s goodwill would be protected because of the inability of the other, through death or total and permanent disablement, to compete against him.

69. Thirdly, Mr Paltos relied upon the profitability of the partnership in the years prior to its dissolution. That submission however did no more than implicitly repeat the primary basis upon which Ms Conoulty valued the goodwill and, as in the case of her valuation, did not address the question of what a hypothetical purchaser would have paid for the business and its goodwill in the absence of a non-compete covenant.

70. Finally, Mr Paltos relied on the principle that the Court “must do the best it can” to assess the quantum of a claim. In Placer (Granny Smith) v Thiess Contractors [2003] HCA 10; (2003) 77 ALJR 768, Hayne J at [38] (with the concurrence of Gleeson CJ, McHugh and Kirby JJ) indicated that “estimation, if not guesswork” is more likely to be appropriate in a case where a plaintiff cannot adduce precise evidence of its loss rather than one in which “although apparently able to do so, the plaintiff has not adduced such evidence” (see also Admiral International Pty Ltd [2022] NSWCA 277 at [270]). Here, the question of whether purchasers of solicitors’ practices ordinarily regard the presence or absence of a vendor’s non-compete covenant as significant could conceivably have been addressed by evidence. In the absence of such evidence, I do not consider it appropriate to assume the correctness of, what appears to me to be, the unlikely proposition that it is not significant.

ORDERS

71. For these reasons, the appeal should be dismissed. I propose the following orders:

1. Dismiss the appeal, with costs.

2. Dissolve the stay granted on 15 August 2022, of the judgment and orders below.

3. Order that the sum of $25,000 paid by the appellant by way of security for costs of the appeal be released to the respondent.

72. KIRK JA: I have had the privilege of reading the judgment of Macfarlan JA in draft. I agree with the orders his Honour proposes, for the reasons his Honour gives.

73. BASTEN AJA: I agree with Macfarlan JA.

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Amendments

10 February 2023 - amended [71(3)] - deleted first reference to "respondent" and replaced with "appellant" so that it says "... paid by the appellant by way of security...".

Decision last updated: 10 February 2023