Public Trustee v Schultz

[1964] HCA 44

HIGH COURT OF AUSTRALIA

McTiernan, Taylor and Menzies

PUBLIC TRUSTEE v. SCHULTZ

(1964) 111 CLR 482

5 August 1964

Partnership

Partnership—Interest of deceased partner—Purchase by surviving partner—Price to be ascertained according to last annual account—Partnership agreement requiring value of goodwill to be included in annual accounts—Accounts always prepared with agreement of partners upon basis &hich ignored goodwill—Agreement effective for all purposes of partnership—Interest upon outstanding purchase price—Power of Court to award.

Decisions

August 5.
The following written judgments were delivered:-
MCTIERNAN J. The appellant is the administrator of the estate of a Mrs. Donaldson who died at Griffith on 11th October 1950. The respondent and Mrs. Donaldson were partners in a timber and hardware business carried on under the name, Area Builders Supply Company, at Griffith. It was a prosperous business. At the date of Mrs. Donaldson's death the goodwill of the business was of substantial value. The respondent and Mrs. Donaldson were equal partners. The partnership articles gave sole management of the business to the respondent and allowed a moderate weekly remuneration to him for his services. The respondent and Mrs. Donaldson's husband were partners in the business for some time before his death. Mr. Donaldson died on 28th July 1932. He left by will his interest in the business to his wife. At the respondent's invitation she and the respondent entered into a partnership with one another to carry on the business. Mrs. Donaldson contributed her husband's share left to her by his will to the capital of the partnership and the respondent contributed his own half share. The partnership was constituted by articles dated 23rd May 1933. They were made retrospective to 28th July 1932. The partnership continued until 11th October 1950, the date of Mrs. Donaldson's death. Upon her death cl. 15 of the partnership articles took effect. The result of the operation of this clause was that the respondent acquired her share in the "partnership business and the property and goodwill thereof" at a price measured by Mrs. Donaldson's share in the "capital and property of the partnership". Sub-clause (a) of cl. 15 provides that the amount of such share is to be ascertained from an annual account taken by the partners, if the partner whose share is acquired by the survivor dies on or after the taking of the first annual account "or as the same shall be ascertained on the taking of such account by the parties interested". The relevant date of the account was in this case 30th June 1950. It is necessary to refer to cl. 8 of the articles, which provides for the taking of annual accounts by the partners. The partners thereby agreed to take out as at June 30th annually a balance sheet, to include in it the estimated value of the goodwill, and to sign such account; and if they did this that it would be conclusive between them as to matters stated therein. None of the balance sheets of the partnership included estimated value of goodwill and only two were signed by the partners ; these related to certain years previous to the year which ended on 30th June 1950. (at p489)

2. The appeal concerns a suit brought by the appellant to obtain by a decree in equity final settlement of the amount of money payable by the respondent to the estate of Mrs. Donaldson for her share in the business, property and goodwill of the partnership which he acquired by operation of cl. 15. The appellant claims that the amount decreed to be payable is not sufficient: the respondent claims in a cross-appeal that the amount is excessive. (at p489)

3. McLelland C.J. in Eq. found that there was an express consent to vary cl. 8 by not including estimated value of goodwill in the annual balance sheet and to omit signing it whenever either of these occurred and that the course of dealing between the partners over the years confirmed the consent which was given. His Honour proceeded to the conclusion that s. 19 of the Partnership Act, 1892 of New South Wales applied to cl. 8. This section provides: "The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and such consent may be either expressed or inferred from a course of dealing." His Honour decided that the variations were limited to cl. 8 and that the course of dealing between the partners did not vary their mutual rights and obligations under cl. 15. However, he added: "Clause 15 refers to the account taken on an annual account day and if an account were taken on an annual account day in accordance with the agreement of the parties as such agreement existed at the relevant time such account would in my opinion answer the description." With respect I do not agree with that opinion. I think that an annual account for the purpose of cl. 15 cannot be other than an annual account which conforms with cl. 8 construed according to its own language. Upon the language of cl. 8 an annual account means a statement of the assets and liabilities of the partnership as at 30th June, which includes the estimated value of the goodwill of the partnership. Clause 15 intends that there should be an estimated value of the goodwill as a separate asset in making up the full price payable for the deceased partner's share in the capital and property of the partnership. It seems to me that it is wrong to hold that the parole variation of cl. 8 works such an accidental effect on cl. 15 that it excepts from the price payable by the surviving partner to the estate of the deceased partner the latter's share in the goodwill of the business. The result, in my opinion, is that the estate of Mrs. Donaldson is not bound by the draft balance sheet as at 30th June 1950. This document does not include estimated value of goodwill. The question whether goodwill would be included in the annual balance sheet was never discussed between the respondent and Mrs. Donaldson. They fell out soon after the partnership began and were not afterwards on speaking terms. There is evidence that on some occasions the accountant pointed out to Mrs. Donaldson that goodwill was not included in the annual balance sheet because it was prepared for the purpose of division of profits and taxation. The goodwill is not in the list of partnership assets which the disputed document contains. Nor is the document signed by either partner. In my opinion it is an error to ascertain the price for the purpose of sub-cl. (a) of cl. 15 by reference to the amount credited to Mrs. Donaldson in her capital account in this draft balance sheet. (at p490)

4. This document and draft profit and loss and trading accounts were brought by the partnership's accountant - who prepared them - to Mrs. Donaldson's bedside at the Griffith hospital four days before her death. She was then gravely ill. The accounts are partly typed, the figures are mostly in small handwriting. The accountant said in evidence that he spread the accounts and supporting papers on Mrs. Donaldson's bed for her to look at them ; explained them to her and that she appeared to understand and approved them. There are many corrections and interlineations in the accounts. It is a document prepared for typing and no doubt decipherable by a person who is fit to give attention to its details. The evidence of the accountant is not corroborated. McLelland C.J. in Eq. found on the accountant's evidence that Mrs. Donaldson approved of the draft accounts shown by the accountant while he was at her bedside. The accounts were not typed anew until after Mrs. Donaldson's death. Although I accept the view of the learned judge as to the credibility of the accountant, nevertheless, I am not prepared to agree having regard to all the circumstances - the appearance of the documents, the grave illness of Mrs. Donaldson, and that she was on her death bed - that the inference ought to be drawn from the accountant's evidence that Mrs. Donaldson really did give her assent to the draft balance sheet. I think that the last alternative in sub-cl. (a) of cl. 15 is applicable to the case and that the price payable under the terms of the clause ought to be ascertained by an annual account of the liabilities and assets of the partnership which includes estimated value of goodwill and that the account be taken as at 30th June 1950. I would allow the appeal and refer the case to the Supreme Court to take such an account. I think that the judgment of McLelland C.J. in Eq. on the points which are raised by the cross-appeal is right. (at p491)

TAYLOR AND MENZIES JJ. This is an appeal from a decree made in a suit in which the appellant, the administrator cum testamento annexo of Sarah Donaldson who died on 11th October 1950, sought declarations and orders in connexion with the dissolution of a partnership formerly subsisting between the deceased and the respondent Schultz. The suit was not commenced until October 1956 and it was heard in the equitable jurisdiction of the Supreme Court in May 1958. An explanation of the delay in the institution of the suit was tendered to us but the unsatisfactory chronology speaks for itself. (at p491)

2. By the decree appealed against it was declared that the partnership was dissolved as from 11th October 1950, that as from that date the respondent had succeeded to the deceased partner's share and the respondent was ordered to pay to the appellant the sum of 4,958 pounds 19s. 0d. This amount was awarded by way of balance of interest on the amount which the learned judge of first instance found became due and payable by the respondent for the deceased partner's share - 16,648 pounds 10s. 4d. Such interest was calculated from 11th October 1950 to 25th June 1958 when the appellant received from the respondent the sum of 18,602 pounds 4s. 8d. on account of his claim. This sum was attributed by his Honour as to 16,648 pounds 10s. 4d. thereof to the discharge of the respondent's liability to pay the capital sum in respect of the share to which he had succeeded and, as to the balance thereof, namely 1,953 pounds 14s. 4d., to a payment on account of interest. The total amount of interest which his Honour thought should be awarded was 6,912 pounds 13s. 4d. and after deducting from this amount the abovementioned sum of 1,953 pounds 14s. 4d., he directed payment of the balance, namely 4,958 pounds 19s. 0d. (at p492)

3. The principal matter in dispute between the parties on the appeal is concerned with the goodwill of the partnership which was not taken into account in determining what sum should be paid by the respondent and it has arisen because of a departure from the manner prescribed by the partnership agreement for the taking of annual accounts. That instrument was executed on 23rd May 1933 and it recited that the respondent and the deceased thereby mutually agreed to enter into partnership to carry on the business of timber merchants and builders' suppliers at Griffith and at such other place or places in addition thereto or in lieu thereof as might be agreed upon by the partners. By the agreement the partnership was deemed to have commenced on 28th July 1932 and the name of the firm was to be "Area Builders Supply Co.". This partnership succeeded a partnership which had formerly been carried on by the deceased's late husband and the respondent and the capital of the partnership was to be the amount of capital as disclosed at the date of the death of the deceased's husband by a balance sheet prepared for probate purposes. All profits and losses of the business were to be divided and borne between the partners in equal shares. Clause 8 of the agreement provided that proper books of account should be kept by the firm as are usual in businesses of a like nature and entered up to 30th June in each year "when stock shall be taken and a statement of account of the partnership assets and liabilities (including estimated value of the goodwill) and the profits and losses for the preceding year shall then be made out and signed by each partner and such signed account shall be conclusive and final between the partners as to all matters stated therein except as to errors discovered within three calendar months of the signing thereof which shall be rectified". Clause 15 was in the following terms:

"15. If either partner shall die during the continuance of the partnership the surviving partner shall as from the date of such death succeed to the share of the Deceased partner in the partnership business and the property and goodwill thereof and shall undertake all the debts, liabilities, and obligations of the partnership, and pay to the representatives of such Deceased partner as a price for such share:-

(a) His share in the capital and property of the partnership, such share, if he die before the day herein appointed for the taking of the first annual account to be the amount of capital credited to him hereunder and if he die on or after that date to be his share in such capital and property as ascertained by the account taken on the annual account day on or next after which he shall have died (hereinafter called 'the last annual Account day') or as the same shall be ascertained on the taking of such account by the parties interested. (b) In lieu of current profits an allowance at the rate of Eight pounds (8 pounds) per centum per annum on his share in the capital and property of the partnership from the last annual account day or from the commencement of the partnership as the case may be to the date of such death. (c) Provided always and it is hereby agreed and declared that the surviving partner shall have the right to pay such purchase price of the Deceased partner's share by three equal consecutive annual instalments the first such instalment to be paid one year after the death of the Deceased partner and the whole of such Purchase money for the Deceased partner's share shall carry interest at the rate of Six pounds (6 pounds) per centum per annum payable annually on the dates abovementioned for payment of instalments." (at p493)

4. It was found as a fact by the learned trial judge that at no time during the subsistence of the partnership were annual accounts prepared strictly in accordance with cl. 8. In none of the annual accounts was goodwill taken into account and there was evidence which his Honour accepted to the effect that the parties expressly agreed to the accounts being so prepared. It is, we think, unnecessary to discuss this evidence in detail for no challenge was made to the relevant finding of fact. What both the notice of appeal and the argument before us asserted was an error of law on the part of the learned trial judge, viz. that an account prepared as aforesaid could not, in the absence of some specific evidence that this was intended by the partners, be regarded as an annual account for the purpose of cl. 15. This proposition was said to be supported by observations in Blisset v. Daniel (1853) 10 Hare 493 (68 ER 1022) and Cruikshank v. Sutherland (1923) 92 LJ Ch 136 The former case was, however, concerned with the rights of an expelled partner and it proceeded upon the basis that, although accounts taken in the manner which it was claimed had been substituted for that provided by the partnership agreement might have applied in the case of the death or retirement of a partner, they could have no bearing in the case of an expelled partner. As the Vice-Chancellor said:- "That is the principle which they state to have induced them to put these particular fixed values, or, in other words, to make no valuation, but to set a nominal and conventional value on all this property ; and they say that that is one mode of making the proper deductions in respect of the valuation - a mode adopted with regard to retiring and deceased partners, and the necessity imposed on the remaining partners of purchasing the shares. How has a valuation come to upon that basis, and for those reasons, any relation whatever to the case of an expelled partner, when the expelling partners are not compelled to take the shares, but when they themselves acquire the shares by their own act, and by their own express wish and intention? I can understand that, looking to death, which may happen to any one or other of them in the course of the year, the parties might well say, 'If either of us die, and there be this sudden difficulty thrown upon the firm - we know not when - it may be at a moment of pressure, and when these disastrous circumstances are likely to take place'; or, looking at a case of a party retiring at his own solicitation, and therefore knowing all the circumstances fully beforehand, they might say that this was a reasonable and proper course, although perhaps not strictly according to the terms of the articles, but amounting to a new arrangement and agreement between the parties; but it has not the slightest bearing on a case where the parties exercising their own option insist on becoming purchasers of the share of the expelled partner. If such a case had ever been contemplated - it is in evidence that this explusion clause had never been thought of by anybody - but if anybody had considered the question of what was fair, right and just with reference to the expelled partner, it is impossible to say that that is to be put upon the same footing, or that it ought to be so valued as if you were compelled to take the property, or as if the whole property were about to be disposed of on a disastrous termination of the partnership" (1853) 10 Hare, at pp 517, 518 (68 ER, at pp 1032, 1033) (at p494)

5. In our view the decision has no bearing on the present case. One may contrast it with the decision in Coventry v. Barclay (1863) 3 De G J &S 320 (46 ER 659), which was decided ten years later. That case was concerned with the amount payable by surviving partners for the share of a deceased partner. The amount to be paid was "so much money as the value of the share or shares, according to the last annual account or rest next preceding the death of such partner or partners" together with interest thereon at a stipulated rate. The partnership agreement provided that accounts were to be taken once in every year during the partnership and "the partners should make, cast up and fully finish between them a true, perfect and particular rest or reckoning in writing of all their joint stock then in co-partnership, and of the value thereof, and of all the gains and produce thereof, and all losses, receipts, payments, dealings and transactions relating to the co-partnership for the year last past before the taking of such accounts". In dealing with the argument that there should have been a proper valuation made for the purpose of each set of annual accounts the Lord Chancellor, first of all, expressed the view that the practice which had been followed in the taking of the annual accounts was not inconsistent with the articles and then went on to say:- " . . that if it" (i.e. the manner of taking accounts) "were inconsistent with that meaning, yet as it is the mode and practice of making valuations which was followed by the partners in this brewery concern for many years before and down to the formation of the partnership of 1831, and has ever since been followed without deviation or objection, it is a practical construction of the 10th article which is valid and binding upon all the partners, and must be accepted as the rule of this partnership. For if the usage, which on this subject has been uniform and without variation, be not strictly in accordance with the written articles, it becomes evidence of a new agreement by the partners, and is as binding as if it had originally been clearly prescribed by the articles. This is a well-established doctrine in the law of partnership as administered by this Court" (1863) 3 De G J &S, at pp 326, 327 (46 ER, at p 662). Later he added:- "I am of opinion, therefore, that a valuation made in accordance with the custom by the partners present on the partnership premises at the prescribed time would be a good and binding valuation for all the purposes of the articles, if it was afterwards accepted or assented to by the absent partner or partners" (1863) 3 De G J &S, at p 328 (46 ER, at p 662) Cruikshank's Case (1923) 92 LJ Ch 136 is not, in our view, inconsistent with that case. The later decision rests, it seems to us, upon the view that the evidence there was insufficient to establish any material variation of the partnership articles and it is not without significance that Coventry v. Barclay (1863) 3 De G J &S 320 (46 ER 659) was referred to with evident approval. (at p496)

6. In distinguishing Cruikshank's Case (1923) 92 LJ Ch 136 in the present case the learned trial judge observed:- "In the present case the reference is to the account taken on the annual account day on or next after which the deceased partner shall have died. The reference is backwards and not forwards" (as in Cruikshank's Case (1923) 92 LJ Ch 136) "and the account which is primarily envisaged is the ordinary annual account taken in the course of the partnership business whilst the parties are alive. An account taken for that purpose answers the description of the account which is to be the basis for the ascertainment of the share of the deceased partner as set out in cl. 15. I see no reason why an account which though not complying with the terms of cl. 8 but which does comply with what the partners have by agreement express or implied from usage or a course of dealing substituted for cl. 8 should not be the basis upon which a share of a deceased partner is calculated". In our view, the distinction which his Honour drew is of significance and we add that, although there is no suggestion that when the parties agreed that the annual accounts should not take goodwill into account they specifically referred to cl. 15 of the partnership agreement, it is clear that one critical purpose of the accounts in the form in which they were prepared was to disclose an agreed value of each partner's share. It may well be that in so agreeing they were not unaware of the difficulties attendant upon making annual valuations of goodwill some of which were adverted to by the Master of the Rolls in Steuart v. Gladstone (1879) 10 Ch D 626; it seems too that they also took the practice of the earlier partnership into account. Whatever their reasons, however, it appears to us that, by agreeing that the annual accounts should be constructed on a basis which ignored goodwill entirely, they must be taken to have so agreed for all of the purposes of the partnership. Indeed, in view of the express agreement which his Honour found, we think the respondent in this case is in a stronger position than were the continuing partners whose rights were the subject of discussion in the case last mentioned (see also Hunter v. Dowling (1895) 2 Ch 223, at p 232) (at p496)

7. The further objection was raised that the annual accounts taken as at 30th June 1950 were not signed by the partners and, therefore, pursuant to the terms of cl. 8 did not become "conclusive and final" between them. But it appears that although the annual accounts for 1942 and 1943 were signed by the partners the annual accounts have not been signed on any other occasion during the subsistence of the partnership. His Honour did find that at all times the annual accounts as made up were approved by both partners and this finding extended to the accounts for the period to 30th June 1950. What seems important to us, however, is not whether this final account is to be regarded as "conclusive and final". For present purposes the important question is whether that account is in accordance with the partnership articles as varied. As the only objection before this Court is that the account did not bring in the value of goodwill and as we have concluded that the partners dispensed with this requirement, we agree with the learned trial judge that the price of the deceased's share, subject to cl. 15 (b), is that ascertained by the accounts of the 30th June 1950 notwithstanding that they were not signed. We may add that our conclusion does not rest upon any finding that the accounts were agreed to by the deceased. (at p497)

8. We are accordingly of the opinion that the appeal should be dismissed. (at p497)

9. There still remains to be considered the matter of the respondent's cross-appeal. For the respondent it is asserted that no interest should have been awarded other than that expressly provided for by the terms of cl. 15: that is to say no interest should have been allowed in respect of any period after 11th October 1953. This contention was put on two grounds. First of all, it was said that several tenders were made by the respondent to the plaintiff but it is sufficient to dispose of this contention to say that for the reasons given by the learned trial judge the first tender was not a valid tender and in the remaining two cases the amount tendered was not sufficient to discharge the respondent's existing indebtedness. The fact that the moneys the subject of the various tenders were thereafter allowed to remain by the respondent's solicitors in a special trust account affords no reason why, in the circumstances of the case, interest should be denied to the plaintiff if it should otherwise be thought to be properly payable. (at p497)

10. The second ground upon which the respondent's main proposition on this aspect of the case was advanced was that the relief finally obtained by the plaintiff was of such a character that interest should have been awarded only if upon common law principles it was proper to make an award of interest. In this connexion, it was pointed out that the relevant provisions of s. 140 of the Common Law Procedure Act, 1899-1957 permit an award of interest only in respect of debts due "at a date or time certain" and we were referred to what seem to be the conflicting decisions in Merchant Shipping Co. v. Armitage (1873) LR 9 QB 99 and Duncombe v. Brighton Club Co. (1875) LR 10 QB 371 The conflict was referred to in the House of Lords in London, Chatham and Dover Railway Co. v. South Eastern Railway Co. (1893) AC 429 by Lord Morris and Lord Shand, the former agreeing and the latter disagreeing with the decision of the Exchequer Chamber in the Merchant Shipping Co.'s Case (1873) LR 9 QB 99, see (4) The decision in the Merchant Shipping Co.'s Case (1873) LR 9 QB 99 was followed in New South Wales, with reluctance, in Hough v. Whitty (1903) 3 SR (NSW) 677 However it is, we think, unnecessary that we should concern ourselves with the question whether the fact that under cl. 15 no liability arose at all until the death of one of the partners makes the present case significantly different from the Merchant Shipping Co.'s Case (1873) LR 9 QB 99 for we are of the opinion that the learned trial judge was justified upon the principles enunciated in International Railway Co. v. Niagara Parks Commission (1941) AC 328 in making an award of interest in respect of the period intervening between 11th October 1953 and 25th June 1958 and we can see no reason why, in the circumstances of the case, we should interfere. (at p498)

11. In reaching this conclusion we have formed the view, contrary to the respondent's submission, that the interest for which subcl. (c) of cl. 15 provides is payable not only upon the amount prescribed by sub-cl. (a) but upon the sum of the amounts prescribed by that sub-cl. and sub-cl. (b). In our view sub-cl. (b) appears as a provision designed to supplement the provisions of the earlier sub-clause for the purpose of adding to the capital sum disclosed by the last annual account a sum which will insure that the price payable shall represent the value upon an agreed basis of the deceased partner's share at the date of death. The sum of these two amounts clearly represents the "whole of such Purchase money" referred to in sub-cl. (c) and upon which the stipulated interest is payable. (at p498)

12. One other matter remains to be mentioned. This is concerned with the amount of interest payable under sub-cl. (c). The learned trial judge held that the interest payable under this subclause should "be calculated on the whole of the sum of 16,648 pounds for each of the annual periods, so that the amount of interest payable on each of the three annual days was 998 pounds 18s. 3d." We do not agree with this conclusion. We think that the expression "the whole of the Purchase money" in this clause appears simply to make it clear that what is to bear interest is the sum of the amounts prescribed by the two earlier clauses and that it is this sum which is to "carry interest" at the specified rates. But since no part of the principal sum was paid within three years it is unnecessary to consider what interest would have become payable if each instalment of principal had been paid on the due date. (at p499)

13. In the result the cross-appeal should also be dismissed. (at p499)

Orders

Appeal dismissed with costs. Cross-appeal dismissed with costs to be set off against the costs of the appeal.