Variety Video v Jones
[2001] NSWSC 5
•22 January 2001
CITATION: Variety Video v Jones [2001] NSWSC 5 CURRENT JURISDICTION: Equity FILE NUMBER(S): SC 3608/94 HEARING DATE(S): 31 January, 1, 2, 3, 4 February, 2, 9, 24 March 2000 JUDGMENT DATE:
22 January 2001PARTIES :
Variety Video Pty Limited (P1)
Juverna Pty Limited (P2)
Wayne Jones (D1)
Cia Wolf (D2)JUDGMENT OF: Austin J
COUNSEL : I S Young (P)
P A Fury (D)SOLICITORS: Lansley Lawyers, Moss Vale (P)
Burston, Cole & Co, Penrith (D)CATCHWORDS: PARTNERSHIP - expulsion clause - expulsion for ‘serious misconduct’ which prejudices partnership business - meaning of ‘serious misconduct’ - whether two partners can dismiss the other two for serious misconduct, by a single decision - whether remaining partners may exercise option to acquire expelled partners' shares after dissolution of partnership LEGISLATION CITED: Conveyancing Act 1919 (NSW), s 181 (1) (b); Partnership Act 1892 (NSW), ss 25, 38, 39, 44 CASES CITED: Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349
Blisset v Daniel (1853) 10 Hare 493
Blue Metal Industries Ltd v Dilley (1969) 117 CLR 651
Bond v Hale (1969) 72 SR (NSW) 201
Carmichael v Evans [1904] 1 Ch 486
Green v Howell [1910] 1 Ch 495
Greenaway v Greenaway (1940) 84 Sol Jo 43
Hanlon v Brookes (1997) 15 ACLC 1626
Hitchman v Crouch Butler Savage Associates (1983) 127 Sol Jo 441
In re A Solicitors' Arbitration [1962] 1 WLR 353
Johnson v Marshall Sons, & Co, Ltd [1906] AC 409
Kerr v Morris [1987] 1 Ch 90
Marlborough Harbour Board v Goulden [1985] 2 NZLR 378
Russell v Clarke [1995] 2 Qd R 310
Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387DECISION: See paragraphs 185-190
THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISIONAUSTIN J
MONDAY 22 JANUARY 2001
3608/94 VARIETY VIDEO PTY LTD & ANOR V WAYNE JONES & ANOR
JUDGMENT
IntroductionHIS HONOUR:
1 This case began in August 1994, when the plaintiffs filed a summons seeking declaratory relief and injunctions. The proceedings were initiated after the plaintiffs (according to their case) purported to expel the defendants from a partnership which conducted a retail store for the sale of ‘adult’ products, known as ‘The Wolf Den’ in Kings Cross. The defendants filed a cross-claim which was in three parts. First, they sought declarations to the effect that they had been wrongfully expelled from the partnership and that the partnership was in fact dissolved at a later date than the plaintiffs had alleged; secondly, they sought orders to prevent the plaintiffs from entering the premises of the Wolf Den and interfering with the business; and thirdly, they sought orders directed towards the winding up of the partnership business, the appointment of a receiver and taking of accounts.
2 The plaintiffs applied by notice of motion to strike out the second and third parts of the cross-claim. Master Macready's judgment on the application (together with an application by the defendants with respect to discovery, which is no longer relevant) was delivered on 4 August 1995. He dismissed the application, on the ground that if there had been a wrongful expulsion, orders for the dissolution of the partnership may be appropriate on the basis that the conduct of the plaintiffs had prejudicially affected the carrying on of the business; and orders with respect to the possession of the premises and the conduct of the business could be appropriate so long as the converse orders continued to be sought by the plaintiffs.
4 That suggestion found favour with counsel for both parties and subsequently I made orders by consent for the determination of seven matters as separate questions under Part 31 of the Supreme Court Rules. The present judgment is directed towards answering these seven questions. I shall state each of the seven questions in sequence, and provide my answers, after setting out pertinent facts.3 Subsequently the matter appeared to have been becalmed, apart from a further interlocutory application, until it was placed in the general list in April 1999 and was ultimately fixed before me for the present hearing. At the commencement of the hearing, counsel for the defendants sought leave to file and move on a notice of motion, the purpose of which was to join another defendant (Bellsan Pty Ltd, which is owned and controlled by the plaintiffs and took over the lease of the premises and the conduct of the business shortly after the expulsion) and to amend the cross-claim so as to seek relief against Bellsan on the theory that it was a trustee of the lease and business for all the partners including the defendants. Counsel for the plaintiffs objected on the ground that if the application were to succeed, the defendants would thereby raise a substantially different case from the one which the plaintiffs had come to court prepared to meet. After hearing submissions on that application, I suggested to the parties that the best way forward was to formulate separate questions for the purpose of resolving most of the issues which both parties were ready to address immediately, on the basis that if the plaintiffs were to succeed in establishing that they had lawfully expelled the defendants from the partnership and had subsequently dissolved it, it would be unnecessary for me to consider the defendants' new claim against Bellsan and the new factual issues to which it would give rise.
Deficiencies in evidence
5 I note, at the outset, that the determination of facts at the hearing was made particularly difficult because of the absence of comprehensive documentary records. It appears that many of the business records of the Wolf Den partnership, including daily worksheets, ledgers, invoices, accounts, general correspondence, copy taxation returns and other general business records were stored in cardboard boxes at the premises of the plaintiffs in Darlinghurst. On 14 April 1999 the eastern suburbs of Sydney were struck by a severe hail storm, which smashed the fibrous corrugated roof of the premises, spread asbestos fibres over the floor area including the boxes of business records, and filled the boxes with water. Loose paper in the boxes became a sodden pulp which was subsequently shredded and discarded, although some papers were salvaged.
7 A third difficulty related to the defendants' affidavits. Mr Jones swore a very short affidavit in which he said that he had read Ms Wolf's affidavit and confirmed the matters contained in it. That statement was objected to and not allowed into evidence, but I granted leave for him to give oral evidence of relevant matters. The remainder of his affidavit, and many paragraphs of Ms Wolf's affidavit, contain unspecific denials of certain paragraphs and parts of paragraphs in the plaintiffs' affidavits. Where the deponent has denied part of a factual account by a witness for the plaintiff, saying nothing about the remainder of that account, counsel for the plaintiffs has invited me to infer that at the time of swearing of the deponent's affidavit, the deponent did not disagree with the remainder of the account. I am not prepared to make that inference on every occasion. The deficiencies of the defendants' affidavits are so systematic that the basic fault was probably a fault of the person who assisted them to prepare their affidavits. Judging from their answers in cross-examination, the defendants do not appear to have been advised that they should deal comprehensively with the plaintiffs' affidavits in their evidence in reply. However, their failure in their affidavits to deny the plaintiffs' account of certain centrally significant events, especially the events of 27 April 1994, cannot be explained away as the product of faulty assistance.6 Another problem in this case was that the affidavit evidence on both sides, but especially the affidavits of the plaintiffs' witnesses other than Mr Land, sworn for the most part in early 1995, left a good deal to be desired because of their lack of specificity and deficiencies in form. I took the approach of admitting into evidence statements that were fairly general but had a comprehensible content; for the most part I did not accept objections merely as to form; and I granted leave fairly frequently to allow the plaintiffs to adduce oral evidence relevant to the material that I rejected. This made it potentially difficult for counsel for the defendants to prepare and take instructions for cross-examination. I refused an application by the defendants for an adjournment, made after the affidavits had been read, but I tried to remain alert to potential difficulties for the defendants. In the end I was satisfied that their conduct of the hearing was not prejudiced by my granting leave to the plaintiffs to adduce oral evidence on specific matters. I allowed the defendants to supplement their inadequate affidavit evidence by oral evidence as well.
The sub-lease and the partnership agreement
8 In December 1989 a business was established at premises in the basement of 61-65 Darlinghurst Road, Kings Cross for the retail sale of restricted publications and articles, under the business name ‘The Wolf Den’. A sub-lease of the premises was entered into and dated 4 December 1989, for a period expiring on 14 November 1994, with an option of renewal for a further period of five years, exercisable on or before 14 May 1994. The sub-lessee was identified in that document as the second defendant, Cia Wolf. One of the sub-lessee's obligations was not to cause or permit drunkenness or disorderly or indecent conduct to take place on the premises. Obligations under the sub-lease were supported by covenants of guarantee and indemnity by Jake Land (a director of the first plaintiff, Variety Video) and his then wife, Jean Land.
9 The plaintiff companies and the two defendants entered into a written partnership agreement on 20 March 1990. Broadly speaking, the agreement reflects a partnership between two providers of finance (the plaintiffs) and two ‘working’ partners (the defendants). That basic distinction remained even though at some stage after commencement of the partnership, Ronald Seaborn (a director of the second plaintiff, Juverna) came to be remunerated for providing bookkeeping services to the partnership, and in 1994 Mr Land took a more active role in management.
11 Clause 6, dealing with the duration of the partnership, is of sufficient importance to be set out in full:10 The recital to the agreement states that the partnership was established for the purpose of conducting ‘the business of the retail sale and display of restricted publications and articles under the name of 'The Wolfs [sic] Den' at the basement of 61-65 Darlinghurst Road Kings Cross’. I infer that the partnership business was the business for which the sub-lease had previously been taken. The agreement states that the partnership commenced on 21 December 1989. The partnership was to be known as ‘The Wolf Den’ and the business name registration for the name was to be held by Cia Wolf on behalf of all partners (clause 5).
‘6. Duration
The partnership shall continue until it is determined by mutual agreement of all partners or by a partner serving written notice of dissolution. Neither the admission of new partners nor the retirement death or expulsion of any partner shall dissolve the partnership between the other partners whose interest in the partnership property at the time of any such event shall continue unaffected by such event except to the extent it is decreased or increased as a result of such event.’12 In his judgment on the interlocutory application Master Macready expressed some puzzlement about clause 6, saying that it was hard to imagine what the word ‘decreased’ might apply to in the context of the clause. With respect, I do not share that puzzlement. The interest of existing partners would be ‘decreased’ for the purposes of clause 6 by the introduction of one or more new partners.
13 By clause 8 it was acknowledged that all funds for the commencement of the partnership business had been provided by the two plaintiff companies, and the parties agreed that the profits due to the two defendants in accordance with clause 9 would be paid to the two plaintiff companies until 40 percent of ‘such amount’ (presumably, the amount of funding for the commencement of the business) shall have been paid.
14 Clause 9 provided that the capital of the partnership would be contributed by, the assets of the partnership business would belong to, and partnership losses would be borne by, the parties in the proportions 30 percent each for the two plaintiffs and 20 percent each for the two defendants. The clause also provided that while Wayne Jones (the second defendant) was ‘devoting his full working time and attentions to the partnership business’, the partners were to determine a salary to be paid to him, and profits were to be distributed in the above proportions after deduction of the salary. Clause 11.2 gave the partners voting rights (presumably, to be exercised at meetings of the partners) proportionate to their equity interests - thus, each of the defendants was given 2 votes and each plaintiff was given 3 votes.
15 Clause 10 permitted each partner at the end of each calendar month to draw an amount on account of the partner's share in anticipated profits, in a sum agreed by the partners. Provision was made for refund of any excess drawings at the end of the year.
16 Clause 11.1 obliged Ms Wolf and Mr Jones to devote such time to the partnership business as the partners would agree. The clause made no provision for a salary for Ms Wolf, but (as mentioned above) clause 9 made provision for a salary for Mr Jones while he worked on a full-time basis.
18 Clause 13 is another important provision:17 Clause 12 permitted any partner to retire from the partnership upon giving one month's notice to the other partners.
19 The plaintiffs say that they invoked clause 14 to expel the defendants from the partnership. It provides:
‘13. Rights of Continuing Partners on the Death or Retirement of a Partner
13.1 On the death or retirement of a partner (the outgoing partner) the other partners (the continuing partners) shall have the option of acquiring the share of the outgoing partner.
13.2 The option referred to in clause 13.1 shall be exercised within one month of the retirement or death of the outgoing partner.
13.3 The value of the share of the outgoing partner shall be as agreed between the partners and in default of agreement at a fair current value as determined upon the application by any partner by the President for the time being of the Institute of Valuers or his nominee who shall act as an independent expert and whose fees shall be paid equally by the outgoing partner and the continuing partner.
13.4 The value as agreed or determined in accordance with clause 13.3 shall be paid to the outgoing partner or his legal personal representative in the case of a deceased partner within a reasonable time after the determination and no later than 90 days after such determination.’
‘14. Expulsion of a Partner
14.1 A Partner may be expelled by the other partners:-
(a) if that partner shall become incapable of attending to the partnership business by reason of unsoundness of mind or by reason of any other ill health, during a continuous period in excess of six calendar months; or
(b) if that partner has been guilty of serious misconduct which prejudice [sic] the partnership business.
14.2 Where a partner is expelled in accordance with clause 14.1 he shall cease to be a partner and the remaining partners, at their option, exercisable within one month of the date of the expulsion, shall be entitled to purchase the share of the expelled partner for an amount calculated in accordance with clause 13 but no account shall be taken if [sic] any goodwill of the partnership in the case of a partner expelled for misconduct.’
The operation of the business and complaints about the defendants' conduct
20 The business was conducted at the basement premises in Darlinghurst Road from about 28 December 1989 until about 28 April 1994, when it came to an end in circumstances that I shall describe. The customers of the business were members of the public who came into the shop down the staircase from Darlinghurst Road. Others came into the shop merely to browse. In this judgment, when I refer to ‘customers’, I intend to identify every member of the public who came into the shop - both the browsers and the buyers.
21 Mr Jones was paid a salary of $1,080 per week during that time, and partnership drawings were made by Ms Wolf and Mr Jones. Mr Land and Mr Seaborn did not work at the shop regularly, but (as I have mentioned) Mr Seaborn attended to bookkeeping and accountancy matters.
22 Initially the business operated from 8am until 2am seven days a week, but later the trading hours were extended to 24 hours a day, seven days a week, worked in three 8 hour shifts per day (although there were occasionally two 12 hour shifts). A time sheet was prepared by each employee for each shift, and a copy was provided to Mr Seaborn for the preparation of wages. The time sheet also served as a sales sheet.
23 Retail transactions were recorded by hand on the sales sheet showing what had been sold, and the sale price. Most of the transactions were in cash. A tally column showed the progressive total of sales for the day. The system was that at the end of each shift, money in the till was added up and the takings were balanced with the sales sheet. $150 to $300 was used as a float in the till. The money was rolled up with the sales sheet and dropped into the safe in the back room of the shop. Mr Seaborn would call into the shop each morning and take the money and sales sheets out of the safe for banking and accounting.
24 So much is uncontroversial. However, I have been presented with two inconsistent versions of the events from mid-1993 until late April 1994, when the plaintiffs claim to have expelled the defendants from the partnership and then dissolved it.
25 According to his evidence, in June 1993 Mr Land became aware of reports which led him to believe that customers in the Wolf Den were being abused by Ms Wolf and Mr Jones, and that they were fighting with each other in the shop. He says he had a number conversations with Mr Jones and Ms Wolf in which he said that he and Mr Seaborn were concerned about the management of the shop, and he suggested that Mr Jones take a holiday. Mr Jones told him not to worry and said ‘we'll look after the shop’. The defendants deny that these conversations took place.
26 Mr Land says that over the ensuing months he paid closer attention to the management of the Wolf Den. He then noticed that on a number of occasions Ms Wolf failed to turn up at the Wolf Den for work, and on some occasions she would not come to the shop for several weeks. Ms Wolf denies that she failed to attend at the shop when rostered on, saying that on occasions she would visit a warehouse to collect goods for the shop. Mr Jones says that as Ms Wolf was not paid for her attendance at the shop, her presence there was a ‘bonus’ for the partnership.
27 Mr Land says that in about January 1994 he saw Ms Wolf's brother serving customers at the shop. At about the same time he arranged for someone on his behalf to make purchases in the shop, in order to determine whether those transactions were recorded on the Wolf Den sales sheet. He spoke to Ms Wolf and complained about her brother working in the shop contrary to what he described as the ‘no relatives’ policy of the partnership. He told her that a number of sales made by her brother had not been recorded on the sales sheet. He told Mr Jones that the brother would have to go. A few days later he saw the brother still in the shop and threatened Mr Jones that the partnership would be terminated if the brother was not removed. Within an hour he received a telephone call from Mr Jones saying that the brother had gone. The defendants deny that there was any ‘no relatives’ policy, and say that the transactions were recorded for the following shift.
28 Renovations were carried out to the shop in early 1994, including the installation of video booths and a back counter. Mr Land spent two or three weeks at the shop physically doing some of the work. There is conflicting evidence as to the frequency of Mr Land's attendance at the shop on other occasions. His evidence is that in the period from late 1993 to April 1994 he attended frequently when he was in Sydney. He was in Sydney for about 12 days per month and during his presence in Sydney he attended for short periods as often as three times a day. Ms Wolf says that he attended only ‘now and then’, perhaps every second or third week. On balance, I prefer Mr Land's account, which is consistent with the level of concern which, I accept, he developed about the management of the business during that period. Later I shall deal with the conflicts of evidence described in paragraphs 25, 26 and 27.
29 Mr Land says that a partnership meeting was held on 1 February 1994, at which he told the defendants that things were not working out and that he and Mr Seaborn wanted to replace them in the shop. He says he expressed dissatisfaction about the defendants' irregular and unsatisfactory attendance at the shop. He did not complain about other aspects of the defendants' behaviour which became subsequent grounds of complaint, because (he says) he thought it desirable to be diplomatic. He says that after discussion, all the partners agreed that the defendants would be permitted to continue to manage the Wolf Den only in consultation with Mr Land.
30 The defendants deny that such a meeting took place or that there was any agreement that the business would be managed by them in consultation with Mr Land, although Mr Jones gave evidence that in about March 1994 Mr Land indicated that he wanted to become more involved by installing modifications to the shop and using his interstate connections for the purchase of stock. For reasons I shall indicate, I accept Mr Land's account of the meeting of 1 February 1994. The defendants then say that if Mr Land's account is accurate, in consequence of the agreement reached between the partners at that meeting, the plaintiffs waived all existing grounds of misconduct. I disagree. The agreed arrangement for management decisions to be taken in consultation with Mr Land is best characterised as an attempt by the partnership to prevent recurrence of misconduct. While the agreement probably implied that the plaintiffs would not immediately act to expel the defendants on the ground of their pre-existing serious misconduct, it was consistent with the agreement for the plaintiffs to take such action on the basis of the whole chain of serious misconduct when further such misconduct occurred.
31 I also reject the defendants' claim that the plaintiffs must be taken to have waived or acquiesced in the misconduct simply by virtue of their failure to expel the defendants within a reasonable time after first becoming aware of their misconduct. Mr Land's evidence shows that the plaintiffs reacted appropriately at each stage of the emerging saga of the defendants' misconduct, and I can find no evidence that the plaintiffs sat on their hands or delayed their responses.
33 The plaintiffs say that on 27 and 28 April 1994 they took steps that had the effect of expelling the defendants from the partnership and then dissolving it. The defendants strongly disagree with the plaintiffs' version of the events of those days. Moreover, the evidence of Mr Seaborn is inconsistent with the evidence of Mr Land. It is appropriate, therefore, for me to make some observations about the credibility of the plaintiffs' and defendants' witnesses before making findings about these contested events. My observations as to the credibility of witnesses will also lay the groundwork for my findings about the alleged misconduct of the defendants, which I shall consider in answering Question 3.32 Mr Land says that in February and March 1994 he observed other conduct of Ms Wolf and Mr Jones that he regarded as unsatisfactory. They did not turn up for work on a number of occasions, were agitated, spoke very quickly and did not appear to retain attention to tasks or conversation. I shall give further consideration to the plaintiffs' allegations of misconduct by the defendants later, when answering Question 3.
The credibility of witnesses
34 Mr Land gave evidence in five affidavits which, by leave, were substantially supplemented by oral examination-in-chief. I found his evidence to be coherent and consistent, though times his recollection was far from perfect, as he admitted. Generally I prefer his version of the events from mid-1993 to the end of April 1994, and during the subsequent period, to the versions offered by Ms Wolf and Mr Jones. I accept his evidence that the defendants were paid $ 3,200 per month from May to August 1994. He said the total amount was $12,600 but that seems to be a mathematical error, the correct figure being $12,800. I reject the evidence of Ms Wolf and Mr Jones that a payment of $ 3,200 at the end of May or early June was not received. I was somewhat troubled by Mr Land's alteration of his evidence as to when a security guard was assigned to the shop. He initially said it was shortly after 28 April, but subsequently said he had been thinking the matter over and had decided that the security guard was posted only after the apprehended violence order was obtained on 25 August 1994. Since, however, the change of evidence does nothing to improve the plaintiffs' case, I accept Mr Land's eventual version as correct.
35 Mr Seaborn's evidence was far from satisfactory. In particular, he constantly protested that he could remember very little of the events of April 1994, and that he was affected in the witness box by his heart condition and by insulin-dependent diabetes. At one stage I adjourned to permit him to take an injection of insulin, although that did not improve his memory very much. He claimed that on 28 April 1994 there were two meetings, one between him and Mr Land and the second a meeting of all four partners. The assertion that there was a meeting of all four partners was not consistent with the evidence given by Mr Land, and was denied by Mr Jones and Ms Wolf. My conclusion is that at best, Mr Seaborn had a very faulty recollection of the events of 28 April 1994. In my view there was no meeting of all four partners on that day. I am prepared to accept other evidence given by Mr Seaborn, at least where it is not contradicted by other witnesses.
36 The other witnesses who gave oral evidence for the plaintiffs were four men, Messrs Lark, Leverett, Chambers and Dickinson. Their evidence related to conduct of the defendants which they had observed in the shop.
37 Mr Lark answered questions in cross-examination directly and (so far as I could tell) honestly. Initially his evidence was that he observed Mr Jones' conduct over the period from March to July 1994, but when it was pointed out to him that Mr Jones left the Wolf Den at the end of April 1994, he frankly accepted that he was mistaken. Overall, I found him to be a reliable witness, although there were some defects in his recollection of events.
38 There were some differences between Mr Leverett's oral evidence and his affidavit. The oral evidence was generally not as hostile to Mr Jones as his affidavit, some parts of which were disallowed. I accept his oral evidence concerning Mr Jones' treatment of customers suspected of wrongdoing, and the combination of his affidavit and oral evidence with respect to two fights between the defendants.
39 Mr Chambers was not an entirely satisfactory witness. His affidavit conveys the impression that the defendants took over from him at the end of his shift on a regular basis, but he admitted in cross-examination that this was not so, and that they took over from him only when he was on rotation during the early part of his employment, and when he specifically asked them to relieve him so that he could catch a plane to Brisbane. He has known Mr Land and Mr Seaborn for many years, and his relationship with them may have influenced him to colour his evidence in their favour. Nevertheless, I accept his evidence, on the balance of probabilities. He appeared to be direct and truthful in the witness box, and his evidence concerning the targeted purchases is corroborated by Mr Land.
40 Mr Dickinson struck me, on balance, as a witness whose evidence I should accept. Mr Land did not corroborate Mr Dickinson's evidence, but Mr Seaborn did.
41 Ms Wolf denied the allegations of misconduct against herself and Ms Jones. She said she was always punctual and attended the shifts to which she was allocated, although sometimes she went to a warehouse and when she did, Mr Jones would attend the shop punctually. She said that Mr Jones drank in the shop but only during the hot months, and only three or four bottles of Crown Lager a shift. She said Mr Jones never used offensive language to customers, although she noted that some of the book titles contained offensive language to which he may have referred. He never was physically violent to customers except in self-defence.
42 In my opinion Ms Wolf was an unsatisfactory witness whose evidence should not be accepted unless reliably corroborated. At various stages during cross-examination she shifted her position. For example, when it was suggested to her that she had told Mr Land that she could find a buyer for the business for $400,000, she first said ‘it was not a serious comment’, and then denied that she had made any such statement. She said that on 30 August 1994 she was not living at 40 Womerah Avenue Darlinghurst, the address to which the plaintiffs' solicitors had sent her a letter bearing that date, and that she was not sure when she ceased residing there. Later she said the street was in Rushcutters Bay rather than Darlinghurst, though it was a borderline street between the two suburbs and the postcode on the letter was correct, and eventually she said that she lived at 40 Womerah Avenue on 30 August 1994 and for some time before and after that date. At first she denied having received or even having seen the letter of 30 August 1994, but later she said she had seen it at some time which may have been months after 30 August, and the letter was produced by the defendants' solicitors when a call was made for it.
43 In the last analysis, however, the most serious deficiency in her evidence is its overall implausibility. Having denied key elements in Mr Land's account, her own explanation of the falling out between the plaintiffs and the defendants was disjointed and entirely unsatisfactory. Ms Wolf denied that the defendants had received any warnings that their behaviour was unsatisfactory prior to April 1994. She said that she was not working a shift on 27 on 28 April, and had no discussions at that time with Mr Land or Mr Seaborn. She said that on about 28 April Mr Jones told her that he had had a conversation with Mr Land as a result of which they would not be allowed to return to the shop. She said that a security guard was put on the shop at about that time and she subsequently had a telephone conversation, and then met with Mr Land on 3 May. On both occasions she asked him why he had put a security guard on the shop. He told her that Mr Jones needed a holiday and things would get back to normal, but she was not allowed to go back to the shop and that he wanted to sell the business. She said she did not want to sell and that she wanted to go back into the shop. She had a later conversation with Mr Land in the middle of May in which he told her that ‘things weren't working out and either we sell the business as a whole or we buy you out or you come up with the money and by us out’.
44 Her evidence implies that the plaintiffs' attempt to exclude her and Mr Jones from the partnership late in April was a bolt from the blue, without any justification. That is implausible, even apart from the weight of evidence to the contrary.
45 Mr Jones, as I have said, gave very brief affidavit evidence in which he purported simply to confirm Ms Wolf's affidavit. That part of his affidavit was disallowed, but he was permitted to give oral evidence, and did so extensively. Various parts of his evidence were inconsistent or misleading. For example, he changed his evidence as to whether he and Ms Wolf had arguments in the shop, at first admitting that there were arguments two or three times a month, but later denying that there were any ‘domestic disputes’ in the shop. He said that the shop operated on three 8 hour shifts per day, but this changed to two 12 hour shifts per day a couple of months before the end of April 1994. Later, when confronted with timesheets for April, he resiled from that evidence and said that there were three shifts up until the end of April (a curious alteration of evidence, given that he was responsible for the preparation of rosters). He said that Ms Wolf's attendance at the shop was a bonus for the partnership, apparently overlooking her obligation under clause 11.1 of the partnership agreement to devote such time to the partnership as the partners agreed. His attempt to explain the handwritten insertion of names in some carbon copies of timesheets was inadequate. He said that in the couple of days prior to 27 April 1994 he had been driving up to visit with his dad, but when pressed he qualified that evidence by explaining that he was referring to his stepfather, and that as he did not drive, the driving was done by Ms Wolf. He gave evidence that he worked the 6pm to 2am shift on a regular basis, but later admitted when shown timesheets that he had worked only seven shifts from 1 to 27 April 1994, although he insisted that he worked for the partnership in other ways at other times.
46 His evidence of his conversation with Mr Land which caused the break-up of the partnership (in effect, that he agreed with Mr Land that he would take a three-month sabbatical) was inconsistent with Ms Wolf's version (that Mr Land said that they were not to return to the shop). In his affidavit he saw fit to refer to paragraph 16 of Mr Land's affidavit of 8 September 1994 and to deny Mr Land's version of the conversation between them in the coffee shop on 27 April, but he did not deny other aspects of paragraph 16. As I have already said, I do not hold against the defendants every failure on their part to deal with factual allegations in the plaintiffs' affidavits, but I find it implausible that Mr Jones would not have denied the finger-biting episode in his affidavit, if it was really false.
47 As with Ms Wolf, Mr Jones' version of the events from mid-1993 to the end of April 1994 is implausible. His evidence is that there was no misconduct by him or Ms Wolf in the shop, and that he conscientiously attended to his duties, arriving late only when he had worked late on the previous night, and then only by less than one hour. He denied all specific evidence of misconduct (including the finger-biting episode) and gave an account of some altercations arising out of attempts by customers to steal goods from the shop.
49 I am prepared to accept that Mr Jones' stepfather was terminally ill and that Mr Jones found out about his stepfather's last illness late in April 1994, and was distressed. Nevertheless I find it implausible that Mr Land would have advocated a six-month sabbatical for Mr Jones, especially since that would entail the absence of Ms Wolf as well. It is particularly implausible that Mr Land would have proposed such an arrangement on the spur of the moment, observing Mr Jones' distress at his father's illness. Mr Jones' evidence does not explain why or how an amicable proposal for a sabbatical developed into a bitter partnership dispute. It denies the evidence of successive witnesses for the plaintiffs. It is inconsistent with Ms Wolf's evidence about what Mr Jones told her when they meet on 28 April after his conversation with Mr Land.48 His evidence was that on 27 April 1994 he received a telephone call from his mother who told him that his dad had been readmitted into intensive care with Krohn's disease and emphysema. He was upset and telephoned Peter Tomasulo (an employee of the partnership) at the shop, arranging that Mr Tomasulo would cover that evening's shift so that Mr Jones could visit his father. Mr Tomasulo invited him to the shop to have coffee as it was evident that Mr Jones was distressed. While he was having coffee with Mr Tomasulo, and still upset and crying, Mr Land arrived. Mr Land took him to another coffee shop and told him that he had been working too hard and was under too much stress with his dad's illness, and that he should take six months off. Mr Jones said he could not take six months off because he needed his wages and his profit share and the shop was his life, but agreed that he had been working for a long period without a holiday. After discussion, says Mr Jones, he agreed with Mr Land that he would take a three-month break. Subsequently he had a nervous breakdown which prevented him from responding effectively in the early part of the present proceedings.
The events of 27 April 1994
51 Mr Land says he took Mr Jones to a nearby coffee shop. According to Mr Land's affidavit evidence, he had the following conversation with Mr Jones:50 Mr Land's evidence, which I accept, is that he telephoned the Wolf Den on the 27 April 1994 (incorrectly referred to in his affidavits as 21 April 1994). He spoke to Peter Tomasulo. Mr Tomasulo told him ‘Things are a mess’, and said that Mr Jones was sitting in a corner crying and that Ms Wolf had bitten his finger. Mr Land went to the Wolf Den fairly quickly after the telephone conversation. He says that when he arrived he saw Mr Jones with scratches all over his face, hands and arms. The tip of one of his fingers was bleeding and according to Mr Land skin and flesh were hanging from the end of the finger. He had a conversation with Mr Tomasulo who repeated what had been said on the telephone. Mr Jones told him that Ms Wolf bit his finger. Mr Jones was yelling and screaming incoherently.
52 In oral evidence, Mr Land gave a somewhat different version. He said he told Mr Jones (Transcript, page 67):
Land: ‘Wayne we can't have this. This is the end of the partnership. Ron and I are taking over. You and Cia are not to go near the shop again. You are both expelled.’
Mr Jones continually cried and was very agitated.
Land: ‘Your behaviour is now seriously affecting the business. You and Cia cannot work in the shop again. Ron and I are prepared to sell the business and pay you both out. Otherwise we'll get a valuation and pay you what is due to you.’
Jones: ‘All right. I'll tell Cia.’
‘These problems, you know, things are getting worse and worse and we cannot carry on this way. We need to take you away from the Wolf Den. We are going to have to terminate our partnership because it's just absolutely ridiculous to run a business the way it is.’
53 It was apparent in cross-examination that Mr Land did not draw any distinction between the concept of ‘expelling’ a partner and ‘terminating’ a partner's position in the partnership. It seems to me unlikely, in the circumstances, that Mr Land would have used the somewhat technical word ‘expel’. It is more likely that he used the word ‘terminate’ or a derivative of it. Indeed, in her complaint for the apprehended violence order, Ms Wolf also attributed the word ‘terminate’ to Mr Land. However, I accept his evidence in cross-examination that whatever language he used, he ‘got the point across’ that the partnership was at an end. I find, in other words, that he informed Mr Jones that by virtue of a unilateral step taken by the plaintiffs, on the basis of the misconduct of the defendants, the partnership had thereby ended. In my opinion he conveyed to Mr Jones what amounted to a decision to expel the defendants from the partnership for their misconduct, even though he probably did not use the word ‘expel’. He did not merely propose to Mr Jones that the partnership be terminated by mutual consent.
55 At the end of his conversation with Mr Land on 27 April, Mr Jones said that he would tell Ms Wolf. Mr Jones had a conversation with Ms Wolf, perhaps on the following day, as a result of which, she says, she formed the opinion that she would not be allowed to return to the premises. I infer that Mr Jones told her the substance of what Mr Land said to him on 27 April.54 During his conversation with Mr Jones, Mr Land used the pronoun ‘we’. He was referring to himself and Mr Seaborn. He had kept Mr Seaborn informed of events at the Wolf Den that were causing him concern. Indeed some of the events were reported by employees to Mr Seaborn rather than to Mr Land. Therefore by 27 April 1994 Mr Seaborn was aware of and shared Mr Land's belief that matters had reached a crucial stage and it would probably be necessary to take a definitive step. However, Mr Land did not have specific authority from Mr Seaborn to expel the defendants from the partnership when he purported to do so on 27 April. He said in cross-examination that he felt he could speak for both himself and Mr Seaborn, but I do not accept that there had been any conferral of authority on him to exercise the power of expulsion on behalf of Mr Seaborn or the second plaintiff. Mr Land's evidence is that he asked Mr Seaborn to ‘confirm’ what he had done on the following day. In other words, he sought ratification for his action.
56 Mr Land says that on 28 April 1994, the day after his conversation with Mr Jones, he and Ron Seaborn had a meeting. He told Mr Seaborn what had happened on the previous day, and said:
The events of 28 April 1994
‘I told Wayne last night that he's not to go near the shop again and to stay away from the shop and I would like your confirmation of that or your agreeance.’
Mr Seaborn said: ‘Yes, I think you're right, we should call it a day’.
58 I accept Mr Land's evidence. On 28 April 1994 Mr Seaborn ‘confirmed’ and therefore ratified Mr Land's action on the previous day, when he had purported to terminate the partnership between the plaintiffs and the defendants on the ground of their misconduct. At their 28 April meeting, Mr Land and Mr Seaborn decided to ‘terminate’ the entire Wolf Den partnership, or in other words to dissolve it.57 Timesheets for the week commencing 22 April 1994 were tabled and inspected. According to Mr Land, he and Mr Seaborn resolved that the Wolf Den partnership be dissolved. Minutes were not taken but Mr Land noted the decision in his diary. The diary note read ‘Ron and I decided terminate partnership W.D.’
Events after 28 April 1994
59 From 28 April 1994 Ms Wolf and Mr Jones were excluded from the premises of the Wolf Den. Mr Land did not see Mr Jones for several weeks after 27 April 1994, but he spoke to Ms Wolf on the telephone on a few occasions. In one of those telephone conversations Ms Wolf told him that she and Mr Jones could find a buyer for the Wolf Den who would pay $400,000. Mr Land was sceptical but encouraged her to set up a meeting. He expressed the opinion that the real value of the business was more in the region of $200,000. Ms Wolf told him that she and Mr Jones needed money and could get a buyer, and asked him to keep paying them in the meantime. After discussing the position with Mr Seaborn, Mr Land told Ms Wolf that he and Mr Seaborn were prepared to make monthly progress payments ‘in advance’ for a short period while arrangements were finalised for the sale of the business.
60 As from 27 April 1994 the plaintiffs made monthly payments to Ms Wolf and Mr Jones while the proposed sale arrangements were explored. It appears that the payments, or most of them, were in fact made to Ms Wolf, but the evidence of Mr Land indicates that they were made for the benefit of both defendants. From 1 May 1994 to 15 August 1994 the plaintiffs paid $12,800 to the defendants. Although the defendants claim that the payments were simply partnership distributions, I find that the payments were made as instalments in advance of a final distribution upon settlement of the partnership affairs of the parties, and in anticipation that the partnership business would be sold.
61 On 1 May 1994 Ms Wolf came to the plaintiffs' office in Darlinghurst to collect a progress payment. Mr Land says that while she was there, she began screaming at Mr Seaborn. Mr Land ordered her to leave. She eventually did so.
62 Ms Wolf deposes to a conversation with Mr Land in a coffee shop on 3 May 1994. She says Mr Land told her that Mr Jones needed a holiday and that things would get back to normal. The implication she seeks to draw is that Mr Land had not previously purported to terminate the partnership but merely to make arrangements for Mr Jones to recover his health. I find it implausible, accepting as I do Mr Land's account of the events of 27 April 1994, that he would subsequently make such statements to Ms Wolf. I reject Ms Wolf's evidence on this matter.
63 Towards the end of July 1994 Ms Wolf contacted Mr Land by telephone to ask for money. He told her that the plaintiffs would not make any more payments. He said he and Mr Seaborn wanted to have the matter resolved and asked her for a letter stating that the defendants would let the plaintiffs try to sell the shop for a realistic price. He said that the figure of $400,000 was crazy. Ms Wolf promised to supply such a letter on the following Monday, but said that she and Mr Jones had no money for rent or food and needed money on that day. Mr Land agreed to give her $2,000 immediately and the balance of $1,200 on the following Monday after the letter was produced. He did not hear from the defendants on the following Monday or for a further two weeks. However Ms Wolf contacted Peter Turner, the solicitor and a business associate of the plaintiffs, in the second week of August and consequently he and Mr Seaborn paid her a further $1,200.
64 Mr Land spoke to Ms Wolf on the telephone on about 19 August 1994. He expressed dissatisfaction with failure to resolve the sale of the business, and arranged a meeting between the plaintiffs and the defendants at 11am on 22 August 1994. At 10:30am he received a telephone call from Ms Wolf cancelling the meeting, because she had forgotten to tell Mr Jones about it and he had gone out to help friends do some landscaping. Mr Land told her he would be available on that day or the following day and Ms Wolf said she would get back to him. Mr Land has not personally heard from Ms Wolf since that time.
65 On 25 August 1994 Ms Wolf obtained an apprehended violence order against Mr Land, on an ex parte basis. The complaint alleged that Mr Land had been abusive and threatening to Ms Wolf, when they argued about removal of her brother from the store, when they subsequently argued over the manner in which the shop should be run, when they argued in April 1994 after she had been excluded from the shop, and when they argued on 24 August 1994. Ms Wolf presented the order at the shop on 25 August 1994 and claimed that it entitled her and Mr Jones to take possession of the shop. Mr Seaborn telephoned the solicitor who acted for the plaintiffs at that time, Peter Turner, from the Wolf Den to seek his advice. Mr Turner spoke to Ms Wolf. He ascertained that she had an apprehended violence order, and explained to her that the order did not entitle her to take possession of the shop. He recommended that she withdraw from the shop and withdraw any unfounded allegations against Mr Land, and attempt to negotiate a settlement. He says she agreed to do so. The order was subsequently dissolved by the Local Court, but the evidence is unclear as to whether the proceedings were withdrawn or dismissed after a contested hearing.
66 On 30 August 1994 the plaintiffs' solicitors wrote identical letters to each of the defendants purporting to give notice that the plaintiffs proposed to resort to clause 13.3 of the partnership agreement and secure an independent valuation through the Institute of Valuers. The letter notified the defendants that the plaintiffs would require a transfer of the business name registration, and that they would receive a copy of the plaintiffs' report to the valuer on the financial affairs of the business.
67 By a letter dated 6 September 1994 the plaintiffs' solicitors wrote to the Australian Institute of Valuers & Land Economists Inc, requesting the Institute to appoint a valuer to value the respective partnership shares of the plaintiffs and the defendants pursuant to clause 13. The letter asserted that the partnership had been dissolved on 28 April 1994. The letter stated that the plaintiffs would pay the cost of valuation in the first instance, and would recover the share of costs payable by the defendants pursuant to clause 13.3. The Institute replied on 13 September 1994 saying that it had appointed Mr P. H. Edmonds as valuer. On 20 September 1994 the plaintiffs' solicitors wrote to the defendants' solicitors inviting the defendants to make any relevant submissions to Mr Edmonds. Mr Land and Mr Seaborn had several meetings with Mr Edmonds and provided him with some information.
68 Mr Edmonds issued a report on 6 October 1994. The purpose of the report was stated to be ‘to determine the amount payable by the 'continuing partners' (the plaintiffs) to the 'outgoing partners' (the defendants) in accordance with Clause 14.2 and 13.3 of the Partnership Agreement dated 20 March 1990’. Mr Edmonds' conclusion was that ‘at 28 April 1994 the 40% of the shares in the Partnership held by Cia Wolf and Wayne Jones had NO VALUE’. The valuation report has been admitted into evidence only as evidence of the fact that the report was obtained.
70 In light of my findings of fact, I now turn to the seven questions for determination under Part 31 of the Supreme Court rules.69 On 14 November 1994 the sub-lease in the name of Cia Wolf came to an end and was not renewed. On 1 December 1994 Bellsan Pty Ltd entered into a new sub-lease for the premises. Bellsan carries on business in the basement at 61-65 Darlinghurst Road under the name ‘Erotica Plus’. The plaintiffs claim that this has been the case since the expulsion of the defendants and dissolution of the partnership on 28 April 1994. Ms Wolf gave evidence that the business continued to trade under the name ‘the Wolf Den’ until the middle of February 1995, and changed its name to ‘Erotica Plus’ only at that time. Whether that is true is immaterial to the issues that I must determine in this judgment.
71 In my opinion the answer to this question is ‘yes’, where (as in this case) the power is invoked by the financing partners to expel the ‘working’ partners.
1. Whether on the true construction of clause 14.1 of the Partnership Agreement that is annexure ‘B’ to the affidavit of Jake Land sworn 24 January 2000, two partners may be expelled validly from the Partnership by the other two partners pursuant to a single resolution or decision by the last mentioned two partners.
A question of construction
73 In Bond v Hale , where substantially the same question arose, Street J based his decision at first instance ((1969) 89 WN (Pt 1) (NSW) 404) on an English precedent, In re A Solicitors' Arbitration [1962] 1 WLR 353. He said (at 408):72 The question is properly framed as a question of the true construction of the partnership agreement. The issue is not about an inflexible principle of law to be applied regardless of the terms of the particular instrument in question.
‘In a field such as the construction of partnership agreements, where they appear in what has become a common form, there are strong reasons, based upon the pursuit of consistency in the law, for following and applying in this jurisdiction decisions of co-ordinate courts in other common-law jurisdictions.’
74 On appeal, Manning JA expressly agreed with Street J's approach ((1969) 72 SR (NSW) 201, 208). However Wallace P (with whom Holmes JA agreed) was not content to base his judgment on the English precedent. He observed (at 205) that some of the reasoning in the English case, which referred to the expulsion clause working an apparent confiscation, may not have fully taken into account the powers of an equity court in respect of consequential orders when a dissolution suit is brought on the ground of misconduct of one or more partners. He saw the question as one about the true construction of the expulsion clause in the particular partnership agreement that was before the court, and proceeded to answer it by closely considering the terms of the partnership agreement.
75 The same approach is found in the judgment of the Court of Appeal of the Supreme Court of Victoria in Hanlon v Brookes (1997) 15 ACLC 1626. In that case Callaway JA (with whom Ormiston and Batt JJA agreed) held that an expulsion clause permitted the expulsion of two partners by a single special resolution. He reached that view as a matter of construction of the particular partnership agreement that was before the court.
77 The expulsion clause in the present case is not, in its terms, significantly different from the expulsion clause in Bond v Hale . However, the partnership agreement in the present case is a poorly drafted document that cannot be regarded as a standard or common form agreement. The proper construction of the present agreement is influenced, in my view, by inadequacies of drafting that make it inappropriate for me to rely on decisions in other cases as direct precedents, and ensure that my decision cannot be seen as inconsistent with judicial decisions about the meaning of more carefully drawn instruments or instruments in common form.76 I draw from Bond v Hale and Hanlon v Brookes the principle that although consistency of interpretation of commercial agreements by courts is a desirable objective, the first task of any court is to construe the agreement before it. The question of consistency of interpretation arises only when one is satisfied that the instant agreement is indistinguishable from agreements previously construed by courts. This is most likely to occur when the agreements are in a standard or common form.
Section 25 and the approach to construction
78 The defendants draw attention to s 25 of the Partnership Act 1892 (NSW), which provides that ‘no majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners.’ In Bond v Hale it was argued that an expulsion clause comparable to clause 14.1 in the present case did not deal with the rights of majorities or minorities, but was directed to defaulters and non-defaulters, and therefore s 25 was irrelevant. But the Court of Appeal rejected this contention (see esp at 208 per Manning JA).
80 The ‘measure of strictness’ of construction means that requirements for the exercise of the power are likely to be treated as mandatory rather than directory ( Hanlon v Brookes at 1631 per Callaway JA), and to be read literally. Even so, the only absolute proposition is that the court must ascertain and give effect to the intention the parties to the agreement. Hence a notice of expulsion of the senior partner signed by all of the other partners has been held to be valid even though the partnership agreement stipulated that the notice be signed by the senior partner: Hitchman v Crouch Butler Savage Associates (1983) 127 Sol Jo 441. Hanlon v Brookes shows that there is no strict presumption of construction against treating an expulsion clause as allowing the expulsion of two partners at the same time.79 The significance of s 25 in the present context is that it evidences a legislative policy that no majority of partners can expel any partner unless a power to do so has been expressed between them, and consequently ‘a measure of strictness in the construction of an expulsion clause is in order’ ( Bond v Hale , at 206 per Wallace P). It seems to me that observations by Page Wood V-C in Blisset v Daniel (1853) 10 Hare 493; 68 ER 1022, at 505 (1027), to the effect that the construction must be ‘of the strictest character’ and that such a clause ‘will be construed in a court of equity strictly against the partners exercising the power of expulsion’ state the matter too highly. In saying so I respectfully adopt the reasoning of Wallace P in Bond v Hale and Callaway JA in Hanlon v Brookes at 1631-2.
Section 181 (1) (b)
81 The defendants draw attention to the fact that (in contrast with Hanlon v Brookes ) there is no provision in the present partnership agreement to the effect that ‘the singular includes the plural’. They say, having regard to the approach to construction to which I have referred, that if the reference to ‘a partner’ at the beginning of clause 14.1 is to be construed as ‘a partner or partners’, the plaintiffs must rely on s 181 (1) (b) of the Conveyancing Act 1919 (NSW). In my opinion, the latter proposition is the false step in the defendants' submission, as I shall explain in due course.
82 Section 181 (1) (b) provides (so far as is relevant) that unless the contrary intention appears, in all contracts ‘the singular includes the plural and vice versa’. In the defendants' submission, s 181 (1) (b) is inapplicable because the contrary intention appears in this case. I agree with the defendants that s 181 (1) (b) does not apply in the construction of clause 14.1, because a contrary intention is exhibited by the partnership agreement. If s 181 (1) (b) were to be applied to the whole of the introductory part of clause 14.1, the commencement of the clause would come to read ‘A partner or partners may be expelled by the other partners or partner...’. This would permit one partner to expel another, without a decision of the partnership as a whole or even of a plurality of partners, and would even allow a single partner to expel all the others, ending the partnership without compliance with clause 6 and entitling the single partner to acquire the interests of all other partners without any payment for goodwill.
84 In Bond v Hale the Court of Appeal concluded that s 181 (1) (b) did not apply to the construction of the expulsion clause then before the court. Wallace P held, as a matter of construction, that the words of the exclusion clause could not be extended to the plural without the aid of s 181 (1) (b). He found several good reasons for not extending the clause to the plural, which led him to conclude that the agreement showed a contrary intention excluding application of s 181 (1) (b). Those reasons were:83 As Russell J said in In re A Solicitors' Arbitration at 356-7, s 181(1)(b) is designed to shorten the drafting of instruments and nothing more, and a provision designed to save verbosity cannot properly be relied upon to produce a substantial change in the operation of an instrument. A comparable provision in interpretation legislation was held by the Privy Council to be a drafting convenience, and their Lordships said that it was not to be expected that the provision would be used so as to change the character of legislation: Blue Metal Industries Ltd v Dilley (1969) 117 CLR 651, 658. Those observations were applied by Callaway JA in Hanlon v Brookes to an express clause in a partnership agreement comparable to s 181 (1) (b).
(a) if the exclusion clause extended to the plural, it would be necessary to confine it, in the case of the exclusion of two or more partners, to exclusion for joint breaches, otherwise it would not make sense for the clause to provide (as it did) that the expulsion was to be without prejudice to the remedies of the other partners for any antecedent breach (see also Street J at first instance, 89 WN (Pt 1) (NSW) at 409);
(b) it was very unlikely that the parties who executed the deed intended to permit a single partner to expel all the other partners, but that would be the consequence of applying s 181 (1) (b);
85 The first and third of these reasons are inapplicable to the present case, but the second applies, and is reinforced by the consideration that in the present case, where the partnership is between two financiers and two operators, it would be commercially irrational to make an arrangement permitting one to expel the other three.
(c) an examination of the partnership agreement, which was evidently a carefully drawn document, showed a contrary intention running through almost from the beginning to the end of the document, since the drafter frequently used the phrase ‘partner or partners’ and the extension of some clauses to the plural would be nonsensical.
The construction of clause 14.1
86 My conclusion that s 181 (1) (b) does not apply to clause 14.1 does not mean that the clause must be read as permitting only the expulsion of a single partner by the other partners. It is still possible to construe the clause as implying a power to remove two partners simultaneously, by applying the established cannons of construction for the implication of contractual terms. For the reasons I shall give, my view is that clause 14.1 implies a power of expulsion exerciseable by the financier partners (the plaintiffs) to expel the ‘working’ partners (the defendants) simultaneously, if the criterion of ‘serious misconduct prejudicing the partnership business’ is satisfied.
87 Even on first perusal, one notices that the partnership agreement is a poorly drafted document. For example:
· the last part of the recital is literally nonsensical unless the words ‘shall carry’ are read to mean ‘shall be carried on’;
· in the recital, the business name is stated to be ‘The Wolfs Den’ whereas in clause 1 the name is ‘The Wolf Den’;
· clause 6 talks about the admission of new ‘partners’ and the retirement, death or expulsion of a ‘partner’, without conveying any obvious reason for referring to incoming partners in the plural and outgoing partners in the singular (although a similar juxtaposition of the singular and the plural did not trouble Wallace P in Bond v Hale , 72 SR (NSW) at 207);
· clause 7 says, ungrammatically, that the bank of the partnership is such bank ‘as the partner mutually agree’;
· clause 8 contains an acknowledgment that ‘all funds’ for the commencement of the business were provided by the plaintiffs and an agreement that the defendants' share of profits be paid to the plaintiffs until 40 percent of ‘such amount shall have been paid’, a provision that confusingly shifts from ‘funds’ to ‘amount’;
· clause 9 (a) refers to ‘such other times as may be signed’, presumably intending ‘assigned’;
· the first sentence of clause 10 is ungrammatical;
· clause 11.2 defines voting rights in terms of numbers, when what appears to be intended is that the numbers reflect voting strength at partnership meetings;
· clause 13.3 refers to ‘the outgoing partner’ and ‘the continuing partner’, whereas clause 13.1 refers to ‘the other partners (the continuing partners)’ in the plural;
· clause 14.1 (b) refers to ‘serious misconduct which prejudice the partnership business’;
· clause 14.2 says that in calculating the purchase price of the share of the expelled partner, ‘no account shall be taken if any goodwill...’;
· as noted more fully below, clause 14.2 gives the remaining partners an option to purchase the share of the expelled partner, but there are no provisions as to the machinery for exercise of the option, whether its exercise must be unanimous, or whether the expelled partner has any right to payment if the option is not exercised.
88 These examples are not of any great significance in themselves. However, cumulatively they demonstrate that the drafter of the agreement failed to pay attention to matters of detail, including matters relating to the use of the singular and plural forms of the word ‘partner’. That being so, it would be wrong for the Court to construct an intellectual edifice upon the foundation of variations in usage of the singular and plural forms, and more realistic to start with the hypothesis that the shifts from the singular to the plural are insignificant or even accidental.
89 The partnership agreement in this case is drafted very differently from the partnership agreement under consideration in Bond v Hale , where the Court of Appeal was able to conclude, in substance, that the use of the words ‘partner’ and ‘partners’ was considered and deliberate. The same can be said of the partnership agreement in Russell v Clarke [1995] 2 Qd R 310, where Ambrose J adopted and applied Bond v Hale . It is also quite different from the agreement in Hanlon v Brookes , which expressly provided that the singular included the plural and vice versa, and permitted the expulsion power to be exercised only by a special resolution of the partners.
90 Counsel for the defendants prepared two lists of provisions of the partnership agreement. The first list, in which the word ‘partner’ was used (according to his submission) in a manner intended to exclude ‘partners’, comprised clauses 6, 10, 11.2-11.3, 13.1-13.4 and 15.1-15.2. The second list, in which (he submitted) the word ‘partners’ was used in a manner intended to exclude a ‘partner’, comprised clauses 6, 7, 9, 10, 11.1, 13.1, 13.3 and 15.1. In my view no sound conclusions as to the intention of the parties can be drawn from an analysis of this kind, bearing in mind the poor drafting of the agreement.
92 In that context, the parties to the agreement must have recognised that a principal occasion for the ‘serious misconduct’ that would entitle the other partners to expel a partner would be in the operation of the business, for which the defendants were rendered responsible by clauses 9 and 11. The right of expulsion functions, in commercial terms, as part of the ‘security’ protecting the investment by the financier partners, although it is also available against a financier partner at the instance of the other partners. In my opinion, given the commercial context and function of the expulsion clause, it is available to be used by the financier partners to expel both of the ‘working’ partners simultaneously for serious misconduct with respect to the operation of the partnership business, which prejudices the business. It is as if clause 14.1 (b) read:91 In a document such as a partnership agreement it is the commercial intent of the parties that is to be ascertained, by construing the instrument as a whole rather than by focusing myopically on particular usages of words in isolation. Hanlon v Brookes , for example, can be said to accord with the commercial expectations of partners of law firms: see K Fletcher, ‘Partnership -multiple expulsions’ (1998) 72 ALJR 506, 510. To my mind, a centrally important commercial element of the present partnership agreement is that it is, ex facie , an agreement for a partnership between two financiers and two operators of the business. Clause 8 contains an acknowledgment that finance for the commencement of the partnership business has been provided by the plaintiffs, and an agreement that the profits due to the defendants will be paid to the plaintiffs until 40 percent of the amount of finance has been paid. Clause 9 provides for Mr Jones to devote his full working time and attention to the partnership business, at a salary, and clause 11 requires both of the defendants to devote such time to the partnership business to ensure its proper advancement as the partners shall agree.
‘A partner or both of the working partners may be expelled by the other partners... (b) if that partner, or both of the working partners in the case of conduct relating to the operation of the business, has been guilty of serious misconduct which prejudices the partnership business’.
93 On this construction, the serious misconduct which gives rise to the application of the clause against both working partners includes serious misconduct by them jointly, and serious misconduct by one to the knowledge of the other, where that misconduct is part of a course of conduct in which the working partners are ‘joint adventurers’.
95 I am conscious that my construction of clause 14.1 is different from the construction preferred by Street J in Bond v Hale . His Honour observed that the power before him was ‘not a power simply aimed at the resolution of internal disputes by enabling one faction to expel another; this concept, indeed, is not relevant to the power’ (89 WN (Pt 1) (NSW) at 409). But there is nothing to indicate that the partnership in that case was between financiers and operators. Moreover, I do not regard the power of expulsion in the present case as simply a dispute resolution mechanism between factions, since its exercise is premised upon the existence of serious misconduct prejudicing the business. I have therefore concluded that although my construction is different from the one adopted by Street J, my reasoning is consistent with his Honour's reasoning.94 My construction of clause 14.1 does not lead to the consequence that one partner can expel all the others, a consequence thought by the Court of Appeal in Bond v Hale to be very unlikely to have been intended by the parties (72 SR (NSW) at 206). It is unnecessary for me to decide whether a decision to expel a partner or partners under clause 14.1 is a decision to be taken by a majority of partners by virtue of s 24 (8) of the Partnership Act. Once I have held (as I have) that the two financier partners may use the clause to expel the two working partners simultaneously on the ‘serious misconduct’ ground, the question of majority decision does not arise on the facts before me.
96 It follows from my answer to Question 1 that the two financier partners may validly expel a working partner. It is unnecessary for me to decide whether two partners may validly expel a third in other circumstances.
2. Whether, in the circumstance where there are four partners in the Partnership, on the true construction of clause 14.1 of the said Partnership Agreement, one partner may be expelled validly from the Partnership by any two other partners.
97 The plaintiffs say that on 27 April 1994 they exercised the power conferred by clause 14.1 (b) by expelling both of the defendants from the partnership, on the ground of serious misconduct by each of them in the preceding period. The defendants contend that there was no serious misconduct by them and consequently no ground for expelling them under clause 14.1 (b). In my opinion the evidence establishes the ground of serious misconduct as alleged by the plaintiffs.
3. Whether, in the events which have happened and for the purpose of clause 14.1 of the said Partnership Agreement, any and, if so, which partner was or partners were guilty on or prior to 27 April 1994 of serious misconduct which prejudiced the partnership business of the Partnership known as ‘The Wolf Den’.
98 The plaintiff's' allegations of misconduct against the defendants may be grouped, for convenience, into eight categories:
The categories of alleged misconduct
99 For the reasons I shall give, I find that the plaintiffs have established one or more instances of misconduct by Mr Jones in categories A, B, D and E, and one or more instances of misconduct by Ms Wolf in categories A and E.
A. in the case of both the defendants, failing to attend at the business premises, or late arrival;
B. in the case of Mr Jones, being under the influence of alcohol while working at the business premises;
C. in the case of both defendants, being under the influence of ‘substances’ while working at the business premises;
D. in the case of Mr Jones, abusive language to customers and staff in the business premises, and assaults upon customers there;
E. quarrelling between the defendants at the business premises, verbally and physically;
F. in the case of both defendants, breaching the partnership's ‘no relatives’ policy;
G. in the case of Mr Jones, giving away goods for free;
H. in the case of both defendants, failing to record takings of the business.
Preliminary matters
100 First, the defendants draw attention to the nature of the business of the Wolf Den and the circumstances in which it was carried on. The Wolf Den was a sex shop in the heart of the ‘red light’ area of Kings Cross. It could be expected to attract a substantial number of unsavoury and undesirable patrons. The evidence discloses that thieves were apprehended on a fairly routine basis there, troublemakers (including drunks) frequently had to be removed, and there were incidents of men masturbating and urinating in the premises. A security company, Kings Cross Security, was engaged to make spot checks at the Wolf Den and to be on call if trouble arose.
101 The defendants say that these matters must be borne in mind when one considers whether the defendants were guilty of serious misconduct prejudicing the partnership business. In the defendants' submission, acts which may constitute misconduct in a partnership conducting the business of retail sale of consumer goods in a suburban shopping mall do not necessarily do so where the shop is a sex shop in the heart of a red light district.
102 I agree that it is important to bear all these matters in mind when considering whether the conduct proven against the defendants is ‘serious’, and whether it is conduct which prejudices the partnership business. In particular, firmer and even rougher responses to minor disorder on the premises would be justified in a sex shop that in a suburban shopping mall. I also accept that language that might be regarded as abusive in a suburban shopping mall may not be open to objection in a sex shop. But that does not take the defendants' case very far, because the principal allegations levelled against them by the plaintiffs are of misconduct going beyond the limits of acceptability, even in a sex shop.
103 Secondly, both the plaintiffs and the defendants make some submissions about the meaning of ‘serious misconduct’ in clause 14.1 (b). The plaintiffs seek to tie the concept of serious misconduct to the partner's basic duties of honesty and loyalty in dealing with other partners and unrelated third persons. They refer to a passage in Lindley and Banks on Partnership (17th ed, 1995) para 10-96 (p 210) which states, in the context of misconduct and dishonesty, that ‘honesty, integrity and restraint are vital in a partner’(see also Carmichael v Evans [1904] 1 Ch 486, 492 per Byrne J). Then they point out that the standard of honesty and loyalty required of a partner to other partners is a high fiduciary standard, and they say that the words ‘serious misconduct’ incorporate that high standard for the purposes of expulsion.
104 I am far from convinced that the reference in clause 14.1 (b) to ‘serious misconduct’ incorporates the standard set by the fiduciary duty of loyalty. But in my opinion it is unnecessary for the plaintiffs to persuade me that this is so. The misconduct which they allege would contravene basic duties of honesty and loyalty set well below the rather delicate equitable standard. I should note that I have not derived any help from the dictionary definitions of ‘misconduct’ to which the plaintiffs referred me.
105 Essentially the defendants' submissions are that
· the words ‘serious misconduct’ are not capable of precise definition and what amounts to serious misconduct in any case is a question of fact;
· there is no serious misconduct if risk of loss or injury is very remote, or if any loss or injury (even if probable) would only be trivial in its nature and character.
107 While the statutory context of that case was very different from the present circumstances, in my opinion the propositions upon which the defendants rely are basic and uncontroversial, and I have no difficulty in adopting them for the purposes of this case. Again, that does not take the defendants' case very far, because the principal allegations against them are of misconduct that would cause direct, non-trivial prejudice to the partnership business. For example, an inexcusable physical assault by one partner upon another is at least capable of justifying expulsion, under a partnership clause which permits expulsion where a partner so conducts himself that the general interest of partners would be likely to suffer: Greenaway v Greenaway (1940) 84 Sol Jo 43. I shall return to the question of prejudice later.106 For these propositions the defendants rely on Johnson v Marshall Sons, & Co, Ltd [1906] AC 409. In that case the question was whether the widow of a deceased worker was disentitled to workmen's compensation under a United Kingdom statute, on the ground that the deceased worker was guilty of ‘serious and wilful misconduct’. Holding that there was no evidence of serious and wilful misconduct on the facts as proven, Lord Atkinson took the opportunity to make some observations about the meaning of ‘serious misconduct’, and stated the propositions set out above.
Category A - non-attendance and late attendance
108 Under clause 11.1 of the partnership agreement, the defendants were required to devote such time to the partnership business as the partners agreed. There is no evidence of any express agreement of the partners on this subject, but the evidence shows that in practice Mr Jones and Ms Wolf were rostered to work shifts regularly. In my view this is enough to give rise to an implied agreement of the partners that they would continue with that practice. Mr Jones was also expected to manage the Wolf Den and received a salary for doing so. It is true that his responsibilities in management would have required him to be absent from the shop from time to time. To the extent that Ms Wolf was expected to be involved in the purchase of stock, the same can be said of her. But in my opinion this does not explain or justify the substantial absences by both defendants from the shop, as disclosed by the evidence of the plaintiffs' witnesses.
109 Edward Dickinson was employed as a salesperson at the Wolf Den for approximately two years during 1990 and 1991. He worked on the 2am to 10am shift on Sundays to Fridays. He says that on some occasions Mr Jones and Ms Wolf worked on that shift, but their usual shift was 10am to 6pm or later. His evidence is that during the time that he worked at the Wolf Den Ms Wolf and Mr Jones were frequently late in arriving for their shift, often by more than an hour and frequently by up to six hours. He says that on many occasions they did not turn up for their shift at all.
110 Timothy Lark was employed as a salesperson at the Wolf Den between March and July 1994, mostly working the 6pm to 2am shift, but sometimes working a twelve hour shift to 6am. He says that except for his first shift, he cannot recall Ms Wolf or Mr Jones remaining in the shop for the whole period of a rostered shift. His evidence is that on almost every shift on which he worked, Ms Wolf or Mr Jones left the shop one or two hours after the start of the shift, frequently leaving as soon as he arrived. He was left to manage the shop alone.
111 Michael Chambers was employed as a salesperson at the Wolf Den from late January 1994 until mid-1995. Initially he was rotated through various shifts, and then was assigned to work the 2am to 10am shift, and from about May 1994 he worked from 8pm to 8.30am each Wednesday to Sunday inclusive. He gave evidence that Mr Jones and Ms Wolf did not seem to have set hours of work and he was never sure if they were working scheduled shifts.
112 He says that in early February 1994, he made it clear to Mr Jones that he had to fly to Brisbane on a 9am flight on a day in the first week in March. He arranged to finish his shift at 8am and for Mr Jones and Ms Wolf to take over from him that time. He asked Mr Jones to make sure that he and Ms Wolf would not be late on that day. He reminded them subsequently on a number of occasions. On the day of his departure Mr Jones and Ms Wolf did not arrive to relieve him at the scheduled shift change over time at 8am. At 8.15am he rang them at home and Mr Jones told him they were still in bed.
4. Whether, in the events which have happened, any and, if so, which partner was or partners were expelled validly from the said Partnership on or about 27 April 1994.
154 My answer is that both of the defendants were expelled validly from the partnership on 27 April 1994.
155 I have found that although Mr Land did not, on the balance of probabilities, use the word ‘expel’ or any derivative of its during his conversation with Mr Jones on 27 April 1994, he said words that communicated to Mr Jones that the plaintiffs had decided unilaterally to terminate their partnership with the defendants on the ground of serious misconduct by the defendants prejudicing the partnership business. In my opinion that was sufficient to communicate to Mr Jones that a decision had been taken by the plaintiffs to expel the defendants under clause 14.1 (b).
156 The defendants submitted that what Mr Land told Mr Jones on 27 April was only that, so far as Mr Land was concerned, the partnership was at an end. In legal parlance, say the defendants, what Mr Land stated was that he wished to determine the partnership, as distinct from expelling Mr Jones and Ms Wolf from it.
157 That submission implies that in the conversation on 27 April Mr Land was seeking agreement or consensus about a future course of action. In my opinion, the submission is not supported by the facts. What Mr Land intended to convey on 27 April was that by virtue of the plaintiffs' decision, the partnership was terminated because of the conduct of Mr Jones and Ms Wolf. It was not a case of seeking consensus, but rather a case of communicating a final decision. The fact that the word ‘expel’ was not used, and that no reference was made to clause 14.1 (b), does not deprive the plaintiffs' decision or Mr Land's communication of it of efficacy, since a clear intention to take a step amounting to expulsion under the clause was communicated.
158 Although Mr Land gave evidence that he believed that he had Mr Seaborn's authority to act in partnership affairs in a general sense, in my view the evidence does not establish that he had the authority of the second plaintiff to take a decision to expel on 27 April 1994. However, the evidence shows that Mr Seaborn ratified Mr Land's decision by ‘confirming’ it on 28 April 1994. On the assumption stated below, the decision to expel therefore came to be adopted as a decision of both plaintiffs by virtue of that ratification. I accept, as counsel for the defendants submitted, that s 142(2) of the Evidence Act 1995 (NSW) is relevant to this issue, because of its central importance in the case, and in my view the evidence is quite clear.
159 This analysis assumes that Mr Land and Mr Seaborn each had the authority to bind their respective companies to the expulsion decision. That is an assumption that the defendants challenge. The defendants submit that the making of a decision to expel half of the partners from a partnership in which two companies are partners cannot be regarded as a matter falling within the authority of a single director of each company, even if the directors concerned are the managing directors of the companies. They say that there is no cogent evidence that the boards of directors of the first and second plaintiffs authorised or ratified any decision to expel the defendants.
160 Mr Land's evidence is that in 1994 there were two directors of Variety Video, himself and his then wife, Jean. He agreed in cross-examination that he substantially ‘called the shots’ in the management of the company, but his wife was involved in decisions of the company in the sense that he discussed most things with her on the weekends, and if she had any objection, he would have a closer look at the issue. Their discussions were not formally minuted.
161 That evidence implies, in my view, that Mr Land occupied a position that was in substance the position of managing director of the first plaintiff. As such he had implied actual authority to deal with everyday matters of management of the company but not to enter into a major transaction other than an ordinary trading transaction: see Ford's Principles of Corporations Law (10th edition, 2000) p 656. In my opinion he did not have authority as managing director to take the decision to expel the defendants from the partnership for serious misconduct. However, his evidence establishes that either his wife approved the decision to expel before it was taken, or confirmed it afterwards, and in any event she held him out as having the authority to take a decision on behalf of the company. There is no direct evidence from the former Mrs Land, but the fact of their divorce is sufficient to explain its absence. My conclusion is that the decision to expel the defendants was effective to bind the first plaintiff vis-a-vis the defendants.
163 The defendants have not submitted that they were entitled to be given an opportunity to be heard before the power of expulsion was exercised against them, although the plaintiffs have referred me to cases relevant to that question. The older case law indicates that there is no such entitlement, absent mala fides: Green v Howell [1910] 1 Ch 495. However, in Kerr v Morris [1987] 1Ch 90, a case relating to a National Health Service medical practice, Dillon LJ evidently regarded it as arguable that since a power of expulsion must be exercised in good faith, a partner cannot be expelled unheard (at 111). It may be that there is a right to a hearing where the partnership is set up under or reinforced by a statutory scheme, so as to justify the importation of principles of administrative law (cf Marlborough Harbour Board v Goulden [1985] 2 NZLR 378), but no such right in a pure contractual partnership. But the issue was not pressed and I need not decide it.162 Mr Seaborn and his wife were the directors of Juverna. Mr Seaborn's evidence is that, after Mr Land informed him that he had expelled the defendants from the partnership on 27 April 1994, he discussed the matter with his wife and she agreed with him that the decision to expel the defendants was correct. Therefore when he took the decision to confirm Mr Land's action at their meeting on 28 April 1994, he had the authority of the second plaintiff to do so.
5. Whether, in the events which have happened, the said Partnership was dissolved validly shortly after 27 April 1994 and, if so, on what date.
164 I have held that Mr Jones and Ms Wolf were validly expelled from the partnership on 27 April 1994. Consequently on 28 April 1994, the only remaining partners were the plaintiffs. Clause 6 of the partnership agreement provides that the partnership shall continue until it is determined by mutual agreement of all partners or by a partner serving a written notice of dissolution. No written notice of dissolution was served. However, at their meeting on 28 April 1994 Mr Land and Mr Seaborn decided to ‘terminate’ and therefore dissolve the partnership. That decision was effective provided that they each had the authority of their respective companies to take it.
166 In the result, my answer to the question is that the partnership was dissolved shortly after 27 April 1994. The date of its dissolution was 28 April 1994 if the respective wives of Mr Land and Mr Seaborn approved the decision prior to its being taken by their husbands, or if not, the earliest subsequent date by which the wives of both Mr Land and Mr Seaborn had confirmed the decision and thereby caused the respective plaintiffs to ratify it.165 Mr Land's evidence implies that either his wife approved the decision to dissolve the partnership before it was taken, or confirmed it afterwards, and in any event she held him out to Mr Seaborn as having authority to take the decision. Mr Seaborn did not give specific evidence that his wife had approved the decision to dissolve the partnership, but the dissolution of the partnership was a natural consequence of the decision to expel the defendants, which she expressly approved. In my view it is appropriate to infer that she either approved the decision before it was taken or subsequently confirmed it.
6. Whether, in the events which have happened and on the true construction of clauses 13 and 14 of the said Partnership Agreement, the remaining partners, as referred to in clause 14.2, were entitled to exercise the option to purchase the share of any expelled partner in the manner specified in that clause.
167 Clause 14.2 provides that, where a partner is expelled in accordance with clause 14.1, the remaining partners, at their option exercisable within one month of the date of expulsion, are entitled to purchase the share of the expelled partner for an amount calculated in accordance with clause 13, but no account is to be taken of any goodwill. By virtue of the expulsion of the defendants on 27 April 1994, the plaintiff became entitled to exercise the option to purchase the defendants' shares for the amount so calculated. The question raised by the defendants' submissions is whether the plaintiffs' subsequent decision to dissolve the partnership affected their entitlement to exercise the option to purchase.
168 The defendants refer to s 38 of the Partnership Act, which provides that upon the dissolution of a partnership, the rights of the partners continue only so far as may be necessary to wind up the affairs of the partnership and not otherwise. Under s 39, on the dissolution of a partnership every partner is entitled to have the property of the partnership applied in payment of the debts and liabilities of the partnership business and to have surplus assets after such payment applied in payment of what may be due to each partner after deduction of what may be due from the partner to the partnership. The defendants say that in the absence of any relevant provisions in the partnership agreement, post-dissolution settlement of accounts is governed by these provisions and s 44 of the Act. In these circumstances, say the defendants, if the plaintiffs dissolved the partnership shortly after 27 April 1994 (as I have held) and did not first exercise the option in clause 14.2, they lost the right to exercise it. The defendants submit that on the evidence, if the plaintiffs ever purported to exercise the option under clause 14.2, they did not do so until on or about 30 August 1994.
170 The correct answer to this question is that the remaining partners were not entitled to exercise the option under clause 14.2 after the expiration of one month from the date of expulsion.169 In my opinion, if the plaintiffs had acted within one month of the date of expulsion they would have been entitled to exercise the option under clause 14.2, notwithstanding that in the meantime they had dissolved the partnership. This is because the option arose by virtue of the expulsion and became vested in the plaintiffs prior to the dissolution taking effect. In my view vested rights of this kind are not taken away by virtue of the dissolution of the partnership, under ss 38, 39 and 44 of the Act. However, it is unnecessary for me to reach a firm decision on this point because, for reasons that I shall explain in answer to Question 7, the plaintiffs lost the right to exercise the option to purchase the defendants' shares when they failed to do so within the one month time limit.
7. Whether, in the events which have happened, the remaining partners, as referred to in clause 14.2 of the said Partnership Agreement, have duly exercised the said option.
171 The defendants were expelled on 27 April 1994. Under clause 14.2 the option had to be exercised within one month of that date. The plaintiffs purported to exercise the option only by the letter of their solicitors dated 30 August 1994, well outside the one month time limit. Consequently they did not duly exercise the option according to its terms. I cannot agree with the plaintiffs, as a matter of construction, that the option remained available to be exercised after the expiration of the one month time period.
172 The plaintiffs contend that there was an agreement between them and the defendants arising out of a request by the defendants for time to enable them to sell the business for $400,000, and for the plaintiffs to make monthly progress payments in advance to the defendants. In the alternative, the plaintiffs claim that the defendants are estopped from contending that the purported exercise of the clause 14.2 option is outside the one month period permitted by the clause, having regard to the principles in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, at 428 per Brennan J. They say the plaintiffs assumed or expected, as a result of representations made by Ms Wolf to Mr Land in about May 1994, that the defendants would find a buyer for the Wolf Den, and they altered their position to their detriment by paying the defendants $ 3,200 per month in anticipation of settlement of the partnership's affairs.
173 I have found that the plaintiffs' version of the relevant facts should be accepted. However, the evidence does not establish that the plaintiffs refrained from exercising the clause 14.2 option in reliance on the defendants' representations, or that the defendants' conduct gave rise to any relevant agreement or assumption or expectation by the plaintiffs. It appears from Mr Land's evidence that what was contemplated between him and Ms Wolf was the sale of the whole business of the Wolf Den on an ordinary commercial basis, including a component for goodwill or ‘potential’. It cannot be said that Ms Wolf induced the plaintiffs through Mr Land to adopt any assumption or expectation that would permit them subsequently to acquire the defendants' partnership shares on the ‘discounted’ basis provided for in clause 14.2.
174 The view that Mr Land proceeded from May 1994 on the basis that the plaintiffs would acquire the defendants' shares for full value rather than on the discounted basis is supported by the terms of the letter written by the plaintiffs' solicitors on 30 August 1994. The letter gives notice that the plaintiffs ‘now propose to resort to Clause 13.3 of the Partnership Agreement and secure an independent valuation through the Institute of Valuers’, and does not assert that the plaintiffs were entitled to acquire for a valuation which excluded goodwill.
175 In my view, therefore, the plaintiffs' arguments based upon agreement and estoppel fail, and the plaintiffs were out of time to exercise the clause 14.2 option well before their solicitors wrote the letter of 30 August 1994.
176 The defendants also submit that the plaintiffs failed to discharge their obligation to act in good faith to endeavour to reach agreement with the defendants as to the value of the shares ( Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349), but I am not persuaded on the evidence that this was so.
177 However, I agree with the defendants that the letter of 30 August 1994 cannot be regarded as an exercise of the clause 14.2 option. The letter refers to an agreement for distribution of the defendants' share of the value of the partnership, with no suggestion that there would be any deduction for the value of goodwill. It invokes clause 13.3 because of the absence of any agreement as to an appropriate valuation, but does not refer to clause 14.2. Therefore even if the defendants were not entitled to rely on the expiration of the time period prior to 30 August 1994, the plaintiffs could not demonstrate that the clause 14.2 option was exercised even at that time.
178 The defendants also submit that the letter of 30 August 1994 could not be regarded as an exercise of the clause 14.2 option because it did not invoke the proper procedure under that clause. Clauses 14.2 and 13.3 require that the valuation be made by the President for the time being of the Institute of Valuers or his nominee, whereas the valuation obtained by the plaintiffs was made by the nominee of the President of the New South Wales Division of the organisation then named the Australian Institute of Valuers and Land Economists. Since the latter body was named, prior to 1 September 1988, the Australian Institute of Valuers (Inc), I am persuaded that the reference in clause 13.3 is a reference to that body.
180 Although nomination by the President of the New South Wales Division would not make the letter of 30 August 1994 an invalid exercise of the clause 14.2 option, my view is that the letter could not be regarded as an exercise of the option for the reasons already given.179 The defendants say that the body is and at all material times has been a national organisation and accordingly the nomination of the valuer should have been made by the national President, not the President of the New South Wales Division. I disagree. Given that the partnership agreement was made in New South Wales and related to a business conducted wholly within this State, the reference to the nominee of the President of the Institute of Valuers embraced a person nominated by the President of the New South Wales Division of the national body, although it probably also permitted the National President to make a nomination.
The rights and obligations of the parties after expulsion and failure by the remaining partners to exercise the option to purchase the expelled partners' shares
181 The separate questions for determination do not include any question about the rights and obligations of the parties with respect to the defendants' partnership shares, should I conclude (as I have) that the defendants have been validly expelled but the plaintiffs have not validly exercised the clause 14.2 option. However, argument was addressed to this question and it seems to me appropriate to make observations about it, with a view to bringing the dispute as close as I can to final resolution.
182 Clauses 13.3 and 14.2 are not satisfactorily drafted, as I have already observed. They do not expressly deal with the rights and obligations of the remaining partners and the expelled partner in the event that there is a valid expulsion but no exercise of the option under clause 14.2 within the specified time limit. It is possible to construe the partnership agreement so as to reach either of two main alternative outcomes in such a situation. First, one could say that unless the clause 14.2 option has been exercised within the specified time, the expelled partner has no right to payment for his or her share in the partnership, which is in effect forfeited to the remaining partners. Secondly, one could say that if the clause 14.2 option has not been exercised within the specified time, the remaining partners are entitled, and indeed obliged, to purchase the share of the expelled partner, but the expelled partner is entitled to be paid for his or her share in the manner calculated under clause 13.3, for a value (calculated as at the time of expulsion) which includes any goodwill of the partnership.
184 The second construction is more rational commercially. It implies that the remaining partners cannot appropriate the expelled partner's share without payment. It means that if the remaining partners act promptly after the expulsion they will be able to acquire the expelled partner's share at a ‘discounted’ price that does not take into account the goodwill of the partnership, but if they fail to act in a timely fashion they will be obliged to acquire the share of the expelled partner only for its full value including any goodwill component. The obligation of the remaining partners arises because under clause 14.2, the value of the expelled partner's share is calculated in accordance with clause 13, and clause 13.4 obliges the remaining partners to pay the outgoing partner the agreed or determined value within a reasonable time no later than 90 days after the date of the determination. It is true that clause 14.2 speaks of the remaining partners being ‘entitled to purchase the share of the expelled partner’, and is not expressed in terms of any obligation to do so, but in my opinion the ‘entitlement’ conferred by clause 14.2 is the advantage of acquiring the expelled partner's share for the ‘discounted’ price that does not allow for goodwill.183 In my view the second construction is correct and the first is incorrect. The Court should lean against construing a partnership agreement in a way that confers a right of forfeiture of a partnership share unless the agreement expressly so provides. It would be implausible commercially for the parties to have reached an agreement which would give the remaining partners the option of either taking a step that would oblige them to make a payment to the expelled partner, or doing nothing and thereby allowing a forfeiture to occur. Clause 14.2 is expressed as an option exercisable by the remaining partners, suggesting that they may obtain an advantage by exercising the option, whereas upon this construction they would obtain an advantage by not doing so.
185 In summary, my answers to the seven questions are as follows:
Conclusion
1. Yes, where (as in this case) the power is invoked by the financing partners to expel the ‘working’ partners.2. The two financier partners may validly expel a working partner.
3. Each of the defendants was guilty on or prior to 27 April 1994 of serious misconduct which prejudiced the partnership business.
4. Both of the defendants were expelled validly from the partnership on 27 April 1994.
5. The partnership was dissolved shortly after 27 April 1994. The date of its dissolution was 28 April 1994 if the respective wives of Mr Land and Mr Seaborn approved the decision prior to its being taken by their husbands, or if not, the earliest subsequent date by which the wives of both Mr Land and Mr Seaborn had confirmed the decision and thereby caused the respective plaintiffs to ratify it.
7. The remaining partners have not duly exercised the said option.6. The remaining partners were not entitled to exercise the option under clause 14.2 after the expiration of one month from the date of expulsion.
186 The seven questions were formulated by consent on the basis that if I were to answer the questions in the way that I now have, the defendants would not press their application to amend the cross-claim to join Bellsan as a defendant and to seek relief accordingly.
187 It appears to me that, the separate questions having been answered in this way, it may be appropriate for the plaintiffs to apply for judgment to be entered in terms of the declaratory orders in paragraphs 1, 2 and 3 of the summons. The injunctive orders sought in paragraphs 4 and 5 are expressed in interlocutory form, and it may be that the plaintiffs do not seek final relief in that form. If final injunctions were to be sought, it would probably be necessary to hear further evidence to ascertain whether there is any real risk that the defendants might engage, at this late stage, in the conduct sought to be enjoined.
188 The defendants' cross-claim substantially falls away, in light of my answers to the separate questions. The defendants are not entitled to the declarations in paragraphs 1,2 and 3, nor the injunctive orders in paragraphs 4, 5 and 10. Nor are they entitled to an order in terms of paragraph 6 for the winding up of the partnership business, since the partnership was dissolved on or shortly after 28 April 1994 - nor, for the same reason, to an order for the appointment of a receiver and manager of the partnership for the sale and distribution of the partnership assets (paragraphs 7, 8, 9 and 13) or for the taking of accounts and the holding of an inquiry in the form in which those orders are set out in paragraphs 11 and 12.
190 Subject to any submissions that may be made by counsel for the parties, and on the assumption that no consent orders to dispose of the proceedings can be agreed, my intention is to set the matter down for a further brief hearing before me in a few weeks' time, and to give directions for the filing and serving, in the meantime, of any application and supporting evidence by the plaintiffs or by the defendants, and evidence in reply by the other side. This would be on the basis that any such applications would be dealt with upon the next occasion, and I would also hear argument as to costs. My ability to bring the proceeding to a conclusion on the next occasion (subject to any necessary inquiry as to the value of the defendants' shares) may depend in part upon whether the plaintiffs seek to make out a case for injunctive relief.189 However, in light of my view that the defendants as expelled partners are entitled to receive payment for the full value of their partnership shares, calculated as at the date of expulsion, it may be appropriate for the defendants to apply to amend their cross-claim to seek orders for an inquiry into the proper value of their shares calculated under clause 13.3 and for payment of the amount so ascertained under clause 13.4.
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