Walker v Melham

[2007] NSWSC 264

CITATION:	Robert Mark Walker v Rodney Derane Melham [2007] NSWSC 264
HEARING DATE(S):	7 & 8 March 2007
JUDGMENT DATE :	9 March 2007
JURISDICTION:	Equity Division
JUDGMENT OF:	White J
EX TEMPORE JUDGMENT DATE:	9 March 2007
DECISION:	See paragraphs 80-89 of judgment.
CATCHWORDS:	PARTNERSHIP – Dissolution – Partnership for undefined term dissolvable by giving notice – Determination of when partnership dissolved – Abandonment of basis on which partnership conducted amounted to abandonment of partnership – Abandonment operates as notice of intention to dissolve partnership – Effect – Assets – Whether land an asset of the partnership – Land purchased from distributed partnership profits and not treated as partnership asset in accounts – Held that land not a partnership asset – Outgoing partner entitled to share of value of net partnership assets as at date of dissolution – Plaintiff’s entitlement to interest on his share of value of net partnership assets – Profits – Profits earned by partnership business after dissolution – Whether outgoing partner abandoned entitlement to share of profits attributable to use of his share of partnership assets – Held that no such abandonment – Laches – Plaintiff’s delay in commencing proceedings to seek account of post-dissolution profits would cause unfair prejudice to defendant – Held that plaintiff gave notice of dissolution of partnership by abandonment of partnership - plaintiff entitled to share of value of net partnership assets as at date of dissolution - plaintiff entitled to interest under s 42(1) of the Partnership Act 1892 - doctrine of laches precluded plaintiff from claiming account of profits arising from defendant’s use of his share of partnership assets. - (NSW) Partnership Act 1892, ss 20, 21, 26(1), 32(c), 42
LEGISLATION CITED:	Partnership Act 1892 (NSW) Partnership Act 1958 (Vic)
CASES CITED:	Palmer v Moore [1900] AC 293 Jorgenson v Boyce (1896) 22 VLR 408 Cutts v Holland [1965] Tas SR 69 Lukin v Lovrinov & Anor (Supreme Court of South Australia, 9 April 1998, unreported; BC9801124) Ryder v Frohlich [2004] NSW CA 472 Higgins & Fletcher, The Law of Partnership in Australia & New Zealand, 8th ed (2001) Sydney, LBC Information Services Sandhu v Gill [2006] 2 All ER 22 Forgeard v Shanahan (1994) 35 NSWLR 206 Peter Butt, Land Law, 5th ed (2006) Sydney, Lawbook Co Harvey v Harvey (1970) 120 CLR 529 O’Brien v Komesaroff (1982) 150 CLR 310 Popat v Shonchhatra [1997] 3 All ER 800 Watson v Foxman (2000) 49 NSWLR 315 Hugh Stevenson & Sons Ltd v Aktiengesellschaft fur Caronnagen–Industrie [1917] 1 KB 842 Meagher, Heydon & Leeming, Meagher Gummow & Lehane’s Equity Doctrines & Remedies, 4th ed (2002) Australia, Butterworths Manley v Sartori [1927] 1 Ch D 157 Prance v Sympson (1854) Kay 678; 69 ER 289 Limitation Act 1969 (NSW) Lindsay Petroleum Co v Hurd (1874) LR 5 PC 221 Lindley & Banks on Partnership, 18th ed (2002) London, Sweet & Maxwell
PARTIES:	Robert Mark Walker v Rodney Derane Melham
FILE NUMBER(S):	SC 5431/05
COUNSEL:	Plaintiff: B Kasep Defendant: F Donohoe
SOLICITORS:	Plaintiff: Frontier Law Group Defendant: Caldwell Martin Cox

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WHITE J

Friday, 9 March 2007

5431/05 Robert Mark Walker v Rodney Derane Melham

JUDGMENT

1 HIS HONOUR: This is an application for the taking of partnership accounts. The plaintiff, Mr Walker, and the defendant, Mr Melham, became partners in about 1979. They carried on a business of house cladding and window fitting.

2 In October 1984, they purchased land at East Jindabyne in New South Wales for $45,000. According to Mr Walker, their original agreement was that they would build a place on the land for them both to use for ski holidays, but they also agreed that they would build two cabins, one for themselves and the other to be rented out. The council refused permission for the construction of two buildings. Instead, a single ski lodge was constructed on the site.

3 There is an issue as to whether $25,000 of the cost of the land was paid from undistributed or distributed profits of the partnership. The balance of the purchase price was borrowed by Mr Walker and Mr Melham jointly, from Westpac Banking Corporation. They acquired the land as tenants in common in equal shares.

4 The ski lodge built on the site was known as the River Gum Lodge. From either the 1986 or 1987 ski season, Mr Walker and Mr Melham let out the lodge. It is common ground that from 1986 or 1987 until May 1994, they carried on a ski lodge business in partnership.

5 It is admitted on the pleadings that a term of their agreement for carrying on this business was that the "plaintiff and the defendant as partners will contribute towards the day-to-day management and control of the ski lodge business." Mr Melham gave evidence, which Mr Walker admitted to be true, that in the late autumn of 1987, being prior to the first official season of the ski lodge, he, Mr Melham, said to Mr Walker words to the effect, "If we're going to be serious about this then we need to put in the time. You can't just go racking off to Sydney to see your girlfriend. It is equal shares and it is equal time. We both need to be here all of the time in the snow season." Mr Walker replied in words to the effect, "Yeah, I agree. I understand it’s like that. It's full on. If we are both dedicated, we can really make something out of this.”

6 It is common ground that for each ski season up to and including the 1993 ski season, Mr Walker and Mr Melham contributed their time and labour equally to the working of the business, as well as making equal financial contributions. This required their full-time participation during each ski season. The season typically ran from the long weekend in June to late September or early October.

7 By the end of the 1993 ski season and prior to the start of the 1994 ski season, relations between the partners had deteriorated. Mr Walker considered Mr Melham to be arrogant and rude, although he deposed that they carried on business as partners between 1984 and 1994 without encountering any remarkable differences or difficulties.

8 In late 1993, Mr Walker embarked on a new business venture in Sydney. He became a director of, and a ten per cent shareholder in, a home building company called Champion Homes (NSW) Pty Ltd. He paid $50,000 for his stake in the new business.

9 In May 1994, Mr Walker and Mr Melham had an acrimonious discussion after which they went their separate ways. The details of the conversation are in dispute. What is not in dispute is that Mr Walker told Mr Melham that he was no longer prepared to work alongside Mr Melham on a day-to-day basis. It had been the previous agreed basis of their partnership that during the ski season, both would work at the lodge full-time.

10 It is common ground that during this discussion Mr Melham proposed that if Mr Walker was not to work at the lodge, the profits should not be split on a 50:50 basis, as had hitherto been the case, but should be split seventy percent to Mr Melham and thirty percent to Mr Walker. Mr Walker did not agree. He proposed that the profits be still split 50:50, but that more staff be employed and that Mr Melham be paid a wage. Mr Melham did not agree to this. According to Mr Melham, Mr Walker asked to be paid rent but Mr Melham refused.

11 In his statement of claim, Mr Walker pleads that:

" In or about 1994 the plaintiff and the defendant had a falling out and, as a result of such falling out, in or about 1994, the Plaintiff and the Defendant made an oral agreement to the effect that the plaintiff not continue to work at the Ski Lodge in the presence of the Defendant unless that was absolutely necessary in the interests of the Walker & Melham Partnership. "

12 According to Mr Melham, the meeting concluded with Mr Melham saying to Mr Walker that he was either in or out. According to Mr Melham Mr Walker said, "Well, you can keep the fucking lot”. Mr Melham replied, "All right, I’ll run the place on my own then." and Mr Walker slammed the door and left. Mr Melham says that this was an abandonment by Mr Walker of any future interest in the business and of any claim to the profits of the business. As will appear later in these reasons, I do not accept either of these characterisations of the meeting of May 1994.

13 It is common ground that from the commencement of the 1994 ski season, the business of the River Gum Lodge was conducted wholly by Mr Melham. He met all the expenses and has kept the income. Mr Walker cut a truckload of firewood for the ski lodge in 1995 when Mr Melham was absent. However, he has played no active part in the day-to-day management of the ski lodge. Nor did he have any other connection with the ski lodge business after May 1994. Mr Walker did not contribute to expenses connected with the land such as council rates.

14 It is common ground that Mr Walker was not excluded from the ski lodge. From 1997 to 2003, Mr Melham carried out various improvements to the lodge, but he makes no claim to an allowance for those improvements.

15 In the summer of 1996/97, Mr Walker removed a tractor and a motorboat from the site. He acknowledges that those goods were partnership property. They were taken away for repair and are presently stored at properties of friends of Mr Walker.

16 On 27 February 2004, Mr Walker mortgaged all his estate in the land to QBE Insurance Australia Limited to secure a debt of $240,000. Mr Melham did not receive any benefit from the mortgage. QBE exercised its power of sale. On 16 December 2004, Mr Melham purchased Mr Walker's interest in the ski lodge site from QBE, exercising its power of sale as mortgagee, for $260,000.

17 These proceedings were commenced on 18 October 2005. By his statement of claim Mr Walker sought the following relief, amongst other orders:

1. An order for dissolution and winding up of the partnership.
2. An order that Mr Melham account to him for all profits made by the partnership.
3. An order that Mr Melham account to him for all benefits received by Mr Melham from the use by Mr Melham of the partnership property, business name or connection; and
4. In the alternative, such share of the profits of the partnership as the Court thinks fit or interest on the partnership assets pursuant to s 42 of the Partnership Act 1892 (NSW).

Issues

18 I was not asked to take accounts on the dissolution of the partnership, but to determine certain questions of principle and to refer the proceedings to an Associate Judge for the taking of accounts. The issues to be resolved are as follows.

19 The first issue is, when was the partnership dissolved? Mr Melham says it was dissolved in May 1994. Mr Walker says that the partnership continued up to 18 November 2005 when Mr Walker, by his defence, pleaded that the partnership was terminated by the conversation in May or June 1994. Alternatively, counsel for Mr Walker submitted that the partnership ended in December 2003 when Mr Walker learned that in his accounts, Mr Melham had converted a reported balance of Mr Walker's partnership capital account into a liability owing from Mr Melham to Mr Walker.

20 The second issue was whether the land was a partnership asset, or whether the partners made use of the land without its becoming a partnership asset.

21 The third issue arises if the land was a partnership asset. The third issue is how an account should be taken, given that Mr Walker mortgaged his interest in the land, and his interest was purchased by Mr Melham from the mortgagee. Counsel for Mr Walker submitted that on the taking of accounts, the land should still be treated as a partnership asset and its value apportioned equally between the parties and Mr Melham should be credited with $260,000 which he paid to reduce Mr Walker's debt to QBE.

22 The fourth issue is whether, assuming the partnership was dissolved in 1994, Mr Walker abandoned any claim in the share of the profits derived by Mr Melham’s continuing to carry on the business of the partnership, attributable to Mr Walker's share of the partnership assets, and whether he abandoned any claim to interest as provided for by s 42(1) of the Partnership Act.

23 The fifth issue is whether Mr Walker is precluded by his delay in claiming a share of profits made since the dissolution of the partnership attributable to the use of his share of the partnership assets. Counsel for Mr Melham did not rely on laches as a defence to a claim for interest under s 42(1). Nor was laches relied upon as a defence to the taking of an account of Mr Walker's share of the partnership assets as at May 1994, assuming that the partnership was dissolved then.

24 The sixth issue is what orders for the taking of account should be made.

First Issue; When Was the Partnership Dissolved?

25 The partnership was not for a fixed term. Nor was it entered into for a single adventure or undertaking. It was a partnership for an undefined term that could be dissolved by either partner giving notice to the other of his intention to dissolve the partnership (Partnership Act, ss 26(1) and 32(c)). The terms of the partnership agreement required the active involvement of both partners in the partnership business. They were to contribute, not only capital equally, but were to contribute their time and labour equally.

26 At the meeting of May 1994, following which the parties went their separate ways, Mr Melham did not agree that the terms of the partnership agreement should be varied so that Mr Walker need not continue to work at the ski lodge in Mr Melham's presence unless it was absolutely necessary to do so. Rather, Mr Walker announced his intentions as a fait accompli. He told Mr Melham that he would not and could not continue the day-to-day management of the ski lodge. Mr Melham accepted that Mr Walker would no longer be working in the business.

27 They discussed what financial adjustments should be made. They both acknowledged that some adjustment would be required if the partnership were to continue. Mr Melham proposed that he receive seventy percent of the profits. Mr Walker proposed that the profits continue to be split 50:50, but Mr Melham receive a wage to be negotiated. They did not reach any agreement as to any financial adjustment. Instead, Mr Walker left and, with one minor and inconsequential exception in 1995, has had nothing further to do with the business. Mr Melham carried on the same business as if it were his.

28 The proper characterisation of these events is that Mr Walker abandoned the basis on which the parties had agreed that the partnership would be conducted, and thereby abandoned the partnership. He did not abandon the partnership in the sense that he abandoned his interest in the partnership assets. Nor, for reasons I will give later, did he abandon his right to a share in profits derived from the use of his share in the partnership assets. However, he did abandon the relations to which the parties had agreed. It was a working partnership and Mr Walker communicated his intention that such a working partnership not continue. This was an abandonment (Palmer v Moore [1900] AC 293; Jorgenson v Boyce (1896) 22 VLR 408; Cutts v Holland [1965] Tas SR 69; Lukin v Lovrinov & Anor (Supreme Court of South Australia, 9 April 1998, unreported; BC9801124) at 22; and Ryder v Frohlich [2004] NSW CA 472 at [135]-[152]).

29 I do not decide this issue on the ground that Mr Walker repudiated the contract of partnership and that his repudiation was accepted. Such a finding would require a decision as to whether Mr Melham was rude and arrogant, as Mr Walker contended, such that he was himself in fundamental breach of the agreement. I do not need to go into that question. Nor do I go into the debate as to whether acceptance of the repudiation of a partnership contract will itself dissolve the partnership. That question was considered by McColl JA in Ryder v Frohlich. It is enough that the partnership was abandoned.

30 In my view, in cases of a partnership at will, such as the present, and in jurisdictions, such as New South Wales, where termination of a partnership at will may be given by notice which need not be in writing, there is much to be said for the view expressed in Higgins & Fletcher, The Law of Partnership in Australia & New Zealand, 8th ed (2001) Sydney, LBC Information Services at pp 216-217, that conduct amounting to abandonment of a working partnership operates as notice of intention to dissolve the partnership.

31 The only contrary indication to the partnership having been dissolved in May 1994 was that partnership accounts continued to be produced. Up to the year ended 30 June 1997, these showed Mr Walker as continuing as a partner. The financial statements were prepared by an accountant, Mr Ashgrove. From 1995 until 2003, Mr Walker did not receive accounts for the ski lodge. That is consistent with the partnership having been dissolved. The receipt by Mr Melham without objection of the accounts prepared by Mr Ashgrove, and his submission of those accounts to the Australian Taxation Office is an admission by conduct on his part that the partnership was not dissolved in May 1994. However, that admission carries little weight. He did not give any real attention to the accounts. I infer that the accountant simply continued to prepare the accounts in the same way as he did in the past.

32 If Mr Melham and Mr Ashgrove did consider the matter, it is likely that they would have been uncertain whether the events of May 1994, and Mr Walker's conduct in ceasing to be involved in the business, brought about a dissolution of the partnership. The continued preparation of accounts, which assumed that he was a continuing partner, is relevant but it is not a decisive consideration. It does not affect my conclusion that the partnership was dissolved in May 1994.

33 I should add - because some time was devoted to this question - that Mr Melham’s income tax return for the year ended 30 June 1998, which was again prepared by Mr Ashgrove, showed Mr Melham as being the sole "partner" of the Melham & Walker partnership. It also disclosed that the partnership had "ceased business". All of the net profit for that year was allocated to Mr Melham. The accounts showed Mr Walker as having a capital amount in the partnership account of $11,981.67. In later years, this was accounted for as a debt owed by Mr Melham to Mr Walker. The debt was purportedly eliminated in the 2004 financial year. Whilst attention was paid to those matters in evidence, they are not relevant to any matter I have to decide.

34 No precise date for the meeting in 1994 was given. However, the partnership was dissolved no later than 31 May 1994. Accounts should be taken as at that date.

Second Issue: Was the Land a Partnership Asset?

35 Initially the parties took a curious position on this question. That they did so was attributable to Mr Walker's having mortgaged his interest in the land to QBE Insurance Ltd in 2004. If, as was his principal contention, the partnership was still on foot this would have been a breach of his fiduciary duty as a partner if the land were a partnership asset. He contended it was not. Mr Melham said that it was.

36 By the close of final submissions when it had become clear from exchanges with counsel that I might find that the partnership had been dissolved in 1994, the parties’ positions were reversed. Mr Walker was then prepared to "concede" that the land was a partnership asset and Mr Melham was prepared to "concede" that it was not.

37 The relevance of this is that if the land were a partnership asset bought with partnership funds, then given that the parties’ contributions were equal as at May 1994, Mr Walker's net share of the partnership assets to which he would be entitled on a notional winding-up at that time (Sandhu v Gill [2006] 2 All ER 22) would include his share of the value of the land. Subject to the defences of abandonment and laches, Mr Walker would then be entitled, pursuant to s 42(1) of the Partnership Act, either to interest on that value or to an account for profits derived from the use of his share in the land up to November 2004.

38 If the land was not a partnership asset, then Mr Melham and Mr Walker occupied and used the land up to May 1994 not under any lease or licence from themselves as co-owners to themselves as partners (which lease or licence might be regarded as a partnership asset), but by virtue of their legal estate as tenants in common to occupy the land. Likewise, after May 1994, Mr Melham occupied the land by virtue of his legal estate as a tenant in common. By virtue of his legal estate, Mr Melham was entitled to occupy the land, provided he did not exclude his co-tenant. Mr Walker was not excluded. Mr Walker would only be entitled to an account for an occupation fee or a notional rent from Mr Melham if Mr Melham sought an account in his favour for the value of improvements erected by him (Forgeard v Shanahan (1994) 35 NSWLR 206). No such account is sought.

39 Mr Melham would be liable to account for income received from the third party’s use or occupation of the property, such as rents received from a tenant (Peter Butt, Land Law, 5th ed (2006) Sydney, Lawbook Co, para [1443]). But it was not submitted by Mr Walker that this would extend to income from paying guests at the ski lodge. The guests received not just accommodation, but services.

40 Section 21 of the Partnership Act provides that unless the contrary intention appears, property bought with money of the firm is deemed to have been bought on account of the firm. The affidavit evidence of both parties was that the purchase price of the land was paid for partly out of the profits of the partnership and the balance from a loan from Westpac in the joint names of Mr Melham and Mr Walker. According to Mr Melham, the loan was repaid from the profits of the Melham & Walker partnership in about one year. In his affidavit, Mr Walker agreed that this was so. In a further affidavit, he gave evidence to the same effect. If this evidence was correct and referred to undistributed profits of the partnership, it would mean that unless the parties intended to the contrary, the land was a partnership asset.

41 Counsel for Mr Walker initially submitted that a contrary intention did appear from the partnership accounts which do not include the land as a partnership asset (see Harvey v Harvey (1970) 120 CLR 529 at 555 and 562-563). Moreover, neither the fact that the parties contemplated that the land would be improved by the construction of buildings on it and that one of the proposed buildings would be let out, nor the facts that a lodge was built on the land with partnership funds and that the lodge was used in the partnership business, necessarily justifies a conclusion that the land was brought in as an asset of the partnership (Harvey v Harvey at 563).

42 Mr Walker gave further evidence during cross-examination as to the source of funds to buy the land. He said that the land was purchased from distributed profits, not undistributed profits, of the partnership so that when he and Mr Melham bought the land, they did so with money which they earned in their individual capacities and not with funds which were then partnership moneys. In cross-examination, Mr Walker said that it was the parties’ personal funds and not partnership funds which were used to repay the Westpac loan. In his affidavit, Mr Walker said that the fees collected from the lodgers were used to help service the loan from Westpac, but I understood his oral evidence to be that it was the distributed profits derived from the collection of those fees which were used to repay the loan.

43 This question might have been capable of resolution from the partnership financial statements for the years ended 30 June 1985 and 30 June 1986. However, these statements were not in evidence, although curiously, the 1984 partnership accounts were. The earliest relevant balance sheet is a balance sheet from the partnership tax return ended 30 June 1988. It includes no partnership asset for land or buildings. Nor do the subsequent financial statements. The financial statements corroborate Mr Walker's oral evidence. If the land and buildings were partnership assets, it could be expected that they would be recorded in the accounts.

44 Mr Walker dealt with his interest in the land for his personal benefit, notwithstanding that he contended the partnership was still on foot. If the partnership were on foot, this would clearly have been a breach of duty if the land were a partnership asset. That is not to say that it may not also have been a breach of his fiduciary duty for him to mortgage his interest in the land if the partnership were still on foot, but the land was not a partnership asset, although used in the partnership. However, the position would then have been less clear.

45 It is Mr Walker who belatedly seeks to contend that the land was a partnership asset. Such a conclusion would be contrary to his own oral evidence and is inconsistent with the partnership accounts on the basis of which the parties must be taken to have conducted themselves up to May 1994. In O’Brien v Komesaroff (1982) 150 CLR 310, Mason J said about s 24 of the Partnership Act 1958 (Vic) (at 322):

“ … not all the property of each partner used for the purposes of the partnership business can be said to be brought into the partnership. It may in some circumstances remain the separate property of one partner … Whether the property of a partner becomes partnership property depends on the agreement of the parties. In Harvey v Harvey [at 549] Barwick CJ said:
‘ Of course the answer to the question whether or not the land itself has been brought into the partnership as distinct from a mere licence to use it for partnership purposes, must ultimately depend on the agreement which the partners have made’
… What I have said applied with equal force to both limbs of s 24. The acts and intention of the parties, not the operation of s 24, determine finally and ultimately the question whether property owned by a partner becomes partnership property. "

46 Section 24 of the Victorian Partnership Act was the equivalent of subs 20(1) of the New South Wales Act. It deals with the obligations of partners in respect of property brought into the partnership. Subsection 20(3) of the Partnership Act (NSW) recognises that land held in co-ownership might not be partnership property, although the co-owners are partners as to profits made from use of the land.

47 I conclude from the oral evidence of Mr Walker and the partnership accounts that the land was not a partnership asset.

48 The plaintiff had contended that, nonetheless, the building on the land was a partnership asset. However, the lodge is a fixture. It is considered to be part of the land. Mr Walker obtained the capital benefit of the improvements to the land when he mortgaged his interest in it. As the land is not a partnership asset he is not entitled, under s 42 of the Partnership Act, to an account for a share of profits attributable to the use of the land and buildings, or to interest on the value of the land and buildings.

Third Issue: Accounting if the Land were a Partnership Asset

49 The third issue I identified earlier does not arise. Had the land been partnership property and been retained as such, the parties would have been entitled to share in the post-dissolution capital appreciation of the land (Popat v Shonchhatra [1997] 3 All ER 800). However, as Mr Walker mortgaged his interest and the mortgagee sold his interest, his share of the capital appreciation was realised.

50 Although it is strictly unnecessary to do so, I should say that even if the land were a partnership asset, Mr Walker would not be entitled to treat the mortgage and sale of his interest in the land as if they had not occurred. Mr Melham bought his interest in the land. He did not pay off Mr Walker's debt. On no basis could accounts be taken on the footing that Mr Walker was to be notionally treated as still being a co-owner of the land.

Fourth Issue: Abandonment of Right to an Account for Share of Post-Dissolution Profits

51 The claim that Mr Walker abandoned his rights to an account for post dissolution profits was based on a contention that the May 1994 conversation ended with Mr Walker saying, "Well, you can keep the fucking lot”, and Mr Melham saying, "All right, I'll run the place on my own" and Mr Walker then leaving. Even if I were satisfied that those particular words were used, they would not amount to an abandonment by Mr Walker of his claim to be entitled to a share of post-dissolution profits attributable to the use made by Mr Melham of his share in the partnership assets. Clearly, Mr Walker was not intending to give up his interest in those assets. Mr Melham did not understand him to be doing so.

52 Why then, it may be asked, should it be inferred that Mr Walker was intending to give up the fruits to which he would be entitled, arising from the use of those assets? That is particularly so when Mr Walker had been demanding a continued entitlement to an ongoing share of fifty percent of the profits of the business.

53 In any event, whilst there was a surprising measure of agreement about what was said in the 1994 meeting, where there was disagreement, I could not be satisfied that the particular words alleged by Mr Melham were used. The conversation occurred almost twelve years before Mr Melham swore his affidavit. The remarks of McLelland CJ in Eq in Watson v Foxman (2000) 49 NSWLR 315 at 318-319 are apposite. I reject the defence of abandonment.

Fifth Issue: Laches

54 There is no doubt that Mr Walker has been dilatory in making his claim. Counsel for Mr Melham accepted that the defence of laches would succeed only if he established not only delay, but prejudice to Mr Melham arising from the delay. Counsel accepted that there was no sufficient prejudice to preclude the taking of accounts as at the date of dissolution of the partnership in 1994, with Mr Walker being entitled to a fifty per cent share of the value of the net assets of the partnership as at that date. He also accepted that there could be no objection to Mr Walker’s receiving interest on that amount pursuant to s 42(1) of the Partnership Act.

55 However, counsel submitted that the delay in bringing proceedings did prejudice Mr Melham in the taking of an account of profits arising from the use of Mr Walker's share of the partnership assets in the business after May 1994. The taking of such an account can be very onerous. In Hugh Stevenson & Sons Ltd v Aktiengesellschaft fur Caronnagen–Industrie [1917] 1 KB 842, Swinfen Eady LJ said (at 849):

“ There is, however, considerable difficulty in the way of an outgoing partner seeking to establish that profits have been made since the dissolution which are attributable to the use of his share of capital or assets. It is almost always necessary to direct special inquiries, rendered necessary by the nature of the business and many other circumstances which have to be taken into consideration. In some cases the subsequent profits made may be wholly attributable to the diligence, business aptitude, credit, and personal qualities of the remaining partner. Indeed, Lord Lindley states in the 8th edition of his book, p 677, that he is not aware of any instance in which a judgment for a share of profits after dissolution has been worked out and has resulted beneficially to the person in whose favour it was made. ”


This passage is cited in Higgins & Fletcher, The Law of Partnership in Australia & New Zealand, 8th ed, at p 251.

56 The loss of evidence due to delay in commencing proceedings may be sufficient prejudice to afford a defence of laches, (Meagher, Heydon & Leeming, Meagher Gummow & Lehane’sEquity Doctrines & Remedies, 4th ed (2002) Australia, Butterworths para [36-020]). Here, there will be difficulties in assessing what profits were derived from 1994. Whilst accounts have been prepared and are available for most years, Mr Walker says that the accounts are inaccurate and do not reflect the true takings of the business. How, might it be asked, can the parties expect, in 2007, to identify what cash takings, if any, were received in 1995 and not accounted for? For some parts of this period, it appears that accounts are not available. Full financial statements were not tendered for all of the relevant years. The Zions book recording bookings is missing. Moreover, it would be almost impossible at this distance to have accurate specific inquiries to determine what amounts were appropriate to allow for Mr Melham’s supervision and management of the partnership business. How could it be determined how much time Mr Melham spent, and on what specific tasks he spent time, more than a decade ago?

57 In my view, the delay in commencing proceedings would cause unfair prejudice to Mr Melham if Mr Walker were to seek an account of post-dissolution profits. Particularly would that be so if the onus lay on Mr Melham to show what profits were earned by means other than the use of partnership property, as held by Romer J in Manley v Sartori [1927] 1 Ch D 157 at 166.

58 Counsel for Mr Walker submitted that the defence of laches was without substance because Mr Walker had consistently maintained his interest in the partnership. Mr Walker attended a mediation with Mr Melham and Mr Ashgrove in 1996, but it came to nothing. Between 1997 and 2003, there was no contact between them, except possibly for a couple of telephone calls.

59 The defence of laches does not depend upon a plaintiff’s failing to assert his rights. It depends on the delay, and the effect of delay, in a plaintiff bringing proceedings to enforce his rights. In fact Mr Walker did not, from about 1996 to 2003, assert his rights. But even if he had, that would not be an answer to the defence.

60 Counsel for Mr Walker also submitted the defence of laches was answered by an acknowledgement given by Mr Melham in February 2004. The background to that acknowledgement was that on 2 February 2004, Mr Walker wrote to Mr Melham. Mr Walker said, amongst other things:

“ 3. I have recently sought legal advice in relation to my entitlements in the property and have been advised that apart from my ownership of the property, I am also entitled to either

(a) A half-share in the profits, which have been earned from the operations of the business since my departure in 1993; and/or

(b) Reasonable remuneration for the sale of a half-share of the business including any goodwill.
4. I suggest that we appoint:
(a) An accountant to determine the extent of my entitlement to the past income of the business and also to place a value on the business at a given date (say the end of February 2004); and
(b) An independent property valuer to value the property.
5. Once we have determined the above, I would consider a reasonable offer for my interests in the property and the business.
6. Unless I hear from you by close of business on Friday 13 February 2004, I will have no option to either return to the business or to appoint a receiver to wind-up our joint interest in the business. ”

61 Mr Melham was in Italy at this time. Nonetheless, he replied on 10 February 2004 in the following terms:

“ I acknowledge receipt of your letter dated 2 February 2004.
As you are aware, I am currently overseas on business. I will be returning to Australia in or around the middle of May this Year.
I have sought Legal advice in respect of ‘River Gum Lodge’ and my legal representative will be contacting you in the near future.
I look forward to resolving the issues in respect of the property and the business soon as possible. I would appreciate if [sic] you withheld from taking any further action in this matter until such time as my Legal Representative has contacted you.
… ”

62 Counsel for Mr Walker submitted that this was an acknowledgement that there was an unsettled account to be resolved in relation to both the property and the business. He submitted that such an acknowledgement defeated the defence of laches. In support of this submission counsel referred to Prance v Sympson (1854) Kay 678 at 682; 69 ER 289 at 291. That case concerned the operation of the Statute of Limitations as a defence to an action of account. Sir Page Wood VC held that a letter containing an acknowledgement of the existence of an unsettled account and a promise to settle it, in the sense of paying what balance might be due, took the case outside the statute.

63 However, this is not relevant to a defence of laches. A confirmation of a cause of action postpones the operation of the Statute of Limitations (s 54 of the Limitation Act 1969 (NSW)). So a defence of an equitable claim based on the analogical application of a Statute of Limitations will likewise be defeated by a confirmation of the cause of action. But a defence based on the Limitation Act does not depend on showing the defendant is prejudiced by the delay. It is sufficient that the prescribed period for commencing proceedings has lapsed.

64 By contrast, the defence of laches may arise, and often does arise, before any limitation period expires. Typically, as in this case, the defence of laches is concerned with the effect of delay, not with the delay itself. There may be delay signifying acquiescence in the defendant's conduct. There may be delay occasioning prejudice. Laches may be relied on where the effect of the delay is to make it unjust for the plaintiff to seek a remedy (Lindsay Petroleum Co v Hurd (1874) LR 5 PC 221 at 239 to 240).

65 It would be astonishing if Mr Melham's willingness to discuss the issues belatedly raised by Mr Walker precluded his complaining that the effect of the delay in the bringing of proceedings was to occasion prejudice, such that it would be unjust to allow the plaintiff a particular remedy. I uphold the defence of laches to the plaintiff's claim to post-dissolution profits under s 42(1).

66 Mr Walker can take consolation from the fact that Lord Lindley said in a passage frequently cited that:

“ Judgments for an account of profits after dissolution are fiercely oppressive; and the writer is not aware of any instance in which such a judgment has been marked out and has resulted beneficially to the person in whose favour it was made. ”

(Lindley & Banks on Partnership, 18th ed (2002) London, Sweet & Maxwell, p 729.)

Sixth Issue: Orders

67 There should be a declaration as to the date of dissolution of the partnership. A specific date must be selected as accounts have to be taken at such a date. The choice of the date is arbitrary. It can be chosen at a convenient time (Lukin v Lovrinov & Anor (BC9801124 at 22-23)). I will declare the partnership to be dissolved as at 31 May 1994.

68 Mr Walker is entitled to an account of the assets and liabilities of the firm at that date. There will be a declaration that the firm's assets do not include the land and buildings. Its assets will include the goodwill of the partnership as at 31 May 1994.

69 The proceedings will be referred to an Associate Judge to inquire into, and certify the assets and liabilities of the partnership as at that date, and the value of each asset and liability. The Associate Judge will also inquire into and certify what are the respective interests of the partners in the net assets of the partnership as so determined. The parties acknowledge that they contributed equally to the partnership to that point. If there were equal drawings to that point, Mr Walker will be entitled to fifty percent of the net assets as so determined.

70 Mr Walker is entitled to simple interest at six per cent per annum in accordance with s 42(1) of the Partnership Act on the account of his share of the partnership assets as so determined.

71 The statement of claim will be otherwise dismissed.

72 Mr Melham filed a cross-claim asserting that the land was an asset of the former partnership with which Mr Walker improperly dealt and claiming a set-off. The cross-claim will be dismissed.

73 I direct counsel to bring in short minutes of order at a time to be discussed with counsel in accordance with these reasons. The order should provide for the return of exhibits after 28 days. I will hear the parties on costs. I will also hear them on whether any other order in relation to the taking of accounts is needed.

[Counsel addressed.]

74 I am told that offers of compromise have been exchanged and that the offers are in terms of a dollar sum or sums to be paid, I assume, by Mr Melham to Mr Walker. No dollar sum can be struck by the court until the accounts have been taken by an Associate Judge in accordance with these reasons.

75 Nonetheless, counsel for Mr Melham submits that an order for costs ought to be made in respect of the hearing before me. That hearing raised discrete issues which the offers of compromise do not, in terms, address. It would have been open to the parties to make offers of compromise in relation to the determination of issues of principle. Hence, it is submitted that the offers of compromise should be regarded as being relevant to the taking of accounts before an Associate Judge, but not to the application before me.

76 I am not persuaded that is the correct way of approaching the matter. There is a single proceeding for the taking of accounts. That proceeding involves two stages, the first of which will be completed when orders are made to give effect to these reasons. If, for example, Mr Walker has made an offer to accept a certain sum of money in settlement of his claim and he is ultimately found to be entitled to more than that offer, I think that would be a very material consideration to what costs orders should be made in relation to the hearing before me.

77 Accordingly, I do not propose to make orders for costs of the hearing before me. I will, however, indicate for the benefit of whoever may ultimately have to determine questions of costs, what costs orders I would regard as appropriate if the matter were unaffected by any offer of compromise.

78 If the question is unaffected by any offer of compromise, the defendant has had a substantial measure of success on the plaintiff's claim. The defendant has failed in his contention that the plaintiff is not entitled to interest pursuant to s 42(1) of the Act. Otherwise he has substantially succeeded, although in the curious way to which I adverted, he succeeded on the question of whether the land was a partnership asset, notwithstanding he had taken a different position on that issue for the most part of the proceedings.

79 If the matter were unaffected by an offer of compromise, I would order that the plaintiff pay eighty percent of the defendant’s costs of the statement of claim. I would also order that the defendant pay the plaintiff's costs of the cross-claim. However, I make no orders about costs at this stage.

[Counsel addressed on the form of orders.]

80 I declare the partnership between the plaintiff and the defendant was dissolved as from 31 May 1994.

81 I order that the proceedings be referred to an Associate Judge to inquire into and certify the assets and liabilities of the partnership as at 31 May 1994 and the value of each of them.

82 I direct that the Associate Judge also inquire into and certify what are the respective interests of the partners in the net assets of the partnership as so determined, and certify what amount is payable by the plaintiff or the defendant to the other pursuant to the account so taken.

83 I declare that the partnership assets do not include land in certificate of title volume 15170 folio 131 or fixtures thereon, being land known as the River Gum Lodge.

84 I declare that the plaintiff is entitled to simple interest at the rate of six per cent per annum on the amount of his share of the partnership net assets as so determined.

85 I order that the statement of claim be otherwise dismissed.

86 I order that the cross-claim be dismissed.

87 I reserve proceedings for further consideration.

88 I stand over the proceedings to 9.30 am in the Registrar's list on Tuesday 20 March.

89 The exhibits may be returned after 28 days.

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