Wang v Rong

[2015] NSWSC 1419

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:	Wang v Rong [2015] NSWSC 1419
Hearing dates:	30, 31 March and 1 April 2015
Date of orders:	30 September 2015
Decision date:	30 September 2015
Jurisdiction:	Equity
Before:	Robb J
Decision:	Refer to [123] – [124]
Catchwords:	PARTNERSHIP – principles of partnership law governing remuneration of partners and entitlement to share in profits and contribute to losses – s 24(6) of the Partnership Act 1892 (NSW) – partner’s failure to undertake work in partnership may disentitle that partner to receipt of salary or may be a breach of the partnership agreement subjecting defaulting party to liability to pay damages – ultimately obligations will depend on proper construction of relevant partnership agreement   PARTNERSHIP – agreed statement of issues to be determined – first plaintiff and first defendant entitled to receive payment stipulated in agreement subject to caveats – distribution to partners are to be credited against share of profits – whether the first plaintiff’s failure to work in the partnership business disentitles him to agreed salary distribution – whether implied term in partnership agreement reduces the obligation that fiduciary duties would have otherwise imposed – court finds distribution of ‘salary’ and ‘wages’ was to be paid to partners in proportion to work undertaken, particularly given nature of the business – consideration of surrounding circumstances – evidence does not prove that parties understood the first plaintiff was solely an investor and would not work in the business – post-contract conduct not admissible in construction of present partnership agreement – the first defendant’s conduct is too equivocal to justify finding of admission – first plaintiff not entitled to proportion of salary in the absence of working
Legislation Cited:	Civil Procedure Act 2005 (NSW) Partnership Act 1892 (NSW)
Cases Cited:	Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570 Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 Johnston v Brightstars Holding Company Pty Ltd [2014] NSWCA 150 Wardle v Agricultural and Rural Finance Pty Ltd [2012] NSWCA 107
Texts Cited:	Keith Fletcher, The Law of Partnership in Australia (9th ed 2007, Lawbook Co.) Geoffrey Morse, Partnership Law (6th ed 2006, Oxford University Press) Roderick I’Anson Banks, Lindley & Banks on Partnership (19th ed 2010, Thomson Reuters)
Category:	Principal judgment
Parties:	Jing Chao Wang (first plaintiff) Rui Zhang (second plaintiff) Kevin Yu Rong (first defendant) KK Win Pty Ltd (second defendant)
Representation:	Counsel: C Harris SC (first and second plaintiffs) S Gray (first and second defendants)   Solicitors: CKSD Lawyers (first and second plaintiffs) GHS Lawyers (first and second defendants)
File Number(s):	2013/228145
Publication restriction:	None

Judgment

Introduction

1. These proceedings involve a partnership dispute between the plaintiffs, Mr Jingchao Wang and Ms Rui Zhang, and the first defendant, Mr Kevin Yu Rong.

2. The second defendant, KK Win Pty Ltd (the Trustee), is the trustee of a unit trust called the Rong Family Trust (the Trust).

3. The partnership between Mr Wang, Ms Zhang and Mr Rong was created by a written partnership agreement dated 13 August 2010 (the Partnership Agreement). Under that agreement, the partners agreed to acquire and operate a franchise coffee shop business at Roselands known as “Gloria Jeans Roselands”.

4. The Partnership Agreement was prepared by an accountant instructed by the partners, Ms Hong Yan (Brenda) Xiao, after negotiations had occurred between the proposed partners. Ms Xiao has had no legal training. The Partnership Agreement was prepared by adapting an inappropriate precedent that was found on the Internet.

The separate questions

5. The hearing of the proceedings commenced on 30 March 2015.

6. On that date, I gave the plaintiffs leave to file in court a further amended statement of claim.

7. The plaintiffs claimed the following relief in par 1A of the relief claimed:

1A.   Declaration that, on the proper construction of Articles 4, 10 and 12 of the Partnership Agreement between the plaintiffs and the first defendant dated 13 August 2010:

(i)   each of the plaintiffs (on the one part) and the first defendant (on the other part) is entitled to 50% of the profits of the Partnership;

(ii)    the first plaintiff is entitled to receive a salary of $30,000 per annum, plus a payment of $20,000 per annum for business expenses, from the Partnership;

(iii)    the first defendant is entitled to receive a salary of $50,000 per annum from the Partnership;

(iv)    but the payments to the first plaintiff and the first defendant, referred to in (ii) and (iii) above, are to be credited against the 50% share of profits that each of the plaintiffs and the first defendant are entitled to as set out in (i) above.

8. Additionally, certain relief was claimed concerning the taking of accounts for the partnership, and for consequential orders.

9. Also on 30 March 2015, the parties joined in asking me to make an order under Uniform Civil Procedure Rules r 28.2, that the questions in a document called “Agreed Statement of Issues” be considered and determined by the court separately from, and prior to, the consideration and determination of the other issues raised in the pleadings. Counsel for the parties informed me that the parties were confident that, once they had the decision of the court on the separate questions, they would be able to resolve the other issues between them. The amounts at issue were not so large as to justify the parties engaging in a formal process of the taking of accounts, and they believed that their dispute could be resolved by negotiation without having to engage in that process.

10. I had no means of judging whether the parties were being unduly optimistic about their ability to resolve the dispute between them, once they had the court’s answers to the separate questions. However, I agreed that the process of taking formal accounts would be time-consuming and costly in proportion to the amounts at issue. I placed weight on the degree of confidence expressed by counsel for the parties. In the circumstances, the requirements of s 56 of the Civil Procedure Act 2005 (NSW) justified the court acceding to the parties’ wishes, even though an element of risk was involved.

11. Accordingly, I made an order under UCPR r 28.2 as requested, and another order standing over all other issues raised in the pleadings to the date which is three months after the delivery of judgment on the questions in the Agreed Statement of Issues. That date will now have to be the first day of court sittings in 2016.

12. The Agreed Statement of Issues contains 3 questions. The first is materially the same as the relief claimed in par 1A of the further amended statement of claim, although expressed in interrogative form. However, the separate questions describe the issues raised in par 1A (i) to (vi) of the amended statement of claim as Questions 1(a) to (d).

13. The remaining two issues in the Agreed Statement of Issues are:

2.   Does the proper construction of the Partnership Agreement mean that in the absence of the First Plaintiff working at the business of the partnership for 2 to 3 days per week the First Plaintiff was not entitled to receive the amount in 1b?

3.   Does the proper construction of the Partnership Agreement mean that the Plaintiffs (on the one part) and the First Defendant (on the other part) are jointly and severally liable for the debts of the Partnership including any debt arising from:

a.   The trading activities of [the Trustee];

b.   The Bankwest loan;

c.   The Gloria Jean’s Franchise Agreement;

d.   The Gloria Jean’s licence; and/or

e.   Any related guarantees provided by Rong and/or Rong’s spouse Qian (Cindy) Zhou.

14. The parties are now agreed that Question 3 in the Agreed Statement of Issues should be answered affirmatively.

The pleadings

15. The statement of claim is brief, and it will be convenient to set the allegations that are relevant to the determination of the remaining separate questions out fully:

1   On about 13 August 2010 the plaintiffs and the first defendant entered into a written Partnership Agreement under which they agreed to acquire and operate a franchise business at Roselands known as “Gloria Jeans Roselands” (“the business”).

2   There were implied terms of the Partnership Agreement that:

(i)   the partners would use the second defendant as a vehicle to purchase the business and to be the legal owner and operator of it

(ii)   but that the second defendant would do so as trustee of a trust to be called The Rong Family Trust (“The Trust”) which would be the beneficial owner of the business

(iii)   the first defendant would be the sole director of the second defendant, and

(iv)   the plaintiffs (on the one part) and the first defendant (on the other part) would each have a 50% beneficial interest in the trust

PARTICULARS

These terms are implied as a matter of fact or law arising out of Recitals 1 – 5 in the Partnership Agreement.

3   ...

4   There was an express term of the Partnership Agreement that each of the first plaintiff and the first defendant would be paid, from the income of the partnership, payments of $50,000 per annum: the first plaintiff as to $30,000 by way of salary and $20,000 by way of “business contribution”, and the first defendant by way of salary.

PARTICULARS

Article 12

5   There was a further express term of the Partnership Agreement that each of the first and second plaintiffs (on the one part) and the first defendant (on the other part) would be entitled to 50% of the profits made each year by the partnership, and would be obliged to contribute 50% of any loss.

PARTICULARS

Article 11

6A   There was a further express term of the Partnership Agreement to the effect that the payments made to the first plaintiff and the first defendant referred to in paragraph 4 above, or on account of their entitlements in paragraph 4 above, would be credited against the share of profits to which the plaintiffs and the first defendant were respectively entitled as set out in paragraph 5 above

PARTICULARS

Article 4

6   In about August 2010, in pursuance of the provisions of the Partnership Agreement referred to in paragraph 2 above:

(i) The Rong Family Trust was established with the second defendant as trustee

(ii) the first defendant was the sole director of the second defendant

(iii) the second defendant purchased the Gloria Jeans franchise business at Roselands and

the second defendant has operated that business under the sole control of the first defendant since that time.

7   In breach of the provisions of the Partnership Agreement set out in paragraph 4 above, the first defendant has not procured the second defendant to pay to the first plaintiff the sum of $50,000 per annum for each year since August 2010, (sic)

8A   In further breach of the Partnership Agreement the first defendant has refused to credit the payments of salary that he received to his share of the profits of the Partnership, but asserts that he is entitled to payment of a salary of $50,000 per annum from the Partnership as a cost or expense of the Partnership, before the profit of the Partnership is calculated.

8   ...

9   ...

16. The original statement of claim was filed on 26 July 2013. The defendants filed a defence on 27 September 2013. That is the only defence filed. The parties were content for the court to deal with the separate questions without the defendants having filed a defence to the further amended statement of claim.

17. As there are significant differences between the allegations made in the statement of claim and the further amended statement of claim, it will be necessary for the court to transpose, as far as possible, the responses in the defence to the further amended statement of claim.

18. The defendants admit the making of the partnership agreement on 13 August 2010 (par 1), as well as the allegation that the Partnership Agreement contained the implied terms alleged in par 2.

19. Paragraph 4 of the statement of claim was different from the same paragraph in the further amended statement of claim in the following ways. The latter deleted the words “as business expenses”, and added at the end the words: “the first plaintiff as to $30,000 by way of salary and $20,000 by way of “business contribution”, and the first defendant by way of salary”.

20. The defendants denied the allegation in par 4 of the statement of claim that there was an express term that Mr Wang and Mr Rong would each be paid $50,000 per annum. The defendants added the following additional response in par 4 of their defence:

B. Say that the first defendant would be paid from the income of the partnership as a business expense salary of $50,000 before tax for working 5×8 hour days at the business premises being Shop FC 13 Centro Roselands, Roselands (GJR).

C. Say that the first plaintiff would be paid from income of the partnership salary of $30,000 pa provided the first plaintiff worked at GJR for 3×8 hour days per week and the first plaintiff has never so worked at GJR.

Particulars

Agreement between the first defendant on the defendants’ part and the first plaintiff in August 2010 and prior to the execution of the Partnership Agreement on 13 August 2010.

21. The defendants admitted that the Partnership Agreement contained the express term alleged in par 5 of the statement of claim, which is in the same terms as par 5 of the further amended statement of claim.

22. The statement of claim did not contain the equivalent of par 6A of the further amended statement of claim. I will proceed upon the basis that the defendants do not admit that allegation, as that approach is consistent with the submissions that the defendants have made concerning how the court should answer the separate questions.

23. In par 5 of the defence, the defendants responded to the equivalent of par 6 of the further amended statement of claim in the following terms:

5.   a) The defendants admit paragraph 6 of the Statement of Claim save that the defendants deny the second defendant has operated the business under the sole control of the first defendant since on or about August 2010. The defendants say that the business was under the sole control of the plaintiffs from the date of completion of the purchase of the business on 14 October 2010 until 7 March 2012 in that:

i)   The first defendant did not know the password for accessing the business bank account BankWest Business Zero Tran account number 000488-9 (the Transaction Account) by way of the internet.

ii)   The plaintiffs had the sole electronic token required to operate the Transaction Account by way of the internet.

iii)   The plaintiffs received all bank statements from BankWest for the Transaction Account and the first defendant did not receive any such bank statements.

b)   The defendants admit that as and from 7 March 2012:

i)   The first defendant (at the suggestion and with the assistance of BankWest) changed the password to the Transaction Account;

ii)   The first defendant (at the suggestion and with the assistance of BankWest) acquired a new token required to operate the Transaction Account by way of the internet;

iii)   As a consequence of b) i) and b) ii) above, the plaintiffs could not access or operate the Transaction Account by way of the internet from 7 March 2012.

c) …

24. In response to the allegation of breach in par 7 of the statement of claim, which is the same as the equivalent paragraph in the further amended statement of claim, the defendants pleaded:

6.   In response to paragraph 7 of the Statement of Claim, the first defendant

a)   admits he has not procured the second defendant to pay to the first plaintiff the sum of $50,000 per annum for each year since 2010 but denies that is the effect of paragraph 4 of the Partnership Agreement when read in conjunction with the oral term pleaded in paragraph 4 c) of this Defence;

b)   In reply to the whole of paragraph 6, the first defendant says that the first plaintiff did no work at GJR and was thus not entitled to receive any payment under Article 12 of the Partnership Agreement or at all.

c)   …

d)   …

e)   Further, the defendants say that the first plaintiff over the period the plaintiffs controlled the business as set out in paragraph 5 above did without the first defendant’s consent and in breach of the Partnership Agreement withdraw monies from the Transaction Account.

Particulars

Financial year ended 2011   $21,758

Financial year ended 2012   $19,589   $41,347

f)   Further, the first defendant has worked continuously at GJR in performance of his obligations under the Partnership Agreement but has not been paid a salary of $50,000 before tax. The first defendant has been paid:

Financial year ended June 11   $23,183

Financial year ended June 12   $46,095

Financial year ended June 13   $28,865

25. The statement of claim does not contain the equivalent of the allegation of breach in par 8A of the further amended statement of claim. I will assume that the defendants’ position is that they deny the breach alleged, and otherwise wish to proceed consistently with the positive allegations in their defence that have been set out above.

26. The defendants filed a cross claim against the plaintiffs on 15 October 2014.

27. In par 5 of the claim for relief in the cross claim, the defendants seek a declaration in the terms of an affirmative answer to Question 3 in the Agreed Statement of Issues. As the plaintiffs advised the court that they did not contend that Question 3 should be answered in the negative, it will not be necessary for the court to explore this aspect of the cross claim further. In due course, the court will answer Question 3 affirmatively.

28. The defendants sought additional relief in their cross claim, but, as I understand it, those claims for relief, and the corresponding allegations of fact, are not material to the remaining two Questions in the Agreed Statement of Issues. It will therefore not be necessary for the court to consider the balance of the cross claim.

The Partnership Agreement

29. It is necessary to set out the material parts of the Partnership Agreement. There are many apparent errors, but for the sake of clarity I will not use the expression “(sic)” in the many places that it would ordinarily be used. It provides:

PARTNERSHIP AGREEMENT: General form documenting an agreement to form a business partnership

PARTNERSHIP AGREEMENT

Partnership agreement made on 13th of August 2010, between Kevin Yu Rong of 45 Hillcrest Ave Hurstville NSW 2220 and Jingchao Wang and Rui Zhang of 18 Dunkeld Ave Hurlstone Park NSW 2193.

RECITALS

1. Partners desire to join together for the pursuit of common business goals.

2. Partners have considered various forms of joint business enterprises for their business activities.

3. Partners desire to enter into a partnership agreement as the most advantageous business form for their mutual purposes.

4. Partners agreed to set up the The Rong Family Trust and KK Win Pty Ltd as trustee, Eric Komonen as appointer in the family trust, Kevin Yu Rong as the sole director and shareholder in KK Win Pty Limited.

5. Partners agreed to have 50% each beneficial interest in The Rong Family Trust as beneficial under other family members as long as business operation.

6. Partners agreed to termination of the appointer Eric Komonen after the loan pay off to Jingchao Wang in 3.5 years time.

7. Partners desire that Mr Jingchao Wang Investment total $500000 in GJC Roseland. Borrowing $250000 to Kevin Yu Rong (see another loan agreement).

In consideration of the mutual promises contained in this agreement, the partners agree as follows:

ARTICLE ONE

NAME, PURPOSE AND DOMICILE

The name of the business shall be Gloria Jean’s Roselands. The partnership shall be conducted for the purpose of running the coffee shop. The principal place of business shall be at Shop FC 13 Centro Roselands Roselands Drive, Roselands, NSW 2196, unless relocated by majority consent of the partners.

ARTICLE TWO

DURATION OF AGREEMENT

The term of this agreement shall be same term as shop lease commencing on the date of fund transfer to KK Win Pty Ltd account, and terminating on 30 August 2016, unless sooner terminated by mutual consent of the parties or by operation of the provisions of this agreement.

…

ARTICLE FOUR

CONTRIBUTION

Each partner shall contribute $50000 on before 30 Jun of each year for Mr Kevin Yu Rong wages will be $50000 for Mr Jingchao Wang the wages will be $30000 plus business contribution $20000 before tax to be used by the partner to establish its capital position. Any additional contribution required of partners shall only be determined and established in accordance with Article Nineteen.

ARTICLE FIVE

BUSINESS EXPENSES

The rent of the buildings where the partnership business shall be carried on and the cost of repairs and alterations, all rates, taxes, payments for insurance, and other expenses in respect to the buildings used by the partnership, and the wages for all persons employed by the partnership are all to become payable on the account of the partnership. All losses incurred shall be paid out of the capital of the partnership or the profits arising from the partnership business, or, if both shall be deficient, by the partners on a pro rata basis in proportion to their original contributions, as provided in Article Nineteen.

…

ARTICLE EIGHT

BOOKS AND RECORDS

Books of account shall be maintained by Jingchao Wang and proper entries made in the books of all sales, purchases, receipts, payments, transactions and property of the partnership. The books of account and all records of the partnership shall be retained at the principal place of business as specified in Article One. Each partner shall have free access at all times to all books and records maintained relative to the partnership business.

ARTICLE NINE

ACCOUNTING

The fiscal year of the partnership shall be from 1st July to 30th June each year. On the first day of October commencing in 2010 and on the 1st July in each succeeding year, a general accounting shall be made and taken by the partners of all sales, purchases, receipts, payments and transactions of the partnership during the preceding fiscal year, and of all the capital property and current liabilities of the partnership. The general accounting shall be written in the partnership account books and signed in each book by each partner immediately after it is completed. After the signature of each partner is entered, each partner shall keep one of the books and shall be bound by every account, except that if any manifest error is found in an account book by any partner and shown to the other partners within one month after the error shall have been noted by all of them, the error shall be rectified.

ARTICLE TEN

DIVISION OF PROFITS AND LOSSES

Each partner shall be entitled to 50% of the net profits of the business and all losses occurring in the course of the business shall be borne in the same proportion, unless the losses are occasioned by the wilful neglect or default, and not the mere mistake or error, of any of the partners, in which case the loss so incurred shall be made good by the partner through whose neglect or default the losses shall arise. Distribution of profits shall be made on the 30th of June each year.

ARTICLE ELEVEN

ADVANCE DRAWS

Each partner shall be at liberty to draw out of the business in anticipation of the expected profits any sums that may be mutually agreed on, and the sums are to be drawn only after there has been entered in the books of the partnership the terms of the agreement, giving the date, the amount to be drawn by the respective partners, the time at which the sums shall be drawn, and any other conditions or matters mutually agreed on. The signatures of each partner shall be affixed on the books of the partnership. The total sum of the advanced draw for each partner shall be deducted from the sum that partner is entitled to under the distribution of profits as provided for in Article 10.

ARTICLE TWELVE

SALARY

Partner Jingchao Wang shall receive salary from the business $30000 plus business contribution $20000 as provided in Article Four. Mr Kevin Yu Rong shall received salary $50000 before tax. The only compensation to be paid shall be as provided in Articles Ten and Eleven.

…

ARTICLE NINETEEN

ADDITIONAL CONTRIBUTIONS

The partners shall not have to contribute any additional capital to the partnership to that required under Article Four, except as follows: (1) each partner shall be required to contribute a proportionate share in additional contributions if the fiscal year closes with an insufficiency in the capital account or profits of the partnership to meet current expenses: or (2) the capital account falls below $ for a period of months.

…

30. It should be noted, for completeness, that the reference in Recital 7 that Mr Wang would invest a total of $500,000 in the partnership, with $250,000 of that amount being loaned to Mr Rong to fund his capital contribution to the partnership, was subsequently altered. In fact, Mr Wang contributed $300,000 and loaned a further $300,000 to Mr Rong. In due course, Mr Rong has repaid that amount to Mr Wang. Mr Wang and Mr Rong therefore made equal contributions of capital to establish the partnership. The Trustee also borrowed an amount of $310,000 from BankWest for the purpose of establishing the partnership business. That loan was guaranteed by Mr Rong.

31. A Gloria Jeans Franchise Agreement and Deed of Assignment of Licence Agreement were entered into on behalf of the partnership on 7 December 2010. Mr Rong and his wife guaranteed the obligations of the Trustee to Gloria Jeans.

32. A considerable amount of evidence was led by both the plaintiffs and the defendants concerning the detailed negotiations that took place that led to the partners signing the Partnership Agreement. The parties agree that much of that evidence is in fact irrelevant, and it should only be taken into account in so far as it establishes the relevant surrounding circumstances at the date the Partnership Agreement was executed, for the purposes of assisting in the construction of that agreement.

Legal principles governing construction of Partnership Agreement

33. There was no material disagreement between the parties concerning the legal principles that are applicable to the proper construction of the Partnership Agreement. The defendants relied upon the following statements of principle, which, in my view, are correct and adequate for the purpose of determining the dispute that is now before the court.

34. In Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184, Bathurst CJ (with whom Macfarlan and Meagher JJA agreed) set out at [52] the principles governing the construction of written contracts, in the following terms:

[52] The principles underlying the construction of written contracts are well established and it is not necessary to deal with them at length. A contract is to be construed by reference to what a reasonable person would understand by the language in which the parties have expressed their agreement having regard to the context in which the words appear and the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Ltd v Alphafarm Pty Ltd [2004] HCA 52 ; (2004) 219 CLR 165 at [40]; International Air Transport Assn v Ansett Australia Holdings Ltd [2008] HCA 3 ; (2008) 234 CLR 151 at [53]. At least in the case of ambiguity, resort can be had to the surrounding circumstances known to the parties in interpreting the particular provision: Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24 ; (1982) 149 CLR 337 at 352; Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 ; (2011) 282 ALR 604.

35. In Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640, the majority observed at [35] (footnotes omitted):

[35] Both Verve and the sellers recognised that this court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. As Arden LJ observed in Re Golden Key Ltd (in rec), unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption “that the parties … intended to produce a commercial result”. A commercial contract is to be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.

Relevant principles of partnership law

36. It will be appropriate for the court to consider a number of principles of law that apply to partnerships, as the Partnership Agreement should be construed having regard to the background principles of partnership law. Although Ms Xiao did not have legal training, she used a precedent which, although in many ways inappropriate, appears to have been prepared having regard to the principles of partnership law. Furthermore, relevant aspects of the Partnership Act 1892 (NSW) apply to the terms of partnership agreements subject to any agreement between the partners.

37. The area of partnership law of most concern is that which deals with the remuneration of the partners and their entitlement to share in profits and contribute towards losses.

38. That is because the separate questions largely concern the partners’ entitlement to “receive a salary”, and whether that entitlement is linked to the need to work in the partnership business, and how any entitlement to a salary should be treated in the partnership accounts.

39. Section 24 of the Partnership Act relevantly provides:

(1)   The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be determined, subject to any agreement expressed or implied between the partners, by the following rules:

(1)   All the partners are entitled to share equally in the capital profits of the business, and must contribute equally towards the losses whether of capital or otherwise sustained by the firm.

…

(5)   Every partner may take part in the management of the partnership business.

(6)   No partner shall be entitled to remuneration for acting in the partnership business.

40. In Keith Fletcher, The Law of Partnership in Australia (9th ed 2007, Lawbook Co.), it is said at [3.150] in relation to the ‘no remuneration’ rule (6) in s 24 of the Partnership Act (footnotes omitted):

This rule follows naturally from rule (5) and from the fiduciary relationship existing between partners. If a partner is entitled to act, then he or she is also under a duty to co-partners to act to the best of her or his ability and, therefore, cannot claim remuneration for what is already an existing duty. The rule can be varied, and often is, by an agreement between the partners…

Even where it is agreed that one of the partners is to have the whole active conduct and management of the business, an agreement to pay remuneration to her or him, will not be inferred from that fact alone. However, a much more difficult question arises where both of the partners have agreed to devote the whole of their time to the partnership business and one of them fails to do so.

41. Fletcher considers a number of authorities, which do not require detailed examination for present purposes. The question, according to the author, is whether if one partner fails to devote the time required to the business, the other is entitled to compensation for the extra time that the other partner is required to devote to the business to make up for the lack of time devoted by the first, or whether the other partner should seek damages for breach of the partnership agreement (if appropriate, in the context of an application for the dissolution of the partnership). The author suggests that the latter is the course supported by authority, and observes:

Such a claim is, of course, very much wider than a claim for remuneration because it may include not only a sum in respect of the extra work that was imposed upon the plaintiff partner but also a sum in respect of any loss suffered by the partnership business as a result of the defendant partner’s neglect.

42. It is said in Geoffrey Morse, Partnership Law (6th ed 2006, Oxford University Press), in relation to the English equivalent of rule (6) at [5.24] (footnotes omitted):

… The idea is that each partner will receive his reward by a straightforward share of the profits and, possibly, interest on his original capital investment. The basic rule therefore is no additional ‘salaries’… On the other hand, it is not unknown for some partners to be more active in the business than others and for those partners to take in addition to a share of the profits a ‘salary’ to be deducted before the net profits are shared out… The important point to grasp in all this is, of course, that such ‘salaries’ are not salaries in the ordinary sense of the word but merely a way of apportioning the profits by agreement. For tax purposes, for example, all the profits of the partnership received by a partner are taxable as the receipts of a trade or profession and not as a salary under a contract of employment. The partnership does not ‘exist’, remember, and a partner cannot employ himself.

43. The author of this work also preferred the view that, if one partner does not attend to the partnership business as required by the partnership agreement, the proper course is for the remaining partners to be awarded damages for breach of the agreement, rather than some amount of compensation for the extra work required of them to make up for the consequences of the defaulting partner’s dereliction.

44. The editor of Lindley & Banks on Partnership (19th ed 2010, Thomson Reuters) at 20-43 also states the general rule as being that, under ordinary circumstances, the contract of partnership excludes any implied contract for payment for services rendered for the firm by any of its members. In the absence of an agreement to that effect, one partner cannot charge his co-partners with any sum for compensation, whether in the shape of salary, commission, or otherwise, on account of his own trouble in conducting the partnership business.

45. This situation arises out of the fact that partners owe fiduciary duties to each other, which require them to act in the interests of the partnership rather than their own interests. In the absence of agreement to the contrary, they have to devote their time to the partnership business in the expectation of sharing in the profits of the partnership, and they are not entitled to a separate remuneration or salary, even in respect of a disproportionate amount of service to the partnership when compared to other partners.

46. The editor of Lindley & Banks also observes that, where it is agreed that a partner will be remunerated in respect of services provided to the firm in his capacity as a partner, any remuneration paid to him will not be deductible by the firm for any income tax purposes.

47. These authors have considered the consequences of a partner not devoting the time required by the partner’s membership of the partnership to its business, in the context of whether the proper remedy for the other partners is compensation for the additional effort that they have to make, or damages for breach of the partnership agreement. They have not considered the question of whether, and if so in what way, the failure by a partner to engage in the work required of that partner by the partnership agreement will disentitle the partner to any agreed ‘salary’, even if in strict terms that ‘salary’ is an allotted part of the expected profits.

48. The significance of these principles is that, for the purposes of interpreting the provisions of the Partnership Agreement, that seem to provide for the payment of salary to Mr Wang and Mr Rong, and may imply that each is required to devote a certain amount of time to the partnership business, as well as how the so-called salary is intended to relate to the profits of the partnership, the following principles may be relevant:

1. The existence of the partnership, and the fiduciary duties imposed upon the partners to conduct the partnership business for the mutual benefit of the partners, imposes a positive obligation on the partners to devote themselves to the partnership business. The amount of time that may be required to be devoted may be implied from the nature of the partnership business.

2. The partners will not be entitled to any separate remuneration proportionate to their efforts devoted to the partnership business, but will only be entitled to share equally in any profits.

3. The partners may vary these arrangements by agreement between themselves.

4. If the partners agree that they will be paid a salary that is in some way proportionate to the time that is devoted by each partner to the partnership business, or the importance of the work done, the entitlement is not a salary in the strict sense, as is paid by an employer to an employee, and indeed the individual partners are not employed by the partners as a whole.

5. In fact, what the partners are doing when the partnership agreement provides for the payment of remuneration to individual partners, in the form of what is called a salary for work done in the partnership business, is that they are agreeing to distribute the profits of the partnership in a special way, such that, instead of each partner being entitled to an equal distribution of profits, the partners who are entitled to salaries will receive parts of the profits equal to those salaries, before the balance of the profits is distributed equally between the partners.

6. If the partners agree to the amount of time that each partner is to devote to the partnership business, any failure by a partner to devote the requisite amount of time will not necessarily have the same legal effect that would be the case in respect of the entitlement of a true employee to be paid the agreed salary, where the employee does not perform the work required by the employment contract. That is because in the partnership context the supposed salary is not paid under an employment contract, but is a special distribution of partnership profits under the partnership agreement.

7. Accordingly, the principles of employment law in relation to the possibility that the defaulting employee may lose the right to be paid the agreed salary, because the employee does not do the work, do not directly apply. In the employment context, that question involves consideration of the periods of work into which the employment is divided, so that it is possible to determine any periods for which the employee is disentitled to the salary by reason of not having done the required work.

49. The consequences of a partner failing to work in the partnership business as required by the partnership agreement will depend upon the proper construction of the agreement. Notwithstanding that the relationship between the partners is not that of employer and employee, it may still be intended that a partner is not entitled to the agreed ‘salary’ except to the extent that the partner does the expected work. Alternatively, the defaulting partner may be contractually entitled to receive an agreed part of the partnership profits as a ‘salary’, and that entitlement may remain even if the work that the partner has agreed to do is not done. However, the failure by the partner to do the work will be a breach of the partnership agreement, which will subject the defaulting partner to the obligation to pay damages to compensate the remaining partners for the consequences of the breach. The damages may include the amount of the ‘salary’ required to be paid to the defaulting partner for which the other partners receive no value. It may therefore not ultimately matter whether the failure by the partners to do the work has the legal effect that the defaulting partner loses the right to receive the salary, or whether he or she remains entitled to receive the salary but, because of the default, the partner becomes liable to pay damages at least equal to the amount of the wasted salary payable by the other partners. The result will be the same in both cases. The parties did not put any submissions about whether the concept of ‘entire’ obligations might affect this analysis

49. Ultimately, the obligations imposed upon the partners depend upon the proper construction of the partnership agreement between the partners. By the use of appropriate language the partners should be able to create obligations that are different to those that would flow out of the considerations set out above. However, it is proper to construe the partnership agreement starting from the proposition that obligations of a fiduciary nature arise out of the very existence of a partnership, and the terms of the partnership agreement should be derived having regard to the nature of the partnership as not being a separate entity capable of contracting with the partners, and their being well-established rules concerning the operation of partnerships.

Determination of separate questions

51. It will be convenient to deal separately with each of the issues raised by the separate questions, and in that context consider the parties’ submissions about the relevance of evidence concerning the surrounding circumstances at the date of the Partnership Agreement.

52. I note that the defendants’ defence raised in their response to par 4 of the statement of claim an allegation that there was an agreement between Mr Rong and Mr Wang in August 2010, by which it was agreed that Mr Wang would be paid a salary of $30,000 per annum provided he worked at the cafe for three eight hour days per week (see par 20 above). This agreement is also referred to in par 6(a) of the defence (par 24 above). However, the separate questions all require the court to construe the Partnership Agreement dated 13 August 2010, and in the case of Questions 1 and 2, to do so by reference to identified Articles. The formulation of the separate questions excludes the possibility that the answers will be influenced by the allegation made by the defendants that there was an additional, prior agreement to the execution of the Partnership Agreement, which has a continuing effect on the rights of the parties.

Question 1(a)

53. Does the proper construction of Articles 4, 10 and 12 of the Partnership Agreement mean that each of the plaintiffs (on the one part) and the first defendant (on the other part) is entitled to 50% of the profits of the Partnership?

54. There was no real contest between the parties that this question should be answered affirmatively.

55. Article Ten, which is entitled Division of Profits and Losses, commences with the words: “Each partner shall be entitled to 50% of the net profits of the business…” Those words provide a clear answer to Question 1(a), save for the caveat that precision requires that the word “net” be added before the word “profits”. That caveat is almost certainly implied in the question anyway.

Question 1(b)

56. Does the proper construction of Articles 4, 10 and 12 of the Partnership Agreement mean that Mr Wang is entitled to receive a salary of $30,000 per annum, plus payment of $20,000 per annum for business expenses, from the Partnership?

57. Article Twelve, which deals with Salary, commences with the words: “Partner Jingchao Wang shall receive salary from the business $30,000 plus business contribution $20,000 as provided in Articles (sic) Four… The only compensation to be paid shall be as provided in Articles Ten and Eleven”.

58. The Partnership Agreement provides for Mr Wang to receive what is called a “salary” of $30,000 per annum, plus an additional payment of $20,000 each year. The agreement describes the latter amount as a “business contribution”. That description may be meaningless. There is nothing in the Partnership Agreement that enables the court to place a conventional commercial meaning on that expression, except by implication from its juxtaposition with the expression “salary”. It may be inferred that the payment of $20,000 was not intended to be a salary; and thus compensation for work done. Nonetheless, Mr Wang was to be entitled to the payment of an additional $20,000. If that payment was not to be a salary, it must, by elimination, have been intended to be an additional lump sum payment that the partnership was obliged to make to Mr Wang before the balance of any profits of the partnership was distributed to the partners.

59. A question also arises as to the meaning and effect of the last sentence of Article Twelve, being: “The only compensation to be paid shall be as provided in Articles Ten and Eleven”. Those articles provide for the division of profits and losses, and advance draws against profits. In the light of the principles of partnership law set out above, the apparent inconsistency between a provision that appears to give the partners a right to receive a salary, and a restriction on their right to compensation to being a share of profits, disappears. What is described as a “salary” is nothing other than a special distribution of profits.

60. The question is whether the effect of the last sentence of Article Twelve is to make the entitlement to receive a salary (and in Mr Wang’s case the additional $20,000) subservient to the parties’ entitlement to share profits equally, so that if the partnership profits are less than $100,000 in any given year, the rights of the parties to receive ‘salary’ will proportionally be reduced. The question is: what does the Partnership Agreement require happen in the case where the amount of the partnership profits in a given year is less than $100,000, so there are insufficient profits to pay to Mr Wang and Mr Rong the ‘salary’ and ‘business contribution’ stipulated in Article Twelve. The last sentence of the article would suggest, as a starting point, that because the only compensation to be paid is a share of profits, there would need to be a proportionate reduction in the payments made under Article Twelve, if the partnership profit was less than $100,000.

61. It is necessary, however, to consider the effect of the words “as provided in Article Four” after the provision for the payment to Mr Wang. That is not an easy task. Article Four appears to deal with capital contributions by the partners, and if read literally, it requires each partner to contribute $50,000 annually to cover the payments of $50,000 each to Mr Wang and Mr Rong. One problem that arises immediately is that the words “as provided in Article Four” in Article Twelve appear (by reason of their placement in the article) only to be intended to apply to Mr Wang, and not Mr Rong. However, when one goes to Article Four, it is clearly intended to apply to each partner equally. I have come to the conclusion that the placement of the expression in Article Twelve is an aberration, and whatever effect the expression is intended to have, it is intended to apply both to Mr Wang and Mr Rong.

62. That does not end the confusion, because there is an apparent inconsistency between the effect of the two articles. Article Four seems to require the partners to contribute, as capital each year, the amount required to pay the $50,000 to Mr Wang and Mr Rong. However, Article Twelve appears to say with equal clarity that the ‘salary’ and the ‘business contribution’ are to be dispositions of profit. In my view, the first of these results is commercially improbable. The object of a partnership is for the partners to contribute the necessary capital to establish the partnership business, and then to top up any shortfalls in capital, but ultimately the partners will wish to share in profits, without having an endless obligation to contribute capital for no good commercial purpose. On the other hand, the second of these results is consistent with partnership law principles; in that agreements to make payments such as salaries take effect as distributions of profit.

63. In these circumstances, it is tempting to construe the Partnership Agreement on the basis that Article Four is also an aberration, and should be ignored as being meaningless. That is not, however, a very satisfactory approach, because it is difficult to ignore the fact that Article Four exists, and furthermore it is specifically referred to in Article Twelve, albeit that the placement of the reference appears to be an aberration.

64. As will be seen below, when I consider the plaintiffs’ submissions based upon the significance of the surrounding circumstances to the construction of the Partnership Agreement, one of the surrounding circumstances is that Mr Wang needed to ensure that he was investing in a business that guaranteed him an income of $50,000 per annum, because that was necessary in order to assist him to facilitate his parents’ migration to Australia. The point is that Mr Wang needed a legal right to receive $50,000 per annum from the partnership. As will also be seen, that appears to explain the division of his remuneration between ‘salary’ and ‘business contribution’.

65. This consideration leads me to the conclusion that Article Four was intended to have effect, but not fully literally in accordance with its terms. The article does not require the partners to endlessly contribute $50,000 in capital each year to fund the whole of the payments of $50,000 to Mr Wang and Mr Rong. It only does so to the extent that the amount of the profit of the partnership business is less than $100,000. In that event, the partners are each required to pay as much of the $50,000 capital contribution as is necessary to permit the payments of remuneration provided in Article Twelve to be made. That would mean that, so to speak, money would go round in circles, but it would ensure that Mr Wang was entitled to receive an income of $50,000 each year.

66. As is self-evident, the wording of the Partnership Agreement in this respect is highly deficient. The interpretation of the interrelation between Article Four and Article Twelve that I prefer does substantial injustice to the wording of the former; but having regard to the relevant surrounding circumstances, I have concluded that that result is preferable to ignoring the wording of Article Four entirely.

67. It is easy to see why, if an individual partner did not have Mr Wang’s reason to be sure that he was entitled to an income of $50,000 per annum, he would waive the entitlement to receive the full $50,000, if the partnership profit was less than $100,000 in a particular year. Otherwise, the partner would have to contribute capital himself equal to the income shortfall, which would have the effect of artificially increasing the partner’s taxable income, so the partner would suffer a net loss equal to the additional income tax.

68. The result is that Question 1(b) should be answered: Yes, subject to the caveat that the payments would be an agreed distribution of anticipated profits, and not a salary in strict terms as would be payable to an employee, and if the total partnership profit was less than $100,000 in any year, Mr Wang was required to make up any shortfall in the payment of his $50,000 from profits by contributing additional capital in the amount of the shortfall..

Question 1(c)

69. Does the proper construction of Articles 4, 10 and 12 of the Partnership Agreement mean that Mr Rong is entitled to receive a salary of $50,000 per annum from the Partnership?

70. Upon the proper construction of Article Twelve, this question must, by parity of reasoning, also be answered affirmatively, in the same way as the answer to Question 1(b).

Question 1(d)

71. Does the proper construction of Articles 4, 10 and 12 of the Partnership Agreement mean that the payments to Mr Wang and Mr Rong, referred to in (b) and (c), are to be credited against the 50% share of profits that each of the plaintiffs and Mr Rong are entitled to as set out in (a) above?

72. The entitlement described as “salary” (including the additional $20,000 payable to Mr Wang) are, in reality, special distributions of the partnership’s profit. That result would flow from the general principle of partnership law that I have discussed above. The general principle is reinforced by the last sentence of Article Twelve, which has the result that, notwithstanding the agreement that Mr Wang and Mr Rong be paid the amounts referred to in that article; ultimately the only compensation they were to be paid was a share of profits under Articles Ten and Eleven.

73. However, it is also necessary to have regard to the effect of Article Four in years where the partnership profit is less than $100,000; so the partners have to top up the shortfall by making capital contributions.

74. The answer to Question 1(d) must therefore be: Yes, unless the profits are not sufficient to make payments of $50,000 per annum to each of Mr Wang and Mr Rong; in which event, the proportion of the $50,000 payments made out of profits are to be credited against the 50% share of profits; and the balance is to be treated as a capital contribution of the partners.

Question 2

75. Does the proper construction of the Partnership Agreement mean that in the absence of Mr Wang working at the business of the partnership for two or three days per week, Mr Wang was not entitled to receive the amount in Question 1(b), being a salary of $30,000 per annum plus a payment of $20,000 per annum for business expenses?

76. The Partnership Agreement does not contain any term that requires either of the partners to work in the partnership business, and also does not stipulate the amount of time that each partner was required to devote to that business. As I have observed above, in the absence of any term in the Partnership Agreement to the contrary, the fiduciary duty imposed upon the partners by reason of the fact of their having entered into the partnership would oblige all partners equally to devote all of the time reasonably necessary to effectively conduct the partnership’s business. The question is therefore not whether there is an implied term in the Partnership Agreement that obliges the partners to work in the business, and identifies the time they should devote to the business, but whether there is an implied term that reduces the obligations that their fiduciary duties otherwise would have imposed upon them.

77. The defendants put the simple submission that the entitlement of each partner to receive a wage or salary was contingent on the contribution of that partner of labour toward the business.

78. They submit that the ordinary meaning of the term “wages” used in Article Four when used as a noun, according to the Macquarie Dictionary, is “that which is paid for work or services, as by the day or week; hire; pay”.

79. I accept the defendants’ submission that the evidence establishes that Ms Xiao, who drafted the Partnership Agreement, and Mr Wang both understood that the word “wages” meant payment for labour.

80. I also accept the defendants’ submission that, if the Partnership Agreement is construed solely upon the basis of the wording in the document, it should be implied from the use of the expressions “wages” (in Article Four), and “salary” (in Article Twelve), that the partners were required to work in the partnership business as a precondition to receiving their wages or salary.

81. The partnership business was the operation of a coffee shop, and that is a surrounding circumstance that causes me to construe the Partnership Agreement in the light of the need for the partners to deal with the requirement to impose upon the partners some appropriate obligation to devote their time to the partnership business. It was not the type of business that could operate by itself with only remote control and management from the partners.

82. I prefer a construction of the Partnership Agreement that has the effect that Mr Wang and Mr Rong would not be entitled to receive the special distribution of profits required by Article Twelve if they did not do the work required. That seems the more sensible construction, as otherwise the partnership would be required to pay the whole amount, and then recover it by an action for damages for breach of the Partnership Agreement. However, even if that is not the better construction of the agreement, if the partnership was required to make a payment of ‘salary’ to Mr Wang and Mr Rong, but the partnership did not receive the benefit of the whole of the required work, the partnership could recover as damages the wasted payment. In the absence of any specific submissions from the parties, I have concluded that the better view is that the proper construction of the Partnership Agreement entitles Mr Wang and Mr Rong to be paid proportionally in respect of the total amount of work in the partnership business required of them. The agreement by each gentleman to work in the partnership business is not ‘entire’ in the sense that any shortfall in the amount of work would entirely disentitle that partner to receive the agreed remuneration.

83. As Mr Rong was to receive a salary of $50,000, and Mr Wang was to receive a salary of $30,000, the natural implication would be that Mr Wang would devote 3/5 of the time that Mr Rong devoted to working in the partnership business. That seems to me to be the only sensible explanation for the otherwise inexplicable division of Mr Wang’s remuneration into ‘salary’ and ‘business contribution’.

84. The Partnership Agreement is silent as to the absolute amount of time that each partner was required to work. That absolute amount was therefore left to the reasonable agreement of the partners, and would depend upon the total amount of time that was reasonably necessary to conduct the business of the partnership properly.

85. The Partnership Agreement is also silent on the time intervals that were intended to be relevant to the determination of when Mr Wang was required to work, given that he was only required to work 3/5 of the time that Mr Rong was required to work. As Mr Wang’s entitlement to be paid a salary was only expressed on an annual basis, the Partnership Agreement might only require Mr Wang to work for 3/5 of the time that Mr Rong worked but only on an annual basis. It might not require Mr Wang to work for, say, 3/5 of each working week. I will return to consider this issue, after I have dealt with the parties’ submissions concerning the relevance of surrounding circumstances to the proper construction of the Partnership Agreement.

Surrounding circumstances

86. The plaintiffs submit that it would be wrong to construe the Partnership Agreement as requiring Mr Wang to devote 3/5 of the time worked by Mr Rong to the partnership business, because the implications that should be made into the agreement must also take into account a number of aspects of the surrounding circumstances known to all parties.

87. The plaintiffs rely upon the following surrounding circumstances, as being relevant to the proper construction of the Partnership Agreement:

1. Mr Wang wished to sponsor his parents’ immigration to Australia.

2. To do this he needed an income of $50,000 per annum and he was seeking an investment which would produce this income.

3. Mr Rong wanted an investor who would furnish funds to enable him to purchase the Gloria Jeans franchise.

4. The Gloria Jeans franchisor did not want franchises to be operated by persons who were investors; it insisted that the franchisees could speak English, because they would need to be able to speak English to work on the floor of the shop. It would be necessary for proficiency in English to be shown to even pass the franchisor’s interview, but it also would be necessary for a franchisee to be able to read the Gloria Jeans documentation.

5. The plaintiffs could not speak English well enough to satisfy the franchisor.

6. The plaintiffs were going to supply all of the money which would be used as equity to purchase the business: Mr Rong was not making any contribution from his own pocket. Mr Rong could not acquire the business unless an investor would make the whole of the equity contribution available: Mr Rong could not borrow $400,000 from the bank, but only $310,000, and so would not have been able to borrow, from the bank, the additional amount to fund his contribution.

88. The evidence probably establishes that all of these matters were known to the parties to the Partnership Agreement at the time that it was made. However, I do not consider that all of these background circumstances throw useful light on the way in which the terms of the Partnership Agreement should be construed, in relation to the implication of any term that required Mr Wang (and indeed Mr Rong) to work in the partnership business, in order to earn the entitlement to receive the salary that was agreed. Most of these matters are neutral to the question of whether Mr Wang had to work for his salary.

88. The fact that Mr Wang apparently had to have an income from an Australian business of at least $50,000 per annum, in order to sponsor his parents’ immigration to Australia is consistent with, and does explain, the provisions in the Partnership Agreement that gave Mr Wang a right to receive $50,000 per annum. In particular, they explain the otherwise strange arrangement that split Mr Wang’s entitlement into a salary of $30,000, and an amount of $20,000 described as “business contribution”. The $20,000 is clearly a top up to reach the sum of $50,000; as its meaning is otherwise commercially inexplicable.

89. The defendants relied in their submission on extracts from the affidavit evidence of Mr Wang, his wife Ms Zhang, Ms Xiao and Mr Rong in which the witnesses discussed Mr Wang’s involvement in the partnership business, and the instructions that the partners gave to Ms Xiao concerning the terms of the Partnership Agreement that provided for the partners to receive annual payments.

90. In my view, the evidence sustains findings that the parties to the Partnership Agreement all had in mind the following surrounding circumstances relevant to the construction issues that arise in the present case. To go further would be to trespass into the area of the actual negotiations between the parties as to the terms of the agreement.

1. The parties all understood that Mr Wang proposed to invest in the establishment of a business in Australia in order to assist his parents to migrate to this country.

2. They also understood that it was necessary for Mr Wang to be entitled to receive a minimum income of $50,000 in order to qualify to be able to assist his parents.

3. Mr Wang did not have any experience of the management of a business of the type that the partners intended to establish.

4. Mr Wang was willing to learn how to manage the business, and to work in it in a manner and for periods that were consistent with his other business obligations.

5. Mr Wang was involved in a number of family businesses in China, and it would be necessary for him to spend a considerable amount of his time in China participating in those businesses.

6. The occasions when Mr Wang would be required to go to China for these business purposes were uncertain as to timing and duration.

92. The evidence does not sustain the submission made by the plaintiffs that one of the surrounding circumstances understood by the parties was that Mr Wang was not going to be working in the business, but was solely to be an investor. The evidence is inconsistent with the proposition that Mr Wang had no intention to work in the business.

93. It was in this context that the parties signed the Partnership Agreement containing, as it did, Articles Four and Twelve; which each stated that Mr Wang would receive “wages”, or a “salary” respectively of $30,000, plus business contribution of $20,000.

94. In my opinion the fact that the Partnership Agreement expressly divided the $50,000 per annum that Mr Wang needed to receive from the conduct of the partnership business into $30,000 wages or salary, and the additional $20,000, strongly implies that Mr Wang was required to work in order to receive the $30,000, and that he was to devote 3/5 of the time to the business that the partners agreed would be devoted by Mr Rong. However, consistently with the commonly understood surrounding circumstance that the timing and duration of Mr Wang’s need to spend time in China were uncertain, the proper implication is that Mr Wang was required to devote his time to working for the partnership business that achieved the 3/5 result on average over the whole year. There is nothing that requires a finding that Mr Wang was required by the Partnership Agreement to work a regular three days each week. That is not required by its express terms, and is inconsistent with what was commonly known concerning Mr Wang’s need to spend time in China.

95. This conclusion is supported by the fact that, although Mr Wang lent to Mr Rong the $300,000 that he required to contribute his share of the initial capital to the partnership, Mr Rong was obliged to repay that sum, and did so. The parties were required to contribute equally to the capital. Indeed, Mr Rong and his wife, but not Mr Wang, shouldered the additional risk of guaranteeing the money borrowed by the Trustee from BankWest. There is no reason to imply that, in addition, Mr Rong was the only partner required to work in the business.

96. The circumstances do not justify an implication that it was intended that Mr Wang would be entirely excused from his fiduciary obligation to devote an equal time to the business as was Mr Rong. However, the only explanation that I can give to the strange division of the $50,000 that Mr Wang was to receive under Article Twelve into $30,000 as “salary” and $20,000 “business contribution” is that Mr Wang was, on an annual basis, required to work 3/5 of the time worked by Mr Rong.

Was there an admission by Mr Rong?

97. The plaintiffs submitted that they are entitled to rely upon certain post-contract conduct by Mr Rong to support their submission that the Partnership Agreement on its proper construction entitled Mr Wang to receive a total of $50,000 each year from the operation of the partnership business, without Mr Wang being obliged to work in the business for any longer period than was convenient to him, or indeed, for any period at all.

98. That conduct consisted of Mr Rong personally paying Mr Wang $1020 on 29 October 2010, and Mr Rong permitting Mr Wang to receive $1020 per fortnight by direct Internet transfer from the partnership’s bank account until about March 2012, when Mr Rong caused the partnership’s bank to cease making those payments. The plaintiffs submitted that Mr Rong was aware that the fortnightly payments were being made, and he did not act to stop them, even though he was aware that Mr Wang had spent very little time assisting the partnership by working at the coffee shop. The plaintiffs submitted that the fortnightly payments represented the $30,000 in wages or salary that Mr Wang was entitled to receive under the Partnership Agreement. (No issue was made of the fact that the payments would total only $26,520; and it is unclear whether the shortfall is to be attributed to tax).

99. The precise submission made on behalf of the plaintiffs was that this post-contractual conduct “constitutes admissions by [Mr Rong] consistent with the construction of the Partnership Agreement for which the plaintiffs contend”.

100. The plaintiffs acknowledged that the post-contract conduct of the parties to a contract is not admissible for the purpose of assisting in the construction of the wording of the contract: see Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570 at [35]; Wardle v Agricultural and Rural Finance Pty Ltd [2012] NSWCA 107 at [358]; and Johnston v Brightstars Holding Company Pty Ltd [2014] NSWCA 150 at [57].

101. They submitted, however, relying upon the judgment of Beazley P in Brightstars Holding Company at [84], that they are entitled to rely in the present case on the conduct of Mr Rong as constituting admissions concerning the proper meaning of the Partnership Agreement, and that such admissions are admissible for the purpose of construing the contract.

102. The Court of Appeal in Brightstars Holding Company held that the conduct in question was admissible because it constituted admissions concerning the facts that constituted the terms of the variation to the settlement agreement that was in issue before the court: see Beazley P at [84]. The relevant issue in that case was the ascertainment of the terms of the variation agreement to which the parties had agreed; that is, what were the terms of the agreement in fact? In the present case there is no issue that requires the identification in fact of the terms of the agreement. It is constituted by the written Partnership Agreement. It is true that significant problems arise in the proper construction of the Partnership Agreement because of the terms in which it was drafted. However, there is no doubt about what those terms were. The only issue to which the alleged admissions made by Mr Rong could go in the present case is the proper construction – or legal effect – of the wording of the Partnership Agreement, which is already known as a matter of fact.

103. In the present case, the following part of Beazley P’s judgment is relevant:

[79] In County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193, McColl JA observed, at [162], that notwithstanding the rule precluding post-contractual conduct as an aid to interpretation of a contract, regard may be had to that conduct as “constituting an admission of the state of the parties’ rights“. The following cases were cited as authority for that proposition: Pitcher v Langford (1991) 23 NSWLR 142 at 160; Grey v Australian Motorists & General Insurance Co Pty Ltd [1976] 1 NSWLR 669 at 684–685; Jones v Sutherland Shire Council [1979] 2 NSWLR 206 at 231; and Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175 at 188E. This statement and the status of these authorities needs to be considered in light of the authorities as to the admissibility and probative value of admissions about matters of law, or of mixed fact and law.

[80] In Dovuro Pty Ltd v Wilkins [2003] HCA 51 ; 215 CLR 317, a question arose as to the admissibility of statements made by a corporation that it had “failed its duty of care“. Gummow J (McHugh and Heydon JJ agreeing) expressed the view, at [71], that those statements did not provide a basis upon which to make a finding of negligence. In coming to that conclusion, Gummow J indicated, at [68], that the observations of Mahoney JA in Jones v Sutherland Shire Council and Pitcher v Langford that admissions could be made of matters of law or mixed fact and law had been stated too widely. Whilst facts may be the subject of an admission, a conclusion which depends upon the application of a legal standard is either not admissible or at the best valueless: see Grey v Australian Motorists & General Insurance Co Pty Ltd per Glass JA at 676.

[81] Glass JA’s statement in Grey was referred to in Eastern Express Pty Ltd v General Newspapers Pty Ltd (1992) 35 FCR 43, where Lockhart and Gummow JJ observed:

[W]hen a standard, measure or capacity is fixed by law, a party cannot be asked to admit a conclusion depending upon the legal standard; however, the witness may be asked to admit facts from which the conclusion of law may be drawn by the court.

[82] Their Honours also observed that the law was unsettled as to whether admissions may be made of matters of mixed fact and law. In Dovuro at 341, Gummow J set out these observations of Lockhart J and himself in Eastern Express. See also J D Heydon, Cross on Evidence (9th ed, 2013, LexisNexis Butterworths).

[83] In Hopcroft v Edmunds (2013) 116 SASR 191, the appellants sought to rely upon a statement by the respondent extracted in cross-examination, that he believed a contract had come into existence, as an admission that there was a contract. Kourakis CJ considered that the evidence was inadmissible because it expressed a legal conclusion. White J (Stanley J agreeing), observed that some admissions involving legal conclusions would not be admissible or at best would be “regarded as valueless“. However, his Honour, at [109], considered the admission made in cross-examination was not based on a legal standard and accordingly its admissibility was not precluded by the statement in Dovuro. Nevertheless, as the statement was only a statement of subjective belief, his Honour held it was irrelevant to the objective assessment of whether the contract had been formed.

104. In the same case, Basten JA said the following in relation to the evidentiary significance of post-contract conduct that does not tend to establish the terms of the contract as a matter of fact:

[120] There are difficulties attending the use of post-contractual statements to construe the terms of a contract. It is an accepted principle that anything which the parties said or did after a contract was made cannot be used “as an aid in the construction of “the contract: Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57 ; 238 CLR 570 at [35] (Gummow, Hayne and Kiefel JJ), referring to the statement of Lord Reid in James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583 at 603. That principle derives from the “objective“ theory of contract, which provides that the legal obligations of the parties to the contract do not depend upon their subjective beliefs but upon the view of the reasonable bystander informed as to the surrounding context and circumstances, which in practice means the view of the court based on the evidence before it: Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 775 (Lord Hoffmann); Wilson v Anderson [2002] HCA 29 ; 213 CLR 401 at [8] (Gleeson CJ); Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52 ; 219 CLR 165 at [40] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ); Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 at [16] (Lord Hoffmann, PC); and see Lewison and Hughes, The Interpretation of Contracts in Australia (Law Book Co, 2012) at [2.04]–[2.05].

[121] On the other hand, where it provides evidence of facts, the assertion of which is against the interests of one party, it may be admissible as an admission by that party. However, to the extent that the evidence reveals an opinion as to a question of law rather than fact, the admission may be irrelevant or valueless. (The relevant authorities were collected by Campbell JA in Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234 ; 261 ALR 382 and in Lym International Pty Ltd v Marcolongo [2011] NSWCA 303.) Alternatively, the evidence may establish contextual facts in existence at the time the contract was executed.

[122] These principles apply to the determination of the meaning of a written document. However, in this case, as succinctly stated by Spigelman CJ in County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193 at [7]:

The issue is not one of interpretation, because there are no words to interpret. The issue is one of fact: what did the parties agree?

105. Gleeson JA at [132] expressed his agreement with Basten JA on this issue.

106. As I have noted above, the plaintiffs’ submission was that Mr Rong’s conduct constituted “admissions by him consistent with the construction of the Partnership Agreement for which the plaintiffs contend”. Formulated in that way, the plaintiffs’ submission has the effect that Mr Rong made admissions concerning the proper construction of the Partnership Agreement; that is, that he made pure admissions of law. The plaintiffs did not submit that the admissions went to mixed matters of fact and law; and it is difficult to see how they could partially concern matters of fact, as there was no relevant issue of fact as to what the terms of the contract were. Accordingly, as a matter of law the post-contract conduct relied upon by is not admissible to assist in the proper construction of the Partnership Agreement.

107. In any event, in my view, the alleged admissions would, in this case, be irrelevant or valueless, in the terms used by Basten JA.

108. As I have said above, in relation to the proper construction of the parts of the Partnership Agreement that concerned the wages or salary to which Mr Wang was entitled, they did not expressly provide for payments to be made at any short term interval such as fortnightly. Mr Wang’s entitlement was expressly dealt with on an annual basis. To the extent that payments were in fact made on a fortnightly basis, that was at most a reasonable arrangement by the mutual agreement of the partners. Equally, the Partnership Agreement did not expressly require Mr Wang to devote any particular part of his time, on a regular short-term basis, to the affairs of the partnership by working at the coffee shop. Specifically, the Partnership Agreement did not oblige Mr Wang to work 3 out of 5 days at the coffee shop, or three-fifths of the days upon which the coffee shop was open on a weekly basis, or any other amount of time. The implication from the terms of the Partnership Agreement was that Mr Wang would devote his time to the partnership business at the coffee shop in a way that would approximate three-fifths of the time reasonably devoted by Mr Rong on an annual basis. Accordingly, there was no necessary or immediate link between the apparent agreement between the parties to start paying both Mr Rong and Mr Wang on a fortnightly basis, and the amount of time that Mr Wang would devote to the business during the course of a year. The relevance of this observation is that, at least initially, Mr Rong could have made or acquiesced in fortnightly payments being made to Mr Wang, without appreciating that Mr Wang would not ultimately fulfil his annual obligation to work at the coffee shop.

109. As time passed, it should gradually have become apparent to Mr Rong that it was becoming increasingly unlikely from the time left in the year that Mr Wang would be able to make up for lost time in devoting the agreed amount of his time to the affairs of the partnership. I do not accept, however, that it would be proper for the court to conclude that Mr Rong’s failure to act to terminate the automatic payments to Mr Wang as soon as it became clear that Mr Wang could not honour his obligation constituted an admission by Mr Rong that the Partnership Agreement did not oblige Mr Wang to work in the partnership business at all; or at least for any greater time than he wanted to.

110. Furthermore, in my view, the serious inadequacies in the manner in which the Partnership Agreement was drafted, and the difficult questions of construction that have thereby arisen, militate against a finding by the court that the equivocal conduct of Mr Rong was consistent only with Mr Rong having an acceptance that the Partnership Agreement has the meaning and effect that the plaintiffs seek to attribute to it. Albeit that Mr Rong is a layman, and a natural Mandarin speaker, if he turned his mind to the wording of the Partnership Agreement, it is likely that he would have been as perplexed as the court has been.

111. The defendants claimed that Mr Rong’s conduct could not in any event have constituted admissions relevant to the proper construction of the Partnership Agreement because, as a matter of fact, after he made the initial payment of $1020 to Mr Wang, he was not aware that the subsequent regular fortnightly payments were being made, until he went to the partnership’s bank in about March 2012 and discovered that the payments were being made. The defendants base this claim on the fact that the partnership’s bank account was controlled by the plaintiffs up until about March 2012, when the financial difficulties faced by the partnership had become so severe that Mr Rong felt obliged to intervene and take control of the partnership’s finances and accounts.

112. If I am correct in the conclusion that I have reached that Mr Rong’s post-contract conduct is not admissible to assist in the proper construction of the Partnership Agreement, then the validity of this response by the defendants does not arise. However, as the issue was contested before me, I should record my conclusion that I do not accept Mr Rong’s claim that he was unaware of the making of the regular fortnightly payments until about March 2012.

113. It is possible that for some period after the plaintiffs began to exercise sole control over the partnership’s bank account and financial records, Mr Rong was unaware of the making of the fortnightly payments. Even that is questionable, as Mr Rong was responsible for the day to day operations of the partnership business, and it is difficult to see how he could practically have managed the business if he was entirely unaware of the income and expenses of the business; including a regular expense as great as $1020 per fortnight.

105. The plaintiffs relied upon 5 pieces of evidence to contradict Mr Rong’s claim that he was unaware that the fortnightly payments were being automatically made to Mr Wang until about March 2012.

106. The first was an email sent to Ms Xiao and Ms Zhang by Mr Rong on 25 May 2011. In the email, Mr Rong started by saying that he was not sure how much was in the partnership account. He then said: “I will deposit 2300 approx tomo (sic) (Thursday), then check the balance”. This statement suggests that Mr Rong was able through his own devices to check the balance in the partnership’s bank account. That is an easy inference to draw, because, as I have said above, it is very difficult to see how Mr Rong could have carried out his side of the operation of the partnership’s business if he was always ignorant about the balance in its bank account. Mr Rong then discussed the amount that he thought the partnership had in hand, and advised that he expected to be able to deposit particular amounts on nominated dates. He then said: “I don’t think that we have enough money for pay (sic) owner’s (2 of) wages on Thursday (normal paid on every 2nd thursday (sic)), hopefully have enough money on Friday for the wages paymeny (sic)”. This statement is a clear acknowledgement that Mr Rong understood that both he and Mr Wang expected to receive fortnightly wages payments; and Mr Rong expected to be able to be able to take steps in the near future to make those payments.

107. As I understand the evidence, on 11 July 2011, Mr Rong signed a PAYG return to the ATO in respect of payments made by the partnership to Mr Wang for the period 1 October 2010 to 30 June 2011 in the amount of $23,181. The return was signed on behalf of the second defendant.

108. On 25 November 2011, Mr Rong signed a BAS statement prepared by Ms Xiao. The statement itself does not disclose the fortnightly payments made to Mr Wang. However Ms Xiao wrote on the document by hand, a reconciliation that showed wages being paid to Mr Wang. She gave evidence that she gave documents of this type to Mr Rong after she had prepared them.

109. On 26 March 2012, Mr Rong wrote an email to Ms Zhang in which he discussed what he described as “the very difficult time” that the partnership business had experienced since the New Year after Australia Day. Mr Rong said “We (Zhou [Mr Rong’s wife] Wong (sic) and rong (sic)) have no pay since March”. This statement shows that Mr Rong was aware that regular payments of wages or salary had been made to Mr Wang. The email also contained a request for Mr Wang to work “on floor for at less [least?] 25 hours per week so it will be (sic) help to reduce the whole wages payment”.

110. Finally, the plaintiffs relied upon a letter from the defendants’ then solicitors to the solicitors for the plaintiffs dated 9 May 2012. The letter states that it was written on instructions, and includes the statement in par 14: “Indeed, our client had to stop all wages to the partners including himself since March 2012 due to short (sic) of funds”.

111. Taken together, this evidence establishes that Mr Rong was aware that Mr Wang was receiving regular payments of wages or salary from the partnership’s bank account from at least 25 May 2011. It is not necessary to make any detailed findings about whether or not Mr Rong read the PAYG return for the BAS statement with Ms Xiao’s handwriting on it when that document was given to him. The other documents relied upon by the plaintiffs sufficiently establish Mr Rong’s knowledge.

112. In the final analysis, however, I have concluded that Mr Rong’s post-contract conduct, although consistent with the Partnership Agreement not imposing upon Mr Wang any positive obligation to spend time working in the partnership business, is too equivocal to justify a departure from the conclusions that I have reached based upon the wording of Articles Four and Twelve, even if that evidence had been admissible on this issue.

113. It follows that, in my view, the proper answer to Question 2 is that Mr Wang was not entitled under the Partnership Agreement in the absence of his working at the business of the partnership for 3/5 of the equivalent time worked by Mr Rong on an annual basis to receive his salary of $30,000. His entitlement to receive the $20,000 was entirely independent of any obligation to work in the business, as it was not part of his salary. Mr Wang was not required to work 3 days out of 5 every single week, but needed to achieve the total amount of work over a given year.

Orders

123. The separate questions should accordingly be answered as follows:

1. Question 1(a): Each of the plaintiffs (on the one part) and the first defendant (on the other part) is entitled to 50% of the net profits of the Partnership.

2. Question 1(b): The first plaintiff is entitled to receive a salary of $30,000 per annum, plus a payment of $20,000 per annum for business expenses, from the Partnership, subject to the caveat that the payments would be an agreed distribution of anticipated profits, and not a salary in strict terms as would be payable to an employee, and if the total partnership profit was less than $100,000 in any year, Mr Wang was required to make up any shortfall in the payment of his $50,000 from profits by contributing additional capital in the amount of the shortfall.

3. Question 1(c): The first defendant is entitled to receive a salary of $50,000 per annum from the Partnership, subject to the caveat that the payment would be an agreed distribution of anticipated profits, and not a salary in strict terms as would be payable to an employee, and if the total partnership profit was less than $100,000 in any year, Mr Rong was required to make up any shortfall in the payment of his $50,000 from profits by contributing additional capital in the amount of the shortfall..

4. Question 1(d): The payments to the first plaintiff and the first defendant referred to in the answers to Questions 1(b) and 1(c) are to be treated as payments out of the net profits of the Partnership, and to the extent that those net profits enable the payments to be made, they are to be credited against the 50% share of profits that each of the plaintiffs and the first defendant are entitled to as set out in the answer to Question 1(a). To the extent that the net profits of the partnership are less than $100,000 in any year, the shortfall in the payments to Mr Wang and Mr Rong must be made out of additional capital contributed by them, and any additional contributions should be made on the partners’ capital accounts.

5. Question 2: On the proper construction of the Partnership Agreement the first plaintiff was required to work at the business of the partnership for 3/5 of the time reasonably necessary for the proper operation of the business on an annual basis; and his entitlement to receive the payment of $30,000 referred to in the answer to Question 1(b) was reduced in the proportion (time actually worked by the first plaintiff on an annual basis) ÷ (time required to be worked by the first defendant on an annual basis).

6. Question 3: On the proper construction of the Partnership Agreement the plaintiffs (on the one part) and the first defendant (on the other part) are jointly and severally liable for the debts of the Partnership including any debt arising from:

1. The trading activities of second defendant;

2. The BankWest loan;

3. The Gloria Jean’s Franchise Agreement;

4. The Gloria Jean’s licence; and/or

5. Any related guarantees provided by the second defendant and/or the second defendant’s spouse, Qian (Cindy) Zhou.

124. As mentioned in par 11 above, the parties have agreed that I should stand over all other issues raised in the pleadings to the date which is three months after the delivery of judgment on the questions in the Agreed Statement of Issues. I accordingly make the following further orders:

1. (7)   Stand the proceedings over to Wednesday 3 February 2016 before the Registrar for directions.

2. (8)   The exhibits and any documents produced on subpoena may be returned forthwith in accordance with the Rules.

125. I will hear the parties as to whether I should reserve the costs of the hearing of the separate questions, or make some other costs order.

**********

Amendments

24 November 2015 - Par 123 (5)

"payments" replaced with "payment of $30,000"

Par 124 (7)

"Monday 1 February 2016" replaced with "Wednesday 3 February 2016"

Decision last updated: 24 November 2015