Wheatley v Bower - [1999] WASC 235

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: WHEATLEY -v- BOWER & ORS [1999] WASC 235

CORAM: MASTER SANDERSON

HEARD: 9 NOVEMBER 1999

DELIVERED : 2 DECEMBER 1999

FILE NO/S: CIV 2438 of 1998

BETWEEN: BRIAN PHILIP WHEATLEY
Plaintiff
AND
RONALD WILLIAM BOWER
CONAL PATRICK O'TOOLE
PATRICK DAVID MOSTYN HUGHES
MERVYN ROTHSTEIN
First Defendants
VALMA SYLVIA CEARNS as Executrix of the estate of IAN ELDRED CEARNS (DEC)
CEDRIC DAVID WILLIAMSON
STEPHEN OWEN-CONWAY
JOHN SWIFT
VALMA SYLVIA CEARNS
STEPHEN DEXTER CROOKS
RICHARD JAMES LARRY McCORMACK
RAOUL RUDOLPH CYWICKI
GUY SHENTON FRENCH
JOHN GERARD DEARN
CRAIG ANTHONY MASAREI
Second Defendants

Catchwords:

Summary judgment - Termination of partnership - Claim for account by plaintiff - Defence of settled account

Legislation:

Nil

Result:

Plaintiff's application dismissed - Defendants' application succeeds

Representation:

Counsel:

Plaintiff: Mr P G Clifford
First Defendants : Mr M J McCusker QC &
Mr P G Donovan

Second Defendants : Mr M J McCusker QC &
Mr P G Donovan

Tenth-named Second Defendant : No appearance

Solicitors:

Plaintiff:    Murfett & Co
First Defendants  :    McCallum Donovan Sweeney
Second Defendants                   :    McCallum Donovan Sweeney
Tenth-named Second Defendant :    No appearance

Case(s) referred to in judgment(s):

Anglo‑American Asphalt Co v Crowley Russell & Co [1945] 2 All ER 324
Davis v Hueber (1922) 31 CLR 583

Case(s) also cited:

Australian Can Co Pty Ltd v Levin & Co Pty Ltd [1947] VLR 332
Clarke v Australian Guarantee Corp, unreported; SCt of WA (Master Sanderson); Library No 980484; 27 August 1998
Cordinup Resorts Pty Ltd v Terana Holdings Pty Ltd, unreported; FCt SCt of WA; Library No 970739; 23 December 1997
Cullen v Steen [1932] St R Qd 192
Fancourt v Mercantile Credits Limited (1983) 57 ALJR 621
Re Gyhan [1885] 29 Ch D 834
Hurst v Bryk [1999] Ch 1
Knox v Gye (1872) 42 LJ Ch 234
Levi v Stirling Brass Founders Pty Ltd, unreported; FCt SCt of WA; Library No 970209; 9 May 1997
Moscow Narodny Bank Ltd v Mosbert Finance (Aust) Pty Ltd [1976] WAR 109
Phillips-Higgins v Harper [1954] 1 QB 411
Webster v Lampard (1993) 177 CLR 598

MASTER SANDERSON: This is the return of two applications for summary judgment. The plaintiff brings his application against all defendants, save for John Gerard Dearn. The second application is by all defendants, save for Dearn, and seeks summary judgment against the plaintiff. For his part, the plaintiff seeks an order for an account in relation to a number of partnerships involving the plaintiff and the defendants. The defendants, on the other hand, seek to have the plaintiff's claim dismissed and judgment entered in their favour against the plaintiff.
Both the plaintiff and all defendants are, or at all relevant times were, legal practitioners. From time to time the plaintiff was in partnership with each of the defendants. The plaintiff pleads seven separate partnerships involving the defendants. The way in which the claim is pleaded can be illustrated by reference to what the plaintiff describes as "the first partnership". The plaintiff says that on 1 July 1986 he entered into a partnership with the defendants Cearns (now deceased), Williamson, Swift, Cearns, Owen‑Conway, McCormack, Bower, Cywicki, O'Toole, French and Crooks. The partnership was conducted under the name of Corser & Corser. The plaintiff then pleads that the partnership agreement was partly in writing and partly to be implied and sets out the terms of the partnership agreement. Reference is made to a policy of insurance taken out on the lives of each of the partners but this is not relevant for the purposes of the first partnership. It is then pleaded that the first partnership was dissolved on 30 June 1987 when Owen‑Conway retired from the partnership. The plaintiff then pleads as follows:
"7.The defendants, who were members of the first partnership as alleged in paragraph 2 hereof at the time it was terminated wrongfully neglected or refused to wind up the affairs of the first partnership or to undertake a taking of accounts thereof."
The relief claimed in the prayer for relief in relation to the first partnership is an order for winding up the affairs of the first partnership and a taking of accounts. The plaintiff also seeks payment of interest on any moneys found payable upon taking the accounts. The prayer for relief does not actually seek payment of any amounts found to be owing to the plaintiff after the taking of accounts, but that is perhaps to be implied from the way the prayer for relief is structured. In any event, on the plaintiff's application for summary judgment, the only relief which is sought is an order for taking of accounts.
The same claim is made in relation to all seven partnerships the plaintiff says he entered into with the various defendants. There is only one difference in relation to the various claims. During the course of each of the partnerships a policy of insurance was taken out over the life of each partner for the benefit of the partnership. The sixth partnership terminated on 30 June 1992 when the late Ian Eldred Cearns retired. The seventh partnership then took over the insurance policies on the lives of the partners in the sixth partnership. It seems, however, that a policy was maintained on the life of the late Ian Cearns although he had retired from the partnership. Upon the death of Ian Cearns a payment was made on the policy. It is the plaintiff's claim that the proceeds of this policy are to be taken into account in relation to the seventh partnership. I will have more to say about the significance of this life insurance payment later in these reasons.
In relation to all seven partnerships the terms of the partnership agreement were said to be:
1.Goodwill was fixed at $25,000 per partner.
2.The financial arrangements of the partnership could only be varied by a unanimous resolution of all partners.
3.If a retiring partner engaged in private practice as a solicitor within two years from the date of his retirement from the partnership he was not entitled to retain any payment for goodwill.
4.Upon retirement a retiring partner was to be paid his share and interest in the partnership together with interest.
In relation to the first four partnerships it is said that insofar as the partnership agreements were in writing, they were constituted by minutes of a partners' meeting dated 24 June 1986. It seems clear that these partnership minutes were adopted by the subsequent partnerships and provided the written part of the partnership agreement. These minutes are to be found as Annexure "C" to the affidavit of Ronald William Bower, sworn 11 October 1999. Appearing under the heading "General Business" in the minutes of a partners' meeting held 24 June 1986 there appears the following entries:
"(a)…
(b)At retirement, the value standing to the credit of the partner's current account less goodwill (hereinafter referred to as the 'net tangible assets') will be the amount to be paid by the firm to a retiring partner. The net tangible assets will not be discounted upon the occasion of a partner's retirement.
(c)The net tangible assets are to be paid to a retiring partner by equal monthly instalments over a period of 2 years with no interest attached thereto.
(d)Goodwill is to be fixed at $25,000.00 per partner.
(e)Upon the retirement of a partner goodwill is to be held by the remaining partners as trustees for sale to any incoming partner.
(f)Any incoming partner must purchase any goodwill held by the firm as trustees for sale by payment of the sum of $25,000.00.
(g)If the firm is not holding any retired partner's goodwill for sale at the relevant time, any incoming partner will pay a goodwill payment to the firm in the sum of $25,000.00 for the existing partners' use beneficially.
(h)When the firm receives a goodwill payment from an incoming partner upon the occasion of a sale by the firm as trustees of a retired partner's goodwill, the firm will forthwith make payment to the retired partner of the sum of $25,000.00.
(i)If there is no incoming partner within a period of 2 years from the date of a retirement of a partner, goodwill be paid out to the retired partner in the sum of $25,000.00 at the expiration of 2 years from the date of the retirement without the accrual of interest in respect thereof.
(j)If the retired partner engages in private practice either on his own account or as a member of a firm in his capacity as a solicitor in the Perth metropolitan region during the period of 2 years from the date of his retirement from the firm, any goodwill payment made to him upon the occasion of his retirement or thereafter will be refunded to the firm.
(k)…
(l)The partners agree that the financial arrangements set out in (a) to (k) above and any resolution to remove a partner or to dissolve the partnership can only be varied by a unanimous resolution of all partners at a meeting at which all members of the partnership are in attendance either personally or by their proxy.
… "
It is apparent, reading these resolutions, that there is some confusion as to just what is meant by "the partner's current account". The term is not actually defined. Under cl (b) the partner's current account less goodwill is defined as "net tangible assets". In his statement of claim the plaintiff says that upon retirement a retiring partner was to be paid his share and interest in the first partnership together with interest. It is not immediately apparent how that obligation arises. What appears to be required is that the retiring partner will be paid his net tangible assets as defined.
It is convenient at this point to deal with the variations and adjustments to the terms of the partnership consequent upon resolutions made on 17 May 1989. As I have indicated above, these variations apply in relation to the fifth, sixth and seventh partnerships. Clause 8(i) of the Resolutions (Annexure "D") is in the following terms:
"At retirement or resignation, the amount standing to the credit of the partner's Current Account less goodwill (hereinafter referred to as the 'net tangible assets') will be the amount to be paid by the firm to a retiring or resigning partner."
This clause closely reflects what was in the 1986 minutes. The only difference is that there is no undertaking in the later agreement that the amount of the net tangible assets will not be discounted on the occasion of the partner's retirement. In any event there is really no dispute between the parties as to the nature of the various partnership agreements and their terms and conditions.
The essence of the plaintiff's claim is set out in his affidavit of 4 February 1999. Paragraph 14 reads as follows:
"14.By letters dated 22 and 24 March 1998 the plaintiff requested payment of the sum of $214,373.24 in relation to the matters referred to in paragraph 13 above. The sum of $214,373.24 is calculated as follows :
14.1Capital and Current
Account as per Final
Accounts 31 December
1992.Annexed hereto
and marked 'A' is a
calculation showing the
figure for my capital
and current account  $101,160.00
14.2Add share Darreh Unit
Trust$5,419.00
- Trust Capital  20.00
- Darreh Pty Ltd
  shares  30.00
- Corser Nominees Ltd
  shares  30.00
- Income483.00       5,982.00
14.3Add share of Retirement
penalties enforced. Annexed
hereto and marked "B"
is a calculation of
retirement penalties
McCormack3,125.00
French3,125.00
Ian Cearns3,125.00       9,028.00
14.4Add share of Retirement
penalties not enforced
contrary to agreement
Swift 1/10$25,000.00      2,500.00
Crooks 1/8 $25,000.00        3,125.00       5,625.00
14.5Add share of Retirement
penalty (when enforced)
Dearn 1/8 $25,000.00  3,125.00
14.6Add adjustment to Ian
Cearns current account for
retirement penalties
McCormack$3,125.00
French$3,125.00
Swift$2,500.00
Crooks$3,125.00 11,875.00
for discount work in
progress at 30/6/92
$711,738.00 - 1/10th       71,174.00
83,049.00
1/9th share thereof  9,228.00
14.7Add share in proceeds
MLC Policies. I Cearns
capital and current account
as per final accounts      127,713.00
1/9th share thereof  14,190.00
14.8Add share loss to
partnership revenue
suffered as a result of the
death of the late Ian
Cearns15,000.00
Less included in Profits
to 31 December 1992        1,892.00
13,108.00
1/9th share thereof  1,456.00
14.9Add share of discount of
work in progress at 31
December 1992
$175,086.00
1/9th share thereof  19,454.00
Sub total items 14.1 to 14.9                 169,248.00
Add interest adjustment
from 1 January 1993 to
1 January 1998 @ 10%
($16,924.80 x 5)  84,624.00
Sub total253,872.00
Less payments made  $39,498.76
TOTAL$214,373.24"
It was not suggested either in the plaintiff's written or oral submissions that he was seeking anything other than what was claimed in par 14 of his affidavit. As will be seen, there is no reference to any of the partnerships other than the seventh in this paragraph. It is true that reference is made to the retirement of McCormack, French and others but this is reflected in the plaintiff's claim for an increased entitlement on his retirement from the seventh partnership. On that basis it is difficult to see how the plaintiff could succeed on his application for accounts to be taken in relation to the first six partnerships.
It is also not entirely clear that accounts would be ordered in this case. There is no doubt that the plaintiff and the other members of the seventh partnership were in a fiduciary relationship. It is generally the case that on dissolution of a partnership a court of equity will order the taking of accounts. But that is by no means always the case. Here, the plaintiff has set out his claim with some clarity. There does not appear to be any doubt in his mind as to the precise amounts to which he is entitled. In that situation one might ask rhetorically - what purpose would accounts serve? The defendants do not dispute the figures, they simply dispute the plaintiff's entitlement to the amounts as claimed. In Davis v Hueber (1922) 31 CLR 583 Higgins J put the position as follows (at 595 ‑ 596):
"A Court of equity could make a decree for accounts under special circumstances only, as where the accounts are so complicated that the Courts of law are inadequate. As stated in King v Rossett, 'before' a Court of equity 'will interfere, a ground for its interposition must be laid, by showing an account which cannot fairly be investigated by a Court of law.' … and [in this case] there was no need for the assistance of a Court of equity in the ascertainment of this issue, debt or no debt. Such an issue is for courts of law, and for Courts of law only. …
There is not the slightest evidence of any complexity in the accounts, even as to the transaction of Hueber with Andersen, Meyer & Co Ltd. The fact that the accounts have not been audited by the latter's auditors does not give jurisdiction. Still less is there any difficulty or complexity, or pretence thereof, in the transactions between Hueber and Davis personally. There is no indication of any dispute as to the accounts between Hueber and Davis, the parties to this cause. Therefore, the equitable jurisdiction as to accounts does not justify this suit in equity against Davis."
This is a summary judgment application. In my view, it is at least arguable that equitable jurisdiction to order the taking of accounts does not arise in this case. If such jurisdiction does arise then it may not be exercised, at the discretion of the court. Once again that seems to me to be an arguable position. That being the case, the plaintiff's application for summary judgment must be dismissed.
Turning then to the defendants' application for summary judgment, it would seem that the only claim that the plaintiff could possibly have is against the members of the seventh partnership. These were Valma Cearns, Bower, Cywicki, O'Toole, Hughes, Masarei and Dearn. That in turn means that no claim would lie against Valma Cearns in her capacity as executrix of the estate of Ian Cearns, Williamson, Owen‑Conway, Swift, Crooks, McCormack or French. What is more, in relation to each of these individuals, it is said that accounts were prepared at the termination of the partnerships in which they were involved and that these accounts were approved by the plaintiff. The plaintiff does not dispute that this is the case. In the circumstances, each of the defendants maintains a defence of settled accounts: see Anglo‑American Asphalt Co v Crowley Russell & Co [1945] 2 All ER 324. In my view, in the absence of any evidence from the plaintiff challenging the accounts of the various partnerships at any time since the accounts were prepared provides each of the defendants (other than those who were in the seventh partnership) with a good defence to this claim. It must be remembered that this is a summary judgment application. Having raised the defence of settled accounts, it was for the plaintiff to produce some evidence that the accounts were challenged or that there had been no settled account agreed. In the absence of such evidence, the defendants' position must be accepted.
In relation to the seventh partnership, the position is somewhat different. The accounts were challenged by the plaintiff even if it was done in a rather pre‑emptory fashion: see Annexure "A" to the plaintiff's affidavit of 8 November 1999. It is at least arguable that the accounts were never accepted by the plaintiff and that the defence of settled account would not lie. However, the defendants say, independent of any defence of settled account, that the plaintiff simply has no claim against them on the best view of his case as he puts it before the court.
The plaintiff's claim can be broken down into three separate areas. Under par 14.1 (which I have quoted above) the accounts of 31 December 1992 showed the plaintiff's current account standing at $101,160. It is common ground between the parties that this is the figure put forward by the defendants on the plaintiff's retirement from the partnership. The plaintiff then seeks a further $5,982 being his share of entitlements in relation to the Darreh Unit Trust. In fact, he was credited with the sum of $6,008.74 in relation to the Darreh Unit Trust. This appears from a letter from Messrs Corser & Corser to the plaintiff dated 5 August 1994 and appearing as Annexure "M" to the affidavit of Ronald William Bower, sworn 11 October 1999. There does not appear to be any dispute about the credit given by the defendants to the plaintiff and this aspect of the plaintiff's claim can be put to one side.
Points 14.3, 14.4, 14.5 and 14.6 (in part) relate to the so‑called "retirement penalties". In my view, this claim proceeds on a complete misunderstanding of the way in which the partners agreed to treat goodwill. Goodwill in any business fluctuates from time to time and can, in reality, only ever be determined when a willing buyer and a willing seller reach agreement as to how much the buyer is to pay for goodwill upon the purchase of a business. Until such an agreement is struck, partners can value the goodwill and they can adjust it up or down but it remains nothing more than an estimate of what goodwill may fetch when and if the business is sold. It is clear that in the various partnerships, the subject of this action, the partners did not want to be bedevilled by arguments about goodwill whenever the partnership came to an end as the consequence of the retirement of a partner. So they agreed that the value of the goodwill for an incoming partner and an outgoing partner was $25,000. They added certain riders so that in certain circumstances an outgoing partner did not receive payment for his goodwill. The value placed upon an outgoing partner's entitlement to payment for goodwill bore no relationship to what the goodwill might actually have been worth. It was not intended to do so. What the partners did was simply introduce a mechanism to facilitate an orderly entry and exist of partners. The net result might in the end be that, if all the partners on a particular date resolved to dissolve the partnership entirely and sell the business as a going concern, the return to each of them representing goodwill might be well above or well below the $25,000 which was the notional value of their partnership. None of that affects the arrangements which were in place on the departure of the plaintiff from the seventh partnership. In my view, there is no basis for saying that the plaintiff is entitled to a share of "retirement penalties" when certain partners resigned. What the plaintiff was entitled to receive was an amount of $25,000 being the agreed value of his goodwill. He was then entitled to receive the net tangible assets which amounted to the current account, less goodwill. If any retirement penalties were to be facted into the overall net position of the partnership they would have to be regarded as part of the goodwill. It is difficult to see how they could be treated otherwise. That being so there is no provision in the partnership agreement for the plaintiff to seek any amount in relation to these retirement penalties on his retirement from the partnership.

The second part of the plaintiff's claim relates to the payment under the MLC Insurance policy upon the death of Ian Cearns. This aspect of the plaintiff's claim is fundamentally flawed. In par 38.4 of his affidavit of 11 October 1999 Bower says that the MLC policy was taken out by a corporate entity, Corser Nominees Ltd. That company then executed a declaration of trust on certain terms and conditions. It is apparent from the uncontradicted evidence of Bower that any payment under the policy of insurance never passed to the partnership. Such amounts as claimed by the plaintiff could not fall within the assets of the partnership and no claim can arise.
Finally, there is the plaintiff's claim for the discount for the work in progress which was applied on the retirement of Ian Cearns from the partnership and on the retirement of the plaintiff from the partnership. The way this "discount" is explained by Bower, is as follows. As is the case with most legal firms, work in progress is recorded by entry onto a computer. The result is that from time to time when asked to do so the computer will provide a report on the value of the work in progress. That computer generated value for work in progress may or may not be accurate. There may be some files where the value of the work in progress could not in practice be recovered. To obtain a realistic value for the work in progress some discount could, and generally probably should, be applied. That is not to say that the actual value of the work in progress is discounted. Rather it is to more accurately assess the real or actual value of the work in progress. It is clear that that has been what has been done when each of the partnerships terminated. In my view it is consistent with the terms of the partnership agreement, as reflected in the minutes of May 1989 and it is an entirely reasonable approach to putting a realistic value on the net tangible assets. For his part, the plaintiff has raised no issue that the "discount" applied is unreasonable or unwarranted and there is no basis set out for his claim.
In all the circumstances, I am satisfied that all of the defendants have a good defence to this claim. In my view the plaintiff has no arguable case and judgment ought be entered for all defendants (other than Dearn) against the plaintiff. I will hear the parties as to the precise form of the orders.