Nixon v Walker
[2010] NZCA 273
•25 June 2010
IN THE COURT OF APPEAL OF NEW ZEALAND
CA804/2008
[2010] NZCA 273BETWEENSHAUN ROGER NIXON
First AppellantANDMARTIN VICTOR RICHARDSON AND SHAUN ROGER NIXON, AS TRUSTEES OF THE FIRM TRUST
Second Appellants
ANDGEOFFREY DONALD CAMPBELL WALKER, ROWAN JOHN CHAPMAN, TIMOTHY JOSEPH GOLDFINCH, MARTIN VICTOR RICHARDSON, DIANNE MAREE LUDWIG AND KURT SHERLOCK
First RespondentsANDGOSLING CHAPMAN LIMITED
Second Respondent
Hearing:2 and 3 March 2010
Court:Glazebrook, Chambers and Ellen France JJ
Counsel:S A Grant and T A Chubb for Appellants
F J Thorp for Respondents
Judgment:25 June 2010 at 3 pm
JUDGMENT OF THE COURT
A The appeal is dismissed.
B The appellants must pay the respondents costs for a standard appeal on a band A basis and usual disbursements.
REASONS OF THE COURT
(Given by Chambers J)
Table of Contents
Para No.
A partner leaving Gosling Chapman [1]
Issues on the appeal [11]
Were the arbitrator and the Judge right in holding that Mr Nixon,
in order to be entitled to his share of the second instalments of
the incoming partners’ goodwill payments, had to be a partner at
the date on which the second instalments were paid?
The relevant contractual provisions [17]
The findings of the arbitrator [27]
Our view on this issue [32]
Did the arbitrator’s award, unbeknownst to the arbitrator, in fact
provide for Mr Nixon receiving his share of the second
instalments? [48]
Can Mr Nixon now run an argument that in late July 2003 the
continuing partners, by their conduct, accepted his proposed
terms for his proposed consultancy? [59]
Can Mr Nixon now run an argument that the continuing partners
are estopped from denying Mr Nixon was entitled to be a
consultant on the terms he had proposed? [73]
Result [84]
A partner leaves Gosling Chapman
[1] The story begins, for current purposes, on 1 April 2002. On that date, two of the first respondents, Dianne Ludwig and Kurt Sherlock, joined Shaun Nixon, the first appellant, and Geoffrey Walker, Rowan Chapman, Timothy Goldfinch, and Martin Richardson, the remaining first respondents, as partners in the accountancy firm, Gosling Chapman. Under the terms of the partnership agreement, Ms Ludwig and Mr Sherlock were required to pay goodwill. Each had to pay $168,000 on 1 April 2002 and a further $100,000 (subject to adjustments) on 1 April 2004. The existing partners were entitled to share equally in those receipts.
[2] In January 2003, Mr Nixon gave notice to his partners of his intention to retire from the partnership as from 31 December 2003. Later he extended this to 31 March 2004.
[3] Initially, the continuing partners, as we shall call the first respondents collectively, were sorry to be losing Mr Nixon. In June and July 2003, Mr Nixon had discussions with Mr Richardson, one of the continuing partners, about the possibility of Mr Nixon becoming a consultant to the firm after his resignation came into effect. Indeed, in July 2003, Mr Nixon, in the presence of other partners, announced to the Gosling Chapman management and staff that he would be resigning as a partner from 31 March 2004 and becoming thereafter a consultant.
[4] Unfortunately, relations began to fall apart in the latter part of 2003. The parties were unable to agree about the detail of the proposed consultancy. As well, some of the continuing partners expressed concern about Mr Nixon’s performance. This ultimately led to the continuing partners advising Mr Nixon in February 2004 that he would not be becoming a consultant after he left the partnership on 31 March.
[5] This advice immediately led Mr Nixon to find alternative employment for the period after 31 March. He and a Gosling Chapman employee, Leanne Cate, managed to arrange employment with another accountancy firm, MGI Wilson Elliot. On 1 March, Ms Cate gave Gosling Chapman notice of her intention to leave.
[6] Mr Nixon’s planned move to MGI provoked the continuing partners into giving, on 8 March, notice of a partnership meeting to be held on 10 March. The purpose of the meeting, as stated in the notice, was to discuss “concerns over the conduct of Shaun Nixon and what steps, if any, should be taken in relation to those concerns, including the possibility of expulsion”.
[7] In the continuing partners’ covering letter, they invited Mr Nixon to discuss the issue in a preliminary way at an earlier meeting on 9 March. Mr Nixon agreed to attend that meeting. At that meeting, they invited Mr Nixon to withdraw from the partnership that day. While details as to what was discussed that day are disputed, it is common ground that, at the end of the meeting, Mr Nixon collected some personal items from his office and then left the Gosling Chapman premises. The following day he began work as a consultant at MGI: the date was brought forward. He continued in that position until 1 April 2006 when he began his own accountancy practice in Albany.
[8] Mr Nixon and the continuing partners, in the months after March 2004, discussed the winding up of the partnership. Eventually all matters were agreed save two, which were recorded in a document stated to be an “Agreement Recording Withdrawal of Partner” and dated 7 October 2004. The two matters unresolved were whether Mr Nixon was entitled to share in the second goodwill payments made by Ms Ludwig and Mr Sherlock on 1 April 2004 and whether Mr Nixon was entitled to compensation “for an alleged wrongful termination of partnership/employment/consultancy arrangements by the continuing partners”. The partners referred those two remaining issues to arbitration and appointed the Hon Dr Robert Fisher QC as arbitrator.
[9] Dr Fisher delivered an award on 18 December 2006. He held that Mr Nixon was not entitled to any part of the goodwill payments made by Ms Ludwig and Mr Sherlock on 1 April 2004 on the basis that Mr Nixon was not at that date a partner. He also found that the parties had never reached agreement with respect to a consultancy, with the consequence that the continuing partners had not breached the arrangement.
[10] Mr Nixon sought leave to appeal to the High Court. John Hansen J granted leave to appeal on four questions of law but declined leave on four others.[1] Keane J heard the appeal, which he dismissed on 12 December 2008.[2] Subsequently, on 8 May 2009, Keane J granted leave to appeal to this Court.[3] In essence, his Honour allowed Mr Nixon to bring to this Court similar questions to those John Hansen J had sanctioned. Since Keane J had entirely upheld the arbitrator’s award, his errors were said by Mr Nixon to be the same ones the arbitrator had made.
Issues on the appeal
[1] Nixon v Walker HC Auckland CIV-2007-404-1372, 13 July 2007 [Hansen J leave decision].
[2] Nixon v Walker HC Auckland CIV-2007-404-1372, 12 December 2008 [Keane J appeal decision].
[3] Nixon v Walker HC Auckland CIV-2007-404-1372, 8 May 2009 [Keane J leave decision].
[11] Four issues arise on this appeal. The first is whether the arbitrator and the Judge were right in holding that Mr Nixon, in order to be entitled to his share of the second instalments of the incoming partners’ goodwill payments, had to be a partner at the date on which the second instalments were paid. For reasons we shall give, we hold that the arbitrator and the Judge were wrong on this point. Mr Nixon was entitled to his share.
[12] This leads on to a second issue, however. Did the arbitrator’s award, unbeknownst to the arbitrator, in fact provide for Mr Nixon receiving his share of those payments? This needs quite a lot of explanation. We provide that below, but we indicate now that our finding is that Mr Nixon has been paid his share.
[13] The third issue relates to the alleged consultancy agreement. Mrs Grant, for Mr Nixon, had successfully sought leave to appeal on what was said to be the issue of whether Dr Fisher and Keane J had erred in refusing to find that the continuing partners had, by their conduct from late July 2003 onwards, accepted Mr Nixon’s terms for his proposed consultancy. But, given the pleadings and the way the case was run before the arbitrator, can this argument now be advanced on appeal? That is the first question under this issue and, for reasons we shall explain, we are doubtful whether the argument is open to Mr Nixon. The asserted issue is probably not a question of law arising out of the award. Even if we are wrong about that, however, we go on to hold that, on the facts found by Dr Fisher, Mr Nixon did not establish this asserted agreement by conduct.
[14] Something rather similar has happened with respect to the fourth issue. Keane J gave leave to appeal on the following question:
Were the respondents estopped from denying the existence of a consultancy agreement by their conduct as described in the third question above?
[15] Mrs Grant submitted to us that Keane J had erred when considering a like question approved by John Hansen J. She said that Keane J’s rejection of a “cause of action in estoppel” on the basis that no contract had been established was erroneous. She submitted that “an agreement on essential terms” did not need to be established “to found an estoppel”. Again, however, given the way the case was pleaded and run before the arbitrator, was it open to Mr Nixon to raise an estoppel argument at all? For reasons we shall give, we find that Mr Nixon cannot now argue for an estoppel cause of action he never pleaded nor ran before the arbitrator.
[16] We shall consider the issues in turn.
Were the arbitrator and the Judge right in holding that Mr Nixon, in order to be entitled to his share of the second instalments of the incoming partners’ goodwill payments, had to be a partner at the date on which the second instalments were paid?
The relevant contractual provisions
[17] The partners of Gosling Chapman recorded the terms of their partnership in an agreement dated 15 May 1995. Clause 10(a) of the partnership agreement provided for the admission of new partners. The admission of a new member had to be approved by special resolution. A special resolution required support from existing partners “holding or representing not less than three-fourths of the capital of the partnership”: clause 17(g).
[18] The partnership agreement provided for the contingency that existing partners might agree to the admission of a new partner only if the new partner agreed to pay goodwill. In the event the existing partners and the incoming partner did agree that goodwill was payable, the partnership agreement provided that any goodwill payment was to “be divided amongst the existing partners in equal amounts”: clause 10(b).
[19] The agreement went on to provide some protection for incoming partners: clause 11(f)(iii). If an existing partner (who had received his or her share of the goodwill payment) ceased to be a partner within two years of the incoming partner’s admission, that retiring partner had to refund all or part of his or her share of the goodwill to the incoming partner according to a formula set out. (We refer to this two year period as “the two year protection period”.) In general terms, the amount to be refunded turned on when in the two year period the retiring partner retired.
[20] Because clause 11(f) is so crucial to the argument between the parties, we set it out verbatim:
On the withdrawal or retirement of a Partner such Partner shall:
(i)Be entitled to repayment of his current account as disclosed in the balance sheet of the Partnership at the most recent Balance Date such portion to be adjusted so as to represent the change in net Partnership assets as at the date of his ceasing to be a Partner, and
(ii)Transfer his share in the Partnership Capital to such person or persons as the remaining Partners shall by Special Resolution direct.
(iii)Refund to the person or persons from whom he received the same goodwill payments received by such partner an amount calculated as follows:
(a)Where the Retiring Date occurs less than 13 months after the Admission Date of the Refund Partner the Retiring Partner shall refund to the Refund Partner all the goodwill paid by the Refund Partner to the Retiring Partner.
(b)Where the Retiring Date occurs not less than 13 months and no more than 24 months after the Admission Date of the Refund Partner the Retiring Partner shall refund to the Refund Partner a portion of the goodwill paid by the Refund Partner to the Retiring Partner, calculated in accordance with the following formula:
A = B (1 – C – 12)
24
(c)Where the Retiring Date occurs more than 24 months after the Admission Date of the Refund Partner the Retiring Partner shall not make any refund to the Refund Partner.
(d)The Continuing Partners shall obtain the release of the Retiring Partner from any guarantee given to creditors of the Partnership including but not limited to the Partnership’s bankers and landlord and obtain the release and discharge of any securities supporting such guarantee and the Continuing Partners shall fully indemnify the Retiring Partner against any claims, costs, actions or other matters arising from the date of retirement until such releases and discharges are obtained.
[21] The agreement further provided, by clause 1(m), that the letters in the clause 11(f)(iii)(b) formula meant:
A = the amount to be refunded by the Retiring Partner to the Refund Partner.
B = the amount of goodwill paid by the Refund Partner to the Retiring Partner.
C = the number of completed months which have elapsed between the Admission Date [of the incoming partner] and the Retiring Date [of the Retiring Partner], up to a maximum of 24.
[22] The point of clause 11(f)(iii) – or “the clause 11(f) provision” as we shall call it for convenience – was to incentivise existing partners to remain for at least two years after the incoming partner’s admission, thereby providing some protection for the incoming partner and a greater likelihood that past fee-generating capacity would continue.
[23] At the time Mr Sherlock and Ms Ludwig were being considered for partnership, there were five partners, Messrs Chapman, Walker, Richardson, Goldfinch and Nixon. They approved the admission of Mr Sherlock and Ms Ludwig by special resolution. The five of them then entered into agreements with Mr Sherlock and Ms Ludwig, whereby each incoming partner bought from the existing partners a share in the capital of the partnership.
[24] The two agreements were in identical form save for the identity of the purchaser. For convenience, we shall concentrate on Mr Sherlock’s agreement, but everything we say applies equally to Ms Ludwig and her agreement. (We shall refer to Mr Sherlock’s agreement as “the sale agreement”, to distinguish it from the partnership agreement.)
[25] As we have said, under the sale agreement, Mr Sherlock agreed to pay to the five named vendors (Messrs Chapman, Walker, Richardson, Goldfinch and Nixon) $168,000 on 1 April 2002. He was also to pay a second instalment, provisionally fixed at $100,000, two years later. We say “provisionally fixed” as the sale agreement provided for a reduction in the second goodwill payment if the firm did not reach a specified profitability level. As it turns out, the firm did not reach the specified profitability level. It is common ground that the application of the formula, which we shall call “the profitability formula”, reduced the second instalment to $85,900. The profitability formula was intended to ensure that, if partners’ drawings did not reach the specified level over the first two years of Mr Sherlock’s partnership, the purchase price would be reduced. The profitability formula is irrelevant to the issue we have to determine. For that reason, we shall refer to the second instalment as if it always had been fixed at $85,900. The purpose of the profitability formula was different from the purpose of the two year protection period in the partnership agreement.
[26] Under the sale agreement, Mr Sherlock agreed that, on becoming a partner in Gosling Chapman, he would be bound by the terms of the firm’s partnership agreement. By this means, Mr Sherlock acquired the benefit of the two year protection period.
The findings of the arbitrator
[27] Issues surrounding the goodwill instalments occupied a significant part of the six day hearing before Dr Fisher, notwithstanding the relatively small amount at issue. There were really two issues before Dr Fisher. First, was Mr Nixon entitled to a one-fifth share of the $85,900? He argued he was; this was disputed by the respondents. The second issue was whether he was obliged to refund any part of his share of the first instalment under the clause 11(f) provision on the basis that he had retired from the partnership within the two year protection period. Mr Nixon argued he was not obliged to refund anything, as he did not retire within the two year protection period. The respondents argued he did have to make a refund in terms of clause 11(f)(iii)(b), as he had retired on 9 March 2004 – that is, in the 24th month of the two year protection period.
[28] As argued before Dr Fisher, both issues turned on whether Mr Nixon remained a partner until 31 March 2004. Mr Nixon said that he had remained a partner until that date. As a consequence, he argued that he had not retired within the two year protection period and consequently was not obliged to refund any part of his share of the first instalment. Further, he said that he was entitled to his share of the second instalment. This latter argument involved effectively treating 31 March 2004 (Mr Nixon’s asserted retirement date) and 1 April 2004 (the date on which the second instalment was payable) as the same. (The details of that argument do not matter for current purposes.)
[29] Neither argument succeeded because Dr Fisher found Mr Nixon had retired from the partnership on 9 March. On the interpretation of the relevant agreements favoured by Dr Fisher, that meant Mr Nixon had to make a small refund with respect to his share of the first instalment and was not entitled to any part of the second instalment.
[30] Dr Fisher, while paying considerable attention to the argument as to whether 31 March 2004 and 1 April 2004 could effectively be treated as the same date, gave little attention to the correct legal analysis in the event of a finding that Mr Nixon had retired on 9 March 2004. No doubt that was because of the way in which the argument was presented to him. All he really said on the topic was that it was “an obvious inference [from the terms of the partnership agreement] that an individual will cease to qualify as a partner for sharing purposes once he or she ceases to be a member of the partnership”.[4] In other words, he inferred that Mr Nixon had to be “an existing partner” at the time when a goodwill payment was received from any incoming partner to the partnership. The reference to “existing partners” in clause 10(b) of the partnership agreement prevailed over the entitlement to the goodwill payments vested in the five named vendors in the sale agreement.
[4] Award at [22].
[31] On appeal, Keane J agreed with Dr Fisher’s conclusion on this topic.
Our view on this issue
[32] When seeking leave to appeal to the High Court, Mrs Grant sought leave to appeal Dr Fisher’s finding that Mr Nixon had withdrawn from the partnership on 9 March 2004. John Hansen J declined leave to appeal on that ground. Mr Nixon did not appeal that refusal.[5] Accordingly, that finding of mixed fact and law is binding. Notwithstanding that, Mrs Grant at times on the appeal sought to challenge the finding obliquely. But we resisted that attack at the oral hearing and we resist it now. This appeal must proceed on the basis that Mr Nixon retired from the partnership on 9 March 2004.
[5] See Arbitration Act 1996, sch 2, clause 5(5).
[33] While questions of fact are not for us, we may observe that, on our reading of the evidence, the arbitrator’s conclusion on this matter was clearly right. Mrs Grant attempted to argue that Mr Nixon had been expelled from the partnership on 9 March 2004. Clearly, on the facts, he was not. But in any event that would have made no difference as the clause 11(f) provision applied to expelled partners as to retiring partners, by virtue of clause 19(c) of the partnership agreement. Mrs Grant also sought to argue, in the alternative, that Mr Nixon had been wrongly forced to withdraw, with the consequence that he should be treated as if he remained a partner and with the consequence that the clause 11(f) provision would not bite. That too is quite unsustainable on the evidence. It is obvious that the continuing partners had the numbers to expel Mr Nixon in terms of clause 19(b) of the partnership agreement, but that power was never exercised because of Mr Nixon’s decision to withdraw first.
[34] But all is not lost for Mr Nixon as, in the end, we have decided it does not matter that Mr Nixon was not a partner on 1 April 2004, the date on which the second instalment was to be paid. Among the arguments Mrs Grant advanced before us on the general topic of the goodwill payments was a submission that Mr Nixon had become entitled to his one-fifth share of the second instalment on the making of the sale agreement. She accepted, of course, that such entitlement would be subject to partial refund if Mr Nixon retired from the partnership within the two year protection period. We are satisfied that argument is correct.
[35] The issue turns on the correct interpretation of clause 10(b) of the partnership agreement. One interpretation, which the arbitrator favoured, is that the reference to “existing partners” is a reference to those who were partners at the date of a particular goodwill payment. The other interpretation, which we favour, is that “existing partners” refers to those who were partners when the agreement was made to admit the incoming partner. With respect to the arbitrator, we consider our interpretation makes better commercial sense and is fairer. The arbitrator’s interpretation leads to some rather odd outcomes, suggesting that objectively it cannot have been the parties’ intention.
[36] It is the partners who enter into the decision and consequential agreement to admit a new partner who potentially suffer a loss. By the decision and the agreement, they suffer a dilution in their share of the capital of the partnership. They thereby agree for the future to share the firm’s profits with one more. That potential loss crystallises as soon as they enter into an agreement to admit into partnership the new member. The compensation they receive is the commitment on the incoming partner’s part to pay goodwill. Sometimes goodwill will be paid in one instalment; frequently, of course, goodwill will be paid in two or more instalments. The fact that goodwill may be paid in instalments does not affect, however, who will in due course be entitled to them: that remains the partners who made the commitment to admit a new member and who thereby suffered a “loss” requiring compensation. The point of clause 10(b) was twofold:
(a)It was to emphasise that the goodwill payment was payable to those who had agreed to admit the new member, not the partners as a firm. That was essential as otherwise the incoming partner, especially if paying by instalments, would acquire an interest in his or her own goodwill payment.
(b)Those who sold a share in the partnership were to share any goodwill payment equally.
[37] Clause 10(b) was not intended to deprive a vendor[6] of his or her share of the sale price if he or she left the partnership before the incoming partner had paid all the instalments of goodwill. That would be quite illogical, as we shall show. Obviously, the incoming partner wants some protection against some or all of the partners he or she has agreed to join decamping shortly after his or her admission. That protection is provided not by clause 10(b) but rather by the clause 11(f) provision.
[6] By “vendor”, we mean one of the partners who resolved and consequentially agreed to admit the new member.
[38] We shall show, by considering several scenarios, how our interpretation works and how it leads to a more commercially sensible outcome than the arbitrator’s interpretation. Take the (common) case where goodwill is paid in instalments, as happened here. For convenience, we shall assume the goodwill was payable in four equal instalments, the first on admission, and the remaining three on the first, second and third anniversaries of admission. Suppose one of the vendors retired after the third instalment but before the fourth. That vendor would not have to refund any part of his or her share of the first three instalments, as he or she would not have retired within the two year protection period. He or she would still be entitled to his or her share of the final instalment. That is perfectly fair to all involved, including the new member.
[39] Suppose now that the vendor retired after the second goodwill payment and before the third. In those circumstances, the vendor would have withdrawn from the partnership within the two year protection period. He or she would be obliged to make a refund to the new member with respect to the first two instalments already paid, such refund to be calculated in accordance with the clause 11(f) provision. When the next two instalments became payable, the vendor’s entitlement to his or her share of those instalments would be subject to the clause 11(f) provision and would be abated, depending upon when he or she had left within the two year protection period. Obviously, set-off would be available. Again, this is perfectly fair to all those involved.
[40] Applying our interpretation to the present case leads to Mr Nixon having to refund part of Mr Sherlock’s first instalment. Mr Nixon remains entitled to his share of the second instalment, but subject to abatement in accordance with the clause 11(f) provision.
[41] Let us now show how, with respect, the arbitrator’s interpretation leads potentially to unfair results. For a start, it would mean that the second instalment gets shared between the remaining four partners (Messrs Chapman, Walker, Richardson and Goldfinch), who would each receive a 25% share of the $85,900 instead of a 20% share. (There is no provision in the sale agreement for adjustment of the total goodwill payable except pursuant to the profitability formula, which has already been taken into account: it reduced the second instalment from $100,000 to $85,900.) Why should Messrs Chapman, Walker, Richardson and Goldfinch get a windfall solely because of the fortuity that Mr Nixon withdrew from the partnership within the two year protected period? Mr Nixon did nothing wrong in withdrawing from the partnership: he was entitled to do so. If he chose to withdraw, clause 11 stipulated how the final accounts were to be drawn up. Clause 10(b) had no role to play in that calculation. Nor did the clause 11(f) provision have any role to play as between Mr Nixon on the one hand and Messrs Chapman, Walker, Richardson and Goldfinch on the other. The clause 11(f) provision was not for their protection or benefit: it was solely for the protection and benefit of the incoming partner.
[42] In actual fact, although this is not clear on the evidence, it seems that Mr Sherlock and Ms Ludwig in fact paid to Messrs Chapman, Walker, Richardson and Goldfinch only 80% of $85,900. If the arbitrator’s decision were correct, that would have been an underpayment. The fact Mr Sherlock and Ms Ludwig did that rather undermines the respondents’ argument, as such a course would have been justified only on the interpretation Mrs Grant now advances and which we have accepted.
[43] Further, on the arbitrator’s reasoning, Mr Sherlock gets no abatement on the second instalment despite one of the original partners having left in the two year protection period. The first instalment is subject to abatement and refund from Mr Nixon because he left in the period, but the second is not because the retiring partner (Mr Nixon) is not entitled to any of it. Suppose all the partners except Mr Chapman had left within the two year protection period. Mr Sherlock’s first instalment would be subject to abatement and refund from the four partners who left. But he would still be up for the $85,900 second instalment, all of which would go to Mr Chapman. Such an outcome is unfair on the retiring partners, who built up the goodwill which Mr Sherlock agreed to buy. It is also unfair on Mr Sherlock, who ends up getting no abatement on a large tranche of the purchase price, notwithstanding he has lost within the protected period four of the five partners he had agreed to join.
[44] Indeed, the arbitrator’s reasoning leads logically to a conclusion that no one seems to advocate. If “existing partners” in clause 10(b) of the partnership agreement means the partners at the date of payment of each instalment, then presumably Ms Ludwig should share in Mr Sherlock’s 1 April 2004 payment and vice versa.
[45] There was some dispute between Mrs Grant and Mr Thorp, for the respondents, as to the extent to which the argument which has found favour with us was argued before the arbitrator or, indeed, was open on the pleadings. In the end, we have not found it necessary to become too concerned about the rights and wrongs of this because of the answer to the second issue on this appeal. In addition, both John Hansen J and Keane J appear to have assumed that the argument was open to Mr Nixon. John Hansen J expressed the first question of law in respect of which he granted leave in these terms:[7]
Whether to share in a goodwill instalment paid to the Gosling Chapman partnership by new partners, the terms of the partnership deed required Mr Nixon to be a partner at the time that the payment was made or due, or whether he simply had to be a partner at the time that the liability to make the payment arose.
[7] Hansen J leave decision at [13]-[14].
[46] Keane J expressed the same concept in similar words in his leave decision.[8] In light of the leave decisions, we did not think it right to preclude Mrs Grant from advancing this argument, even though obviously the case was advanced somewhat differently before the arbitrator.
[8] Keane J leave decision at [19].
[47] We hold with respect to this first issue that Mr Nixon was entitled to his share of the second instalments of the incoming partners’ goodwill payments notwithstanding the fact he had ceased to be a partner by the date the second instalments were paid. He took his entitlement, however, subject to abatement and liability for refund (by way of set-off, if necessary) in accordance with the clause 11(f) provision.
Did the arbitrator’s award, unbeknownst to the arbitrator, in fact provide for Mr Nixon receiving his share of the second instalments?
[48] We now turn to explain why the fact we have reached a different conclusion from the arbitrator and the Judge on the first issue does not end up assisting Mr Nixon.
[49] Mr Nixon, in his statement of claim, sought from each of Mr Sherlock and Ms Ludwig $17,180, a total of $34,360. The figure of $17,180 was one-fifth of the second instalment, which, as adjusted, ought to have been $85,900.
[50] Mr Sherlock and Ms Ludwig counterclaimed against Mr Nixon. Each of them said Mr Nixon owed $10,327 under the clause 11(f) provision. How that figure was reached was not explained in the counterclaim.
[51] As we have said, Mr Nixon’s claim failed. With respect to the counterclaim, Dr Fisher said:[9]
In those circumstances the counterclaim must succeed. It is not disputed that under the counterclaim the quantum of the refund is $10,327 due to Ms Ludwig and another $10,327 due to Mr Sherlock.
[9] Award at [40].
[52] Neither counsel at the hearing ever explained to the arbitrator how that figure was reached; there was no need to, as the sums were agreed.
[53] It now appears, however, that a mistake was made, certainly on the respondents’ side, possibly also on Mr Nixon’s. On the arbitrator’s reasoning, Mr Nixon was not entitled to any part of the second instalment. He was also obliged to refund part of the first instalment. The calculation should have been:
$33,600 x (1 – 23 – 12)
24
=$33,600 x 13
24
=$18,200
[54] Instead, however, Mr Sherlock and Ms Ludwig appear to have done the calculation (for the purposes of their counterclaim) on an assumption that Mr Nixon was entitled to a one-fifth share of the second instalment. That is to say the calculation was done as follows:
$50,780 x (1 – 23 ‑ 12)
24
=$50,780 x 13
24
= $27,505.83
[The figure of $50,780 represents $33,600 as Mr Nixon’s share of the first instalment and $17,180 as his share of the second instalment.]
[55] Mr Sherlock and Ms Ludwig have then given a credit for the sum of $17,180 which, on this calculation, was payable on 1 April 2004 but not in fact paid.[10] After deducting that sum, the net refund Mr Nixon had to pay was $10,325.83, which was rounded in the counterclaim to $10,327. In other words, the respondents’ calculation was exactly what the result would be on the argument which Mrs Grant now propounds and which we accept.
[10] The fact each gave this credit supports the inference we have drawn that Mr Sherlock and Ms Ludwig paid Messrs Chapman, Walker, Richardson and Goldfinch only 80 per cent of the second instalment.
[56] Unbeknownst to the arbitrator, the amount he awarded to Mr Sherlock and Ms Ludwig was, although what they asked for, less than they were entitled to on the arbitrator’s reasoning. Mr Sherlock and Ms Ludwig did not cross-appeal on discovering the error. Mr Thorp sought no adjustment. Quite clearly, Mr Nixon, although succeeding on the first issue, is not entitled to any adjustment of the refund he was due to pay. The set-off between what he owed the incoming partners by way of refund and what they owed him by way of his share of the second instalment was, as it happens, correctly calculated.
[57] When Mr Nixon’s problem in this regard became clear at the hearing before us, Mrs Grant suggested we should allow Mr Nixon’s appeal on this aspect of the case and enter judgment for him in the sum of $17,180. She accepted, notwithstanding the absence of a cross-appeal from Mr Sherlock and Ms Ludwig, that we could adjust their award on the counterclaim by increasing the judgment sum for each of them by $17,180. Such a course is not legally possible. Where A establishes a set-off equal to or exceeding B’s claim, judgment is entered in A’s favour on the claim because set-off amounts to an absolute defence. Where A succeeds in establishing a set-off but for a lesser amount than B recovers on the claim, judgment is entered for B for the difference.[11]
[11] Laws of New Zealand Set-off and Counterclaim (online ed) at [21] and [107], and the cases there cited.
[58] In this case, Mr Nixon’s debt to each incoming partner always exceeded the incoming partner’s debt to him. In those circumstances, Mr Nixon was never entitled to judgment against the incoming partner, but he was entitled to set off his claim against the greater debt he owed, with the consequence that each incoming partner was entitled to judgment only for the difference. As it turns out, the arbitrator’s award provided exactly that.
Can Mr Nixon now run an argument that in late July 2003 the continuing partners, by their conduct, accepted his proposed terms for his proposed consultancy?
[59] After Mr Nixon told his partners in January 2003 of his intention to retire from the partnership, several of the partners approached him to enquire whether he would be interested in remaining with Gosling Chapman as a consultant. This interested Mr Nixon, provided he could work part time at Gosling Chapman. He had other interests he wanted to pursue, which is why he had decided to retire from the partnership. Over the following months Mr Nixon had discussions, primarily with Mr Richardson, about the terms of a consultancy agreement.
[60] In his pleadings at the arbitration, and also in the evidence he gave at the arbitration, Mr Nixon asserted that he and Mr Richardson, acting on behalf of the continuing partners, entered into an oral consultancy agreement in early July 2003. He asserted that the continuing partners breached that agreement when they advised in February 2004 that he would not be becoming a consultant after he left the partnership on 31 March.
[61] The arbitrator found that no such agreement had ever been concluded. He found that four key points were never resolved between Mr Nixon and Mr Richardson. The most critical item never resolved was the hourly rate Gosling Chapman would pay Mr Nixon. Mr Richardson had offered $180 an hour. Mr Nixon demanded $200 an hour. Matters never moved beyond the point at which Mr Richardson indicated that most, but not all, of the partners would probably agree to Mr Nixon’s demand. That was not sufficient, the arbitrator said, to form a term in a binding contract between Mr Nixon and the continuing partners.[12] The claim in contract accordingly failed as no contract had been formed.
[12] Award at [62].
[62] On appeal, Keane J considered Dr Fisher’s findings of fact absolutely clear. Given those findings, the cause of action in contract had to fail.[13]
[13] Keane J appeal decision at [85].
[63] Before us, Mrs Grant appeared to accept that she could not challenge the arbitrator’s rejection of the asserted oral agreement between Mr Nixon and Mr Richardson. But, she said, that was beside the point because what Keane J had failed to grapple with was her assertion that, notwithstanding the fact Mr Nixon and Mr Richardson had been unable to reach agreement, the continuing partners, by their conduct, had accepted Mr Nixon’s proposed terms. This acceptance by conduct was said to be evidenced by, among other things, their permitting Mr Nixon to announce his change in status, first to Gosling Chapman managers on 22 July 2003, and then to staff on 25 July 2003. For convenience, we call this alleged agreement the “conduct agreement” to distinguish it from the pleaded “oral agreement” alleged to have been made between Mr Nixon and Mr Richardson.
[64] We do not know to what extent this argument was run before Keane J. As we were considering this case after the hearing, it occurred to us that this argument might never have been run before the arbitrator either. Mr Nixon’s claim before the arbitrator seemed to have been run on the basis that he and Mr Richardson had reached an oral agreement concerning the consultancy. A major issue at the arbitration was whether such an oral agreement had been reached. The arbitrator found it had not. A subsidiary issue arose as to the scope of Mr Richardson’s actual or ostensible authority to bind the continuing partners. The arbitrator, while expressing a view on that topic,[14] never had to rule on it definitively, given his finding that Messrs Nixon and Richardson had never reached final agreement. The “agent authority” point also gave rise to a ratification issue: even if Mr Richardson did not have authority, had the continuing partners ratified the agreement he reached? Again, that did not need definitive answer from the arbitrator, because of his finding that there was no agreement to ratify.
[14] Award at [63]-[68].
[65] What seemed to us never to have been pleaded was a quite different agreement, the constituent parts of which were:
(a)An offer by Mr Nixon in terms of his negotiating stance in his discussions with Mr Richardson; and
(b)Acceptance by conduct on the part of the continuing partners, such acceptance being evidenced by, among other things, their permitting Mr Nixon to inform managers and staff of the fact that he would be becoming a consultant after he retired from the partnership on 31 March 2004.
[66] It seemed to us that perhaps the reason Dr Fisher had never dealt with this argument squarely was that it had never been raised squarely. That in turn caused us concern, as we have, on appeal, no jurisdiction to determine questions of fact. Nor do we have jurisdiction to determine questions of law which do not arise out of the award.[15]
[15] Arbitration Act, sch 2, cl 5(5).
[67] In the end, we decided to seek further submissions from counsel on this point.
[68] Mrs Grant, in her further submissions, strongly submitted that the assertion of the conduct agreement had been raised at the arbitration and ruled on by the arbitrator, with the consequence that we have jurisdiction. She submitted the conduct agreement had been pleaded. With respect, it was not. She submitted that, in any event, arbitrations are conducted less formally than court proceedings so far as pleadings are concerned. That is often the case, but this arbitration appears to have been conducted in all respects as if it were a High Court case. For instance, Mrs Grant at the arbitration sought leave to amend her pleadings with respect to another point, an application the arbitrator formally granted.
[69] She also submitted that Dr Fisher had looked at all the various assertions relating to contract formation, including the assertion that the agreement had been made when the continuing partners by their conduct accepted Mr Nixon’s offer. Finally, she also submitted that, even if the conduct agreement was not adequately pleaded, everyone involved in the asserted conduct agreement had given evidence. Accordingly, there was no prejudice.
[70] We remain unsure as to whether we do have jurisdiction to consider this question, but we have decided to answer it anyway. We are quite satisfied that the alleged conduct agreement cannot succeed because of the arbitrator’s findings of fact, which cannot be reviewed. The arbitrator found, as we have said, that four key points were never resolved between Mr Nixon and Mr Richardson. Among those key points was the critical issue of hourly rate. There is no evidence that Mr Nixon ever discussed those four key points with the other partners after he failed to reach agreement with Mr Richardson; still less is there evidence that he secured their acceptance of his position. Mr Nixon always knew, as the arbitrator found, that at least Mr Chapman was opposed to $200 an hour.[16]
[16] Award at [56].
[71] The arbitrator found that, although by late July 2003 there was “a general expectation” that Mr Nixon “would continue as a consultant after 1 April 2004”, it was no more than that.[17] Given the arbitrator’s findings of fact, we consider that legal conclusion inescapable. Mr Nixon never established the conduct agreement.
[17] Award at [71].
[72] So far as the pleaded claim for breach of the oral agreement is concerned, we are satisfied the arbitrator made no errors of law in the way he approached the claim. Given his findings of fact (which we cannot review), he came to the only legal conclusion open to him, namely that Mr Nixon and Mr Richardson never concluded a legally binding agreement in early July 2003 whereby Mr Nixon was to become a consultant on his retirement from the partnership. So far as the unpleaded claim for breach of an asserted conduct agreement is concerned, we query whether we have jurisdiction, but, even if we have, we do not accept Mrs Grant’s submissions. The asserted conduct agreement was never established.
Can Mr Nixon now run an argument that the continuing partners are estopped from denying Mr Nixon was entitled to be a consultant on the terms he had proposed?
[73] Mrs Grant’s submission under this head can be summarised briefly. Even if Messrs Nixon and Richardson did not conclude a legally binding oral agreement in July 2003 (as pleaded), the continuing partners are estopped from denying a consultancy arrangement as asserted by Mr Nixon by reason of their subsequent conduct on which Mr Nixon relied. The arbitrator dealt with the topic of estoppel briefly but erred, Mrs Grant submitted, in finding against the estoppel on the basis that no agreement had been reached. The whole point of the estoppel doctrine, Mrs Grant submitted, was that it provided a remedy in circumstances where it would be unconscionable to allow a person to resile from his or her promises even though no legally binding agreement had been reached. Her primary authority was the leading decision of the High Court of Australia in Waltons Stores (Interstate) Limited v Maher.[18] In short, the arbitrator erred in law in the way in which he approached the whole estoppel argument.
[18] Waltons Stores (Interstate) v Maher (1998) 164 CLR 387.
[74] Like the “conduct agreement” issue discussed in the previous section of these reasons, the estoppel dimension to this case has arisen in an unsatisfactory way. Mr Nixon never pleaded it. Mrs Grant did not mention it in her opening submissions to the arbitrator. “Estoppel by conduct” was mentioned in two paragraphs of Mrs Grant’s closing submissions to the arbitrator, but in the context that it somehow lent support to “the existence of a consultancy agreement” as pleaded. (Similarly, the doctrine of part performance was said to assist in proving “the existence of an oral contract”.) Mrs Grant cited no authority with respect to the two paragraphs dealing with “estoppel by conduct”. Mr Thorp did not deal with estoppel at all in his closing submissions. That is scarcely surprising given that estoppel had not previously been mentioned in this context.
[75] In those circumstances, Dr Fisher’s approach to the relevance of estoppel is entirely understandable. He clearly thought that the estoppel argument was being used to bolster, in a rather ill-defined way, the claim that Messrs Nixon and Richardson had reached a legally binding agreement.[19]
[19] See Dr Fisher’s heading to this part of his award, “Additional arguments in support of consultancy claim”.
[76] It is clear that, since the arbitration, the estoppel argument has substantially changed. We are not sure the extent to which Mrs Grant developed the new argument before Keane J, as His Honour’s judgment on the estoppel point is brief. Certainly before us, however, the estoppel argument assumed far more importance than the challenge to Keane J’s alleged failure to tackle properly the “conduct agreement” issue. Mrs Grant made considerable submissions on this topic and cited a number of cases. Her assertion is that Mr Nixon should have succeeded on a cause of action based on promissory estoppel. At the forefront of her argument on this topic is that estoppel can provide a remedy in circumstances where the parties have not reached express agreement. To quote from her submissions:
Estoppel is often called upon precisely because there is an absence of express agreement.
[77] All of this raised concerns in our minds as to whether we had jurisdiction to deal with this issue. Was it a question of law arising out of the award? We sought further submissions on this topic as well.
[78] Mrs Grant accepted that estoppel had never been raised until her closing submissions before the arbitrator, but, she emphasised, it was raised then. The arbitrator accordingly became seized of the issue. Secondly, while she accepted estoppel had never been pleaded, she submitted that pleading estoppel was unnecessary, as it was “a mine sweeper to remove defences”. In this case, estoppel was being used “to remove the defences of no express agreement and lack of authority”. Mrs Grant also cited Vector Gas Ltd v Bay of Plenty Energy Ltd, in which the Supreme Court was prepared to consider an argument on estoppel by convention, even though estoppel had never been pleaded.[20]
[20] Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [48] and [84]-[85].
[79] We cannot accept those submissions. Two paragraphs in closing submissions cannot, at least in the circumstances of this case, put the issue on the arbitrator’s table. In any event, the estoppel argument, as briefly put to the arbitrator, was a quite different argument from the one run before us. Further, the position is quite different from what the Supreme Court was dealing with in Vector. First, in Vector, there was no dispute that a written agreement had been made. What was in dispute is what the words used in the correspondence meant, and in that respect some judges thought an estoppel arose. While estoppel should have been pleaded, the absence of pleading was not fatal, in the circumstances, as there was no question of surprise and it arose from the terms of the correspondence which had passed between the parties. The point was not one which could have been countered by the calling of further evidence. That is far removed from the present case, where it is now established there was no agreement. Had the matter been raised properly at the arbitration, there clearly would have been further evidence, as Mr Thorp asserts in his further submissions.
[80] In short, we are satisfied Mrs Grant’s estoppel argument as now advanced cannot be run for the first time on an appeal restricted to questions of law. If Mr Nixon wished to run promissory estoppel as an alternative to his claim in contract, he had to plead it. It is, after all, a different cause of action from his claim in contract. His pleaded claim in contract was based on what he said he and Mr Richardson had agreed at a meeting in early July 2003. The claim based on promissory estoppel, on the other hand, is essentially based on what the continuing partners said and did later in July 2003 and on their silence and inactivity thereafter when, to their knowledge, Mr Nixon was doing things in reliance on their assurance he would become a consultant after his retirement from the partnership.
[81] A cause of action based on promissory estoppel has, at the least, the following features:[21]
(a)There must be a clear and unambiguous representation or promise by one party to the other;
(b)The party to whom the representation or promise was made must have relied on it to such an extent that it would be inequitable or unconscionable to allow the promisor to go back on his or her word;
(c)Any relief is discretionary, and may be limited to that which the Court deems necessary to remove the inequity caused by the failure of the other party to keep to his or her word.
[21] John Burrows, Jeremy Finn and Stephen Todd Law Of Contract in New Zealand (3rd ed, LexisNexis, Wellington, 2007) at [4.7.4].
[82] All those features would have had to be pleaded. They were not. Evidence would have had to be called. The arbitrator would then have had to make findings of fact. This is no mere pleading point. Take the second element. It was irrelevant to the contract claim advanced before the arbitrator whether or not Mr Nixon had relied to his detriment on what the continuing partners had allegedly represented. Nor was unconscionability an issue. We accept Mr Thorp’s submission he would have wanted to call evidence relating to those matters and would have cross-examined Mr Nixon further. And, of course, Mr Thorp would have wanted to make submissions on this cause of action to the arbitrator. The arbitrator would then have been required to make findings of fact and law relevant to these issues.
[83] None of that has occurred. If, at the arbitration, Mrs Grant had thought she was in difficulties with respect to the alleged oral agreement between Mr Nixon and Mr Richardson, she could have sought to amend her pleadings to add promissory estoppel as an alternative cause of action. We cannot speculate on whether an application to amend would have succeeded. What cannot be done, however, is attempt to introduce these topics by sidewind on appeal, as if they are part of the contract claim she did run. Despite leave to appeal being granted on this topic, we are satisfied it cannot properly be taken. The question is not a question of law arising out of the award.
Result
[84] Mr Nixon has effectively failed on the goodwill issue. He has failed on the contract grounds of appeal. He cannot raise a new cause of action based on estoppel.
[85] Accordingly, we dismiss the appeal. The appellants must pay the respondents costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Boyle Mathieson, Auckland, for Appellants
Fleming Foster & Co, Manurewa, for Respondents
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