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Federal Court Reports > Volume 174 > Momentum Productions Pty Ltd and Another v Lewarne

Momentum Productions Pty Ltd and Another v Lewarne

174 FCR 268

Citation: [2009] FCAFC 30

Court: Federal Court of Australia

Judges: Spender, Jessup and Middleton JJ

Hearing Date/s: 27 August 2008

Judgment Date: 19 March 2009

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Catchwords | Top

Partnership — Agency — "Business in common" — What constitutes — Necessity for mutuality — Whether necessary for persons to be agents

of each other — Partnership Act 1892 (NSW), s 1

Headnote | Top

Facts

Section 1(1) of the Partnership Act 1892 (NSW) (the Act) provided that partnership was the relation that existed between persons carrying on a

business in common with a view of profit. The appellants argued that the existence of mutual agency was an essential aspect of partnership, in

that it was an indispensable part of any conclusion that parties carried on "business in common".

Holdings

Held: Mutual agency should be regarded as one of the incidents of a partnership, rather than as an essential defining element thereof. The

authorities require that partners in a business must all be principals such that the acts of one are binding on the other(s), but do not require proof

of agency over and above the matters to which s 1(1) of the Act refers. 36, 44:

Lang v James Morrison & Company Ltd (1911) 13 CLR 1[PDF]; Duke Group Ltd (in liq) v Pilmer (1999) 73 SASR 64[PDF]; Cox v Hickman (1860) 8

HL Cas 268, distinguished.

Appeal against decision of Stone J, [2007] FCA 1136, allowed in part.

SARAH SOMERSET

Action | Top

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Appeal

Judgment | Top

19 March 2009 Cur adv vult

Spender, Jessup and Middleton JJ

Introduction

1

This is an appeal from a judgment of a Judge of the Court, given on 9 October 2007, wherein her Honour ordered that a receiver be

appointed to a partnership consisting, according to her Honour, of the first appellant, Momentum Productions Pty Ltd ("Momentum"),

the second appellant, Mr Richard James Scotts ("Mr Scotts") and the respondent, Mr Richard John Lewarne. The trial Judge also made

other orders, generally favourable to the respondent, with respect to the assets of the partnership and the distribution of those assets

between the partners. We shall refer to those orders in more detail presently, but we should commence by outlining the facts which

gave rise to the proceeding below, and the nature of the dispute which came before her Honour.

2

The dispute concerned the East Village Hotel, situated at 234-236 Palmer Street, East Sydney. The land upon which the hotel

stood was owned by a company called Retemu Pty Ltd ("Retemu"). In April 2003, the hotel premises were leased by Retemu to a

company called Wellfox Enterprises Ltd ("Wellfox"), which operated the hotel business there. It was agreed between Wellfox and

Mr Scotts that the latter would purchase the business, and take an assignment of the lease, for the sum of $1.7 million. Mr Scotts used

Momentum, a company in which he was the sole shareholder, and the only director, as the vehicle for this purchase and assignment.

On 14 April 2003, Momentum executed a contract for the purchase of the hotel business from Wellfox for the sum of $1.7 million.

3

It seems that Mr Scotts was unable to raise the funds necessary to finance the purchase of the hotel business. He was about $400,000

short of what was required. Accordingly, he approached his brother Anthony and the respondent with a proposal that they should

take up equity in the business. Mr Scotts' proposal was that his brother should contribute $100,000, and that the respondent should

contribute $300,000. According to the respondent, which the trial Judge accepted, Mr Scotts told him that, if he invested $300,000

"into the business", he would give the respondent "a 15% share of the equity of the pub and 15% of the profits". That Mr Scotts offered

to give the respondent a 15% interest in something in return for the latter's payment of $300,000 was not seriously in dispute before

the trial Judge. What was contentious was the nature of the agreement pursuant to which the money was paid, and the nature of the

relationship between the respondent and Mr Scotts and/or Momentum.

4

After a deal of discussion, on 7 July 2003 the respondent paid $300,000, and Mr Anthony Scotts paid $100,000, to take up their interest

in the hotel business. In the case of the respondent, this payment was, at the direction of Mr Scotts, made by way of a bank cheque

in favour of Westpac Banking Corporation ("Westpac"). On 25 July 2003, Momentum settled the purchase of the hotel business, and

became lessee to Remetu by assignment from Wellfox.

5

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According to the trial Judge, the purchase of the business was financed, as to $200,000, by vendor finance and, as to $1.53 million, by

a loan from the Commonwealth Bank of Australia. Part of the security for that loan was a mortgage of a property in Robertson Street,

Narrabeen. Previously to this series of transactions, the registered proprietor of that property had been Mr Scotts' mother. It was subject

to a mortgage in favour of Westpac. Unbeknown to the respondent, the $300,000 which Mr Scotts had received from the respondent

with respect to the hotel business was used to discharge that mortgage. Mr Scotts then took a transfer of the registered title from

his mother and, as the now registered proprietor, used the property to contribute to the security for the loan of $1.53 million from the

Commonwealth Bank to Momentum, which funds were then used in the settlement of the purchase of the hotel business.

6

The hotel traded under its new management — effectively that of Mr Scotts — from 25 July 2003. According to the trial Judge, by

early 2004, it had become clear that there were significant structural problems with the premises. For several months in 2004 the

building was covered in scaffolding. These problems affected the profitability of the business. On 12 May 2005, Momentum commenced

proceedings against Retemu in the Supreme Court of New South Wales, seeking damages for loss of trade. In late 2004, the

respondent began to express concerns about his investment, and the manner in which the hotel was being managed. That culminated

in the respondent seeking to extract himself from the business, and the break-down of his relationship with Mr Scotts.

7

The issues before the trial Judge fell into two broad groups. The first group was substantially concerned with the question whether

the relationship between the respondent on the one hand and Mr Scotts and Momentum on the other hand was, as contended for

by the respondent, a partnership (and if so as to the identity of the partners) or, as contended for by the appellants, a contracted

shareholding. The second group concerned various representations which, according to the respondent, had been made by Mr Scotts

for the purposes of obtaining his (the respondent's) equity participation in the hotel business, and which were said to be misleading or

deceptive.

8

The trial Judge held that the nature of the participation of the equity holders in the hotel business was that of partnership. Her Honour

held that the partners were Momentum, Mr Scotts and the respondent. Those holdings are challenged on appeal. Her Honour also

accepted substantial elements of the respondent's case that he had been induced to pay $300,000 for his share of the equity in the

hotel business by representations which were misleading or deceptive, and which amounted to conduct, by Mr Scotts and Momentum,

contrary to s 52 of the Trade Practices Act 1974 (Cth) ("the Trade Practices Act") and s 41 of the Fair Trading Act 1987 (NSW) ("the

Fair Trading Act").

9

In the orders under appeal made on 9 October 2007, the trial Judge declared that the partnership between the respondent and the

appellants had been terminated on 20 November 2006 pursuant to ss 26 and 32 of the Partnership Act 1892 (NSW) ("the Partnership

Act"). Her Honour appointed a receiver and manager to the partnership, giving him the same powers with respect to the partnership,

and the partnership business, as those set out in s 420 of the Corporations Act 2001 (Cth). Her Honour ordered Mr Scotts to pay to the

partnership the amount of $416,276.71, together with interest on that sum pursuant to s 52 of the Federal Court of Australia Act 1976

(Cth). Her Honour declared that Mr Scotts held his interest in the Narrabeen property subject to an equitable charge in favour of the

partnership to secure the sum referred to. Her Honour declared that Momentum held any legal or equitable rights in the lease of the

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hotel for the benefit of the partnership. Her Honour gave directions for the settling of the accounts between the partners, and ordered

the procedure to distribute the residue in a particular order, the first 15% of which was to be paid to the respondent.

10

The appellants challenged the trial Judge's orders, and her Honour's reasons, on a number of grounds. First, they contended that her

Honour was in error to have found that the relationship between the parties with respect to the business of the East Village Hotel was

one of partnership. Associated with that ground was the proposition that her Honour ought not to have found Mr Scotts to have been a

partner, when that had not been pleaded by the respondent. It was also said that her Honour could not have determined that each of

the appellants was a partner in the business without determining their respective partnership interests. Secondly, and alternatively, the

appellants contended that her Honour was in error to have made the declarations and orders which she did in the absence of one of the

persons said to be a partner, Mr Anthony Scotts, as a party to the proceeding. Thirdly, the appellants challenged the orders by which

her Honour sought to restore the benefit of the respondent's contribution of $300,000 to the partnership. They say that her Honour was

in error to have found that the $300,000 payment was a capital contribution, to have found that that payment was not for the benefit

of the partnership, and to have ordered Mr Scotts to make a payment to the partnership before a final accounting with respect to the

partnership. Fourthly, the appellants contended that, in the valuation of the business for the purposes of the grant of monetary relief

to the respondent under the Trade Practices Act and the Fair Trading Act, the trial Judge ought to have placed a positive value on the

Supreme Court proceedings being conducted in the name of Momentum.

The facts relevant to the business structure issues

11

We commence by setting out briefly the events and circumstances leading up to the respondent's payment of $300,000 to Mr Scotts

which, according to her Honour's findings, gave rise to the relationship of partnership for carrying on the business of the East Village

Hotel. In so doing, we rely upon the findings of the trial Judge, subject only to this qualification. On a number of occasions, her Honour

set out alternative versions of particular meetings, conversations etc given by the respondent and Mr Scotts. Where there were

differences of significance between those versions, her Honour often expressed a preference for the evidence of the respondent. Even

where she did not do so, it is clear that her Honour had no confidence in the evidence of Mr Scotts. She said that Mr Scotts "did not

present as a reliable or frank witness". She described his answers under cross-examination as often being "evasive, unconvincing and

confusing and, at times, [verging] on the absurd". Her Honour had the "clear impression" that Mr Scotts' responses "were tailored to

advantage his case ... rather than to any attempt to give truthful answers". Her Honour concluded:

"Throughout cross-examination, the occasions where Mr Scotts' credibility was questioned are far too numerous to mention. My overall

impression is that Mr Scotts knowingly blurred the truth in order to obtain an advantage to himself and that, despite his protestations

as to his benevolent intentions he was in fact quite ruthless in his business dealings with both friends and family. I formed the opinion

that Mr Scotts is willing to be dishonest when he perceives that it is in his interests, both in his business dealings and in Court, and

accordingly I am not willing to accept his evidence in this proceeding unless it is corroborated by independent evidence."

In these circumstances, we believe we are justified, in the absence of any contextual indications to the contrary, in treating the

respondent's, rather than Mr Scotts', evidence about particular occasions as stating the facts by reference to which we should decide

this appeal, even where her Honour made no specific finding to that effect.

12

In early May 2003, Mr Scotts first raised with the respondent the prospect of the latter investing in the business of the East Village

Hotel. Mr Scotts said to the respondent: "Ric, if you invest $300,000 into the business, I will give you a 15% share of the equity of the

pub and 15% of the profits." The respondent said that he told Mr Scotts that he would need to see a report which had recently been

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prepared valuing the business by Robert Baker Magin. That report valued the business at $1.7 million. At a meeting on 4 May 2003, the

respondent questioned Mr Scotts as to why, if the business were valued at $1.7 million, an investment of $300,000 would purchase only

15% of the hotel. Mr Scotts replied:

"I need extra money invested into the business by you and Ant [Anthony Scotts] because I've agreed to take over and pay Wendy's

legal costs which are about $80,000 and other associated costs such as stamp duty, registration of the lease etcetera.

I own the units next door and I've got permission from Tony [the landlord] to extend the pub into the units. One of the first things I'm

going to do is construct a new pokie room in there. This will give us about 35% more space in the public bar and increase annual profit.

I also own five extra pokie licenses and I'm going to buy 5 extra pokies. The rule of thumb is that each pokie returns $50,000 profit per

annum. That means we'd be looking at an extra $250,000 per year profit just for the 5 extra pokies. I've also negotiated a 22 year lease

for the pub."

Ms Jennifer Dalitz, the respondent's wife, was also at that meeting, and she recalled that Mr Scotts had said:

"Under the agreement I will retain control with 80% ownership in the business, Lewarne will purchase 15% and Anthony Scotts will

purchase 5% ownership of the business. I have purchased the units next door and I think we should relocate the poker machines in

there. This will make more room available in the ground floor bar area, and will also enable us to acquire and operate the additional five

poker machines that the business is entitled to. I've got DA approval to use the units next door as a gaming area."

According to the respondent, Mr Scotts also said:

"

I will use yours and Anthony's money to put toward the purchase price and the associated costs and there will be plenty left over

which I will use as working capital for the business ... I am satisfied that there is plenty of working capital for the business to operate

successfully.

...

I've got DA approval and the land lord's permission to extend the pub into the units next door and to extend the poker machine licenses

into this area so that we can operate pokies in there. The landlord has requested additional rent if we operate the pokies in this area.

However, I am in the process of negotiating this."

13

The parties next met on 6 May 2003. Mr Scotts then said to the respondent:

"Ric, the figures show that the pub is currently making over $500,000 profit per year. I've worked in pubs before and the pokies at the

East Village are currently returning less than the market average. This is because of where they are located in the pub. I'm going to

move them to a better location and they will return more for the business. I'm also going to refurbish the pub. You will make more than

$75,000 per year for your profit share."

Ms Dalitz, who was also at that meeting, said that Mr Scotts said: "I have enough funds to finance the purchase price, but I am looking

for investors to assist in funding working capital."

14

On 9 May 2003, Mr Scotts emailed to the respondent (and sent a copy to Anthony Scotts) a document headed "Outline Agreement b/w

East Village (Richard Scotts) & Rick Lewarne". Under the heading "Summary Notes", the document recorded, relevantly:

"

—

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I agree to sell 15% of the East Village business for $300, 000

...

—

In year one I also agree to pay your interest payments against any mortgage loan eg. (6%). This sum will then be offset against final

profits.

—

I will agree to pay your profit share on a 6-month basis.

...

—

All strategic decisions will be made in consultation with equity partners, however Richard will have a final say on management

decisions.

—

I can confirm the pub now has a 22-year lease & I have approval to add 5 extra poker machines for a total of 15. I also have a DA

approval to extend the pub license into the premises next door.

—

You may on-sell your share of the business to another party as long as that entity/person is not seen as a determent to the business.

This approval cannot be unreasonably refused.

—

In year one Richard will receive a salary of no more than $50,000

—

As a separate deal I have also purchased the building next door to the pub. This comprises of one ground floor commercial unit & one

upstairs residential unit. The pub currently pays rent of $900 per week against both of these properties. The ground floor is currently

being used for pub storage & upstairs for office. I also have a DA approval to knock the wall down & extend the pub into the commercial

unit. The owner has also granted permission for the license to extend into this section.

Turning the commercial space into a gaming room has the potential to increase profits substantially. Freeing up the existing poker

machine area will also create approx 35% extra space for the ground floor bar."

The document also contained Mr Scotts' broad ideas for the "initial plans" for the hotel, which dealt with detailed operational matters,

but which do not seem to bear upon the questions which arise on appeal.

15

At a further meeting on 14 May 2003, Mr Scotts said to the respondent:

"The lease and the liquor licence will be transferred to Momentum. I will run the business on behalf of you and Anthony, but I'll consult

both of you about any major decisions that come up."

16

On 16 May 2003, Mr Scotts sent the respondent an email (of which a copy was sent to Anthony Scotts), attached to which was a

document headed "Heads of Agreement between Momentum Productions Pty Ltd (East Village) & Rick Lewarne". Mr Scotts asked the

respondent to call him the following day, and to let him know his (the respondent's) thoughts as to the Heads of Agreement. The front

page of the document stated that it was between:

"

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Rick Lewarne

Company name ...

AND

Richard Scotts

Momentum Productions Pty Ltd

East Village Hotel

234 Palmer St, East Sydney NSW 2010"

The text of the document was as follows:

"By agreement dated 17th May 2003, Rick Lewarne agrees to purchase 15% of the East Village business for $300,000.

The East Village business is defined as the annual gross profit (profit less operating expenses before tax)

Based on a 2002 Gross Profit of $500,000 this equates to a minimum return of 25% or $75,000.

Funds to be made available by way of bank cheque. Settlement date & cheque details to be advised next week.

Equity participation will be capped to a maximum of 20% in year one with Anthony Scotts to receive 5% of the business for $100,000.

While it is unlikely that equity in the business will be further diluted, existing partners will however get the first right of refusal.

Equity Participation:

5% Anthony Scotts

15% Rick Lewarne

80% Richard Scotts

You may on-sell your share of the business to another party as long as that entity/person is approved by Richard Scotts. Richard

cannot unreasonably withhold this approval without good cause.

In year one of the agreement Momentum agrees to pay your monthly interest payments against a mortgage loan eg. (6%). This sum will

then be offset against final profits.

Momentum agrees to pay your profit share on a bi-annual basis.

The hotel books will be made available for inspection on a week-to-week basis.

All strategic decisions will be made in consultation with equity partners, however Richard will have a final say on management

decisions.

Richard will keep full ownership of 238 Palmer St. East Sydney (unit next door). The East Village currently pays $900 rent per week

towards these units for storage, office use & residential purposes. The objective will be to expand the pub & extend the license [sic] into

this ground floor commercial space making it cash positive as soon as possible.

In year one Richard will receive a salary of no more than $50,000."

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At the same time as sending the above document to the respondent, Mr Scotts sent a document to Anthony Scotts, which was identical

save for variations which reflected the fact that Anthony's investment was to be for $100,000, and the extent of his purchase of the

business was to be 5%.

17

The respondent then sought advice from his solicitor, Mr Anthony Dempsey. On 4 July 2003, the respondent and the two Messrs Scotts

met with Mr Dempsey to discuss the drafting of a formal agreement on the basis of their agreed terms. The respondent gave

Mr Dempsey a copy of the Heads of Agreement dated 16 May 2003. He told him that he did not want to be a director of Momentum —

he just wanted to be an "owner" of the business. According to Mr Dempsey, the respondent said:

"Anthony and I have put in money with Richard to buy the East Village Hotel. We would like you to draft a partnership agreement to set

out the terms of what we have agreed."

Mr Dempsey said that he provided the Heads of Agreement to a solicitor assisting him, Mr Arthur Carney, in a facsimile sent on

4 July 2003, with the instructions: "We are seeking assistance in the drafting of a partnership agreement between the three parties to

reflect the points made in the draft Heads of Agreement." According to Mr Dempsey, the respondent said that the Heads of Agreement

reflected the understanding between the parties. He also told Mr Dempsey:

"Richard is to own 80% of the business, Ant 5% and myself 15% ... Ant and I will be silent partners. Richard will be responsible for day

to day operations. Ant and I will be consulted on big picture strategic decisions."

18

No further step was taken towards formalising the relationship between the parties before 7 July 2003, when the respondent gave

Mr Scotts a cheque in the sum of $300,000 made out, at Mr Scotts' direction, to Westpac. It was upon the delivery of that cheque that,

as found by her Honour below, a partnership came into existence.

19

Notwithstanding that circumstance, her Honour referred also to evidence of an exchange between the respondent and Mr Dempsey

(and another solicitor with whom Mr Dempsey worked) on 9 July 2003. According to Mr Dempsey, the respondent then said:

"I know Momentum may have some skeletons in the closet. If Anthony and I enter into a shareholders' agreement with Richard and

Momentum we do not want to be directors or non-executive directors of the company. We only want to be shareholders. If there are

liabilities of Momentum, I don't want my head on the chopping block as a director ... "

Mr Dempsey said that he would draft "a suitable shareholders' agreement" for the respondent. About three weeks later, Mr Dempsey

did send a draft shareholders' agreement to the respondent, and to Anthony Scotts. The draft was, however, rejected by the

respondent, and it seems that nothing further was done to progress the idea that it should be a shareholders' agreement that gave

formal expression to the nature of the relationship between the parties.

20

The trial Judge regarded the communications between the respondent and Mr Dempsey after 7 July 2003 as suggesting that the

respondent then had it in mind to enter a more formal contract, and she held it more likely than not that that was also Mr Scotts'

position. Her Honour continued:

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"In my view Mr Scotts and Mr Lewarne intended to be bound immediately but also intended to make a further contract which would

substitute for the original contract; GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631. That

substitute contract was never made and therefore the proposed terms of it are not relevant to the resolution of the present issues."

With respect to her Honour, we think it may be something of an overstatement to say that the proposed terms of some more formal

contract were not relevant to the issues before her. To the extent that those terms (eg as embodied in the Heads of Agreement) had

the capacity to throw light on the parties' then intentions, they were available to be used for that purpose, and we do not believe that her

Honour was reluctant to do so.

21

What is important from the above passage, however, is the recognition by her Honour that the parties intended there to be a formal

contract but that, pending the making of such a contract, they entered into a less formal, yet legally binding, agreement to govern their

participation in the hotel business. This has consequences for the resolution of the question as to the nature of that participation, and

the use to which the Heads of Agreement might be put in that regard. It shows why her Honour was prepared to look at the Heads of

Agreement for the purpose of throwing light on the parties' general intentions, but not to regard them as contractual terms which had

been agreed as such. No particular objection to that approach was made by the appellants on appeal, and, for our own part, we have

no difficulty with it.

Business models contended for by the appellants

22

Before the trial Judge, the respondent contended that there was a partnership. The appellants' primary contention was that Mr Scotts

and the respondent entered into a contract whereby the latter agreed to purchase from the former 15% of the share capital of

Momentum for the sum of $300,000. This contention was complicated by the circumstance that Momentum only ever had two issued

shares, and was not seriously pressed on appeal. The appellants' alternative contentions were that there was no contracted agreement

at all, or that any agreement was void for uncertainty. Notwithstanding that case at trial, the appellants submitted on appeal that it

was "unduly restrictive" for her Honour to have considered only two possibilities, namely, a partnership and a share sale agreement.

It was submitted on their behalf that there were "two other possibilities", namely, first, that, although the payment of $300,000 was for

the respondent's interest in the hotel business, that interest would not be created until there was a formal agreement (pending which

the money would be held on terms not defined, and subject to repayment), and secondly, that the Heads of Agreement gave rise to a

contract (presumably between Momentum and the respondent) by which the respondent purchased a share in the profits of Momentum.

The first of these "possibilities" was never the subject of detailed argument before us on appeal. It was barely mentioned in the

appellants' oral submissions. The second of the "possibilities" effectively crystallised as the complexion, alternatively to a partnership,

which the appellants pressed us to place upon the terms agreed by the parties in the period leading to 7 July 2003. They submitted that

Momentum and the respondent agreed for the latter to purchase 15% of the profits of the hotel business, and that the respondent did

not have a 15% share in the capital of the business.

23

In support of this argument the appellants referred to the Heads of Agreement, wherein the business was defined as "the annual

gross profit (profit less operating expenses before tax)". It was the business as so defined that the respondent "agrees to purchase".

However, this document was drawn by Mr Scotts. The trial Judge held that there was no evidence that the respondent ever accepted

the document as a written statement of the agreement pursuant to which he paid $300,000 on 7 July 2003, or that he had accepted all

of its terms. Counsel for the appellants criticised that observation, and pointed to evidence to the effect that the respondent had given

the Heads of Agreement to Mr Dempsey, and had advised him that those heads reflected the understanding between the parties. This

criticism, in our view, fails to recognise the distinction, which her Honour clearly understood, between the respondent accepting the

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Heads of Agreement as written terms of a contract in its own right, on the one hand, and the respondent using the Heads of Agreement

as a statement of the understandings which had been reached to that time, as provided to his solicitor for the purposes of preparing, if

possible, more formal documentation, on the other hand.

24

We do not think that Mr Scotts' definition of the business in his own document was sufficient to impress upon the parties' agreement the

characterisation that the respondent was doing no more than purchasing 15% of the future profits of the business. Further, although

described as "gross profit", the concept referred to in the Heads of Agreement was clearly net profit and corresponded, more or less

at least, with the entitlement of a member of a partnership. A person who is entitled to a share of net profits only is someone who

carries the essential risk of being in business, namely, the risk that gross profits will not be sufficient to cover the unavoidable expenses

involved in such a business.

25

Neither, save for the say-so of the appellants, is there anything to suggest that the respondent did not have an interest in the capital of

the business. The objective facts suggest that he did. The whole point of Mr Scotts seeking the respondent's contribution was because

the former needed capital to purchase the business. That contribution went straight into the capital of the business (or would have,

had Mr Scotts used it as intended). The appellants also pointed to the circumstance, referred to in the Heads of Agreement, that the

respondent's profit share would be paid bi-annually, whereas Mr Scotts was entitled only to a salary of $50,000 (in the first year).

Assuming (which her Honour did not find) that these provisions were terms of the contract between the parties, we see nothing in them

which would be inconsistent that contract being one of partnership. If expressly agreed, that a working partner would be entitled to

a salary as part of operating expenses is consistent with a partnership arrangement, as is the periodic calculation and distribution to

principals of net profits.

26

In addition to the matters to which we have just referred, there is one consideration that makes it unlikely, as a matter of objective

analysis, that the parties intended only that the respondent would purchase 15% of the profits of Momentum. There was no agreement

as to the term of the arrangement. How would the parties have answered an officious bystander who enquired of them: what will

happen if, for unexpected reasons and without the fault of any person, after, say, three, six or nine months it is discovered that

the business must be sold? Would Mr Scotts seriously have said that, in such a case, the respondent would be entitled to nothing

because the transaction of 7 July 2003 was in the nature of a purchase? We cannot believe that Mr Scotts would have so answered

the bystander's question; or, if he did, that the respondent would have gone ahead with the agreement against that understanding

by Mr Scotts. Quite clearly, a purchase in which the risk of there being no profits, or profits of little value, was borne entirely by the

respondent could not have been in the parties' contemplation. Subject to the appellants' particular objections to the finding that the

agreement was one of partnership, which we address below, the conclusion that the respondent acquired a share in the capital of the

business is, and would have been below had this point been put squarely to her Honour, nigh inevitable.

27

The alternative contention made by the appellants below — that there was no concluded agreement between the parties at all, or that

any such agreement was void for uncertainty — corresponds with the appellants' case on appeal only in the very broad sense that

the latter involved an attack upon her Honour's finding that there was a partnership agreement on every available ground. We shall

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deal with that case on the merits, but note that the case did not involve any discrete treatment of the requirements for contractual

completeness as such, or of the problems of uncertainty in the context of an agreement otherwise complete.

The appellants' attack on the partnership finding

28

Dealing then with the appellants' attack on the trial Judge's conclusion that, upon the payment by the respondent of $300,000 on

7 July 2003, a partnership agreement came into existence, it is convenient to commence by setting out the statutory definition of a

partnership, and the rules for determining the existence of a partnership, as contained in ss 1(1) and 2(1) of the Partnership Act:

"

1(1)

Partnership is the relation which exists between persons carrying on a business in common with a view of profit and includes an

incorporated limited partnership.

...

2(1)

In determining whether a partnership does or does not exist, regard shall be had to the following rules:

(1)

Joint tenancy, tenancy in common, joint property, or part ownership does not of itself create a partnership as to anything so held or

owned, whether the tenants or owners do or do not share any profits made by the use thereof.

(2)

The sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or

common right or interest in any property from which or from the use of which the returns are derived.

(3)

The receipt by a person of a share of the profits of a business is prima facie evidence that the person is a partner in the business, but

the receipt of such a share, or of a payment contingent on, or varying with the profits of a business does not of itself make the person a

partner in the business; and in particular:

(a)

The receipt by a person of a debt or other liquidated demand by instalments or otherwise out of the accruing profits of a business does

not of itself make the person a partner in the business or liable as such:

(b)

A contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does

not of itself make the servant or agent a partner in the business or liable as such:

(c)

A person being the widow, widower or child of a deceased partner, and receiving by way of annuity a portion of the profits made in the

business in which the deceased person was a partner, is not by reason only of such receipt a partner in the business or liable as such:

(d)

The advance of money by way of loan to a person engaged or about to engage in any business on a contract with that person, that the

lender shall receive a rate of interest varying with the profits, or shall receive a share of the profits arising from carrying on the business,

does not of itself make the lender a partner with the person or persons carrying on the business or liable as such: Provided that the

contract is in writing and signed by or on behalf of all the parties thereto:

(e)

A person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by the person of the

goodwill of the business is not by reason only of such receipt a partner in the business or liable as such.

"

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In the present case, clearly a business was being carried on for profit. What was controversial was whether the respondent was

carrying on that business in common with Mr Scotts and/or Momentum.

29

It was agreed that the respondent was to receive a share of the profits in the business of the hotel. In those circumstances, the

effect of r (3) in s 2(1) of the Partnership Act was that, prima facie, the respondent was a partner in the business. However, the

appellants stressed the second limb of the opening passage of the rule, namely, that the receipt of a share of profits does not of itself

make the recipient a partner in the business concerned. That is true, of course, but paras (a) to (e) of the rule show examples of the

circumstances in which the receipt of a share of profits need not lead to the conclusion that the recipient is a partner. Paragraphs (a),

(b), (c) and (e) refer to situations in which, quite clearly, partnership would be negatived by the context. Paragraph (d) refers to a

situation in which moneys are advanced on loan, with the lender receiving a share of the profits by way of or in the place of interest.

Even then, such an arrangement does not "of itself" make the lender a partner, but only where the contract in question is in writing and

signed by or on behalf of all the parties thereto.

30

The present case does not fall within any of the examples of non-partnerships (or not-necessarily-partnerships) set out in r (3). The

facts lack any obvious context which would, of itself, tend to negative a conclusion that there was a partnership. From the negotiations

to which the trial Judge referred (including the Heads of Agreement), a conclusion that the respondent was going into business, albeit

in a limited way, with Mr Scotts and/or Momentum, is as natural as any other. From the outset, Mr Scotts referred to the respondent as

getting "a 15% share of the equity of the pub" (per the respondent) or as getting "15% ... ownership of the business" (per Ms Dalitz).

The Heads of Agreement, drawn by Mr Scotts, proposed that the respondent would "purchase 15% of the ... business". Of themselves,

these and like expressions used by the parties naturally bespeak an intention to carry on business in common. Against the context of

them, there is no reason not to give the evidentiary presumption in r (3) its full operation. The onus was clearly on the appellants to

show why the respondent should not be regarded as a partner in the hotel business. They did not do so at trial, but submitted on appeal

that her Honour had erred in a number of ways, with respect both to partnership questions as such and to the role of Momentum in the

partnership as found below.

31

It was submitted on behalf of the appellants that the respondent had not pleaded, in his third Further Amended Statement of Claim, that

Mr Scotts was a party to the relevant contract. The respondent answered this point by referring to the following passage in her Honour's

judgment:

"In his Third Further Amended Statement of Claim Mr Lewarne pleaded that the parties were Momentum and himself but later he

submitted that it was a tri-partite agreement involving Mr Scotts as well. The respondents claimed that the agreement was between

Mr Scotts and Mr Lewarne and that Momentum was not a party. What is painfully clear from the evidence is that Mr Scotts referred

to himself and to Momentum without apparent distinction and that, even if Mr Lewarne appreciated the distinction, he did not seek

clarification of the issue."

The appellants did not seriously contend that her Honour was not entitled to decide the matter according to the submissions made by

the parties, rather than to the allegations in the pleading. It was put to us on behalf of the respondent that his case at trial — that there

was an agreement involving Mr Scotts as well as Momentum — did not provoke any objection from the appellants based upon want of

procedural fairness. Counsel for the appellants did not controvert that assertion, and made no reference to the point in their written reply

submissions. In the circumstances, we reject this point.

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32

It was next submitted on behalf of the appellants that her Honour was in error to have found the existence of a partnership agreement

by selectively piecing together evidence as to some of the conduct of the parties concerned. It was contended that her Honour had

"ignored" the outline agreement referred to in 14 above and the Heads of Agreement. Her Honour was criticised for having preferred

evidence of what had been said in conversations, including conversations which predated these documents. We cannot accept these

criticisms of her Honour's reasons. She did not ignore the documents referred to, but she did, as was her obligation, take into account

all the facts and circumstances which had the potential to throw light upon the true nature of the consensus between the parties. In

this respect we refer to the judgment of the Full Court in Amadio Pty Ltd v Henderson (1998) 81 FCR 149 at 172[PDF], to which the

appellants drew our attention:

"The existence of a partnership is determined by reference to the true contract and intention of the parties as appearing from all of the

facts and circumstances relevant to the relationship of the parties ... "

33

In the present case, her Honour held that the essential terms of the agreement between the parties could be identified from the

discussions between them, and from "their immediate behaviour" after the creation of the contract. It was the respondent who submitted

that the written terms of the agreement were to be found in the outline agreement and in the Heads of Agreement. Her Honour did not

accept that submission. She considered that the outline agreement was not an offer capable of being accepted by the respondent but,

in any event, that it was effectively overtaken by the Heads of Agreement. As to the latter, her Honour said it was relevant evidence:

" ... as to the discussions that had taken place between the parties and shows that they had reached an agreement on essential

elements of the contract — the amount Mr Lewarne was to pay ($300,000), the form which his investment would take (15% share as a

partner in the business of the East Village Hotel) and the manner in which the hotel business would be conducted (with Mr Scotts taking

the dominant management role but consulting on strategic decisions)."

There is, in our view, no substance in the suggestion that the trial Judge ignored the outline agreement or the Heads of Agreement;

or that in any other respect she failed to take account of evidence which had the potential to throw light upon the true nature of the

agreement reached between the parties.

34

It was next submitted on behalf of the appellants that the trial Judge "misapplied the principles relating to the formation of contracts

other than by offer and acceptance". This proposition was made very briefly in the appellants' written outline, and was the subject

of no elaboration in the oral submissions made on their behalf. The outline referred to the survey of the authorities by Heydon JA in

Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at 176-179[PDF], and to the judgment of Tadgell J in Toyota

Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106 at 178, where his Honour referred to a passage where

it was stated that "cases where offer and acceptance are lacking are so rare that for purposes of general discussion they may be

disregarded". The error of the trial Judge in the present case, according to the appellants, was that her Honour "showed none of the

caution displayed by Tadgell J". We reject this cursory and, we are bound to say, quite unsophisticated, criticism of her Honour's

reasons by the appellants. In the first place, it would rarely be a legitimate basis of appellate criticism merely to contend that the court

below had omitted to show the degree of caution which had been evident in the reasons of a different Judge in a different case. In the

second place, and more importantly, the appellants' brief criticism of her Honour's reasons does less than justice to the actual terms

thereof. As it happens, her Honour referred both to Brambles and to Toyota, as well as to a number of cases in which the observations

of McHugh JA in Integrated Computer Services Pty Ltd v Digital Equipment Corporation (Aust) Pty Ltd (1988) 5 BPR 11,110 at 11,117

had been approved. Her Honour relied upon the judgment of Tadgell J in Toyota as support for the view that, where there was no

clear evidence of offer and acceptance, it was necessary to look to the conduct of the parties to determine if they had agreed to incur

reciprocal promissory obligations. Her Honour accepted the remark by McHugh JA in Integrated Computer Services that the approach

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which his Honour there endorsed was not "a licence to dispense with the well-established hallmarks of a contract". Her Honour held that

it was always necessary for the essential elements of a contract to be established, "even if not with textbook precision". In other words,

her Honour displayed every bit as much caution as was appropriate in the circumstances confronting her.

35

The appellants' next ground lay at the centre of their case on appeal, and much was made of it in their oral submissions. It was

submitted that "mutuality" was an essential aspect of any contract of partnership, yet it was lacking from the agreement between the

parties in the present case. First, it was said that, in the conduct of the business, the parties were not doing so as agents for each

other. Secondly, it was said that, although the parties had agreed to share in the profits of the business, they had not agreed to share

in the losses. Thirdly, it was said, in effect, that the obligations of the respondent and of Mr Scotts under the agreement between them

were asymmetrical: the respondent's only obligation was to contribute $300,000, while Mr Scotts "had nothing to contribute and had no

obligations" because all the obligations which related to the conduct of the business were imposed upon Momentum. Fourthly, it was

said that the respondent had no right "to partake in the management of the venture". Fifthly, it was said that the respondent had no say

on the matter of the admission of new equity participants in the business. We shall address these points in turn.

36

The existence of agency, it was submitted, was an essential aspect of a partnership. As we understand it, the appellants proposed that

it was an indispensable part of any conclusion that parties carry on business in common that it be shown that they were the agents

of each other, relying in this respect upon the judgment of Griffith CJ in Lang v James Morrison & Company Ltd (1911) 13 CLR 1

at 11[PDF] and upon that of the Full Court of the Supreme Court of South Australia in Duke Group Ltd (in liq) v Pilmer (1999) 73 SASR

64 at 272-274[PDF]. Uninstructed by authority, we would take the view that agency should be regarded as one of the incidents of a

partnership, rather than as an essential defining element thereof. We would, with respect, associate ourselves with the sentiments

expressed in the 18th edition of Lindley (I'Anson Banks RC, Lindley and Banks on Partnership (18th ed, 2002)). The author warns

of the "danger that what are, in truth, normal incidents or characteristics of partnership are wrongly perceived as prerequisites to

the existence of that relationship". After a brief reference to the judgment of Lord Coulsfied in Dollar Land (Cumbernauld) Ltd v CIN

Properties Ltd [1996] SLT 186 at 195, he continues (at 14):

"Thus, whilst mutual agency may properly be regarded as a central feature of the law of partnership, it is clearly something which flows

from the partnership relation, not the other way around."

In this respect the author refers, with approval, to the judgment of Cleasby B in Holme v Hammond (1872) (1872) LR 7 Ex 218. Are we

obliged by Lang v James Morrison and Duke Group to take a different view? That is to say, in addition to the requirements set out in

s 1(1) of the Partnership Act, is it necessary to establish that the putative partners were the agents of each other in order to conclude

that they were in fact in partnership?

37

In Lang v James Morrison the plaintiffs, London merchants carrying on the business of receiving and disposing of frozen meat from

abroad, had obtained judgment in the Supreme Court of Victoria against the appellant, TS Lang. The Supreme Court accepted

evidence from which it concluded that, in relation to a contract made by communications between the plaintiffs and one JW McFarland

(trading as Thomas McFarland & Co), McFarland was the partner of Lang and of one Keates, and that there was relevantly, therefore,

contractual privity between the plaintiffs and Lang. It seems that the contract related to a joint venture between the plaintiffs and

McFarland at least for the shipment of frozen meat from Victoria to London and for its sale there. The High Court upheld Lang's appeal,

reversing the Supreme Court's conclusion as to the existence of a relevant partnership. In the course of his reasons for judgment,

Griffith CJ said (Lang v James Morrison 13 CLR at 11):

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"Now in order to establish that there was a partnership it is necessary to prove that J.W. McFarland carried on the business of Thomas

McFarland & Co on behalf of himself, Lang and Keates, in this sense, that he was their agent in what he did under the contract with the

plaintiffs — not that they would get the benefit, but that he was their agent. That appears from Ex parte Tennant; In re Howard 6 Ch. D.,

303, particularly the judgment of Cotton, L.J. 6 Ch. D., 303, at p. 317."

38

Lang v James Morrison was not a case in which the members of an alleged partnership were disputing as between themselves

whether the partnership existed. Rather, it was a case in which third parties who had contracted with one of the persons alleged to

be a partner (McFarland) were alleging that a partnership between him and other persons existed. The plaintiffs made this allegation

since, by the time of the judgment of the Supreme Court, both McFarland and Keates had become insolvent. At its highest, the

evidence established that McFarland had spoken separately to Lang and to Keates about carrying on business together. There was

no partnership document, and the three men had never met together to form a consensus as to the existence, or nature, of the alleged

partnership. The character of the dealings between McFarland, Lang and Keates was rendered the more ambiguous by reason of the

circumstance that they were, in fact, in a separate partnership, as McFarland, Lang & Co, but it seemed clear that that firm was not

concerned in the line of business in which Thomas McFarland & Co engaged in its relevant dealings with the plaintiffs.

39

Both Griffith CJ and Barton J held that the evidence would not sustain the plaintiffs' case that, when the contract between them and

McFarland was entered into, the latter was relevantly in partnership with Lang and Keates. The case was decided substantially because

of the incomplete, ambiguous and altogether unsatisfactory nature of the evidence upon which the plaintiffs relied to support their

allegation of partnership. Part of that evidence related to a conversation in which McFarland and Lang discussed the line of business

being proposed by the plaintiffs. According to McFarland's evidence (which was accepted in the Supreme Court), Lang asked him

whether he thought that it was a safe business. McFarland replied that he thought it was. Lang asked what was "the most you can

lose"; McFarland said that he hoped to make £1,000; and Lang said that, if the worst came to the worst, "£500 ought to cover all the

losses". According to McFarland, he and Lang agreed to cable the plaintiffs that they would go on with the business on their terms.

40

In the course of giving his reasons for judgment, Griffith CJ made the statements to which we have referred in 37 above. Although

his Honour said that it was "necessary to prove" that McFarland carried on the business on behalf of himself, Lang and Keates in the

sense that he was their agent in what he did under the contract with the plaintiffs, we do not read this passage as proposing that, in

any case in which the existence of a partnership is sought to be established, it is an essential part of the case of the party seeking

to do so to prove separately that each putative partner was the agent of the other. Put another way, we do not think that the Chief

Justice had it in mind, for example, to suggest that a statement of claim on behalf of such a party might be struck out as not disclosing a

reasonable cause of action if it omitted to allege that each of the proposed partners was the agent of the other. Rather, in the light of the

unsatisfactory facts in Lang v James Morrison, we consider that the Chief Justice was concerned only to provide content to the concept

of "carrying on business" in the context of partnership law, and to distinguish a partnership from the kind of arrangement with which his

Honour considered the facts in that case were equally consistent, namely, the giving to Lang and Keates of an interest in McFarland's

share in the joint venture with the plaintiffs.

41

In Duke Group, it was contended that the members of otherwise separate firms operating in different Australian cities were members

of a single national partnership, because, for some purposes, they had adopted such a style, and a single name which applied in all

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places. Under the heading "Carrying on business in common", their Honours in the Supreme Court of South Australia said (Duke Group

73 SASR at 273):

"In order to meet this criterion, it is not necessary that each of the alleged partners should take an active part in the direction and

management of the firm. The business may well be carried on by or on behalf of the partners by someone else. The person carrying on

the business must be doing so as agent for all the other persons who are said to be partners."

Their Honours referred to the speech of Lord Wensleydale in Cox v Hickman (1860) 8 HL Cas 268, and to the words of Griffith CJ in

Lang v James Morrison to which we have referred. Their Honours said (at 272-273) that the requirements of agency and mutuality

were reflected in ss 5 and 6 of the Partnership Act 1891 (SA) "as being the consequences of entering into a partnership". They said

that, unless there was the "mutuality" implicit in ss 5 and 6, there could be no partnership. On the facts in Duke Group, the agreement

between the separate firms contained an express term that the authority granted to each "participating firm" would "in no way render

any participating firm the agent of any one or more of the other participating firms or of any one or more of the members thereof ... ".

(Duke Group 73 SASR at 262). In the light of this provision, it is, with respect, unsurprising that their Honours in the Full Court held that

the parties concerned were not carrying on business in common.

42

The proposition which the appellants sought to extract from Duke Group — that, before there can be a partnership, there must be

mutual agency — cannot, however, be dismissed merely by referring to the term in the parties' agreement to which we have referred.

Their Honours relied for that proposition upon judgments of high authority, particularly Cox v Hickman which is a pillar upon which much

subsequent partnership law has been built. In that case, certain of the creditors of a firm which had become embarrassed carried on

the business of the firm as trustees. One of them, Cox, never acted as such, and another of them, Wheatcroft, acted for six weeks and

then resigned. Subsequently, the continuing trustees became indebted to Hickman in the course of carrying on the business of the

firm, and gave him bills of exchange. Hickman later sought to sue Cox and Wheatcroft on the bills, upon the proposition that they were

partners in the firm. The House of Lords held that he could not. In a speech with which Lord Brougham agreed, Lord Campbell said

(Cox v Hickman 8 HL Cas at 303):

"But I am of opinion that the creditors of the old firm cannot be considered, by executing the deed, as having authorised the trustees as

their agents either to purchase the goods or to accept the bills."

Lord Cranworth said (at 304-305):

"The liability of one partner for the acts of his co-partner is in truth the liability of a principal for the acts of his agent. Where two or more

persons are engaged as partners in an ordinary trade, each of them has an implied authority from the others to bind all by contracts

entered into according to the usual course of business in that trade. Every partner in trade is, for the ordinary purposes of the trade,

the agent of his co-partners, and all are therefore liable for the ordinary trade contracts of the others. Partners may stipulate among

themselves that some one of them only shall enter into particular contracts, or into any contracts, or that as to certain of their contracts

none shall be liable except those by whom they are actually made; but with such private arrangements third persons, dealing with the

firm without notice, have no concern. The public have a right to assume that every partner has authority from his co-partner to bind the

whole firm in contracts made according to the ordinary usages of trade."

His Lordship held that the trustees had not made themselves partners in the firm in this sense. Lord Wensleydale said (at 312-313):

"A man who allows another to carry on trade, whether in his own name or not, to buy and sell, and to pay over all the profits to him, is

undoubtedly the principal, and the person so employed is the agent, and the principal is liable for the agent's contracts in the course of

his employment. So if two or more agree that they should carry on a trade, and share the profits of it, each is a principal, and each is an

agent for the other, and each is bound by the other's contract in carrying on the trade, as much as a single principal would be by the act

of an agent, who was to give the whole of the profits to his employer. Hence it becomes a test of the liability of one for the contract of

another, that he is to receive the whole or a part of the profits arising from that contract by virtue of the agreement made at the time of

the employment. I believe this is the true principle of partnership liability."

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His Lordship thought it impossible to say that the trustees' receipt of profits in the firm was, in the circumstances, such as to constitute

the relation of principal and agent between Cox and Wheatcroft on the one hand and the trustees on the other. Lord Chelmsford

concurred generally with the other judgments.

43

There are two observations we would make about Cox v Hickman, and its relevance to the circumstances of the present case. The

first is to point out that the judgment of the House of Lords predated the first modern legislation regulating partnership in England (the

Partnership Act 1890 (UK)), and predated by five years the first legislative treatment of partnerships (Bovill's Act, 28 & 29 Vict. c. 86).

Notwithstanding the high authority of that judgment, whether a partnership exists must now be determined by reference to provisions

corresponding to ss 1 and 2 of the Partnership Act. The second observation is that Cox v Hickman was not what might be called a

conventional case of parties going into business together with a view of profit. The parties alleged to be partners were in fact creditors

who had undertaken, as trustees, the burden of carrying on a struggling business with a view, apparently, to having their debts repaid

from the profits of the business. It was a very special context, and it was not, with respect, surprising that their Lordships would have

tested the question whether a partnership existed by reference to the relationship of principal and agent.

44

In our view, the emphasis which one sees in the authorities, including Lang v James Morrison and Duke Group, upon agency as

an indicator of partnership is referrable to the element of carrying on business in common. What that requires is that the persons

concerned be principals in the business. It is not sufficient that one be the employee of the other, or that the business be carried on by

one for the benefit of (eg as trustee for) the other (see Cox v Hickman). If two or more persons are principals in this sense, each will be

bound by transactions into which one of them enters in the name of the business. It will thus often be convenient to analyse the facts of

a particular case with reference to the question whether the agreement is such as would make the acts of one of the persons binding on

the others. If so, it would tend to show that each such person participates in the business in question as a principal, rather than in some

other capacity, and that they are all, therefore, carrying on the business in common. However, we do not read the authorities relied on

by the appellants as going further than this. We do not read them as requiring proof of agency over and above the matters to which

s 1(1) of the Partnership Act refers.

45

Returning to the context of the present case, the trial Judge approached the question of partnership with a keen eye on the significance

of agency and a mutuality of rights and obligations. Her Honour followed Duke Group in this respect. She summarised her conclusion in

the following terms:

"The relationship between Mr Lewarne and Mr Scotts was accepted by them as involving a mutuality of rights and obligations that was

consistent with them being in partnership as that relationship is defined in the Partnership Act."

Her Honour held that "the conduct and communications of the parties at the time evince an intention that Mr Scotts would act as agent

for all, and that each party to the agreement would have rights and obligation to each other under the agreement". Her Honour said that

evidence to that effect was "largely uncontested". Further, our attention was drawn to the following passage in the cross-examination of

Mr Scotts:

"[T]hat you decided that you would all be involved in this business and work co-operatively together?---Yes.

Even though you had the day to day management responsibilities, you were all together there in common to make the business

profitable and work?---Yes.

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And they were relying on you as you understood it to be effectively their agent in relation to the dealings with the outside world in

respect of the pub?

---I assume so. Yes."

It was submitted on behalf of the appellants that this evidence did not go far enough for the respondent's purposes, for two reasons.

It was said, first, that, to the extent that she did so, her Honour was wrong to rely upon the use of the term "agent" as used by a lay

witness, when the question before her was whether the legal relation of agency had been established. It was said, secondly, that it was

not sufficient merely for Mr Scotts to have been the agent of his brother and the respondent: the relation of partnership required that

there be mutual agency, implying that Mr Scotts' brother and the respondent were likewise the agents of Mr Scotts.

46

We recognise that it is a mistake unthinkingly to give a legal connotation to the use of the word "agent" in a business or commercial

context: see International Harvester Company of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Company (1958) 100 CLR 644

at 652-653[PDF]. As there pointed out, in the world of business, an "agent" may be a person or company which has, for example, the

distribution and service rights for particular products within a particular locality. However, the context in which Mr Scotts gave the

answers to which we have referred above, and to which her Honour referred in the extract from her judgment most recently quoted

above, was not that of a distribution or service agent at all. Neither Mr Anthony Scotts nor the respondent was the principal of a

separate business, in relation to which Mr Scotts was their agent in the sense of being a local representative. There was only one

business in question, Mr Scotts was intended to be the hands-on operative in that business, and the other two were proposed to have

minority proprietorships of some form. The only sense in which Mr Scotts could have understood the questions put to him in cross-

examination was that in which the term "agent" refers to a person who acts on behalf of another.

47

We also accept, as we must, that the legal characterisation of the relationship between the parties in the present case was not to be

determined by the say-so of one of them, even if it appeared to be an admission against interest in the course of cross-examination.

Whether a partnership exists is a mixed question of fact and law, and the same might be said of the question whether one of the

incidents of an existing relationship between persons is that each is the agent of the other. So we accept that the matter of agency

is not concluded adversely to the appellants simply by the answers given by Mr Scotts to which we have referred above. But the

respondent did not need to base his case upon Mr Scotts' evidence in this regard. His receipt of a share of the profits in the hotel

business made him, as a matter of evidence, prima facie a partner in that business. It was for the appellants to show that the whole of

the facts and circumstances were inconsistent with such a conclusion. However limited was the use to which her Honour was entitled to

put these answers by Mr Scotts, they did tend to confirm, rather than to contradict, the statutory presumption. As we read her Honour's

judgment, she used Mr Scotts' evidence in this sense, and we believe that she was entitled to do so.

48

The appellants effectively invited us to accept that it could never have been the respondent's intention that he be bound, personally, by

any engagement into which Mr Scotts entered in the name of the hotel; or, for that matter, that it could have been Mr Scotts' intention

to be bound by engagements entered into by the respondent (or by Anthony Scotts) in the name of the hotel. We do not regard these

propositions as self-evident and, save for the fact that the respondent and Anthony Scotts wanted to have little or nothing to do with

the day-to-day operation of the hotel, there is nothing in the findings of her Honour which would sustain them. The limited extent of the

respondent's participation in the day-to-day operations, of course, was wholly consistent with the minority nature of his interest in the

business. It is a commercial commonplace that some partners participate in this limited kind of way.

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49

The appellants next submitted that the respondent had not agreed to share in the losses of the business. The agreement between the

parties said nothing on the matter of losses, one way or the other. If that agreement were one of partnership, the respondent would

have no option but to share in the losses: see Partnership Act, s 24(1)(1). However, it was submitted on behalf of the appellant that

there were positive indications that the respondent had no intention of sharing in the losses, and made that clear to the other parties.

50

The appellants submitted that the respondent had given "express instructions" to Mr Dempsey that "he did not want any exposure to

the debts of Momentum". However, the evidence showed (as her Honour noted) that the respondent was concerned about the previous

trading record of Momentum — or about Momentum's "skeletons in the closet" as the respondent put it — and for that reason never

wanted to be a director of Momentum, nor even (on a later occasion) a shareholder. This concern on the part of the respondent was

quite another thing from a reluctance on his part to participate in any losses made by the East Village Hotel during the period that he

was co-proprietor (if he was).

51

Our attention was also drawn to the following passage in the cross-examination of the respondent:

"Now, you did not want to be a director of Momentum because you felt that would put your head on a chopping block as a director?---

They weren't my exact words, but that is correct. I did not want to be a director of Momentum; that is correct.

Because it would expose you to some kind of liability?---That is correct.

From your own general knowledge as a director of several companies you would have less liability if you were a shareholder of

Momentum?---That is correct.

You would also know that as a partner with Momentum your head is back on the chopping block?---That is correct, yes. I could not have

been in a worse position.

Than?---Than being a partner of Momentum.

You did not want to have your exposure to liability?---That is correct.

So you were saying you wished to be a shareholder?---No. Not a shareholder of Momentum, but a shareholder of the hotel.

But the hotel is business activity carried on by whom?---Momentum.

I see. And you wished to be a shareholder of the person carrying on the business?---No, of the actual East Village or---"

At this point, her Honour intervened. We do not consider that this evidence demonstrated a reluctance on the part of the respondent to

share in the losses of the business. He did not want his head to be on the chopping block, as he considered would be the prospect if

he became a director of Momentum or, as he put it, a partner of Momentum. But he did want to be a "shareholder" of the hotel. There

is undoubtedly a deal of ambiguity in all this, but on no view does it justify the conclusion that the respondent was not consciously

hazarding his $300,000 against the risk that the hotel business might make trading losses, or was not intending to bear his 15%

responsibility in those losses.

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52

Turning next to the appellants' point about asymmetry, we do not consider that there is anything in it at all. As a matter of principle,

there is no reason why partners might not agree to make contributions which differ both in kind and in quantum. In some cases, a

partner who has contributed capital might thereafter do nothing, but remain as a "silent partner". As a matter of fact in the present case,

her Honour below said:

"In cross-examination, Mr Scotts assented to the proposition that the parties agreed that Mr Lewarne, Mr Anthony Scotts and he would

"all be involved in this business and work co-operatively together" and to the further proposition that even though he had "day to day

management responsibilities" the parties were "all together there in common to make the business profitable and work". Indeed, it

was part of the respondents' defence in this proceeding that Mr Scotts had various responsibilities relating to the day to day running of

the business and that Mr Lewarne had initially agreed to carry out the work necessary to extend the hotel into the adjoining premises.

Mr Scotts also agreed that he understood Mr Lewarne and Mr Anthony Scotts to be relying on him to act as their agent in relation to

dealings with the outside world in respect of the hotel."

The circumstances to which her Honour referred are in no sense inconsistent with the relation of partnership. We would only add that,

to the extent that this point raised by the appellants was tied to the role of Momentum and its relationship with the human parties, we

shall deal with it below in the context of a number of the appellants' issues which concern that role.

53

The trial Judge did not find, and we would not accept, that the nature of the agreement between the parties was such that the

respondent had no right to partake in the management of the business. Her Honour found, and it was clearly established on the

evidence, that Mr Scotts would consult with his brother and with the respondent on strategic decisions, but would himself have the final

say, as befitted someone with an 80% equity share. There is also the evidence of Mr Scotts as referred to by her Honour in the passage

set out at 52 above, namely, that it was intended that the three men would all be involved in the business and work co-operatively

together. We therefore reject the proposition that the respondent's only role was to contribute $300,000 to the business, and that

thereafter he had no right to participate in the management thereof.

54

It is true that the respondent had no say as to the admission of new equity participants in the business (save for having a first right

of refusal), but this is no more than a comment on the terms of the agreement between the parties. It is in turn no way inconsistent

with that agreement being one of partnership. We are unaware of any rule of law that prevents parties, otherwise uncontroversially in

partnership, from agreeing that one or more of their number shall have the final say on such matters. Indeed, when the one with a final

say also represents a majority of the equity in the firm, it is not at all surprising that such an agreement might be made.

55

From our own reading of the factual findings made by the trial Judge, together with the limited additional evidence to which the

appellants referred us on appeal, we consider that an intended participation which included the respondent and Anthony Scotts as

principals in the hotel business is the most obvious and natural interpretation to be put on the communications between the parties

leading up to 7 July 2003, and is not contradicted by the communications which they had immediately after that date. We reject the

appellants' case that the parties did not have this kind of relationship in mind.

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The position of Momentum

56

We turn next to the issues raised by the trial Judge's finding that Momentum was a partner in the business of the East Village Hotel,

along with the respondent, Mr Scotts and the latter's brother Anthony. Her Honour's finding was expressed as follows:

"In the negotiations leading up to the agreement, Mr Scotts spoke both for himself and Momentum. Indeed, as I have earlier

commented, Mr Scotts referred to himself and Momentum interchangeably and without apparent distinction. On balance I find the

evidence supports the conclusion that Momentum, as well as Mr Scotts, was a party to this preliminary contract. It is likely that

Mr Anthony Scotts was also a member of the partnership from the same date however I have only limited evidence on this point which

I have not been asked to decide. In general, I do not find it necessary to distinguish between Mr Scotts' conduct when he was acting for

Momentum and when he was acting for himself and shall not do so unless there is a particular need."

The appellants contended that the parties could not have intended that Momentum was in partnership with them. It was pointed out

that it was Momentum alone that owned and operated the business of the hotel. It held the lease, it had purchased the business

from Wellfox, and its books of account (in draft form only though they were in the evidence at trial) showed that all of the receipts and

outgoings were its alone. It was the corporate vehicle through which Mr Scotts carried on the business of the hotel: it was unlikely in

the extreme, the appellants submitted, that Mr Scotts should have intended that he be in partnership with his own company. Even the

respondent and Mr Anthony Scotts, it was submitted, must have intended that it was Momentum which would be the trading entity and

which would be exposed to any claims from third parties that might arise from time to time.

57

Before considering these points, we should refer to certain limitations in the evidence which was led before the trial Judge in relevant

respects. Assuming, as we do, that the business was actually carried on as "East Village Hotel", if s 5 of the Business Names Act 1962

(NSW) (which was in force in 2003) had been complied with, that name would have been registered in relation to each person carrying

on business thereunder. We were told, however, that there was no evidence as to whether the name was registered. The evidence was

also deficient as to the identity of the licensee under the Liquor Act 1982 (NSW), although we note that, in a letter written by Ms Dalitz

(and signed by the respondent) to Mr Scotts on 20 September 2004, complaint was made that the licence had not yet been transferred

into the name of Momentum. Neither, it seems, was there any evidence of the name in which the hotel did business on the supply

side. There were no invoices, for example, addressed to the hotel from the suppliers of alcoholic beverages or other items in which the

business traded.

58

As against these considerations, in evidence was a letter from Momentum's (or perhaps Mr Scotts') accountants dated

18 November 2004 enclosing a (draft) profit and loss statement and trial balance for the year ended 30 June 2004. These accounts

were in the name of Momentum. They disclose that Momentum was the trading entity. However, reliance on them is made problematic

by the fact that the trial balance listed the respondent's capital contribution of $300,000 as a "loan" (and similarly listed the $100,000

contribution of Anthony Scotts), a position for which no party contended before the trial Judge or on appeal. No final accounts of

Momentum were in evidence.

59

Neither was there any evidence of Momentum's financial situation, or as to the extent of its capitalisation, as at 1 July 2003 (shortly

before settlement of the contract to buy the business from Wellfox). The respondent's concern that Momentum might have had

"skeletons in the closet" seems to be consistent with a trading history of some kind, but there was no direct evidence on the subject.

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The trial Judge was not told how much Momentum itself brought by way of capital into the business of the hotel. Her Honour was told

that Momentum made no cash contribution for the purchase price: the whole was financed by a combination of vendor finance and a

bank loan. But the source of the initial working capital requirements of the business was not revealed. Counsel for the appellants were

unable to throw any light on these matters. Presumably the balance sheet of Momentum as at 30 June 2003 would have done so, but it

was not in evidence.

60

Her Honour found that, in the negotiations and discussions between the parties leading to the respondent's payment of $300,000

on 7 July 2003, Mr Scotts made no distinction between himself and Momentum. Neither did the other parties recognise any such

distinction, save that the respondent clearly understood that Momentum was a company with a past, of which he had no intention of

becoming a director. It seems to have been commonly understood that Momentum was the lessee of the premises and the purchaser

of the business. It was anticipated that Momentum would be the relevant trading entity, in name at least (subject to the ambiguity to

which we have referred above about the business name used for the purpose of transacting business with the third parties). On the

other hand, the evidence seems to sustain the conclusion that Momentum was Mr Scotts' service company only, that it had no assets or

source of income separate from the hotel, and that, in substance if not in corporate form, its business activities were effectively those of

Mr Scotts. Counsel for the respondent described Momentum as Mr Scotts' "alter ego", a description which, in our view, is apt enough.

61

Were it not for the interposition of Momentum, and looking at substance rather than form, what occurred here was a relatively

uncomplicated case of three men going into business together to operate a hotel. They brought different things into the business, and

participated in varying degrees. But none of that is unusual in small business. A legal analysis of the position is complicated by reason

that one of the men used a service company. However, any such analysis, in our view, should to the maximum extent possible remain

faithful to the reality of the situation, and seek to accommodate the legal form used by Mr Scotts in a way that least distorts the result

that the law would otherwise recognise as flowing from that reality.

62

As we have said, the distinction which the trial Judge was called upon to make by the position adopted by the parties before her was

between a partnership of some kind and an agreement between the respondent and Mr Scotts for the former to purchase a 15%

shareholding in Momentum. Much of her Honour's reasons were concerned to resolve this distinction, and if the appellants criticised

the way she did so, it was but faintly. We agree with her Honour that the substance of the agreement reached by the parties tends to

indicate a partnership, rather than an agreement for the purchase of shares, and to do so by a considerable margin. At the point of

identifying the parties to the partnership, however, the whole of her Honour's reasons appear to have been expressed in the paragraph

which we have set out in 56 above. Quite probably because the case on this point was not put to her Honour with the emphasis, or in

the detail, that characterised the appellants' submissions on appeal, the trial Judge did not advert to the difficulties which inevitably lay

in the way of a finding that Momentum was a partner, along with three individuals concerned.

63

Foremost among those difficulties, as the appellants contended, is the intrinsic unlikelihood that Mr Scotts might have intended to be

in partnership with his own service company. The whole point of having such a company, from the perspective of its sole shareholder,

is to provide a corporate vehicle for the purpose of trading with third parties. It is quite unlikely that Mr Scotts ever had it in mind that

Momentum would not only play such a role, but would also be a principal in the proprietorship of the business, along with Mr Scotts

himself. Neither is there any credible suggestion that the respondent considered himself to be entering into partnership with Momentum.

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The Heads of Agreement provide no support for such a suggestion: they name only the three individuals as taking up 100% equity in

the proposed business between them. Counsel for the respondent pointed to the presence of the name of Momentum, as well as of that

of Mr Scotts, on the front page of the Heads of Agreement, but we think that is more likely to represent an indication of the name of the

company through which Mr Scotts traded rather than of a free-standing party to the agreement in its own right.

64

The other difficulty with her Honour's findings as to members of the partnership is that it lacks any specification of the respective shares

of Momentum and Mr Scotts. Counsel for the respondent urged us to regard this as a matter of no consequence, and as something

to be worked out as between the two of them. In the unlikely event that there was any dispute about it, the court could resolve it after

hearing the separate submissions of Momentum and of Mr Scotts. It was submitted that the whole question of the internal division of

Mr Scotts' 80% share in the business as between himself and Momentum was irrelevant to the present dispute, which lay along the

axis between both of them, on the one hand, and the respondent, on the other hand. All this may be well and good, but it represents a

pragmatic, rather than a legally justifiable, basis for dealing with the question of the respective interests of Momentum and Mr Scotts.

Although the point was not argued, it seems that s 24(1) of the Partnership Act — which provides for partners to be equally entitled

to share in capital and profits, and equally obliged to contribute to losses — would not provide an answer to the internal division of

the 80% share as between Mr Scotts and Momentum. Since this was a partnership created by conscious agreement (rather than, for

example, by two or more people simply commencing to carry on business in common), and since the partners specified (in so much of

the Heads of Agreement as was uncontroversial) the precise shares of the three individuals involved, we think it quite unlikely that they

intended that, notwithstanding that specification, Momentum should also be a partner. Consistently with what was agreed in relation

to the individuals, we consider that, had the parties proposed that Momentum should also be a partner, its share would have been

specified.

65

The alternative approach would be to say that there was a partnership of the three men only, but that Momentum was used as the

corporate vehicle through which they carried on business. Momentum would then, in effect, hold the lease and the business on trust for

the partners in their different shares, and would be answerable to the partners for the net profits earned in the conduct of business of

the hotel. Such an approach would be consistent with the evident intentions of the parties, including so much thereof as may be taken

to have been reflected in the Heads of Agreement. The approach does not confront the difficulties which, according to the appellants,

are associated with the approach taken by her Honour. Further, this approach is the point that one reaches if one commences with the

actual facts of the case and works upwards, as it were, towards a legal conclusion. The facts, in our view (and in the findings below)

quite strongly bespeak a partnership between the two Messrs Scotts and the respondent. We refer to what we have said in 63 above.

It is as clear as may be that Mr Scotts was to be the executive partner in charge of the day-to-day operation of the business. He also

held a majority of share in the partnership, such as enabled him to have the final say on all matters which arose for decision, large and

small. We then find that the assets of the business are in the name of the service company of Mr Scotts, and that all trading is done by

that company (at least as recorded in the books of the business, however it may have appeared to third parties).

66

The reality of the above arrangements, in our view, is that the partnership was that of the three men only. Mr Scotts was the executive

partner. It was understood that he would, in effect, run the business. But it was also known by his brother and by the respondent that

Mr Scotts used a service company for these purposes. Momentum was known to the respondent, as was its role in the way Mr Scotts

proposed to operate the business. We consider that Momentum was used by Mr Scotts, with the informed consent of the other two

men, as the vehicle through which the East Village Hotel traded. To the extent that it held the legal title to the assets of the business,

it did so on trust for the partnership (or, which would be effectively the same thing, on trust for Mr Scotts who in turn held it on trust for

the partnership). It is perfectly conventional for the assets of a partnership to be held in the name of a single partner, who then accounts

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to his or her partners in relation to those assets. The use by the single partner — with the informed consent of others — of a service

company for the purposes of holding those assets cannot, in our view, make any difference in point of principle.

67

It is true that the legal characterisation of the relationships, and of the agreement between the parties, referred to above was not that

preferred by her Honour and was not the one for which the parties (in the case of the respondent, primarily) contended. However,

during the hearing of the appeal the court proposed that the parties should make such submissions as they were minded with respect

to the approach here under discussion. The appellants strongly resisted our adopting it. In written submissions filed some days after the

hearing of the appeal, counsel for the appellants said:

"When natural persons agree to participate in a business venture such that they will "conduct the business through a corporate entity"

with the business assets held by the corporate entity and with the business itself being conducted by the corporate entity so that the

natural persons are protected by the corporate veil from claims by third parties yet share in the profits derived by the corporate entity

then what the natural persons have agreed to form is a corporation not a partnership. It cannot be said that the natural persons are

"conducting a business in common" because the actual business is being conducted by the corporate entity not by the natural persons.

The corporation is not entering into these contracts as agent of the natural persons in the sense required in a partnership, that is to say

it is not "pledging the credit" of the natural persons."

We cannot accept these submissions. In effect, they assert that it is legally impossible for a partnership of natural persons to use a

corporate entity for the purposes of holding property, engaging in trading transactions with third parties, and the like. We were referred

to no decided case, and to no text, which would provide support for the position advocated for by the appellants and, for our own part,

we have found none. That there may be — and seemingly often is — a separation of the legal and beneficial interests in the assets

of a partnership is expressly recognised in Lindley: see 18th ed, p 520. If one partner may hold the legal, but not the beneficial, title to

particular assets, or to all assets, it is not at all clear what principle of law should stand in the way of the partners as a whole agreeing

that that partner should, or may, use a service company for the purpose. And the position need not be any different if the role of such a

company is to trade in the name of the partnership (eg in the present case, as "East Village Hotel") as well as to hold assets.

68

With respect to the appellants, the approach which we prefer has nothing to do with the corporate veil at all. Let it be accepted that

there is such a veil as between the external relations of a trading company and its shareholders. The present analysis is not concerned

with that axis at all. It is concerned with the interposition of an entity, be it a company or an individual, in the capacity of a trustee

between the members of a trading partnership and those with whom they have dealings. The partners themselves would be no more

"protected ... from claims by third parties" than is anyone beneficially entitled in analogous circumstances.

69

We do not suggest that the individuals concerned in the present case consciously turned their mind to the creation of a trust as a

means of carrying on business. No more so than in the case of a simple partnership in which an item of property is legally held in the

name of one of the partners. But, as we have said, what the parties did do was to agree to carry on business with each other (with

varying interests), to agree that Mr Scotts would run the business, and to agree (at least implicitly) that Mr Scotts could use Momentum

as the nominal trading entity. The approach which we prefer is how the law treats what the parties agreed to do on the facts of this

case. And, it must be said, Mr Scotts' description, in the Heads of Agreement (which he drew), of the parties' respective interests as

"equity" is in no sense inconsistent with this analysis.

70

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For the above reasons we shall uphold the appeal to the extent necessary to vary her Honour's declarations as to the constitution of the

partnership. The varied declarations will reflect our view that Momentum was not a partner.

The position of Anthony Scotts

71

It was next submitted on behalf of the appellants that the trial Judge erred in making orders affecting the property of the partnership

because one of the partners, Mr Anthony Scotts, was not a party to the proceeding. However, it was pointed out by counsel for the

respondent that, by the time of the hearing before the trial Judge, Mr Richard Scotts had paid his brother the sum of $90,000 to acquire

his interest in the partnership. Brief reference was made in the written outlines filed by the parties on appeal to the question whether

this transfer of interest produced the result, as a matter of law, that the existing partnership was dissolved, and a new partnership came

into existence. Counsel for the appellants referred, without elaboration, to the terms of s 31(1) of the Partnership Act, which imply that

there may be an assignment of a partner's share without the partnership itself coming to an end. In our view, in the circumstances

of the present dispute, these distinctions are moot. One way or another, by the time the matter came on for trial, Anthony Scotts

was no longer a member of the partnership, and need not have been (at the time when her Honour made final orders) a party to the

proceeding.

72

We would also add that counsel for the respondent pointed out that the appellants never objected to the non-joinder of Anthony Scotts,

and never took the point now sought to be made that the final orders made by her Honour were irregular by reason of that non-joinder.

Counsel for the appellants responded that the respondent had not pleaded that Anthony Scotts was a member of the partnership, in

which circumstances they, the appellants, could hardly have been expected to take the point which they now raise on appeal. With

respect to the appellants, we consider that this response is somewhat disingenuous. By the time of final submissions before the trial

Judge, it was as clear as may be that the existence of a partnership involving all three men was a realistic prospect by way of final

outcome to the proceeding. We accept the submission made on behalf of the respondent that, if the appellants proposed to resist the

conclusion that there was such a partnership on the ground of the non-joinder of Anthony Scotts, it was incumbent upon them to do so

in their submissions before the trial Judge. We reject the suggestion that they were absolved from that obligation because of the then

state of the pleadings.

Mr Scotts' obligations regarding the respondent's contribution of $300,000

73

We turn next to the consequences of the way Mr Scotts dealt with the payment of $300,000 made to him by the respondent on

7 July 2003. As noted earlier in these reasons, Mr Scotts requested the respondent to make out his cheque to Westpac, which then

had a mortgage over the Narrabeen property, registered in the name of Mr Scotts' mother. Mr Scotts used the respondent's money to

discharge that mortgage. He then procured the property to be transferred into his own name, and used it as part of the security for the

loan from the Commonwealth Bank (taken out in the name of Momentum), which was used to fund the purchase of the hotel business

from Wellfox. There is evidence which suggests that the Commonwealth Bank had obtained a valuation of $495,000 for the Narrabeen

property.

74

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It was submitted on behalf of Mr Scotts that the trial Judge was in error to have regarded him as in breach of his duties as a fiduciary

by undertaking the transactions referred to in the previous paragraph. It was submitted that those transactions were for the benefit of

the hotel business, in the sense that they enabled Mr Scotts to put together sufficient security for the Commonwealth Bank to provide

finance for the purchase of the business. It was submitted, in effect, that the respondent had contributed $300,000 to the business, and

Mr Scotts had used those funds in a way which was calculated to benefit, and which did benefit, the business. As a fiduciary he was

entitled so to proceed.

75

We cannot accept these submissions. With respect to those responsible, the submissions made on his behalf seek to place a self-

serving interpretation upon a series of transactions in which there was the clearest of conflicts between Mr Scotts' own self-interest and

the interests of the hotel business. The trial Judge had no difficulty in appreciating that Mr Scotts preferred his own self-interest in the

circumstances, and neither do we.

76

The position which Mr Scotts represented to the respondent in the weeks leading to 7 July 2003 was that, if the respondent contributed

$300,000, and Mr Anthony Scotts contributed $100,000, there would be sufficient funding for the purchase of the business. As it

happened (and this was no doubt appreciated by the respondent), Mr Scotts' calculations were based upon him being obliged to secure

loan finance from some source. What might then be expected to have happened in a conventional situation, and what would have been

consistent with Mr Scotts' fiduciary position, would have been for Mr Scotts to have put the respondent's and Anthony's contributions

into the capital of the business, together with funds obtained by himself and/or Momentum, including borrowed funds to the extent

that was necessary. Rather than proceed in this way, Mr Scotts, having received money from the respondent as a fiduciary, used that

money to discharge a mortgage over his mother's property. He then became the registered proprietor of that property. It is true that

he volunteered that property as part of the security for a loan which financed the purchase of the hotel business from Wellfox, but,

had the respondent's money been paid directly into capital of the business, we regard it as reasonable to infer that only $1.2 million or

thereabouts would have been required to be borrowed from the Commonwealth Bank. The interest on that would have been less than

was paid on the $1.53 million loan that was actually required, to the end advantage of the business, and therefore of its principals. The

result of all this was that the respondent was denied the alternative use of his $300,000 and the benefit, as a principal in the business,

of the work that those funds would otherwise do in keeping down the interest payments of the business.

77

In the way the matter was organised by Mr Scotts, the hotel business would, from moneys that would otherwise go into net profits,

make regular interest payments to the Commonwealth Bank. We were not informed whether the loan agreement with the bank required

also the periodical payment of capital, and her Honour made no finding on the subject. However, the loan itself was an obligation of

Momentum, ie of the business. Had the business traded successfully as originally anticipated, eventually the loan would have been

paid back, even if only by the sale of business. This payment back would have come from the capital of the business. The result of it,

quite obviously, would have been that Mr Scotts would have obtained an unencumbered title to the Narrabeen property. That matters

did not turn out thus does not diminish the force of the analysis set out above, which demonstrates beyond argument that the use to

which Mr Scotts put the respondent's contribution was in breach of his fiduciary duties and can in no sense be regarded as having been

for the benefit of the business. In the result, Mr Scotts must account to the partnership for the sum of $300,000. To this sum the trial

Judge added interest, which brought it up to $416,276.71, and no complaint was made on appeal as to this aspect of her Honour's

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orders. Neither did the appellants complain of her Honour's declaration that there was an equitable charge over the Narrabeen property

to secure this sum.

Did the trial Judge's orders make Mr Scotts a "debtor to himself"?

78

The appellants next submitted that the effect of the order that Mr Scotts pay the sum of $417,276.71 to the partnership was to make

him "a debtor to himself" because, as well as being the obligee under the order, he was, on the findings of the trial Judge, a partner.

The appellants referred us to the principle whereby, where partners owe, or may owe, moneys to each other, or where one of them may

owe money to the partnership as such, the court will not order a payment to be made in satisfaction of one or more of these individual

debts, but will make everything a matter of accounting as between all partners, and order the payment of money as between partners

only when the net sums due to and from each of them have been calculated.

79

The appellants rely upon the following quotation from Lord Lindley, set out in para 3-04 of the 18th edition of Lindley, and said to

represent "the orthodox legal view":

"The law, ignoring the firm, looks to the partners composing it; any change amongst them destroys the identity of the firm; what is called

the property of the firm is their property, and what are called the debts and liabilities of the firm are their debts and their liabilities. In

point of law, a partner may be the debtor or the creditor of his co-partners, but he cannot be either debtor or creditor of a firm of which

he is himself a member."

The appellants drew our attention to a number of cases in which, one way or another, it had been held that a partner or former partner

could not be both debtor and creditor with respect to the same transaction. The gist of the appellants' submissions is sufficiently

conveyed by the judgments in three of those cases. In De Tastet v Shaw (1818) (1818) 1 B & Ald 664; 106 ER 244 it was held that no

action could be maintained on a deed by which a partner promised to pay to the members of the partnership, including himself, moneys

which were then owing by him, but unascertained in amount. In Richardson v Bank of England (1838) (1838) 4 My. & C. 165; 41 ER 65

one member of a dissolved partnership had advanced large sums for the use of the business, and another member had drawn out (with

the consent of the partners) large sums for his own use. It was held that these members were not properly described as a creditor and a

debtor, respectively, of the firm. Lord Cottenham LC said (at 172; 68):

"The supposed creditor's debt is due from the firm of which he is a partner; and the supposed debtor owes the money to himself in

common with his partners; and, pending the partnership, equity will not interfere to set right the balance between the parties."

In Green v Hertzog [1954] 1 WLR 1309 it was held that an action by a former partner to recover from the other former partners the

amount of a loan to the partnership (since dissolved) was misconceived. The Court of Appeal held that the way for such claims to be

resolved was under the English equivalent of s 44(b).2 of the Partnership Act.

80

It will be noted that each of the cases referred to involved the question of the extent to which a partner or former partner might be

treated as a debtor or creditor of the firm of which he or she is or was a member. Because, under Anglo-Australian law, a partnership

has no existence separate from its members, there could be no such relation. Advances to the firm by a partner must be treated as

credit items in an accounting. All this may be accepted. However, none of the cases upon which the appellants rely involved anything

in the nature of defalcation or breach of trust. We consider that a partner who has, in breach of his or her fiduciary duty, applied to his

or her own benefit part of the partnership capital cannot be regarded as no more than the debtor of the partners generally, including

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himself or herself. When such a breach of trust is involved, it is, in our view, a distraction to propose that the defaulting partner's duty to

restore the partnership property to its rightful use goes no further than to place him or her in the position of a debtor.

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It is true that a partnership is, as a matter of law, no more than the individuals who constitute it. That very circumstance, however, puts

a sharp edge on the legal nature of the duties of a partner in whose name partnership assets are held or who has effective control

over those assets. It makes the fiduciary quality of such a partner's position critical. It is that quality which gives legal consequences

to the practical identification of partnership property as such. If a partner, in breach of his or her fiduciary duty, misapplies partnership

property, he or she is doing more than using money in which he or she happens to have a joint interest along with others: he or she is

failing to treat property de facto under his or her control, as the property of the partners as such. In our view, it is as clear as may be

that equity would, on the suit of a person beneficially entitled, intervene to prevent that happening or, if it had happened, make such

orders as were necessary to rectify the position.

82

Returning to the facts of the present case, we do not think that, relevantly to this point of the appellants, the respondent's proceeding

against them was, or was analogous to, an action on a debt said to be owing to him from the partnership as such. Rather, it was in the

nature of a suit by a person beneficially entitled to hold a fiduciary accountable for his breach of duty. To allow Mr Scotts to retain the

funds which he took from the partnership pending the finalisation of accounts as between the partners is, in our view, an outcome which

equity would be most reluctant to countenance. Rather, those funds (with interest which, as we have said, is uncontroversial) should be

restored to the partnership, now represented by the receiver. We consider that there was no error involved in the trial Judge's order to

this effect.

The valuation of the Supreme Court action

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The trial Judge's calculation of damages under s 87 of the Trade Practices Act included an assessment of the amount of capital

which the respondent was likely to lose by reason of his investment in the East Village Hotel (which was made on the strength of

representations made by Mr Scotts, which her Honour found to be misleading and/or deceptive in a number of respects). Since the

respondent had paid $300,000 for a 15% interest in the business, her Honour calculated that the implicit valuation of the business,

at that time, was $2 million. A valuation report tendered at trial, which all parties accepted so far as it went, placed the value of the

business (at the time it was made) at $900,000. Accepting that report, her Honour reckoned the respondent's losses under this head as

being 15% of $1.1 million. None of this reasoning is challenged on appeal.

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However, the figure of $900,000 took no account of the value, if any, of Momentum's Supreme Court action against Retemu to which

we have referred in 6 above. The appellants submitted below that some value should be given to that action. In her Honour's reasons

published on 9 October 2007, the trial Judge said that she was not satisfied that any value could be attributed to that action. It was

submitted on behalf of the appellants that her Honour was in error for having omitted to provide any reasons for this conclusion.

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At trial, the respondent tendered a report from another valuer, Jonathan Grant Rowell, written on 17 October 2006. Mr Rowell

considered specifically the effect of the Supreme Court action on the value of the business. He said:

"I have assumed that the following outcomes from the proceedings are possible:

a)

The proceedings are discontinued by Momentum, with no future cash flow impact;

b)

The proceedings are settled prior to or during a trial, resulting in a net cash inflow to Momentum;

c)

The matter proceeds to trial and an award for damages is made in Momentum's favour, resulting in a net cash inflow; and

d)

The matter proceeds to trial and no award of damages to Momentum is made, resulting in a net cash outflow to Momentum arising from

the costs it incurred in taking the matter to trial.

Generally, I would expect a future cash inflow to have a positive impact on the valuation of a Business and likely increase its value.

In considering the quantum of the impact on the value of a Business one would have to determine with reasonable certainty both the

amount and timing of the cash inflow, as well as the timing of any cash outflows.

I have been provided with a copy of an Amended Statement of Claim filed on 20 February 2006 by Momentum and an affidavit of

Steven Prassas sworn on 22 December 2005. Both documents relate to the proceedings and set out the nature of the claim. However,

neither document quantifies Momentum's alleged loss and damage.

I am instructed that a quantification of Momentum's alleged loss and damage does not yet exist and that the proceedings are still at a

relatively early stage. Accordingly, it is not yet possible to determine with any degree of certainty their likely outcome.

In these circumstances I do not believe it is either prudent or possible, at this stage, to attribute any value to the proceedings, and

consequently, on this basis, I have concluded that they currently have no impact on either the value or the potential selling price of the

Business.

If a quantification of Momentum's loss and damage existed and there was a clear indication as to the reasonableness of that

quantification together with the likelihood of its success at trial, or otherwise, one would then need to consider the matter further."

Mr Rowell then referred to Australian Accounting Standard AASB 137, and to its treatment of contingent assets. A contingent asset

is defined as "a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-

occurrence of one or more uncertain future events, not wholly within the control of the entity". He considered that the Supreme Court

action fell into the category of a contingent asset. He pointed out that AASB 137 required that an entity "shall not recognise a contingent

asset". For a contingent asset to be recognised, AASB 137 "requires that it be virtually certain that an inflow of economic benefits will

arise". On the information available to him, Mr Rowell did not consider that Momentum was able to demonstrate, at that time, that an

inflow of future economic benefits would occur. He said that, in the case where a future inflow of economic benefits was probable, as

opposed to virtually certain, an entity was still not able to recognise the asset in its financial report, but should disclose in a note to the

accounts a brief description of the nature of the contingent asset and, where practicable, an estimate of its financial effect. Mr Rowell

concluded:

"In the current circumstances, and based on the information available to me, the likelihood of the success of Momentum's claim for

loss and damage is neither virtually certain or probable and as such it would not either recognise or disclose the existence of the

proceedings.

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Consequently, I do not consider that it is currently possible to attribute any value to the proceedings and accordingly, on this basis, the

proceedings have no impact on either the value or the potential selling price of the Business."

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About a month after Mr Rowell's report was prepared, on 14 November 2006, another valuer, John Henry Williams, prepared a report

for the appellants. The report quantified the loss sustained by Momentum as a result of the acts and omissions of Retemu upon which

Momentum sued in the Supreme Court. Mr Williams set out the assumptions upon which his report was based as follows:

"I am instructed to assume that subsequent to April 2004 the premises were in a state of disrepair due to the actions of Retemu and

further that action in order to rectify this was to be taken by Retemu. The rectification required scaffolding to be erected around the

premises and I am instructed that this scaffolding was left in place for an excessively long period, from April 2004 to December 2004.

I am further instructed that during and subsequent to this period the hotel has continued to experience structural problems which have

not been rectified and which I have been instructed to assume are the responsibility of Retemu. In order to prepare this calculation I

am required to assume that any reduction below expected sales subsequent to April 2004 is the result of the structural problems and

therefore represents loss as a result of the alleged actions of Retemu."

On those assumptions, Mr Williams proffered a range of between $1.19 million and $1.74 million as the loss suffered by Momentum. As

we read Mr Williams' report, it appears to be a substantially arithmetical comparison of the trading and profit history which Momentum

in fact experienced with the trading and profit history which it might reasonably have expected to experience in the absence of the

structural problems of the hotel premises to which we have referred. Mr Williams adverted to the possibility that the acts and omissions

of Retemu might have led to a reduction in the value of the hotel business. He said that, to calculate this figure, it would be necessary

to subtract the current value of the hotel business from the value which the business would have had in the absence of the conduct of

Retemu of which Momentum complained. He said that a valuation of this kind was not within his expertise, and did not take the matter

any further.

87

That was, apparently, the state of the evidence upon which her Honour was invited by the appellants to give a positive value to the

Supreme Court action. Clearly the appellants carried the evidentiary onus in relevant respects. Although Mr Rowell's reluctance to

place a value on that action was in part referable to the absence, at the time, of any estimate of Momentum's loss and damage, it was

also significantly influenced by the absence of any reasoned estimate of Momentum's prospects of succeeding in the action. Further,

Mr Rowell justified his approach by reference to the way that contingent assets were required to be dealt with under AASB 137.

88

Although the trial Judge did not elaborate upon her conclusion that no account should be taken of the value, if any, of the Supreme

Court action, the evidence to which we have referred leaves little scope for uncertainty in that respect. For our own part, we do not

believe that that evidence ought to have been regarded as sufficient to alter the valuation otherwise placed on the hotel business as at

the date of the trial. Further, in their submissions on appeal, the appellants contented themselves with submitting that the trial Judge

was wrong not to have given reasons for her conclusion, and in referring to Mr Williams' report. They presented no detailed or analytical

argument as to why her Honour was wrong in the conclusion that she reached, nor as to the accretion in value which her Honour should

have recognised as potentially arising from the Supreme Court action. Indeed, at the conclusion of the hearing of the appeal, the court

remains none the wiser as to the value which the appellants contend should have been given to the business by her Honour. In the

circumstances, we reject this ground of appeal.

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Disposition of the appeal

89

For the reasons given above, the only respect in which we propose to uphold the appeal relates to the members of the partnership

carrying on business at the East Village Hotel. We shall vary the first order (which is in the nature of a declaration) made by the trial

Judge on 9 October 2007 by substituting "the Second Respondent" for "the Respondents". Otherwise, the appeal will be dismissed.

90

The variation which we propose to make to the trial Judge's orders will not alter the substance of her Honour's disposition of the dispute

as between the respondent and Mr Scotts. That variation was resisted by Mr Scotts. He contended that Momentum was not a partner

only in support of his case that there never was a partnership. That case has not prevailed. In the circumstances, we can see no

basis for departing from what would be the usual course of ordering that the unsuccessful appellants pay the costs of the successful

respondent.

Orders | Top

Orders accordingly

Legal Representatives | Top

M Ashhurst SC and S Docker, for the appellants

NC Hutley SC and MBJ Lee, for the respondent

Solicitors for the appellants: Comino Prassas

Solicitors for the respondent: Sparke Helmore