Supreme Court New South Wales Medium Neutral Citation: Lewis v Martinez and the persons named in the Schedule (No 5) [2024] NSWSC 359 Hearing dates: 25-27 March 2024 Date of orders: 8 April 2024 Decision date: 08 April 2024 Jurisdiction: Equity Before: Elkaim AJ Decision: 1. A declaration that the expulsion of the plaintiff by the resolution put to the defendants on 7 November 2020 was invalid by reason of breaches of the Partnership Deed. 2. A declaration that as between the plaintiff and the defendants the partnership was dissolved with effect from 10 February 2021, being the date of the filing of the statement of claim. 3. An order that the plaintiff's damages arising from the breaches of the Partnership Deed, if any, are to be assessed. 4. An order that the defendants are to pay the plaintiff's costs of the hearing in respect of liability, such costs, subject to any consent agreement between the parties, are not to be payable until the conclusion of the proceedings. 5. All other costs are reserved. 6. A direction that all parties provide a representative of the first defendant with a copy of this decision and the decision made on 26 March 2024 (Lewis v Martinez and the persons named in the Schedule (No 4) [2024] NSWSC 308). Catchwords: PARTNERSHIP AND JOINT VENTURES – rights and duties between parties – expulsion – interpretation of agreement – whether resolution for expulsion was valid – where partnership deed required seven days written notice and 80% of whole partnership votes – where variation resolution came after expulsion resolution – held that expulsion was not valid by reason of breaches of partnership deed PARTNERSHIP AND JOINT VENTURES – rights and duties between parties – fiduciary relationship – good faith obligations – whether expulsion power was exercised for an improper purpose – held that this purpose was not established PARTNERSHIP AND JOINT VENTURES – dissolution – dissolution by court of partnership between plaintiff and defendants – dissolution for just and equitable reasons Legislation Cited: Evidence Act 1995 (NSW), ss 63, 67 Partnership Act 1890 (UK), s 35(f) Partnership Act 1958 (Vic), ss 23, 39(f) Cases Cited: Battle v Bundagen Co-operative Ltd (No 2) [2011] NSWCA 38 Blisset v Daniel (1853) 10 Hare 493; 68 ER 1022 Cappe v Tsung [2018] NSWCA 86 Green v Howell [1910] 1 Ch 495 Hanlon v Brookes (1997) 15 ACLC 1626 Jones v Dunkel (1959) 101 CLR 298 Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361 Mullins v Laughton [2003] Ch 250 Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1 Russell v Russell (1880) 14 Ch D 471 Ryder & 1 Ors v Frohlich & 1 Ors [2004] NSWCA 472 Variety Video v Jones [2001] NSWSC 5 Texts Cited: R I'Anson Banks, Lindley & Banks on Partnership (21st ed, 2022, Thomson Reuters) Category: Principal judgment Parties: Gregory William Francis Lewis (Plaintiff) Juan Martinez and the persons named in the Schedule (Defendants) Representation: Counsel: Mr F Douglas KC (Plaintiff) Mr J Carter (Plaintiff) Mr J Douglas (Plaintiff) Mr D Williams SC (Defendant) Mr A Barnett (Defendant) Solicitors: Bridges Lawyers (Plaintiff) Gilchrist Connell (Defendant) File Number(s): 2021/38379 Publication restriction: Yes JUDGMENT 1. HWL Ebsworth is a law firm. It is made up of partners and staff. The partners are either Capital Partners or fixed draw partners (FDPs). It is generally more lucrative to be a Capital Partner than an FDP. FDPs are sometimes called salaried partners. 2. The partnership is governed by a Partnership Deed (the Deed) dated 20 May 2016. Each Partner is expressed to be a practice trust represented by a trustee of the trust. The parties conducted the matter on the basis that the partners were the individual trustees. I will continue that course. 3. The Deed (cl 27) states that it is to be governed by Victorian law. The Partnership Act 1958 (Vic) allows the rights and duties of partners to be varied by the consent of all partners (s 23). The Deed achieves this purpose and therefore fundamentally governs the relationship between the parties. 4. The plaintiff became a Capital Partner on 1 October 2014, presumably under an earlier version of the Deed. He says attempts were made to expel him as a Capital Partner, perhaps twice, in August and November 2020 respectively. 5. If there was an attempt in August 2020, it failed, and the plaintiff continued to be treated as a Capital Partner. This case is fundamentally about the asserted expulsion in November 2020. 6. The plaintiff says the asserted expulsion was contrary to the Deed and was therefore void or ineffective. Accordingly, he either remained a Capital Partner entitled to the pecuniary benefits of that status or he is otherwise entitled to significant damages. 7. The defendants say that he was properly expelled in November 2020. A partner who is expelled ceases to have any connection to the partnership. 8. On 10 February 2023 Slattery J, by consent made the following order: "Pursuant to UCPR Rule 28.2 the assessment of the quantum of any relief to be determined separately from and subsequent to the hearing of all other issues in the proceedings." 1. The effect of this order is that it has fallen to me to decide liability (meaning, was the expulsion valid) and the appropriate relief but not the quantum of any such relief. 2. The defendants are the partners in the law firm. Mr Martinez is the first named defendant. The rest of the partners form the balance of the defendants. Unfortunately, Mr Martinez died on 18 March 2024. For reasons I gave separately I permitted the matter to proceed (Lewis v Martinez and the persons named in the Schedule (No 4) [2024] NSWSC 308). 3. Mr Martinez would have played a much greater part in the proceedings than simply being the firm's representative. This is because he was, at all relevant times, the managing partner and participated in most of the discussions and email correspondence with the plaintiff. The defendants rely on an affidavit of Mr Martinez affirmed on 28 July 2022. On 20 March 2020, a notice was served on the plaintiff pursuant to s 67 of the Evidence Act 1995 (NSW) that the defendants would rely upon the affidavit pursuant to s 63 of this Act. 4. At the hearing, no objection was taken to the reading of Mr Martinez's affidavit. The Deed 1. The defendants frequently emphasised the nature of the partnership created by the Deed. It was not one in which the partners entered through a contribution of goodwill and exited with a payment-out of goodwill. To the contrary, this was an 'easy in, easy out' style of partnership which permitted persons to join without a financial contribution but also did not give them any capital sum when they left the partnership. 2. Thus cl 19 states: "19.1 No Capital Partner is entitled to receive any payment or compensation for any goodwill associated with the Practice or any increase in value of the Partnership assets on a Capital Partner's death or retirement when compared with their value at the date of that Capital Partner's admission or during that Capital Partner's term as a Capital Partner. 19.2 The Capital Partners acknowledge that their only entitlement as Capital Partners is as provided in this deed up to the date that they cease to be a Capital Partner." 1. For purposes of this litigation, I think the following are the important contents of the Deed: 2. Clause 1 contains definitions. An Extraordinary Resolution "means a resolution of the Capital Partners passed by not less than 80% of the Capital Partners voting in a manner as stipulated by the Rules from time to time." 3. A Fixed Draw Partner "means partners appointed by the Managing Partner who do not contribute capital and are ineligible to vote upon partnership resolutions and have a fixed draw of profits as determined by the Managing Partner." 4. The Managing Partner at all relevant times was the first defendant. 5. Under clause 7.1 the net profits are to be shared in accordance with the calibration points of each partner. Clause 7.2 says that the calibration points "are approved by the Capital Partners from time to time and are as set out in the Rules." 6. Clause 9.1 says that unless otherwise stated, all decisions are to be made by a majority of the Capital Partners. 7. Clause 15 relates to the "Conduct of Capital Partners". Under cl 15.1, as relevant here, each partner must: "(b) use their best endeavours to carry on the Practice for the benefit of the Partnership; … (e) be just and faithful to the other Capital Partners in all matters relating to the affairs of the Partnership; (f) at all times and also on every reasonable request give the other Capital Partners full and correct information and truthful explanations of all matters relating to the affairs of the Partnership and give all possible assistance to them in carrying on the Practice to their mutual advantage; … (j) acknowledge the obligation of utmost good faith to one another." 1. Clause 15.3 provides for an indemnity by a Capital Partner who breaches any of the obligations in cl 15.1 in favour of the other Capital Partners. 2. Clause 17 dictates the consequences of voluntary retirement or the death or permanent disability of a Capital Partner. A Capital Partner who dies or becomes permanently disabled is treated as a partner who has retired voluntarily. 3. I have already observed that, under cl 19.1, no payment of goodwill arises on the death or retirement of a Capital Partner. 4. Clause 20 deals with the expulsion of Capital Partners. I think it necessary to set out the entire clause: "20. Expulsion of Capital Partners 20.1 Extraordinary Resolution The Capital Partners may by Extraordinary Resolution expel any other Capital Partner. 20.2 Acknowledgement The Capital Partners acknowledge and agree that: (a) no reason need be given for expulsion of a Capital Partner by Extraordinary Resolution; (b) the intention of the agreement embodied in this deed is to ensure that the Capital Partners shall be at liberty to expel any Capital Partner on the basis that the expelled Capital Partner has no goodwill in the Practice as stipulated in clause 19; (c) the intention of this deed is to afford flexibility for the Capital Partners to expel any Capital Partner by Extraordinary Resolution for any reason they deem appropriate; and (d) as and from the date of expulsion of a Capital Partner, that expelled Capital Partner's Nominated Person shall have no other right or entitlement pursuant to this deed except those entitlements which have accrued to the date of expulsion. 20.3 Consequence of expulsion Clause 18 applies to a Capital Partner expelled pursuant to clause 20.1 save and except as provided below: (a) the entitlement to any undrawn net profits and WIP to which that Capital Partner is entitled to be paid having regard to the methodology set out in clause 18.3 shall be paid on the following basis: (i) within 30 days of expulsion of any Capital Partner the National Finance Manager shall determine an estimate of that Capital Partner's entitlement to any undrawn net profits and WIP and pay to him/her one half of such estimated entitlement; and (ii) thereafter within a further 60 days the National Finance Manager shall verify the total entitlement of that Capital Partner and the outstanding balance due to him/her shall be paid immediately; (b) all provisions of clause 18.1 apply where a Capital Partner is expelled. For avoidance of doubt, clause 20.3(a) above is subject to clause 20.6. 20.4 Notices (a) All notices, documents, discussions and matters relating to the expulsion or attempt to expel the offending Capital Partner must be kept confidential by all Capital Partners which confidentiality will remain a continuing obligation notwithstanding the termination of this deed. (b) At least seven days written notice must be given to all Capital Partners including the Capital Partner proposed to be expelled. 20.5 Variation The terms of this clause and all procedures referred to in this clause may only be varied by Extraordinary Resolution of the Capital Partners. 20.6 Withholding and set off Monies In the event of expulsion of a Capital Partner, if: (a) a liability arises under clause 15.3 as a result of a breach under clause 15.1 or 15.2 by that Capital Partner or its Nominated Person; or (b) that Capital Partner or its Nominated Person has failed to comply with its obligations under this deed and that failure has, as determined by the Managing Partner (acting reasonably) at the date of expulsion, caused or is likely to cause loss or damage to the Practice, the Capital Partner's entitlement to its current account may be reduced by an amount equivalent to the loss and damage suffered or incurred by the Practice by reason of the non-compliance and the Managing Partner shall be at liberty to withhold from, that Capital Partner's current account a sum that, in the Managing Partner's opinion (acting reasonably), represents the loss and damage suffered by, or likely to be suffered by the Practice by reason of the non-compliance under this deed pending resolution or determination of any dispute in relation to whether there was any non-compliance under this deed causing loss and damage and if so the quantum of the loss and damage suffered or incurred by reason of the non-compliance under this deed." The alleged expulsion on 7 and 8 November 2020 1. I have decided that the expulsion on 7 and 8 November 2020 was invalid because of breaches of the Deed, in turn derived from my construction of the Deed. 2. The events of 7 and 8 November 2020 are obviously a culmination of previous events, in particular those that had occurred in August 2020 when the plaintiff asserts there had been an earlier attempt at his expulsion. I do not think it necessary at this stage to deal in any detail with what occurred in August 2020. This is because: 1. The defendants do not say that the plaintiff was expelled in August 2020. 2. The defendants do not allege that the expulsion in November 2020 was caused by any misconduct of the plaintiff. To quote learned senior counsel for the defendants (other than the first defendant): "It must be quite clear I'm not suggesting that Mr Lewis was secretly dismissed for misconduct, I'm not suggesting that at all. Rather what I am putting to your Honour's consideration or will be putting to your Honour for consideration is that when one looks at the history of what occurred in connection with this expulsion, it negates the proposition advanced at the heart of the plaintiff's case that he was expelled for an illicit purpose." 1. It will be necessary to return to August 2020 when dealing with the plaintiff's allegations concerning equitable relief. 2. Returning to the construction issue, the starting point is the meaning and effect of an expulsion. Being expelled as a Capital Partner is not a demotion to an FDR or an employee. It is a complete, forced, and absolute divorce from the firm. It is the most serious and severe action which the partnership can take against one of its members. In Battle v Bundagen Co-operative Ltd (No 2) [2011] NSWCA 38 Hodgson JA at [49] described the expulsion of a member of a cooperative as "a very serious step". Accordingly, the expulsion power should not be "construed loosely." Sackville AJA referred to the expulsion as a "drastic step" at [92]. 3. The parties differed on the degree of scrutiny they said should be applied to the construction of the expulsion clause. 4. I have referred above to Battle where it was said that an expulsion clause should not be considered loosely. The plaintiff submitted that the method of construction should go further to the extent that there should be a strict construction of the expulsion provisions. 5. I was referred to the decision of Meagher J in Cappe v Tsung [2018] NSWCA 86, at [25]: "The character of these rights and duties justifies a reluctance to find that the parties intended to authorise so substantial a variation. General wording in an express power is insufficient to authorise what would otherwise constitute a breach of fiduciary duty by an agent: Tobin v Broadbent (1947) 75 CLR 378 at 401 (Dixon J). And even specific powers to deal with the property of a minority interest-holder are strictly construed: see Blisset v Daniel (1853) 10 Hare 493 at 506; 68 ER 1022 at 1028 (Page Wood V-C) (as to powers of expulsion between partners); Gambotto v WCP Ltd (1995) 182 CLR 432 at 446 (Mason CJ, Brennan, Deane and Dawson JJ), 452 (McHugh J) (as to powers to appropriate shares in a company)." 1. The defendants did not accept the applicability of Cappe and in particular the reliance, for the present case, on Blisset v Daniel (1853) 10 Hare 493; 68 ER 1022. The defendants said I should prefer the interpretation of Callaway JA in the Victorian Court of Appeal as stated in Hanlon v Brookes (1997) 15 ACLC 1626 at 1631: "Such expressions must always be understood in the context of the case in which they were uttered, and of course it is not the law that, provided the expelled partner's legal advisers can think of a construction of the partnership agreement that is favourable to him or her, the case is decided in their client's favour. What is meant is, for example, that, if a 70 per cent majority is required, a 69 per cent majority will not do; that, if 14 days' notice in writing is required, 13 days' notice in writing or 15 days' oral notice is insufficient; and that the requirements are usually mandatory in character and not directory. The last point does not entail that they cannot be waived, nor is waiver excluded by the possibility that seven days' notice may have provided a "cooling off" period. It means that a purported expulsion without compliance or waiver is invalid. The language of Wallace, P. in Bond v Hale at p. 206 is to be preferred, namely that "a measure of strictness" is in order in the construction of an expulsion clause." 1. The approach in Hanlon was said to be endorsed by Austin J in Variety Video v Jones [2001] NSWSC 5 at [79]: "The significance of s25 in the present context is that it evidences a legislative policy that no majority of partners can expel any partner unless a power to do so has been expressed between them, and consequently 'a measure of strictness in the construction of an expulsion clause is in order' (Bond v Hale, at 206 per Wallace P). It seems to me that observations by Page Wood V-C in Blisset v Daniel (1853) 10 Hare 493; 68 ER 1022, at 505 (1027), to the effect that the construction must be 'of the strictest character' and that such a clause 'will be construed in a court of equity strictly against the partners exercising the power of expulsion' state the matter too highly. In saying so I respectfully adopt the reasoning of Wallace P in Bond v Hale and Callaway JA in Hanlon v Brookes at 1631-2." 1. The defendants' submission ultimately suggested this approach: "Accordingly, in this case there should be "a measure of strictness" of construction in relation to expulsion, rather than a construction that "must be strictly construed" as submitted by the plaintiff." 1. I think that the same result is produced whatever the measure of strictness that is applied. Approaching the matter, as put forward by Austin J in Variety Video, namely by giving effect to "the intention of the parties to the agreement" I should take into account that the Deed reflects an intention of the parties that, firstly, the resolution must be extraordinary, which of itself carries a meaning of 'out of the ordinary', and secondly, that expulsion is a very serious step to be taken. 2. Notably, of the 13 clauses in the Deed that require an extraordinary resolution to achieve a particular result, it is only the expulsion clause (cl 20) that dictates seven days' notice. 3. The expulsion resolution was emailed to the Capital Partners on 7 November 2020 at 4:38pm. It stated: "Dear All, Pursuant to the authority provided by our Partnership Deed dated 20 May 2016 I put the following email resolution to the Capital Partnership - Resolution: Pursuant to Clause 20 of the Partnership Deed dated 20 May 2016, that the Lewis HWL Practice Trust be expelled with immediate effect from the Partnership. That all time limits or other technical requirements are hereby waived and/or abridged. I have applied the voting buttons. The vote will conclude at 5 pm on 8 November 2020. Regards Juan Martinez Managing Partner." 1. The reference to the "voting buttons" is to the capacity of the recipients of the email to lodge their vote by the pushing of a button on a computer. Despite the use of the plural, only one button was required to be pressed to record a vote in respect of both resolutions (the expulsion resolution and the time variation resolution). 2. It is also important to observe that the variation resolution comes after the expulsion resolution. 3. There is no dispute that the resolution could be decided by email and by the use of buttons. But this resolution, says the plaintiff, and I agree, was invalid because: 1. The variation of the seven days' notice should have preceded the expulsion resolution, perhaps to the extent of a separate resolution on a separate day. 2. The two resolutions could not be voted upon by a single button which did not allow for one to be considered separate to the other. 1. The variation power is in cl 20.5 which is set out above, but which I will repeat: "The terms of this clause and all procedures referred to in this clause may only be varied by Extraordinary Resolution of the Capital Partners." 1. The defendants submitted that: 1. There was no vice or harm in the use of a single button for both resolutions because a responding voter had the option to press the 'No' button if he disagreed with either resolution. 2. The variation wording used in the resolution was in common use in the partnership. 1. In relation to the first point, the response ignores the necessity for the variation resolution to be passed before the expulsion resolution. The latter could only be considered after the waiver had been approved. At the very least the waiver resolution could have been decided by the pressing of a button, followed by a separate button in respect of the expulsion resolution. 2. The fact that the Capital Partners had the option to press the 'No' button is beside the point. If they were of the view that expulsion was appropriate it is unlikely they would have considered, separately, the waiver resolution. But cl 20.5 expressly calls on the Capital Partners to have seven days' notice. Conceivably, during this period they might be open to persuasion or deeper thought about their intended vote of expulsion. 3. The possibility of further consideration ties in with the submission made by the plaintiff that he had been denied an opportunity to be heard. In dealing with the expulsion resolution the Capital Partners were being asked to decide if the plaintiff should or should not be expelled. The plaintiff said this required them to judge his circumstances, as explained in Russell v Russell (1880) 14 Ch D 471 at 479. 4. On the assumption that the partners were 'judging' the plaintiff, the following principle was said to be applicable, derived from Green v Howell [1910] 1 Ch 495 at 504: "There is also a further principle, not in any way confined to partnership transactions, which is this, that wherever it is left to a judicial tribunal, strictly so called, or a quasi-judicial tribunal, to determine whether a person is or is not properly excluded, common justice requires that explanation and notice shall be given to the person said to be amenable to the jurisdiction and that he should have an opportunity of defending himself." 1. I do not think it is necessary to go so far as to say that the partners were exercising a judicial or quasi-judicial function. I think it is sufficient that the Deed provided for seven days' notice for consideration of an expulsion resolution, whether to facilitate personal, inter-partner discussion or hearing from the partner to be expelled. The seven days' notice was inserted for a purpose. 2. It entirely undermines the seriousness and consequences of the expulsion resolution to 'bundle it up' with the variation resolution, let alone to deal with the variation resolution as a second resolution, that is, after dealing with the expulsion resolution. 3. As to the second point, I was referred to three other examples of the use of the same wording. None of them concerned an expulsion resolution. Even if there had been many more than three other examples, that fact would not validate what in my view is a plainly invalid process. There was no suggestion of any estoppel arising from the previous use of similar wording. 4. The conclusion I have reached therefore is that the expulsion of the plaintiff on 8 November 2020 was invalid. This is enough to entitle the plaintiff to a declaration to this effect. 5. There is another construction issue that I think assists the plaintiff. 6. The respective parties read the meaning of an extraordinary resolution, which I have set out above, in different ways. I will illustrate the differences by the insertion of semi-colons into the definition. 7. The plaintiff read the definition in this way: "Extraordinary Resolution means a resolution of the Capital Partners passed by not less than 80% of the Capital Partners; voting in a manner as stipulated by the Rules from time to time." 1. The defendants read the definition as follows: "Extraordinary Resolution means a resolution of the Capital Partners passed by not less than 80% of the Capital Partners voting; in a manner as stipulated by the Rules from time to time." 1. There were 181 Capital Partners as at 7 November 2020. 86 voted 'Yes' before voting closed at 5pm on 8 November 2020. 20 voted 'Yes' after 5pm. 74 Capital Partners abstained, by which I understand means they did not press either the 'Yes' or 'No' button. There was no abstention button. One voted 'No.' If consideration was only given to the 87, or perhaps 107 (including the 20 late voters) who actually voted, then the 80% was achieved. 2. If the 80% had to be a percentage of the 181 Capital Partners, then an affirmative vote of either 87 or 107 did not achieve the 80%. 3. If the same degree of scrutiny is applied to the meaning of an extraordinary resolution as I have applied to the giving of notice issue, and in particular bearing in mind the severity of an expulsion, then I think I am bound to find that the 80% must be 80% of the whole of the partnership. 4. Neither 86 votes or 107 votes amounts to 80% of 181. On my interpretation of an extraordinary resolution, the resolutions were not carried. It also does not matter whether or not the abstaining votes were counted as 'No' or were simply to be ignored. 5. My conclusion about the 80% is a second reason for a declaration that the expulsion resolution was invalid. Other reasons for relief requires more detail of the facts 1. It is first of all necessary to go back some months before the November 2020 resolution. In July 2020, the first defendant suggested the corporatisation of the partnership through an Initial Public Offering (an IPO). At that time, the plaintiff had 16 calibration points. The plaintiff wrote to the first defendant on 2 August 2020 requesting an increase in his points. 2. On 5 August 2020, a "Capital Partner Information Pack", describing the proposed IPO, was distributed to the Capital Partners. The summary suggested an enterprise value of $1.2 billion which, if raised, would be eventually distributed according to the respective partner's calibration points. Part of the process, because the partners would become salaried employees of the new corporation, was that they would receive a fixed salary of about $260,000 per annum for a period of two years. They would also have the benefit of dividends on shareholdings that they might hold in the new company. 3. Also on 5 August 2020, the first defendant emailed the plaintiff telling him, somewhat contrary to his request for more calibration points, that it was "not proposed" and that he "be a participant in the IPO sell down process." As a salve to the expected disappointment that the first defendant expected on the plaintiff's part, he added: "Having said that, as a result, you will be eligible for short-term and long-term incentives as well as the employee share plans which sell down partners won't be during the escrow period." 1. Obviously taken aback by the email from the first defendant, the plaintiff emailed the first defendant the following day asking him to reconsider his decision. He pointed out that his calibration points had been halved from 30 down to 15 in March 2019, but then increased to 16 in August 2019. The plaintiff again requested an increase in his points. 2. Undeterred and unmoved by the plaintiff's pleas, the first defendant sent the plaintiff an email on 8 August 2020 confirming that the plaintiff would not be participating in the IPO and stating that "the structure of your rem will be negotiated and discussed." 3. On 11 August 2020 resolutions were passed by the Capital Partners which included the removal of the plaintiff's calibration points and the designation of the plaintiff as an FDP. These resolutions are the origin of the plaintiff's original assertion of a first attempt to expel him from the partnership. 4. The plaintiff was understandably concerned about the change in his status and made that clear to practice heads within the Sydney office. On 13 August 2020 the first defendant wrote to the plaintiff asking him if he was going to "continue agitation of the IPO decision". He continued: "If it is I will need to take a different approach to that which I intended which was to engage in a sensible discussion around a path forward." 1. On the same day, the first defendant gave the plaintiff, but no other Capital Partner, seven days' notice of an intention to table a resolution to expel the plaintiff from the partnership. Some discussions between the plaintiff and the first defendant followed, in which it was agreed that the first defendant would give the plaintiff 72 hours' notice of any intention to propose a resolution for the plaintiff's expulsion. 2. In September and October 2020, the plaintiff received his usual Capital Partner remuneration, confirming the ineffectiveness, or perhaps abandonment, of the resolutions that had been passed on 10 August 2020. 3. On 18 October 2020, a modified IPO proposal was distributed. This time the enterprise value was expressed to have a "floor of $450m". Suffice to say that an IPO was never made. The idea was abandoned in late November 2020. 4. The next day, 19 October 2020, the plaintiff emailed the first defendant pointing out that although he remained a Capital Partner he was not included in the proposed calibrations and share allocations that would apply to the new IPO. The plaintiff said he was reserving his rights if he was not included. 5. The next major event was the first defendant putting forward the motion, on 7 November 2020, for the expulsion of the plaintiff. This is the resolution I have found to be invalid. 6. As noted above the resolution was sent to the Capital Partners at 4.38pm on 7 November 2020. It was bare of any reason for the expulsion. At 5.24pm the first defendant sent another email, this time stating: "For context of the resolution just put (which I did not want in the formal email with the proposed resolution). Greg did not accept the FDP designation given to him in the original restructure vote put by Mitch and passed by the partnership. He has been threatening legal action. I have attempted on a without prejudice basis to compromise and reach a solution however this has been unsuccessful and this is now the only option so we can move forward." 1. The plaintiff submitted that there was an obligation for reasons to be given for the resolution. The defendant responded that cl 20.2 allows an expulsion without any reason being given, but in any event the email at 5:24pm does contain reasons. 2. The first defendant, in his affidavit, does not say why the reasons could not have been included in the 4.38pm email nor why he decided to send the second email an hour later. If there was a good reason for not including the reasons in the formal resolution, the 'reasons' email could have followed within minutes, if not seconds. 3. A further factor that must be added to the relevant history for the purposes of understanding the plaintiff's complaints is the movement of calibration points amongst some other Capital Partners, essentially with the result of a substantial increase to some of the partners. The change in calibrations that was to attend the proposed August 2020 IPO shows some fairly substantial increases, but in particular to the first defendant. This is the source of the plaintiff asserting that the move to expel him had the improper purpose to "exclude him from participating in the IPO process and to enable other Capital Partners (and, in particular, (the first defendant)) to benefit from his expulsion." Exercise of the expulsion power for an improper purpose 1. The improper purpose, submitted by the plaintiff, was "to exclude him from participating in the IPO process and to enable other Capital Partners (and, in particular, Mr Martinez) to benefit from his expulsion." The plaintiff's, "rights and benefits would be shared by other Capital Partners, and most beneficially by Mr Martinez." 2. The plaintiff submitted that Blissett and Russell both supported his case. He submitted that there was a duty "of utmost good faith owed between partners, and that the expulsion of a partner for the purpose of expropriating a partner's interest in the partnership violates that duty." 3. The defendants did not dispute the existence of fiduciary and good faith obligations between partners. Clause 15.1(j) acknowledges as much. Rather the defendants said the important question was the scope of the duty. It was submitted that because the interests of the partners, besides the partner to be expelled, would obviously be affected by the expulsion, there was therefore no room for the application of a fiduciary duty when considering an expulsion. 4. The defendants submitted that "at a time when considering expulsion of a partner, that mutual trust and confidence will not exist." The defendants relied upon the decision of Bryson J in Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1, at page 17: "One way of conceiving of the limit of their fiduciary obligations is to conceive of it as the limit of the activities as to which the parties have mutual trust and confidence in each other. The enjoyment of the rights of ownership is not within this area." 1. The defendants submitted: "Therefore if a fiduciary disloyally looks to his or her own interests, he or she will not have breached a fiduciary duty if the conduct is outside the scope of the fiduciary obligation." 1. I think there are two difficulties with applying Noranda to the present facts: 1. Clause 15(e) says the partners must be "just and faithful to the other Capital Partners in all matters relating to the affairs of the Partnership." An expulsion is an affair of the partnership; and 2. removing a partner's rights and expelling that partner from the partnership goes well beyond "the enjoyment of the rights of ownership." As I have said above, more than once, the expulsion of a partner is a matter so grave that it demands the attention, and due consideration, of those deciding upon the expulsion. 1. Whichever way one looks at the fiduciary duty, be it on the broad basis suggested by the plaintiff, or as confined in the manner put forward by the defendants, it is fundamental to any conclusion that there must first be identified the existence of an improper purpose. In this case, that must be to find that the reason behind the expulsion was to misappropriate the plaintiff's calibration points for the benefit of the defendants, and primarily the first defendant. 2. The difficulty with making such a finding is to find the evidence that supports it. The plaintiff submitted that the absence of explanation from the first defendant, or any other partner, and the extent of the increase in the first defendant's calibration points, raise an inference of an improper purpose. The plaintiff actually went further than relying upon a Jones v Dunkel (1959) 101 CLR 298 sanctioned inference. The plaintiff submitted that the first defendant's: "failure, as a party-witness, to give evidence on that subject goes beyond a mere inference that such evidence would not assist the defendants' case; rather, his failure to do so reflected an admission on the basis that he had withheld evidence because he "was conscious that success in the litigation would be rendered impossible or less likely if the material withheld were revealed." (Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361 at [64])." 1. It goes without saying, that taking away the plaintiff's 16 points, but not increasing the overall number of points, will give other partners a greater share of the enterprise value. However, notwithstanding the increase in the first defendant's calibration points I do not think an inference can be drawn that the increase is a product of the decrease in the plaintiff's points. Nor do I think that, in the manner described in Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361, that I could conclude that the first defendant deliberately withheld any explanation for the expulsion. It is to be recalled that the defendants relied heavily on the terms of the Deed, and in particular cl 20.2 which says that no reason need be given for an expulsion. I do not think I can make the leap from the first defendant's silence on the point to an admission of wrongdoing. It is equally feasible that the contents of his affidavit were dictated by his perception, albeit wrongly, of the validity of the partnership's processes pursuant to the Deed. 2. There is no doubt that the first defendant's proposed calibration points rose significantly, in fact by 34.1%. There were increases to other Capital Partners but none to the extent of the defendant, the highest other increase being about 14%. 3. It would be wrong however to suggest that by taking away the plaintiff's 16 points, the first defendant, and perhaps others, were able to increase their own points. Mathematically, there not being a limited number of available points, the suggestion would be absurd. This point is illustrated by the following example: For the August 2020 enterprise value of $1.2billion the first defendant's extra 34.1 points were worth $6,521,115.54. The plaintiff's 16 points were worth $3,059,760.96 which if taken from him could be a partial source of the first defendant's gain. However, the 'bonus' could equally have come from the three Capital Partners who lost 6, 5 and 5 points respectively ($1,147,410.36 + $956,175.30 + $956,175.30 = $3,059,760.96). Corresponding results would be obtained when lower enterprise value $550m was suggested. 1. In addition, a decrease of 16 calibration points does not translate as an increase in the value of those points to the first defendant or any other Capital Partner. 2. The plaintiff submitted that the August resolution which took points away from the plaintiff and allocated "disproportionate weighted Calibration Points" to the first defendant necessarily indicated the improper purpose. I disagree. 3. MFI 1, which is an aide memoir, provides a useful summary of the 'ups and downs' of the individual partners calibration points. A particular partner lost 19 points, another lost 13 and yet another lost 18. A number of other partners lost smaller numbers of points. It is equally conceivable that these lost points were just as valuable to the partners that lost them as the plaintiff's 16 points were to him. It is equally feasible, as seen in the above example, that those partners whose points increased derived their benefit not from the plaintiff's points but from other partners who lost points. 4. If the plaintiff was the only person to have lost points and the first defendant was the only person to have gained points I would have little difficulty in drawing the inference of an improper purpose. But in the scheme of multiple increases and decreases I do not think I can make a finding of improper purpose directed at the plaintiff's points. 5. Accordingly, while I think a fiduciary duty was unquestionably owed between the Capital Partners in considering an expulsion resolution and that the deliberate diminution of a particular partner's points to enhance those of another partner would be an improper purpose, I am not satisfied that that purpose has been established. The failure to give reasons for the expulsion 1. As has already been seen the 4:38pm email gave no reasons for the expulsion, but some reasons were given at 5.24pm. I do not know how many persons voted between the emails. 2. The first question however is whether it was necessary to give reasons at all, in particular in the light of cl 20.2(a): "no reason need be given for expulsion of a Capital Partner by Extraordinary Resolution" 1. I think the answer lies not in any expression of a fiduciary duty but in cl 2.3(b) of the Rules under the Deed: "The proposed email resolution shall include: (a) … (b) the basis for the resolution with any relevant information; (c) … ." 1. The first defendant does not say in his affidavit why he sent the second email at 5:24pm. Perhaps he remembered that he needed to give reasons, or perhaps he was prompted by a colleague. I do not think it matters. He did not give reasons with the resolution, and he should have. However, the resolutions are in any event invalid, so I do not see any relevance to the failure to include the reasons in the first email. 2. Suffice to say, if it is necessary to make a finding on the point, the 4.38pm email was in breach of the Rules set by the Deed. Denial of an opportunity to be heard 1. In my view, and I have already made the point, the requirement for seven days' notice of the resolution is an expression of the gravity of an expulsion resolution and in turn an indication that time should be allowed for the resolution to be considered. 2. The combining of the resolution to expel and the resolution to vary the rules, whatever other vices existed, was itself a denial of the opportunity to be heard. But once again I think this allegation falls into the same category as the failure to give reasons. 3. I think the failure is an expression of a breach of the terms of the Deed and not necessarily a product of a breach of any obligation in equity. Summary on liability 1. The effect of all of the above is that I am satisfied that the defendants were in breach of the Deed. All of the defendants are jointly and severally liable because, no matter how much was the involvement of the first defendant, he was acting as the managing partner and at all times on behalf of the partnership. 2. I should add that no submission was made on the part of the defendants that there should be any distinction, in orders or declarations made, as between the first defendant and the rest of the defendants. The defendants accepted that if I found the expulsion was invalid, that a declaration to that effect should be made against all of the defendants. 3. The plaintiff is therefore entitled to a declaration that his expulsion was invalid. Relief 1. The plaintiff seeks declarations in respect of both the August and November 2020 resolutions. Whatever may be said of the former, they were effectively ignored, the plaintiff being treated, and remunerated, as a Capital Partner until the 7 November 2020 resolution. I do not see any need to make any declaration in respect of the August resolutions. 2. I have already said that I will make a declaration that the 7 November 2020 resolution was invalid. 3. The next issue relates to whether or not there was a repudiation of the partnership agreement by the defendants. 4. Paragraph 91 of the amended statement of claim (filed on 27 March 2024) states: "By their breaches of the Partnership Act, Partnership Deed, duty of good faith and fiduciary obligations, the Capital Partners have evinced an intention no longer to be bound by the Partnership Deed insofar as Lewis is concerned and have thereby repudiated the obligations to Lewis under the Partnership Deed, which repudiation Lewis hereby accepts." 1. Notwithstanding the assertion of repudiation, the plaintiff's written submissions state that the plaintiff remains a Capital Partner. In closing submissions senior counsel for the plaintiff said: "The concept of repudiation simply has no applicability to partnership agreements. The position taken into the pleadings by the parties cannot bind this Court as to a question of law, and that the statements in the pleadings as to repudiation do therefore simply have no legal consequence, unless of course your repudiation is part of the law, in which event they do. … Mr Lewis' position is that the prevailing authority is to the effect that the repudiation does not constitute a technical dissolution of the partnership but that the circumstances that precipitated the repudiation such that this Court should dissolve the partnership as between Mr Lewis and the defendants on a just and equitable ground." 1. There seems little doubt that, on the authorities, repudiation has no part to play in the dissolution of a partnership, at least a partnership where there are multiple partners. 2. In Lindley & Banks on Partnership (R I'Anson Banks, Lindley & Banks on Partnership (21st ed, 2022, Thomson Reuters) at [10-275]) the current author states: "… it is now clear that the doctrine of repudiation has little or no application to partnerships, and it must follow that the service of an invalid expulsion notice can never amount to a repudiatory breach of a partnership agreement, save perhaps in the case of a two partner firm." 1. However, the plaintiff properly drew my attention to the decision of McColl JA in Ryder & 1 Ors v Frohlich & 1 Ors [2004] NSWCA 472, a case involving a two person partnership. Her Honour's comments about repudiation were accepted here by the parties to be obiter. 2. Similar to Ryder, the plaintiff, as described above, and defendants do not assert that the partnership continues to exist with the plaintiff continuing, until now, to be a Capital Partner. I think the practicality of the situation was summed up in this discussion I had with Mr Williams SC: "HIS HONOUR: Mr Williams, what I'm trying to finesse out of you is you having pointed out the way the matter is pleaded, that if I'm against you on the validity of the expulsion, there really is no issue about repudiation. WILLIAMS: Precisely. One can get there in a number of ways, but that's one way of getting there. What we do oppose is any effort in light of the pleading for the plaintiff to now contend that he is a partner, because we would have done something about that, had that been the contention." 1. As far as the dissolution of the partnership is concerned, Neuberger J , in Mullins v Laughton [2003] Ch 250 at [104], having found that a dissolution was not "possible on the grounds of an accepted repudiatory breach" went on to refer to the dissolution power he had under the Partnership Act 1890 (UK) and specifically to s 35(f) which "empowers the court to dissolve a partnership on the grounds that it is just and equitable to do so." Section 39(f) of the Partnership Act 1958 (Vic) is in the same terms and I think gives me the power to make the dissolution declaration sought by the plaintiff. 2. The dissolution is of course only as between the plaintiff on the one side and the defendants on the other side, and has no effect on the partnership as between the defendants themselves. This is consistent with the plaintiff's submission that the: "Court should dissolve the partnership as between Mr Lewis and the defendants on a just and equitable ground." 1. I did not understand the defendants to submit that a dissolution of this type was not appropriate or possible. I think the way to proceed is by way of a declaration in similar terms to that proposed in [2] of the relief claimed in the most recent statement of claim. This would place the dissolution as at the date of the filing of the original statement of claim. 2. In relation to specific damages the plaintiffs sought 'buy-out' orders both in respect of "the interest of Lewis in the goodwill, debtors, work in progress, cash at bank and other property of HWL Ebsworth" and also in respect of the plaintiff's "share of the net profits of the Partnership to the date on which payment is made to buy out his interest in the partnership property" based on the calibration points that the plaintiff had before the August resolution or ought to have had. 3. The defendants opposed the making of a buy-out order, and in fact, any definitive damages order. Senior counsel said: "One thing that we contend is that this stage of the proceedings isn't about identifying heads of damages and how much or how little or whether they are applicable or not, this is about whether an entitlement to declarations exist, whether an entitlement to buyout orders exist, whether entitlement to damages, if any, or compensation, if any, exists. This isn't the time for your Honour to consider whether there's been a loss of reputation, for example, that's a matter of an assessment. This isn't the time for your Honour to do anything in our respectful submission other than say, in light of these findings, there'll be an order for equitable compensation, if any, or damages, if any, which is then the subject of the assessment process." 1. It is also relevant at this stage to return to the basis upon which I found that the plaintiff's expulsion was invalid, namely that there were breaches of the contractual provisions contained within the Deed. With this in mind I think the alternative order sought by the plaintiff, at [5] in the relief claimed in the amended statement of claim, but with some slight amendment, is appropriate. This order will keep alive the plaintiff's contentions as to the nature and heads of the damages which he seeks. 2. In relation to costs, the defendants said they should be reserved. The plaintiff seemed to accept the logicality of the suggestion but also pointed out that even if the plaintiff were to receive no damages it had always been open to the defendants to accept the invalidity of the expulsion. 3. I think the plaintiff is correct. Although the oral evidence was limited, the hearing extended over almost 3 days and had obviously been the subject of significant preparation, both as to the preparation of the court books and the applicable legal argument. 4. I think the plaintiff should receive the costs of the liability hearing with all other costs to be reserved. I will also ask the parties if they consider that an order for mediation is appropriate. Orders 1. I make the following declarations and orders: 1. A declaration that the expulsion of the plaintiff by the resolution put to the defendants on 7 November 2020 was invalid by reason of breaches of the Partnership Deed. 2. A declaration that as between the plaintiff and the defendants the partnership was dissolved with effect from 10 February 2021, being the date of the filing of the statement of claim. 3. An order that the plaintiff's damages arising from the breaches of the Partnership Deed, if any, are to be assessed. 4. An order that the defendants are to pay the plaintiff's costs of the hearing in respect of liability, such costs, subject to any consent agreement between the parties, are not to be payable until the conclusion of the proceedings. 5. All other costs are reserved. 6. A direction that all parties provide a representative of the first defendant with a copy of this decision and the decision made on 26 March 2024 (Lewis v Martinez and the persons named in the Schedule (No 4) [2024] NSWSC 308). ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 April 2024