KHOURY v FITZ-GIBBON SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL KIRBY P, MAHONEY and PRIESTLEY JJA 28 and 29 August 1989, 4 October 1989 [1989] NSWCA 124 PARTNERSHIP — dissolution — articles provide for valuation of goodwill — partnership dissolved after short interval parties request appointment of valuer — valuer appointed — later settlement deed — deed provides for one partner to take clients — valuer not informed of settlement terms — valuation made — valuation challenged — held: (1) On a true construction of the articles of partnership and settlement deed. It was not open to hold that the valuation could be attacked on the basis that it failed to offset the goodwill included in the clients taken by one partner in accordance with the settlement deed; (2) On its true construction the valuation was of the goodwill and not, as the appellant claimed, of the practice of the partnership; (3) On the true construction of the partnership deed there was not, as the appellant claimed, one single "sum" payable on dissolution such as to render the respondent's action for the valued goodwill premature; (4) Accordingly, appeal dismissed. VALUATION — goodwill — observations by Priestley JA as to the proper approach to valuing goodwill of a solicitor's practice. LEGAL PRACTITIONERS — solicitor — value of practice goodwill. WORDS AND PHRASES — "goodwill"; "sum". ORDERS The parties within 14 days to bring in short minutes of the orders which they ask the Court to make in the light of the dismissal of the appeal and the conclusion of the other proceedings between the parties. Such orders to provide that the appellant pay the respondent's costs of the appeal. Kirby P The facts are set out in the judgment of Priestley JA. as his Honour'srecapitulation of the arguments of the appellant demonstrates, the resolution of this appeal is not without difficulty. The source of the difficulty is the ambiguous language in which the parties expressed their 1984 and 1985 agreements. That difficulty is compounded by the unexplained fact that neither party saw fit to bring to the notice of the valuer, appointed at their request by the President of the Law Society, the terms of the 1985 deed. It is in these circumstances that the Court has been taken to attempts to give meaning to the documents in the events which actually occurred. I admit to having found a superficial attractiveness in the appellant's primary proposition, when first stated. This was that CL18(ii) of the 1984 deed was varied by the 1985 deed because, to hold otherwise, would result in the appellant's surrendering the respondent's clients to him and yet having to pay a full half of the value of the goodwill which ordinarily would include the value to the partnership practice of those clients. Stated so baldly, the argument has force. However, for the reasons given by Priestley JA, closer examination of the two deeds, and particularly CL3 of the first, stands in the way of accepting that submission. One can only speculate why neither party drew the settlement of 1985 to the attention of the appointed valuer. Each party was content to leave the valuer to proceed with the valuation of the goodwill of the practice as the 1984 deed provided and despite the supervening events. 2 UNREPORTED JUDGMENTS Again, although the matter is not beyond doubt, I agree with the reasons Priestley JA gives for dismissing the appellant's argument that the valuer's valuation was not in accord with his appointment. It is true that on a number of occasions the valuer refers to the valuation of legal practices. But I agree that there was no necessary incompatibility between the valuation of goodwill and securing opinions of relevant persons concerning the valuation of entire practices. Whether the circumstances in which a binding valuation may be set aside are limited to those stated by McHugh JA in Legal and General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 at 335 or apply to a wider range of circumstances than there stated does not need, in this appeal, to be determined. The basis upon which the valuer's valuation is attacked is not, ultimately, established. Accordingly, the valuation stands. I would dispose of the argument concerning the meaning of the word "sum" (in the singular) in CL18(e) of the 1984 deed as Priestley JA does. This is but the final example of the ambiguity of the document, apparently drawn by the parties themselves, which has caused their litigious misfortunes. The appellant's argument is not meritless. But the better view is that expressed by Priestley JA. These conclusions obviate consideration of the respondent's defensive argument based on conventional estoppel. I agree with the orders which Priestley JA has proposed. It may be hoped that they will bring to conclusion this unrewarding saga of litigation. Mahoney JA The issue before the court in this appeal is detailed in the judgment of Priestley JA which I have had the advantage of reading. In the present proceeding, Mr Fitz-Gibbon claims only payment of one-half of the amount specified by the valuer as the value of the goodwill of the partnership. That claim assumes that CL18 of the 1984 document operated to oblige Mr Khoury to pay to him one half of the value, as determined by the valuer, of the goodwill of the firm. Subject to the matters to which I shall refer, the argument has proceeded upon the basis that this is the effect of CL18 and that, in the events which have happened, that clause has been brought into operation. It might have been argued that the drafting of the deed, and in particular of CL18, was so defective that it did not so operate. Thus, CL18, according to its terms, operates only if "the other partner" there referred to determines the partnership "by notice in writing" or if the partnership is determined "by notice given under CL3 hereof", ie, by a notice by one partner. In fact, the partnership was determined by the 1985 deed. However, the arguments presented by Mr Simos QC and Mr Bennett QC have, in my opinion sensibly, proceeded on the basis that, as the result of CLS of the 1985 deed or otherwise, CL18 has been brought into operation so as, subject to the matters to which I shall refer, to entitle Mr Fitz-Gibbon to be paid an appropriate sum in respect of the goodwill of the partnership. As part of the background or context to which, as it has been suggested by Mr Simos QC, the court may have regard, the court has been informed that when the partnership was entered into 1984, Mr Fitz-Gibbon brought into the partnership (as it was described) some clients and in addition paid a substantial sum to acquire his share of the partnership assets. It has been suggested in argument that these background facts assist in understanding the operation of the two documents. It is not, I think, necessary to pursue the question whether and to what extent it is proper to take these matters into account. URJ KHOURY v FITZ-GIBBON (Mahoney JA) 3 The submissions made by Mr Simos QC on behalf of the appellant Mr Khoury are, in substance, three. First, it was submitted that the valuation made by the valuer did not bind the parties so as to create any obligation on Mr Khoury to pay for goodwill the amount specified in CL18(ii) because, to put the matter compendiously, the valuer purported to value, not the "goodwill if the partnership" within CL18 and CL18(ii), but the whole of the partnership. I do not think that this submission should be accepted. Mr Simos's arguments were directed essentially to the construction of the valuation and he referred, in support of his construction of it, to evidence which had been given before the trial judge. Whether it is open to him to call in aid such evidence need not be determined. In my opinion the valuation, upon its proper construction, discloses that what was valued was the goodwill of the partnership as referred to in CL13 and CL18(ii). I agree with what has been said by Priestley JA in this regard. Second, Mr Simos QC submitted that the valuer erred because he did not take into account the effect upon the goodwill or what was to be valued of the 1985 deed. In substance, the submission was that had it not been for the 1985 deed, the valuer was to value the goodwill upon the basis that all of the clients of the partnership were to be taken into account: because of the 1985 deed and in particular CL3 of it, what effectively passed to Mr Khoury was the clients of the partnership less those which Mr Fitz-Gibbon "should take out of the partnership practice". Therefore, the submission suggested, the valuer had valued the wrong thing and his valuation did not operate so as to give rise to a liability under CL18(ii). As each counsel, I think, accepted, the construction of the 1985 deed and its effect upon the rights of the parties is by no means clear. The parties, having set in train the valuation procedure prior to the 1985 deed, allowed the valuer to complete his valuation without informing him of the effect of the 1985 deed. The court has heard argument that, because of what they did, Mr Khoury is estopped from now contending that the valuer erred in proceeding upon the basis upon which he was invited and subsequently permitted to act. And various reasons, or speculations, were advanced to explain why the parties did not think it necessary to inform the valuer of the 1985 deed. Whatever be the reason why the parties acted as they did, the issue is whether, as the result of the 1985 deed, what the valuer was to value was, not the value of the goodwill as at the date of determination of the partnership, but that goodwill if and insofar as it was affected by Mr Fitz-Gibbon's taking out of the partnership the relevant clients. I do not think that such was the effect of the 1985 deed. With a consciousness that the construction of these deeds does not admit of dogmatism, I think that the parties intended CL3 of the 1985 deed to affect the operation of CL19 deed but not CL18(ii) of it. Stated in general terms, the effect of a termination of the partnership which brought CL18 into operation was relevantly twofold. First, one partner succeeded to, inter alia, the whole of the goodwill of the partnership and assumed the liability, in due course, to pay, inter alia, one half of the value of that goodwill. And, second, the other partner became bound by the restrictions contained in CL19. He was not entitled to accept work or business from any former client within two years of the dissolution and, if he did accept work or business, he was obliged to pay "an amount for goodwill" assessed as there provided. The effect of the 1985 deed and in particular CL3 of it, was that Mr Fitz-Gibbon was released from that obligation in relation to the clients there referred to. The 1985 document in terms provided for the variation 4 UNREPORTED JUDGMENTS of CL19 but provided for the confirmation of CL18 and that "such rights do not merge herein except insofar as varied above". I think that the parties intended, by what they did, that, in respect of the specified clients, Mr Fitz-Gibbon should be released from his obligations under CL19 but that the obligations accruing under CL18(ii) should remain. That, as I have said, appears to be the basis on which they allowed the valuation to proceed. Whether the parties did this because they thought that, had the 1985 deed not been executed, the relevant clients would have in any event done what the 1985 deed contemplated they would do, viz, seek out Mr Fitz-Gibbon and whether the amount involved under CL19 would have been so small as to constitute an appropriate basis for the compromise of the dispute embodied in the 1985 deed does not appear. The third submission was to the effect no amount was payable under CL18(ii) as such and that the only sum payable under CL18 was the aggregate "sum" of the amounts in pars (i), (ii), (iii) and (iv) of that clause. I understand the parties to accept that these provisions and the amounts payable under them have now been ascertained and that the parties are content to have the total sum dealt with at this stage. I agree with what is proposed by Priestley JA. Priestley JA This is an appeal from a decision of Yeldham J sitting in the Common Law Division. The plaintiff before him, the respondent in this Court, was Mr Fitz-Gibbon and the defendant, the appellant in this Court, was Mr Khoury. The two men had executed articles of partnership bearing date 13 April 1984 ("the 1984 deed") pursuant to which they began to carry on practice in partnership as solicitors. The 1984 deed contained the following provisions relevant to the appeal: "3. Any partner may terminate partnership on the last day of any calendar month occurring on or after the 31st day of July, 1985 by giving not less than three calendar months notice in writing to the other partner of his intention so to do and at the expiration of such notice the partnership shall determine accordingly...... 11. The capital of the firm shall be contributed by the partners equally. 12. The property of the firm shall comprise the lease of office premises, furniture, fixtures, fittings, library and office equipment described in the Schedules 'A' and 'B' attached to this agreement with the firm funds shall be the property of the firm unless the partners agree to the contrary. 13. In any case in which it may become necessary to value the goodwill of the business the same shall, unless otherwise agreed be referred to the decision of a person (to be nominated in the case of the partners differing by the President for the time being of the Law Society of New South Wales who shall act as an expert and not as Arbitrator and whose decision shall be final and binding on the parties). 18. If any partner: (a) Commits any malicious breach of any of the provisions of Clauses 6 and 7 hereof; (b) Become physically or mentally unfit to attend the partnership business for more than six calendar months; (c) Is convicted of any criminal offence, punishable by imprisonment; (d) Ceases to hold a practising certificate; or (e) Conducts himself in a manner prejudicial to the partnership, then the other partner may within three (3) calendar months after becoming aware thereof by notice in writing determine the partnership as to that partner. Upon termination of the partnership under this Clause or by notice given under Clause 3 hereof, the URJ KHOURY v FITZ-GIBBON (Priestley JA) 5 other partner shall succeed to the share of such partner undertake all the debts liabilities and obligations of the partnership and pay in equal shares to such partner or his representatives as the price of such share the following sum: i) The amount standing to the credit of such partner in the partnership books in respect of capital and profits as the same shall be ascertained after taking an account at the date of such determination. ii) The amount of the share of such partner in the value of the goodwill of the firm determined in the manner hereinbefore provided. iii) The amount of the share of such partner in the accounts rendered but unpaid at the date of the termination after making due allowance for bad debts provided that payment thereof shall only be made as and when the fees are received. iv) The fair value of the share of such partner in the accounts not rendered or fees accrued but uncharged at the date of the termination of the partnership in respect to work completed or partly performed after proper allowance for fees paid in advance up to that date: Provided that payment thereof may be made at any time within six calendar months after the receipt of the fees. The continuing partner may pay such sums in three equal instalments with the first payment from the date of the termination. 19. If either of the partners retires from the partnership after giving notice as provided in CL3 or if the other partner determines the partnership to that partner under CL18 or CL20 that partner shall not accept work or business from any former client of the firm within two (2) years after the dissolution, shall pay an amount for goodwill assessed at fifty per cent of the fees charged such client for work done in respect of the financial year preceding the date of the dissolution or for the succeeding financial year, whichever sum is the greater, and each partner shall on demand give the required information as to such fees to the other partner to enable such adjustments to be made." (In this Court the parties agreed that after "dissolution" where it first appears in CL19, words to the effect "and if he does, he" had by mistake been left out.) By notice dated 1 February 1985 the appellant purported to determine the partnership pursuant to CL18(e) of the 1984 deed, as and from 31 January 1985. By letter dated 6 February 1985 the appellant wrote to the President of the Law Society enclosing the 1984 deed and asking that a nomination be made pursuant to CL13. By letter dated 7 February 1985 the respondent also wrote to the President of the Law Society asking him to implement CL13. The President complied with their request. By a document entitled Appointment of Valuer dated 27 February 1985 the President recited the existence of the 1984 deed, CL13, and that it had become necessary to value the goodwill of the partnership business. The Appointment then nominated Mr Silvia to value the goodwill of the business, he to act as an expert and not as an arbitrator, his decision being final and binding on the parties. Copies of the Appointment were sent to both the appellant and the respondent. The Appointment did not make any reference to a deed made by the appellant and the respondent bearing date 14 February 1985 ("the 1985 deed") which had come into existence after the sending of the letters to the President and before the appointment of Mr Silvia. There is nothing in the appeal papers to indicate that either the President or Mr Silvia was ever made aware of the terms of the 1985 deed. This deed recited that the parties were desirous of terminating their partnership and that it was necessary to vary certain of the terms and conditions of termination. The deed's first clause takes the form it does because the appellant 6 UNREPORTED JUDGMENTS did not maintain that his notice of 1 February 1985 was effective.The 1985 deed's clauses, all relevant to the appeal, are as follows: "1. The partnership conducted under the name of Benjamin, Khoury and Fitz-Gibbon be dissolved from the Ist February, 1985. 2. That Article of the said Articles of Partnership be deleted. 3. The parties agree that Peter Gerald FitzGibbon should take out of the partnership practice clients brought into the practice or introduced to the practice since the inception of the partnership by Peter Gerald Fitz-Gibbon TOGETHER WITH all files, papers and documents associated with the said clients. To this extent, Article 19 of the said Articles of Partnership is varied and will have no force or affect, such clients to be identified by an asterisk against the name on the client list in Schedule 1. 4. The parties agree that all the capital items and items on Lease brought into the partnership practice (but excluding library) by Peter Gerald Fitz~Gibbon shall be taken out of the practice by the said Peter Gerald FitzGibbon on condition that the said Peter Gerald Fitz-Gibbon accepts liability for the ongoing lease payments on any of the said leased items. 5. The parties confirm Article 18 of the Articles of Partnership and such other rights as given in the partnership agreement and such rights do not merge herein except in so far as varied above. The parties may agree from time to time to vary matters referred to in Article 18." On 26 February 1985 the respondent commenced proceedings by summons in the Equity Division in which he sought, inter alia, an order that a receiver and manager be appointed to the partnership business. In these proceedings Powell J heard an application by the respondent for an interim receiver and manager which on | March 1985 he dismissed, standing over the balance of the summons to a later day. In the reasons he gave for his decision he considered the effect of the 1985 deed. He said: "Doing the best I might, I have come to the conclusion that the Deed ought to be regarded as recording an agreement between the parties, first, that the partnership be deemed to have been dissolved on Ist February 1985 pursuant to a notice of termination given by the Plaintiff, and, second, that, except to the extent to which they are varied by the Deed, the parties' rights, following such dissolution, are to be regulated by the Articles of Partnership, and, in particular, by Clauses 18, 19 of the Articles of Partnership. That this is the proper interpretation to be given to the Deed is, so it seems to me, suggested by the terms of CL3 of the Deed and by reference therein to Clause 19 of the Articles of Partnership. Although, as I have earlier recorded, Article 19 of the Articles of Partnership, as engrossed, does present its own problems, it is, I believe, tolerably plain that the intention of the draftsman was that an outgoing partner - that is, a partner who, pursuant to CL3 had given, or who, pursuant to CL18 had been given, a notice of termination - would be subject to a restraint of trade following termination. Since, therefore, CL3 of the Deed purports to relieve the Plaintiff, to an extent, from the restraint provided for in CL19 of the Articles of Partnership, it would seem to follow that the intention of the parties was that the Plaintiff was to be treated as an outgoing partner for the purposes of the Articles of Partnership. If this be so, then the reference, in CL5 of the Deed, to Article 18 of the Articles of Partnership, would seem to indicate that except to the extent to which they had been varied by the Deed, the future rights of the parties to the URJ KHOURY v FITZ-GIBBON (Priestley JA) 7 assets of the partnership, and their future financial relations, were to be regulated by CL18 of the Articles of Partnership, the Plaintiff being, for the purposes of that Clause, the outgoing partner. Although CL18 of the Articles of Partnership, too, presents its own problems, it seems to me to be passably clear that its purpose was to effect a compulsory sale to, and purchase by, the continuing partner of the outgoing partner's interest in the assets of the partnership in any case in which the partnership was determined by notice given pursuant to either CL3 or CL18." The proceedings by summons in the Equity Division went forward over a prolonged period, and by the time the proceedings from which this appeal is brought were being decided by Yeldham J (10 May 1988) the taking of accounts between the parties had not been completed. The proceedings before Yeldham J were begun in the Common Law Division by statement of claim on 9 August 1985. These proceedings followed the making by Mr Silvia of a valuation pursuant to his Appointment. His valuation of the goodwill of the partnership, dated 23 May 1985, was $233,171. The respondent's statement of claim alleged that he was entitled to half of this sum and claimed an order that the appellant pay to him $116,585.50. Yeldham J held that the respondent had made out his claim to this sum, together with interest. The first argument relied on by the appellant in the appeal was that the effect of CL3 in the 1985 deed was to vary CL18(2) of the 1984 deed so that the goodwill there referred to was the goodwill remaining after the respondent had, to use the terminology of CL3 of the 1985 deed, taken out of the partnership practice clients he had brought into the practice when it began or introduced to it after it began. This construction has some attractions. It would avoid what is at first glance an inexplicable result; if some such construction is not adopted, the 1985 deed will have brought about the result that the appellant by the 1985 deed was agreeing to the respondent's taking away from the practice part of its goodwill, with the appellant remaining bound to pay to the respondent half the value of the goodwill as it was before the respondent took away part of it. On the materials available to the Court in this appeal, there is no apparent reason why the appellant would make such a concession. However, further thought requires me to add that there is not sufficient material before the Court to justify the Court in drawing any conclusions about the motives of the appellant and the respondent in executing the 1985 deed. It could be, for example, that the appellant did not consider that the goodwill attached to the clients the respondent was to take away under CL3 of the 1985 deed was worth troubling about. Or, the position could be quite the contrary; the Court simply does not know. Another fact about which the Court has no material at all is why Mr Silvia was never told of the 1985 deed. One obvious possibility is that neither of the parties thought it was relevant to the valuation they had set in train. Neither party gave evidence. The Court does not know whether the last mentioned possibility has any basis in fact. In the complete absence of information about this matter it would be wrong to take it into account in the construction of the two deeds, even if it were otherwise permissible to do so. The Court is left in the position, it seems to me, that it must seek the meaning of the two deeds, read together, from their contents and such scanty material as is in evidence and was known to both parties when the deeds were made, as furnishes a contextual background. Construing the deeds in this way, I first note my agreement with Powell J's understanding of them, in the passage from his reasons I have set out; I also note, that as I understood their arguments neither party before us sought to argue to the 8 UNREPORTED JUDGMENTS contrary; proceeding from that basis, it seems to me to be significant in getting at the meaning of the deeds when read together that the 1985 deed begins by stating that the parties agree that their partnership be dissolved from 1 February 1985. Prima facie at least this would make 1 February 1985 the date of the determination spoken of in CL18(i) of the 1984 deed. That in turn would mean that the date as at which the valuation of goodwill was to be made, pursuant to the deeds read together, was 1 February 1985. (This incidentally appears to have been the date taken by the parties, because Mr Silvia's valuation, on p2, indicates that both the appellant and the respondent gave figures to Mr Silvia ($106,000 and $92,000 in round numbers) as being what each man contended were the cash receipts for the eight and a half months of operation of the practice from 14 April 1984 to 31 January 1985. In the absence of further information on this point however I do not think should take what was noted in the valuation into account.) CL3 of the 1985 deed fairly clearly seems to go on the footing that the respondent had not at the date when it was made yet taken out of the partnership practice what can be called for shortness' sake "his" clients. Thus, if CL18(ii) of the 1984 deed, in speaking of valuing the goodwill of the firm, is speaking of valuing it at the date of determination of the partnership spoken of in CL18(i), CL18(iii) and CL18(iv), then it seems clear enough that the goodwill to be valued was the goodwill as it stood at 1 February 1985, before being diminished by that part of the goodwill referable to the respondent's clients. The only way of escaping from this conclusion is by saying that CL3 of the 1985 deed had the effect of varying CL18(ii) of the 1984 deed by limiting the meaning of "goodwill of the firm" in that sub-clause to "goodwill of the firm at 1 February 1985 less the goodwill associated with the respondent's clients, " these being the clients he was to take with him as an outgoing partner pursuant to the agreement of 14 February 1985. The submission supporting this reduction in meaning of "goodwill" is based upon CLS of the 1985 deed by which the parties confirmed Article 18 of the 1984 deed except "as varied above". Neither CL1 nor CL2 of the 1985 deed could have any varying effect on CL18(ii). The need to construe the 1984 deed in the way contended for therefore depends on CL3 and CL4 of the 1985 deed. I cannot see anything in CL4 which fits in with the requirement of such a construction; the value of the capital items and items on lease is not known, and either their value, or the liabilities associated with the leased items may have been such as to be of little financial effect. There is no reason appearing from the deeds or the facts known to the Court within the limits I earlier mentioned which leads me to think that for the respondent to take away the items mentioned in CL4 either was or was not an advantage to the respondent or of any particular significance to the appellant. Further, of course, the relevance of the items in CL4 to the valuation of goodwill, as distinct from a valuation of the practice, is minimal. It follows that the whole weight of the construction contended for by the appellant depends on CL3. There are not any words in the clause which do the work of restricting the meaning of "goodwill" in CL18(ii) in the way contended for by the appellant. The restriction must therefore depend on the meaning to be found in CL3 which is not found directly in the words of the clause. In the end, therefore, it seems that the question comes down to this: should the Court conclude that CL18(ii) was varied in the way contended for by the appellant because not to do so will bring about the result that the appellant will have to pay the respondent the full half of the value of goodwill, a part of which the appellant agreed, by the 1985 deed, the respondent could take from the practice? I said earlier that this way of disposing of the matter has some URJ KHOURY v FITZ-GIBBON (Priestley JA) 9 attraction. However, it does not seem to me that the construction contended for has any foothold in the words of CL3 themselves. The appellant says, in effect, the parties must have meant to restrict the meaning of goodwill in the way contended for. The short answer seems to me: why must they? I earlier mentioned one possible reason why they may not. Put more generally, the appellant may have intended exactly what the deed seems to say, at the time he executed it, and later decided, for whatever reason, to take a different view. It may be legitimate to take into account that he has not sought rectification of the deed; however, I will assume it is not legitimate and put that thought out of mind. To me it seems that there simply is not enough in CL3 (and certainly there is nothing outside it in the contextual facts) making it sufficiently probable that the parties must have meant to bring about the result now contended for by the appellant, as to justify the Court in finding in the words the meaning contended for. I therefore do not accept the appellant's first argument. There was an alternative put to the first argument to the effect that CL3 of the 1985 deed was intended to deal finally with the division of goodwill and that CLS was intended to preserve only the subject matters in CL18(i), (iii) and (iv). I cannot see any basis for this submission, either in the words of the 1985 deed or the general context of the transaction, scanty though that context is. The second principal argument for the appellant was that Mr Silvia's valuation was not a valuation in accordance with his Appointment. The Appointment, in conformity with CL13 of the 1984 deed nominated Mr Silvia to decide the value of the goodwill of the partnership business. It was submitted that instead of doing this, Mr Silvia had valued the value of the practice, such a valuation including matters additional to goodwill. In putting the submission in this way, the appellant accepted the correctness of the following passage in the reasons of McHugh JA in Legal and General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314: "In my opinion the question whether a valuation is binding upon the parties depends in the first instance upon the terms of the contract, express or implied. This was pointed out by Sir David Cairns in the Court of Appeal in Baber v Kenwood Manufacturing co Ltd (at 181). A valuation obtained by fraud or collusion can usually be disregarded even in an action at law. For in a case of fraud or collusion the correct conclusion to be drawn will almost certainly be that there has been no valuation in accordance with the terms of the contract. As Sir David Cairns pointed out, it is easy to imply a term that a valuation must be made honestly and impartially. It will be difficult, and usually impossible, however, to imply a term that a valuation can be set aside on the ground of the valuer's mistake or because the valuation is unreasonable. The terms of the contract usually provide, as the lease in the present case does, that the decision of the valuer is 'final and binding on the parties'. By referring the decision to a valuer, the parties agree to accept his honest and impartial decision as to the appropriate amount of the valuation. They rely on his skill and judgment and agree to be bound by his decision. It is now settled that an action for damages for negligence will lie against a valuer to whom the parties have referred the question of valuation if one of them suffers loss as the result of his negligent valuation: Sutcliffe v Thakrah [1974] AC 727; Arenson v Arenson [1977] AC 405. But as between the parties to the main agreement the valuation can stand even though it was made negligently. While a mistake or error on the part of the valuer is not by itself sufficient to invalidate the decision or the certificate of valuation, nevertheless, the mistake may be of a kind which shows that the valuation is not 10 UNREPORTED JUDGMENTS in accordance with the contract. A mistake concerning the identity of the premises to be valued could seldom, if ever, comply with the terms of the agreement between the parties. But a valuation which is the result of the mistaken application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case the critical question must always be: Was the valuation made in accordance with the terms of a contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into account or has failed to take into account matters which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract." (at 335-336) Although the foregoing opinion comes from a dissenting judgment, it was not the basis of McHugh JA's disagreement in the case, which proceeded as has the present one, on the footing that it was by a test such as that described by McHugh JA that the Court should make its decision. The appellant's contention that the valuation was not in accordance with CL13 of the 1984 deed was based on an examination of the terms of the valuation itself. There is frequent reference in the valuation both to goodwill and methods of valuing legal practices. The turnover of a practice is relevant to the valuation of both subject matters. The method adopted in the valuation was to establish the practice's turnover and then to arrive at the figure of sixty cents in the dollar of the turnover as being the appropriate measure of goodwill. The appellant's strongest point was that at one stage in describing the way in which he reached his conclusion Mr Silvia referred to his having talked with various persons expert in valuing practices and to their shared opinion that "the purchase price of practices with turnover of less than $500,000" (as was the position in the present case) "usually ranged between 50c and 70c in the $1 based on annual turnover". With this observation in the forefront of his argument, the appellant then went through the valuation pointing to various other statements which, it was submitted, showed that although Mr Silvia was purporting to value goodwill, in fact what he had done was to arrive at a figure for the value of the practice. After considering the various aspects of the valuation upon which the appellant relied to support this submission, I do not think that it is made out. The valuation begins by stating five factors which the valuer took into account in arriving at what he referred to as his "valuation of the goodwill of the partnership". (For the appellant, it was not disputed that these five factors were relevant to a valuation of the partnership goodwill. It was pointed out however, correctly I think, that each of the five factors was also relevant to a valuation of the practice.) The valuer then described the nature of the practice and referred to information obtained from people involved "in the valuation and/or sale of legal practices". He set out a number of matters that he had been told were relevant to such valuations and/or sales. This discussion all took place under the heading "Nature of practice", which was the first of the five factors that he said he took into consideration in his valuation. The valuation proceeded by discussing the second factor "Value of work in progress and debtors and Provision for Non Collectable Debts", and then moved on to discuss the third factor "The Turnover of the Practice". The fourth factor listed, The Income of the Practice" was not separately discussed, no doubt being subsumed under the heading "The Turnover of the Practice". Then the fifth factor Cost of Running the Practice" was briefly discussed. To this point in his valuation it seems to me that Mr Silvia had shown URJ KHOURY v FITZ-GIBBON (Priestley JA) 11 a full appreciation of the distinction between the value of the goodwill of the practice and the value of the practice itself. Indeed, it is difficult to believe that a partner in a firm of chartered accountants, chosen by the President of the Law Society as an expert valuer, would not be aware of the distinction, although it is of course possible that he might not attach very much importance to it in a situation where the valuation of goodwill would yield a figure not very different from that of the practice itself. Mr Silvia stated his conclusion as follows: *Conclusion After considering the nature of the partnership, the value of outstanding debtors and work in progress, the profitability and turnover of the practice, I have decided that a figure of 60c in $1.00 is the appropriate measure of goodwill. This falls into the mid range of goodwill that was quoted to be by Mr Len New, Miss Anne Rankin and Mr Peter Mitchell from their experiences in valuing legal practices. Mr Fitz-Gibbons argued that the value of goodwill should be 100c in $1.00 as he had entered the partnership on that valuation basis. He further argued that due to the low bad debts position of the partnership and the consequent profitability of the partnership that a 100c in $1.00 valuation was appropriate. After considering this argument, I have rejected it as my approach to the valuation has been on the basis of what a willing buyer would be prepared to pay for the goodwill of the partnership. Details of practices for sale that were given to me by the experts that I consulted are attached. In selecting this figure of 60c in $1.00 consideration was given to the fact that the practice encompassed a number of areas of law. One other matter which influenced the calculation of goodwill was the aspect of over-recovery in respect of some litigation matters which the practice has undertaken." The appellant points to the sentence in which Mr Silvia says that his 60c in the $1.00 figure falls into the mid range of goodwill that was quoted by the experts in valuing legal practices. The appellant correctly says that the word "goodwill" is misused in that sentence, because what the experts were telling Mr Silvia was the mid range for valuing legal practices, not the goodwill component in the value of legal practices. Based on this, the appellant contends that Mr Silvia was treating the value of goodwill as identical with the value of a legal practice, and that being so, since he used a 60c in the $1.00 obviously derived from the information he received about legal practices, he in fact valued the legal practice rather than its goodwill. I do not think that the valuation shows that was what Mr Silvia did. Throughout the valuation the references to goodwill show that Mr Silvia was fully aware that that was what he was appointed to value. There was nothing inconsistent in approaching the valuation of goodwill in getting the views of persons about market methods of calculating prices for entire practices. so long as a valuer is aware of the distinction between the value of the goodwill of a practice and the value of the whole of what a purchaser will receive upon buying the practice, he can get useful information for the valuation of the one by reference to what is happening in the market about the other. On my reading of Mr Silvia's valuation that is what he was doing. In proceeding on the footing that the goodwill of a practice would be related to its yearly turnover, it seems to me he was quite correct. The fact that he took work in progress into account seems to me to be justified in the circumstances of this case because of the period during which the practice had been operating and the fact that there was no work in progress on hand when the practice began. In order to try and form a proper opinion about the number of clients the practice had and the fees they generated 12 UNREPORTED JUDGMENTS during the short life of the partnership, it seems to me it was necessary to take these matters into account. After arriving at the turnover, Mr Silvia then applied 60c in the $1.00 to it. Prima facie, this indicates a valuation of the goodwill rather than the whole practice. The only way in which he could have been valuing the whole practice by this method, would be if in using the 60c figure he was allowing a component for the fixtures, fittings and any other components beyond turnover. The only indication that I can see, that shows any possibility of his having done this is in the second sentence in his Conclusion, which I have referred to previously. At best from the appellant's point of view however, it seems to me that this slip on his part shows no more than that he made a mistake of a mechanical kind in his valuation of the goodwill of the practice. It does not show that he was valuing the wrong subject matter. The mistake he made seems to me to fall into the area of mistake discussed in Legal and General Life which is not sufficient to invalidate the expert valuer's conclusion. It therefore seems to me that the valuation was within the terms of CL13 of the 1984 deed, and this ground of appeal also fails. The appellant's third argument was based on the terms of CL18(e) of the 1984 deed. It was submitted that the word "sum" appearing at the end of the opening para of CL18(e) showed that what was to happen pursuant to the provision was that each of the figures referred to in sub-pars(i) to (iv) were to be calculated, and when that was done, the sum of the four figures was to become payable to the outgoing partner. It was also submitted that not all of sub-pars (i) to (iv) would yield a positive result, so that, it was said, it was clear that no amount should be paid under any of the individual sub-paragraphs until a final nett figure was known. The clearest reason for thinking that this submission too must fail, stems from the proviso to sub-par (iv). The whole context of CL18 seems to me to show that that proviso is one qualifying sub-par (iv), and not, as the appellant contended, all four sub-paragraphs. Sub-paragraph (iv) seems to me quite clearly to contemplate that payments under it may be made independently of payments under the preceding three sub-paragraphs, and further, that there may be three separate payment in discharging the obligation under sub-par (iv). If this is right, it shows that the word "sum" at the conclusion of the first paragraph of the clause cannot bear the meaning which the appellant wishes to place on it. The clause obliges the remaining partner to pay the sum of the four sub-paragraphs to the outgoing partner, but not by one payment. If I am right in reaching this conclusion, and the conclusion I have already expressed about sub-par (iv), then there seems to me to be no reason why the amounts calculated in respect of each of the sub-paragraphs should not become payable as soon as they are calculated, whether that be simultaneously or separately. It was argued that this might produce the result, if the account taken pursuant to sub-par (i) resulted in a debit against the outgoing partner, that if he had previously been paid the amount arrived at under sub-par (iii), he would have to repay the difference to the remaining partner; and it was said that this could not have been the intention of the parties. It may very well have been the intention of the parties if neither of them contemplated that the account pursuant to sub-par (i) was likely to produce a debit. This of course is another of the areas in which the Court has no information. The language seems to me to be reasonably clear, to the effect I have mentioned. I do not think the appellant's arguments to the contrary succeed. URJ KHOURY v FITZ-GIBBON (Priestley JA) 13 These conclusions lead me to the opinion that the appeal should be dismissed. The respondent, by notice of contention, had raised a further argument in support of dismissing the appeal, this argument being based on conventional estoppel. Because, in my view, each of the appellant's arguments fails, there is no need to consider the conventional estoppel argument. The Court was told that outstanding matters under the proceedings in the Equity Division had been finalised, in a way that should be reflected in the final orders in this appeal. Rather than try and translate what the Court was told into an immediate order, it seems preferable to me for these reasons to first be published, so that the parties may then bring in, within fourteen days, short minutes of the orders they ask the Court to make in light of the dismissal of the appeal and the conclusion of the other proceedings. The orders should provide for the appellant to pay the costs of this appeal. Counsel for the Appellant: T Simos QC and Mr Moore Solicitors for the Appellant: Barkell and Peacock Counsel for the Respondent: DMJ Bennett QC and RJ Colquhoun Solicitors for the Respondent: Pullinger Berecry and Co