New South Wales Supreme Court CITATION : HEARD & ANOR v. KELL & ORS [2001] NSWSC 455 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 1325/01 HEARING DATE(S) : 23.05.01 JUDGMENT DATE : 5 June 2001 PARTIES : Malcolm John Heard and John Erin McEwan - Plaintiffs Peter George Kell, Roger John Downs, David Wilfrid, Burrows, Paul Alexander Kean, David Laurence Potts, Peter Chodat and Paul Dante Magagnino - Defendants JUDGMENT OF : Bryson J at 1 COUNSEL : P.J. McEwen S.C. & P.A. Fury - Plaintiffs J.S. Wheelhouse - Defendants SOLICITORS : Heard McEwan Lawyers Kells The Lawyers CATCHWORDS : PARTNERSHIP - dissolution - written agreement for dissolution provided for split advertisement in priority position in Yellow Pages to which the old partnership was entitled under practices of publisher - agreement "Subject to Yellow Pages approval" split advertisement published in 2000 YP and publisher's approval withheld for 2001 YP - on the construction of the dissolution agreement, the majority were entitled to the priority and the minority were not entitled to share in the absence of publisher's approval - decision on terms of dissolution agreement. CASES CITED : _ DECISION : Give judgment for the defendants with costs. IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BRYSON J. TUESDAY 5 JUNE 2001 1325/01 MALCOLM HEARD & ANOR v. PETER GEORGE KELL & ORS JUDGMENT 1 HIS HONOUR: The parties are nine former members of the solicitors' firm "Kell Heard McEwan" (KHM) which carried on practice at Wollongong and in surrounding areas for many years until they dissolved the firm on 21 May 1999. Thereafter the plaintiffs Mr Heard and Mr McEwan carried on practice also in Wollongong and surrounding areas under the firm name "Heard McEwan" (HM) and Mr Kell and six others carried on practice as "Kells the Lawyers" (KTL). The parties made two agreements dated 30 April 1999, entitled "Heads of Agreement (Finance)" and "Heads of Agreement (Procedure)". Heads of Agreement (Finance) set out the financial considerations and method of payment for the acquisition in cl.1 of Heads of Agreement (Procedure); it provided for collection and distribution of work-in-progress over 18 months and for a large amount as an assured minimum to be paid to HM; and also provided for a cash payment of a different large amount to HM on 21 May 1999 which was the completion date. Heads of Agreement (Procedure) established the terms and conditions for which the money and consideration in the Finance agreement were given. Stated in a broad way, the assets including goodwill and the business organisation passed to KTL on completion, the payment in the Finance Agreement was to be made to HM, and practical arrangements were made for all to cease to use the old business names, to allocate premises, staff, client files, business files and records, accounts, and other consequential provisions. 2 One of the assets of KHM was the commercial opportunity represented by dealings which had taken place since about 1984 with the publishers of the Yellow Pages telephone directory for Kiama, Shell Harbour and Wollongong. The identity of the publisher had changed but the publisher's practices and organisation had been continuous. In 1999 and since the publisher has been Pacific Access Pty Ltd (PA). At the section of the Yellow Pages with entries for solicitors KHM published a display advertisement in each annual issue from about 1984 onwards, under an oral arrangement originally made with Mr Duncan Coulton on behalf of the then publisher. Under this arrangement the KHM advertisement was the second advertisement appearing in the display section, and this was a very prominent position. Mr Coulton gave an assurance that if KHM took out a display advertisement it would have the second position and the KHM display advertisement would be on the first page of the Solicitors section or would be otherwise prominent. The second ranking was always maintained. The parties value this ranking highly and regard it as adding greatly to the effectiveness of the advertisement. It is difficult to suppose that KHM had a contractual right to maintain this position which it could enforce against the publishers of the Yellow Pages, but in fact the publishers were always willing, until the dissolution, to maintain the arrangement and the prominence of the advertisement, and contractual arrangements to lodge a display advertisement were made each year for the next annual edition of the Yellow Pages. It is difficult to define this commercial opportunity and it is not strictly accurate to speak of it as property or a chose in action, but the commercial opportunity should be regarded in equity as a partnership asset of KHM for purposes affecting the relationship of former partners among themselves; none of them could appropriate it and exclude the others from the opportunity while they were partners or on dissolution. I call this asset the advertising priority. 3 PA maintains rules called "Yellow Pages - Advertising Rules" which are incorporated in its contractual relations with advertisers by printed Clause 8 on the back of its Contracts. The Advertising Rules 1999 applied to contracts for the 2001 Yellow Pages. The Rules deal with priority of the kind which KHM's display advertisements received. The passages in the Rules which PA has relied on are these: Group Advertising If a partnership has been dissolved and immediately reconstituted upon the departure of one or more partners, priority may be retained if the reconstituted partnership consists of at least a majority of the previous partners if this is considered fair and reasonable by Pacific Access Pty Ltd in the circumstances. 4 Clause 1 of Heads of Agreement (Procedure) was in these terms: The Offer 1.1 The offer is for all assets and goodwill of the firm Kell Heard McEwan . This includes: 1.2 all furniture & equipment 1.3 all files & safe custody documents 1.4 all intellectual property, including logo 1.5 all contractual rights. 5 The defendants' counsel contended and I accept that when the offer in cl.1 was accepted by all concerned signing the two agreements and completing them, the effect as among the partners was that the advertising priority became an asset of the defendants and their firm KTL. 6 Clause 12 of Heads of Agreement (Procedure) is in these terms: 12. Yellow Pages. 12.1 Subject to Yellow Pages approval the existing ad to be split vertically. The left side (vertical) to be held by the firm. Cost of the ad to be shared equally. 7 Clause 12.1 is not limited in its operation to a particular time and it must be taken from its terms and the earlier circumstances which identify what was referred to as "the existing ad" that cl.12.1 was intended to have effect for as long as the opportunity to publish a display advertisement in the priority position was available. 8 In 1999 Mr Heard told Mr Brad Adams, who then was PA's representative, that the partnership was to be dissolved, that there would be a new firm HM and the remaining partners would continue practice together, that there was an agreement to sharing the current display advertising position and that they had agreed to split it down the middle. Mr Adams said that PA was able to publish a split advertisement; he said "Well, we can, but no separate billing is possible. We can go along with the shared advertisement provided the old Kell Heard McEwan identification number remains and only one source is responsible for payment. So long as the Kell Heard McEwan identification number exists, space in the directory will be jointly available to you." 9 Whether or not what Mr Adams said was correct when he said it, it was in conflict with Advertising Rules 1999 which PA adopted at some time in 1999. Those rules meant that it was not in accordance with PA's policy and practices to act as Mr Adams said or to publish the split advertisement. 10 Late in 1999 arrangements were made to publish a split advertisement with the ranking in the second position, and the split advertisement appeared in the priority position in the Year 2000 Yellow Pages. The space available was divided equally and vertically, and an advertisement for KTL appeared on the left and an advertisement for HM appeared on the right. The KHM identification number was used when lodging the advertisement for publication. The advertisement was paid for out of an account managed by KTL which in fact continued a bank account which had been conducted by KHM before the dissolution, and HM and KTL bore the expense equally. PA's invoices for advertising for the Year 2000 directory were sent to KTL and paid out of that account. 11 Unfortunately the part of the split advertisement which referred to KTL gave a wrong telephone number as a result of some mistake by PA. This led KTL to make a large claim for damages against PA, and to conduct communications about this claim for some months through the Year 2000, concluding on 18 December 2000 with an arrangement under which KTL were to receive some value, not payment of money but credit for advertising. These negotiations were a complicating factor in relations between KTL and PA and in arrangements for publishing a display advertisement under the advertising priority in the Year 2001 edition of the Yellow Pages. 12 On 20 October 2000 Mr Kean, who is a partner in KTL and is one of the defendants, and was responsible in KTL for arranging advertising with the assistance of managers and staff, was told something by Mr Coulton which indicated that PA regarded or might regard lodgment of the advertisement on behalf of more than one organisation as important or as a difficulty. Mr Kean prepared art work and finalised KTL's requirements for advertising in the 2001 Yellow Pages during November 2000; this included other entries and advertising material as well as the display advertisement for the priority position. 13 On 17 November 2000 KTL wrote a letter, signed by Mr Kean but prepared by a manager under his control, to Mr Coulton of PA. Mr Coulton had a very long connection with advertising in the priority position and other advertising for KHM. This letter confirmed bookings which had been spoken of at the meeting on 20 October for three Yellow Pages advertisements, including one "six unit display ad (formerly the split ad of Kell Heard McEwan located on page 789." After dealing shortly with the contents of the advertisement in a way which referred only to information about KTL the letter said: On 21 May 1999 we changed our name from Kell Heard McEwan to Kells The Lawyers. At the same time Malcolm Heard and John McEwan retired from the partnership to start their new business Heard McEwan Lawyers. Although there was a change in our name and a change in the ownership of the business, the business in all other respects continued. There is a detailed agreement for the transfer of ownership and we enclose a copy of clause 1 of that agreement which sets out what the remaining partners bought from the retiring partners. We are restrained by the agreement from providing you with a copy of the entire document but it is not relevant to you in any event. We trust this satisfies your query about ownership of the continuing business. 14 In a conversation between Mr Kean and Mr Russell Medhurst, who worked at Melbourne in Product Services for PA, on 6 December 2000 Mr Medhurst said "I don't know how you have managed to have a shared advertisement. That is against our rules and it won't be happening again." He also said "If your firm has been dissolved and there are two new businesses, neither of you will have the priority positioning. You are two new customers" and "This is all covered in the Yellow Pages advertising rules. You will need to get a copy of these from the legal department." 15 On 8 December 2000 Mr Kean wrote a much longer letter to Mr Medhurst, again putting history of the firm KHM and changes in the firm, with a summary of some provision of the Heads of Agreement and the terms of cl.12.1. Then Mr Kean set out the history of the lodgment of the split advertisement, and discussed the question whether KTL was a new customer or a continuing customer. This letter was a long and carefully argued claim for KTL to be treated as a continuing customer and to be accorded the priority position for a display advertisement. 16 Mr Kell received communications in response from Ms Geraldine Doyle, the solicitor in-house for PA. There was a telephone discussion on 5 January after which she sent him excerpts from PA's advertising rules. On 5 January she also sent a very strong letter to Mr McEwan one of the plaintiffs and stated that the shared agreement would not be permitted in future in the Yellow Pages. She said "I also confirmed that Pacific Access Pty Ltd had agreed that Kells is entitled to the priority position in the Wollongong Yellow Pages Directory formerly occupied by Kell Heard McEwan." She went on to state the basis for this decision in terms of provisions of PA's 1999 Advertising Rules about advertising which contains grouping together of businesses not under the same ownership not being acceptable. She also said that the Year 2000 split advertisement did not comply with the advertising rules and should not have been published and "As stated above, Pacific Access will not publish the advertisement in future directories because it does not comply with the advertising rules." She also said that Pacific Access was entitled to give priority position to KTL, and referred to the provision on page 95 of the Advertising Rules which relates to retaining priority where a partnership is dissolved and immediately reconstituted by a majority of previous partners. The firmness of PA's position is emphasised by later combative correspondence from Ms Doyle. 17 In the circumstances PA clearly did not approve of a split advertisement in the Year 2001 Yellow Pages, the condition "Subject to Yellow Pages approval" in cl.12.1 was not fulfilled, it was not possible for a split advertisement to be published and the obligations in cl.12.1 were defeated by failure of the condition. The Year 2001 Yellow Pages have been published without a split advertisement, and with a KTL advertisement in the priority position. Unless there is some large change in PA's advertising rules or in PA's approach to business there does not seem to be much prospect that its approval will ever be forthcoming, or that there could be much to be gained by attempting to obtain it. I cannot give a decision to deal with future contingencies. In any event PA is not a party to the litigation and I have not been asked to make any order binding them and I could not compel PA to publish a split advertisement. 18 What fall for decision now are claims by HM that it is entitled against KTL to damages under the common law for breach of contract or to equitable remedies. This requires consideration of some further conduct of KTL and particularly Mr Kean which is the subject of complaint by HM. Mr Heard sought the attention of KTL to making arrangements for publishing an advertisement in the Year 2001 Yellow Pages, beginning with a e-mail message to Mr Kell on 20 October 2000 and a conversation with Mr Kell on 21 October. Mr Heard said that he had been informed by Mr Coulton that Yellow Pages had been instructed that KTL would not be participating "in the joint KHM space which formerly carried the KHM advertisement." Mr Kell gave an explanation which was incomplete but included "It's my understanding that if we tried to change the spot to either Heard McEwan or Kells it will mean that both firms will be denied the spot". "… We both lose the opportunity … and both go to the end." Mr Kell said he would have Mr Kean get in touch with Mr McEwan; but Mr Kean did not get in touch. Mr Heard sent Mr Kell another message seeking action on 8 November and another message on 30 November and received a reply from Mr Kell on 1 December which conveyed no information. Then on Tuesday 5 December Mr Heard sent Mr Kell a message which set out a history of inaction and said "As nothing further has been received from you and the closing date is this Friday, we have informed Yellow Pages that it appears that you do in fact desire to take no part in the joint space and that accordingly Heard McEwan desires to take the whole space." This appears to have precipitated action by Mr Kean including communication with Mr Medhurst on 6 December by telephone and his carefully considered letter of 8 December. 19 One position taken by the plaintiff's counsel was that the whole course of KTL's conduct, particularly conduct of Mr Kean which led to KTL's advertisement being published in the priority position, shows that there has been a breach of fiduciary duty by KTL towards HM. If a fiduciary duty was owed, it would be breached by conduct on behalf of KTL which was intended to exclude HM from the advantages of having its advertisement share the priority position, and it would also be breached if KTL actually got for itself the whole advantage through some circumstances even if KTL had not acted in bad faith and had not contrived deliberately to elbow HM out of the advantage. Within a continuing partnership it would clearly be a breach of fiduciary duty for one group of partners to obtain an advantage of this kind for themselves to the exclusion of another group, and they would be exposed to an appropriate equitable remedy. However my view of the two Heads of Agreement, particularly of cl.1 of the Heads of Agreement (Procedure) is that the advertising priority was an asset which passed to KTL on completion on 21 May 1999. This is the plain meaning of the words in cl.1 and is supported by an overview of the two Agreements, in which ownership of assets passed to KTL, and HM received a large sum of money and other financial entitlements. Thereafter there was no sense in which the advertising priority could be treated in Equity as if it were a piece of property of which all the former partners were co-owners; it was property of KTL. Clause 12.1 is a contractual arrangement about how an asset owned by KTL was to be used. In my opinion there are no indications in the text of the Heads of Agreement which support a reading in which the advertising priority is an exception from the assets and goodwill which passed to KTL. In my opinion KTL is not and since 21 May 1999 has not been a fiduciary for HM of the advertising priority, and any duties which it may owe to HM in relation to it are contractual, not fiduciary duties. 20 The contractual arrangement in cl.12.1 is stated in very brief language. It deals with an arrangement which will bring advantages to both sides but the advantages can only be achieved by a measure of co-operation in making arrangements for the publication of the advertisement, as well as in paying for it. There is a penumbrum of implied or ancillary obligation surrounding cl.12.1 which requires the parties to act reasonably in co-operation to bring about publication of the advertisement, and prevents either party from taking any action which would prevent the other from getting the benefit of the arrangement in cl.12.1. To be more particular, it would be a breach of contract for either party to take action to prevent or discourage PA from giving approval. 21 In practical terms the question whether there was a breach of implied obligation is a question whether Mr Kean brought about PA's withholding its approval, (and PA clearly did withhold its approval in Ms Doyle's correspondence) and whether he did so intentionally or by conduct which was in breach of the implied obligation to act reasonably in co-operation with HM. Mr Kean's conduct is open to examination in the respect that he did not enter into communication with HM so as to participate with them in arrangements for lodging the split advertisement, and did not respond to initiatives from Mr Heard, although Mr Kell had said that he would. Mr Kean's two letters of 17 November and 8 December are arguably open to the reading that they advocated to PA that the priority position should be given to an advertisement by KTL and did not advocate that the priority position should be given to a split advertisement in which HM was to participate. Mr Kean was cross-examined forcefully, and implications adverse to him were put to him in cross-examination, but he did not accept them and offered explanations which referred to the difficulties of his position and to the overall need to preserve the priority position by establishing, in some sense which PA might accept, that KTL was a continuation of KHM. 22 Mr Kean's conduct fell short of wholehearted common endeavour with HM. However there are some matters in the factual context which are to be considered. One is the combative strain in Mr Heard's communications and the line taken by him suggesting that it was KTL which was vacating the advertising priority and that HM would take the whole space. This was a signal for circumspect behaviour by Mr Kean. Another difficulty for Mr Kean was the negotiations relating to a large claim against PA, which it was reasonable for KTL to advance but which obviously imposed strain and difficulty on other business dealings with PA concurrent with the negotiations. These negotiations led to an arrangement in principle with PA on 18 December 2000, not embodied in a written agreement until March 2001. Another matter to be considered in appraising Mr Kean's conduct is that it was prudent not to emphasise, in dealings with PA, that the split advertisement was to be published on behalf of two separate organisations; as became fully known when Mr Medhurst spoke on 5 December and when extracts from PA's rules became available, there was a risk that the priority position would be lost to all concerned. Overall I do not accept that as a matter of fact Mr Kean's conduct of business in November and December and the terms of his letters were intended to elbow HM out of the advertising priority or the opportunity to publish a split advertisement; Mr Kean was proceeding carefully, indeed gingerly, in a complex situation, to preserve the advertising priority, in which his firm had even more interest than HM. In my finding there was no breach of cl.12.1 and its penumbrum of implied obligation by KTL. 23 Mr Kean's letter and communications were not the only things influencing PA's decisions. The terms of Ms Doyle's letters of 5 and 8 January show that she was in communication with Mr McEwan of HM and she saw it as appropriate to point out to him, fully and clearly, that a split advertisement would not be permitted. Mr Kean's letter was far from being the only influence on what PA decided to do: obviously the question of a split advertisement had been put forward to PA and Ms Doyle by HM, and PA responded according to its own views about split advertisements. PA's attitude and response were not brought about by Mr Kean. 24 It now appears from Ms Doyle's forceful correspondence and from the Advertising Rules extracts of which she produced that there was no real prospect that PA would agree to publish a split advertisement in the 2001 Yellow Pages; that would have been contrary to PA's own advertising Rules and commercial policies, what happened in the 2000 Yellow Pages was an exception and was against PA's own rules, and it was always likely that some responsible person in PA would, sooner or later, learn of what was happening and apply PA's own Advertising Rules. As a matter of causation, Mr Kean's attention or inattention to the matter and the terms of his letters have no real place in the causation of the outcome in which Yellow Pages approval was not available. The condition of cl.12.1 was not fulfilled, and KTL had no contractual obligation under cl.12.1 but were at liberty to use their advertising priority for their own advantage in the 2001 Yellow Pages. KTL could expect to obtain the advertising priority in their dealings with PA under the provision of the Advertising Rules dealing with partnership dissolution and reconstituting the partnership by a majority of the old members. In practical terms they were entitled to that priority from the point of view of PA. As between KTL and HM they were also entitled to the advertising priority, as the contractual obligation in cl.12.1 was the only restriction on their entitlement. 25 For these reasons the defendants should succeed. 26 Order: Give judgment for the defendants with costs. -------- Last Modified: 06/07/2001 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.