New South Wales Supreme Court CITATION : Old v Hodgkinson; Old v McInnes [2010] NSWSC 1335 HEARING DATE(S) : On the papers. JUDGMENT DATE : 23 November 2010 JURISDICTION : Equity Division JUDGMENT OF : Young JA DECISION : Rulings on accounts and orders as to costs. CATCHWORDS : Partnership- accounts- partner ordered to pay equitable compensation to three member firm- whether entitled to a one-third discount. Costs- how costs in long drawn out partnership case must be borne. LEGISLATION CITED : Civil Procedure Act 2005, s 98 Hamer v Giles (1879) 11 Ch D 942 Kraft v Kupferwasser (1991) 23 NSWLR 236 CASES CITED : Leisure Investments Pty Ltd v Bilioara Pty Ltd [2001] NTSC 3 Meekin Enterprises v Gersbach (6.8.1997, unreported) BC9703425 Ross v White [1894] 3 Ch 326 Sundale Enterprises Pty Ltd v Christie [2003] 1 Qd R 111 1063/04: Fraser Patison Old (P) Hugh Rudyard Hodgkinson (D1) Kenneth John McInnes (D2) PARTIES : 4064/04: Fraser Patison Old (P) Kenneth John McInnes (D1) Hugh Rudyard Hodgkinson (D2) Andrew Hugh Jenner Wily (Referee) FILE NUMBER(S) : SC 1063/04; 4064/04 R D Marshall (P) COUNSEL : M Condon (D) R Higgins (Referee) Horowitz & Bilinsky Solicitors (P) SOLICITORS : Griffith Nicholson Lawyers (D) McLachlan Chilton (Referee) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION YOUNG JA Tuesday 23 November 2010 1063/04 – OLD v HODGKINSON 4064/04 – OLD v McINNES JUDGMENT 1 HIS HONOUR: This is hopefully the last set of reasons for judgment in these matters which have been proceeding in fits and starts since 2004. 2 The principal parties are former partners in a firm of patent attorneys plus the referee who was appointed to work out the consequences of their differences. 3 I have given previous judgments over the years, the principal judgments being [2004] NSWSC 1202, [2008] NSWSC 697 and [2009] NSWSC 1160. 4 After six sets of submissions had gradually floated into my chambers between November 2009 and April 2010, I requested my Associate to send a memorandum to the legal representatives of the parties in which I listed what I thought were the remaining issues in the proceedings and sought confirmation that this was so. 5 The six matters were: 1. What adjustment should be made with respect to the compensation for Mr Old removing the files: should one-third of the compensation flow back to Mr Old as a partner at the time of removal of the files? 2. The date from which interest should be computed. 3. What, if any, adjustments to the amended spreadsheet ought to be made. 4. The costs of the partnership suit. 5. The costs of the other litigation. 6. The referee's costs. 6 All counsel confirmed that the list set out the only matters still to be decided. 7 Further submissions then came in from all parties until 22 July 2010. It is clear that all submissions have now been made and the case must be finalised. I must apologise for the delay in finishing the matter, my excuse is that it is very difficult to bring back into one's mind all the details of complicated litigation that has extended over years and my translation to the Court of Appeal has meant that I have had to give priority to appellate matters. 8 I will now deal with the six matters listed above and then under head 7, make final comments and reflect on the orders that must be made. 9 Before doing so, I should note, for clarity that Mr Roger Marshall of counsel appears for Mr Old, who is sometimes referred to as "the plaintiff', Mr Miles Condon of counsel appears for Messrs McInnes and Hodgkinson, who are sometimes referred to as "the defendants" and Mr Rohan Higgins of counsel appears for the referee. 10 1. In my reasons of 3 November 2009, I calculated the adjustment for Mr Old removing the files as $95,288 against Mr Old. 11 Mr Old argues that as the entity entitled to that $95,288 adjustment was a partnership of which he was a one-third partner, $31,762 (one-third) should be credited back to his account. 12 Mr Condon submits that Mr Old puts up a proposition that cannot be defended. He has committed a wrong which affects only his two partners. He should not be entitled to one third of damages from himself. 13 In my view, Mr Old's proposition is theoretically correct in law. He owed duties to the partnership and must account to the partnership. The compensation becomes a partnership asset and, if there is a surplus, taking that asset into account, Mr Old is entitled to one-third of the surplus. 14 However, Mr Condon's principal point is that the way the order was structured and the compensation was treated in the accounts, he is not so entitled. 15 The order was to assess the equitable compensation that should be allowed to Messrs Hodginson & McInnes against Mr Old. The referee did that exercise and found $142,931 which I considered should be discounted by one-third making the compensation $95,288. 16 The short answer to the first outstanding question should thus be "No". No part of the compensation should flow back to Mr Old. 17 2. Messrs Hodginson and McInnes claim interest on two amounts, (a) $58,894 being costs brought about by breach of Mr Old's fiduciary duty; and (b) the $95,288 equitable compensation referred to in issue 1. They claim interest at the court rate from 1 July 2004 in respect of the former and 1 July 2005 in respect of the second. It would seem that, up to 8 November 2010, the relevant amounts are, respectively $35,002 and $48,116. 18 Mr Marshall for Mr Old says that interest should only be charged on the balance of the overall partnership accounts. 19 Again, I consider that Mr Marshall correctly states the general rule, but that the circumstances in the present case are outside the general rule. 20 Ordinarily in a partnership, unless there is a special agreement, partners who subscribe additional capital or partners who lend or borrow from the partnership funds do not pay interest. 21 On the settlement of final accounts, a debt may become due and owing from one ex partner to another. This will not carry interest. However, and, if sued for, the court will allow interest from the date when it was demanded and not paid. 22 However, in the instant case, the money on which interest is claimed is equitable compensation due from one ex partner to the others. It is in the same plight as any other adversarial monetary claim. Interest should flow from the appropriate date and the date chosen by Mr Condon appears to me to be appropriate. 23 3. As I understand it, there is no longer any contest about this matter and that the spreadsheet annexed to Mr Marshall's letter to my Associate of 30 June adjusted only to reflect what is covered by my decision in the two previous issues should stand as the final document. 24 4. This is probably the major issue to be decided. 25 Again the basic principles to be considered are quite clear, but there is difficulty in applying them appropriately in the light of the strange nature of the present proceedings. 26 First, of course is the overriding provisions of s 98 of the Civil Procedure Act 2005 and the rules fleshing out that section that costs are in the general discretion of the court subject to established guidelines. 27 Then, in Hamer v Giles (1879) 11 Ch D 942, 944, Jessel MR said: "…where there is no fault on either side, but the partnership accounts have to be taken in this Court, the costs of the action for taking the accounts from the beginning ought to be dealt with as all other costs of necessary administration, that is they must come out of the partnership assets. Of course, where an action for dissolution is rendered necessary by the misconduct of a partner….the Court not only has jurisdiction, but is bound to exercise it, by making that partner pay so much of the costs as are occasioned by his misconduct." 28 That passage has been applied on many occasions. Significantly for NSW it was applied by Powell J in Kraft v Kupferwasser (1991) 23 NSWLR 236, 234 and by M McLelland CJ in Eq in Meekin Enterprises v Gersbach 6.8.1997 unreported BC9703425. 29 However, Powell J in Kupferwasser made it clear that the costs of taking accounts included the costs of adjudicating on disputed entries in the accounts. 30 In the Meekin case, the then Chief Judge in Equity quoted from and applied what appears in the 17th edition of Lindley & Banks on Partnership 23-117 that: "Where…such proceedings are, in reality, commenced in order to obtain an adjudication on some disputed claim between the partners, the unsuccessful litigant will normally be ordered to pay the costs up to the date of trial." 31 In the Northern Territory in Leisure Investments Pty Ltd v Bilioara Pty Ltd [2001] NTSC 3, Thomas J said that when considering costs in partnership suits, courts must distinguish between "proceedings for dissolution of partnership as an administrative exercise" and adjudications of disputes between partners. In the latter case, the unsuccessful partner will normally be ordered to pay costs. 32 In my reasons of 3 November 2009 (Old v Hodgkinson [2009] NSWSC 1160 at [140] et seq), I ordered that the referee's fees be paid as to 49% by Mr Old and 51% by the jointure of Messrs Hodgkinson and McInnes. I now have to deal with the legal costs of each side in the proceedings. 33 Mr Condon, in his submissions of 2 December 2009 notes that the authorities make a clear distinction between a suit to wind up a partnership where what is happening is virtually an administrative adjustment of rights and cases where there are definite issues between the former partners. In the former case, it is fair and the usual order is, that the costs of the winding up be paid out of the partnership assets as administration of the winding up is a partnership expense. However, the second class of case is in a different situation; see eg Meekin Enterprises v Gersbach. 34 Mr Condon puts that proceedings 4064 of 2004 cannot be classed as administrative winding up of a partnership. Those proceedings were commenced by Mr Old in the District Court against Mr Mcinnes for debt for the alleged non payment for a share in the partnership and later transferred to this court. 35 Again, so far as 1063 of 2004 is concerned, Mr Condon puts that the proceeding very soon moved from being a simple partnership winding up suit to one determining disputes between the partners. Mr Condon puts that the root cause of this was Mr Old's wrongful appropriation of a number of the partnership files. 36 Mr Condon notes a number of offers of compromise and Calderbank letters and that it was the defendants not the plaintiff who secured a reduction of the referee's fees and submits that Mr Old should be ordered to pay the defendants' costs on the indemnity basis. 37 The written submissions of each side blame the other for obstruction of the proceedings and raise points that the other side was in an unsuccessful adversarial position on some issues. There are also issues as to the significance of so-called offers of compromise. 38 The submissions are sufficiently detailed as to make it best to set them out in full detail. 39 Mr Condon, for Messrs Hodgkinson and McInnes in his submissions of 2 December 2009 submitted as follows (in these submissions "defendants" mean Messrs Hodgkinson and McInnes and "plaintiff" means Mr Old): "The claim in proceedings 4064 of 2004 cannot be properly characterised as involving the administration of the dissolution of the HOM2 partnership. To the contrary, it arose out of a discrete dispute concerning the alleged obligations of Mr McInnes to Mr Old and Mr Hodgkinson; thus the normal rule referred to above does not apply and costs should be determined (subject to the submissions concerning indemnity costs) in accordance with the starting point mandated by UCPR r 42.1." 40 Paragraphs 11-13 of Mr Marshall's submissions of 31 March 2010 are as follows: "11. In the partnership suit, in the process of varying the 2003 accounts generally, the Referee decided the following issues: (a) a claim by HAM for $146,998.61 for work done on HOM runoff. This was reduced to $37,739; (b) breach of fiduciary duty by Mr Old. There was no factual contest on liability (Mr Old admitted he took the files). Quantum was the only issue. Your Honour reduced the amount awarded by the Referee by one-third; (c) there was a need for the Referee to bring into account bills rendered by HAM for work done by HOM. In net value this was $122,937. This in itself highlights bad faith on the part of the defendants in that they deferred billing work done before 30 June 2003 until July or August 2003, presumably in an effort to prevent Mr Old from obtaining a receipt for it; (d) there was also a false claim for ongoing rent after dissolution made by Mr Hodgkinson. The Referee had to deal with that and rejected it; (e) there were also the failed Fair Trading Act claims raised. The Referee had to deal with them, and also Mr Old. In the end, after the Report, they were abandoned. (f) The Referee decided that Mr Old caused a $58,894 loss to the defendants in chasing absent files; and (g) that goodwill should be included in the accounts. 12. Your Honour should not overlook the obstructive behaviour by the defendants in dealing with the Referee: (a) they failed to comply with the Referee's demand for documents and information. This was the subject of much evidence in 2006, including a contested hearing before your Honour on 12 April 2006; (b) they tried to remove the Referee and failed in their motion. This delayed the report by several months; (c) what is worse, they did not pay the Referee. In May 2007 (2 months after the report was delivered) your Honour had to order that $90,000 be paid by the defendants pending the determination of the Referee's fees; (d) they further delayed the reference by applying ex-parte to the Referee over the Christmas break 2006/2007, notwithstanding your Honour's decision twice before that the Referee get on and finish his report come what may. This led to argument before your Honour on 7 February 2007; (e) the defendants' submission of their defences only one or two months before the Referee's reporting date and the inability of the Referee to deal fully with all of them (as he was supposed to do), a further instance of the delaying behaviour. 13. Whilst Mr Old has failed in legal argument to convince your Honour that goodwill should be included in the 2003 accounts, overall the situation is a draw, much the same as many partnership disputes. The inflated claim for work done after dissolution was severely cut down by the Referee. There was no complaint to your Honour about that. Further, the Referee had to work hard to find out anything from the defendants including exactly how much was wrongly billed by HAM and was really attributable to HOM work." 41 Mr Marshall made additional submissions on particular aspects of costs particularly with respect to the premium proceedings and the offers of compromise with which I will deal separately. 42 Mr Condon, in reply objected to parts of Mr Marshall's paragraphs 11-13 as follows: (i) 11c of Mr Marshall's submissions on the basis that bad faith had never been put to Mr Old; (ii) As to 12b, although the motion failed, it did result in some solid criticism of the referee and may well have brought about a better report; (iii) As to 12c this is allegedly unsupported by evidence and, in any event, the referee's fees were properly challenged. 43 Mr Marshall replied contesting each of those objections. 44 Thus, Messrs Hodgkinson and McInnes claim that Mr Old should pay their costs of the proceedings on the indemnity basis. 45 It would seem that Mr Old is content that the ordinary rule apply. 46 I do not consider that there is that much to be gained by a minute review of the proceedings. So far as the basic exercise before the referee was concerned, it was principally an administrative exercise. There were disputes to be resolved and there were regrettable conflicts between the parties and between the parties and the referee and these did increase the costs. 47 In particular there was the motion to remove the referee. This failed, but it is fair to say that the bringing of the motion and the matters that were discussed when considering it probably did enable a better report to be prepared than would otherwise have been the case. 48 Mr Old points to the number and significance of claims made by Messrs Hodgkinson and McInnes which failed or were allowed for a much reduced sum. 49 If the usual order were made and the whole of the costs were treated as part of the administration of the winding up of the partnership then the costs of both sides would be submitted to a costs assessor, the amounts allowed added together and each former partner would have one-third of that total treated as a debt owed by the partnership to him on the accounts (see Ross v White [1894] 3 Ch 326 and Sundale Enterprises Pty Ltd v Christie [2003] 1 Qd R 111). 50 Thus, if the partnership was in credit in the amount of $150,000 and the costs of Mr Old were allowed at $100,000 and the costs of the other partners at $125,000, the net result would be that the accounts would be in debit by $75,000. Each partner would then contribute one-third ie $25,000 to make up this deficiency so that the net result would be that the $150,000 would be distributed as to $75,000 to Mr Old and ($62,500-$25,000=$37,500) to each of Messrs Hodgkinson and McInnes. 51 My experience over many years is that dissolution of partnership suits involving accountants or solicitors tend to be very bitter battles. The present case was no exception. I do not consider that in the background of the present dispute, there was anything that could properly be said to have overstepped the bounds of hard fought dispute into the category of misconduct. 52 My judgment of November 2009 in [140] and following proceeds on the basis that I favour the solution that each party bear and pay one third of the costs. There is nothing in the subsequent submissions which cause me to depart from this view. 53 As to the premium proceedings I remarked in my judgment of November 2009 in [142]-[143] that there should be no costs on either side on the basis that Mr Old succeeded on a side issue and that his two principal bases for his claim failed and that he ended up with only a fraction of his claim. I adhere to that view. 54 Thus I am of the view that the ordinary rule should apply as to the parties' costs, that is they should be paid out of the assets (or augmented assets) as indicated above subject to no costs being payable in respect of the premium proceedings. 55 I now turn to the matter as to whether the offers of settlement and offers of compromise should have any effect on the view reached in [54]. 56 There are two strains of offers to consider: strain A, Offers to settle made in 2005 and 2006; and B, Offers of Compromise in 2007. 57 As to A, on 24 March 2005, Mr McInnes wrote to Mr Old a letter proposing settlement on the basis of mutual inspection of books. He said that there was no hidden pot of gold in the partnership accounts and that the receiver's fees would hurt all of them. Mr Old responded by writing a note on the top of a copy of this letter: "Dear Ken, Your offer is rejected" (the note was dated 31.5.2005). Mr McInnes responded by a note dated the same day on the bottom of the letter, "Dear Fraser, Noted but are you prepared to suggest some alternative? If not then so be it and I will stop wasting my time." 58 On 18 May 2006, the then solicitor for Messrs Hodgkinson and McInnes wrote to Mr Old's solicitor with a copy of the first page of the 2005 letter, noting that there had been no further response and asking whether that letter could be treated as a Calderbank letter or whether he would have to repeat it. 59 As to B, in June and July 2007, the fresh solicitors for Messrs Hodgkinson and McInnes made four formal offers of compromise, two referable to 1063 of 2004 and two referable to 4064 of 2004. 60 There is some doubt as to whether any of these offers complied with the rules. However, it is also true that the court does not always insist on complete compliance with form. However, it is also true, that the court need not make a special order for costs just because of Calderbank letters. 61 So far as they formal offers of compromise are concerned, they have little significance in a case where the dispute is what is the balance of the partnership accounts rather than a claim for damages or debt at common law. 62 Thus I do not consider the offers affect the result of the decision on costs. 63 5. I believe that I have covered this in [49] above. 64 6. The matter of the referee's costs was dealt with in my November 2009 judgment. 65 It would seem that the only issue remaining here is whether the referee should pay interest on the overpayment of his fees and, if so, from what date. 66 I agree with Mr Higgins on the latter question that any interest should run from 9 August 2007 being the first date on which there was any overpayment. 67 I have reached the view that I should not order interest. There is no legal right for the parties to receive interest and when one considered the amount of trouble to which the parties have put the referee as a quasi officer of the court, I cannot see any equity in compelling the refund to be made with interest. 68 7. I trust with the above reasons, final accounts and short minutes can now be prepared. 69 I was hoping that this would be my last exposure to this matter. However, I need at least to sign off on the short minutes. I fix Monday 6 December 2010 at 9.30am to deal with the short minutes. However, if any of the counsel feel that we may need more than 20 minutes or if the time I have chosen is particularly inconvenient, provided my Associate is contacted by 1 December, another time may be able to be arranged. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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