Supreme Court New South Wales Medium Neutral Citation: McLeod v McKendry [2012] NSWSC 1646 Hearing dates: 19/12/2012 Decision date: 19 December 2012 Jurisdiction: Equity Division - Commercial List Before: McDougall J Decision: Leave granted to amend and to rely on affidavits served out of time (in each case, as to part only of what was sought). Catchwords: [PROCEDURE] - civil - application for leave further to amend List Response - application requires leave to withdraw admission - whether interests of justice permit withdrawal of admission - application for leave to rely on further evidence - whether further evidence permitted will have an adverse impact on the hearing date -whether further evidence relates to issues raised by the pleadings. Legislation Cited: National Health Act 1953 (Cth) Category: Procedural and other rulings Parties: Lyndon John McLeod (Plaintiff) Guy William Newbold McKendry (Defendant) Representation: Counsel: CRC Newlinds SC / D M Macfarlane (Plaintiff) K J Williams (Defendant) Solicitors: Riley Gray-Spencer Lawyers (Plaintiff) Sparke Helmore Lawyers (Defendant) File Number(s): 2012/113470 Judgment (ON APPLICATION FOR LEAVE TO AMEND AND TO RELY ON AFFIDAVITS SERVED OUT OF TIME) 1HIS HONOUR: The parties were partners in a pharmacy business conducted at Rutherford under the name "McLeod's Pharmacy at Rutherford." The relationship between them was governed by a partnership deed. Clause 20 of that deed provided that one partner might terminate the partnership by giving three months' notice in writing to the other. That was done in this case. The plaintiff, Mr McLeod, was the partner giving notice. 2The giving of that notice gave the defendant, Mr McKendry, the option to buy Mr McLeod's share in the capital and assets of the partnership business. Clause 20 provided a mechanism for the determination of the amount to be paid. As one might expect, particular attention was paid to the goodwill of the partnership. 3There is no doubt that the partnership has been terminated. There is no doubt that Mr McKendry has exercised his option to buy Mr McLeod's share in the partnership business. There is no doubt that Mr McKendry is bound to pay whatever is the amount properly determined in accordance with cl 20 of the partnership deed. There is a substantial dispute as to, in particular, the amount to be paid for goodwill. 4In a way which is not uncommon, there was a service entity associated with the partnership business. Services were provided by a company known as Transip Pty Ltd as trustee for a unit trust known as the MAC Unit Trust. It has always been Mr McLeod's case that the (sole) asset of the partnership was the business at Rutherford which was "carried on through a combination of an operating company [Transip] as trustee for the MAC Unit Trust, and the partnership, at the premises known as...". (Commercial List Statement at [12]). 5In those circumstances, Mr McLeod contends, among other things, that in valuing goodwill for the purposes of and in accordance with cl 20(b) of the partnership deed, the net profit, which is an integer of the calculation, is to be determined not only by reference to the earnings of the partnership but also by reference to the earnings of the unit trust. 6On the "pleadings", as they stand, (and they include not only the commercial list statement from which I have quoted, but also an amended commercial list response filed on 17 August 2012) it was common ground that "the assets of the partnership included all assets held by Transip as trustee of the MAC Unit Trust, including...a lease of the premises" from which the business was conducted. That specific allegation is made in cl 6.1A of the amended list response. That allegation is supplemented by a general admission of para 12 of Mr McLeod's contentions, as to the business being operated in combination by the partnership and the unit trust, set out earlier in these reasons. 7The matter is set down for hearing for four days commencing on 22 April 2013. If the matter does not finish within the four days it will be necessary either for it to be adjourned to a date when the trial judge will be available or for the trial to continue before that judge and for other litigants to have their cases "bumped". Of course, this assumes that the present state of the list continues up until 22 April 2013 and the following weeks. 8Mr McKendry moves the Court for relief in respect of his list response and in respect of his evidence. As to the list response, Mr McKendry wishes to rely upon a further amended list response which does (or if filed would do) a number of things. One of the things that Mr McKendry wishes to do is to withdraw his allegation that the assets of the partnership included the assets of Transip as trustee of the unit trust. Another thing that he wishes to do is to withdraw his admission that the partnership business was carried on through a combination of the partnership and Transip as trustee of the unit trust. (I put to one side a separate issue which Mr McKendry pleads, that the assets of the partnership included certain other matters under the National Health Act 1953 (Cth); those allegations are in play and are not to be disturbed.) 9Further, Mr McKendry wishes to raise a particular contention, in relation to a particular expense: namely, that the expense was one charged to the partnership in breach of Mr McLeod's fiduciary duty. 10There are other amendments sought to be made, but they are not otherwise controversial - that is to say, otherwise than to the extent that they wish to continue pleading out the alleged consequence of separation between the partnership and the unit trust. 11The admission of the relevant part of the list statement is clear and distinct. Not only is it clear and distinct, it is supplemented by the express allegation that the assets of the partnership included all assets held by Transip as trustee of the unit trust. It is open to infer, and I do infer, that the relevant allegations and admissions on the pleadings as they stand represent the reality of the way in which the business was conducted, even if they do not accord with the legal distinction between the partnership (more accurately, the partners) on the one hand and the trust (more accurately, Transip as trustee) on the other. 12Some support for that inference is found in the way in which various calculations have been carried out as to the value of Mr McLeod's interest in the partnership. Those calculations include calculations performed by Mr Peter Saccasan, an accountant in a firm known as "Guild Accountants" who apparently provided accounting services to the partnership, in two memoranda. One of those memoranda is dated 12 September 2011. Another is dated 29 March 2012. I think, but it does not matter, that there may have been another memorandum chronologically between those two. 13When one reviews the two memoranda to which I have referred, it appears to be quite clear that Mr Saccasan calculated an adjusted profit and loss figure for the partnership by bringing to account, among other things, the combined earnings of the partnership and Transip as trustee, and likewise the expenses incurred by the partnership and Transip. 14That seems to reflect what I perceive to be the underlying commercial reality, namely that the parties always regarded the partnership business as including the service trust element, and effectively combined the two in a commercial way in their own minds. 15Be all that as it may, there is no doubt that the pleadings as they stand do not represent the "correct" legal and factual situation. Whether that is something which is open to be argued is a different matter, having regard to the way in which the proceedings have developed. In particular, whether or not Mr McKendry should be permitted to withdraw his admissions, and otherwise to amend his pleadings, so as to seek to separate the various entities, is not something that in my view is determined simply by looking at whether or not what he says is accurate, and whether or not the true situation could be set out in some other and more accurate way. 16As I have said, each of the allegation and admission in issue was something made deliberately, and at a time when Mr McKendry had legal advice. It appears from the way in which submissions were put today that the significance of the admission, in terms of dollars and cents, is only something that has come to the attention of Mr McKendry and his legal advisors in recent months. Nonetheless, there is a real question as to whether an admission deliberately made, and a supporting allegation deliberately made, should be permitted to be withdrawn or varied, simply because it is now seen to have significant consequences that should have been (but were not) perceived earlier. 17It is to be noted, further, that Mr McKendry's pleaded case is that by reason of the ownership structure as he presently alleges it, he is entitled to have transferred to him, on payment of the amount properly determined, not just Mr McLeod's interest in the partnership strictly so called, but also the interest of or controlled by Mr McLeod in the unit trust. That is apparent from Mr McKendry's allegation that the effect of his exercise of the option is that he has entered into a contract for sale of the "partnership assets". By reference to earlier paragraphs of his list response those assets are said to include, as I have pointed out, all assets held by Transip as trustee of the unit trust. That is the legal mechanism by which Mr McKendry seeks to have transferred to him all assets involved in the operation of the business. If that position is not maintained then there is no explanation, on the pleadings, of how it is that Mr McKendry is entitled to have transferred to him the assets of the unit trust. 18That might seem to be a practical problem only, but in my view it is something which, once again, reflects the underlying reality of the way in which the parties conducted the partnership business. 19To my mind, if Mr McKendry were now permitted to withdraw from the state of affairs that, on the pleadings, is admitted to exist, there would be caused significant injustice and stress (the broad detail of which I accept) to Mr McLeod. The work that has been carried out for him to date in valuing the partnership business, which has been carried out on a basis that includes in effect rolling together the operating results of the partnership and the unit trust, would need to be redone. There would be an outcome that Mr McLeod would be required to sell the partnership business, but not necessarily his interest in the unit trust. That would serve to frustrate the intention that, obviously enough, the parties sought to achieve through the mechanism of cl 20 of the partnership deed. 20In this context, it is worth bearing in mind that the unit trust structure was set up some time after the partnership deed was made. It appears that the parties did not consider (or if they considered, did not follow through) whether, as a result of the change to the structuring of the business, it might be necessary to vary the partnership deed or to supplement it in some way. 21In circumstances where the matter has gone as far as it has on the basis of a state of affairs admitted on the pleadings, and in circumstances where the true state of affairs has been visible (and its impact on the calculation of goodwill assessable) since at least 12 September 2011, I do not think that the interests of justice required that Mr McKendry should have leave to withdraw from the position that, as to the combination of the partnership and the unit trust, emerges from the pleadings as presently they stand. 22Otherwise, with the exception of the amendment relating to breach of fiduciary duty, there is no real problem with the amendments that Mr McKendry wishes to make. And as to the breach of fiduciary duty, refusing leave would not make any difference to the underlying issue; and no doubt for that reason, Ms Williams of counsel, who appeared for Mr McKendry, did not press the relevant paragraph. 23Putting those conclusions into more concrete form: I would not allow the amendment sought to para 6.1A of the amended list response. Nor would I allow the amendments sought to be made by paras 27.1AB and 27.1AC. The amendment sought to be made by para 27.2A(a) is not pressed; and if it were, I would not allow it. 24That leaves as the only contentious amendment, the amendment sought to be made to para 28. That amendment asserts that the amount payable by Mr McKendry for Mr McLeod's interest in the partnership and the value of the net assets of the unit trust is a specified figure. It seems to me that there is no detriment in allowing para 28 to be amended in the manner sought. I say that because, having refused leave in respect of what might be called the unit trust issue, there is shown on the pleadings (and in this respect I do not accept Mr Newlinds' submission to the contrary) a basis on which Mr McKendry claims to be entitled to have transferred to him the assets of the unit trust. At the risk of repetition: That is the basis explained in para 18B of the amended list response as it presently stands. 25The next matter in contention concerns Mr McKendry's application for leave to rely on further evidence. Leave is needed because the evidence was not served in accordance with the Court's last directions, and the Court also ordered that Mr McKendry not be permitted to rely on evidence not served in accordance with those directions, without the leave of the Court. 26The evidence in question is two affidavits of Mr McKendry's accountant, Mr Thompson. Mr Thompson is both Mr McKendry's personal accountant and someone who is being called to give expert evidence on the valuation issues. 27The way in which Mr McLeod sought to prove his case as to value, in his evidence in chief, was, at least so far as the affidavits are concerned, economical. He annexed a variety of documents, including the two memoranda to which I have referred, and indicated that he would rely on those to prove the value of goodwill and, using that as an element of a calculation, the amount payable to him for his share in the partnership business. 28On the face of things, that evidence would not have been admissible to achieve that result. However, Mr Newlinds SC (who I should have said appears with Mr Macfarlane of counsel for Mr McLeod) submitted that it was Mr McLeod's intention to tender, at the hearing, a body of primary accounting evidence which would make good the calculations contained in the two memoranda. Whether or not that is a satisfactory way of proceeding is something on which I need not express an opinion. 29The consequence of the way in which Mr McLeod put his affidavit evidence in chief was that Mr McKendry's evidence in reply was relatively limited. He proved, through an affidavit of an employee of the business Ms Coffey, a number of business records. He gave evidence himself of matters going to the assets and the like of the partnership business. And he sought to rely on a report of an expert accountant, Mr Lonergan. There is no doubt that Mr Lonergan is properly to be regarded as an independent expert. However, for various reasons, although Mr Lonergan identified relevant standards, guidelines, principles and the like that were relevant to the calculation of the purchase price, he was unable, in the absence of supporting information, to express an opinion as to what might be payable by application of those standards, guidelines, principles and so on to the underlying financial material, in accordance with the mechanism for valuation set out in cl 20 of the deed. He said that he had insufficient information, in particular as to stock, to enable him to undertake the calculations. 30The response to that was further and far more detailed evidence. Mr McLeod swore an affidavit in which he commented at length on the stock of the business at various points. He did so by reference to, among other things, records of the business at those points. Mr Saccasan then prepared an affidavit which went into far more detail than did his earlier memoranda. That affidavit, among other things, assumed that the revised stock figures calculated by Mr McLeod were correct. As a result of all this, Mr Saccasan came to a revised calculation of the purchase price payable in accordance with the mechanism (as he understood it) of cl 20. 31Ms Williams submitted that the real nature of Mr McLeod's case on value only came out in this evidence which she characterised as "reply" evidence. Mr Newlinds disputed this characterisation. However, I think, the characterisation given to it by Ms Williams is in substance correct. It is not properly and only evidence in reply, but includes a substantial body of material that should have been included in Mr McLeod's evidence in chief. 32Mr McLeod's solicitor, Mr Cameron, said that when he agreed (or more accurately when someone in his office agreed) to the timetable and the guillotine order, he did not fully comprehend the magnitude of the task involved in replying. Thus, he said, it took longer than he expected for the affidavits in respect of which leave is now sought to be prepared. 33I have considerable sympathy for that position. Not only are the affidavits of Mr McLeod and Mr Saccasan in reply (I will not continue to use inverted commas) lengthy, they are supported by many and detailed volumes of primary material. 34Be all that as it may, the evidence in respect of which leave is sought is now complete. It was delivered about a week late in one respect and about three weeks late in another respect. For reasons that will become apparent, it does not seem that this is going to have any deleterious impact on the hearing date. 35There are two features of the evidence in question that do require particular attention. One is that Mr Thompson seeks to give evidence which in effect finalises the partnership accounts at the date of termination (under cl 20, the partnership is terminated three months after the notice of termination is given). It is common ground that, if that state of affairs cannot be agreed and brought to account in some way, this is an issue between the parties that will require resolution. It is clearly efficient for that issue to be dealt with in the course of the hearing which, it appears, will take place in any event. 36Another feature of Mr Thompson's evidence is that he deals with what he considers to be the effect of excluding the unit trust and its income and expenditure from the calculation of the amount payable. Clearly enough, that aspect of his evidence assumed that leave to amend the list response will be given. Since the necessary leave is not to be given, that part of his evidence should be excluded. 37There is a third issue with Mr Thompson's evidence. He goes in to some detail on the question of "dead stock". As I understand it, it is intended to suggest that some of the stock of the business at various times was unsaleable, or "dead", and thus that it should not be brought to account in considering stock (which of course is relevant among other things to cost of goods sold) at various points in time. That is not a particular "base profit error" pleaded and particularised in Mr McKendry's amended list response (nor is it pleaded or particularised in the draft further amended list response). It is apparently, in some way which was not explained at least in a way that I could follow, subsumed in the way that various of the so called base profit errors are particularised. But on reading the parts of the pleading that refer to the base profit errors in question, it simply does not appear that any part of the error is due to the classification as good and saleable stock of stock which in fact was not good and saleable. 38That cannot possibly be an issue in reply. In circumstances where it is neither in reply nor otherwise justified by the pleadings, I do not think that leave should be given in respect of that part of Mr Thompson's affidavit. 39The result of all this is that I will grant leave to amend, except for the paragraphs that I have expressly noted should not be the subject of that leave. I will further grant the leave sought to rely on Mr Thompson's two further affidavits, except to the extent that they concern what might be called the Transip or unit trust issue and the dead stock issue. 40For the sake of precision, the parties should bring in short minutes of order to give effect to what I have said in this regard. 41I mentioned before that granting the leave sought would be unlikely to affect the hearing date. At present, as I have noted, the matter is set down for some four days. It did not seem to me that it had any real prospect of finishing within four days even on the issues and evidence as they stood. That understanding has been confirmed by reason of the orders that I have indicated I will make. 42There is also a question as to whether the parties can get the matter ready for hearing by the date presently fixed, namely 22 April. 43The Court is able to offer a further period, of some ten days, commencing on 6 May. That is only two weeks later. Hence, the inconvenience and expense caused by vacating the date is unlikely to be aggravated to any significant degree. My only hesitation at allocating the date of 6 May is that the parties may not be able to get themselves ready for hearing. But both Ms Williams and Mr Newlinds assure me that they think that they can do so. 44Thus, I will vacate the hearing presently fixed, for four days commencing 22 April 2013, and list the matter for hearing commencing 6 May 2013 with an estimate of seven to ten days. 45There is one further matter, apart from costs, which requires mention. In the course of argument I expressed the view that it seemed to me that the parties were intent on a course of mutually assured destruction. Their operating structure is such that even if and when the partnership assets are transferred to Mr McKendry, and even if they include the assets of the unit trust (as, on the pleadings, they will), nonetheless Mr McKendry will have Mr McLeod, or a company controlled by Mr McLeod, as his landlord in the Rutherford business. Further, at least at present, Mr McLeod and Mr McKendry are partners in two other pharmacies. (I should have said that I do not regard with any great favour Mr McLeod's protestations of penury which conspicuously failed to mention this fact. But since it does not matter, I will say no more.) 46It seems to me to be crystal clear that if the parties are determined to fight to the death, then each has the ability to cause a significant amount of grievance and trouble to the other. That is clearly an undesirable situation: particularly bearing in mind the relationship of trust and confidence which is supposed to subsist between partners. 47For those reasons I raised the prospect of mediation. It seems to me that this is a case that cries out for mediation, preferably before someone who practises "evaluative mediation". That aspect at least of my views appears to have fallen on fertile soil. 48Accordingly, I will order that the parties mediate their dispute, such mediation to occur by 15 February 2013, and list the matter for directions on 22 February 2013. 49That leaves the question of costs. In the circumstances of this case, and leaving aside the costs that may flow from amendment, it seems to me, at least tentatively, that the balance of success and failure is such that the just order as to costs is that the costs of the notice of motion should be costs in the proceeding. I will however hear counsel on that. 50Subject to the question of costs, the only formal orders that I make are: 1. Direct the parties to bring in short minutes of order by 12 noon tomorrow to give effect to these reasons. 2. Direct that the exhibits and other material provided on the application be handed out. [Counsel addressed on costs.] 51HIS HONOUR: Mr Newlinds submitted that Mr McLeod should have his costs of the motion. In reverse order he submitted that it was Mr McKendry who needed, and thus had to seek, the Court's indulgence. That is correct. However, I think, it is a matter that could have been dealt with far more simply and quickly than it was had a reasonable approach been taken in respect of the matters in which indulgence was sought. 52Mr Newlinds submitted, further, that his client had had substantial success on the amendment application, and likewise on the evidence application. I do not think that this is correct. At least in terms, the opposition to each was entire. Again, it may have been possible for a more selective approach to be taken; but it was not. 53In those circumstances I remain of the view that costs should be costs in the proceedings save for the costs occasioned by the amendment which should be payable in the usual way. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 28 February 2013