Mark Lawler Architects Pty Ltd v Rod Seymour Pty Ltd [2013] NSWSC 1697

Supreme Court New South Wales

Medium Neutral Citation: Mark Lawler Architects Pty Ltd v Rod Seymour Pty Ltd [2013] NSWSC 1697 Hearing dates: 11 November 2013 Decision date: 11 November 2013 Jurisdiction: Equity Division Before: White J Decision: Parties to bring in short minutes of order in accordance with reasons Catchwords: PARTNERSHIP - accounting between partners - agreement to make adjustment to billings accounting if one partner's contribution to gross billings fell below a certain proportion - construction of agreement - method of quantifying additional contribution by one partner - whether additional contribution should be included in gross billings for determining proportions of contribution to billings - relevant financial years to consider Category: Principal judgment Parties: Mark Lawler Architects Pty Ltd (Plaintiff) Rod Seymour Pty Ltd (Defendant) Representation: Counsel: G B Carolan (Plaintiff) E A Walker (Defendant) Solicitors: Bilbie Dan Solicitors and Attorneys (Plaintiff) McDonald Johnson Lawyers (Defendant) File Number(s): 2012/97946

Judgment 1HIS HONOUR: The issue raised in these proceedings concerns the basis for taking accounts following the dissolution of a partnership between the parties. The plaintiff and the defendant were the partners of a firm known as Seymour Lawler Architects from 14 September 1998 to 30 June 2009. It is common ground that the partnership was dissolved as at 30 June 2009 and a declaration will be made by consent accordingly. 2A document entitled "Partnership Heads of Agreement" was signed on 12 August 2004. It recorded that from 1 July 2000 the partnership equity and profits were to be distributed in the proportions of 75 per cent to the defendant, Rod Seymour Architects Pty Ltd, and 25 per cent to the plaintiff, Mark Lawler Architects Pty Ltd. It was a term of the Partnership Heads of Agreement that: "Partners Work All architectural work undertaken by the partners will be conducted within the partnership except for the partners['] projects in which they have a financial interest. For partners['] private projects in which they have a financial interest there will be a separate fee agreement negotiated for each project which will not have any fee factored in for the principle [sic] of the partner provided the overall practice fees are maintained. In relation to these projects the partnership will have the right of first refusal to carry out the project, architectural and documentation work. Partners will not engage in any paid architectural work outside of the partnership." 3From about April 2006 Mr Lawler conveyed to Mr Seymour concerns he had that Mr Seymour was concentrating on his own private development projects. Mr Lawler contended that this was to the detriment of the partnership. He had two concerns that he made known. First that as a result of Mr Seymour's concentrating on his own private developments, his billings would decline, and secondly that the partnership was doing architectural work in connection with those projects at less than the full rates that would be charged to other clients. 4On 18 August 2007 a meeting was held between Mr Lawler and Mr Seymour that was also attended by a Mr David Farley, an accountant for Mr Lawler, and by a Mr Stephen Lambourne who was the accountant for the partnership. It is common ground that at that meeting an agreement was reached between Mr Seymour and Mr Lawler that addressed these issues. What is in dispute is the effect of the agreement that was reached and there are some differences of expression of the terms of that agreement. The agreement was oral. It was not subsequently reduced to writing, although Mr Lambourne sent a letter to the parties on 14 May 2008 on which Mr Seymour relies as setting out Mr Lambourne's understanding of the agreement reached. 5Mr Farley has, it seems, the least recall of the details of the meeting and what was agreed at that meeting. He said, in substance, that when Mr Lawler voiced his concern about Mr Seymour's spending a lot of his time concentrating on his own private development projects to the apparent detriment of the partnership, Mr Seymour responded by saying that there was nothing to discuss, that he would maintain his billings at the levels he had billed in the year before, and that he would be able to maintain his billings whilst also carrying out work on his private projects. Mr Farley deposed that there was discussion about Mr Seymour's using staff and partnership resources to work on his private projects and he recalls that some agreement was reached in relation to how the work done by members of staff of the partnership were to be charged at a reduced rate. He recalled that Mr Lawler said words to the effect of: "I am still concerned there needs to be a mechanism or a method for making an adjustment between the partners if Rod is unable to maintain his billings at the level of the previous year (the year preceding the 2007 financial year), because I believe the partnership is already starting to see the effects of Rod concentrating on his own private projects in that he is not sending as many month end bills out." He deposed that Mr Seymour responded by saying words to the effect: "I am telling you there will be no problem with me maintaining my billings at the prior year's level, if not higher." 6Mr Lawler's version of the meeting was considerably more detailed. He deposed that Mr Lambourne said words to the effect that they were meeting to talk about how they could resolve an issue about compensating the partnership for work Mr Seymour was doing on his private projects. According to Mr Lawler, Mr Lambourne asked him to confirm that his concern about that issue came from about June 2006. Mr Lawler said that his concern really came from about April 2006 onwards, but they could take June 2006 as a starting point. Mr Seymour said that he was entitled to use the office and staff in respect of his projects as he wished. But after some further discussion, according to Mr Lawler, the following conversation occurred: "I said: 'Rod, there needs to be compensation to the partnership for the resources and time that are going into your private projects. The people working on your projects are partnership employees, working from desks and using computers owned by the partnership, and these costs have already been or are being paid by the partnership.' Rod said: 'Do you mean to tell me that I have to write a cheque to Mark in order to do work on my own projects?' Lambourne: 'Yes and the reason is that the partnership has already paid the costs associated with overheads and staff wages for work done on your projects. This goes back 12 months or longer. The normal way in a partnership, this happens in accounting partnerships for example, is the work is paid for but done by the practice for the principal at a discounted rate.' I said: 'Why should there be a discount? Those staff, and Rod himself, could be using that time to be working on full paying matters for clients.' Lambourne: 'Because he is a principal in the business and needs to get recognition for that. What do you think on this David.' Farley: 'I agree a partner in a business should be entitled to a discount on the full rate.' Lambourne: 'I think if Rod was charged 80% of the full whack, that would be reasonable - a 20% discount. If this was applied, 80% would definitely cover the practice's costs.' I said: 'But that discount means the profit on those jobs is reduced or done away with altogether, yet at the same time Rod is busy with his own projects and not putting his time into the practice, or getting work in, meaning a corresponding drop-off in his billings. I know for example that Rod now isn't sending out as many month-end accounts. This is what I'm concerned about. We also need to remember it's not like Rod is actually paying anything at the moment for his private work to be done by the partnership either and there is a large debt unpaid and accruing.' Rod said: 'I will be able to maintain my current billings at historical levels whilst at the same time working on these personal projects of mine. There will not be a problem.' Lambourne: 'Ok, so the way it is to work to address your concerns Mark, is that Rod will receive a 20% discount on work the practice does on his own private projects, but only if he maintains his billings at historical levels. The split of the profits in the partnership by reference to the partnership agreement is 75 Rod/25 Mark. Looking at the billings for the year prior to where Mark's concerns kick in the billing ratio is in accordance with a 75% Rod/25% Mark ratio. How about we use that ratio as the benchmark for working out if there needs to be compensation back to the partnership?' I said: 'That's all fine Steve, but my concern is by Rod focussing on his private work, his billings will decline and therefore the overall partnership income will decline. I've said this over and over.' Rod said: 'Mark, I give you my personal undertaking to make up any shortfall difference to the practice if my billings dip due to me concentrating on my private projects, but let it be said I don't see my billings dropping at all.' Lambourne: 'Well it's a two-fold test. Firstly overall billings need to be benchmarked against the 2005/2006 historical figure, and if not adjustments need to be made to gross up the annual turnover figure, and after that the 75/25% ratio is applied, and we then work out if there needs to be any compensation to the partnership. Gentlemen, are we both happy with that arrangement?' I said: 'Yes.' Rod said: 'Yes.'" 7The recollection of Mr Seymour of the meeting and that of Mr Lambourne is not I think materially different, at least not in relation to the main point of discussion, although there are differences in expression. Mr Seymour said that the discussion was as follows: "Mr Lambourne said words to the effect: 'This meeting has been arranged to discuss the nature of the current partnership agreement in place at present and whether any modifications to that agreement are necessary in light of the circumstances that prevail now and are likely to continue.' Mark Lawler said words to the effect: 'Rod is spending time on his own projects and I am concerned that this is distracting Rod's attention from other projects.' I said: 'Over the entire history of the SLA Partnership my billings have been in excess of my profit share. Yes I have been spending time on some of my projects recently, but that was always disclosed to Mark Lawler before the formation of the Partnership that that is where I wanted to head in the future, and that one of the reasons I proposed the idea of the Partnership to Mark Lawler in 1998 was to free up some of my time so that I could spend time on my projects, and at the same time have someone in the office to help keep an eye on the day to day running of the office.' Mark Lawler said words to the effect: 'yes, but you are spending a large amount of office time recently on your projects.' I said: 'I work all hours of the day and week on SLA work. You work your 9 to 5.30 time in the office. I don't work like that. I work all sorts of hours, both in the office and outside the office. The proof of my effectiveness has been the record of my billings since the start of the partnership and the many awards my projects have won.' Mark Lawler said: 'Yes, but you are spending a lot of time recently on your projects in the office as well as using staff time on those projects. You should pay the full staff time charge out rate for the time that staff spend on your projects.' I said: 'I have always indicated that staff working on my projects would be billed to those projects. The full charge out rate is rarely achieved by other projects in the office, and in the circumstances it is fair and reasonable to charge staff time on my projects at a slightly lesser rate, because the SLA Partnership has no risk in doing this work, since time sheets are being kept for all salaried staff time. The full staff charge out rate is over two and a half times the actual salary paid to those staff by SLA. SLA would still make a good profit on my jobs, even at the slightly reduced rate.' Mark Lawler said: 'You should pay the full SLA charge out rate. There is no reason that you should not.' Mr Lambourne said: 'It is not uncommon that in similar situations in other professional businesses, that an owner or partner might be charged a lesser rate for their own matters than general clients might pay.' Mr Lawler said: 'Rod should pay the full rate.' I said: 'That is not fair or reasonable, especially in the circumstances where I carried the firm in terms of billings and financing for the majority of the history of the entire SLA Partnership.' After further discussion, Mr Lambourne said: 'I think it is reasonable that Rod be charged 80% of the standard staff charge out rate for staff time spent on Rod['s] jobs, and that Rod's own time spent on his jobs is not counted, but that if Rod's billings fall below the 75% of gross SLA Partnership billings anticipated by the current Partnership Agreement signed in July 2000, then there should be an adjustment in the capital accounts of the Partners to adjust for this.' I said: 'I am happy with that.' Mark Lawler said: 'OK.'" 8Mr Lambourne said that the discussion was as follows: "6. To the best of my recollection this meeting was attended by Rodney Seymour, Mark Lawler, David Farley who I know to be an accountant from Lawler Partners and myself. I recall that there was a discussion about the fact that Rodney Seymour was using resources of the firm for his own work and words to the following effect were said: Rod Seymour said: 'I don't work 9 to 5. I work 7 days a week and the proof is in my billings which are still there.' Mark Lawler said: 'You are using a lot of our staff and the practice should get something for it.' Rod Seymour said: 'Steve, what would be fair? How much should the staff be charged to the practice at?' I said: 'I think that if staff were billed to your projects at 80% of the usual rate then that would be more than fair and there would even be some profit in it. As the partnership is 75% Rod and 25% Mark it would be fair that the 80% should apply on the basis that Rod's fees are maintained at 75% of the total billings in accordance with the partnership equity. If Rod's fees drop below 75% of total billings there should be an adjustment to the billings to Rod's private work to reflect this.' Rod Seymour said: 'I am okay with that.' Mark Lawler said: 'I am also OK with that.'" 9Thus it was common ground that there was discussion as to how the partnership would bill Mr Seymour for his private projects and it appears that that discussion also led into a discussion as to Mr Seymour maintaining his billings at 75 per cent of total billings and that there would be an adjustment if his billings fell below the 75 per cent level. There are differences between the parties as to how that adjustment should be made. But so far as the evidence about what was said at the meeting is concerned, the differences seem to be whether or not the adjustment should be made by increasing billings on Mr Seymour's projects, or by his otherwise contributing to the billings of the partnership, or by there being an adjustment to the partners' capital accounts. For reasons which will be given shortly I do not think that these differences denote any real difference in the substance of the matter. 10At the date of this meeting the partnership accounts for the year ended 30 June 2007 had not been finalised. The evidence of both Mr Lawler and Mr Seymour was to the effect that the financial statements for any one year were concluded about six or seven months after the end of that financial year. 11On 14 May 2008 Mr Lambourne wrote to the parties as follows: "Dear Rod and Mark, I refer to our recent meeting in relation to the Seymour Lawler work in progress and invoicing for the 2 Dudley Road project. As previously agreed between yourselves invoicing for this project was to be based on 80% of normal staff rates with no recovery for Rod's time on the proviso that Rod's billings do not fall below 75% of total billings. Set out below is a summary of billings for the period 1 July 2004 to 30 April 2008 which indicates that Rod's billings have been 73.26% of total billings. Summary of Billings: Total Rod Mark 2004/2005 1,019,863 813,374 206,307 2005/2006 1,123,515 851,306 271,788 2006/2007 931,066 626,402 304,550 2007/April 2008 610,239 408,135 202,053 $3,684,683 $2,699,217 $984,698 73.26% 26.72%