Bartier Perry Pty Ltd v Paltos

PAYNE JA: Mr Paltos, the respondent, was admitted as a solicitor in 1979 and specialised in family law. In 2010, he commenced to practise in partnership with Peter Milevski in a practice styled “Paltos Milevski Family Lawyers” (the Partnership). When the Partnership was established three documents were executed, namely, a Heads of Agreement, a Deed of Agreement of Partnership Terms and a Put and Call Option Agreement.

On 23 December 2015, Mr Paltos suffered two strokes and was hospitalised. Mr Paltos was unable to return to work in any capacity for a period of time after he suffered the strokes.

On 15 February 2016, Mr Milevski wrote to Mr Paltos signalling a dispute about the Partnership. The next day, 16 February 2016, the appellant, Bartier Perry Pty Ltd (Bartier Perry), was retained to act for Mr Paltos. On 29 February 2016, a formal retainer was executed, which described the services to be provided by Bartier Perry as including “advising [Mr Paltos] with regard to [his] Partnership in Paltos Milevski and in relation to the demands being made by [his] partner”. In discharge of that retainer, Mr Paltos dealt principally with Mr McCaffery from Bartier Perry and, less frequently, with a Mr Creais.

Sometime prior to 18 April 2016, Bartier Perry advised Mr Paltos that Mr Milevski could terminate the Partnership and suggested that Mr Paltos offer to sell 20% of the Partnership to Mr Milevski or dissolve the Partnership himself.

On 18 April 2016, Mr Milevski commenced proceedings in the Supreme Court against Mr Paltos, seeking dissolution of the Partnership. On about the same date, Bartier Perry ceased to act for Mr Paltos.

On 21 April 2016, the Supreme Court made orders by consent including orders that the Partnership be dissolved and Receivers appointed. The claim for an account sought in those proceedings was adjourned and has yet to be heard in the Equity Division (the Account Proceedings). In separate proceedings, which are to be determined before the claim for an account is resolved, Mr Milevski seeks payment of $461,476.30 said to be owing by Mr Paltos. Those proceedings will be heard together with Mr Paltos’ cross-claim in which he is seeking from Mr Milevski, among other things, an amount representing 70% of the value of the Partnership assets as at 21 April 2016, by reason of Mr Milevski having allegedly taken over the Partnership from the Receivers without paying for the goodwill of the Partnership (the Partnership Proceedings). Damages from the Receivers by reason of their conduct of the receivership are also apparently to be sought.1 Multiple hearing dates have been vacated and the proceedings were last before the court in June 2021. Despite opposing the application by Bartier Perry to have the present matter heard at the same time as the Partnership Proceedings because at that time Mr Paltos asserted there were no overlapping issues, it appears that Mr Paltos has successfully had those proceedings adjourned on the basis that the outcome of his case against Bartier Perry is material to the outcome of those proceedings. On 30 June 2021, a judge in the Partnership Proceedings made the following orders:

On 17 August 2016, Mr Paltos lodged a Notice of Intention to Engage in Legal Practice with the Law Society of New South Wales under the name “Paltos Family Lawyers Pty Ltd”, although as it transpired Mr Paltos was unable to work as a solicitor until December 2016. In December 2016, Mr Paltos returned to practise as a solicitor, albeit at a much-reduced capacity than he had enjoyed before his strokes.

On 5 October 2017, Mr Paltos commenced proceedings against Bartier Perry seeking damages for breach of contract, negligence, and for misleading and deceptive conduct arising from essentially the same conduct; that is, its alleged failure properly to advise Mr Paltos about his rights to exercise a put option granted by the Put and Call Option Agreement. As I have said, an application by Bartier Perry for those proceedings to be heard and determined at the same time as the Partnership Proceedings was rejected. Accordingly, the present appeal comes before this Court before the Partnership Proceedings have even commenced to be heard. I will return in detail to the complexities created by this state of affairs, particularly as regards the damages appeal.

In Paltos v Bartier Perry Pty Ltd [2020] NSWSC 705 and Paltos v Bartier Perry Pty Ltd (No 2) [2020] NSWSC 1706, Rothman J held that Bartier Perry was liable to pay Mr Paltos damages of $1,411,707 for breach of its duty of care, retainer and s 18 of Sch 2 to the Competition and Consumer Act 2010 (Cth) (Australian Consumer Law) because it had failed properly to advise Mr Paltos of his rights to exercise the put option under the Put and Call Option Agreement. The primary judge’s award of damages was subject to an undertaking being given by Mr Paltos to pay to Bartier Perry certain components of any damages he received from the Account Proceedings and the Partnership Proceedings (together the Equity Proceedings). The undertaking was in the following terms:

As I have explained, Mr Paltos has sought from Mr Milevski in the Partnership Proceedings payment of an amount representing 70% of the value of the Partnership assets (including goodwill and work in progress) as at 21 April 2016. It is common ground in the present case that the quantum of damages payable by Bartier Perry to Mr Paltos must be reduced by the amount Mr Paltos is entitled to recover from Mr Milevski for the goodwill of the Partnership and work in progress as at the date of dissolution of the Partnership. This state of affairs raises obvious and significant issues about the assessment of and quantum of damages in the present case to which I will return.

The principal facts found by the primary judge may be summarised thus:

The document at the heart of Mr Paltos’ case was the Put and Call Option Agreement. The essence of that case was simple. Mr Paltos alleged that, acting competently, Bartier Perry should have advised him that if he remained unable to work in the Partnership for a period of six months he would at that time, but for a limited period only, be able to exercise the put option granted by the Put and Call Option Agreement. Competent advice would have been that exercise of the put option may be financially advantageous to Mr Paltos and that he should seek accounting advice about that question. Acting competently, Bartier Perry should have advised Mr Paltos that the put option arguably survived the dissolution of the Partnership.

Mr Paltos’ case was that if he were given that advice he would have served a put option notice. He would in that event have been entitled to be paid in accordance with the formula in the Put and Call Option Agreement. As he was not given that advice, he failed to exercise the put option in time and that valuable right was lost. Mr Paltos claimed that Bartier Perry, in contract, tort and under s 18 of the Australian Consumer Law, was liable to compensate him for that loss.

As the terms of the Put and Call Option Agreement are at the heart of this case, I will set out its relevant terms at some length. Clause 2.4 of the Put and Call Option Agreement provided:

“Trigger Event” was defined in cl 1.1 as follows:

“TPD” was defined in cl 1.1 of the Put and Call Option Agreement as follows:

The following relevant terms were defined in cl 1.1 of the Put and Call Option Agreement:

The exercise of the put and call options was dealt with by cll 5.1 and 5.2 which provided:

At the trial a great deal of evidence was led about Mr Paltos’ medical condition during the period of the Bartier Perry retainer. The primary judge spent some time analysing that evidence and identifying the circumstances in which the put option was exercisable.

As is clear from the passages quoted above, the condition precedent to the exercise of, relevantly, the put option, was the “occurrence of the Trigger Event in respect of the Owner”. “Trigger Event” was defined to mean “the death or total and permanent disablement of an Owner or Incoming Partner”.

“TPD” was a defined term the construction of which was controversial before the primary judge. The essential debate at the trial was whether the definition required proof of “total and permanent disablement of an Owner” in addition to proof of the matters in (a), which addressed the case where there was an “Insurance Policy”, or (b), where there was no “Insurance Policy”. The primary judge concluded that the definition did not require proof of “total and permanent disablement of an Owner” in addition to proof of the matters in (a) or (b) of the definition.

The primary judge’s preferred construction was that the Trigger Event occurs at the end of six months of disablement, being in this case Mr Paltos’ inability to perform his usual working activities in the Partnership for a period of six consecutive months:

His Honour was apparently of the view that the existence of the implied term (explained below) was potentially important as otherwise the dissolution of the Partnership might destroy the right. Senior Counsel for Bartier Perry accepted that his Honour’s alternative finding at [367], that on the proper construction of the Put and Call Option Agreement the right to serve a put option notice survived the dissolution of the Partnership, was correct.

On the contingent basis that the right to serve a put option notice did not survive the dissolution of the Partnership, however, the primary judge found that the Put and Call Option Agreement contained an implied term to the effect that:

The primary judge concluded that Mr Paltos was suffering “total and permanent disablement” within the meaning of the Put and Call Option Agreement as at the date six months after he first suffered a stroke. He would have been entitled to serve a put option notice under the Put and Call Option Agreement at that time.

By that time, however, Bartier Perry’s retainer had been terminated. The critical issue about liability was whether it had been shown that during the currency of its retainer a reasonably competent solicitor in the position of Bartier Perry would have given Mr Paltos advice that if he remained unable to work in the Partnership after six months he may be able to exercise the put option.

The primary judge found that a reasonably competent solicitor in the position of Bartier Perry should have, at least following the deterioration of Mr Paltos’ medical prognosis on about 13 April 2016, given Mr Paltos advice that if in June 2016 he remained unable to carry out his usual working activities in the Partnership he may be able to issue a put option notice under the Put and Call Option Agreement requiring Mr Milevski to pay him for his 70% share of the Partnership by reference to the formula in Schedule C to the Put and Call Option Agreement.

The primary judge accepted that prior to 13 April 2016 Bartier Perry was not negligent in failing to give that advice because of Mr Paltos’ strongly expressed desire to return to carrying out his usual working activities in the Partnership as soon as possible. The primary judge found, however, that by 13 April 2016 it was obvious to Bartier Perry that:

There was a limited controversy on the appeal about the advice that the primary judge did find that Bartier Perry had given about the exercise of the put option. It was common ground that the advice given was brief. Mr McCaffery said words to Mr Paltos to the effect of “the put options do not help [you, Mr Paltos]”. The principal controversy was whether Mr McCaffery went on to qualify that statement by saying words to the effect of “at present because there is a six-month requirement in relation to your disability”, “yet” or “at this time”. It is not precisely clear which, if any, version of those qualifying words the primary judge accepted had been said:

Despite the rejection of Mr McCaffery’s evidence about the qualifying words in this passage, it appears from his Honour’s discussion of breach that his Honour accepted, at least on a contingent basis, that the advice given to Mr Paltos by Mr McCaffery included qualifying words such that the Put and Call Option Agreement “did not apply yet or at this stage”.

Even assuming that the qualifying words had been uttered, the primary judge found that a cursory reading of the Put and Call Option Agreement should have revealed to Bartier Perry that up to 30 days after Mr Paltos had been unable for six consecutive months to undertake his usual activities in the Partnership because he had suffered a stroke, there existed an opportunity for him to exercise the put option by serving an option notice. After 30 days, the option would lapse.

The primary judge accepted that Mr Paltos had made known to Bartier Perry his “continuing strident desire to return to his practice”. Although Bartier Perry, through Mr McCaffery, was aware of the significant limitations in Mr Paltos’ capacity to determine what was in his best interests, it was not negligent for Bartier Perry to follow those instructions for the majority of the time they were retained.

The primary judge found that the position changed dramatically on 13 April 2016, when Mr Paltos’ medical condition had, according to the contemporaneous medical evidence, deteriorated significantly, and Mr Paltos had indicated to Bartier Perry that he was now prepared to give up all of his interest in the practice. His Honour found:

For essentially the same reasons as in relation to the breach of contract and negligence findings, the primary judge found that Bartier Perry had engaged in misleading and deceptive conduct by adverting to the put option contained in the Put and Call Option Agreement, but failing to explain that if Mr Paltos’ disability persisted for six months he would be entitled to serve a put option notice and may be financially much better off as a result.

The next question to which a significant amount of the trial and a large part of the appeal was directed was the causation issue; whether, had Bartier Perry given Mr Paltos the advice about the possible exercise of the put option described at [14]-[18] above, Mr Paltos would have served on Mr Milevski a put option notice under the Put and Call Option Agreement in June 2016.

The primary judge found that if he had been given the advice by Bartier Perry about the possible exercise of the put option at [14]-[18] above, Mr Paltos would have served a put option notice on Mr Milevski during the period the notice would have been effective:

The primary judge concluded that Mr Paltos had demonstrated that he suffered a loss by reason of not issuing a put option notice to Mr Milevski. That was because his Honour accepted that on the correct construction of the Put and Call Option Agreement Mr Paltos was entitled to be paid an amount calculated in accordance with Schedule C to that agreement, despite Mr Milevski resisting making such a payment. Mr Duggan, an expert accounting witness called by Mr Paltos, calculated the value of the Partnership on the basis prescribed by the Put and Call Option Agreement as $2,016,724 and the purchase price of Mr Paltos’ interests as 70% of that amount, $1,411,707. His Honour accepted that calculation and rejected a submission that the calculation of the amount payable under the put option by Mr Duggan involved double counting. That matter is the subject of ground 5 of the appeal and I will address the complexities raised by that issue when dealing with that ground.

The primary judge accepted that Mr Paltos was seeking the payment of amounts by Mr Milevski in the Partnership Proceedings which, if recovered, would reduce the amount of the damages payable by Bartier Perry. The amount Mr Paltos was seeking, as I will explain in greater detail when dealing with ground 6 of the appeal, was an amount representing 70% of the value of the Partnership assets (including goodwill and work in progress) as at 21 April 2016. As I have said, the Partnership Proceedings in which those payments are sought have not yet been heard.

Bartier Perry submitted that as Mr Paltos had chosen to conduct this case against his legal advisors separately from and prior to resolution of the underlying disputes about the Partnership, the primary judge was obliged to assess Mr Paltos’ damages now. Bartier Perry submitted that it was common ground between the parties at the trial that 70% of a figure between $879,434 and $1,026,007 calculated by Ms Rebecca Conoulty, the expert accountant Mr Paltos relies upon in the Partnership Proceedings, was the correct calculation of 70% of the value of the Partnership assets (including goodwill and work in progress) as at 21 April 2016. Bartier Perry submitted that this amount should be deducted from $1,411,707.

The primary judge recognised that some allowance needed to be made for the fact that Mr Paltos was claiming in these proceedings to have suffered loss of $1,411,707 in circumstances where, simultaneously, he was claiming in the Partnership Proceedings to have suffered a loss of over $600,000 which he accepted, if awarded, would reduce the damages recoverable from Bartier Perry. In the principal judgment, the primary judge considered the issue this way:

The primary judge did not make orders but gave the parties an opportunity to make further submissions about the orders to be made.

On 1 December 2020, the primary judge delivered judgment in Paltos v Bartier Perry Pty Ltd (No 2) [2020] NSWSC 1706 (the second judgment).

As to the undertaking issue, the primary judge said:

It will be necessary to address, in detail, his Honour’s reasons on the topic of the undertaking when addressing ground 6 of the appeal. I will return to that topic then.

His Honour also gave consideration to claims for additional relief made by Mr Paltos which are the subject of the notice of cross-appeal. As those claims are detailed and somewhat convoluted, I will address them when dealing with the notice of cross-appeal.

Finally, the primary judge made an award of indemnity costs on the basis of an offer of compromise in the amount of $1.4 million. If Bartier Perry enjoy success in this appeal in reducing the amount of the damages award below $1.4 million it follows that the award of indemnity costs from the date of that offer must also be set aside.

His Honour made the following orders:

Bartier Perry advanced six grounds of appeal. It contended that the primary judge erred:

Bartier Perry sought to adduce evidence on the appeal which was submitted to be fresh evidence arising after the hearings by the primary judge. The evidence was contained in the affidavit of Timothy Randolph Price sworn on 19 March 2021 and its exhibit marked “TRP-1” comprising:

Bartier Perry submitted that the Facebook and Linkedin posts confirm that Mr Paltos has returned to practise as the principal solicitor at Paltos Family Lawyers and, at the very least, establish that Mr Paltos considers himself cognitively capable of working as a solicitor and has retained his commitment to returning to practice. It was submitted that the judgments in Waleys and Jamison also establish that Mr Paltos returned to practice and did some legal work in the business named “Paltos Family Lawyers”. It was submitted that the judgments, when viewed in light of the more recent social media posts, underscore Mr Paltos’ ongoing and unwavering commitment to return to practice.

Where the evidence relates to matters occurring after the trial, there is no requirement to show special grounds to justify its reception: Supreme Court Act 1970 (NSW), s 75A(9) (“subsection (8) [which requires special grounds] does not apply to evidence concerning matters occurring after the trial or hearing”). Nevertheless, in exercising the statutory power to admit fresh evidence regard must be had to the nature of the proceedings and the general public interest in the finality of litigation: Doherty v Liverpool District Hospital (1991) 22 NSWLR 284 at 296; Great Wall Resources Pty Ltd v O’Sullivan [2009] NSWCA 119 at [28]-[30]; Council of The City of Botany Bay v Michos [2013] NSWCA 244 at [33].

Bartier Perry are correct that the material sought to be tendered on the appeal is fresh in that it was not available in 2020 at the time of the hearings before the primary judge. At its highest, however, this fresh evidence shows what was already apparent from the primary judgment itself, namely that after the relevant period in which Mr Paltos could have exercised the put option, he returned to practise as a solicitor, albeit on a much more limited basis than before he suffered the strokes. As I will explain, there is no longer an issue in this case about whether, in order to exercise the put option, Mr Paltos needed to demonstrate that he was totally and permanently disabled, in the sense that he was no longer able to work as a solicitor in the future. The primary judge rejected that construction of the Put and Call Option Agreement and Bartier Perry did not appeal from that finding.

Bartier Perry submitted that the evidence is relevant to establishing that Mr Paltos continued to practise law after the expiration of the notional Option Exercise Period and, by extension, believed that he was mentally capable of so acting. The evidence was said to undermine the primary judge’s conclusion (at [314]) that Mr Paltos “was suffering from a condition that prevented him from working and was getting worse” as it indicates that his condition did in fact improve to the point at which he was able to return to practice. This, however, was understood by the primary judge who made a finding (at [12]) that in August 2016, Mr Paltos lodged a Notice of Intention to Engage in Legal Practice with the Law Society of New South Wales under the name Paltos Family Lawyers Pty Ltd and in December 2016, he returned to practise as a solicitor. The fresh evidence confirms those findings but takes the matter no further.

Bartier Perry also submitted that the evidence confirms the primary judge’s finding that Mr Paltos was committed to returning to practice. It was submitted that this bears upon the question of whether Mr Paltos would have sought to exercise the put option if he had been properly advised in relation to it. I do not agree.

This submission is based upon a misconception about the proper operation of the Put and Call Option Agreement. As I have already said, the primary judge found that the correct construction of the Put and Call Option Agreement was that the Trigger Event occurs at the end of six months of disablement, being in this case the inability on the part of Mr Paltos to perform his usual working activities in the Partnership for a period of six consecutive months. None of this fresh evidence goes anywhere near to establishing that Mr Paltos can now perform his usual working activities in the Partnership, let alone that he could at the time he was legally able to exercise the put option.

To the extent that Bartier Perry seek to rely on this evidence as a “roadblock” warranting a finding relevant to causation that, although incorrect as a matter of law, Mr Paltos may have thought that he could not exercise the put option lest he be forbidden from ever practising as a solicitor in the future, that was a matter well and truly litigated before the primary judge on the basis of abundant material that Mr Paltos strongly desired to return to practise as a solicitor and by the time of the trial had done so to a limited extent. This evidence adds nothing material to the abundant evidence which was before the primary judge on that topic.

Given the nature of the proceedings, the extensive findings already made on this subject, the peripheral relevance of the material and the general public interest in the finality of litigation, I would exercise the Court’s discretion to reject all of the fresh evidence and dismiss Bartier Perry’s notice of motion.

Despite the provisions of the Civil Liability Act 2002 (NSW) and the Competition and Consumer Act being central to the resolution of the present case, a striking feature of these proceedings is the absence of any real references to those legislative provisions by the parties before the primary judge or in this Court.

The consequences are that, for the purposes of the appeal, virtually all of Bartier Perry’s complaints are concerned with the construction of the Put and Call Option Agreement and findings of fact made by the primary judge. The exception is ground 6, which complains about a matter of principle in the ascertainment of Mr Paltos’ damages. Even in that case, however, the provisions of the Civil Liability Act and the Competition and Consumer Act were barely addressed.

Ground 1 of the appeal involves four separate, but overlapping, challenges to the primary judge’s findings of fact about Mr McCaffery’s advice to Mr Paltos about the Put and Call Option Agreement. Bartier Perry submitted that on a correct understanding of the facts it had discharged its obligation properly to advise Mr Paltos about the manner and circumstances of exercise of the put option granted by the Put and Call Option Agreement.

I have concluded that this ground must fail. This is because, on the assumption most favourable to Bartier Perry about what Mr McCaffery on behalf of Bartier Perry told Mr Paltos about the manner and circumstances of exercise of the put option, Mr Paltos was nevertheless entitled to succeed in his case that Bartier Perry breached its retainer and the concurrent duty of care.

Before descending into the detail of Bartier Perry’s complaints about factual findings, it is first necessary to address submissions made on behalf of Mr Paltos which asserted that in order to succeed on this ground Bartier Perry was required to demonstrate that factual findings made by the primary judge must be shown not to have been “open”:

As was made clear during oral address, that submission cannot be accepted. In a case such as the present, where s 75A of the Supreme Court Act applies, the Court is conducting a rehearing. A judgment of this Court is required both on the facts and the law. In relation to demeanour-based credit findings, as explained in Fox v Percy (2003) 214 CLR 118; [2003] HCA 22 at [22]-[28], appellate restraint is required. Nevertheless, as the High Court went on to explain in Fox v Percy:

The primary judge made the following finding about Mr McCaffery’s advice to Mr Paltos:

Bartier Perry submitted that the primary judge erred in finding that Mr McCaffery did not “formally construe” the Put and Call Option Agreement or advise Mr Paltos about his construction of that agreement. It was submitted that his Honour’s finding was contrary to Mr McCaffery’s evidence, admissions made by Mr Paltos in cross-examination, the objective evidence and other findings in his Honour’s judgment.

Bartier Perry submitted that the Court should find that in late February 2016, Mr McCaffery construed the Put and Call Option Agreement and correctly advised Mr Paltos that the put option did not assist him at that time because before it could be exercised there was a six-month requirement in relation to his disability.

It may be that by finding that Mr McCaffery did not “formally construe” the Put and Call Option Agreement, all that his Honour was saying was that Bartier Perry did not construe the Put and Call Option Agreement in the strict sense of not accurately interpreting and finding its correct meaning. As I will explain, that finding was correct. If, however, the finding made by the primary judge that Mr McCaffery did not “formally construe” the Put and Call Option Agreement intended to convey that Bartier Perry did not look at the Option Agreement at all, this was an overstatement of the position. As I will explain, however, I do not think that even if the finding should be understood as intended to convey that Bartier Perry did not look at the Option Agreement at all it affects his Honour’s overall conclusion that Bartier Perry failed to give Mr Paltos competent advice about his rights under the Put and Call Option Agreement. That is, I accept that Mr McCaffery read the Put and Call Option Agreement and sought to understand its terms, sufficient to warrant the description that he “construed” it, at least in that limited sense. I also accept that it is likely that Mr McCaffery said to Mr Paltos that the Put and Call Option Agreement did not apply to him “yet” or “at this time”. In context, the oral advice by Mr McCaffery was likely to have included some reference to the time dimension of the exercise of the option. Mr McCaffery’s advice was not, however, in the circumstances and having regard to the terms of Bartier Perry’s retainer, sufficient to discharge its obligation to provide competent legal advice to Mr Paltos about his rights against Mr Milevski as regards the Partnership. I will return to this subject shortly.

Bartier Perry next submitted that the primary judge erred in finding that by 14 April 2016 Mr Paltos was prepared to give up the whole of his interest in the Partnership. It was submitted that, at that time, Mr Paltos retained a “strong and passionate desire” to return to work and believed that desire “would be fulfilled or might be fulfilled” in the future. It was submitted that even though Mr Paltos was willing to transfer his interest in the Partnership to Mr Milevski, he was not prepared to do so in a way that would prevent him from being able to work again, which (so the written argument asserted) would have occurred if he tried to invoke his rights under the Put and Call Option Agreement.

Whilst I accept that on 13-14 April 2016 Mr Paltos continued to harbour a desire to return to work as a solicitor when he was able to do so, the primary judge’s finding that by 13 April Mr Paltos was prepared to give up, by which the primary judge meant transfer, the whole of his interest in the Partnership, was plainly correct.

The contemporaneous documents and unchallenged findings of the primary judge make clear that on 14 April 2016 Mr Paltos had agreed in principle to the transfer of his interests in the Partnership to Mr Milevski, “by whatever mechanism”, and that his current condition prohibited him from getting back to work as soon as he had expected:

It is one thing to conclude that Mr Paltos would seek to practise as a solicitor in the future. Plainly he did. It is a quite different thing to find that Mr Paltos would be prepared to transfer the whole of his interest in the Partnership. There is no inconsistency in the two states of mind or decisions made by Mr Paltos. As I have explained, the primary judge’s finding that Mr Paltos did not need to be “totally and permanently disabled” in addition to meeting the description in clause (b) of the definition of “TPD” was not challenged by Bartier Perry on appeal. Whilst it is correct that Mr Paltos would not have been permitted to solicit clients of the Partnership if he had exercised the put option, Bartier Perry’s submission that having exercised the put option Mr Paltos could never work as a solicitor again is untenable.

The primary judge drew the following conclusions:

Bartier Perry submitted that the primary judge erred in finding that by at least 14 April 2016 Mr McCaffery was aware, or should have been aware, that Mr Paltos was totally and permanently disabled within the meaning of the Put and Call Option Agreement. There were said to be three problems with his Honour’s finding:

Bartier Perry invited the Court to find that Mr McCaffery believed that there was a real prospect that Mr Paltos “may not” be totally and permanently disabled for the purposes of the Put and Call Option Agreement when the Option Exercise Period notionally would have commenced on 23 June 2016. It was said that, in light of the medical evidence available at the time, it was not unreasonable for him to hold this belief.

Bartier Perry is correct that as at 14 April 2016, Mr Paltos could not have been totally and permanently disabled within the meaning of the Put and Call Option Agreement and the primary judge erred in so concluding. As I will explain, however, I do not think that it affects his Honour’s overall conclusion that Bartier Perry failed to give Mr Paltos competent advice about his rights under the Put and Call Option Agreement.

Bartier Perry’s retainer was not limited to providing advice only if Mr McCaffery did not believe there “was a real prospect” that Mr Paltos may not be “TPD” as defined in the Put and Call Option Agreement on the Option Exercise Date. Assuming, in Bartier Perry’s favour, that Mr McCaffery believed that there was a real prospect that Mr Paltos “may not” be totally and permanently disabled for the purposes of the Put and Call Option Agreement on 23 June 2016, I have concluded that he was nonetheless obliged by the terms of his retainer to provide advice to Mr Paltos about his rights under the Put and Call Option Agreement, should he meet the description of “TPD” as defined on the relevant date of the Trigger Event.

The contemporaneous evidence about Mr Paltos’ health as at 13 April 2016 provides an ample basis for his Honour’s conclusion that Mr Paltos may have remained totally and permanently disabled within the meaning of the Put and Call Option Agreement on 23 June 2016, and if so, he may have been able to exercise the put option.

Bartier Perry submitted that the primary judge erred in finding that Bartier Perry’s duty required it to provide further advice to Mr Paltos about the Put and Call Option Agreement on or about 14 April 2016 or at any time between that date and the termination of Bartier Perry’s retainer.

It was submitted that the appropriate time for giving advice about the potential to exercise the put option after the dissolution of the Partnership would have been closer to 23 June 2016 when the prospect of Mr Paltos recovering within the six-month period prescribed by the definition of “TPD” could be known with greater certainty (at which stage Bartier Perry’s retainer had already been terminated).

This complaint should be rejected. The finding by the primary judge that, acting competently, Bartier Perry should have provided advice to Mr Paltos about the manner and timing of the exercise of the put option was correct. As I will explain, the primary judge did not err in finding that Bartier Perry should have so advised Mr Paltos at least after 13 April 2016 when his medical condition had significantly deteriorated and he had agreed to transfer his share in the Partnership.

As noted at the outset, this ground complains about four overlapping factual findings made by the primary judge in support of an overall submission that the primary judge erred in concluding that Bartier Perry breached its duty of care and retainer.

Bartier Perry is entitled, to an extent, to succeed in relation to some of those factual findings:

Sub-grounds 1(a) and (c) should be allowed to that limited extent. That does not lead to ground 1 being upheld. That is because, on the assumption most favourable to Bartier Perry about what Mr McCaffery on behalf of Bartier Perry told Mr Paltos about the manner and circumstances of the exercise of the put option, Mr Paltos was nevertheless entitled to succeed in his case that Bartier Perry breached its retainer and the concurrent duty of care.

Whilst I find that it is likely that Mr McCaffery said to Mr Paltos during the currency of the retainer that the Put and Call Option Agreement did not apply to him “yet” or “at this time”, this was insufficient to constitute reasonably competent advice. The primary judge was correct to conclude that Bartier Perry, via Mr McCaffery, ought to have advised Mr Paltos between 13 April and 18 or 19 April that if he continued until 23 June 2016 to be incapable of carrying out his usual duties in the Partnership, he could exercise his option to require Mr Milevski to purchase his 70% interest in the Partnership in accordance with the formula in Schedule C to the Put and Call Option Agreement.

The conclusion drawn by the primary judge that Bartier Perry breached its retainer and concurrent duty of care by failing to give this advice was amply supported. There was a limited suite of documents here in issue. Bartier Perry had them all. Bartier Perry’s retainer plainly encompassed providing advice to Mr Paltos about the appropriate and possible means available to him to transfer his interest in the Partnership to Mr Milevski on the best terms possible, whether immediately, upon termination of the Partnership, or after its dissolution. By 13 April 2016, this was the only matter of substance that Bartier Perry was retained to advise about. On or after 13 April 2016, a reasonably competent solicitor in the position of Mr McCaffery would have understood that, if Mr Paltos remained unable to perform his usual duties in the Partnership in June 2016, the put option under the Put and Call Option Agreement was an obvious and potential method available to Mr Paltos to transfer his interest in the Partnership for value. Acting competently, advice to that effect should have been given.

Reasonably competent advice would have been that if Mr Paltos remained unable to work in the Partnership for a period of six months he would at that time, but for a limited period only, be able to exercise the put option granted by the Put and Call Option Agreement. Competent advice would have been that exercise of the put option may be financially advantageous to Mr Paltos and that he should seek accounting advice about that question. Acting competently, Bartier Perry should have advised Mr Paltos that the put option arguably survived the dissolution of the Partnership. Bartier Perry failed to give that advice. There was no error in the conclusion by the primary judge that Bartier Perry thereby breached its retainer and concurrent duty of care.

Bartier Perry submitted that for the reasons advanced in support of ground 1, its conduct was not misleading or deceptive. It was submitted that:

For essentially the same reasons as in relation to ground 1, the different formulations of advice said to have been given by Mr McCaffery to Mr Paltos do not matter in this case. On the version of Mr McCaffery’s advice most favourable to Bartier Perry, I am satisfied that the advice given to Mr Paltos was misleading and deceptive.

Mr Paltos sought damages under s 236 of the Australian Consumer Law. While the measure of damages under s 82 of the Trade Practices Act 1974 (Cth) (which is relevantly in similar terms to s 236) is not necessarily the same as for negligence (see Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388; [2004] HCA 3), Mr Paltos formulated his claim under this provision in the same manner as he did for breach of retainer and duty. However, it should be noted that the test for causation that inures in the word “by” found in s 82 adopts the common law “common-sense concept” discussed in March v E & MH Stramare Pty Ltd (1991) 171 CLR 506; [1991] HCA 12: see Wardley Australia Ltd v Western Australia (1992) 175 CLR 514; [1992] HCA 55 at 525 per Mason CJ, Dawson, Gaudron and McHugh JJ. The test of causation in s 5D of the Civil Liability Act is not necessarily the same: Adeels Palace Pty Ltd v Moubarak (2009) 239 CLR 420; [2009] HCA 48 at [43]-[44]. Nevertheless, in this case it was not suggested that there was any material difference in the application of the provisions.

Whilst I find that it is likely that Mr McCaffery said to Mr Paltos during the currency of the retainer that the Put and Call Option Agreement did not apply to him “yet” or “at this time”, this was misleading and deceptive conduct. There was a limited suite of documents in issue. Bartier Perry had all of the documents and was being asked to provide advice to Mr Paltos about the appropriate and possible means available to him to transfer on the best terms possible his interest in the Partnership to Mr Milevski, whether immediately, upon termination of the Partnership, or after its dissolution. In that context, it was a dangerously incomplete statement of the rights Mr Paltos enjoyed to advise him that “the Put Options do not help [you, Mr Paltos]” yet or at this time. Whilst literally true, this advice was misleading and deceptive, in that it was apt to mislead Mr Paltos about the nature of his legal rights.

The true position was that Mr Paltos arguably enjoyed valuable rights under the Put and Call Option Agreement. If Mr Paltos remained unable to work in the Partnership for a period of six months he would at that time, but for a limited period only, be able to exercise the put option granted by the Put and Call Option Agreement. Non-misleading advice would have been that the exercise of the put option may be financially advantageous to Mr Paltos and that he should seek accounting advice about that question. Acting in a non-misleading way, Bartier Perry should have advised Mr Paltos that the put option arguably survived the dissolution of the Partnership. Bartier Perry failed to give that advice.

Bartier Perry’s conduct was misleading and deceptive. Ground 2 should be rejected.

It will be recalled that, at least on a contingent basis, the primary judge found that the Put and Call Option Agreement contained an implied term to the following effect:

Bartier Perry submitted that the implied term did not satisfy any of the conditions necessary to ground a term implied in law or in fact. In particular, Bartier Perry submitted that it was not necessary to give business efficacy to the Put and Call Option Agreement because:

The latter submission may be put to one side immediately. The primary judge did not find that the put option was exercisable “pre-emptively” before June 2016. There was no notice of contention filed by Mr Paltos addressing this topic.

I have concluded that ground 3 proceeded on an essentially false basis. As Bartier Perry submitted, the primary judge found that on the correct construction of the Put and Call Option Agreement, the put option survived the dissolution of the Partnership. That construction of the Put and Call Option Agreement was not challenged on the appeal.

The primary judge found that, properly advised, Mr Paltos could and would have exercised the put option in June 2016. In those circumstances there was no basis to conclude that the implied term should be implied in law or in fact as a term of the Put and Call Option Agreement. Shortly put, it was unnecessary on the proper construction of the Put and Call Option Agreement for such a term to be implied.

For a term to be implied in law, the test is usually described as one of necessity: Liverpool City Council v Irwin [1977] AC 239 at 254-256, 262, 265-266; Byrne v Australian Airlines Ltd (1995) 185 CLR 410; [1995] HCA 24 at 453. Whilst the list of classes of contracts in which the law will imply terms is not closed (Castlemaine Tooheys Ltd v Carlton & United Breweries Ltd (1987) 10 NSWLR 468 at 487D), the implied term found here can hardly be described as necessary in circumstances where the express terms, correctly construed, provide that the right to exercise the option survived the dissolution of the Partnership.

For a term to be implied in fact, that term must, inter alia, be necessary to give business efficacy to the agreement: BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266; [1977] UKPCHCA 1 at [40]-[41]; Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; [2014] HCA 32 at [21]-[23], [28]. It was not necessary to imply a term into the Put and Call Option Agreement in order to give business efficacy to the agreement. On the proper construction of that Agreement, the option survived the dissolution of the Partnership.

Accordingly, assuming that the finding was other than tentative and contingent, I have concluded that the primary judge erred in finding the existence of the implied term. It follows that the primary judge erred in finding that there was a breach of contractual duty in Bartier Perry failing to advise Mr Paltos about the existence of the implied term.

I have also concluded, however, that this error was not material to the outcome. That is because, as Bartier Perry accepted on the appeal, the primary judge found that:

Bartier Perry submitted that Mr Paltos had not proven that he would have exercised the put option if advised he was able to do so. As this was the focus of ground 4 of the appeal, I will return to it shortly.

Whilst I would uphold ground 3 of the appeal, this conclusion does not affect the correctness of the primary judge’s findings about breach of retainer, duty or misleading and deceptive conduct. The findings of breach are amply supported by other findings made by the primary judge which were not challenged on the appeal.

Grounds 4(a) and 4(b) concern causation. Bartier Perry’s complaints are essentially about findings of fact. It was submitted that the primary judge erred in finding that Mr Paltos had proven that he would have either sought to rely on the implied term to prevent the dissolution of the Partnership or attempted to exercise the put option after the Partnership had been dissolved if he had been correctly advised in relation to his rights under the Put and Call Option Agreement. This was because of the risks and disadvantages of seeking to exercise the option, which were submitted to be repugnant to Mr Paltos’ priorities at the time. In oral submissions these risks and disadvantages were collectively referred to as “speed bumps”.

The case regarding the implied term and the dissolution of the Partnership may be set to one side. As I have found, the implied term was unnecessary in circumstances where the put option survived the dissolution of the Partnership. The alternative causation case raises no additional issues more favourable to Bartier Perry.

Bartier Perry submitted that on the assumption that prudent advice was as I have found (at [86] above), the hypothetical prudent solicitor would also have advised Mr Paltos:

Bartier Perry submitted that the primary judge proceeded on the basis that, if Mr Paltos had been properly advised, he could have either consented to Receivers being appointed or exercised his rights under the Put and Call Option Agreement and potentially received more money than if the Partnership were simply wound up. Bartier Perry characterised this as a false dichotomy for the following reasons:

Bartier Perry further submitted that the primary judge’s analysis on causation was unsound because it was based on his Honour’s erroneous finding that Mr Paltos gained an insight into the degree to which he was disabled on or about 13 April 2016, ignoring the fact that Mr Paltos still believed at that time that he may recover and be able to return to work. It was submitted that the fact that Mr Paltos took steps to return to work after the Partnership was dissolved, and then did in fact return to work as a solicitor in late 2016, is powerful objective evidence of that belief. It was submitted that he would not have acted any differently if he had been advised that he could exercise the put option after the dissolution of the Partnership; it would have been inconsistent with his priorities and the risks would have been too great for him at the time.

Mr Paltos submitted that it strained credulity to suggest that Mr Paltos would not have exercised the put option when he has taken essentially the same litigation risk by commencing these proceedings and the related Partnership Proceedings and he had no choice but to have exercised the put option, had he been advised that he could.

It was submitted that the same conclusions apply to causation in respect of damages for misleading and deceptive conduct, save that the limitation under s 5D(3) of the Civil Liability Act does not apply to subjective evidence of Mr Paltos after the event: see Australian Executor Trustees (SA) Ltd v Kerr [2021] NSWCA 5 at [290].

It is axiomatic that proof of causation lay on Mr Paltos: Civil Liability Act, s 5E; Australian Consumer Law, s 18.

The question before the primary judge was whether, on the balance of probabilities, Mr Paltos had demonstrated that if he had been advised, between 13 and 19 April, that if he continued to be incapable of carrying out his usual duties as a partner of the Partnership until 23 June, he could arguably have exercised his put option to require Mr Milevski to purchase his 70% interest in the Partnership in accordance with the formula in Schedule C to the Put and Call Option Agreement (and that he should seek accounting advice about the value of that interest), the put option would likely have been exercised.

I have concluded that the primary judge was correct to find that had such advice been given, it is likely that the put option would have been exercised by Mr Paltos.

In reaching this conclusion it is important not to allow hindsight to lead too readily to a conclusion that Mr Paltos would have exercised the put option.

As to the risks of litigation to which Bartier Perry drew attention, it may be accepted that acting competently, Mr McCaffery would have warned Mr Paltos that litigation was a likely outcome of exercise of the put option. Mr Milevski may well have disputed Mr Paltos’ entitlement to exercise the put option and would have engaged in litigation to seek to avoid having to purchase Mr Paltos’ 70% interest in the Partnership in accordance with the formula in Schedule C to the Put and Call Option Agreement. Although the legal arguments to be advanced on behalf of Mr Milevski are unknown, it may be that ultimately Mr Milevski would have advanced arguments of the breadth advanced by Bartier Perry about the correct construction of the Put and Call Option Agreement. I have concluded that those arguments are not correct. On the proper construction of the Put and Call Option Agreement Mr Paltos was entitled to succeed.

The objective evidence available about Mr Paltos’ appetite for expensive and uncertain litigation tends strongly in favour of the conclusion that Mr Paltos, if properly advised by Bartier Perry, would likely have issued a put option notice, despite the risk that Mr Milevski would have made Mr Paltos participate in litigation to secure any payment. Mr Paltos has at every relevant turn, including as at the relevant dates for this hypothetical litigation, in fact chosen to litigate; against Mr Milevski, against the Receivers and against Bartier Perry. In all three cases it may be inferred that the litigation was expensive and, considered prospectively, carried financial, health and reputational risks for Mr Paltos. I accept that Mr Paltos would have regarded in 2016 and 2017 the public disclosure of his disability and matters relating to an alleged gambling habit as undesirable. I am nevertheless comfortably satisfied that if he had been given the correct advice Mr Paltos would have exercised the put option despite the risk that it would expose the extent of his disability and allegations about his gambling. In effect exactly the same risks existed and have come to pass in these proceedings and in the Partnership Proceedings. I also accept that Mr Paltos would have needed to be in a position to fund litigation against Mr Milevski. On the basis of the conduct of the present proceedings and the Partnership Proceedings, I am persuaded that Mr Paltos has proven that he would have both exercised the put option and successfully sought to vindicate his rights in court if necessary.

As to Mr Paltos’ personal, professional and health priorities (namely, to recover so that he could return to work), Bartier Perry’s written submissions (at least) proceeded on a false basis. It is not correct that had he successfully exercised the put option Mr Paltos would have been prohibited from ever working as a solicitor again. A great deal of Bartier Perry’s submissions were based on this assertion, which is incorrect on the proper interpretation of the Put and Call Option Agreement. The “Trigger Event” requiring Mr Milevski to purchase Mr Paltos’ interest was that if Mr Paltos continued until 23 June to be incapable of carrying out his usual duties as a partner in the Partnership, he could exercise his put option to require Mr Milevski to purchase his 70% interest in the Partnership in accordance with the formula in Schedule C to the Put and Call Option Agreement. Having exercised the option, Mr Paltos would have been precluded from soliciting the clients of the practice: Trego v Hunt [1895] 1 Ch 462. Whilst I accept that Mr Paltos at all relevant times wanted to return to work as a solicitor, the prospect raised by Bartier Perry of him never being able to practise again is simply incorrect on the proper construction of the Put and Call Option Agreement. Bartier Perry’s submissions about Mr Paltos’ fear that exercise of the option would impede his return to practice are in any event overblown in circumstances where Bartier Perry did not give any advice on the subject, and competent advice, which they did not give, was that the exercise of the option would not have had the effect that Bartier Perry now say Mr Paltos would have feared that it did. The objective evidence is that Mr Paltos’ personal, professional and health priorities were at the least consistent with the exercise of the put option.

Thirdly, even if as Bartier Perry submit it was correct that “essentially monetary issues” were driving Mr Paltos, the evidence before the primary judge makes clear that it is likely Mr Paltos would have exercised the put option if competently advised by Bartier Perry. If Mr Paltos had consulted his accountant about the monetary outcome of exercise of the put option (as he should have been advised to do) he would have received advice about the value of the put option of the kind he in fact received from Mr Paltos’ accounting expert witness in these proceedings, Mr Duggan. It is likely that on receipt of that advice Mr Paltos would have issued a put option notice.

Making allowance for all of the “speed bumps” identified by Bartier Perry, on the balance of probabilities I am satisfied that, if given competent advice by Bartier Perry, Mr Paltos would have exercised the put option. Factual causation has been established under s 5D of the Civil Liability Act. I am also satisfied, for essentially the same reasons, that factual causation under s 18 of the Australian Consumer Law has been established.

I would reject ground 4.

Bartier Perry submitted that the primary judge erroneously found that Mr Paltos would have been entitled to be paid $1,411,707 under cl 5.1 of the Put and Call Option Agreement after accepting the calculations prepared by Mr Paltos’ accounting expert witness, Mr Duggan.

It was submitted that Mr Duggan incorrectly used the formula in Schedule C to the Put and Call Option Agreement when calculating the “Purchase Price” for the purposes of cl 5.1. It was said that the formula in Schedule C determines the “Market Value of Business Interests” and the formula in the definition of the term “Purchase Price” in cl 1.1 of the Put and Call Option Agreement should have been used instead. It was said that if Mr Duggan had calculated the value of the Purchase Price in accordance with the correct formula he would have arrived at a figure of $988,194.

Ground 5 may be disposed of shortly.

It will be recalled from [17] above that “Market Value” in the Put and Call Option Agreement is defined thus:

“Business Interests” in the Put and Call Option Agreement are defined thus:

“Purchase Price” in the Put and Call Option Agreement is defined thus:

It will be recalled that cl 5.1(a) provides:

The language of cl 5.1 of the Put and Call Option Agreement is against Bartier Perry’s suggested construction. As is the context.

The definition of “Purchase Price” makes clear that “B” in the formula is the “Market Value of all Business Interests”. Schedule C to the Put and Call Option Agreement provides, relevantly:

The calculation identified by Schedule C is of the “Market Value of Business Interests”, not the Market Value of all Business Interests.

Bartier Perry’s case is that Schedule C identified the market value of Mr Paltos’ Business Interests and that the Market Value of Mr Paltos’ Business Interests was to be used as “B” in the formula in the definition of “Purchase Price”.

In Schedule C, the market value of Mr Paltos’ Business Interests was determined by multiplying all of the other integers in the calculation by 0.7, representing “F”, the percentage that Mr Paltos’ Business Interests the subject of the putative put option bears to the total of all Business Interests.

Bartier Perry’s submission was that the Market Value of Mr Paltos’ Business Interests so calculated was then to be used in the formula for “Purchase Price” as representing B, “the Market Value of all Business Interests”; in effect applying the 0.7 multiplier that Mr Paltos’ Business Interests the subject of the putative put option bear to the total of all Business Interests twice.

Bartier Perry’s construction is inconsistent with the language used in the Put and Call Option Agreement. Bartier Perry’s construction would be an incoherent and uncommercial construction of the Put and Call Option Agreement. The integer B in the formula for “Purchase Price” is plainly “the Market Value of all Business Interests”. This is not the outcome of the calculation required by Schedule C to the Put and Call Option Agreement. That is clear from the chapeau which describes that calculation as being the “Market Value of Business Interests”, not the Market Value of all Business Interests. It is also clear from the derivation of “F” which allows the multiplier to be calculated by identifying the relationship as a percentage of the Business Interests the subject of, relevantly, the put option to “all Business Interests”.

Bartier Perry’s construction is also inconsistent with the relevant context. There is a detailed worked example forming part of Schedule C to the Put and Call Option Agreement. That worked example is consistent, and only consistent, with the construction given to the calculation of the Purchase Price accepted by the primary judge.

No sensible reason was advanced by Bartier Perry as to why a businessperson reading the Put and Call Option Agreement would conclude that the 0.7 multiplier for Mr Paltos and 0.3 multiplier for Mr Milevski should be applied twice and not once to determine the Purchase Price for the exercise of an option.

The primary judge was correct to reject Bartier Perry’s construction of the calculation of the Purchase Price for the purposes of the Put and Call Option Agreement.

Ground 5 should be rejected.

It will be recalled that the primary judge did not assess Mr Paltos’ damages on a lump sum basis once and for all but rather awarded Mr Paltos $1.41 million in damages and required Mr Paltos to give the following undertaking:

That is, Mr Paltos was required to undertake to repay Bartier Perry amounts comprising “any calculation on account of goodwill” of the Partnership and any payment “on account of work in progress” of the Partnership at the date of its dissolution achieved in the Partnership Proceedings. This was because, on the hypothesis that Mr Paltos had exercised the put option, neither goodwill of the Partnership nor work in progress of the Partnership would have been payable to Mr Paltos. Thus, any amounts received in relation to those claims must be deducted from the amount of $1.41 million that the primary judge awarded to Mr Paltos.

It was thus common ground before the primary judge that in the Partnership Proceedings against Mr Milevski, which have as yet not been heard, Mr Paltos is seeking payments of amounts on account of goodwill and work in progress of the Partnership as at the date of its dissolution which, if recovered, must properly be deducted from the damages payable to Mr Paltos by Bartier Perry.

In Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625; [1981] HCA 3 at 643 Stephen J said:

In Todorovic v Waller (1981) 150 CLR 402; [1981] HCA 72 at 412, Gibbs CJ and Wilson J said:

It should immediately be observed that Mr Paltos did not rely before the primary judge or in this Court upon any statutory exception to the fundamental principle as explained by the High Court. Accordingly, there is no occasion to consider the extent of the statutory exceptions to this principle in, for example, the Competition and Consumer Act.

Bartier Perry submitted that:

Mr Paltos submitted that the undertaking was appropriate, the Court has the power under s 23 of the Supreme Court Act to make such orders as are necessary for the administration of justice, and s 63 empowers the Court to grant all such remedies “absolutely or on terms” in respect of legal and equitable claims. It was submitted that the primary judge was entitled to enter an award of $1.41 million on terms that required an undertaking to refund amounts, if any, received in respect of goodwill or work in progress.

I am unable to agree with Mr Paltos’ submissions. There are qualifications to the general principle that common law damages are assessed on a lump sum basis once and for all, but those qualifications do not apply here. In Carazi Pty Ltd v Blow Dry Bar Franchising Pty Ltd (in liq) (No 2) [2015] NSWSC 108, White J surveyed the cases wherein exceptions or qualifications to the principle explained by Stephen J in Pennant Hills had been established.

One such exception was established by Polkinghorne v Holland (1934) 51 CLR 143; [1934] HCA 28, where the plaintiff entered into three transactions on the advice of a solicitor. The principal issue in the case was whether the solicitor’s partners were liable for the losses which the plaintiff suffered that were occasioned by the solicitor’s fraud. In respect of two of those transactions the High Court held that the delinquent solicitor’s partners were vicariously liable, as he was acting in the course of the business of the firm. One of those transactions involved a transfer to the plaintiff of 4,000 £1 shares in a company. The share certificate that was issued showed that the shares were fully paid, but in fact they were paid only to four shillings in the pound. The orders of the High Court included the entry of judgment for the plaintiff against the defendants for two sums totalling £5,000 plus interest, those being sums of money outlaid by the plaintiff which were lost. The orders also included the following:

The introduction of capital gains tax as a feature of federal taxation led to the development of further qualifications to the general principle explained in Pennant Hills. In Rabelais Pty Ltd v Cameron (1995) 95 ATC 4552 at 4553 Hodgson J said:

Observations to like effect are made in Turner v TR Nominees Pty Ltd (1995) 31 ATR 578 at 596; SRSC v Beaumont [2004] NSWSC 164 at [389] and [396]; and Walton v Illawarra [2011] NSWSC 1188; (2012) 28 BCL 202 at [92], [139] and [172].

These tax cases all concern damages awards where, by operation of the tax system and time taken to exercise rights of review created by Part IVC of the Taxation Administration Act 1953 (Cth), it is not possible at the time of judgment to determine the tax payable in respect of the damages award. Tax is only payable in the year of income in which the award is made. Subject only to the possibility of obtaining a binding private ruling (which may be sought in advance) or a change in the law (as occurred when personal injury damages were excluded from the reach of the capital gains provisions) [1] the amount of tax payable on an award of damages, if any, cannot be known at the time the award is made. All of the relevant cases concern facts where, if tax were payable, the plaintiff would be entitled to a greater sum in damages. They are, to that extent, consistent with the order made by the High Court in Polkinghorne.

Mr Paltos was granted leave to file additional written submissions to identify any case or academic writing where an order of the kind made here had been considered. No such case or academic work was cited by Mr Paltos. If any such case exists it has not been brought to the attention of the Court by either party.

The fact that there is no such case is unsurprising. There are critical problems with the undertaking, which each underline the essential purpose of the rule explained by the High Court in Pennant Hills and Todorovic v Waller.

The first issue is finality in litigation. Mr Paltos is of course free to seek to conduct a case against his advisors seeking damages by reason of negligent advice where the damages sought overlap with damages sought in related proceedings. He is entitled to seek to have the proceedings against the advisors determined prior to those related proceedings, as he successfully achieved here. In this case, however, as the related case has not been heard (or settled on reasonable terms in the way described by the High Court in Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603; [1998] HCA 38), Mr Paltos is obliged to prove his damages. As the amount of damages in the future overlapping case is unknown, well established principles require the Court to assess the probabilities and possibilities of future hypothetical events, here the damages outcome of the as yet undetermined related proceedings. This is because to the extent that Mr Paltos is seeking payments for the goodwill and work in progress of the Partnership, those amounts must be deducted from the $1.41 million he was otherwise awarded by the primary judge. Those future hypothetical events are determined on the probabilities and possibilities:

Whilst, as I will explain, Mr Paltos repeatedly eschewed the possibilities and probabilities of future events occurring as forming part of his case, that methodology was the correct legal basis upon which to determine Mr Paltos’ damages insofar as they related to future hypothetical events.

The second reason underlining the applicability of the rule described by Stephen J in Pennant Hills here is the real risk of insolvency. On Mr Paltos’ own evidence before the primary judge the likelihood is that he was insolvent as at 29 April 2019. A statement of assets and liabilities filed by him demonstrated that his liabilities exceeded his assets at that date by over $2 million. Significant debts were owed to the Australian Taxation Office accruing interest at the General Interest Charge rate, which is significant. Other than some work as a solicitor, which he correctly submitted was sporadic, no other likely future source of income was revealed. If the award made by the primary judge is upheld, subject to Mr Paltos’ undertaking, there is a real possibility that the value of the undertaking offered to Bartier Perry is zero.

The third reason underlining the applicability of the rule described by Stephen J in Pennant Hills in the present case is that Mr Paltos’ commercial incentives in the Partnership Proceedings become completely different in light of the undertaking. Acting properly in a settlement of the Partnership Proceedings, Mr Paltos has an incentive to maximise his return overall whilst conceding payments in relation to goodwill and work in progress, which would be the subject of the undertaking and repaid to Bartier Perry. New and quite different commercial incentives have been created for Mr Paltos by the award of damages subject to the undertaking in the present case.

I have concluded that the primary judge erred in awarding damages to Mr Paltos on the basis of an undertaking to repay Bartier Perry certain amounts (if subsequently obtained by Mr Paltos in separate litigation). This was a case where the primary judge was required to award Mr Paltos lump sum damages, paid once and for all. No statutory exception to that principle was relied upon by Mr Paltos. No different outcome arising from his Australian Consumer Law case was suggested. The qualifications to the principle explained in cases such as Rabelais Pty Ltd v Cameron and Polkinghorne do not apply on the facts of this case. In failing to award Mr Paltos lump sum damages, paid once and for all, the primary judge fell into error.

I would uphold ground 6 of the appeal.

Error having been established, s 75A(10) of the Supreme Court Act and r 51.53 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) provide that this Court should not order a new trial unless a substantial miscarriage or wrong would thereby be occasioned. Factors relevant to the exercise of this power here are that:

On 11 June 2021, to assist in considering whether this Court should itself determine the damages payable by Bartier Perry to Mr Paltos, the Registrar wrote to the parties in the following terms:

On 28 June 2021, the parties each filed written submissions about these questions. On 5 July 2021, the parties each filed written submissions in reply about these questions.

It is regrettable that the submissions filed by Mr Paltos (which were signed by his solicitors and not by counsel who had appeared at the hearing) travelled far beyond the leave granted to make additional submissions about the six identified questions. In particular, Mr Paltos submitted that an order should be made that Mr Paltos be permitted to apply for additional damages under cl 5.2 of the Put and Call Option Agreement, depending on the outcome of the Partnership Proceedings. Clause 5.2 of the Put and Call Option Agreement is already the subject of the cross-appeal, which I deal with below. The possibility of an order permitting a further application to the Court (after the conclusion of the Partnership Proceedings) by Mr Paltos for additional damages was not a topic about which additional submissions were sought. Save that there may be some tangential relevance to the questions posed by the Court, I do not propose to address the submissions that travelled outside the questions asked by the Court. I accept Bartier Perry’s submission in reply that the amount of Mr Paltos’ loss was not impossible to prove.

The essence of the parties’ submissions, to the extent that Mr Paltos’ submissions were responsive to the Court’s request, was as follows.

Having considered those submissions, I have concluded that this Court should itself determine the damages payable by Bartier Perry to Mr Paltos. The alternative, to remit the matter to either the primary judge or to the judge hearing the Partnership Proceedings, would not be consistent with the dictates of Part 6 of the Civil Procedure Act and in particular the just, quick and cheap resolution of disputes. These proceedings relate to events which occurred over five years ago. Despite the related Account Proceedings being commenced in the Equity Division in 2016, the records of the Court indicate that, apparently on Mr Paltos’ application, they (together with the Partnership Proceedings) have now been adjourned indefinitely to await the outcome of these proceedings in this Court.

To address the correct assessment of damages it is thus necessary to consider the evidence about damages in some detail. In analysing damages, it is necessary to consider whether there are any relevant differences in the way Mr Paltos’ claims in contract, tort and for breach of s 18 of the Australian Consumer Law are advanced. I accept the joint submission that in the way the case was conducted, although the potential measure of damages is of course different in each claim, Mr Paltos’ case was that the measure of damages was in each claim the same. That is, no different damages outcome is contended for by Mr Paltos in relation to his damages in contract, tort or under the Australian Consumer Law.

In the case of the claim in contract, Mr Paltos was entitled to be put in the same position as he would have been had the contract been performed. Had the contract been performed by the necessary advice having been given, the option would have been exercised. One aspect of putting Mr Paltos in the same position as if the contract had been performed is to address Mr Paltos’ damages on the assumption that whatever amount in relation to goodwill and work in progress that Mr Paltos was entitled to by reason of the dissolution of the Partnership be taken into account in calculating the value of the lost opportunity to exercise the put option. This is because, on the facts of this case, the opportunity to exercise the put option was lost after the Partnership had been dissolved and an account ordered. The opportunity lost was the opportunity to recover the amount of up to $1.41 million from Mr Milevski, depending (in part) on the outcome of the Partnership Proceedings. There is no evidence that Mr Milevski would not have been able to pay up to $1.41 million on exercise of the option.

Because the put option was not exercised, in the Partnership Proceedings, Mr Paltos is entitled to 70% of the value of the net assets of the Partnership as at the date of dissolution. Had he exercised the put option he would not have been entitled to that benefit and it must be brought into account in assessing his damages in the present case.

Before the primary judge and in the submissions made by counsel in this Court, Mr Paltos accepted that the damages he is seeking from Bartier Perry must be reduced by any amounts in goodwill and work in progress obtained in the Partnership Proceedings. To the extent that the submissions made by his solicitors referred to at [162]-[164] resile from that concession, I reject them. Nothing in cl 5.2 of the Put and Call Option Agreement, which formed the basis of the submissions made by Mr Paltos’ solicitors, affects the concession correctly made by counsel for Mr Paltos at the trial and repeated in this Court that the damages Mr Paltos is seeking from Bartier Perry must be reduced by any amounts in goodwill and work in progress obtained in the Partnership Proceedings. I will return to the operation of cl 5.2 of the Put and Call Option Agreement in addressing Mr Paltos’ cross-appeal.

Upon dissolution of the Partnership, clients had been required by the Receivers to elect between retaining Mr Milevski’s new firm, retaining Mr Paltos or moving their work elsewhere. The majority of the employed staff had taken up employment with Mr Milevski’s new practice. [2] It appears that all or nearly all of Mr Paltos’ clients transferred their business to Mr Milevski. [3] As I will explain, Mr Paltos submitted in this Court that the correct factual finding to make is that all of the assets of the Partnership were transferred to Mr Milevski by the Receivers for no consideration.

The Conoulty report prepared on behalf of Mr Paltos for the purposes of the Partnership Proceedings referred to in the submissions at [164(2)]-[164(3)] above is an important document. Both parties accepted that it was admitted into evidence by the primary judge. I reject Mr Paltos’ submission that Ms Conoulty’s report should be given less weight due to matters contained in a later report. There is no evidence before this Court of any later report. Mr Paltos chose to conduct his case against Bartier Perry separately from and before the Partnership Proceedings. The circumstance that this case must be determined on the basis that Mr Paltos chose to deploy is one of his own making. Ms Conoulty explained that:

A question not addressed in detail by the parties is on whom the onus lies to establish the value of the benefit that Mr Paltos will or might receive on the taking of accounts on dissolution of the Partnership for the value of Partnership assets (potentially including goodwill) at the date of dissolution. Bartier Perry asserted that the onus was on Mr Paltos to prove the difference between what he would have received had the option been exercised and what he is entitled to as his share of the Partnership assets, including goodwill, on the taking of accounts, if the claim is considered as a claim in tort or for damages for breach of s 18 of the Australian Consumer Law.

The approach of subtracting value from price is commonly employed where the acquisition of land, chattels, businesses or shares is induced by deceit. It has also been commonly employed under s 82 of the Trade Practices Act which is relevantly the same as s 236 of the Australian Consumer Law. It is sometimes described as the rule in Potts v Miller (1940) 64 CLR 282; [1940] HCA 43. As the High Court explained in HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54 at [35], in McAllister v Richmond Brewing Co (NSW) Pty Ltd (1942) 42 SR (NSW) 187 at 192 Jordan CJ, who called the rule “well settled”, acknowledged that it was only a “rule of practice”. The flexibility of the rule can be seen by reference to a number of its characteristics set out in HTW Valuers v Astonland at [36]-[37]:

In HTW Valuers v Astonland the plaintiff sued in tort for fraudulent misrepresentation that induced his entry into a contract to purchase a business. The plaintiff did not rescind the contract of sale. To establish that it had suffered any damage, it bore the onus of proving that the price it paid for the property purchased was more than the “fair or real value” of the property it had acquired at the date of purchase. Because the plaintiff did not adduce evidence of what that value was, it failed to discharge its burden of proving it had suffered any loss.

Although Mr Paltos made no direct submission on this question, I have concluded that Bartier Perry’s submission should be rejected. This is not a case for the application of the “rule” in Potts v Miller, however flexibly applied. A closer analogy to the present question is where a plaintiff claims damages for breach of contract for wasted expenditure. In such a case if the defendant asserts that the alleged wasted expenditure nonetheless benefitted the plaintiff, the onus of establishing the value of that benefit lies on the defendant: Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (1991) 33 FCR 1; [1991] FCA 758 at 17; Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333 at [255], [264]; Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] NSWCA 443 at [44], [53], cited in E K Nominees Pty Ltd v Woolworths Ltd [2006] NSWSC 1172 at [195].

The reason that the amount with which Mr Paltos would be credited on the taking of accounts for the Partnership assets is relevant to the assessment of damages is because Bartier Perry can say that it is a benefit he will derive by reason of its breach of contract. Accordingly, the onus of establishing the value of that benefit lies on Bartier Perry.

That conclusion, however, as pointed out by Bartier Perry, only takes Mr Paltos so far. This is because, in the circumstances of this case, Mr Paltos and Bartier Perry each essentially submit that the correct measure of Mr Paltos’ interest in the taking of accounts for the Partnership assets is the same. To the extent that Mr Paltos in his most recent round of submissions suggests that the interests of Mr Milevski and the Receivers need to be taken into account, I reject the submission. Neither Mr Milevski nor the Receivers are parties to these proceedings. Whatever finding is made about Mr Paltos’ damages claim against Bartier Perry, it does not affect Mr Milevski or the Receivers. Findings of fact made by this Court are not admissible in the Equity Proceedings to prove the existence of a fact that was in issue in this Court: Evidence Act 1995 (NSW), s 91. The fact that this question is being determined now, in the absence of Mr Milevski and the Receivers, is a direct consequence of the forensic choice Mr Paltos made to conduct this case separately and before the Partnership Proceedings. If it is not already clear, in the special circumstances of this case the findings of this Court about the sums representing goodwill and work in progress to which Mr Paltos is entitled are not intended to have any bearing on any question to be litigated between Mr Paltos, Mr Milevski and the Receivers. Much less can those findings give rise to a res judicata or issue estoppel in proceedings involving different parties.

As to the subject matter of the calculation, I have concluded that it is limited to the value to Mr Paltos of goodwill and work in progress in the Partnership Proceedings. I reject the additional heads of damage sought by Mr Paltos. Annexure 1 to Mr Paltos’ submissions is based upon cl 5.2 of the Put and Call Option Agreement. No case raising those matters was conducted before the primary judge and, subject to the cross-appeal which I will address below, the subject matter of Annexure 2 was not before this Court. I also reject Annexure 2 to Mr Paltos’ submissions. The evidential basis for the matters described in that Annexure was not before this Court. I also reject the suggestion made by Mr Paltos that the Account Proceedings and the Partnership Proceedings would not have occurred had Mr Paltos been given correct advice by Bartier Perry. The conduct of Mr Milevski and Mr Paltos in the events which have occurred make it almost inevitable that both the Account Proceedings and the Partnership Proceedings would have occurred even if Bartier Perry had given correct advice. The first because the put option was not yet exercisable when Mr Milevski commenced the proceedings and Mr Milevski would not have acknowledged an obligation to pay the sum calculated in accordance with cl 5.1 of the Put and Call Option Agreement without a court order. The second because, even now, and despite acknowledging a substantial debt to the Partnership, Mr Paltos and Mr Milevski are unable to agree about the correct treatment of the loan funds.

In Mr Paltos’ pleadings in the Partnership Proceedings (the amended cross-claim filed with consent pursuant to orders made on 20 November 2017), which were before the primary judge, he claims:

Mr Paltos’ case, which Bartier Perry embrace for the purposes of this damages calculation, is that Mr Milevski has conducted his legal practice since April 2016 using the entire assets, undertaking and goodwill of the Partnership and that Mr Milevski has not paid the Receivers or Mr Paltos for those assets of the Partnership.

There was a great deal of evidence before the primary judge about Mr Paltos’ claim for goodwill and work in progress. It appears from the Receivers’ letter of 2 December 2016 and its attachment that Partnership debtors as at the date of dissolution totalled $227,008. The Partnership was profitable. In the year ended 30 June 2012 it earned a profit of $984,533 on revenue of $2,140,040. In the 2013 financial year the profit derived was $785,398 on revenue of $2,040,205. In the 2014 financial year the Partnership made a profit of $865,229 on revenue of $2,220,268. In the 2015 financial year the partnership made a profit of $1,014,055 on revenue of $2,228,755. The accounts for the year ended 30 June 2016 (wrongly headed 30 June 2015) show a profit for the 12 months to 30 June 2016 (presumably to 21 April 2016) of $640,819 on revenue of $1,547,446.

The arrangement between the Receivers and Mr Milevski is recorded in BCR Advisory’s letter of 6 April 2017 and Mr Milevski’s response of 11 April 2017. The Receivers stated that they could not conduct the Partnership business and that most but not all of the Partnership’s previously appointed staff elected to take up employment with Mr Milevski’s practice. For the most part, the day to day work on matters continued to be conducted by the same personnel as had previously been the case, but for Mr Milevski.

The first valuation of the Partnership obtained by the Receivers was the JNP report which identified a valuation range of between $860,902 and $1,065,371. It will be recalled that both parties accepted that this report was in evidence without restriction. Mr Jason Phillips of JNP Capital assessed the “Fair Value” of the Partnership as at 21 April 2016 on a going concern basis without regard to any discount for a minority interest. Mr Phillips recorded that “Milevski Family Lawyers has been engaged by Messrs Morgan and Davis to service the Partnerships’ client base.” He summarised the “fee revenue trends” for the financial years of 30 June 2012, 2013, 2014, 2015 and the year from 1 July 2015 to 21 April 2016. In the previous four financial years fee income was steady ($2,081,052, $1,974,882, $2,087,210, $2,109,281) (presumably fees rendered). From 1 July 2015 to 21 April 2016 fee income was $1,412,142. Next, Mr Phillips tabulated the monthly revenue billed by each professional in the months from July to December 2015. He opined that the extent of the Partnership’s client base which had continued to be serviced by Mr Milevski or an employee of Mr Milevski suggested that a significant level of intangible value in the Partnership had passed to Mr Milevski. He noted that Mr Milevski had referred to the Partnership and his former role in it on the website of his practice. Mr Phillips applied a discounted cashflow analysis as the primary valuation methodology. These were based on what he described as “detailed forecast of future cashflows” but used earnings before interest and tax as a surrogate for “ungeared cashflows generated by the business to arrive at an Enterprise Value”. The cashflow forecast was determined using the profit-loss forecast for the period from 1 July 2017 to 30 June 2021 adopting an estimated 3% long-term growth rate. For reasons which are too lengthy to set out, Mr Phillips adopted a discount rate being a “… required rate of return that will satisfy all capital providers investing in other investments with a comparable risk”, being the opportunity cost of capital referred to as the “Weighted Average Cost Of Capital” (after tax) of 28.04% (or 40.06% pre-tax). This was applied to estimated future fee receipts based on average monthly historical fees but using post-23 December 2015 staffing levels (less estimated future staff expenses, rent and other overheads, both for a five-year period). The resulting calculation was that the Enterprise Value of the “Valuation Entity” (being the Partnership) was in a range of $860,902 to $1,065,371. No value within that range was any more or less appropriate than any other value. Mr Phillips adopted a mid-point of the valuation range which is $963,137. This was a valuation of goodwill of the Partnership.

On 2 December 2016 the Receivers wrote to Mr Milevski stating:

The spreadsheet prepared by the Receivers debited Mr Milevski with $674,195 as his liability to pay 70% of the value of goodwill of the Partnership (described in the spreadsheet as “sale of business”). The other net assets of the Partnership showed a shortfall of $632,092 including Receivers’ fees incurred up to 2 December 2016 of $70,508 and an estimate of future Receivers’ fees of $45,000.

The reason the Partnership had a shortfall of assets to liabilities was substantially that Mr Paltos had overdrawn his profit share and that the Partnership was substantially indebted to Westpac. Part of the Partnership’s borrowings to Westpac were for a loan that was for Mr Paltos’ private purposes. The primary judge found that he had overdrawn his entitlement to a share of profits to the extent of $373,809.79 (at [426]). The Receivers had calculated that the amount of overdrawing was $374,374.33. Mr Paltos did not dispute that he owed the firm $215,372.50 for loans taken by the Partnership for his personal benefit. It was common ground, however, that these liabilities are irrelevant to the assessment of damages for which Bartier Perry is liable. Despite seeking to engage cl 5.2 of the Put and Call Option Agreement for a variety of purposes, Mr Paltos did not contend that cl 5.2 required Mr Milevski to indemnify him or procure his release from those debts.

On 8 August 2016 the Receivers advised Mr Paltos that:

The Receivers provided a copy of a debtors’ ledger as at 31 July 2016 which showed that the outstanding debts as billed at 21 April 2016 (or earlier) totalled $372,495. The Receivers had received $71,689. $24,373 was written off and there was an outstanding balance of $276,433.

On 11 May 2017 the solicitor for the Receivers, Ms M Harpur, advised Mr Paltos’ solicitor that:

On 21 July 2017, Ms Harpur advised Mr Paltos’ solicitor that as both Mr Paltos and Mr Milevski had taken issue with the JNP valuation, the Receivers had consulted a Mr Greg Wiese and asked that he review the JNP valuation and provide his own valuation of the assets of the Partnership of which Mr Milevski received the benefit (the Wiese valuation).

It will be recalled that the primary judge did not determine the admissibility of the Wiese report. I have concluded that the report was admissible and that there is no real prejudice to Bartier Perry by its admission. This is because submissions were able to be made by Bartier Perry about the assumptions and conclusions of the Wiese report which are compelling. The Wiese valuation attributed no value to goodwill of the Partnership on the basis, contrary to Mr Paltos’ submissions in this Court, that the Partnership assets and business had not been transferred to Mr Milevski. If the assumption upon which the Wiese valuation was built was correct, then Mr Milevski did not acquire the Partnership asset being the goodwill of the practice because, as Barwick CJ and Stephen J said in Geraghty v Minter (1979) 142 CLR 177; [1979] HCA 42 at 181 and 193, goodwill cannot be dealt with separately from the business with which it is associated and is inherently inseverable from that business (this was approved and applied in Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605; [1998] HCA 42 at [22]). In Murry, the majority held (at [31]) that:

The reasons for Mr Wiese’s assumption that the goodwill inhered in the Partnership’s business and was not transferred to Mr Milevski were that:

Mr Wiese did not engage with the opinion of Mr Phillips of JNP Capital. He said that the JNP valuation was “fair value”. His instructions were to use market value. Mr Wiese said:

Mr Wiese distinguished between the personal goodwill of each of the partners and the Partnership’s goodwill. The personal qualities of each of the partners would no doubt be a source of Partnership goodwill, but it may be doubted that it had a separate existence prior to the dissolution of the Partnership.

Mr Wiese opined that the only assets of value that passed from the practice of the Partnership to Mr Milevski’s practice as Milevski Family Lawyers was the value attributable to a library including precedents and templates, the workforce who commenced employment with Milevski Family Lawyers and “transferred files”. He assessed the value of those assets as $177,500.

Mr Paltos did not accept the Wiese valuation. He instructed Ms Conoulty to prepare the Conoulty report of 25 March 2019. As I have said, the parties each accepted that his Honour held the report to be admissible. To the extent that Mr Paltos relied on the additional finding of the primary judge that the report was not relevant, I reject the submission. The report was only not relevant because his Honour was persuaded to accept the undertaking from Mr Paltos which I would set aside. Ms Conoulty considered that the “Transferred Assets”, being the assets of the Partnership transferred to Mr Milevski, have a value in the range of $879,434 to $1,026,007 including goodwill.

It bears emphasis that Ms Conoulty’s report represented Mr Paltos’ damages case. At least when Mr Paltos was represented by counsel, both parties in the present proceedings urged on the Court that Ms Conoulty’s report was based on the correct methodology and was based upon factual assumptions that the parties invited the Court to conclude were correct. To the extent that Mr Paltos in the most recent round of submissions urged caution in the adoption of Ms Conoulty’s report he did not do so by reference to any assumption or conclusion of that report, but by reference to matters which were not in evidence – the contents of a later report of Ms Conoulty and the death of Mr Wiese.

Ms Conoulty valued the Transferred Assets by applying a methodology of capitalisation of maintainable earnings. She adopted a multiplier of between 3.0 and 3.5. She approached the valuation on the basis that the value should be determined as fair value not market value, that is, represented as including the special value to Mr Milevski of the Transferred Assets. She considered that a multiple of between 3.0 and 3.5 was below the high point of the market value multiple ranges and that the fair value of the Transferred Assets would lie at the upper end of that range.

Ms Conoulty opined that Mr Milevski continued substantially the same business within Milevski Family Lawyers as previously operated by the Partnership. She gave the following reasons for that opinion:

In calculating the future maintainable earnings of the business transferred to Mr Milevski, Ms Conoulty adjusted the results of the Partnership as a whole to exclude fees personally generated by Mr Paltos because he would not be contributing to those fees in the future and Mr Milevski would not generate those additional billings. That is, Ms Conoulty made allowances in favour of Mr Milevski for goodwill personal to him but did not agree with Mr Wiese that no goodwill of the Partnership existed. She considered the average monthly billing for each professional employee of the Partnership for the two months of February and March 2016. She excluded January because it is a typically low billing month consistent with most professional service firms and excluded April as it was the month in which the Receivers were appointed and therefore not a full month. Ms Conoulty assessed the average monthly revenue to be $121,892 which she multiplied by 11.5 months because January fee revenue is generally lower than other months. She discounted that revenue by 10% to allow for the assumption that some of Mr Paltos’ clients would not transfer their business to Mr Milevski. In considering that discount Ms Conoulty took into account that Mr Paltos was not capable of servicing those clients due to his ill health. She calculated that of the $921,000 in fees received and billed by Milevski Family Lawyers relating to Partnership transferred files, $505,102 related to clients where Mr Paltos was the partner prior to his stroke. She also made allowance for an element of personal goodwill attributed to Mr Milevski.

Ms Conoulty conducted her assessment of expenses in relation to the generation of those earnings. On this basis she calculated that the pre-tax future maintainable earnings of the Transferred Assets was $293,145. Applying a capitalisation rate of between 3.0 and 3.5 she valued goodwill as between $879,434 and $1,026,007. The midpoint of that range is $952,721 which is close to the JNP valuation albeit that that calculation was made on a different basis. 70% of that midpoint is approximately $666,905.

In assessing Mr Paltos’ damages, as I have said, Bartier Perry bore the onus of demonstrating what the value was of Mr Paltos’ claim for an allowance for the net value of the Partnership assets on the taking of accounts to which he would not have been entitled had the put option been exercised. That assessment depends upon making findings about future hypothetical facts, namely the outcome to Mr Paltos of his claims for goodwill and work in progress upon the taking of the Partnership accounts. I reject the submission made by Bartier Perry that the question to be determined is simply the value of the goodwill of the Partnership. By reason of Bartier Perry’s conduct Mr Paltos has an additional right. That additional right is the opportunity to conduct litigation to compel Mr Milevski to pay for the goodwill of the Partnership upon the taking of the Partnership accounts, of which Mr Paltos is entitled to 70%. By reason of Mr Paltos’ decision to conduct his damages case separately from and prior to the proceedings involving Mr Milevski, the outcome of this aspect of the Partnership Proceedings is a future hypothetical fact in these proceedings.

In making findings about future hypothetical facts the correct approach is that described by the High Court in Malec v Hutton. There the High Court explained that hypothetical future events are not “commonly susceptible of scientific demonstration or proof” and can only be evaluated in terms of chance (per Brennan and Dawson JJ at 639 and Deane, Gaudron and McHugh JJ at 642-3). The High Court explained that the correct approach was to calculate the “degree of probability” (per Deane, Gaudron and McHugh JJ at 643) or “possibility” (per Brennan and Dawson JJ at 639-640) of a future event occurring and then to adjust the award of damages according to that calculation, unless the probability is so low (less than one per cent) as to be speculative or so high (more than 99 per cent) as to be practically definite (at 643). That approach to future hypothetical facts is the same in contract, tort and under s 18 of the Australian Consumer Law.

The present question is one to be determined having regard to the percentage probability or possibility that Mr Paltos will achieve the recovery that Ms Conoulty has calculated, which Mr Paltos asserts is correct and Bartier Perry also rely on. Neither party has put forward any arguments in relation to the percentage possibility that the judge determining the Partnership accounts would accept JNP Capital’s or Ms Conoulty’s assessment of the value of goodwill and work in progress, on the one hand, or the Wiese valuation, on the other.

In reaching the conclusion that the correct approach is that described by the High Court in Malec v Hutton I am conscious that neither party invited this approach. I have determined, however, that it is the legally correct approach. I reject Bartier Perry’s submission that it is procedurally unfair to them to proceed in this way. Contrary to Bartier Perry’s submission, Mr Paltos was not obliged to prove the value of the goodwill of the Partnership. As I have said, it was Bartier Perry who bore the onus of proof on that subject. There is nothing procedurally unfair about addressing an issue about which Bartier Perry bore the onus of proof by adopting the correct legal approach. Bartier Perry have been given every opportunity to make submissions about the correct figure for goodwill and work in progress. As I have said, they submitted that 100% of Mr Paltos’ share of the figure calculated by Ms Conoulty should be subtracted from the damages otherwise payable to Mr Paltos. I also reject the submission made by Mr Paltos’ solicitors that he proved $1.41 million of damage and that no deduction was appropriate for the value of the goodwill. Plainly, and as Mr Paltos accepted before the primary judge and in the submissions by counsel in this Court, the value of any goodwill of the Partnership obtained by Mr Paltos in the Partnership Proceedings must be subtracted from the damages Bartier Perry is liable to pay as that sum is a benefit Mr Paltos would not have enjoyed if he had successfully exercised the put option.

The critical differences between the expert reports before the Court relate to the assumptions made about whether the Receivers permitted Mr Milevski to acquire the employees and assets of the Partnership without payment or whether Mr Milevski simply obtained the business of clients including clients of Mr Paltos where Mr Paltos was not able to acquire those clients for himself due to ill health. On this topic, it was common ground that “on or about 22 April, for no consideration, the receivers handed the practice and everything with it to Mr Milevski”. As Senior Counsel for Mr Paltos explained:

Bartier Perry’s submission about this topic was simple. Before the primary judge and in this Court both parties submitted that the Conoulty report was correct and was based upon factual assumptions the Court should find were correctly made. In the absence of any contradiction, the Court should find that what Mr Paltos himself asserts – the accuracy of the assumptions and conclusions in the Conoulty report – are correct. On this basis Mr Paltos is entitled to between $879,434 and $1,026,007. 70% of that figure should be deducted from the $1.41 million Bartier Perry is otherwise liable to pay Mr Paltos.

Mr Paltos’ position on these issues in oral address was opaque:

In supplementary submissions Mr Paltos submitted:

I reject Mr Paltos’ submission that amounts Mr Milevski may be required to pay to the Partnership are not relevant to the damages calculation. The whole basis of the Partnership Proceedings is that Mr Paltos is entitled to 70% of the net assets of the Partnership. It is his case that he is entitled to an amount which will be determined on the basis that it includes 70% of the goodwill of the Partnership. Although Mr Paltos’ submissions referred to Mr Milevski’s approach to the litigation, no submission was advanced, by either party, in support of that approach.

Both parties accepted that R I Banks, Lindley & Banks on Partnership (20th ed, 2020, Thomson Reuters) expresses a proposition relevant to determination of the present question thus:

In Smith v Everett (1859) 27 Beav 446 and Mellersh v Keen (No 2) (1860) 28 Beav 453, Sir John Romilly MR held that in the case of a partnership that was dissolved on the death of one of the partners and the surviving partner continued to carry on the business and thus obtain the benefit of the goodwill, a share in the goodwill formed part of the estate of the deceased partner if the goodwill had any value at all having regard to the right of the surviving partner to carry on business in competition: see Smith v Everett at [452]. In Mellersh v Keen his Lordship said at [455] that in determining the value of goodwill the question is:

In Re David and Matthews [1899] 1 Ch 378, Romer J said at 383 that the goodwill should be valued on the footing that if the business were sold the surviving partner would be at liberty to carry on a rival business but could not use the name of the partnership and would not have the right to solicit the old customers of the firm.

Relatively few implied restrictions are imposed on a vendor of goodwill, so that a valuable partnership business may, in practical terms, be unsaleable and, thus, worthless to anyone but a former partner who wishes to acquire it. Goodwill may have no value independently of the partnership premises or the firm name. Lord Lindley pointed out that:

The current editor of Lindley & Banks takes the view that, as a statement of principle, this goes too far. Although goodwill is unmarketable, it clearly exists as an asset: at [10-227]. The editor suggests that Lord Lindley perhaps meant that unsaleable goodwill must be ignored for accounting purposes: citing Wilson v Williams (1892) 29 L R Ir 176, where the goodwill of a stockbroker’s business was excluded from the accounts for this reason. Although it was once suggested that the goodwill of a solicitor’s practice has no value (see Arundell v Bell (1883) 52 L J Ch 537), this is clearly not the present position: see Sobell v Boston [1975] 2 All ER 282; Bridge v Deacons [1984] AC 705; Burchell v Wilde [1900] 1 Ch 551; Fitch v Dewes [1921] 2 AC 158 at 168 per Lord Cave.

In Thames Cruises Ltd v George Wheeler Launches Ltd [2003] EWHC 3093 at [43], Peter Smith J expressed the view at [43] that it was unlikely (but not impossible) that a partnership at will would have developed “any sizeable goodwill value because of the ability of the partners of the dissolved firm to compete subsequent to dissolution”. Lindley & Banks suggests that the position would be the same on the dissolution of a partnership for a term, absent any applicable express restriction: at [10-227]. Goodwill generated by the efforts of the partners will, in the normal course, be a partnership asset: at [10-228].

In the event of a general dissolution (i.e. one involving a full-scale winding up), the goodwill must normally be sold, unless the partners agree otherwise (and unless the goodwill is valueless or otherwise inherently unsaleable): at [10-229]; see fn 1101.

Lindley & Banks explains that if the firm’s business and its associated goodwill ceases to exist on dissolution, there will be nothing to realise. In Ryder v Frohlich [2006] NSWSC 833 (see further [2004] NSWCA 472), the business consisted of the provision to a company of the services of the two partners. One partner abandoned the partnership and the business, by definition, ceased to exist. It was not possible to go back to the position which existed prior to the dissolution for valuation purposes: at [10-229].

Section 38 of the Partnership Act 1890 (UK) contemplates that the members of a dissolved firm will complete any unfinished business but will not take on any new work. The editor of Lindley & Banks says that it is self-apparent that, if no new work can be taken on, the value of the firm’s goodwill will be swiftly dissipated unless (exceptionally) a forced sale can be secured on or shortly following the dissolution date: at [10-230].

If one partner secures the benefit of the firm’s goodwill for him or herself, he or she can be compelled to account for its value, but such value will naturally reflect the fact that he or she and the other partners would be entitled to set up business in competition with the notional purchaser: at [10-230]. It may be impossible for any partner to demonstrate that the goodwill has no saleable value until the partnership affairs have been fully wound up: at [10-231].

A partner’s ability to carry on a competing business in the same locality may, for all practical purposes, represent a sufficient deterrent to prospective purchasers to render the goodwill unsaleable: at [10-233]. In cases where the death of a partner results in the dissolution of the partnership, if the personal representatives of the deceased partner do not seek to force a sale of the partnership assets and are content to receive the value of his or her share as at the date of death, a payment will only fall to be made in respect of goodwill if it has a marketable value: at [10-233]. However, goodwill is often of little or no value on a dissolution (i.e., where the valuation is on a “break up” basis): at [36-53].

Lindley & Banks explains that where goodwill does have a value, the actual method of valuation will be determined by the size of the business and the type of goodwill involved. All of the circumstances must be considered before it is possible to determine which method will be appropriate in a given case: at [36-59].

In Mellersh, a partnership was dissolved with the effect that one partner would obtain exclusively the benefit of the goodwill and be made accountable for it. The Chief Clerk calculated the value of the goodwill on the principle that:

The Master of the Rolls, Sir John Romilly, held that the Chief Clerk came to the right conclusion. The Master of the Rolls considered that the Court was bound to ask “[w]hat [the goodwill] would have produced, if it had been sold in the most advantageous manner and under such circumstances that it would have produced the largest sum for all the parties interested?” It was held that:

In affirming the Chief Clerk’s certificate, Sir Romilly concluded that the goodwill might have been sold, and might have produced something considerable:

These principles have been accepted in New South Wales. In Page v McKensey (Supreme Court (NSW), Windeyer J, 17 December 1993, unrep), Windeyer J valued the goodwill of a partnership of chartered accountants. After dissolution the defendants continued to use the business name and “to all intents and purposes continued the partnership business”. Windeyer J accepted the defendants’ valuation evidence that the value of the name without covenants was $150,000 and treated that as the value of the goodwill. His Honour rejected the plaintiff’s valuation evidence, which was assessed on the basis of the sale of a going concern with full covenants including restraint covenants. His Honour summarised the principles as follows:

On appeal, the appellant did not challenge the correctness of Windeyer J’s statement of the method by which goodwill is valued: Page v McKensey [1995] NSWCA 351.

Page v McKensey was cited with approval in Old v McInnes and Hodgkinson [2011] NSWCA 410 at [87] (Meagher JA, Beazley and Giles JJA agreeing). That case relevantly concerned the question of whether a partner was entitled to have the value of goodwill brought to account in the dissolution of the partnership.

As a matter of principle the task in assessing damages here is to determine on the evidence before the primary judge what the prospects were of Mr Paltos obtaining on the taking of an account the sum claimed by Mr Paltos in the Partnership Proceedings on account of goodwill and then discounting that opportunity for the uncertainties of litigation.

There appears to be much to be said for the proposition that in substance the business of the Partnership was transferred to Mr Milevski (as Ms Conoulty assumed). As Lord Romilly said in Mellersh in relation to the business there in question (a banking business), had the receivers advertised the business of the practice as being for sale with all that that entailed, including the right to use the partnership name and to approach the clients to solicit their continued business free from constraint that either of the partners could themselves solicit the clients, a considerable sum could be realised. Indeed, it is possible that Mr Milevski could have bid to purchase the business in order to retain the clients.

On the other hand, the position the Receivers now patently adopt, that no Partnership assets were transferred to Mr Milevski and thus no amount is payable for goodwill, is also arguable.

The peculiar circumstances of this case, however, give rise to a real difficulty. Bartier Perry asserts, based on Mr Paltos’ own evidence and submissions, that the assumptions and conclusions of the Conoulty report are to be preferred. Mr Paltos makes no real submission in opposition to acceptance of the Conoulty report, other than to refer to later reports not in evidence and to urge care in protecting Mr Milevski’s and the Receivers’ rights. Each of these submissions I reject as essentially irrelevant to the present task.

Although both parties were apparently content to proceed on the basis that the Court should approach this question on the balance of probabilities, the correct approach, as I have discussed, was that explained in Malec v Hutton of assessing the percentage probability or possibility of the relevant event. Doing the best I can, that percentage is 70%. That is because the essential submissions made by Bartier Perry about this question were, subject to irrelevant qualifications, accepted by Mr Paltos. To recap:

As I have said, Mr Paltos after being given a separate chance to make considered written submissions on this topic did “not necessarily dispute the propositions” set out at (1)-(7) above.

It follows that the award of $1.41 million to Mr Paltos was excessive. There was no response of substance or by reference to evidence in this case to Bartier Perry’s submission that “[t]his Court would find that the value of the Partnership’s goodwill was $957,928”. A deduction of 70% of that figure (rounded down to $957,000) is appropriate. 70% (Mr Paltos’ share) of that figure is $669,900. 70% (the appropriate Malec v Hutton percentage) of that amount is $468,930. This is the amount I would deduct from the award of $1,411,707. Mr Paltos is thus entitled to an award of damages of $942,777 from Bartier Perry.

In circumstances where the basis of the award of indemnity costs was based solely on an offer by Mr Paltos to settle for $1.4 million, it follows that the award by the primary judge of indemnity costs should also be set aside.

Regrettably, determining the subject matter of the cross-appeal and the relief sought by the cross-appellant proved an elusive task.

The amended notice of cross-appeal filed on 6 April 2021, the first day of the appeal hearing, sought the following relief:

The findings of the primary judge on this topic were set out at [91]-[93] of the second judgment:

The terms of cl 5.2(a) of the Put and Call Option Agreement are set out above at [18]. The only substantive relief sought by the cross-appeal tracks carefully the terms of cl 5.2(a).

Somewhat surprisingly, given the reliance upon cl 5.2(a) of the Put and Call Option Agreement in the notice of cross-appeal, the following exchange occurred early during the course of oral argument on the cross-appeal:

Considerable argument followed about the ways in which it was submitted that cl 5.2(b) of the Put and Call Option Agreement might somehow be engaged on the facts here.

After lengthy exchanges with the Court about possible difficulties with the application of cl 5.2(a) to the facts of this case, the following exchange occurred:

No application was made to amend the notice of cross-appeal to rely on cl 5.2(b) or any other clause.

Having identified the indemnity provided by cl 5.2(a) as the subject matter of the cross-appeal, the following exchange occurred:

A clearer acknowledgment of the inappropriate nature of the relief sought in the amended notice of cross-appeal is difficult to envisage.

Despite this clear abandonment of the only relief sought by the cross-appeal, in supplementary written submissions dated 13 April 2021, Mr Paltos submitted that the Court should make the following orders:

The submissions accompanying these suggested orders were barely comprehensible. Those submissions travelled far outside the limited grant of leave to make submissions that was afforded to the parties. The parties were granted leave to file short notes on: (a) “what … is being claimed by Mr Paltos in the accounting exercise [apart from goodwill] and what, if anything, is conceded”; and (b) whether there are any cases “wherein an assessment of damages, something like this undertaking, has been a part of the mechanism meant to reflect that assessment”, being the undertaking that was required by the primary judge at [98] of the second judgment.

In circumstances where Senior Counsel for the cross-appellant has accepted that there is no evidence of any claim that Mr Paltos is liable in respect of a liability which arises at any time after 21 April 2016 and conceded that there was no point in any order of the kind sought on the notice being made, no basis has been shown for the making of the order sought in the amended notice of cross-appeal.

Even more troublingly, the relief sought in proposed orders (b)(iii) and (iv) was inconsistent in material respects with the amended notice of cross-appeal, particularly by reason of the references to cl 5.2(b)(ii) which formed no part of the cross-appeal. As I have said, no leave to further amend the amended notice of cross-appeal was sought. If such leave were sought, in the circumstances in which this issue was litigated on the appeal, I would refuse leave. Proposed order (b)(iv) appears to be a completely new form of order in place of the undertaking offered which was the subject of ground 6 of the appeal. No notice of contention or notice of cross-appeal was filed seeking such relief and if the submissions filed beyond the leave granted are intended to comprise such an application, I would refuse it. It is simply too late in these proceedings for such a fundamental change to be proposed, without notice and outside the framework of the appeal and the cross-appeal.

Finally, in the submissions filed on the subject of damages addressed at [164(4)] above, the solicitors for Mr Paltos repeated submissions made about cl 5.2 of the Put and Call Option Agreement. It was submitted that:

Those submissions must be rejected, essentially for the same reasons I have just given. Dealing with each I conclude:

No notice of contention or notice of cross-appeal was filed seeking relief under cl 5.2 of the kind now asserted by Mr Paltos. Again, it is simply too late in these proceedings for such a fundamental change to be proposed, without notice and outside the framework of the appeal and the cross-appeal. As I have said at [178], Annexures 1 and 2 to Mr Paltos’ submissions dated 28 June 2021 must be rejected. I accept Bartier Perry’s submission that Annexure 1 should be ignored. The Annexure summarises a claim based on cl 5.2 of the Put and Call Option Agreement which was not pleaded or conducted below. I also accept that the evidentiary basis for Annexure 2 is not before this Court and thus the Annexure is not relevant.

The cross-appeal must be dismissed with costs.

Section 98 of the Civil Procedure Act confers on the Court a wide discretion with respect to costs. Under r 42.1 of the UCPR, the general rule is that the Court is to order that costs follow the event. The “event” may be characterised in more than one way. Generally the “event” refers to the result of the claim or counterclaim, as the case may be, and may be understood as referring to the practical result of a particular claim: Doppstadt Australia Pty Ltd v Lovick & Son Developments Pty Ltd (No 2) [2014] NSWCA 219 at [15] (Ward, Emmett and Gleeson JJA). Where there has been a mixed outcome in the proceedings, and it is appropriate to entertain the process of apportioning costs as between different issues in the proceedings, in general such an exercise will be carried out on a relatively broad brush basis, and largely as a matter of impression and evaluation by the Court: Doppstadt at [19]; James v Surf Road Nominees Pty Ltd (No 2) [2005] NSWCA 296 at [36]; Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 3) (1998) 30 ACSR 20 at 22.

The relevant principles for the determination of costs on an issue-by-issue basis were stated in Bostik Australia Pty Ltd v Liddiard (No 2) [2009] NSWCA 304 at [38] (Beazley, Ipp and Basten JJA):

The present case is one where the various issues dealt with were severable and it is appropriate to entertain the process of apportioning costs as between different issues in the proceedings. Such an exercise will be carried out on a relatively broad brush basis.

Whilst the appellant succeeded, and would ordinarily be entitled to costs, the appellant has achieved complete success on only one issue; damages. The respondent was successful on all other issues.

To reflect the relative success of the parties on the severable issues I would order that there be no order as to costs with a view to each party paying their own costs of the appeal. For abundant clarity, that order is intended also to apply to the reserved costs of Bartier Perry’s notice of motion filed on 21 December 2020.

For the foregoing reasons I propose the following orders:

WHITE JA: I agree with Payne JA.

McCALLUM JA: I agree with Payne JA.