Gregg v Burrowes & Ors (trading as PricewaterhouseCoopers)

There has, from about January of this year, been extensive media coverage about alleged misuse of confidential government information by the accounting firm styled PricewaterhouseCoopers (PwC or the Firm). It has been reported that PwC was, in its professional capacity, given confidential information by the Australian Taxation Office (ATO) in relation to tax planning which, contrary to its obligations, PwC passed on to clients and others (the Tax Scandal – being the description used by the parties themselves).

The plaintiff (Gregg) is, and since 1 July 2013 has been, a partner in PwC. He is in PwC’s Research and Development (R&D) team, which is part of PwC’s Private Clients Practice. The R&D team is responsible for advising clients in relation to the federal Research and Development Tax Incentive scheme, under which certain entities whose aggregated turnover is less than a specified threshold can receive a refundable tax offset equal to their corporate tax rate, plus a premium. The R&D team does not provide advice on other Australian tax matters but advises solely on the specific R&D provisions in income tax legislation.

The PwC partnership is constituted by a deed made on 8 April 1997 (the Partnership Agreement) between partners who attested it, together with other persons, including Gregg, who were subsequently admitted to the partnership.

The Partnership Agreement provides for specific roles to be played by designated partners and various partner sub-groups, including a Board of Partners and a group defined as “Management”. It provides that Management may make a written Recommendation to the Board of Partners that a Partner be required to retire, and for the Board of Partners to require a Partner to retire if, after giving the partner an opportunity to make submissions, the Board, in its absolute discretion, so determines. The Board of Partners may, in such a case, determine the terms of the retirement which may, it seems, include retirement without payment of any financial benefit.

On 3 July 2023, Gregg was given written notice that a Recommendation that he be required to retire had been made and received.

Gregg contends that the Recommendation is ineffective because it does not meet the requirements of the Partnership Agreement. By these proceedings, in which he cites the members of the Board of Partners as defendants, he seeks a declaration to that effect.

The issue for determination is: does the Recommendation meet the requirements of the Partnership Agreement?

I have concluded that the answer is no. My reasons follow.

References to clauses are, unless otherwise stated or the context indicates to the contrary, references to clauses in the Partnership Agreement.

Clause 23 is in the following terms:

Clause 1 is headed “Definitions”. It contains, amongst others, the following definitions:

Clause 10.1 is part of a clause headed “Appointment and Tenure of the Board of Partners”. It provides, relevantly, that the Board of Partners consists of a maximum of 10 Partners holding office as members of the Board of Partners (other than the Country Senior Partner), the Country Senior Partner and a maximum of 3 Appointed Board Members.

Clause 23A is headed “Retirement on Notice” and provides for the Board of Partners, on the Recommendation of Management, to effect the retirement of a Partner by providing the Partner with six months’ notice in writing. It does not contain a provision (equivalent to cl 23.3(d)) entitling the Board of Partners to determine the terms of retirement on notice. To the contrary, cl 23A.5 provides that the Partner will receive a lump sum income distribution.

Clause 32 is headed “General Obligations of Partners”. Clause 32.2(a) provides that partners shall be just and faithful to each other in all transactions relating to the business of the Firm. Clause 32.2(d) provides that partners shall behave in a professional and business-like manner at all times. Clause 32.2(f) provides that partners shall act in all matters in utmost good faith.

PwC apparently has an internal procedure for the imposition on partners of a financial penalty, called a Risk and Quality (or R&Q) penalty, by way of an adjustment to the partner’s performance income. The Court was informed from the bar table that an R&Q penalty may be imposed as part of a performance review, but the Court was not favoured with any details on how this procedure works. The criteria for the imposition of such a penalty and its true economic effect were not explained.

Nevertheless, the evidence establishes that in August 2021, such a penalty was imposed on Gregg on the basis of an asserted repeated failure by him to comply with risk management engagement processes in the conduct of a number of matters for which he was responsible.

The evidence shows that the penalty was set at “20% of performance income” and was apparently $80,116. The evidence does not identify the financial or accounting period, if any, to which the penalty related, but it must have been before August 2021 when the penalty was imposed.

Under cover of an email dated 17 August 2021, Martina Crowley, PwC’s National Private Clients Leader, sent Gregg a file note recording an earlier discussion between her, Gregg, and another partner, Wayne Plummer, concerning the imposition on Gregg of the R&Q penalty. She enquired whether Gregg wished to discuss the penalty further. The email concluded, “We would be happy to discuss the finalisation of the matter to enable you to concentrate on the future”. Gregg responded, “No need for further discussion. Please finalise the matter”.

At the end of 2017, the ATO obtained information revealing that there may have been breaches of confidentiality by PwC having disclosed to clients and others, confidential information which had been given to it in a professional capacity by the ATO. The matter was investigated in the Senate. The details of which committees considered it and what they thought or found are not necessary to recount.

On 28 May 2023, the Acting Country Senior Partner of PwC, Kristin Stubbins (Stubbins), directed that Gregg go on special leave, commencing immediately, pending an internal review. He was informed that he was to have no contact with partners or staff of PwC, that he was not to visit the premises of the Firm, and that he was not to access its computers or communicate with the media.

On 29 May 2023, Stubbins published a media statement containing a public apology on behalf of PwC.

She acknowledged that PwC had displayed a clear lack of respect for confidentiality, did not have adequate processes and governance in place, and had a culture at the time in its tax business that had allowed inappropriate behaviour and had not, until now, always properly held its leaders and those involved to account. She announced that PwC had commenced an investigation and as a result, had stood down nine unnamed partners (it can safely be inferred that Gregg was one of them).

An exchange of correspondence between PwC and Gregg about him being stood down followed, which, for present purposes, it is not necessary to detail.

On 3 July 2023, Stubbins sent the following letter to Gregg:

The attached Notice follows:

I will refer to the Notice attached to the 3 July 2023 letter as the Recommendation. The Recommendation has been redacted to protect the identity of PwC clients referred to in it.

On 3 July 2023, PwC released a media statement announcing that it had reached conclusions in its investigation into the handling of confidential Treasury information and past failures in professional, ethical or leadership responsibilities. It announced that eight partners had exited or were in the process of being removed from the partnership. It stated that Gregg had been given notice of PwC’s findings against him and a process had started under the Partnership Agreement to remove him from the partnership. I infer that this was a reference to the Recommendation. What effect, if any, these statements might ultimately have in the context of the possible further operation of cl 23 is a matter for conjecture.

On 4 July 2023, Gregg’s solicitors wrote to PwC’s solicitors taking the position that the Recommendation was invalid and requesting further particulars.

On 11 July 2023, solicitors acting for PwC provided certain documents and further particulars to Gregg.

On 18 July 2023, PwC’s solicitors sent two letters to Gregg’s solicitors taking issue with Gregg’s claim that the Recommendation was invalid and acknowledging that the Recommendation was not based on a finding or assertion that Gregg misused the government’s confidential information.

By Summons sued out of this Court on 19 July 2023, Gregg seeks a declaration that the Recommendation is not valid because it does not adequately specify Management’s reasons for forming its view that Gregg should be required to retire and making the Recommendation.

The Summons contains a prayer for a declaration that Gregg is entitled to further particulars of the Recommendation. This was correctly not pressed.

It is not in issue that if the Recommendation does not satisfy the contractual requirements for its validity under the Partnership Agreement, a declaration is appropriate to be made. The parties agreed that if a finding to that effect is made, the terms of the declaration should be left over for consideration.

Mr A Moses SC with Mr K Anderson appeared for Gregg. Mr M Darke SC with Ms E Bathurst appeared for the defendants.

The Court had the benefit of written and oral argument. The hearing was conducted economically by both sides and concluded within the day. I have taken all of the arguments into account, but will not restate them.

The hearing commenced with an application by PwC for an order that publication of significant parts of the Partnership Agreement be restricted to the Court and the parties and their legal representatives on the grounds that the material is confidential. I declined to make the order in circumstances where PwC itself had gone public on the Tax Scandal and the standing down of some partners, including Gregg.

The following initial observations are appropriate.

These proceedings concern only the validity or otherwise of the Recommendation. They do not concern the exercise or proposed exercise of the Board of Partners’ power to require Gregg to retire, except to the extent that the effective exercise of that power depends, relevantly, on an earlier valid Recommendation having been made. These proceedings do not concern the merit, or lack of merit, as the case may be, of any complaint against Gregg.

This is not a case concerning the sufficiency of reasons given by a court, arbitrator or other tribunal exercising jurisdiction or power. It is squarely a case about a contract and the qualities of a bargain. It does not involve the application of any principle beyond contractual principles. It does not concern the application of any legal precept that because the reasons are not to be specified by a court, they should be approached generously or not examined with a fine-tooth comb or “an eye keenly attuned to error”. [1] Authorities and learning concerning the adequacy of reasons given in a non-contractual setting (that is, other than because a contract requires them) are of limited assistance.

PwC does not assert that Gregg committed a material breach of the Partnership Agreement within cl 23.2(a).

PwC does not assert, but eschews, that the Recommendation is based on Gregg having misused any confidential information.

Gregg does not assert that in making the Recommendation, Management did not act in good faith.

The only controversy for resolution is whether the Recommendation complies with the contractual requirement in cl 23.3(a) that Management “specify” its “reasons” for forming its view and making the Recommendation.

A two-step process is required. First, the Court must determine what the phrase “specify reasons” in cl 23.3(a), on its proper construction, means. Second, the Court must determine whether, on that construction, the Recommendation specifies reasons.

The terms of the Partnership Agreement are to be construed by reference to the language used by the parties, the circumstances (including commercial considerations, if any) which it addresses, and the objects which it is intended to secure. The meaning of words chosen is to be determined objectively by reference to the text, the context and their purpose. The meaning which will be given to them is that which a reasonable businessperson would have understood them to mean. Preference is given to a construction supplying a congruent operation to the various components of the whole. Where the words chosen are open to more than one construction, the Court will prefer a construction which avoids consequences which are capricious, unreasonable, inconvenient or unjust. See Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; [1973] HCA 36; McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; [2000] HCA 65 at [22]; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 at [22]; Zhu v Treasurer (NSW) (2004) 218 CLR 530; [2004] HCA 56 at [82]; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17 at [15]; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[51].

What does the requirement under cl 23.3(a) to specify reasons entail?

In Shoalhaven City Council v Firedam Civil Engineering Pty Ltd (2011) 244 CLR 305; [2011] HCA 38 (“Firedam”), the High Court was concerned with an expert determination made under the terms of a building contract. The contract provided for an expert to determine, in binding fashion, issues in dispute, including the grant or refusal of extensions of time. The relevant clause required the expert to issue a certificate stating the expert’s determination and “giving reasons”. At [26]-[27], French CJ, Crennan and Kiefel JJ said (citations omitted):

At [39], Gummow and Bell JJ said (citations omitted):

The approach to be taken to evaluating the requirement under cl 23.3(a) to give reasons is the same which the High Court took in Firedam.

The sub-clause is to be considered in the context of cl 23.3 and the Partnership Agreement as a whole, and with the objects it intends to secure clearly in mind. The character and quality of reasons for the purposes of cl 23.3(a) must respond to the nature of the issue to which it relates and the consequences which giving them (or not giving them, as the case may be) may bring.

No doubt, the overall object which cl 23 seeks to secure is the protection of the partnership, by providing a mechanism to force the retirement of a partner who has transgressed (and who, by implication, is therefore not considered fit to continue in that role).

Within that context, however, the clause imposes strict limits on the circumstances in which the power may be exercised, and it stipulates a procedure that must be followed before the power is exercised, including a requirement that Management specify its reasons for making the Recommendation.

The submissions of both sides seemed to emphasise the role of reasons as being to facilitate an opportunity on the part of the partner, who might lose valuable economic and proprietary rights, to be heard, before the power is exercised. No doubt, that is part of the object which specifying reasons intends to secure.

An equally important function of the reasons is, however, to enable the Board of Partners justly and faithfully, and in utmost good faith, to make a determination. It should be borne in mind that a determination that a partner be required to retire, affects not only the partner, but the partnership. It would not be in the interests of the partnership to require a partner, who might be a valuable contributor, to retire where the merits do not justify it. A function of the reasons is to put the Board of Partners in a position properly to evaluate the matter.

Clause 23 has four components:

As a matter of text, cl 23.3(a) uses the word “specify” rather than the word “give”, and it uses “reasons”, not “grounds”. [2] The Macquarie Dictionary defines “specify” as “to mention or name specifically or definitely; state in detail”. [3] By contrast, the Macquarie Dictionary defines “give” as “to deliver freely; bestow; hand over”. [4] In its ordinary English meaning, “specify” imports clarity and precision. A requirement to specify reasons is stricter than a requirement merely to give them. [5]

In evaluating what cl 23.3(a) requires by way of reasons, it seems to me that the following factors are pertinent:

In my view, having regard to the text and these factors, whilst perfection may not be required, to secure the objects of cl 23 and facilitate the congruent operation of its constituent parts and the Partnership Agreement as a whole (including cll 32.2(a) and (f)), the reasons specified under cl 23.3(a) must enable:

This entails at least identifying the basal facts constituting the conduct of the partner upon which Management’s view is based (that is, what the partner did or did not do), sufficient to allow the partner fairly to traverse them and to enable the Board of Partners, acting justly, faithfully and in good faith, to make a determination that the partner be required to retire.

I think it also entails exposure of the actual path of reasoning by which Management has arrived at its view that the conduct identified meets one or more of the thresholds in cl 23.2 and why it holds the view that the circumstances warrant that the partner should be required to retire.

Initially, PwC put that if the Recommendation is inadequate, the subsequent correspondence with Gregg can be read as supplementing it. This contention was correctly abandoned. The correspondence was written on behalf of PwC, meaning the partnership (which still includes Gregg). The other participants (not Gregg) in the process provided for in cl 23 are Management and the Board of Partners. The PwC correspondence was written on behalf of neither. Besides, the Recommendation will, under the terms of the Partnership Agreement, stand or fall on its own merits. This follows, amongst others, from the fact that the time limits in cl 23.3(c)-(d) run without regard to subsequent correspondence.

PwC submitted that if the partner regards the reasons as inadequately specified, it is a matter that she or he can take up in their own submissions to the Board of Partners.

I reject this submission. The adequacy of the reasons is not to be measured against the possibility that the partner has the opportunity to point out deficiencies.

PwC also submitted that the adequacy of the reasons should be viewed in light of the partner’s own knowledge of the facts surrounding matters or circumstances identified in the reasons.

I also reject this submission. To accept it would be inimical to the requirement under the Partnership Agreement that reasons be specified. In addition, it cannot be assumed that Management or, more importantly, the Board of Partners, will know what the partner knows so as to enable the Board of Partners justly, and in utmost good faith, to make a determination.

The Recommendation does not identify, or sufficiently identify, the basal facts constituting the conduct of Gregg upon which Management’s view is based. For this reason alone, it fails to meet the requirements of cl 23.3(a).

Additionally, it fails to expose the actual path of reasoning by which Management has arrived at its view that:

For the convenience of the reader, passages in the Recommendation are reproduced below.

Paragraphs 2, 8 and 9 of the Recommendation are, as I read them, intended to encapsulate the complaint against Gregg.

Paragraph 2 reads:

Paragraphs 8 and 9 read:

Paragraphs 3 and 4 read:

The reference in par 8(a) to a failure “to adequately discharge his leadership role and/or professional responsibilities”, appears to refer back to par 2 (which refers to Gregg being a partner from 1 July 2013 and leader of the Firm’s R&D tax incentive group from 1 July 2016) and to pars 3 and 4.

It will be observed that:

Paragraph 3 refers to occasions where Gregg failed to discharge his supervisory functions in relation to matters (presumably only those within the parentheses). This is translated in par 8(a) into a failure to discharge his leadership role and/or his professional responsibilities. The nature and extent of Gregg’s supervisory functions, leadership role and professional responsibilities are not identified with respect to any particular matter, or at all. Neither the occasions upon which he is said to have failed nor the way in which he is said to have failed is identified.

Paragraph 3 refers to a dispute with a client (for which Gregg was responsible) seeking recovery of fees amounting to $130,000. The dispute is not described. No act or omission by Gregg pertinent to the dispute is identified. It is not said that any complaint was justified or that the fees were recoverable by the client or why.

Paragraph 4 refers to the Firm having received a letter of claim making a number of allegations. The allegations are not described. No act or omission by Gregg pertinent to the allegations is identified. It is not said that any allegation (whatever it may have been) was justified. The reference to Gregg having signed the Management letter provides no clue as to what the allegation is, if any, against him.

Paragraphs 3 and 4 thus do not identify the basal facts constituting the conduct in which Gregg is said to have engaged.

Paragraphs 5, 6 and 7 read:

Paragraph 5 does not identify the notices or their contents.

Paragraph 6 does not describe the behaviours of concern. It refers to an ATO remark that PwC was primarily concerned with expanding its market share and winning new clients and made it clear that the Firm had broader responsibilities within the tax system. The paragraph does not identify the nature of the broader responsibilities referred to. More importantly, it does not identify any basal fact constituting conduct on the part of Gregg upon which Management has reached its view.

Paragraph 7 refers to the ATO having expressed concerns in relation to culture within the tax practice at relevant times. It does not identify those concerns or say that any of them were justified. No act or omission by Gregg pertinent to the concerns is identified.

Paragraphs 5, 6 and 7 thus do not identify the basal facts constituting the conduct in which Gregg is said to have engaged.

The consequence of the deficiencies identified above is that the Recommendation does not enable:

It follows from the Recommendation’s failure to identify the basal facts, that it does not disclose Management’s path of reasoning by which it reached its view that Gregg has acted in a manner which is materially inconsistent with the standard of conduct expected of a partner, or has acted in a manner which may damage the reputation of the Firm.

The Recommendation does not disclose any path of reasoning by which Management reached its view that the outcome should be that Gregg should be required to retire. In this context, and specifically, the Recommendation does not (amongst other things) disclose any path of reasoning which led to its view that the R&Q penalty affair, which was finalised by the imposition on Gregg of a financial penalty, has any part to play in its conclusion or what part.

The Recommendation does not comply with the requirement in cl 23.3(a) that Management specify reasons for forming its view and making the Recommendation. Gregg is accordingly entitled to declaratory relief.

Within seven days, the parties are to bring in Short Minutes of Order articulating the terms of the declaration. If they are unable to agree on those terms, the Court will settle them.

I provisionally order that the defendants are to pay the plaintiff’s costs. This order will solidify unless, within seven days, either party, in writing, notifies the other and my Associate that some other order is sought and provides a brief statement of the grounds. If such notice is given, this order will not take effect, and I will give directions for the determination of costs.

The exhibits are to be returned.