Cole v Lee

1. [1]

   These proceedings concern a partnership between the plaintiff, the first defendant and the second defendant, who are pharmacists.

2. [2]

   The partnership began in about February 2000 when the plaintiff, who had previously operated two pharmacies in the Randwick area as a sole trader, sold a one-third interest in one of those pharmacies to each of the defendants. The pharmacy in question was known as “Royal Randwick Pharmacy” (“RRP”).

3. [3]

   The partnership was the subject of a deed executed by the parties and styled “Partnership Deed”. The Deed permitted the plaintiff to continue to operate the other pharmacy on her own account, and that other pharmacy is of no further relevance for these proceedings.

4. [4]

   Since the partnership began, by arrangement between the parties, the management of the business has been carried out by the defendants. The plaintiff worked initially in the dispensing area on weekends, but it is not clear from the evidence whether she still does so.

5. [5]

   By agreement between the parties, the RRP business was subsequently sold. Three pharmacies were then acquired at the Macquarie Shopping Centre, North Ryde, and operated under the auspices of the partnership.

6. [6]

   The plaintiff has a significant amount of money tied up in the partnership in the form of loans, and has also granted security over her property for partnership liabilities. I assume that the defendants are in a similar position. For two years or so there have been negotiations between the parties for the sale or incorporation of the partnership business and the winding up of the partnership, but these did not result in any agreement.

7. [7]

   The Partnership Deed provides (cl 21) for a “pre-emption” procedure whereby a partner might offer to sell his or her interest in the partnership to the other partners (at a price to be determined by agreement or alternatively by valuation) and, if the offer is not accepted, the partner might then sell to a third party. The Deed also contains a provision (cl 27) for the dissolution of the partnership, involving the sale of the partnership assets and the discharge of the partnership liabilities.

8. [8]

   The plaintiff wishes to extricate herself from the partnership, but without invoking the “pre-emption” procedure. In October 2016, the plaintiff served a “notice of determination” purporting to terminate the partnership pursuant to the Partnership Act 1892 (NSW).

9. [9]

   The present proceedings were commenced in December 2016. The plaintiff seeks a declaration that the partnership was validly terminated by service of the plaintiff’s notice of termination of October 2016, and further orders, purportedly by way of specific performance, for the dissolution of the partnership pursuant to cl 27. Alternatively, the plaintiff seeks orders that the partnership be wound up by the Court on the just and equitable ground.

Issues for decision

1. [10]

   The proceedings came before me for hearing on 30 May 2017. The defendants contended (albeit that this had not been put on their behalf in prior written submissions) that the notice was ineffective. The defendants’ position was that although as a matter of principle they did not oppose the plaintiff withdrawing from the partnership business, she should do so by following, at least in the first instance, the cl 21 procedure. Alternatively, if the partnership was to be wound up on the just and equitable ground, orders should be made to allow the defendants to purchase the plaintiff’s interest in the partnership at valuation rather than conducting a public sale.

2. [11]

   The first critical issue between the parties is, therefore, the validity of the notice. If the plaintiff succeeds on this issue, it will be unnecessary to consider winding up on the just and equitable ground. I therefore decided to deal with this issue separately. If the plaintiff fails on the issue, it will be open to her to press on, if she is so advised, with an application to dissolve the partnership under the just and equitable ground.

Partnership Deed provisions

1. [12]

   Clause 3.1 of the Partnership Deed provides:

2. [13]

   The “Business” is defined as:

3. [14]

   The “Premises” are defined as:

4. [15]

   The proceedings have been conducted before me on the basis that the “Business” now consists of the three pharmacies at the Macquarie Centre. This is consistent with the Deed, in that the definition of “Business” is “a pharmacy business” located at the former location, but the definition of “Premises” contemplates that the location could be moved. In any event, it is clear that all parties have agreed, even if implicitly, to the expansion of the Business to the current three outlets and for the Partnership Deed to continue to apply on that basis: Partnership Act 1892 (NSW), s 19.

5. [16]

   I have already referred to cl 27 which deals with the winding up of the Business. That clause begins:

6. [17]

   The Deed provides for a number of circumstances in which the interests of a particular partner, or the partnership itself, may be terminated. I have already referred to the “pre-emption” procedure in cl 21. That clause begins:

7. [18]

   Clause 25 provides:

8. [19]

   Clause 23 provides:

9. [20]

   Reference to expulsion “pursuant to clause 27” in sub-cl (a)(iii) is clearly a mistake and should be read as a reference to cl 25. The reference to dissolution “in accordance with clause 28” in the chapeau to sub-cl (a) is more troublesome. The reference to cl 28 itself is clearly wrong, as that clause deals with income tax depreciation. Counsel for the defendants contended that the reference should be to cl 27, but that is rather redundant given that cl 27 is referred to later in sub-cl (a). Counsel for the plaintiff suggested that the words should be ignored. On balance, I agree with counsel for the defendants, because elsewhere in the Deed dissolution is always referred to as dissolution under the Deed rather than at large.

10. [21]

    Clauses 2.1 and 2.2 dealt with the creation and commencement of the partnership. Clause 2.3 provides:

11. [22]

    Clause 2.3 recognises a distinction between the “termination” of the partnership so far as one partner is concerned (sub-cl (b)) and termination of the whole partnership (sub-cl (a)). In a multi-party partnership such as this one, termination as regards one partner brings the partnership to an end in the sense that the business ceases to be operated by a partnership consisting of the former partners, but the partnership continues in the sense that the continuing partners remain partners in the business and remain bound to each other to continue the operation of the business in partnership in accordance with the terms of the partnership agreement. On the other hand, the termination of the partnership as a whole terminates the relationship of partner between all of the partners and results in the cessation of the partnership business except to the extent necessary to sell the partnership assets and otherwise wind up the partnership’s affairs.

12. [23]

    Clause 20 provides:

13. [24]

    Clause 20 uses the term “dissolve” instead of “terminate” as in cl 2.3, but the meaning seems to be the same. Clause 20(a) must, I think, be understood as referring to the dissolution of the partnership as a whole. It follows that it effectively operates as a restatement of cl 2.3(a).

14. [25]

    Clause 20(b) apparently only makes explicit what is already implicit in cl 23, namely that bankruptcy, expulsion etc does not effect an automatic dissolution of the whole partnership and the partnership remains on foot among the continuing partners, who may elect either to buy out the interest in question or to dissolve the partnership.

15. [26]

    There is a puzzle created by the use of the word “retirement” in cl 20(b). The Deed nowhere provides in its terms for the “retirement” of a partner. Counsel for the plaintiff pointed out that the other events referred to (death, bankruptcy or expulsion) are the events referred to in cl 23(a)(i), (ii) and (iii) and accordingly suggested that the word “retirement” in cl 20(b) should be read as a reference to a partner becoming permanently mentally incapacitated which is the event referred to in cl 23(a)(iv). Counsel for the defendants suggested “retirement” is used in a more general sense but the submission was not developed in great detail. On balance, I do not think I need to resolve the issue. No-one suggests that the clause creates some free-standing right of “retirement”.

Legislative context

1. [27]

   The notice served on behalf of the plaintiff purported to terminate the partnership pursuant to s 26 of the Partnership Act 1892 (NSW). At the hearing, the plaintiff also sought to rely on s 32.

2. [28]

   Section 26 provides as follows:

3. [29]

   Section 32 provides:

4. [30]

   The apparent overlap with s 32(c) raises the question of what purpose s 26 was intended to have. The heading to s 26 refers to the “retirement” of a partner and although the heading is not part of the text of the Act, recourse may be had to it for the purpose of interpretation of the Act: Interpretation Act 1987 (NSW), s 34(1)(b).

5. [31]

   “Retirement” is referred to in a number of other places in the Act. Section 17 relevantly provides (emphasis added):

6. [32]

   Section 37 provides (emphasis added):

7. [33]

   Sections 42 and 43 apply where a member of the firm has “died, or otherwise ceased to be a partner, and the surviving and continuing partners carry on the business of the firm … without any final settlement of accounts as between the firm and the outgoing partner, or the partner’s estate”. In such a situation the estate or the outgoing partner is entitled to a share fixed by the Court of the profits made since “the dissolution”, but not where the partnership agreement has provided for the exercise of an option to purchase the interest of the deceased or outgoing partner. Although the text speaks of an “outgoing” partner, the heading to s 43 refers to a retiring or deceased partner.

8. [34]

   The term “retirement” naturally describes a situation in which one partner ceases to be a member of the firm but the partnership business is carried on by the remaining members of the firm, with or without the introduction of a replacement partner. This is clearly the sense in which it is used in s 17 which refers to the continuing partners as “members of the firm as newly constituted”. The meaning appears to be the same in s 37 (where it is used in apposition to “dissolution”) and the heading to s 43.

9. [35]

   Further textual clues are provided by the fact that s 26 appears in Pt 3 of the Act, which deals with relations between partners, and does so alongside s 25 which deals with the “expulsion” of partners, another circumstance in which one partner ceases to be a member of the firm but the business may be carried on by the other partners.

10. [36]

    Part 3 also contains s 31, which deals with the rights of an assignee in the case of an assignment by any partner of the partner’s share in the partnership. This is another circumstance where an individual partner’s interest has to be considered on its own and independently of the relationship between the other partners. Subsection (2) expressly refers to a “dissolution of the partnership, whether as respect [sic] all the partners, or as respects the assigning partner”.

11. [37]

    Section 32, on the other hand, is found in Pt 4 of the Act which deals with “dissolution”.

12. [38]

    Many of the provisions of Pt 4 which speak of dissolution clearly refer to dissolution of the partnership as between all partners: s 33 (dissolution by bankruptcy, death or charge); s 34 (dissolution by illegality); s 35 (dissolution by the Court); s 37 (notification of dissolution: quoted at [32] above) and ss 38 and 39 (which deal with winding up).

13. [39]

    However, it is not as simple as saying that the term “dissolution” is exclusively used to mean the termination of the whole partnership.

14. [40]

    Section 42 (quoted in part at [33] above) in speaking of “the dissolution” appears to be speaking of the dissolution of the partnership relationship as regards the outgoing partner only. Section 31 (quoted in part at [36] above) refers to dissolution in both senses.

15. [41]

    Both ss 26 and 32, as well as the other sections to which I have referred, are taken from the Partnership Act 1890 (UK). That Act had a tortuous passage to the statute book. I received supplementary submissions from counsel for both parties which addressed the background to, and construction of, the relevant provisions, and I also undertook some further research into the legislative history for myself.

16. [42]

    The move to codify partnership law was promoted by the Associated Chambers of Commerce who retained the then Mr Frederick Pollock, of counsel, to draft the initial Bill, which was introduced into Parliament in 1879. At that stage, Pollock had already published a text book on partnership law in the form of a digest, which summarised the law in a series of articles and propositions. The second edition of his work, published in 1880, included as an appendix the then form of the Bill, being his initial Bill as amended in Committee.

17. [43]

    The Bill encountered resistance in Parliament. In the course of a debate in 1882, opponents taunted the Government that the Bill had been introduced by the President of the Board of Trade, rather than by the Solicitor-General or the Attorney-General, suggesting that it had been drafted by business interests rather than expert lawyers. The Government responded that the then Lord Justice Lindley had provided some comments on the Bill but the then Mr Davey QC (later Lord Davey) retorted that the Master of the Rolls (then Sir George Jessel) thought it “a thoroughly bad Bill, one of the worst of the proposed Codes”: House of Commons Debate (21 July 1882) vol 272 cols 1324-31.

18. [44]

    Further versions of the Bill, with revisions, were introduced in 1882, 1883, 1884 and 1889 before the Bill was finally passed in its 1890 form: Sir Nathaniel Lindley, A Treatise on the Law of Partnership (6th ed, 1893, Sweet and Maxwell) at 1.

19. [45]

    Section 26 of the current NSW Act may be traced back to s 44 of the Partnership Bill 1880 (UK), in the appendix to Pollock’s 1880 work: Sir Frederick Pollock, A Digest of the Law of Partnership (2nd ed, 1880, Stevens and Sons) at 143. The section is titled “Retirement from partnership at will” and a reference to article 42 of his digest is provided. The section appeared as follows (emphasis added):

20. [46]

    Article 42 of the digest, also titled “Retirement from partnership at will”, provided (at 66):

21. [47]

    The 1884 edition of Pollock’s work contained as an appendix the Partnerships Bill 1883 (UK). Section 44 had become s 45, but was still titled “Retirement from partnership at will”. The language of the section was identical to the previous s 44 in all respects save one: the words “retire from it” now read “determine the partnership”: Sir Frederick Pollock, A Digest of the Law of Partnership (3rd ed, 1884, Stevens and Sons) at 145. Although no reference to an article of his digest was provided, article 42 was in the same terms as in Pollock’s 1880 work.

22. [48]

    Although I have not researched the minutes of Committee meetings between 1880 and 1883 to determine the reasoning behind this amendment, it may be that the amendment’s goal was to align it with the provision dealing with the continuation of a partnership beyond its fixed term, now s 27 of the NSW Act. This provision appeared as s 45 in the 1880 Bill and as s 46 in the 1883 Bill in identical terms, immediately after the provision dealing with retirement from a partnership at will. It provided (emphasis added):

23. [49]

    In Pollock’s digest, he provided the following examples of the operation of this provision (Pollock, 1880, at 67; Pollock, 1884, at 68-9; emphasis added):

24. [50]

    Although the provision did not change in the 1883 Bill, apart from its numbering, by 1890 the language had been amended, such that the emphasised clause now read “so far as is consistent with the incidents of a partnership at will”: Partnership Act 1890 (UK), s 27. This is the form of the current s 27. The result is that the relationship between ss 26 and 27 is now less obvious than it was at the initial stage of the drafting process.

Prior authority

1. [51]

   In the English case of Moss v Elphick, the plaintiff agreed to pay £250 to become a partner with the defendant in a tobacconist business. The partnership agreement stated (cl 4) that the partnership “shall be terminated by mutual arrangement only”. The plaintiff purported to terminate the partnership by notice under s 26. The case came on appeal from a County Court to a Divisional Court consisting of Darling J and Pickford J ([1910] 1 KB 465). Darling J considered that the partnership was one for “no fixed term” within the meaning of s 26 (at 467-8). But his Lordship reasoned that the situation was also covered by s 32(c) and that s 32 had the effect that the agreement could not be terminated otherwise than by mutual arrangement. Pickford J agreed and said (at 468-9):

2. [52]

   A further appeal was taken to the Court of Appeal ([1910] 1 KB 846) which was dismissed. The appellant argued that the approach of the Divisional Court resulted in an impermissible overlap between s 26 and s 32. Vaughan Williams LJ said (at 848):

3. [53]

   Fletcher Moulton LJ reached the same conclusion by different reasoning. He said (at 848-9):

4. [54]

   Farwell LJ said (at 849-50):

5. [55]

   In the Scottish case of Maillie v Swanney 2000 SLT 464, the parties were solicitors who were members of a firm constituted by a written contract of partnership. Clause 10 provided for an insolvent partner to cease to be a partner and to be excluded from the business. Clause 11 provided for the expulsion of a partner for fundamental breach of a contract. Clause 12 provided for retirement upon notice being given. Each clause provided that the event in question would not terminate the partnership. Clause 13 provided for death or incapacity to be dealt with as retirement. Clause 14 provided that the partners might terminate the partnership by mutual agreement. Clause 15 provided that where clauses 11, 12, or 13 applied the remaining partners had an option to discontinue the business, in which event, or if there were a mutually agreed termination under clause 14, the whole assets of the partnership were to be sold. The pursuer gave notice purporting to terminate the partnership under the UK Act.

6. [56]

   Lord Penrose referred to the interaction between ss 26 and 32. He said (at 468-9):

7. [57]

   Lord Penrose ultimately dealt with the issue by reference to s 32. His reasoning and conclusion were as follows (at 470):

Validity of purported termination

1. [58]

   It is convenient to deal first with s 32. The plaintiff’s contention is that she was entitled to terminate under sub-paragraph (c). This gave rise to two questions: first, whether the partnership was one “entered into for an undefined time”; and second, whether the Partnership Deed contained any agreement between the partners to the contrary.

2. [59]

   In my opinion, each of sub-paragraphs (a), (b) and (c) must be construed on the basis that they do not overlap with each other. A partnership can only be dissolved once and, accordingly, if one sub-paragraph applies the others cannot. It follows that an “undefined time” in sub-paragraph (c) must be different from both “a fixed term” and also the period of a “single adventure or undertaking”.

3. [60]

   The terms of the Partnership Deed make it clear there was no specific period of time over which the partnership was to continue. At the same time, they make it clear that the partnership was to continue, subject to specific exceptions, for the duration of the Business.

4. [61]

   Counsel for the plaintiff argued that the operation of the three pharmacies was not a “single adventure or undertaking”, relying on ACE Project Group Pty Ltd v Ginger Development Enterprises Pty Ltd [2006] NSWSC 962. In that case Lloyd AJ said at [9]:

5. [62]

   However this decision predated the Court of Appeal decision in Sze Tu v Lowe (2014) 89 NSWLR 317. In that case, a partnership firm conducted retail businesses at two different locations, one being a grocery business (“WYT”) and the other being a butchery (“YS”). YS was sold in 1986 and WYT was closed in 1989. The Court of Appeal held that the partnership was for a “single adventure or undertaking”. Gleeson JA, who gave the judgment of the Court, said:

6. [63]

   In my opinion, the facts of this case lead to the same conclusion. The Business was in its inception a pharmacy business operating from one retail outlet. That Business has continued but has transferred and expanded to three other locations. It is still recognisably the same business. Although it has a number of registered business names, it trades under a single Australian Business Number.

7. [64]

   In my view, the Business, albeit conducted at multiple locations, which differ from the location where it was originally conducted, remains a “single adventure or undertaking”. Accordingly, in my view, sub-paragraph (b) applies and sub-paragraph (c) cannot apply.

8. [65]

   If I am wrong about this, I think that the Partnership Deed excludes termination by notice under s 32(c). Clause 3.1 (quoted at [12] above) provides for the parties to carry on the Business “until the Partnership is determined as provided by this deed”. The partnership can only be determined in defined circumstances, and the Deed confers no right on the partners to terminate it unilaterally. The only unilateral step a partner can take which may result in termination is to invoke the “pre-emption” procedure. This is quite inconsistent with termination merely on notice. The circumstances are relevantly the same as they were in Maillie v Swanney.

9. [66]

   I conclude, therefore, that the plaintiff had no right to dissolve the partnership under s 32(c).

10. [67]

    As to s 26, the first question is whether it applies at all. On the reasoning of Darling J in Moss v Elphick, the present case would be one of a partnership which was for “no fixed term” because there was no specified date on which the partnership was to terminate. Lord Penrose in Maillie v Swanney was inclined to the same view. However, the reasoning of Fletcher Moulton LJ in Moss v Elphick is to the contrary: in his Lordship’s view, a partnership for “no fixed term” means a partnership at will and does not include a partnership which is not terminable at will, even if the partnership has no definite date of conclusion. Another way of expressing the same idea is to say, as Farwell LJ said, that s 26(1) applies only to a partnership at will. This view is supported by the heading and, apparently, the antecedents, to s 26.

11. [68]

    Such reasoning amounts to saying that “no fixed term” in s 26(1) means something different from the opposite of “fixed term” in s 32(a). Although statutes are usually construed so that the same term is given the same meaning throughout the statute, that is only a presumption. The lack of consistency in terminology in the Act (no doubt resulting, at least in part, from its difficult and lengthy passage to the statute book) gives the presumption less force in this case. In any event, the presumption must give way if it produces a result which is otherwise inconsistent with the language and purpose of the relevant provisions. In my view, this is such a case. In s 32(a), the phrase “fixed term” is used in contradistinction not only to “undefined time” in sub-paragraph (c) but also to the period of “a single adventure or undertaking” in sub-paragraph (b). The same tripartite division does not occur in s 26. I think this provides a sufficient basis for concluding that the phrase “no fixed term” in s 26 is not exactly the opposite of “fixed term” in s 32(a). Section 26, therefore, did not apply in the present case because the partnership was not one for “no fixed term”.

12. [69]

    If I am wrong in this view, then I would still conclude, in accordance with the result in Moss v Elphick, that s 26 did not permit termination in the present circumstances. Whether this is put on the basis of an implicit limitation arising from cl 32(c) (in accordance with the reasoning of Darling J and of Pickford J) or some implicit limitation in s 26 (as Vaughan Williams LJ appeared to suggest) does not matter.

13. [70]

    In Maillie v Swanney, Lord Penrose suggested (quoted at [56]) that s 26 may be confined to the termination of a single partner’s interest in a partnership, rather than dissolution of that partnership as a whole.

14. [71]

    The learned author of Lindley & Banks on Partnership (19th ed, 2010, Thomson Reuters) said of this at [9-03] fn (7):

15. [72]

    I think that the vehemence with which this opinion is expressed is somewhat surprising. The lack of consistency in the use of the terms “dissolution” and “termination” is far from satisfactory, but the structure and terminology used in the Act and the antecedents to the Act to which I have referred at [45] to [50] above do, in my view, suggest that the purpose of s 26 may simply have been to provide for the termination of the membership of the partnership by the partner giving notice, which would not necessarily, at least in a multi-party partnership, bring the partnership wholly to an end. Even so, such an interpretation would not be particularly satisfactory. It would leave unclear how the section operates in the case of a two person partnership. It would also leave unclear how, in the absence of agreement, the retiring partner is to realise any value that his or her interest in the partnership may have where no full dissolution takes place.

16. [73]

    There is no need to consider this question further for present purposes. Even if s 26(1) is so confined, it would still be necessary to consider whether, in the present case, it could be invoked by the plaintiff to terminate her interest in the partnership without the consent of the defendants and without following cl 21. That would give rise to the same questions about the scope of s 26 that I have addressed above.

17. [74]

    There have been a number of decisions at first instance where s 26 has been referred to as creating a statutory right of termination. Examples are: Williams v Nicoski [2003] WASC 131; Giltej Applications Pty Ltd v Rosaria Grace Moschella [2005] NSWSC 599.

18. [75]

    However, in none of these cases does it appear that the question was argued or the relevant authorities referred to. In my opinion, the analysis of the statutory language, its antecedents, and the course of authority show that the circumstances in which s 26 can be invoked are limited.

19. [76]

    It follows, in my view, that s 26 does not assist the plaintiff in this case.

Conclusion and orders

1. [77]

   I have concluded that the plaintiff’s “notice of determination” was ineffective to result in the termination of the partnership. It follows that the plaintiff’s claim, to the extent based on the notice of determination, must be dismissed.

2. [78]

   This leaves the plaintiff’s application to have the partnership wound up on the just and equitable ground. Although the plaintiff is free to proceed with that aspect of the application, given the findings which I have made she will have to overcome the argument that before it can be said to be just and equitable to wind the partnership up, the “pre-emption” procedure in cl 21 should at least be tried. It may be that the plaintiff would be better served by not pressing that aspect of her claim in these proceedings. Should the “pre-emption” procedure not work, it would then be open to the plaintiff to bring fresh proceedings for the purpose of seeking an order for winding up of the partnership on the just and equitable ground. I will give the plaintiff an opportunity to consider her position in this regard in the light of my judgment. I will also defer dealing with costs until the plaintiff has decided what course to take.

3. [79]

   The orders of the Court are: