w w w . L a w y e r S e r v i c e s . i n



Lindsay Allan Clark v/s Libra Developments Ltd & Others


Company & Directors' Information:- LIBRA INDIA PRIVATE LIMITED [Under Process of Striking Off] CIN = U51909DL1996PTC082555

    CA No. 233 of 2011

    Decided On, 28 September 2011

    At, Court of Appeal of New Zealand

    By, THE HONOURABLE MR. JUSTICE ELLEN FRANCE
    By, THE HONOURABLE MR. JUSTICE RANDERSON & THE HONOURABLE MR. JUSTICE HARRISON

    For the Appellant: L A Andersen, J C McLeod, Advocate. For the Respondent: P B Churchman, L S Beecroft, Advocates.



Judgment Text

Randerson, J.

Introduction

[1] This appeal is a further round of long-running litigation between the parties who were formerly in partnership as property developers in the Dunedin area.

[2] It is no longer in dispute that the partnership was between the appellant Mr Clark and the first respondent Libra Developments Ltd (Libra), a company owned by a trust controlled by the second respondent Mr Hyslop. Profits and losses were to be shared equally. Mr Hyslop had operated previously as a self-employed building contractor while Mr Clark had been a building supply merchant. In general, Mr Hyslop handled the day-to-day management of building projects while Mr Clark provided or arranged finance.

[3] The partnership commenced in 1997 and terminated on 30 October 2002. Ever since, the parties have been involved in litigation which is still not resolved. In the High Court, Chisholm J has delivered three substantive judgments[1] and this Court has issued two previous decisions.[2]

[4] The current appeal arises from the judgment of Chisholm J issued on 21 March 2011 determining a range of issues relating to the manner of calculation of partnership assets. An accounting between the parties previously ordered by the High Court has not yet taken place. The matters at issue relate to three projects in which have the partnership was engaged or which were in prospect prior to dissolution:

(a) The refurbishment of Cargill House in Dunedin.

(b) A property development at Eastbourne Street, Dunedin.

(c) A property development at Haggart Alexander Drive, Mosgiel.

[5] Central to the matters in dispute on appeal is whether the appellant was under a duty to complete any of these projects after the dissolution of the partnership. The Judge found there was such a duty in respect of the first two projects but not the third. These findings had consequential effects in respect of the damages or other relief to which Libra and Mr Clark might be entitled in respect of the projects.

[6] The principal dispute relates to the Cargill House project in respect of which the Judge made an award of damages against Mr Clark of $250,000 based on a finding that the partnership had lost the chance of making a profit on the refurbishment as a result of breach of fiduciary duty on his part. In respect of Eastbourne Street, the Judge found that Mr Clark was under a duty to complete the development. In consequence the Judge fixed the basis upon which profits would have accrued to the partnership. On the Haggart Alexander Drive project, the Judge found that the partnership property was to be valued at 9 August 2007 relying on a valuation obtained by Libra at that date. The timing and amount of this valuation is in dispute.

[7] Against that brief outline, we see the issues as:

(a) Whether there was a duty on Mr Clark to complete the Cargill House project on behalf of the partnership and whether the Judge erred in awarding damages of $250,000 in respect of that project.

(b) Whether there was a duty on Mr Clark to complete the Eastbourne Street development and whether the Judge erred in fixing the profit which would have thereby accrued to the partnership.

(c) Whether the Judge erred in fixing the value of the Haggart Alexander Drive property on the basis of the valuation of 9 August 2007.

First issue: Whether there was a duty on Mr Clark to complete the Cargill House project on behalf of the partnership and whether the Judge erred in awarding damages of $250,000 in respect of that project

Cargill House - Background

[8] In June 2000, Danube Holdings Ltd (DHL) entered into a contract to purchase Cargill House, a multi-storey building in the Dunedin CBD for a sum of just over $1 million. Mr Clark was the sole shareholder and director of DHL but it is now accepted that DHL was a corporate vehicle for the benefit of the partnership between Mr Clark and Libra.

[9] At Mr Hyslop’s instigation, a director of Scenic Circle Hotels was approached about the possibility of Cargill House being converted to a Scenic Circle Hotel. Negotiations with Scenic Circle were pursued and a joint venture agreement was entered into on 12 July 2002. The main parties to the heads of agreement were DHL and various entities associated with Mr Clark and Scenic Hotels.

[10] The Judge described the terms of the heads of agreement:

[109] In simple terms the heads of agreement provided for the incorporation of Cargill Hotel 2002 (CH 2002) and the sale of the property from DHL to that company for $1.8m plus a further $1.2m to be paid by CH 2002 at a later time. Thus the total purchase price was $3m. Mr Clark’s interests (his trust) were to hold 50% of the ordinary shares in the company and the Scenic Circle interests the other 50%. The building was to be converted into a Scenic Circle Hotel and, following conversion, the hotel was to be managed by Scenic Circle Hotels Management Services Limited.

[11] The project was initially costed at approximately $8 million. It was to be financed through interest-free advances made by the shareholders of a newly incorporated company (CH 2002) along with bank finance. Although there were some complexities in the ownership structure of CH 2002, it was essentially owned equally by the Clark and Scenic Hotel interests. The directors also reflected those interests.

[12] Neither Mr Hyslop nor Libra had any ownership interest in the company or had any other involvement with it. However, Libra stood to gain through DHL as the corporate vehicle for the partnership. It was initially intended that DHL would carry out the refurbishment utilising Mr Hyslop’s skills in construction and project management.

[13] An important term of the heads of agreement was that it was conditional upon:

2.7 DHL entering into a contract with Cargills[3] (on terms which are acceptable to DHL, Cargills and CIL[4]) for DHL to undertake building and construction work in respect of the hotel within 50 days of the date of this agreement.

If the conditions of clauses ... 2.7 are not satisfied then this agreement shall be at an end.

[14] It was common ground that no building and construction contract was entered into as envisaged by clause 2.7 within the stipulated period of 50 days and no such contract had been entered into by the time the partnership was dissolved in October 2002.

[15] Prior to the heads of agreement being entered into, there were negotiations between Mr Hyslop and Mr Clark as to the former’s entitlement in the Cargill Hotel project. When these negotiations struck difficulties, Mr Hyslop lodged a caveat against the title to the hotel. The Judge found this led to a marked deterioration in the relationship between the two men. He further found that by mid October 2002, Mr Hyslop was no longer part of the 'hotel project team'. He and his family had been residing in the Cargill Hotel building but were evicted from it on 30 October 2002 in circumstances which the Judge described as involving quite 'considerable acrimony'.[5] After that date, Mr Hyslop was excluded from the project and did not play any further part in it.

[16] Importantly, Mr Clark’s solicitors wrote to Mr Hyslop’s solicitors on 29 October 2002 denying any relationship of partnership but stating nevertheless:

If our client is incorrect, and some partnership relationship was held to exist, then we hereby give notice that the partnership is dissolved forthwith.

[17] It is common ground that the partnership later found to exist was lawfully terminated by notice as at 30 October 2002.[6] While accepting that the heads of agreement was 'technically' at an end at the date of dissolution, the Judge found that the joint venture envisaged by the heads of agreement nevertheless proceeded.[7] We take the Judge to mean by this that the proposal to refurbish Cargill House proceeded largely in accordance with the heads of agreement. But it did so without any involvement by Mr Hyslop or DHL in the refurbishment work. DHL’s role was confined to the sale of the property to CH 2002. The hotel conversion by CH 2002 began in 2003 and the hotel opened in March the following year. Ownership of the property was formally transferred from DHL to CH 2002 in February 2004.

[18] The Judge found that after the termination of the business relationship between Mr Hyslop and Mr Clark, the latter took over the partnership’s interest in the project. Had it not been for Mr Hyslop’s dismissal from the project, it was more likely than not that the refurbishment contract would have been performed by DHL and there would have been a significant profit for that company, and thereby the partnership.[8]

[19] The Judge rejected a suggestion made by Mr Clark that the involvement of Mr Hyslop in the project was unacceptable to Scenic Circle interests from the outset. He also rejected Mr Clark’s evidence that DHL could not have physically undertaken the contract. But he found that:

[132] ... once Mr Hyslop had been dismissed by Mr Clark and excluded from the project, any prospect that the refurbishment contract would be awarded to DHL evaporated. Without Mr Hyslop DHL did not have the ability to perform the contract. Mr Clark was also clearly involved in the decision to proceed with the joint venture even though in terms of clause 2.7 the failure to award the contract to DHL meant that technically the heads of agreement was at an end. He was a party to the heads of agreement and without his co-operation it would not have been possible for that outcome to be reversed.

[133] In my view this combination of events (dismissal of Mr Hyslop from the project, assuming control of the partnership project for Mr Clark’s own benefit, and participating in the abandonment of any entitlement that the partnership had to administer the refurbishment contract) constituted a breach of the duty of good faith owed by Mr Clark. From the time Mr Hyslop and the partnership were excluded from the project Mr Clark was effectively preferring his own interests (through his trust) to the interests of the partnership.

[20] We pause here to record that the Judge rejected the proposition advanced by Libra and Mr Hyslop that Mr Clark had personally taken over the refurbishment contract and reaped the benefit from it. Instead, the Judge found that the refurbishment contract was actually performed by CH 2002 and not Mr Clark personally.[9]

[21] The next step taken by the Judge was to examine whether Mr Clark’s breach of the duty of good faith was capable of sustaining an award of damages based on the loss of a chance. In finding affirmatively on this point, the Judge adopted the approach taken by French J in Sanders v Laing which we later discuss.[10] Chisholm J rejected a submission made on behalf of Mr Clark that the Supreme Court in Chirnside v Fay[11] had disapproved of damages being awarded for loss of a chance in a joint venture situation. As the Judge saw it, the Supreme Court found in that case that the plaintiff had not lost the chance of entering into a profitable venture because he was already a party to the venture.

[22] The next step in the Judge’s reasoning relied on his finding that there was a duty on the part of Mr Clark to complete transactions that had begun but were unfinished at the time of dissolution. In this respect, the Judge relied on observations made by this Court in its 2008 judgment[12] to this effect:

[10] ...The whole thrust of Chisholm J’s first decision was that Mr Clark owed a duty, which it is unnecessary [to] complicate with the adjective 'fiduciary', to bring about an equal result in relation to the partnership assets. They included both the share of Danube Holdings Ltd and the business opportunities which arose during the period of the partnership. That included the opportunities that the agreement of 12 July 2002 afforded the Clark interests.

[11] It may be that the whole of the interests of the partnership in relation to the Cargill House venture are expressed in Mr Clark’s 50 per cent shareholding in Cargill Hotel 2002 Ltd. In that event the taking of accounts would presumably include a valuation of that holding. But discovery and, conceivably, further interlocutory orders needed to establish what has happened to the partnership property, will be required to permit the taking of accounts.

[12] The principle we apply is that nothing has happened which would deprive Libra of its share of the 50 per cent interest in the Cargill House project held by Mr Clark and thus the assets into which it may be traced.

[23] By way of background to these findings, this Court observed in its 2008 judgment that Chisholm J had relied on s 45(1) of the Partnership Act 1908 and on Chirnside v Fay in holding, in his second judgment that: [13]

Libra was entitled to recover the profits that would have accrued to it through the partnership if the partnership’s involvement had not been unilaterally terminated.

[24] In reaching the conclusions cited above,[14] this Court referred to the principles established by cases such as Featherstonhaugh v Fenwick,[15] Chan v Zacharia,[16] and Thompson’s Trustee in Bankruptcy v Heaton.[17] These cases dealt with the equivalent of s 41 of our Partnership Act under which, in certain circumstances, there may be an ongoing obligation on partners of a firm, even after dissolution, to 'complete transactions begun but unfinished at the time of the dissolution ...'.

[25] Against this background, Chisholm J went on to find that there was a real or substantial possibility that, but for Mr Clark’s breaches of duty, DHL would have been awarded the refurbishment contract for Cargill House.[18] The Judge concluded that the sum of $250,000 would fairly reflect DHL’s loss of this chance. The Judge saw this sum as reflecting both loss of profit and the loss of the ability by the partnership to apply the profit in reduction of an advance it would have been required to make to CH 2002 if arrangements had proceeded in terms of the heads of agreement. In consequence, no adjustment would be required in respect of interest payable to Mr Clark in relation to this advance.[19]

[26] Libra and Mr Hyslop claimed that the partnership would have made a profit on the joint venture of $542,580. This sum reflected the partnership’s share of savings on the construction costs which they claimed the partnership would have made if the partnership had carried out the refurbishment. The Judge discounted this sum because he considered the profit would not have been 'anywhere near' that figure and because the savings in construction costs would be reflected, at least in part, in the valuation of the shares held by the Clark interests in CH 2002.[20]

Cargill House – The arguments advanced

[27] Mr Andersen accepted that Mr Clark had breached his fiduciary duty by securing for his own benefit (or for the benefit of interests associated with him) the opportunity the partnership had to undertake the Cargill House refurbishment contract. To the extent that Mr Clark or his interests had benefited from the project (to the exclusion of Libra and Mr Hyslop) Mr Clark was liable to account for the profits made. But Mr Andersen submitted there was no proper basis for awarding damages for loss of any chance the partnership might have had of obtaining the Cargill House contract for itself.

[28] In essence, Mr Andersen’s submission was that the partnership had been lawfully dissolved and there was no ongoing obligation on Mr Clark as a former partner to complete the Cargill House project. The project could not have been completed as a partnership project given the breakdown of the relationship between the parties. The Judge had found that the project could not have proceeded without Mr Hyslop. Mr Clark’s only obligation in the circumstances was that which he now accepts, namely the obligation not to profit, for his benefit alone, from the opportunity the partnership had possessed at the time of dissolution.

[29] In response, Mr Churchman submitted that Mr Clark was seeking to revisit findings already made and endorsed by this Court. He also submitted that the Judge’s findings were correct for the reasons given by him. Mr Churchman also placed emphasis on s 45 of the Partnership Act as additional support for the Judge’s findings.

Cargill House – Discussion

[30] There are two important matters which are not in dispute which must be reiterated at the outset. The first is that the partnership was lawfully dissolved by notice. Mr Clark did not breach any obligation in that respect. The second is that at the date of dissolution, the partnership (through DHL) had neither the right to obtain the contract to refurbish Cargill House nor any obligation to perform any such contract. This conclusion follows inevitably from the non-fulfilment of clause 2.7 in the heads of agreement, as the Judge accepted.

[31] We view the disposition of this appeal as turning on the finding by the Judge that Mr Clark was obliged to complete the Cargill House project for the benefit of the partnership. Any such obligation could only arise by virtue of the provisions of the Partnership Act, or under a contractual obligation assumed by the partnership, or from any fiduciary duty on the part of Mr Clark.

[32] The authority to continue the partnership business after dissolution is governed by the terms of the partnership agreement and the Partnership Act. There are no relevant terms of the partnership agreement in this case but s 41 of the Partnership Act provides:

41 Continuing authority of partners for purposes of winding up

After the dissolution of a partnership the authority of each partner to bind the firm, and the other rights and obligations of the partners, continue (notwithstanding the dissolution) so far as may be necessary to wind up the affairs of the partnership and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise:

Provided that the firm is in no case bound by the acts of a partner who has become bankrupt; but this proviso does not affect the liability of any person who has after the bankruptcy represented himself, or knowingly suffered himself to be represented, as a partner of the bankrupt.

[33] The cases have emphasised that s 41 affords only limited authority to bind the firm and to complete transactions begun but unfinished. Upon the dissolution of a partnership, the primary obligation upon the partners is to wind up the affairs of the partnership as soon as practicable, to discharge all the firm’s proper debts and liabilities, and to distribute the surplus assets of the firm in accordance with the terms of the partnership agreement and the law.[21]

[34] It is well-established that, post-dissolution, the primary purpose of the power of a partner to bind the firm or to carry on its business under s 41 of the Partnership Act is to enable the affairs of the partnership to be wound up in an orderly fashion.[22] Consistent with the general duty to progress promptly the winding up of the partnership of the dissolution, the power or obligation to continue the firm’s business after dissolution is limited and extends only so far as is necessary to wind up its affairs and to complete transactions begun but unfinished at the time of dissolution.[23]

[35] The leading authority in the United Kingdom on the meaning of 'transactions' in this context is the decision of the House of Lords in Inland Revenue Commissioners v Graham’s Trustees.[24] Lord Reid said:[25]

What is meant by transactions begun but unfinished when the partnership was dissolved? If the common law had been clearly settled before 1890, I would interpret this section in light of the earlier law. But it appears that there was then little authority on this matter. So this section should if possible be construed so as to reach a reasonable result. It was argued that 'transactions' means bargains. But that would deprive this provision of all content, for it is clear that surviving partners have no right to bind the assets of the dissolved firm by making new bargains or contracts. Their right and duty is to wind up its affairs. In my view this must mean that the surviving partners have the right and duty to complete all unfinished operations necessary to fulfil contracts of the firm which were still in force when the firm was dissolved.

[36] Lord Reid went on to refer by way of example to a partially completed contract for the construction of a bridge. The surviving partners would be bound to finish the work.[26]

[37] 'Transactions' are those of a contractual nature existing at the date of dissolution which have begun but are unfinished at that date. The partners are not obliged to enter into new bargains or contracts, particularly if that would require incurring substantial expenditure or liabilities which did not exist at the date of dissolution. Similarly, a partner is not obliged to undertake fresh liabilities in order to preserve an asset of the partnership.[27]

[38] The leading New Zealand authority is the decision of this Court in Sew Hoy v Sew Hoy. In that case, three brothers and their wives purchased land which they held together as partners. The land was compulsorily acquired by the Crown under the Public Works Act 1928. Shortly afterwards, one of the partners died, thereby dissolving the partnership. Much later, the Crown offered part of the land back to all the original members of the partnership including the trustees of the deceased partner. This offer was made under s 40 of the Public Works Act 1981. The Crown entered into negotiations with the trustees of the deceased partner since they had been the only ones to express any interest. Four of the remaining partners brought proceedings against the trustees claiming they had breached fiduciary duties owed to the partnership by failing to pass on relevant information and by pursuing their individual interests at the expense of the partnership as a whole. The claim was rejected in the High Court and this decision was upheld on appeal.

[39] Two substantive judgments were delivered with Keith J concurring. Blanchard J found that the enactment of s 40 of the Public Works Act 1981 meant no more than that the partners had gained an expectation or hope that, at an indefinite future time, the conditions in that section might be satisfied. Even then, there was no unqualified obligation on the part of the Crown to offer the land back.[28] Referring to s 41 of the Partnership Act in relation to the obligation to complete transactions begun but unfinished, Blanchard J mentioned with approval Lord Reid’s description of such transactions as 'unfinished operations necessary to fulfil the contracts of the firm which were still in force when the firm was dissolved'.[29]

[40] Blanchard J found that it was neither necessary nor possible in order to complete the winding up of the partnership to deal with the chance that there might be a future offer by the Crown under s 40. [30] In those circumstances, there was no transaction then unfinished in relation to the land. The mere possibility of a future offer back did not leave the sale to the Crown unfinished. If such an offer did arise, it would amount to an entirely new venture involving only those who chose to accept it. It would also require substantial expenditure on their part.

[41] The Judge went on to say:

[33] ...This is not something contemplated by s 41. In Graham’s Trustees Lord Reid said it was clear that surviving partners had no right to bind the assets of the firm by making new bargains. In my view the same would apply to successors of a former partner. Even if everyone to whom an offer was properly addressed had joined in the acceptance, the transaction arising would have been an event quite distinct from an incident of a winding up. It would have been something done by the choice of the former partners and their successors, not an act of the dissolved partnership permitted under s 41. No partner could have had any continuing authority under that section to bind the others to an acceptance of the Crown’s offer.

[42] Blanchard J concluded that the opportunity afforded by the offer under s 40 of the Public Works Act 1981 was not an asset of a kind falling within s 41 of the Partnership Act.[31]

[43] The second substantial judgment in Sew Hoy was delivered by McGrath J. He observed that: [32]

...'the affairs of the partnership' to be wound up in terms of s 41 comprise partnership rights and interests in the nature of property. They also indicate that interests of a lesser or more nebulous character are not partnership property and accordingly not part of the 'affairs of the partnership' which are protected by s 41.

[44] Referring to the speech of Lord Reid in Inland Revenue Commissioners v Graham’s Trustees[33] McGrath J said:

[60] Lord Reid clearly saw s 41 as very much a residual provision. It did no more, in relation to 'transactions begun but unfinished', than to require that unfinished contractual operations be completed under conditions that would have applied had the contract under which they were taking place still existed. Commercial necessity required as much. But it did not require more. Consistent with this, surviving partners had no right to bind the assets of the dissolved firm by making new bargains.

[45] McGrath J did not view s 41 of the Partnership Act as making any major intrusion on the general policy of the Act that a dissolved partnership’s affairs should be promptly wound up and the partners discharged from their residual continuing authority and obligations.[34] He acknowledged that duties of good faith might arise between partners post-dissolution in respect of the realisation of property of the partnership including completion of unfinished contracts. But the prospective buy-back rights under s 40 of the Public Works Act were not of that character.[35]

Cargill House - Conclusions

[46] We conclude that Mr Clark was not obliged by s 41 of the Partnership Act to complete the Cargill House project for these reasons. First, there was no contractual right or obligation on the part of the partnership to undertake the project. Secondly, the opportunity to undertake the refurbishment of Cargill House was not an asset of the partnership to which s 41 was intended to apply as part of the winding up of the affairs of the partnership. It was quite different from the assets of the partnership arising under the leases in cases such as Featherstonhaugh v Fenwick,[36]Thompson’s Trustee v Heaton[37]and Chan v Zachariah [38]. These cases were concerned with the post-dissolution obligations of former partners in relation to the leases of premises held by the partnership at the date of dissolution. The outcome in each case was a finding that the leases were an asset of the partnership and one or more partners could not take advantage of the lease for their own benefit and to the exclusion of other former partners. The opportunity available to the partnership through DHL in the present case was not of that character. It was no more than an opportunity even if, as the Judge found, it would likely have come to fruition if the partnership had continued.

[47] Thirdly, the success of the opportunity depended on whether Mr Hyslop’s involvement was acceptable to Scenic Hotels. Once the business relationship between Mr Clark and Mr Hyslop came to an end, in clearly acrimonious circumstances, Mr Hyslop’s ongoing involvement in the project was unacceptable to Scenic Hotels. As the Judge found, the partnership had no prospect of completing the project in the absence of Mr Hyslop. The reality is that the opportunity previously anticipated by the partnership was no longer available for the partnership to undertake.

[48] Finally, this was not a case where a small amount of expenditure was required to complete a project which had already been commenced but was not completed at the time of dissolution – such as a building already under construction which was substantially complete at the time of dissolution. Rather, no work had commenced on the project and no contract to do so had been completed. As Blanchard J observed in Sew Hoy, a partner in a dissolved partnership is not obliged to undertake fresh and, we would add, substantial, liabilities in order to preserve partnership opportunities. While Mr Clark would have incurred substantial liabilities if DHL had proceeded with the project, the transaction effectively became a new and different transaction after the partnership was dissolved.

[49] We do not view our conclusion about the application of s 41 of the Partnership Act as differing from those reached by this Court in its 2008 judgment. This Court was not required in the 2008 judgment to determine whether there was a duty on the part of Mr Clark to complete the Cargill House project under s 41 of the Partnership Act. The Court was not, for example, required to consider the types of 'transactions' to which s 41 applied and it was not necessary to consider the leading cases of Sew Hoy and Inland Revenue Commissioners v Graham’s Trustees which are discussed at length in this judgment. In contrast, our judgment is directly concerned with Chisholm J’s subsequent finding that there was such a duty. Also relevant here is Chisholm J’s subsequent finding of fact that the partnership could not complete the project without Mr Hyslop’s involvement. This meant that the partnership could not pursue the opportunity it had.

[50] We note that this Court’s 2008 judgment uses the expressions 'partnership assets' and 'the interests of the partnership' interchangeably[39] We do not view the use of the expression 'partnership assets' as signifying anything other than that this Court considered the Cargill House project belonged to the partnership in the sense that if, post-dissolution, Mr Clark utilised the opportunity for his own benefit to the exclusion of Libra, he would be in breach of fiduciary duty, a proposition with which we agree as discussed below.

[51] Mr Churchman submitted that Mr Clark had carried on the partnership business after dissolution by concluding arrangements with Scenic Hotels and proceeding with the refurbishment of Cargill House. In this respect he relied on s 45(1) of the Partnership Act which provides:

45 Right of outgoing partner to share profits made after dissolution

(1) Where any member of a firm dies or otherwise ceases to be a partner, and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner or his estate, then, in the absence of any agreement to the contrary, the outgoing partner or his estate is entitled, at the option of himself or his representative, to such share of the profits made since the dissolution as the Court may find to be attributable to the use of his share of the partnership assets, or to interest at the rate of 5 percent per annum on the amount of his share of the partnership assets.

[52] We are satisfied that this section has no application in the circumstances of this case. The section is intended to apply where, after dissolution and before completion of the winding up of a partnership, a partner in the firm utilises the capital or assets of the firm to carry on its business for his or her own benefit. In this context the 'share of the partnership assets' means the outgoing partner’s share in the proprietary ownership of assets belonging to the partnership.[40] The opportunity to undertake the Cargill House project could not properly be described as a partnership asset of the character contemplated by s 45.

[53] The absence of any contractual obligation on the part of the partnership to undertake the project is sufficient to distinguish French J’s decision in Sanders v Laing. The parties in that case had formed a joint venture to develop two properties for sale at a profit. The Judge found that the defendant was in breach of a contractual obligation in the case of one property to incur only such costs as were reasonable to further the joint enterprise. However, the claim failed because the joint venture was never likely to have made any profit.

[54] In relation to the second property, the Judge found the defendant was in breach of the joint venture contract by instructing the builder not to start building work on it. The Judge awarded damages on the basis of loss of the chance to make a profit. She considered the defendant’s breach of contract had deprived the plaintiff of a real and substantial chance to develop the property at a profit. It is plain that French J awarded damages for breach of a contractual obligation to complete the project as a term of the joint venture. No such contractual obligation exists here.

[55] We now address the nature of Mr Clark’s fiduciary obligations to Libra and Mr Hyslop. It is fundamental that partners owe a duty of good faith to each other and that this duty extends beyond dissolution of the partnership until the completion of the winding up.[41] The duty precludes a partner taking advantage of information, business connections or opportunities belonging to the partnership in order to secure private advantage or profit to the exclusion of the other partner or partners without their consent. In this respect, the fiduciary obligations of partners are similar to those of joint venturers.[42]

[56] The duty of good faith also requires that former partners continue to act equitably towards each other in the winding up of the affairs of the partnership in a way which is fair to all concerned. This obligation was recognised by Blanchard J in Sew Hoy as encompassing an obligation not to prevent or hinder the former partner from participating in an opportunity belonging to the partnership. However, Blanchard J was careful to qualify this obligation as arising in relation to partnership assets of a kind falling within s 41 of the Partnership Act.[43] The duty to act equitably has also been recognised in the case of joint venturers after termination of the venture: see the joint judgment of Blanchard and Tipping JJ in Chirnside v Fay.[44]

[57] But, in the context of a partnership, we do not view the fiduciary duty on the part of former partners as extending to an obligation on Mr Clark to obtain and complete a contract to refurbish Cargill House for the benefit of the partnership. Such a duty would, we think, be inconsistent with the obligations on former partners under s 41 of the Partnership Act. While equity and the general law may supplement the rights conferred and duties imposed under the Partnership Act, we do not consider it appropriate to extend the operation of s 41 beyond its terms and intended purpose.[45]

[58] In the circumstances of this case, the opportunity to obtain the contract for the Cargill House refurbishment was not available to the partnership after the dissolution for the reasons already canvassed. There was nothing left to be preserved for the partnership. Since the partnership had no entitlement to the refurbishment contract, Mr Clark was not in breach of any fiduciary obligation by abandoning any such entitlement. But that did not mean Mr Clark could take over for his sole benefit the opportunities and business connections the partnership possessed.

Cargill House – The appropriate remedy

[59] The decision of the Supreme Court in Chirnside v Fay is instructive as to the appropriate remedy for breach of fiduciary duty in a case where one joint venturer appropriated the joint venture (a property development) to himself to the exclusion of the other. The High Court had held that the appropriate remedy was to require the fiduciary to account to the plaintiff for the profit made in breach of his duty. This Court held that the appropriate approach was to award the plaintiff damages for loss of the chance to participate in the development.

[60] The Supreme Court held unanimously that although either remedy was potentially available, the appropriate remedy was an accounting for profits as the High Court had found. The Chief Justice said that the 'pre-eminent' remedies for breach of duties of loyalty are rescission and profit-stripping through account. Compensatory damages were potentially available and are measured by what the plaintiff has lost. In contrast, an account of profits is measured by what the fiduciary has gained.[46] The Chief Justice agreed with the view expressed in the judgment of Tipping J (speaking for himself and Blanchard J) that an award of damages for loss of a chance was not appropriate.[47]

[61] In giving the reasons for this conclusion, Tipping J said that the plaintiff did not lose the chance of entering into a joint venture for the development because he was already a party to that venture.[48] He went on to explain that no element of chance or contingency was involved.[49] The opportunity had gone forward and its potential had been realised in the completed development. The 'conventional' remedy in such circumstances was to require the fiduciary to account. That required an evaluation of the profit made in breach of the relevant duty.[50]

[62] We conclude that the appropriate remedy in the circumstances of this case was to order Mr Clark to account to Libra for any profit achieved by him which was properly attributable to his breach of duty in appropriating the business opportunity of the partnership to himself. To award damages for loss of the chance for Libra to participate in the development was not appropriate for reasons similar to those identified by the Supreme Court in Chirnside v Fay. Mr Clark had proceeded with the development which had been completed. There was no relevant chance or contingency. The advantage Mr Clark had wrongly obtained was realised and expressed in the shares he or his interests held in CH 2002.

[63] Nothing in this finding detracts from the conclusion in this Court’s 2008 judgment that something more than an accounting of the partnership assets at the date of dissolution was required. As this Court found, the partnership interests lay in the business opportunities which arose during the period of the partnership including the opportunities that the agreement of 12 July 2002 afforded the Clark interests. The principle this Court found to apply was that nothing had happened which would deprive Libra of its share of the 50 per cent interest in the Cargill House project held by Mr Clark and thus the assets into which it might be traced.

[64] This Court also observed in its 2008 judgment that the whole of the interests of the partnership in relation to the Cargill House venture might be expressed in Mr Clark’s 50 per cent shareholding in CH 2002. As Mr Clark accepts, the appropriate remedy to reflect Mr Clark’s breach of duty lies in the shareholding which he and his interests hold in CH 2002. It is not in dispute that the value of the shareholding held by the Clark interests in that company is to form part of the accounting exercise to be undertaken.

[65] We see a further difficulty with the award of compensatory damages in addition to the grant of the remedy of account. As the Judge recognised, there is an obvious overlap between these remedies. We are unable to identify any justification for the award of both remedies. Libra is not entitled to have it both ways. It cannot be entitled to an accounting for the unauthorised profit made by Mr Clark by taking over the partnership’s opportunity for his own benefit while simultaneously claiming damages for the loss of profit the partnership would have made if it had undertaken the development itself. The two are mutually exclusive.

[66] Mr Churchman sought to justify the dual award on the basis that the savings of $1,085,000 in budget construction costs identified by the partnership would have been realised as profit by the partnership if it had carried out the refurbishment contract under the heads of agreement. Instead, Scenic Hotels had received the benefit of half these savings. The $250,000 awarded by the Judge reflected the partnership’s share in the savings identified. To the extent this raises a new basis to support the Judge’s damages award, it ought to have been put forward formally as an additional ground to support the Judge’s decision. That did not happen.

[67] Mr Churchman acknowledged the Judge’s finding that additional rooms had been added to the hotel (an increase to 110 rooms from the 80 originally envisaged) and that the additional cost was met from the savings on budget and an injection of $600,000 from the Scenic Circle interests.[51] In these circumstances, we are satisfied that the identified savings are appropriately reflected in the value to be attributed to the shares held by the Clark interests in CH 2002 and that no additional award is warranted.

Second issue: Whether there was a duty on Mr Clark to complete the Eastbourne Street development and whether the Judge erred in fixing the profit which would have thereby accrued to the partnership

[68] In 2002, Mr Hyslop commenced a 53 unit-titled development at Eastbourne Street. When he was adjudicated bankrupt, nine of the titles were sold by the mortgagee to Mr Clark who continued the development. By the time the partnership was dissolved on 30 October 2002, three further units had been completed. Six sites remained undeveloped and remained uncompleted at the time of the last hearing before Chisholm J. The Judge accepted evidence that in order to complete this development, a further staged development plan would have to be deposited and the units completed. To achieve that, all existing unit holders would have to consent although this was not seen to be insurmountable.

[69] The Judge found that, for the purposes of s 41 of the Partnership Act, the Eastbourne Street project had begun but remained unfinished at the time the partnership was dissolved. He accepted evidence that the partnership had fully reticulated all the sites and there was sufficient cladding to complete all six houses that remained uncompleted at 30 October 2002. The Judge found there was an obligation on Mr Clark to complete the development so that this component of the partnership operation could be wound up within a reasonable time.[52]

[70] The Judge went on to find that each unit would have sold for a gross price of $297,000 from which expenses for each unit would have to be deducted using another partnership project at Law Street as a guide to the likely amount of the expenses (with some adjustments which are not material for present purposes). The Judge also found that if the partnership had not been dissolved, the development would have been completed by 31 December 2006.[53]

Eastbourne Street – Discussion

[71] Mr Andersen submitted that the Judge had erred in finding that Mr Clark was obliged by s 41 of the Partnership Act to complete the project. Although work on the development had commenced and was partially completed to the extent that a number of houses had been finished, the focus of the partnership’s activities at the time of the dissolution was on the Cargill House project. It was not suggested that the partnership had any contractual obligation to complete the development. While the sites had been reticulated and exterior cladding was available, Mr Clark was not obliged to incur expenditure in building the houses as noted by Blanchard J in Sew Hoy.[54]

[72] We accept Mr Andersen’s submission. We are not persuaded that Mr Clark was under any obligation to complete the development given the absence of any contractual obligation to do so. He could not have been obliged to incur expenditure in completing the remaining houses. If Mr Clark had completed the development for his own benefit to the exclusion of Libra and Mr Hyslop, he would have been required to account for any profit made thereby but this did not occur. The result is that it was simply a matter of valuing the remaining land in its undeveloped state. Since the Judge adopted a valuation date based on the time the development would have been concluded, that conclusion may not now be appropriate and is to be considered further by the High Court.

Third issue: Whether the Judge erred in fixing the value of the Haggart Alexander Drive property on the basis of the valuation of 9 August 2007

[73] In 2001, the partnership purchased a block of land at Haggart Alexander Drive, Mosgiel. Title was not obtained until 2002. Although the land was found to be capable of subdivision into seven allotments, no steps had been taken to implement a subdivision at the time of dissolution.

[74] The questions the Judge was asked to answer were whether Mr Clark had an obligation to develop the land after dissolution of the partnership and, if so, what were the consequences of his failure to do so. As earlier noted, the Judge found that Mr Clark was not under any obligation to develop the land. The basis for this finding was there was no evidence in terms of s 41 of the Partnership Act that the development of the property had begun but remained unfinished at the time of dissolution. There was no wider duty resting on Mr Clark to complete the development of the land. On that basis there could not be any claim for an allowance based on the loss of a chance.[55] In the Judge’s view, it was simply a matter of notionally winding up this component of the partnership operation on a basis that was fair to both parties. On the basis of a valuation obtained by Libra dated 9 August 2007, he determined on a pragmatic approach that this was the appropriate date for valuation and that the market value of the land was to be determined on the basis of the valuation.[56]

[75] Mr Andersen submitted on behalf of Mr Clark that the decision made by the Judge as to the date of valuation was outside the scope of the issues he was asked to determine, and was inconsistent with a subsequent determination made by the Judge that the relevant date at which all valuations and divisions were to be made was 30 June 2010. Mr Andersen submitted that Mr Clark did not have any opportunity to test the value of the land which was assessed at $650,000 at the date of Libra’s August 2007 valuation. This was to be compared with a 2010 valuation obtained by Mr Clark at a figure of $335,000.

[76] In response, Mr Churchman submitted that Mr Clark had the opportunity to engage a valuer to value the property at August 2007 if he had wished to do so. He supported the pragmatic approach taken by the Judge on the basis that, if the valuation were to be redone at a different date, further expense would be incurred. In any event, the date fixed by the Judge was an appropriate date. The winding up of the partnership’s affairs ought to have been concluded as soon as possible, particularly bearing in mind that Libra had a continuing obligation to pay interest at 10 per cent in relation to advances made to the partnership by Mr Clark.

Haggart Alexander Drive – Discussion

[77] We have some sympathy for the Judge in adopting what appears to be a pragmatic decision as to the date and amount of the valuation of the land. However, it must be accepted that the finding by the Judge was technically outside the scope of the questions he was asked to determine. With some regret, the issue of the date and the amount of the valuation of this land must be remitted to the Judge for further consideration. We note, however, that the Judge appears to have reached a sensible conclusion on the valuation issue and we would hope that the parties could resolve it without further litigation.

Conclusion

[78] In summary:

(a) In respect of Cargill House, there was no obligation on the part of Mr Clark to undertake the refurbishment of Cargill House for the benefit of the partnership and there was no basis for the award of $

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250,000 against him for damages for loss of a chance. (b) In respect of Eastbourne Street, there was no obligation on Mr Clark to complete the development and no basis to find that Mr Clark was liable to account to the partnership for loss of profit. (c) In respect of Haggart Alexander Drive, the Judge’s findings as to valuation were outside the scope of the questions asked by the parties. [79] In formal terms, the appeal is allowed with the following consequential orders: (a) The findings by the Judge in relation to question 1.3 (Cargill House) are set aside. (b) The findings by the Judge on questions 7.1, 7.2 and 7.3 (Eastbourne Street) are set aside and the issues relating to the appropriate date and amount of valuation of the remaining land are remitted to the High Court for further consideration. (c) The findings by the Judge in answer to question 7.2 (Haggart Alexander Drive) as to the date and amount of the valuation of the land are set aside and are remitted to the High Court for further consideration. [80] The respondents must pay costs to the appellant as for a standard appeal on a band A basis together with usual disbursements. [81] Finally, we have already noted Mr Churchman’s point about the interest accruing on advances made by Mr Clark to the partnership. Our findings on appeal may lead to the need to adjust the accounting process if any injustice to Libra or Mr Hyslop arises in consequence. We simply flag this issue without comment and leave it to the parties to raise in the High Court should it become necessary. 1. Libra Developments Ltd v Clark HC Dunedin CIV2002-412-39, 4 February 2005; 10 June 2008 and 21 March 2011. 2. Clark v Libra Developments Ltd [2007] 2 NZLR 709 (CA) (in respect of which the Supreme Court declined leave to appeal on 15 March 2007, Clark v Libra Developments Ltd [2007] NZSC 16, [2007] 2 NZLR 709); and Clark v Libra Developments Ltd [2008] NZCA 416. 3. Cargills is CH 2002. 4. Clipper Investments 2002 Ltd (a company associated with Scenic Hotels). 5. At [115]. 6. Termination of a partnership by notice is authorised by the Partnership Act 1908, ss 35(1)(c) and (2). 7. At [111] and [132]. 8. At [127] and [128]. 9. At [134] and [135]. 10. Sanders v Laing HC Christchurch CIV-2006-409-2041, 20 October 2008. 11. Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433. 12. Clark v Libra Developments Ltd [2008] NZCA 416. 13. Libra Developments Ltd v Clark HC Dunedin CIV-2002-412-39, 4 February 2005; 10 June 2008. 14. At [21]. 15. Featherstonhaugh v Fenwick [1810] EngR 194; (1810) 17 Ves Jr 298, 34 ER 115. 16. Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178. 17. Thompson’s Trustee in Bankruptcy v Heaton [1974] 1 WLR 605. 18. At [142]. 19. At [146]. 20. At [144]. 21. See generally Partnership Act 1908, ss 42 and 47. 22. Inland Revenue Commissioners v Graham’s Trustees 1971 SLT46 (HL) per Lord Upjohn; Sew Hoy v Sew Hoy [2001] 1 NZLR 391 (CA) per Blanchard J at [32] and McGrath J at [62] [Sew Hoy]; and Duncan v The MFV Marigold 2006 SLT 978 (OH) at [38]. 23. Sew Hoy, per Blanchard J at [32]–[33]. 24. Inland Revenue Commissioners v Graham’s Trustees 1971 SLT 46 (HL). 25. At 48. 26. Lord Reid’s observations were cited with approval in Sew Hoy, per Blanchard J at [32] and McGrath J at [59]. 27. Sew Hoy, per Blanchard J at [33] and [39]. 28. At [28]. 29. Inland Revenue Commissioner v Graham’s Trustees 1971 SLT 46 (HL) at 48. 30. At [33]. 31. At [46]. 32. At [58]. 33. Inland Revenue Commissioners v Graham’s Trustees 1971 SLT 46 (HL) at 48. 34. At [62]. 35. At [70]. 36. Featherstonhaugh v Fenwick [1810] EngR 194; (1810) 17 Vest Jr 298, 34 ER 115. 37. Thompson’s Trustee in Bankruptcy v Heaton [1974] 1 WLR 605. 38. Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178. 39. At [10-] and [11]. 40. Sandhu v Gill [2005] 1 WLR 1979 (Ch) at [18] per Lightman J. 41. Lindley and Banks on Partnership (19th ed, Sweet & Maxwell, London, 2010) at [16.01] and [16.06]. 42. Lindley and Banks on Partnership at [16.13]; Boardman v Phipps [1967] 2 AC 46 (HL); Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544; Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433; and Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178 at 197–199. 43. Sew Hoy, at [37]. 44. At [92]–[93]. 45. Section 3 of the Partnership Act preserves pre-existing rules of equity and common law but only to the extent that those rules are not inconsistent with the express provisions of the Act. 46. At [16] and [17]. 47. At [23]. 48. At [95]. 49. At [98]–[102]. 50. Gault and Keith JJ agreed with the conclusions of Tipping and Blanchard JJ on this point. 51. At [116]. 52. At [81]. 53. At [88]–[90]. 54. See [39] above. 55. At [99]. 56. At [100] and [101].
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