Chan v Zacharia

(1984) 53 ALR 417
(1984) 154 CLR 178
(1984) 58 ALJR 353

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(Decision by: Murphy J)

Chan
vZacharia

Court:

Judges: Gibbs CJ
Murphy J
Brennan J
Deane J
Dawson J

Legislative References:
Partnership Act 1891 (SA) - 38

Case References:
Featherstonhaugh v Fenwick - (1810) 17 Ves 298; 34 ER 115
Clegg v Fishwick - (1849) 1 Mac & G 294; 41 ER 1278
Clegg v Edmondson - (1857) 8 De G M & G 787; 44 ER 593
Biss v Biss - [1903] 2 Ch 40
Birtchnell v Equity Trustees Executors and Agency Co Ltd - (1929) 42 CLR 384
Griffith v Owen - [1907] 1 Ch 195
Thompson's Trustee v Heaton - [1974] 1 WLR 605
Nicholson v Gander (1909) - 8 CLR 648
Keech v Sandford - (1726) Sel Cas T King 61; 25 ER 223
Trimble v Goldberg - [1906] AC 494
Knox v Gye - (1872) LR 5 HL 656
Bayer v Bayer - 214 NYS 322
Livingston v Commissioner of Stamp Duties (Qld ) - (1960) 107 CLR 411
Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd - (1974) 3 ALR 409; 131 CLR 321
Hugh Stevenson & Sons Ltd v Aktiengesellschaft fur Cartonnagen-Industrie - [1917] 1 KB 842
Bourne v Bourne - [1906] 2 Ch 427
Spence v FC of T - (1967) 121 CLR 273
Knox v Gye - (1872) LR 5 HL 656
Attorney-General v Boden - [1912] 1 KB 539
Manley v Sartori - [1927] 1 Ch 157
Trustees Executors and Agency Co Ltd v FC of T - (1944) 69 CLR 270
Hugh Stevenson and Sons Ltd v Aktiengesellschaft fur Cartonnagen-Industrie - [1918] AC 239
Re Falk - (1892) 18 VLR 589
Rees v Duncan (1900) - 25 VLR 520
Gordon v Gonda - [1955] 1 WLR 885
Amalgamated Television Services Pty Ltd v Television Corporation Ltd - [1969] 2 NSWR 257
Coomber v Coomber - [1911] 1 Ch 723
Birtchnell v Equity Trustees Executors and Agency Co Ltd - (1929) 42 CLR 384
Lees v Laforest - (1851) 14 Beav 250; 51 ER 283
Bray v Ford - [1896] AC 44
Boardman v Phipps - [1967] 2 AC 46
New Zealand Netherlands Society " Oranje " Inc v Kuys - [1973] 1 WLR 1126
Hordern v Hordern - [1910] AC 465
Smith v Cock - [1911] AC 317
Aberdeen Railway Co v Blaikie Brothers - (1854) 1 Macq 461
Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd - (1958) 100 CLR 342
Consul Development Pty Ltd v DPC Estates Pty Ltd - (1975) 132 CLR 373
Keech v Sandford - (1726) Sel Cas T King 61; 25 ER 223
Featherstonhaugh v Fenwick - (1810) 17 Ves Jr 298; 34 ER 115
Clegg v Edmondson - (1857) 8 De GM & G 787
Thompson's Trustee v Heaton - [1974] 1 WLR 605; [1974] 1 AllER 1239
Regal (Hastings) Ltd v Gulliver - [1967] 2 AC 134
Griffith v Owen - [1907] 1 Ch 195
Biss v Biss - [1903] 2 Ch 40
Metlej v Kavanagh - [1981] 2 NSWLR 339
Thompson's Trustee v Heaton - [1974] 1 WLR 605
Furs Ltd v Tomkies - (1936) 54 CLR 583
Peso Silver Mines Ltd (NPL) v Cropper - (1966) 58 DLR (2d) 1
Barnes v Addy - (1879) LR 9 Ch App 244

Hearing date: 24, 25 August 1983
Judgment date: 7 June 1984

Canberra

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Decision by:
Murphy J

The parties Dr Chan and Dr Zacharia had been partners in a medical practice. The partners had a lease from Ajay Investments Pty Ltd of the premises where they conducted the practice. The lease had an option for renewal. To renew both Dr Chan and Dr Zacharia had to make a written request, on or before 30 September 1981. Months before then, the partners had quarrelled, dissolved the partnership (21 May 1981), and were litigating against one another. They were mutually antagonistic. A receiver had been appointed to wind up the partnership.

On the last day for exercising the option the receiver wrote to the manager of Ajay Investments Pty Ltd, stating: "... although the Agreement contains an option to renew, I have been unable to obtain the concurrence of the Doctors to act on their behalf in that regard. I was therefore without authority to exercise the option". On the same day the solicitors for Dr Zacharia had written to Ajay Investments Pty Ltd attempting to exercise the option. However, without Dr Chan's agreement this was ineffective. Similarly, Dr Chan's earlier letter to Ajay Investments Pty Ltd (19 September 1981) could not, without the concurrence of Dr Zacahria, be a valid request. Thus, when Ajay Investments Pty Ltd wrote (30 November 1981) to acknowledge that it would enter a lease agreement with Dr Chan the partnership had already been dissolved and the option to renew had expired.

Section 38 of the Partnership Act 1891-1975 (SA) (the Act) provides that: "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 " (my emphasis).

No relevant transaction was unfinished at the time of dissolution. Exercise of the option was a matter of choice. Exercise of the option was not necessary to wind up the affairs of the partnership, rather it would have extended the affairs and delayed the winding up. Obtaining a new lease was not part of the winding up of the partnership business. There was no obligation on either partner to join in renewing the lease. In these circumstances the doctrine of equity that a partner should be presumed to have obtained a new lease through his fiduciary position ( Keech v Sandford (1726) Sel Cas T King 61 ; 25 ER 223) has no application. The former partners were at arm's length. I agree with Matheson J in the Court of Appeal that Dr Chan did not breach any fiduciary duty. He should not now be subjected, on the basis of a non-existent equity, to an obligation he had not undertaken ( Trimble v Goldberg [1906] AC 494 at 499-500).

In Knox v Gye (1872) LR 5 HL 656, Lord Westburry referred to "the looseness with which the word 'trustee' is frequently used. The surviving partner is often called a 'trustee', but the term is used inaccurately. He is not a trustee, either expressly or by implication" (at p 675). This applies equally to partnership property after dissolution and is a view which finds support in several United States decisions that a partner no longer owes any fiduciary duty to a former partner when the partnership is dissolved ( Bayer v Bayer 214 NYS 322 ; Re Silverberg App Div, 438 NYS (2d) 143).

It is not equitable to impose on Dr Chan a duty to join in the exercise of the option. Why should Dr Chan be expected to enter a fresh transaction, become a co-tenant for a further term with a person to whom he was antagonistic and who was an adversary in litigation, presumably so that he and Dr Zacharia could then agree to transfer the lease to one of them or to someone else at a profit to the dissolved partnership. The acquisition of a further lease was not for the purpose of the partnership business. Dr Chan was entitled to decline to prolong his relationship with Dr Zacharia in this way. He was entitled to have nothing more to do with him than necessary. Dr Chan did not deal with the partnership property for his own advantage. It was after the expiration of the option period that he obtained a new lease of the premises, not on the option terms, but on the payment of a $10,000 premium.

What if, in addition to the payment of the premium, the new lease had been for a five year term, not the two year term specified in the option? What if Dr Chan had obtained the new lease 12 months later? Once the terms of s 38 of the Act are ignored, we enter an area where to regard Dr Chan as a trustee for himself and Dr Zacharia of any new lease, whatever its terms and whatever collateral payment was necessary to obtain it, would be extremely artificial. It would be difficult to distinguish rationally between a lease that should be held in trust and one that should not. Equity traditionally intervened where the parties were unequal, for example to protect infants from adults, or clients from their legal advisers. Such intervention is unwarranted in these circumstances, where two equal, adequately-advised parties at arm's length are competing, and fails to give full effect to s 38 of the Act.

The appeal should be allowed.