Kak Loui Chan versus John Zacharia, Partnership
[1984] HCA 36(Judgment by: Gibbs C.J.(1))
Kak Loui Chan
vJohn Zacharia, Partnership
Judges:
Gibbs C.J.(1)
Murphy J.(2)
Brennan J.(3)
Deane J.(4)
Dawson (5) J.
Subject References:
Partnership
Dissolution
Assets
Partnership business conducted in leased premises
Agreement for new lease obtained by one partner before partnership affairs wound up
Whether held for benefit of partnership
Fiduciary relationship
Constructive trust
Legislative References:
Partnership Act 1891 (S.A.), - s. 38,39.
Judgment date: 7 June 1984
Canberra
Judgment by:
Gibbs C.J.(1)
APPEAL from the Supreme Court of South Australia.
The facts of this case are fully stated in the judgment of my brother Deane which I have had the advantage of reading.
2. There can be no doubt that if the agreement to grant Dr Chan a lease of the partnership premises at Mansfield Park had been made before the partnership had been dissolved Dr Chan would have held any interest which he acquired under that agreement on a constructive trust for the partnership between himself and Dr Zacharia. It is firmly established by a line of authorities which includes Featherstonhaugh v. Fenwick (1810) 17 Ves 298, at p 311 (34 ER 115, at p 120); Clegg v. Fishwick (1849) 1 Mac & G 294, at pp 298-299 (41 ER 1278, at p 1280); Clegg v. Edmondson (1857) 8 De GM & G 787, at pp 806-807 (44 ER 593, at p 601); and In re Biss. Biss v. Biss (1903) 2 Ch 40, at pp 56-57 and 61-62, that a partner who, without the consent of his co-partner, obtains a renewal of a lease of the partnership premises in his own name, prima facie holds the lease on a constructive trust for the partnership. The expression "renewal" in this statement includes the grant of a new lease, whether or not there was a right of renewal of the lease originally held by the partners. The Court of Appeal in In re Biss. Biss v. Biss drew a distinction between two classes of cases - one (of which trustees form a notable example) whose members are absolutely incapable of retaining for themselves the benefit of a renewal, and the other (which includes partners) in which there is no more than a rebuttable presumption of fact that the person concerned is incapable of retaining that benefit. If, as the judgment of Romer L.J. in that case, at p.61, suggests, the second class consists of persons who do not clearly occupy a fiduciary position, it is difficult to see why partners should fall within it, since, as Dixon J. said in Birtchnell v. Equity Trustees, Executors and Agency Co. Ltd. [1929] HCA 24; (1929) 42 CLR 384 , at p 407: "The relation between partners is, of course, fiduciary." However, the distinction between the two classes is well recognized in the authorities and may be drawn, not between persons who owe a fiduciary duty and those who do not, but because of the nature of the particular fiduciary duty in question. That seems to be the view of so distinguished an equity lawyer as Parker J., who, in Griffith v. Owen (1907) 1 Ch 195 explained, at pp 203-204, very clearly the principles involved:
"The principle of Keech v. Sandford (Sel Cas 61;2 W & T 7th ed. p 693) is primarily applicable to renewal of leases, and depends partly on the nature of leasehold property and partly on some fiduciary relationship or duty existing on the part of the person whom it is sought to declare a trustee towards the persons who seek to have the trust declared. In the case both of leases renewable by right or custom and of leases not so renewable the renewal is prima facie considered to have been obtained by virtue of the interest which the person obtaining the renewal has in the property, and accordingly the renewed lease is prima facie looked on as a graft on the original interest and subject to the same trusts or limitations. In some cases the person who obtains the renewal is allowed, in others he is not allowed, to shew that, in spite of the nature of the property, there is in the particular circumstances nothing inequitable in his claiming the renewed lease for his own benefit. Whether he is or is not allowed to do this depends on the particular fiduciary relationship or duty existing on his part: see the judgment of Collins M.R. in In re Biss. Thus a trustee is never allowed to do this, but a mortgagee is. I think it clear, however, that when once the fiduciary relationship or duty is established on the part of the person obtaining the renewal the onus of proving that there is nothing inequitable in his claiming to retain the benefit for himself rests with him."
discharged - see Clegg v. Edmondson, at p 807 (at p 601 of ER) cited in In re Biss. Biss v. Biss, at p 62. The presumption could not be rebutted unless the partner who had obtained the renewal could at least show that it was obtained without any breach of the obligations which were cast on him by the partnership relation.
3. In the present case, the new lease was obtained after the partnership had been dissolved but before the affairs of the partnership had been wound up. After the dissolution, the obligations of the partners continued so far as was necessary to wind up the affairs of the partnership: see s.38 of the Partnership Act 1891 (S.A.), as amended. In those circumstances the obligation of "perfect fairness and good faith" which is owed by one partner to another continued: see Lindley on Partnership 14th ed. (1979), at p 430. In Thompson's Trustee v. Heaton (1974) 1 WLR 605 , Pennycuick V.-C. said, at p 613, that it follows "that where the property of a dissolved partnership includes a leasehold interest, then subject to any other arrangement which may be made between the partners concerning that interest, each of the former partners owes the same obligation to the other former partner in respect of that interest as he did while the leasehold interest remained the partnership property ...". That statement is, in my respectful opinion, correct if it is understood to be limited to the case of a partnership which has not been completely wound up, and in which the leasehold interest remains the property of the former partnership. Thompson'sTrustee v. Heaton concerned the purchase of a reversion of a lease, which may stand on a different footing from the renewal of a lease, but whether or not the conclusion reached by Pennycuick V.-C. in that case was correct, a matter on which I need express no opinion, I consider that after the dissolution of a partnership which has not been fully wound up, a partner is under the same restrictions with regard to the renewal of a lease which remains a partnership asset as if he were still a partner. I cannot accept the correctness of the statement of the learned editors of Jacobs' Law of Trusts in Australia 4th ed. (1977), at p.236, par.1308, note 30, where, after saying that there is no irrebuttable presumption of law that a partner taking a renewed lease is a constructive trustee of it for the partnership, but a presumption of fact which may be rebutted, the learned editors continue: "Where the partnership has been dissolved or abandoned there is an a fortiori case, and not even a presumption to rebut." Nicholson v. Gander [1909] HCA 34; (1909) 8 CLR 648 , which is cited as authority, does not support that proposition. It is doubtful whether that was a case of partnership (see at pp.665, 670 and cf. p.657) but, if it was, the enterprise had been abandoned and nothing remained to be wound up, and the authority to enter land for the purpose of prospecting for minerals, which was the subject of the proceedings, was not founded on or connected with an earlier authority which had belonged to the parties to the enterprise and which had expired before the new authority was granted.
4. In the present case there is another and important circumstance which affected the capacity of Dr Chan to obtain a new lease for his own benefit. The winding up entailed the application of the surplus assets of the partnership in payment of what might be due to the partners. The option for renewal, being part of the lease, was an asset of the partnership. To enable that asset to be realized, it was, in my opinion, the duty of each partner to join in exercising the option, assuming that the renewal was of value (as obviously it was) and assuming that the other party required it. A refusal by one partner to enable the option to be exercised meant that an asset of value was lost to the partnership. Dr Zacharia attempted to persuade Dr Chan to join in exercising the option, and if Dr Chan had genuinely wished to incur no further obligations as lessee, it may be that he could have insisted on obtaining from Dr Zacharia proper protection before he joined in exercising the option. However Dr Chan refused to exercise the option because he wished to obtain a new lease for himself. He made it impossible for the partnership to exercise the option, and in those circumstances it is inequitable that he should be permitted to retain for himself the new lease which could not have been granted if the option had been exercised. He has demonstrably failed to discharge the onus of rebutting the presumption that he was incapable of taking a new lease solely for his own benefit.
5. Accordingly the Supreme Court was correct in concluding that Dr Chan was a constructive trustee of any interest which he obtained under the agreement for a new lease.
6. I would dismiss the appeal.