Chan v Zacharia

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

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(Judgment by: Deane 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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Judgment by:
Deane J

The appellant (Dr Kak Looi Chan) and the respondent (Dr John Zacharia) are medical practitioners. On 6 September 1978 they entered into a written "Memorandum of Agreement" under which Dr Zacharia agreed to sell and Dr Chan agreed to purchase one-half of Dr Zacharia's "right title goodwill and interest" in a medical practice which Dr Zacharia was then carrying on in Adelaide together with the "plant equipment and chattels and other assets of the medical practice (excluding book debts)". By that agreement, the two doctors agreed to carry on medical practice as equal partners for a period of one year from 1 December 1978 (and thereafter, until determined by notice or death) upon the terms set out in the agreement. Dr Chan, who was apparently resident in Malaysia, was not in a position to commence practice in Adelaide on the agreed date. By indenture made on 16 January 1979 the two doctors varied the terms of the practice agreement in a number of respects including a variation in the commencement of the partnership to "the day upon which Dr Chan physically enters and commences working in the said medical practice". It is common ground that the partnership agreement between the two doctors is to be found in the written "Memorandum of Agreement" as varied by the indenture of 16 January 1979. I shall refer to the agreement, as so varied, as "the partnership agreement".

Dr Chan and Dr Zacharia finally commenced to carry on practice as partners on 6 August 1979. They remained as partners until 21 May 1981 when, as was subsequently declared by the Supreme Court of South Australia in partnership proceedings initiated by Dr Chan, the partnership was determined by notice given by Dr Chan to Dr Zacharia. By order made on 12 August 1981 in those partnership proceedings, Mr Michael Mount, who is a chartered accountant, was appointed receiver for the purpose of the winding up of the partnership business in accordance with the terms of the partnership agreement.

Before the commencement of the partnership, Dr Zacharia was carrying on his practice from three separate Adelaide locations. Among them were premises in Wilson Street, Mansfield Park (the Mansfield Park premises or the premises) which he had used, for the purposes of his practice, since 1966. On 12 November 1979, Ajay Investments Pty Ltd (Ajay Investments) which owned the premises granted a written lease of them to the two doctors for a term of three years commencing on 1 January 1979. Under the terms of that lease, the doctors agreed that, unless the landlord gave its prior written consent to some other use, they would use the premises solely for the purpose of carrying on medical practice. The lease, which referred to the doctors as "the tenant", contained a "special covenant" that Ajay Investments "shall grant to the tenant upon the written request of the tenant made not less than three calendar months prior to the expiration of the said term ... an extension of the said term for a period of TWO (2) YEARS at a rental to be fixed" either by agreement of the parties or by a licensed property valuer appointed by Ajay Investments.

As established medical consulting rooms, the Mansfield Park premises had obvious attractions for any medical practitioner who wished to carry on practice in the general area in which they were situated. Those attractions were enhanced by the fact that, by reason of the effect of restrictions under zoning regulations, medical consulting rooms in the Mansfield Park area were very difficult to obtain. The premises were obviously of particular importance to Dr Zacharia and Dr Chan as the location of at least part of the goodwill of the practice which had been carried on initially by Dr Zacharia and subsequently by the partnership.

Clause 21 of the partnership agreement provided that, upon a dissolution of the partnership in circumstances to which the clause applied and which included the circumstances in which Dr Chan had given notice of dissolution, the partner lawfully giving notice of dissolution should have "the option ... of purchasing the share of the [other] partner in the chattels of the partnership at a price equal to his share of the book value thereof". By order made on 21 September 1981 in the partnership proceedings, the Supreme Court of South Australia declared that the tenancy agreement for the Mansfield Park premises was not one of the "chattels of the partnership" within the meaning of cl 21 but was to be treated as one of the "assets ... of the partnership" within cl 26 which was the general clause providing for realization and distribution of assets upon dissolution of the partnership. For present purposes, cl 26 provided:--

Upon the determination of the partnership ... a full and general account shall be taken of the assets debts and liabilities of the partnership and of the transactions and dealings thereof and with all convenient speed such assets (other than the goodwill) and the books of account and patients' records shall be sold realized and got in and the proceeds applied in paying or discharging such debts and liabilities and the expenses of and incidental to the premises and such winding up of the partnership affairs and subject thereto in paying to each partner any unpaid profits which may be due to him and the balance (if any) of such proceeds shall be divided between the partners equally and the partners respectively shall execute do or concur in all necessary or proper instruments acts matters and things to give full effect thereto and upon such winding up no value shall be placed upon the goodwill of the practice or the books of account and patients' records and:

(a)

the goodwill of the practice shall not be sold or offered for sale but each of the partners shall be absolutely free to practise anywhere as he may think fit;

...

The provision that the option to renew the lease for a further period of two years be exercisable by "the written request of" the doctors "made not less than three calendar months prior to the expiration" of the original term meant that an effective exercise of the option required that notice in writing be given on or before 30 September 1981. Subject to the fixing of a new rent and the absence of a further option to renew, the renewed lease which would have resulted from an exercise of the option would have been on the terms of the original lease which permitted assignment or transfer with the written prior consent of Ajay Investments and provided that such consent should not "be unreasonably or capriciously withheld". It is apparent from the material in evidence that, before the expiry of the time within which the option for a renewed term might be exercised, Mr Mount and the two doctors were all conscious of the potential value of the residue of the term of the lease and the option for a further term of two years.

On 25 September 1981, Dr Zacharia's solicitors wrote to Dr Chan's solicitors asking that Dr Chan join with Dr Zacharia in exercising the option. On the same day, Dr Zacharia's solicitors wrote to Mr Mount's solicitors advising that Dr Zacharia wished Mr Mount, as receiver, to exercise the option to renew the lease and suggesting that the receiver dispose of the residue of the existing lease (together with the option) by public auction. On 30 September 1981, Dr Zacharia's solicitors wrote to Ajay Investments in the following terms:--

We act for Dr John Zacharia, who with Dr Kak Looi Chan, in partnership has leased doctors rooms at 94 Wilson Street, Mansfield Park from your company.

The lease provides an option for the partnership to renew the lease for a further two years commencing on 1 January 1982. Our client has instructed us that he wishes to exercise the option to renew the lease and he has asked Dr Chan to join him in renewing the lease and in so far as our client is able to he hereby exercises his option.

Our client has instructed us to write this letter to you on his behalf to inform you as to his exercise of the option.

On 30 September 1981, Mr Mount wrote to Ajay Investments advising that he had been "unable to obtain the concurrence of the doctors to act on their behalf" in exercising the option to renew the lease. Mr Mount described the lease as an "asset of the partnership of particular value and significance" and requested Ajay Investments to give him an "assurance that both or either of the doctors would be acceptable as a future tenant or tenants" and "some indication of the rental which would apply during any extended term" to enable him, with Ajay Investments' help, "to resolve the problem so that each doctor received his just entitlement and that neither by some ploy or stratagem obtains more than his just proportion of the value and property of the late partnership".

The fact that Dr Chan declined to join in an exercise of the option to renew the lease did not mean that he had remained inactive. To the contrary, on 19 September 1981, Dr Chan had written to a director of Ajay Investments (Mr Lampard) and to Ajay Investments' letting agents, seeking to obtain a renewal of the lease for two years not for the partnership but for himself. In the letter to the agents, Dr Chan stated that he wished "to exercise the option to have an extension of the lease for a further period of two years ... as per contract". In his letter to Mr Lampard he referred to the problems which he had had "in the determination of my partnership with Dr J Zacharia who has been most adamant that the lease is an 'asset' and will only part with for a price of $40,000". The letter stated that "it may also be relevant to let you know that I have offered $10,000 for a take over of his half of the lease with no success" and suggested that a decision "to allow the extension in my own name and rights will be the solution to all the problems".

After September had passed without the option being exercised, Ajay Investments, not surprisingly in view of the content of Dr Chan's letter to Mr Lampard, adopted the approach that it required a premium for any further lease of the premises. On 5 November 1981 Mr Lampard wrote to Mr Mount advising "the terms" which Ajay Investments required for a two year lease with a further right of renewal for a further two years. Those terms included a premium of $10,000, a rental of $60 per week increasing by 10 per cent at the end of each year and a covenant against transfer of the lease without the landlord's written consent. The annual rent then being paid for the three years under the current lease was $2265.12.

On 18 November 1981 Mr Mount's solicitors wrote to the respective solicitors for the two doctors advising that Mr Mount had been "led to believe" by Mr Lampard "that a tenancy would be available to either or both of Drs Chan and Zacharia according either to their own agreement or according to Mr Mount's determination" and that "Mr Mount accordingly proposes to call upon each of the doctors to submit an offer to purchase from the partnership the right to occupy the premises pursuant to the terms of the existing lease during the remainder of its currency and pursuant to Mr Lampard's offer of a further term upon the conditions indicated". This letter was followed by a further letter of 20 November 1981 from the solicitors for Mr Mount in which each of the doctors was "respectively invited to tender on the following basis": that the "subject matter of the tender" was the "right to receive from Ajay Investments Pty Ltd a tenancy of the surgery premises"; that the grant of tenancy was subject to the payment to Ajay Investments of a premium of $10,000; that the invitation to submit the tender and the tender itself would be subject to Ajay Investments' willingness to grant the tenancy; that the premium of $10,000 would be included in the tender figure and paid by Mr Mount to Ajay Investments; and that the "balance of the tender figure will be treated as an asset of the late partnership".

In response to the call for tenders, Dr Zacharia wrote tendering the sum of $40,000. Dr Chan did not submit a tender. On 27 November 1981, Dr Chan's solicitors wrote to Mr Mount's solicitors advising that, after they had received the letter calling for Dr Chan's tender, they had been "unequivocally advised" by Mr Lampard that Ajay Investments would "grant a lease of the subject premises to [Dr Chan] exclusively". On 30 November 1981 Ajay Investments signed a document in the following terms: " AJAY INVESTMENTS PTY LTD hereby acknowledges that it will enter into a lease with KAK LOOI CHAN for its premises being shop No 5, Corner Wilson and Trafford Streets, Mansfield Park, and that it has withdrawn its authority to MICHAEL JAUNAY MOUNT to call tenders for the lease of the premises." On the same day, Dr Chan sent to Ajay Investments a letter indemnifying it "against all actions, suits and demands" which Dr Zacharia might bring against it in respect of the grant of a lease to Dr Chan. Some days previously, the solicitors for Dr Chan had sent two copies of an agreement for lease executed by Dr Chan, together with a cheque for $10,000, to the solicitors for Ajay Investments. That agreement for lease was apparently awaiting execution on behalf of Ajay Investments when litigation intervened.

On 21 December 1981, Dr Zacharia instituted the present proceedings in the Supreme Court of South Australia. The defendants were Ajay Investments, Dr Chan and Mr Mount. An order was made in the Supreme Court that the case should go to an early trial of the issues relating to the claims against Ajay Investments and Dr Chan. The early trial of those issues came on for hearing before Mitchell J. Her Honour dismissed the action against Ajay Investments but found in Dr Zacharia's favour in the action against Dr Chan. Her Honour indicated that she would make a declaration to the effect that any interest acquired by Dr Chan in a new lease of the Mansfield Park premises was an asset of the former partnership and was held by him as a constructive trustee. The decision against Dr Chan was confirmed by the Full Court of the Supreme Court (King CJ and Jacobs J; Matheson J dissenting). Dr Chan now appeals to this court from that decision of the Full Court. Dr Zacharia did not appeal to the Full Court from the decision of Mitchell J in Ajay Investments' favour and that part of the action which involves a claim against Mr Mount still awaits hearing in the Supreme Court. In the result, the only parties to the appeal to this court are the two doctors and the only remaining question on the appeal is the question whether Dr Chan holds or will hold any interest in a new lease of the Mansfield Park premises as a constructive trustee. In that regard, it should be mentioned that it is now common ground that none of the actions of Mr Mount, Dr Zacharia or Dr Chan constituted an effective exercise of the option to renew the lease.

As was declared by the Supreme Court in the partnership proceedings, the rights held by Dr Zacharia and Dr Chan under the lease of the Mansfield Park premises constituted an asset of the partnership. That asset included both the benefit of the lease of the premises and the benefit of the right to obtain a renewed lease by due exercise of the option. The rights and duties of the two doctors in respect of that partnership asset fell to be defined by reference to the applicable provisions of the partnership agreement, the provisions of the Partnership Act 1891-1975 (SA) (the Act) and the general law.

Section 39 of the Act provides, for present purposes, that, on the dissolution of a partnership, every partner is entitled as against the other partners to have the property of the partnership applied in payment of the debts and liabilities of the firm and to have the surplus assets, after such payment, applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm. Clause 26 of the partnership agreement (set out above), which applied in respect of general assets including the rights under the Agreement for Lease, contains provisions which closely correspond to those of s 39. The clause also provides that any surplus, after payment of debts, liabilities, expenses and amounts due to the partners, is to be "divided between the partners equally" and that each partner is required to "execute do or concur in all necessary or proper instruments acts matters and things to give full effect" to its provisions. Under s 38 of the Act, the authority of each partner to bind the firm and the other rights and obligations of the partners continue, after the dissolution of the partnership, 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".

There is no suggestion in the present case that the partnership was insolvent. That being so, both before and upon its dissolution, each of the two doctors had an undivided beneficial interest in the totality of the general assets of the partnership. After the dissolution, each was entitled to insist that those general assets be applied in the winding up of the partnership in accordance with the provisions of the Act and, as regards any surplus after payment of debts, liabilities and expenses, the partnership agreement. Subject to the effect of particular provisions of the partnership agreement (eg cl 21 as to "chattels of the partnership" and cl 26(a) as to goodwill) which are not presently in point, neither doctor had a separate ascertained beneficial share or interest in any particular partnership asset (see, generally, Livingston v Commissioner of Stamp Duties (Qld ) (1960) 107 CLR 411 at 453; Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 3 ALR 409 ; 131 CLR 321 at 327-8). Neither was entitled to claim for himself the benefit of either the residue of the current lease or of the option for a further lease. The beneficial interest in the rights under the lease was partnership property which, under the complementary provisions of the partnership agreement, the Act and the general law, was, if possible, to be disposed of by sale in the winding up of the partnership (see Hugh Stevenson & Sons Ltd v Aktiengesellschaft fur Cartonnagen-Industrie [1917] 1 KB 842-7 (affirmed [1918] AC 239 at 846); s 39 of the Act and cl 26, supra , of the partnership agreement): "wherever the legal estate may be, whether it is in the partners jointly or in one partner or in a stranger it does not matter, the beneficial interest ... belongs to the partnership, with an implied trust for sale for the purpose of realizing the assets and for the purpose of giving to the two partners their interests when the partnership is wound up and an account taken" (per Romer LJ, Re Bourne ; Bourne v Bourne [1906] 2 Ch 427 at 432-3). After the dissolution of the partnership, the two doctors held the legal rights under the lease, including the option, as trustees for those entitled to share in the proceeds of the realization of partnership assets (see Re Fuller's Contract [1933] Ch 652 at 655-6 and Spence v FC of T (1967) 121 CLR 273 at 280).

It was submitted on behalf of Dr Chan that the above conclusion that the doctors held the legal rights under the lease as trustees was inconsistent with the comments of Lord Westbury in Knox v Gye (1872) LR 5 HL 656 at 675-6 to the effect that the surviving partner in that case was not, after the dissolution of the partnership upon the death of his partner, a trustee of any of the partnership assets vested in his name or received by him and that "there is nothing fiduciary between the surviving partner and the dead partner's representative, except that they may respectively sue each other in Equity". Those comments must, however, be understood in the context of Lord Westbury's view that a surviving partner became the owner of the whole of the partnership assets "both at Law and in Equity" and that the only right of the representative of a deceased partner was to an account and payment of "that portion of the clear balance that accrues to the deceased's share and interest" (at p 675). So understood, his Lordship's comments find no real support in the speeches of any of the other members of the House who constituted the majority: see per Lord Colonsay (at p 678) and per Lord Chelmsford (at p 687) and should not now be followed even in the context of a case of dissolution of partnership by death. It is now established, under the general law as reinforced by the provisions of Partnership Acts and in the absence of overriding provisions of a particular partnership agreement (see Attorney-General v Boden [1912] 1 KB 539), that the legal representative of a deceased partner has "an unascertained interest in every single asset of the partnership, and it is not right to regard him as being merely entitled to a particular sum of cash ascertained from the balance-sheet of the partnership as drawn up at the date of his death" (per Romer J, Manley v Sartori [1927] 1 Ch 157 at 163-4 cited, with approval, by Rich and Williams JJ, in Trustees Executors and Agency Co Ltd v FC of T (1944) 69 CLR 270 at 285, 295-6). In that regard, subsequent elucidation of partnership law has confirmed that the "convincing reasoning" of Lord Hatherley LC in his dissenting speech in Knox v Gye should be accepted as correct (see, for example, per Lord Atkinson, Hugh Stevenson and Sons Ltd v Aktiengesellschaft fur Cartonnagen-Industrie [1918] AC 239 at 250; Re Falk (1892) 18 VLR 589 at 598-9; Rees v Duncan (1900) 25 VLR 520 at 526). Notwithstanding the strictures of authorities as eminent as Lord Westbury and Sir Frederick Pollock (see Pollock's Law of Partnership 13th ed (1937), pp 141-2), there is neither metaphor nor inaccuracy in the description, in the ordinary case, of a partner or of a surviving partner as a trustee of a particular item of partnership property which is legally vested in his name but the "beneficial interest" in which "belongs to the partnership" ( Re Bourne , supra ; at 432-3, and see, generally, Gordon v Gonda [1955] 1 WLR 885 at 893-5, 897).

Any rights which Dr Chan acquired in relation to a new lease of the premises resulted from negotiations between Ajay Investments and Dr Chan who was purportedly acting on his own behalf. It was clearly the intention and understanding of both Ajay Investments and Dr Chan that any such rights would be held by Dr Chan beneficially and not as a trustee for the former partnership in receivership. It is common ground that, if there be a trust of such rights, it must be a constructive trust arising under applicable principles of equity as a consequence of the existence or breach of some fiduciary obligation binding Dr Chan in the particular circumstances in which he was placed. As Walsh J pointed out in Amalgamated Television Services Pty Ltd v Television Corporation Ltd [1969] 2 NSWR 257 at 261, it is necessary that it should be "established that there exists an obligation of such a kind" that a court exercising equitable jurisdiction "may take cognizance of it and may, therefore, have jurisdiction to enforce it". Fiduciary relationships may take a wide variety of forms and may give rise to a wide variety of obligations. Ordinarily, in determining whether a constructive trust of particular property has arisen as a consequence of the existence or breach of a fiduciary obligation, it is necessary to identify the nature of the particular fiduciary relationship and to define any relevant obligations which flowed from it (see eg, per Fletcher Moulton LJ in Re Coomber ; Coomber v Coomber [1911] 1 Ch 723 at 728-9).

In the present case, Dr Chan and Dr Zacharia each occupied two related and overlapping roles as regards the legal rights (including the option) under the lease. The first role was as a trustee of those legal rights. The second was as a member of the former partnership of which the beneficial interest in those rights was an asset. The role of trustee was plainly a fiduciary one involving fiduciary obligations in relation to that trust property. It was, however, submitted on behalf of Dr Chan that, since the trust property was partnership property held for partnership purposes, the partnership relationship was, for present purposes, the dominant one and any fiduciary obligations of Dr Chan as a trustee were subject to, and liable to be displaced by, his rights and obligations as a partner in the dissolved partnership. Those overriding rights and obligations were not, it was submitted, fiduciary in their nature and neither their existence nor their breach could form a basis of a constructive trust of any right to a new lease which Dr Chan obtained for himself. It is convenient to turn immediately to consider the submission that Dr Chan's role as a former partner was not a fiduciary one involving fiduciary obligations in respect of the property of the dissolved partnership.

A partnership can be confined to one joint activity or be a continuing relationship between its members. As between the partners, the rights and duties of the members of a partnership are primarily contractual, flowing from the express or implied terms of the particular partnership agreement. Questions of illegality aside, the implication, by statute or the general law, of general or particular obligations or standards is, as between the partners, ordinarily subject to any contrary provision in the agreement between them. It is conceivable that the effect of the provisions of a particular partnership agreement, in the context of the nature of the particular partnership, could be that any fiduciary relationship between the partners was excluded. As a general rule, however, the relationship between partners is a fiduciary one. "Indeed, it has been said that a stronger case of fiduciary relationship cannot be conceived than that which exists between partners. ... The relation is based, in some degree, upon a mutual confidence that the partners will engage in some particular kind of activity or transaction for the joint advantage only. In some degree it arises from the very fact that they are associated for such a common end and are agents for one another in its accomplishment. ... The subject matter over which the fiduciary obligations extend is determined by the character of the venture or undertaking for which the partnership exists, and this is to be ascertained, not merely from the express agreement of the parties, whether embodied in written instrument or not, but also from the course of dealing actually pursued by the firm" (per Dixon J: Birtchnell v Equity Trustees Executors and Agency Co Ltd (1929) 42 CLR 384 at 407-8).

The partnership in the present case was a relationship of confidence between the two doctors. It encompassed both the practice of their profession and the ownership of the plant and equipment and the tenancy of the premises with or within which that practice was carried on. There was nothing in the particular partnership agreement which excluded either the ordinary consequence that such a relationship is a fiduciary one or the implication of the obligations that are the ordinary concomitants of such a fiduciary relationship. To the contrary, the partnership agreement expressly required that each doctor "devote his whole time" (subject to annual leave) to the medical practice, "act in all things according to the highest standards of professional conduct" and "be just and faithful to the other partner in all transactions relating to the partnership" (cl 19). The partnership agreement also reinforced the fiduciary obligations in relation to partnership property which are the ordinary incidents of the partnership relationship in that it emphasized the distinction between a partner's personal property and property which he received or held on behalf of the partnership. It did this by bringing into partnership property both fees from the conduct of the partnership practice and any other professional receipts of a partner; by requiring that all "moneys cheques and negotiable instruments received ... on account of the partnership" be paid forthwith into the partnership bank account; and by prohibiting, in a variety of provisions, any separate dealing with partnership property.

The relationship between the partners was curtailed and altered by the dissolution of the partnership. It did not however cease. In particular, and with the exception of the "goodwill" of the practice (as to which see cl 26(a), supra ), each doctor, by reason of his position as a former partner, remained under fiduciary obligations in respect of the partnership property which was to be realized and applied in paying or discharging partnership debts and liabilities and the expenses of and incidental to the winding up of the partnership affairs and, subject thereto, "in paying to each partner any unpaid profits which may be due to him and the balance (if any) ... divided between the partners equally" (cl 26). Notwithstanding the dissolution of the partnership, "the good faith and honourable conduct due" from each partner to the other persisted for the purposes of winding up the affairs of the partnership and each partner remained under a fiduciary obligation to co-operate in and act consistently with the agreed procedure for the realization, application and distribution of partnership property (see Lindley on The Law of Partnership , 14th ed (1979), p 654; Lees v Laforest (1851) 14 Beav 250 ; 51 ER 283; the Act, ss 29(2), 38 and 39). The partnership agreement reinforced those fiduciary obligations by expressly requiring that the partners respectively do or concur in anything necessary or proper to give full effect to that agreed procedure (cl 26).

It follows from the above that, as regards the rights under the lease of the Mansfield Park premises, each of Dr Chan's roles of trustee and former partner was a fiduciary one with fiduciary obligations. Each role complemented and reinforced the fiduciary relationship involved in the other. In particular, each role involved the fiduciary obligation to act, in relation to rights under the lease of the Mansfield Park premises, in the interests of the dissolved partnership and the beneficial realization of its assets. The question that lies at the heart of the present appeal is whether, in these circumstances, Dr Chan was entitled to decline to join in an exercise of the option for a further lease and to obtain and retain the benefit of a new lease of the premises for himself.

There is a wide variety of formulations, of the general principle of equity requiring a person in a fiduciary relationship to account for personal benefit or gain. The doctrine is often expressed in the form that a person "is not allowed to put himself in a position where his interest and duty conflict" ( Bray v Ford [1896] AC 44 at 51) or "may conflict" ( Boardman v Phipps [1967] 2 AC 46 at 123) or that a person is "not to allow a conflict to arise between duty and interest" ( New Zealand Netherlands Society " Oranje " Inc v Kuys [1973] 1 WLR 1126 at 1129). As Sir Frederick Jordan pointed out however (see Chapters on Equity , 6th ed (Stephen), 1947, p 115, reproduced in Jordan : Select Legal Papers (1983), p 115), this, read literally, represents "rather a counsel of prudence than a rule of equity": Indeed, even as an unqualified counsel of prudence, it may, in some circumstances, be inappropriate (see, eg Hordern v Hordern [1910] AC 465 at 475; Smith v Cock [1911] AC 317 at 325-6. The equitable principle governing the liability to account is concerned not so much with the mere existence of a conflict between personal interest and fiduciary duty as with the pursuit of personal interest by, for example, actually entering into a transaction or engagement "in which he has, or can have, a personal interest conflicting ... with the interests of those whom he is bound to protect" (per Lord Cranworth LC, Aberdeen Railway Co v Blaikie Brothers (1854) 1 Macq 461 at 471) or the actual receipt of personal benefit or gain in circumstances where such conflict exists or has existed.

The variations between more precise formulations of the principle governing the liability to account are largely the result of the fact that what is conveniently regarded as the one "fundamental rule" embodies two themes. The first is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage. Notwithstanding authoritative statements to the effect that the "use of fiduciary position" doctrine is but an illustration or part of a wider "conflict of interest and duty" doctrine (see, eg Boardman v Phipps , at p 123; NZ Netherlands Society v Kuys , at p 1229), the two themes, while overlapping, are distinct. Neither theme fully comprehends the other and a formulation of the principle by reference to one only of them will be incomplete. Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain; or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee (see Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342 at 350). That constructive trust arises from the fact that a personal benefit or gain has been so obtained or received and it is immaterial that there was no absence of good faith or damage to the person to whom the fiduciary obligation was owed. In some, perhaps most, cases, the constructive trust will be consequent upon an actual breach of fiduciary duty: eg, an active pursuit of personal interest in disregard of fiduciary duty or a misuse of fiduciary power for personal gain. In other cases, however, there may be no breach of fiduciary duty unless and until there is an actual failure by the fiduciary to account for the relevant benefit or gain: eg, the receipt of an unsolicited personal payment from a third party as a consequence of what was an honest and conscientious performance of a fiduciary duty. The principle governing the liability to account for a benefit or gain as a constructive trustee is applicable to fiduciaries generally including partners and former partners in relation to their dealings with partnership property and the benefits and opportunities associated therewith or arising therefrom (see, Birtchnell v Equity Trustees , supra, at pp 395-7, 408-9; Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 , at 394).

In Keech v Sandford (1726) Sel Cas T King 61 ; 25 ER 223, Lord King LC held that it was a "rule" that "should be strictly pursued, and not in the least relaxed", that a trustee of a tenancy who obtains a renewal of the lease for himself holds the interest in the renewed lease as part of the trust estate. Lord King's admonition that the rule should be not in the least relaxed has been largely obeyed in that, in its application to the case of the ordinary trustee, the "rule" has been accepted as being applicable, regardless of whether the original lease was renewable by right or custom or whether the lessor was willing to grant a new lease for the benefit of the trust or whether there would, in the circumstances, be nothing inequitable in the trustee obtaining a renewal of the lease for his own benefit. The rule has been extended, either in its strict or in a modified form, to persons under obligations arising from certain other fiduciary relationships (eg, executor or agent) and to certain other relationships which are not fiduciary but are said to be special (eg, tenants for life and remaindermen; mortgagee and mortgagor). In particular, it has been applied to a member of a partnership in respect of the renewal of a lease which was held on behalf of the partnership (see Featherstonhaugh v Fenwick (1810) 17 Ves Jr 298 ; 34 ER 115; Clegg v Edmondson (1857) 8 De GM & G 787 at 807 ; 44 ER 593 at 601). It has, in my view correctly, been accepted as being so applicable notwithstanding that the partnership has been dissolved (see Thompson's Trustee v Heaton [1974] 1 WLR 605 ; [1974] 1 All ER 1239 Lindley on The Law of Partnershi , 14th ed (1979), p 430, and Snell's Principles on Equity , 28th ed (1982), p 245).

One can point to impressive support both for the view that the rule in Keech v Sandford is an independent doctrine of equity with no more than an "illusory" link with the general equitable principle governing the liability of a fiduciary to account for personal benefit or gain (see the discussion of both the rule and the general equitable principle in Finn : Fiduciary Obligations (1977), Chs 21 and 23) and for the contrary view that that rule is no more than a manifestation of that general principle (see, for example, per Dixon CJ, McTiernan and Fullagar JJ: Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd , supra, at p 350, and per Lord Russell of Killowen: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134(n), at 149-50). It would plainly be futile to attempt to reconcile all that has been said in the cases as to the nature and scope of the rule in Keech v Sandford . It is preferable to acknowledge the existence of unresolved difficulties and differences about both the precise nature of the rule and its application to persons who are not trustees. Those difficulties and differences are, however, such as to encourage rather than preclude the search in this court for unity of principle. With all respect to those who have expressed a contrary view, I consider that the rule should not be seen as either a completely independent principle of equity or as a mere manifestation of the general principle governing the liability of a beneficiary to account for personal benefit or gain. The case itself is an illustration of that general principle: indeed, it is one of the cases which established it. The "rule" in Keech v Sandford is, however, a rule concerned with the operation of presumptions in the application of that general principle to particular types of property. "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" under the prior lease (per Parker J Griffith v Owen [1907] 1 Ch 195 at 204).

In its primary application to the renewal of a lease by a trustee, the rule in Keech v Sandford "depends partly on the nature of leasehold property and partly on" the position of special opportunity which a trustee occupies (see per Parker J, Griffith v Owen (at p 203) and per Collins MR in Re Biss ;; Biss v Biss [1903] 2 Ch 40 at 57). The effect of the rule in such a case is that there is an irrebuttable presumption (a presumption of law: per Collins MR, Re Biss , at p 55) that the lease was obtained by use of the position of advantage which the trustee enjoyed as the tenant at law, that is to say, by the use by the trustee of his fiduciary position, with the result that he holds the new lease as constructive trustee under the general principle governing the liability of a fiduciary to account for a personal benefit or gain. The presumption which the rule creates in its application to a fiduciary other than a trustee is irrebuttable or rebuttable according to the nature of the powers and obligations of the fiduciary with respect to the leasehold property and the extent to which the interposition of the fiduciary represents, as it were, a barrier between the person to whom the fiduciary duty is owed and the lessor (cf per Collins MR: Re Biss , at p 57). In the extension, by analogy, of the rule in Keech v Sandford to certain "special" non-fiduciary relationships under which a person is under an obligation to advance or preserve the interests of another, the presumption would appear, at least ordinarily, to be a rebuttable one (see per Romer LJ, Re Biss , at pp 61-7; cf Collins MR at pp 56-7).

In Re Biss , Collins MR (at p 56) included partners in "the class of cases" in which the relevant presumption is "a rebuttable presumption of fact". It has been suggested (see, eg, S Cretney: "The Rationale of Keech v Sandford", The Conveyancer and Property Lawyer (NS ), vol 33 (1969) 161, at pp 175-6) that his comments to that effect were the result of an erroneous view that the relationship between partners is not a fiduciary one. No real basis for that suggestion is, however to be found in the Master of the Rolls' judgment since he neither expressed the view that the partnership relationship was not fiduciary nor propounded the fiduciary nature of a relationship as determinative of whether the presumption was irrebuttable. The closest he came to seeking to identify a criterion for determining whether the presumption was irrebuttable was his reference ([1903] 2 Ch 40 at 57) to "possession" with "the opportunity of renewal ... acting upon the goodwill that accompanies it". On the other hand, Romer LJ remarked (at p 60) that the relevant presumption was irrebuttable if the "person obtaining the renewal ... occupies a fiduciary position" and indicated (at p 62) his acceptance of the observation of Turner LJ in Clegg v Edmondson that he was "not prepared to say that in no case can a partner during the continuance of the partnership contract for a new lease to be granted to himself of property which is in lease to the partnership without the new lease being held to be subject to trusts for the benefit of the partnership". It would seem to follow that Romer LJ did not see the partnership relationship as a fiduciary one. Such a conclusion is difficult to reconcile, however, with his Lordship's actual references to the nature of the partnership relationship ([1903] 2 Ch 40 at 61, 62): "in ordinary cases concerning the carrying on of the partnership business he is an agent for the partners"; "he clearly owes a duty to his co-partners not to acquire any special advantage over them by reason of his position" and "partners, between whom the utmost good faith is required by a Court of Equity". It may be that the solution is to be found in the difficulty which occasionally exists in determining whether the fiduciary obligations of a partner extend to particular property or to what is not obviously a partnership endeavour and in Romer LJ's distinction (at p 61) between a case where it could be said that the person renewing the lease "clearly occupied a fiduciary position in the matter " (emphasis added) and the case where it could not. Notwithstanding the difficulties and differences in and between the judgments of Collins MR and Romer LJ in Re Biss , there are clear statements in both judgments (with each of which Cozens Hardy LJ agreed) which support the conclusion that the presumption that a partner holds a renewed lease as constructive trustee -- or, as I would enunciate the primary rule in Keech v Sandford , the presumption that the renewed lease was obtained by use of the partner's fiduciary position -- is a rebuttable one. Those statements are consistent with overall authority and should be accepted as correct and applicable both to the case where the renewed lease is obtained by a partner in a subsisting partnership and the case where the renewed lease is obtained by a member of a partnership which has been dissolved but whose assets are in the course of realization (see Clegg v Fishwick (1849) 1 Mac & G 294 at 298-9 ; 41 ER 1278 at 1280 where Lord Cottenham LC held that the legal representative of a deceased partner had a "prima facie case" to assert an interest in a renewal of a lease obtained by the surviving partners after the partnership had been dissolved by the death: Featherstonhaugh v Fenwick ;; Clegg v Edmondson ;; Metlej v Kavanagh [1981] 2 NSWLR 339 at 343-5; but cf Thompson's Trustee v Heaton [1974] 1 WLR 605 at 612-3).

Prima facie, the rule in Keech v Sandford has a dual operation in the present case: there is an irrebuttable presumption that any rights in respect of a new lease of the Mansfield Park premises were obtained by Dr Chan by use of his position as a trustee of the previous tenancy and there is a rebuttable presumption of fact that any such rights were obtained by use of his position as a partner in the dissolved partnership whose assets were under receivership and in the course of realization. There is no logical inconsistency between the two presumptions in that a single benefit may well be obtained by the use of two distinct fiduciary positions. Nor is there any valid reason to preclude the dual operation of the rule to produce the two distinct presumptions. There is, however, no advantage to be gained in the present case from reliance on both presumptions or on one rather than the other since the persons to whom the relevant obligations under each fiduciary relationship were ultimately owed are the same and there is no possible basis in the facts for a finding that the presumption that any rights in respect of a new lease of the premises were obtained by Dr Chan by use of his position as a former partner has been rebutted. Whatever presumption is relied upon, the ultimate result will be the same. Indeed, the facts of the present case are such to mo make it strictly unnecessary to rely on either presumption: it is apparent that, as a matter of fact, Dr Chan was introduced to the premises through the partnership and that he obtained any rights in respect of a new lease of the premises through the use -- or misuse -- of his position as a trustee of the former tenancy and as a former partner. It follows that Dr Chan holds, and will hold, any rights to or under a new lease of the premises as a constructive trustee unless there be some reason for excluding the ordinary application of the general principle.

Many of the statements of the general principle requiring a fiduciary to account for a personal benefit or gain are framed in absolute terms -- "inflexible", "inexorably", "however honest and well-intentioned", "universal application" -- which sound somewhat strangely in the ears of the student of equity and which are to be explained by judicial acceptance of the inability of the courts, "in much the greater number of cases", to ascertain the precise effect which the existence of a conflict with personal interest has had upon the performance of fiduciary duty (see per Lord Eldon, Ex parte James (1803) 8 Ves Jr 337 at 345 ; 32 ER 385 at 388; per Rich, Dixon and Evatt JJ in Furs Ltd v Tomkies (1936) 54 CLR 583 at 592-3). The principle is not, however, completely unqualified. The liability to account as a constructive trustee will not arise where the person under the fiduciary duty has been duly authorized, either by the instrument or agreement creating the fiduciary duty or by the circumstances of his appointment or by the informed and effective assent of the person to whom the obligation is owed, to act in the manner in which he has acted. The right to require an account from the fiduciary may be lost by reason of the operation of other doctrines of equity such as laches and equitable estoppel (see, eg Clegg v Edmondson , supra, at 807-10 ; ER at 602). It may still be arguable in this court that, notwithstanding general statements and perhaps even decisions to the contrary in cases such as Regal (Hastings) Ltd v Gulliver and Boardman v Phipps , the liability to account for a personal benefit or gain obtained or received by use or by reason of fiduciary position, opportunity or knowledge, will not arise in circumstances where it would be unconscientious to assert it or in which, for example, there is no possible conflict between personal interest and fiduciary duty and it is plainly in the interests of the person to whom the fiduciary duty is owed that the fiduciary obtain for himself rights or benefits which he is absolutely precluded from seeking or obtaining for the person to whom the fiduciary duty is owed (cf Peso Silver Mines Ltd (NPL) v Cropper (1966) 58 DLR (2d) 1 at 8). In that regard, one cannot but be conscious of the danger that the over-enthusiastic and unnecessary statement of broad general principles of equity in terms of inflexibility may destroy the vigour which it is intended to promote in that it will exclude the ordinary interplay of the doctrines of equity and the adjustment of general principles to particular facts and changing circumstances and convert equity into an instrument of hardship and injustice in individual cases (see Canadian Aero Service Ltd v O'Malley (1973) 40 DLR (3d) 371 at 383; Cretney : op cit, at pp 168ff; Oakley : Constructive Trusts (1978) pp 57ff). There is "no better mode of undermining the sound doctrines of equity than to make unreasonable and inequitable applications of them" (per Lord Selborne LC, Barnes v Addy (1879) LR 9 Ch App 244 at 251).

The circumstances of the present case have already been recounted in some detail. There is nothing in them to avoid or modify the application of the general principle under which a fiduciary holds any benefit or gain which he has obtained by use of his fiduciary position upon constructive trust for those to whom his fiduairy duty was owed. Dr Chan was not authorized, by the partnership agreement, by any other instrument, agreement or circumstance or by the assent of either Dr Zacharia or the receiver, to disregard his fiduciary duties as a trustee and a former partner and seek the new lease for himself. There is no doctrine of equity which operates to preclude the assertion by Dr Zacharia of a constructive trust of any rights in relation to a new lease. Whatever way one looks at the case, it is one in which Dr Chan abused his fiduciary position as a trustee and a fmer partner to seek an advantage for himself and in which he subjected the performance of his fiduciary obligations to the pursuit of his personal interest. He holds and will hold any fruits of that abuse of fiduciary position and pursuit of personal interest upon constructive trust for those entitled to the property of the dissolved partnership.

The appeal should be dismissed.