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- Thompson v Royds[2001] QDC 321
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Thompson v Royds[2001] QDC 321
Thompson v Royds[2001] QDC 321
DISTRICT COURT OF QUEENSLAND
CITATION: | Thompson v. Royds [2001] QDC 321 |
PARTIES: | MYLES THOMPSON (Plaintiff) v. WILLIAM JAMES ROYDS (Defendant) |
FILE NO/S: | D3010 of 1998 |
DIVISION: |
|
PROCEEDING: | Determination of question before trial |
ORIGINATING COURT: | District Court Brisbane |
DELIVERED ON: | 12 December 2001 |
DELIVERED AT: | Brisbane |
HEARING DATE: | (Submissions received in writing) |
JUDGE: | McGill DCJ |
ORDER: | Preliminary question answered – The amount payable is to be determined in accordance with the formula in para. 9 of the amended defence, including work in progress in speculative matters, appropriately valued |
CATCHWORDS: | PARTNERSHIP – Action between parties – option to purchase share of retiring partner at price related to net profit – net profit to be assessed taking into account work in progress including in speculative matters Browell v. Goodyear [2000] TLR 735 - followed |
COUNSEL: | M.P. Sumner-Potts for the plaintiff |
SOLICITORS: | Bruce Dulley & Andrew Crooke of the plaintiff |
- [1]This is the determination of a question ordered to be decided separately and in advance of the trial under r. 483. On 15 May 2001 I ordered the following question be decided: “Is the amount payable to the plaintiff pursuant to Clause 18 of the partnership deed, Exhibit JRT 2 to the affidavit of the defendant filed 23 June 1998, on the true construction of that clause, to be determined in accordance with the formula alleged in para. 9 of the amended defence of the defendant filed 17 October 2000, or in some other and what way?”
History of the action
- [2]The plaintiff and the defendant formerly carried on in partnership a practice as solicitors in Cairns. On 17 June 1998 a plaint was filed in the District Court at Cairns seeking a declaration that the partnership was dissolved on a particular date, an order that the partnership business be wound up, an order for the appointment of a receiver and manager of the partnership, and various consequential orders, and for an order that the defendant pay the plaintiff an amount required to be paid pursuant to the partnership deed. With the plaint was filed a judgment summons. On 23 June 1998 the defendant filed what was described as a conditional Entry of Appearance and Defence and on the same day filed a summons seeking an order that the proceedings be struck out, or stayed, an order for the appointment of an arbitrator, and in the alternative various declarations. When the matter came before the District Court in Cairns on 26 June 1998, it was transferred to the District Court in Brisbane, no doubt because both of the participants in the dispute were known to the two resident judges in Cairns.
- [3]The plaintiff’s summons came before Wensley ADJC who on 31 July 1998 ordered that it be dismissed with costs. The reasons for that decision record, among other things, that there has been since early 1998 a dispute between the parties as to how the “net profit of the practice” referred to in clause 18 of the partnership deed ought to be computed. His Honour was of the opinion that as it stood the plaint did not come within the jurisdiction of the District Court, but allowed the plaintiff to amend to raise the jurisdiction. Leave to do this was given, and directions were given as to how the defendant’s application was to proceed (if necessary). His Honour concluded that it was inappropriate to order an account in circumstances where there were disputes in relation to matters on the basis of which the account would have to be determined.
- [4]An amended plaint was filed on 11 August 1998. That plaint contained an allegation that the value of the partnership property did not exceed the monetary limit of the District Court[1]. That overcame the jurisdiction difficulty identified with the earlier plaint. An Entry of Appearance and Defence and counterclaim was filed on 16 September 1998; a reply and answer was filed on 28 September 1998. On 22 April 1999 Boulton DCJ made by consent a referral order for case appraisal. The case appraiser’s certificate and decision were filed on 1 December 1999; notice of election to go to trial was filed on 24 December 1999. Thereafter there have been further interlocutory applications, and the pleadings have been amended from time to time but the matter is still well short of trial and making slow progress.
Preliminary question
- [5]When the matter came before me on 15 May 2001 I was told the only matter remaining in issue was as to the amount payable under clause 18 of the deed. I was also told that it was common ground that the relevant partnership deed was that a copy of which is exhibit WJR2 to the affidavit of the defendant filed on 23 June 1998. Clause 18.1 of that deed provides as follows:
“Should either partner wants (sic) to resign, retire or determine the partnership, he shall give to the other partner the option to purchase his share in the partnership, which shall be exercisable for three months from the date of the written notice. Each partner will be entitled to purchase the other partner’s share for a price equivalent to six months of net profit of the practice (determined by averaging the practice net monthly profit over the previous 12 months) and shall pay the purchase price within 30 days of the date of exercise of the option.”
Clause 18.2 provides that the retirement of a partner gives the remaining partner the option either to wind up the partnership in accordance with clause 15, or to purchase the share of the retired partner, and contains certain machinery provisions; it appeared to be agreed during the hearing on 15 May that it was unnecessary for me to be concerned with clause 18.2. I agree with that[2].
- [6]It was also common ground that the effect of what had happened on 4 March 1998 was that the plaintiff had expressed a desire to retire and determine the partnership and the defendant therefore had the option under clause 18 to purchase the plaintiff’s share in the partnership, and had exercised that option on 8 March 1998. As a consequence it was common ground that the legal effect of what had happened was that clause 18.1 had been triggered. To some extent that reflected a change in what had been the previous attitude of at least one of the parties in this matter. I then gave directions for the filing of any further affidavits sought to be relied on on the part of either party in relation to the preliminary question, and the filing of written submissions, on the basis that there will be an oral hearing only if thought necessary. Having considered the written submissions and the material, I do not feel the need for further assistance by way of an oral hearing, and neither party has sought a further oral hearing.
- [7]Paragraph 9 of the amended defence was in the following terms:
“Pursuant to the option the amount payable by the defendant to the plaintiff was equal to half of:
TR – TO + A – A(1) +B(1) – B +C – C(1)
- (a)TR = total receipts for 12 months up to 4 March 1998;
- (b)TO = total outgoings for 12 months up to 4 March 1998;
- (c)A = work in progress as at 4 March 1998;
- (d)A(1) = work in progress at as 4 March 1997;
- (e)B(1) = amount owed to creditors as at 4 March 1997;
- (f)B = amount owed to creditors as at 4 March 1998;
- (g)C = amount owed by debtors as at 4 March 1998;
- (h)C(1) = amount owed by debtors as at 4 March 1997.”
I can find no reply to this pleading on the file, or any reply after that filed on 28 September 1998, which says nothing about this allegation. On 15 May there was talk of a further reply, but it has not been filed.
Evidence
- [8]There is really no clear dispute about this on the affidavit evidence. The defendant relies on an affidavit of Mr. King, a partner of KPMG Accountants in Cairns who has experience as an accountant dating from 1976, and who swears that the formula for assessing profit of the parties’ legal practice as is set out in para. 9 of the amended defence is “stated in layman’s terms and is an appropriate formula for a defined period”. He goes on to swear that accounting standards applied by members of the Institute of Chartered Accountants in Australia did not provide a formula for the calculation of profit or loss for a particular period, but this formula is not inconsistent with requirements of the applicable standards. The formula is for an accounting profit, which may be different from taxable income.
- [9]The defendant also relies on an affidavit of Mr. Dillon, who swears that he is a qualified accountant practicing in Cairns, and that the method of assessing net profit for the relevant period is:
“(a) Net operating profit for the period;
- (b)Add value of work in progress at the end of the period;
- (c)Add debtors at the end of the period;
- (d)Add creditors at the beginning of the period;
- (e)Less creditors at the end of the period;
- (f)Less the value of work in progress at the beginning of the period;
- (g)Less debtors at the beginning of the period.”
This formula is expressed in slightly different terms from that in para. 9 of the amended defence, but is in substance the same thing.
- [10]Mr. Dillon added that:
“Under generally accepted accounting principles, consistency in accounting is paramount. Therefore when work in progress, debtors and creditors are taken into account, all work in progress, creditors and debtors are to be taken into account in assessing net profit. It is not appropriate to be selective in these items.”
He went on to swear that under generally accepted accounting principles an account rendered and outstanding is taken into account when assessing net profit, although if the debt is subsequently written off it is taken into account again at that point. He swears that it is not generally accepted accounting practice to be selective as to the likelihood of payment or to ignore accounts that are outstanding which had not been written off.
- [11]The plaintiff relied on an affidavit of Mr. O'Connor filed on 21 June 1999. Mr. O'Connor has been an accountant in practice since 1982, and has been the partnership accountant. According to his affidavit in para. 4:
“In order to determine the net profit of the partnership, it is proper accounting practice to take the operating profit, add the increase (if any) in work in progress over the period, add the increase in debtors (if any) over the period and subtract the increase (if any) in creditors over the period”.
- [12]This is entirely consistent with the evidence of the other accountants. He says he has been provided with estimates from the defendant of the “potential value of files as of the relevant dates” in the amount of $450,000 as at 4 March 1997, and $320,000 as at 3 March 1998: Exhibit POC2. In an affidavit of Mr. O'Connor sworn 25 June 1998 and filed 28 July 1998, he deposed to a need to know the full extent of the debtors and creditors at the date of dissolution, and to assess work in progress at the date of dissolution and a date 12 months earlier. He did not at that stage have that information.
- [13]In a further affidavit sworn 22 July 1998 and filed on 24 July 1998, Mr. O'Connor deposed to the annual accounts, which he had prepared on behalf of the plaintiff and also on behalf of the partnership, having taken into account actual receipts, outstanding accounts, creditors and debtors: para. 5. However, those accounts did not include any accounting for work in progress. It had not been the practice of the parties to take into account any value for work in progress for the purposes of their accounts, or for taxation purposes. As far as he was aware, there was no record of the value of work in progress being kept by the partnership. That points up the difficulties with the use of the formula which the pleadings and the experts on both sides appear to agree is appropriate: if the parties have not in fact at the relevant time kept track of the value of work in progress, it would now be extremely difficult to ascertain the value of work in progress at the two relevant dates. Since it will only be any change in the value of work in progress which will be significant, in theory a great deal of time and effort would be applied in determining what the two figures are, only to discover that there was no significant change. In theory, of course, the value for costing purposes of the files that were current at the time could be assessed as at the dates, but that would be a huge exercise, and one which I think should be avoided if possible[3].
- [14]If work in progress is routinely charged for regularly, and does not greatly fluctuate from time to time, there ought not to be much change between the value on one day and the value a year later. That, however, will be more accurate of a larger and busier practice, and assumes the practice operating consistently over the period. The matter is also complicated by a dispute as to the way in which work in progress should be taken into account in relation to speculative matters.
- [15]In November 1998, Mr. O'Connor prepared a profit and loss statement, a copy of which is Exhibit POC 4 to that affidavit. However, that document has not been prepared in accordance with the formula in the amended defence, in a number of respects, as explained in notes to the account. It appears that there was some adjustment to the debtors as at 5 March 1997, sundry creditors have not been taken into account on the basis that there would not be any material adjustment between the years, and the value of work in progress was not taken into account on the basis that the partners were unable to reach agreement on which debts or services constituted sundry debtors or creditors. Mr. O'Connor prepared two revised versions in May 1999 (Ex POC5) but there were still a number of significant qualifications by way of notes to those accounts, because important issues remain in dispute between the parties. In one of these, work in progress was said to have been included based on a valuation prepared by the defendant, including for speculative fee based files, although reference was made to a facsimile of 12 June 1998, which is part of the exhibit, which stated that
“Work in progress is roughly equal at the beginning of the period and at the end of the period”.
That is inconsistent with the estimate from the defendant previously quoted. Mr. O'Connor did not regard that account as being properly prepared.
- [16]One thing which is apparent from these documents is that one important factor in quantifying the figure for net profit is how the work done for one particular client is treated for the purposes of this exercise. A substantial amount of work was done for this particular client in relation to a defamation action, which was ultimately tried before a jury, subject to an appeal, and then retried, with the client being unsuccessful. The client is said to have been impecunious, and as a result nothing was ever paid for this work, but apparently there were periods when there were substantial fees which had been charged to the client (and were not paid) or substantial amounts of work which had been done but not charged for. There is also some dispute between the parties as to whether this file was properly characterised as speculative anyway, or whether it was merely a situation where in fact the lawyers were not going to get paid unless the client won. Obviously how the value of work associated with that particular client is treated for the purposes of this accounting exercise will have a substantial bearing on the outcome of this dispute. Mr. O'Connor, in his affidavit has sworn that in his opinion this matter ought not to be taken into account, and that the version of the accounts which does not do so is the version which correctly represents the net profit of the partnership. It may be better to say that it more correctly represents the net profit of the partnership, because neither version is presented by Mr. O'Connor without significant qualification by way of notes.
Authorities
- [17]I was referred to a number of authorities in relation to the question of how work in progress, both in general and in relation to speculative matters, should be dealt with for accounting purposes. The leading case in Australia is the decision of the High Court in Henderson v. Federal Commissioner of Taxation (1970) 119 CLR 612. This involved a taxation case where the taxpayer was a member of a partnership of accountants, who had been returning partnership income on a receipts basis up to 1965 and then changed to an earnings basis. The effect of this was that a large sum of money which was received in 1966 for work done in 1965 was not returned as income in either year. The Commissioner sought to deal with this by assessing the taxpayer in 1966 on a cash basis. On appeal it was held that the income was properly assessed on an accruals basis. Windeyer J at p.630 described the “earnings basis” as follows:
“The net receipts of the business, being the difference between the actual receipts and outgoings in the period, is first ascertained. To this is added the amount which at the end of the period is outstanding as debts due to the business proprietor in respect of the business. From the total of these two sums there is then subtracted the amount which was outstanding for debts due but not collected at the beginning of the period. The result will show a profit or a loss for the period”.
His Honour went on to say that the accounts included provision for “work in progress”, in respect of which he noted a statement of the House of Lords that work in progress must be regarded as a receipt, a point on which professional accountants appear to be universally agreed, though it might not at once be obvious to the layman: p.635.
- [18]On the same page His Honour recognised the appropriateness of taking into account work in progress in circumstances where one is dealing with the manufacture of physical things, but thought it was a mistake to apply this approach directly to uncompleted services by a tradesman or the practitioner of some profession. After some further analysis he concluded at p.636:
“What he is entitled to be paid forms part of his income calculated on an earnings basis; but not for work in progress, but for work done. Similarly an accountant engaged to conduct a continuous audit may be entitled to be paid for the hours he has spent and for his attendances, although he only asks to be paid periodically. But when a professional man is, according to the terms of his engagement, not to be paid until his task is completed, I do not think he can be said to have earned anything by that task until then. A lawyer retained to write an opinion or draw a deed cannot ordinarily say that he has earned any income by his work until he has produced the result of it”.
His Honour then noted that records were kept of what work was done, and on the basis of this the value for charging purposes of the work could be determined, and continued at p.637:
“This recording of the value of work in progress might be said to show accruals, using that term in a sense which it appears often to have for accountants in practice, especially in the United States … but accruals in this sense are not I think equivalent to earnings for the application of an earnings basis for the assessment of income according to our law … Money is not earned income until it is in law recoverable as a debt. Of course, if an amount were recoverable as quantum meruit, although a task was not completed, it could be said to be earned. And, as I have said, services may create debts before a bill is sent to a debtor. But services rendered do not produce taxable income until they create a debt, and it must be a debt which is in fact recoverable, not a bad debt”.
- [19]On appeal, the Full Court confirmed the appropriateness of assessing income on “an earnings or accrual basis” and at p.650 said as to work in progress:
“But this, in my opinion, is an entirely inappropriate concept in relation to the performance of such professional services as are accorded in an accountancy practice when ascertaining the income derived by the person or persons performing the work. When the service is so far performed that according to the agreement the parties are in default thereof, according to the general law, a fee or fees have been earned and it or they will be income derived in the period of time in which it or they have become recoverable. But until that time has arrived, there is, in my opinion, no basis when determining the income derived in a period for estimating the value of the services so far performed, but for which payment cannot properly be demanded and treating that value as part of the earnings of the professional practice up to that time and as part of the income derived in that period. It may be that a different course can be taken if an estimation of profits is being made for some other purpose than the present”.
The effect of this decision is clear: for tax purposes, income is not treated as having been earned for services rendered until the point has been reached where there is a liability on the part of the client to pay for that service. When that point is reached will depend on the terms of the retainer, and perhaps the operation of the general law, but commonly legal costs are payable in respect of specific tasks undertaken: McGowan v. Commissioner of Stamp Duties [2001] QCA 236.
- [20]Accordingly, work undertaken by a solicitor could be said to move through a series of stages: effort has been applied to the benefit of a particular client, but the solicitor has not completed a task which gives rise to an obligation to pay in accordance with the retainer or the general law; the solicitor has done something under which he would be entitled to be paid, but has not yet sent a bill; he has sent a bill for some work, but has not yet been paid; payment is finally received for the work. The High Court decided that for the purposes of income tax law only work which has reached the second stage can be taken into account. The court however recognised that for other purposes it may be appropriate to adopt a different approach. Since I am not concerned with the derivation of taxable income, but with “net profit” for the purpose of fixing the price for a partnership interest, and therefore in accordance with proper accountancy practice, this decision is not determinative of the outcome.
- [21]Nevertheless, in a similar situation in Robertson v. Brent & Haggitt [1972] NZLR 406, Wilson J of the Supreme Court of New Zealand followed Henderson in the context of a dispute arising out of the dissolution of a professional partnership, and concluded that a share of a valuation of work in progress at the time of a partner’s retirement was not an asset and could not be assigned, in the absence of some agreement between the parties that work in progress was to be valued for the purposes of the partnership. The agreement being silent as to that matter, that had not been achieved, so that the plaintiff failed in that aspect of the claim.
- [22]It seems to me that that decision is inconsistent with the decision of the Court of Appeal in McGowan v. Commissioner of Stamp Duties [2001] QCA 236, where it was held that the value of work in progress of a firm of solicitors was properly taken into account in determining the value for stamp duty purposes of an assignment by a retiring partner to the remaining partners of his share in the partnership assets. Although Robertson was not mentioned, in my opinion it is plainly inconsistent. Henderson was mentioned, but for the purpose of distinguishing it. In McGowan, the value of work in progress was taken into account as shown in the balance sheet of the partnership, and the Commissioner was content to adopt the valuation in the balance sheet, so there was no dispute before the court as to how work in progress was to be valued. The judgment contains an authoritative exposition of when a solicitor becomes entitled to payment for work done for a client.
- [23]McPherson JA, who gave the principal judgment, said at para. 9:
“Apart from items such as unpaid fees for work done for which clients have already been billed (represented in the partnership balance sheet as ‘debtors’) the remaining assets of a practitioner are likely to consist primarily of the two items of (1) disbursements made on behalf of clients, for which payment has yet to be claimed (‘unbilled disbursements’), and (2) the value of work done but not yet completed and charged for by the solicitor (‘work in progress’)”.
Later His Honour said at para. 11:
“If a party to a contract for services wrongly repudiates it before the work is completed the party doing the work is entitled to a quantum meruit for services performed, even if …. the incomplete work is, objectively speaking, of little or no value to the client or anyone else. It is, in any event, not often that steps taken in the course of instituting an action and bringing it to trial are of no value at all to the client who gave instructions for them. The half written opinion or half drafted deed mentioned by Windeyer J may be examples; but issuing proceedings, delivering pleadings and particulars, arranging for discovery, answering interrogatories and generally attending to and prosecuting an action towards its conclusion are all activities requiring professional skill and time, which confer on the solicitor who performs them a lien over documents and funds held on behalf of the client. In most cases, it is the existence of that lien, or its assertion, that effectively precludes the client from seeking legal advice or assistance elsewhere without first paying for services performed by his previous solicitor. In this, as in most other matters, accounting practice which treats “work in progress” as an asset of a solicitors practice is no more than a reflection of the underlying legal principles and conceptions involved”.
His Honour concluded that the work in progress was rightly treated as a component of the partnership property assigned, and so properly taken into account in assessing the stamp duty payable on the deed of assignment.
- [24]Subject to one matter, that case is directly applicable to the present case, and I am bound by it. The one qualification is that the dispute in the present case is about the proper assessment of net profit, rather than the identification of the assets of the partnership as at a particular date. The formula provided for in clause 18.1 of this partnership agreement was not that the retiring partner would be paid the value of his share of the assets of the partnership as at the date of assignment, but rather that he would be paid an amount determined by reference to the net profit of the partnership during a particular period. But there is nothing to indicate in the deed that the profit of the partnership was to be determined other than on ordinary accounting principles, and the uncontradicted evidence on both sides is that ordinary accounting principles require the work in progress to be taken into account for the purposes of deriving profit, both at the beginning and end of the relevant period. The deed is concerned with profit, not taxable income, so Henderson does not directly apply. In my opinion, the decision in McGowan clearly indicates that it is appropriate to take work in progress into account, and the only issue it does not resolve is how that is to be valued for the purposes of being taken into account.
- [25]The issue of the value of work in progress was touched on by the Federal Court in Crommelin v. Deputy Commissioner of Taxation (1998) FCA 878, a case concerning the taxable status of a payment made by continuing solicitors to a retiring solicitor in respect of a share of the work in progress of the partnership prior to his retirement. The court spoke of the work in progress having a particular value, and of the value of it as being relevant for certain purposes, but in that case it was not necessary for the court to assess the value. There had been some dispute before the Administrative Appeals Tribunal as to whether there was an agreement between the parties as to the value of the taxpayer’s share of work in progress, but ultimately the court held that what mattered was that the payment represented the taxpayers entitlement to a proportionate share of work in progress hence indirectly fees earned, so that it was taxable as income.
- [26]The question of the valuation of work in progress, particularly in the context of speculative work, was considered in England by Blackburne J in Browell v. Goodyear [2000] TLR 735, a case arising out of the dissolution of a partnership where the bulk of the firm’s work in progress at the date of dissolution related to claims in industrial accident cases most of which had been undertaken on a “no win, no fee” basis. If each claim was successful, a fixed amount of costs dependant on the complexity of the case together with disbursement was recoverable. His Lordship declined to follow Robertson (supra) and expressed the view that the fact that no payment was due from the client until the service had been rendered in full did not meant that the work in progress in connection with those services was of no value, an approach consistent in my opinion with the decision in McGowan. His Lordship held that it was necessary to have regard not merely to what proportion of the total work, which would lead to payment of a particular fee, had been done as at the relevant date, but also what proportion of the various claims were likely to result in a situation where the fee became payable.
- [27]Viewed in this light, there may not be much practical difference between work in progress in a speculative matter and work in progress in an ordinary matter, in view of the analysis of the legal position in relation to the latter in McGowan. Both are contingent, the latter on completion of the work, the former on successful completion of the work; both are property notwithstanding that they are contingent, and both can have a value attributed to them notwithstanding they are contingent. The value of the former depends on what ultimately will be recovered by way of costs in respect of the work done to that point if the matter is successful and the probability of the matter being successful, something which is likely to be more easily assessed in dealing with a large number of similar matters by reference to the success rate. In the case of speculative matters, if the action is successful there will certainly be money available to pay the fees. In the case of non-speculative matters, the fees are payable by the client, but what matters in terms of the value of the work in progress is the prospect of actually being paid. If a client is impecunious, so that in practice payment will only be received if the action is successful, there may be no real difference between the value of the work in progress for a matter which is technically speculative and a matter which is not. For these reasons, it is not a matter of adopting a mechanical approach, such as by including all work done including speculative matters at face value, or by excluding all work done on speculative matters.
Other matters
- [28]There are a couple of other matters to which I should attend. During the hearing on 15 May counsel for the defendant asked me to make a formal finding that the relevant period was 12 months to 4 March 1998. My initial reaction was that this was the wrong date, since the 12 month period should run back from the date on which the option was exercised: p.38. On reflection, I am satisfied that that reaction was in error, and counsel’s submission was correct. Although clause 18.1 is not explicit as to the date from which the 12 month period runs, the wording is certainly consistent with its being calculated by reference to the date on which the option comes available, and that in my opinion is the preferable construction, because it would be more consistent with the commercial objective of the clause, and it would avoid a construction which would make it possible for the party with the benefit of the option to manipulate the price, as could occur if the relevant period ran back from the date on which the option was exercised. It would also mean that the price would be fixed as soon as the clause was triggered, rather than depending upon the date on which the option was exercised. Accordingly, I think that that is the relevant date. The formula used in para. 9 of the defence assumes that that is the relevant date, and by answering the question the way I propose that will be confirmed. If necessary, I am prepared to find that that is the relevant date.
- [29]The other matter is that my hope, at the time of that hearing, that the action could be resolved without having to make any sort of assessment of the value of work in progress at either date has not been fulfilled. However convenient such an outcome would be, I am persuaded that is not the correct construction. Nevertheless, the prospect of having to value the work in progress on all the files on each of the two days is a daunting one, and one the cost of which is likely to be wholly disproportionate to the amount over which the parties are fighting. I would urge the parties to adopt a practical resolution of the matter on a negotiated basis, but if they cannot achieve that it will be necessary for some basis to be adopted by which these issues can be resolved. I suspect that, if necessary, I could make some broad brush assessment of the value of work in progress on a file by file basis, in respect of files which have ultimately been concluded as long as I know what the amount paid ultimately was, and some history of the matter, and that may be the best solution.
- [30]The position of “speculative” matters, or matters where there is a “no win no fee” agreement in place, has to be approached in a realistic manner and not necessarily in the same way in respect of all such matters. There are plenty of solicitors now who run personal injury actions for plaintiffs on this basis, in the confident expectation that in the great majority of cases their fees will be paid in due course. In my opinion, it would be wholly unrealistic to value work in progress in relation to such a matter at nothing. On the other hand, there are matters where the situation is more complicated. There may be genuine “pro bono” work, or work done for a friend, where there is no real expectation of payment, and there may be other matters which are “speculative” in the popular sense, being unlikely to succeed but being pursued as an act of kindness towards the client. That does not mean that the client is necessarily not going to be charged, because if ultimately the action is successful (or is settled) and costs are recovered from the other side, the solicitor would charge accordingly, but again it is unrealistic to assess the value of work done in such a manner on the same basis as a matter where the client is highly likely to succeed so that fees are highly likely to be paid.
- [31]The approach adopted in Browell v. Goodyear (supra) indicates that this assessment of the success rate is to be done with the benefit of hindsight, as indicated by the direction that some of the calculation would not be undertaken until there was sufficient experience to be able to determine a success rate. The same may well apply to unusual matters of a one-off character. They may have been already resolved by now; if not, it may be necessary for me to make an assessment of the prospects of success in order to perform a valuation. It would also be appropriate to take into account the fact that many civil matters are settled by negotiation rather than through litigation to judgment, and in some cases that may involve some compromise on the part of the solicitor as to the fees sought to be recovered. These are all matters which can be taken into account, with a degree of precision which will relate to the length of the investigation. Obviously a suitable balance will have to be found.
- [32]I therefore order that the question be answered as follows:
The amount payable is to be determined in accordance with the formula alleged in para. 9 of the amended defence of the defendant filed 17 October 2000, with work in progress to include speculative matters and to be valued on an appropriate basis. I will circulate these reasons and give the parties time to consider the situation before listing the matter for a further mention. It would be acceptable on that occasion for the parties or their legal advisors to appear by telephone.
Footnotes
[1] The defendant appears never to have pleaded to this allegation, so it is taken to have been admitted: DCR r.92(3).
[2] Retirement could occur only under clause 14.9 so clause 18.1 was concerned with a situation where a partner who did not have a right to retire wished to do so. Clause 18.2 covered retirement, under clause 14, as well as death or bankruptcy; it provided for different rights.
[3] In Browell v. Goodyear [2000] TLR 735 Blackburne J regarded as one important consideration in such a valuation, that “the method used should be inexpensive and simple to apply”.