You can’t sue me for that. Your old partners already have!

In the recent decision of Zphere Pty Ltd v Pakis the Supreme Court of Victoria considered a scenario where a partnership dispute in respect of an accounting firm was litigated in large part and had reached a settlement. Then, a partner who had not been involved in the litigation, commenced their own set of proceedings. The partner alleged that the relevant breach was with respect to one partner causing the partnership benefits to be directed to an entity of theirs rather than become a benefit of partnership.

Before final orders were made, deeds were signed that saw the defendant pay a sum, surrender their partnership assets, and the proceedings dismissed.

The plaintiff, a former partner of the partnership then sued the defendant for the same breach.

The defendant said that the plaintiff was bound by the deeds; estopped due to res judicata; and was bringing a claim which was an abuse of process.

The earlier litigation related to the defendant taking an improper benefit in breach of partnership obligations. The plaintiff was never joined to them or made aware of them.

At the core of each of issues is the similarity of the old litigation, and the new.

The doctrine of res judicata requires, in essence, two issues, to be dealt with.

Was the first litigation a final decision? Yes, the dismissal orders were final.

The next issue for the Court to decide was whether the plaintiff was “privy” of the parties to it?

The plaintiff highlighted their absence from the earlier litigation, powerlessness to intervene, and lack of knowledge of it.

The plaintiff’s claim was for 9.8% of the value of the breach based on the plaintiff’s partnership share. In fact, the 9.8% was not a share as tenancy in common, but an entitlement on dissolution not divisible into proportions as against the defendant.

The Court found a partnership interest is analogous to a trust. Like a trust, legal interests are subject to the equities of others. As trustees are privies then, following this analogy, so are partners.

As such, the plaintiff was estopped from pursuing this element of the claim by the doctrine of res judicata.

The plaintiff joined the partnership pursuant to a 2006 deed which was in force at the time of the breach.

The earlier proceedings were commenced by the partnership governed by a 2017 deed (which the plaintiff did not sign, having previously left the partnership).

The breach was suffered by the partnership at the time of the breach (i.e. pursuant to the 2006 deed) and to be distributed pursuant to that partnership’s constitution.

The 2017 deed appointed a representative of the (new) partnership. That representative and the (new) partners ran and settled the earlier litigation.

As such, the deed did not release the defendants from the plaintiff’s claim.

The defendant said the plaintiff’s claim was an abuse of process due to the prospect of inconsistent findings, and the defendant’s prejudice suffered if forced to relitigate a claim the defendant considered concluded.

The defendant failed to have the proceedings dismissed as an abuse of process. The defendant could have joined the plaintiff to the earlier proceedings and didn’t. The defendant could have sought to have the plaintiff sign up to the settlement deed, and didn’t.

The plaintiff was prevented from bringing their claim.

This case illustrated the importance of res judicia and where it might ultimately prevent you from bringing it into Court. If you would like advice in relation to a partnership dispute please do not hesitate to reach out to our Corporate Disputes team.

*This article was prepared with the assistance of Christie Preston*

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