You can’t sue me for that. Your partners already have!
Zphere Pty Ltd v Pakis  VSC 496
In the recent decision of Zphere Pty Ltd v Pakis the Supreme Court of Victoria considered a res judicata and abuse of process scenario. A partner in accountancy firm had previously brought a proceeding against a defaulting partner which had been finally determined by consent orders. The court had to determine whether the proceeding should be stayed on abuse of process grounds.
This partnerships dispute was litigated in large part, then settled.
Before final orders were made, deeds were signed that saw the defendant pay a sum, surrender their partnership assets, and the proceedings were dismissed.
The plaintiff, a former partner of the partnership then sued the defendant for the same breach.
The defendant said the plaintiff was bound by the deeds; was 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. Next: was the plaintiff a “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 TiC, 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 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 defendant succeeded on estoppel due to res judicata and lost the argument that they were bound by the deeds and this was not found to be an abuse of process.
The plaintiff was thereby prevented from bringing the claim.
This case illustrated the doctrine of res judicia. It also emphasised the high threshold for a deciding of an abuse of process. If you would like advice in relation to corporate disputes please do not hesitate to reach out to our team.
*This article was prepared with the assistance of Christie Preston*
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