Lewis v Martinez and the persons named in the Schedule (No 5) [2024] NSWSC 359

Coffee and a Case Note

“You tried to kick me out of the law firm partnership!”

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A partnership operated a law firm. A deed governed the partners’ relationship. The partners were either fixed draw (“salaried”) partners or (often more lucrative) capital partners: [1], [2]

Each partner was a trustee of a separate trust: [2]

P was a capital partner, purportedly expelled from the partnership in November 2020: [5]

P said the purported expulsion was contrary to the deed; meaning P remained a partner or was entitled to damages: [6]

The Ds characterised the partnership as “easy in, easy out” - partners did not make a contribution to join, and were not “paid out” on their exit: [13]

When a capital partner exited, that exit was a “complete, forced, and absolute divorce from the firm”: [29]

The Ds proposed P’s expulsion by email with a “voting button” mechanism and also proposed that the technical requirements for expulsion (e.g. the giving of 7 days notice) be waived or abridged: [38] - [40]

Crucially, only one button was required to be pressed in order to vote on both proposed Extraordinary Resolutions (which the deed said needed 80% of the vote to pass): first (i) expulsion, and then (ii) waiver of technical requirements: [39]

P said this process was invalid because (i) the waiver of technical requirements (like notice) should come before the substantive expulsion vote, and (ii) the question of waiver and the substantive expulsion vote should have had separate voting buttons, allowing partners to vote separately on each resolution: [41]

The Court found the requirement of notice was for a purpose including, potentially, the marshalling of support by the capital partner at risk of expulsion: [48]

The Court found it undermined the seriousness of the consequences of expulsion for the question to be bundled up with the technical variation resolution (or, in the alternative) before it: [49]

The Court found what had taken place was a “plainly invalid process”: [50]

P’s expulsion from the partnership was, therefore, invalid: [51], [101] - [103]

This view was bolstered by the Court’s finding that the Extraordinary Resolution (as defined in the deed) required 80% of all partners to vote in its favour in order to be passed.This was by contrast to the Ds’ position, who asserted that only 80% of the *voting* partners were needed for such a resolution to pass: [52] - [57]

Noting the solemnity of the outcome of an Extraordinary Resolution, and based on the general tenets of commercial construction, the Court found 80% of the partnership was required to pass an extraordinary resolution, not merely 80% of partners engaging in the vote: [58], [59]

P therefore succeeded in their liability argument, with a cost order made in their favour: [122]

The argument about damages was saved for another day.

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