Austco Enterprises Pty Ltd v Tanduna Pty Ltd & Zerso Pty Ltd
[2012] VCC 38
•17 February 2012
| IN THE COUNTY COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
CIVIL DIVISION
COMMERCIAL
EXPEDITED DIVISION
Case No. CI-11-00307
| AUSTCO ENTERPRISES PTY LTD (as Trustee for AUSTCO FROZEN FOODS UNIT TRUST) (ACN 006 174 090) | Plaintiff |
| v | |
| TANDUNA PTY LTD (ACN 142 580 014) | First Defendant |
| and | |
| ZERSO PTY LTD (ACN 068 055 612) | Second Defendant |
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JUDGE: | HIS HONOUR JUDGE GINNANE | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 18-21 July 2011 – Final written submission 2 August 2011 | |
DATE OF JUDGMENT: | 17 February 2012 | |
CASE MAY BE CITED AS: | Austco Enterprises Pty Ltd v Tanduna Pty Ltd & Zerso Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2012] VCC 38 | |
REASONS FOR JUDGMENT
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Catchwords: CONTRACT – sale of business – liability for employee entitlements – purchasers’ claim for rectification of contract - whether mutual or unilateral mistake affecting contract – variation of contract.
ESTOPPEL - promissory estoppel - representation by vendor about payment of employee entitlements - reliance- detriment
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr C F Morgan | Richmond & Bennison |
| For the Defendants | Mr P H Wallis | Davis Legal |
HIS HONOUR:
1 On 1 July 2010, the plaintiff sold a cold store business and the land on which it stood at Laverton North to the defendants. The total sale price was $15 million.
2 This proceeding deals with the contract for the sale of the cold store business.
3 The first defendant, Tanduna Pty Ltd, is a company associated with Mr B Barwick and the second defendant, Zerso Pty Ltd, is a company associated with Mr G Stone. Mr Barwick and Mr Stone are associated with the Melrina Group (“Melrina”), which operates meat wholesaling businesses and associated activities.
4 Melrina had leased part of the Laverton North premises, including office space, since the late 1990s.
5 Mr Barwick worked with Mr Stone in Sydney. They formed a partnership in June 2004 and trade in Victoria as Melrina Victoria.
6 On 15 June 2010, Mr Stone and Mr Barwick, through their family trust companies, entered into a partnership agreement in relation to their investment in the cold store business.
7 The issue in this proceeding is whether the vendor had to pay, by way of making an adjustment to the sale price, all, or only 30 per cent, of the entitlements of employees, who it employed at settlement. Those entitlements included long service leave and annual leave.
8 Clause 18.8 of the Contract of Sale of Business, which is part of a clause headed Employees and Officers, provided that:
“At Completion the vendor must allow an adjustment in favour of the Purchaser of an amount calculated in accordance with the formula set out below and the Purchaser must, with effect from the Completion Date, assume responsibility for the Employee Entitlements:
A = EE x CT
where:
A is the amount of the adjustment;
EE is the amount of the Employee Entitlements as at the Completion Date; and
CT is the income or company tax rate applicable to the Vendor as at the date of this contract.” (highlighting in the original)
9 The figure to be applied as the “CT” for the purposes of calculating the Employee Entitlements was 30 per cent, being the company tax rate.
10 The term “Employee Entitlements” is defined by clause 29 of the contract to mean:
“all accrued entitlements of the Transferring Employees in respect of annual leave (including any loadings) and long service leave accruing in respect of service of seven years or more.”
11 The term “Transferring Employees” means:
“the Employees who accept the Purchaser’s offer of employment referred to in Clause 18.2”.
12 The amount of the employee entitlements as at the completion date, which was 1 July 2010, was $371,433. This sum was deducted from the purchase price paid at settlement. In accordance with the application of clause 18.8, the adjustment to the purchase price that should have been allowed in favour of the purchaser was $111,430 in accordance with the CT figure of 30 per cent, whereas the purchasers were allowed the sum of $371,433 by way of a reduction in, or adjustment to the purchase price. This amount is the result of applying the figure of 100 per cent and thereby allowing the purchasers all of the employee entitlements outstanding at 1 July.
13 The difference between those sums is the amount of $260,003. That is the amount for which the plaintiff sues. It was accepted by the parties to be the amount owing by the purchasers to the vendor by the application of the terms of clause 18.8.
14 A dispute arose between the parties, that flared particularly in the last few days before settlement, as to whether clause 18.8 should be applied in the calculation of the purchase price. The plaintiff’s case is that it completed the sale but reserved all of its rights under the contract. In a letter of 30 June 2010, its solicitor, Mr Harry Silver, informed the defendants’ solicitor, Mr Leon Davis, that his instructions were to proceed to settlement, allowing the sum of $371,433 as an adjustment in favour of the purchasers, but reserving all the vendor’s rights.
15 The defendants’ defences were three-fold. First, that the contract was entered into by the plaintiff and defendants by mutual mistake; alternatively, it was entered into by the defendants by unilateral mistake, insofar as it provided for the purchase price for the business to be adjusted in accordance with the formula set out in clause 18.8, ie by the factor of 30 per cent, rather than by the full amount of the vendor’s liability for employee entitlements. The contract should be rectified on the basis of common or unilateral mistake to provide for an adjustment of the full amount of the employee entitlements rather than 30 per cent of those entitlements.
16 The purchasers were given leave, during the trial, to file a counterclaim seeking orders for rectification.
17 Second, the contract was varied by the parties on 1 July 2010, the settlement date, so as to provide for the purchase price of the business to be adjusted down by the full amount of the vendor’s liability for the employee entitlements; or alternatively, so as to provide for the plaintiff and defendants to negotiate, after the settlement, the provisions of clause 18 of the contract in good faith.
18 Third, the plaintiff is estopped from denying that it was obliged to allow an adjustment to the purchase price for the business of the full amount of the liability for the employee entitlements.
19 A further defence relying on the merger of rights upon settlement was not pursued.
20 The following persons gave evidence on behalf of the vendor: Mr Harry Silver, the vendor’s solicitor, Mr Barry Harvey, the managing director of the vendor, and Mr Philip Salamone, the vendor’s financial controller.
21 The persons who gave evidence on behalf of the purchasers were their solicitor Mr Leon Davis, Mr Raymond McKenna the financial controller of Melrina Pty Ltd, Mr Gary Stone a director of Zerso Pty Ltd and the managing director of the Melrina Group, who lives in Sydney, and Mr Benjamin Barwick a director of Tanduna Pty Ltd, who is the general manager of the meat trading business and a director of the cold storage business and who lives in Victoria.
22 The Melrina group of companies purchases meat from abattoirs and then sells it. It is primarily a meat wholesaling operation with a boning room in Sydney, where its head office is located. Other companies in the group are located in New South Wales, Victoria and South Australia. Another Sydney business of the group supplies portion cut meat to the hospitality industry.
23 Mr Davis has been a solicitor since 1982 and conducts a legal practice in Sydney, employing a secretary and a para-legal. He gave evidence that his central vision is not good and he has some difficulty reading small type.
The events prior to the execution of the contract
24 In late 2009, the parties agreed to enter into the transaction for the sale of the land and business for a total price of $15 million.
25 Mr Silver, the vendor’s solicitor, gave evidence that the contract was in the form of a Law Institute of Victoria Sale of Business Contract and a contract obtained from a computer system called LEAP. He also referred to a New South Wales Law Society contract that contained a similar clause to Clause 18.8.
26 The contract carries the following wording on its cover sheet:
“Standard form of contract prescribed by the Estate Agents (Contracts) Regulations 2008”.
27 No rationale was given for the adoption of the amount of 30 per cent in clause 18.8. Mr Silver was not aware of any other sale of business transaction in which the contract included a clause in the terms of clause 18.8.
28 Mr Davis gave evidence that he had never been involved in a contract where the employee entitlements have been adjusted in the way that this clause provides.
29 Mr Silver gave evidence that he received instructions from Mr Harvey and Mr Unglik, the directors of the vendor. However, Mr Harvey and Mr Unglik had fallen out in 2009 and rarely spoke to each other. Mr Silver also was in frequent contact about the sale with Mr Salamone, the financial controller of the vendor.
30 Mr Davis, the solicitor for the purchasers, mainly received his instructions from Mr McKenna, the financial controller of the purchasers.
Meeting of 4 May 2010
31 The purchasers contended that on 4 May 2010, at a meeting in the board room of the Laverton North premises attended by Mr Harvey, Mr McKenna, Mr Stone and Mr Barwick a number of operational issues affecting the cold store business, including the issue of the employee entitlements were discussed. They contended that agreement was reached:
(a)that the employees of the business would have their contracts of employment terminated by the plaintiff and be immediately re-employed by the defendants;
(b)the defendants would assume the plaintiff’s liability to pay the employee entitlements as at the date at which the employees were re-employed by the defendants;
(c)the purchase price for the business would be adjusted down by the full amount of the liability for the employee entitlements.
32 At the 4 May meeting, Mr Stone said that he preferred that the employee entitlements be paid out by the vendor and that the purchasers start with a clean slate. Mr Harvey, who was to work for the purchasers for a time, expressed a preference for the purchasers to assume liability for employee entitlements and that the amount of those entitlements be deducted from the purchase price. By this means, ongoing employees would have some annual leave entitlements, which they might use if, for example, they had pre- planned holidays for dates in the near future. If they had been paid out their annual leave entitlements they would not have been able to take such holidays as paid leave.
33 Mr Harvey had little recollection of the meeting of 4 May. He accepted that he probably discussed the issue of employee entitlements with Mr Stone. However, the evidence of such discussions that he could give generally confirmed the evidence of Mr McKenna, Mr Barwick and Mr Stone. In cross-examination in answer to the question:
“Q- What was agreed between you subject of course to going away to talk to the lawyers was that the purchaser would take on the obligation to pay and be reimbursed by you for that. That was the gist of it, wasn’t it?”
Mr Harvey replied:
“A- Probably, yes[1].”
[1]Transcript (“T”) 154
However he also gave the following evidence:
“Q- In a negotiation with you you’d agreed 15 million as a price, there’s a liability that he said, ‘I want you to pay it out.’ 400,000 let’s just call it that as a round figure. You tell him, ‘No, I don’t want you to pay it out, I want you to take it on for operational reasons.’ You’re not saying ‘I want you to pay me an extra 400,000’ are you?
A- I don’t think the way that it was to be paid out was even discussed on that, it was just an operational thing. I don’t think that was even brought into the question[2].”
[2]T 154
34 When the purchasers’ account of the 4 May meeting was put to him, Mr Harvey sated:
“I said before I don’t remember having that meeting but I not saying we didn’t have it[3].”
[3]T 154 -155 cf 127
35 I prefer the evidence of the purchasers, Mr Stone, Mr Barwick and Mr McKenna, in respect of the meeting of 4 May to that of Mr Harvey, who appeared to have a limited recollection of it.
36 However, I am not satisfied that an agreement in respect of the amount of the employee entitlements for which each party was to be responsible was reached at the 4 May meeting. Rather, the parties agreed to discuss the matter further after consulting their lawyers and advisors.
Events after 4 May 2010
37 In early May, Mr Silver sent Mr Davis a draft contract for the sale of the business. It included clause 18.8.
38 On 6 May, Mr Davis wrote to Mr McKenna and Mr Stone informing them that he had received a draft agreement for the sale of the business and setting out his review of its “primary terms”. His letter included the following:
“Clause 18 relates to arrangements to be made in respect of transferring employees and I will review this to you once we obtain details.”[4]
[4]Exhibit 4
39 Mr Davis gave evidence that before he sent the letter of 7 May he had a conversation with Mr Silver in which he said words to the effect:
“Harry, the contract is wrong. There should be no adjustment. …There is to be a full adjustment of employee entitlements …The clause, to me, does not make sense[5].”
Mr Silver replied:
“I agree. We normally don’t use it. It’s a standard Law Institute of Victoria clause which nobody uses because it does not make sense[6].”
[5]T 255 L10-11 and L21-23
[6]T 255 L 23 -26
40 Counsel for the vendor objected to this evidence because it had not been put in cross-examination to Mr Silver. In the circumstances, I place little weight on this evidence.
41 On 13 May, Mr Davis emailed a letter to Mr Silver, stating inter alia:
“My client will require the Business Sale Agreement to provide a list of employees and confirmation that your client will be liable for all employee entitlements.”
42 Mr Silver understood that Mr Davis was seeking his confirmation that the vendor would be liable for all employee entitlements.
43 In a file note of 14 May, Mr Silver recorded details of a telephone conversation with Mr Davis, including the following note:
“- List of employees
He wants all entitlements paid
That’s in order.”
44 Mr Silver made file notes of a number of conversations, including those held with Mr Davis, Mr Harvey and Mr Salamone. Mr Davis did not make such file notes. There was no significant issue as to the accuracy of Mr Silver’s file notes. They were referred to at trial. I set out in these reasons a number of the file notes as an accurate summary of the substance of particular conversations.
45 Mr Silver’s file note of a conversation with Mr Salamone on 19 May recorded that Mr Harvey did not want the employee entitlements paid out. This reflected his concern that employees should retain some leave entitlements. Mr Silver was concerned that that course would leave the vendor with some exposure.
46 On 20 May, Mr Silver sent an email to Mr Davis attaching an inventory of assets, an employee list and leave entitlements forecast. The email included the following:
“Whilst my client will be liable to pay all wages and accumulated annual leave entitlements to the date of settlement, this will not be the case in relation to long service leave. I refer to the terms of the draft contract and standard commercial practice in this regard. My respectful opinion is that our clients’ respective accountants discuss these aspects if any clarification is sought.”
47 Mr Silver accepted that this statement concerning the contract was incorrect in that he was mistaken in his interpretation of the effect of clause 18.8 in relation to the responsibility for payment of annual leave entitlements.
48 On 20 May, Mr Harvey spoke with Mr Silver about his concerns that the effect of termination of the contracts of the employees may trigger an obligation to pay them redundancy payments.
49 On 20 May, Mr Davis sent an email to Mr Silver stating:
“I note that your client, on settlement, will be liable to meet all employee entitlements, including sick leave entitlements, other [than] long service leave entitlements. In relation to long service leave entitlements I am instructed that my client will assume liability for those entitlements on settlement however your client is to in fact pay to my client an equivalent sum. As those entitlements have not yet been calculated I suggest that on settlement my client make payment to your client of the following sums:
(there was then specified amounts, which totalled $15 million for the land, value of equipment and the value of the business).
I would appreciate your confirmation that this dissection of purchase price is in accordance with your client’s instructions.”
50 On 27 May, Mr Davis wrote a letter to Mr Silver which included the following paragraph:
“Please confirm that your client agrees that my client will assume liability for all employee entitlements on Settlement and that it will provide to my client on Settlement a cheque in respect of its proportion up until Settlement.” ( Emphasis in original)
51 Mr Silver’s file note of a conversation with Mr Davis on 27 May stated in part:
“He again advises and apologises that contracts can’t be exchanged tomorrow.
Requests amended contracts. I will await requested changes.
He has received my e-mails.
…
He also wants provision re adjustment of entitlements.”
52 On the same day, 27 May, Mr Davis wrote to Mr Stone and Mr McKenna setting out what was required in order to exchange contracts and enclosing copies of each of the contracts. He stated that they remained incomplete as they did not contain the purchasers’ names and the consideration.[7]
[7]Ex D
53 On 28 May, Mr Harvey, as managing director, wrote to all employees of the vendor, stating:
“Firstly I would like to thank you for your support of our Company whilst you have been employed by Austco Enterprises Pty Ltd.
You are aware of the change in ownership of our Company and you have met the new owners, Garry Stone and Ben Barwick who have reiterated that the transition of the business will be as seamless as possible.
On the 30th June 2010 your position with Austco Enterprises T/A Polar Cold Storage will be terminated, similarly you will be offered employment by the new owners and all your entitlements will be transferred to them.
Your current position will be maintained in line with our Workplace Agreement.
We look forward to the continuing success of Polar Cold Storage.”
54 On 31 May Mr Barwick sent a letter to all employees stating:
“As you have all been made aware, there will be a change of ownership at Polar Cold Storage effective from 30th June 2010. The new business will be trading under the name of Austco Polar Cold Store and will commence trading on 1st July 2010.
Subject to Exchange of Contracts we would like to formally offer you with Austco Polar Cold Store under the same terms and conditions of your existing employment. Your existing positions will be maintained in line with the current Workplace Agreement that is in place and all of your existing entitlements will be transferred and honoured by the new business.
We have endeavoured to make the transition of the new business as seamless as possible and we look forward to working with everyone and continuing the success of Austco Polar Cold Store.”
55 On 2 June, Mr Davis wrote to Mr Silver stating inter alia:
“I note your comments in relation to the finalisation of both Contracts. At this time my client requires no amendment to either Contract subject to the additions that have been discussed in previous correspondence.
I would be obliged [if] you would forward to me complete copies of the Contracts at your earliest opportunity in order that they may be reviewed and the Land Contract be forwarded to our Victorian Agents. It would be appreciated if you would also provide me with any Statements or Disclosure Forms relevant to these Contracts.”
56 On Friday 4 June, Mr Silver sent Mr Davis an amended draft Contract of Sale of Business for his consideration. It contained amendments which had been requested. It included clause 18.8. Mr Davis replied:
“Thanks Harry I’ll get back to you shortly.”
57 Mr Davis gave evidence that he read the amended draft contract, that he saw that clause 16.4 had been deleted and that he did read on past that deletion. He gave evidence that he was: “well aware that clause 18.8 was still there”[8].
[8]T 313
58 On 8 June, Mr Davis wrote to Mr Stone and Mr McKenna enclosing the draft amended Contract of Sale of Business received from Mr Silver, and stating:
“I note that neither the Contract for Sale of Land nor the Contract for Sale of Business can be completed until the valuations of the land plant and equipment are valued. I understand that your valuations will be received later this week.
7 Employee entitlements are to be transferred on completion. Please confirm that this correct.” ( emphasis in the original)
59 Mr Davis’ evidence was that he intended in his letter of 8 June to convey to Mr McKenna that “that is all I can give you at the moment until we get Harry Silver to make an amendment.” He denied that his letter was referring to clause 18.8. He considered that the clause meant that the purchasers would receive a cheque and assume the liability. By this he presumably meant, that in exchange for the transfer of liability for employee entitlements, the purchasers would receive a cheque for the entitlements for which liability was assumed.
60 Mr McKenna received the draft contract while on holidays in Tahiti and did not read it properly or at all. He relied on Mr Davis.
61 On 9 June, Mr Silver sent Mr Davis an email referring back to his email of 19 or 20 May and attaching a further copy of the employee information schedule, which was entitled “Leave entitlement – forecast”.
62 On 10 June, Mr Silver emailed Mr Salamone asking him to commence calculating adjustments of employee entitlements, rents and other adjustables as at 30 June. The email included the following:
“You will note from the sale of business contract that an allowance in favour of the purchaser in relation to long service leave entitlements need only be made in respect of those employees in the service of Austco Enterprises Pty Ltd for a period exceeding 7 years (refer to the definition of Employee Entitlements in clause 29).”
63 On 11 June, Mr Silver sent Mr Davis a further draft contract of sale of business with mark-ups. It again contained clause 18.8.
64 Mr Davis gave evidence that he had a number of conversations with Mr Silver during that period and that he understood that Mr Silver had agreed, or had been instructed by his client to agree, that the vendor would make an allowance to the purchasers of the full amount of the employee entitlements.
65 Mr Silver, in giving evidence, agreed that he did not reply to letters from Mr Davis, such as the letter of 20 May, that showed, from his perspective, that Mr Davis misapprehended who would be liable for employee entitlements.
66 Mr Silver agreed that it was common for a vendor to pay all employee entitlements on the sale of a business. However, he said that Mr Davis did not send him any proposal for amendment of clause 18.8.
67 On 15 June, Mr Silver sent Mr Davis “a final draft of the contract of the sale of business”. Mr Davis sent it to Mr McKenna.
68 On 15 June at 8:10 am, Mr Silver had a telephone conversation with Mr Davis. His file note of the conversation stated:
“Land valuation $13.3 m
Business $ 1.7
Approves contracts
Finalise considerations and contracts and send to Peter Lumb”
69 Mr Silver regarded Mr Davis’ comments in this conversation as providing his approval of the contract in a form that included clause 18.8. Mr Davis said that his recollection of the conversation was vague. He understood that the parties were going to talk about the employee entitlements before the execution of the contracts, but he agreed that he had no evidence that he could point to say that that was the case.
70 On 15 June at about 11.35 am Mr Lumb of Nevett Coutt lawyers, who were Mr Davis’ Melbourne agent, rang Mr Silver and suggested an amendment to special condition 4.4. Mr Silver apparently agreed to that amendment.
71 Mr Davis spoke to Mr Silver a second time on 15 June stating, according to Mr Silver’s file note, that his clients were “not at all happy with breakdown of consideration, ”because they were given to understand that they could obtain their own valuation”.
Exchange of contracts
72 The contracts were signed and exchanged later on 15 June at a meeting at Mr Silver’s office in Elsternwick, attended by Mr Harvey, Mr Unglik, Mr Barwick, Ms Barwick, Mr Stone, Mr McKenna and Mr Lumb. The contract for the sale of business was signed by Mr Harvey and Mr Unglik as directors of the vendor, by Mr and Ms Barwick as directors of the purchaser Tanduna Pty Ltd and by Mr Stone as director of the purchaser Zerso Pty Ltd. A deposit of $100,000 was paid in respect of each contract.
73 At the meeting, Mr Silver went through the points of the contract, but the evidence suggests that he did not mention clause 18.8 or its operation. The spelling of the name Tanduna (the first defendant) was corrected. The parties then signed the contract.
74 Mr Stone said that he did not read the contract before signing it. He thought that the deal that he had made with Mr Harvey would be contained in its terms. He had no idea that the contract provided that the vendor would pay only 30 per cent of the employee entitlements was in the contract.
75 Mr Barwick gave evidence that he did not read clause 18.8 and was not aware of its operation until 29 June.
76 Mr Davis’ evidence was that he knew at the date of settlement that the contract contained clause 18.8. He had been waiting for a new version of the contract after he and Mr Silver had agreed that it would be “a full entitlement transfer” but it never came[9].
[9]T 260
77 Mr Davis’ evidence was that he had to send the contracts to his clients in Sydney and Victoria and to his Victorian agents for exchange and:
“it all happened without the new contract arriving from Harry Silver and it was an oversight that that clause was not deleted[10].”
[10]T 260
78 Mr Davis gave evidence that his instructions had always been that the vendor would give an allowance of the full employee entitlements. He said that the contract should have been changed to provide for an allowance to the purchasers of the full amount of the employee entitlements. He accepted responsibility for the fact that it was not so changed.
Events after the execution of the contract
79 On 16 June, Mr Davis wrote two letters to Mr Stone and Mr McKenna concerning the contracts that had been exchanged. One of those letters included the following paragraph:
“3. On Completion an adjustment will be allowed by the Vendor to the Purchaser in respect of Employee Entitlements existing as of the date of Completion. The Purchaser will be responsible for Employee Entitlements after the date of Completion.”
80 Mr Davis gave evidence that he first realised that the executed contract contained clause 18.8 in its original form when he first received the settlement adjustments from his Victorian agent.
81 Mr Salamone gave evidence that up to 28 June, as far as he knew, the employee leave entitlements were going to be transferred to the purchasers and there was to be an adjustment in accordance with the contract. After the exchange of contracts he provided information to Mr Silver that he required for settlement and for the preparation of the statement of adjustments.
82 When Mr Davis received the statement of adjustments, he asked Mr McKenna if his instructions had changed. Mr McKenna told him that they had not and that the purchasers required the full adjustment of employee entitlements by an allowance at $371,000 and a consequent reduction of the purchase price. Mr Davis then telephoned Mr Silver and told him that the figures were wrong, that Mr Silver had agreed that there would be a “full adjustment” and requested an amended statement of settlement adjustments[11].
[11]T 261 -262
83 On 29 June, Mr Silver sent an email to Mr Davis enclosing in an attachment the following:
“1. Prepayments expenses schedule. 2. Adjustment of employee entitlements. 3. Schedules (3) of employee entitlements.”
The email stated in respect of employee entitlements:
“My client’s accountant (in-house) has calculated the adjustment of employee entitlements in accordance with the terms of the contract. Should any further adjustment be necessary, then the parties will no doubt deal with this after settlement. I await your advices in the meantime.”
84 The attachment containing a Leave Entitlement Summary dealt with Annual Leave, Personal Leave and Long Service Leave. Its forecast of the value of the leave entitlements as at 30 June 2010 was $371,433 and 30%, or the company tax rate of that figure, produced an “adjustment per clause 18.8 of Sale of Business Contract” of $111,430 in favour of the purchasers.
85 Mr McKenna saw the Statement of Adjustments on 29 June. He gave evidence that he then read clause 18.8 for the first time. He stated that the settlement would have been “stymied” if the purchasers had to pay the extra $260,000[12]. He was aware that the vendor was reserving its rights to negotiate about the payment of employee entitlements.
[12]T 343
86 Mr McKenna spoke with Mr Stone soon after he received the statement of adjustments on 29 June. They telephoned Mr Harvey who according to Mr McKenna, agreed with them that the full entitlement of $370,000 should be in the schedule; ie as an allowance to the purchasers. He told them that he would get the issue of the employee entitlements sorted out.
87 Mr Harvey gave evidence that he first knew that clause 18.8 provided for the purchasers to receive only 30 per cent of the employee entitlements when it was raised a couple of days before settlement. He did not read clause 18.8 and still had not read it when he gave evidence at the trial.
88 Mr Barwick was not aware of clause 18.8 until he received a telephone call on 29 June from Mr McKenna. He gave evidence of a conversation with Mr Harvey on 29 June, after Mr McKenna had rung and told him that there was an issue with employee entitlements, in which he said to Mr Harvey:
“I hear that, you know, you’ve had a discussion regarding employee entitlements.”
Mr Harvey replied:
“Yes, don’t worry. What’s in the contract was not what we agreed. We’ll get it fixed”.
89 Mr Barwick gave evidence that Mr Harvey said that he had spoken with his accountant, who had said that:
“what was in the contract was incorrect anyway and the deduction that should have been allowed was 70 per cent of the employee entitlements, should have been what we would, as a purchaser – so there was going to be 30 per cent. Basically the 111,000 should have come off the purchase price and we would get 260,000.”
He said:
“so what was in the contract was incorrect, but don’t worry about that. That’s incorrect. We’ll get it fixed up as to what the agreement was.”[13]
[13]T 417- 418
90 Mr Harvey gave evidence that he would not have said that. But he also said that he didn’t remember Mr Barwick coming into his office to talk about the issue of employee entitlements and that:
“But I’m not saying that he didn’t but I honestly can’t remember.”[14]
[14]T 161
Settlement of the contracts
91 Settlement of the contracts was fixed for 30 June, but it was postponed to the following day. However a number of significant communications occurred on 30 June.
92 On 30 June at 8.15 am Mr Davis telephoned Mr Silver and according to his note, queried the deduction of 30 per cent of employee benefits Mr Silver informed Mr Davis that this was not a deduction but the formula applied by the contract in achieving the adjusted purchase amount. Mr Silver gave evidence that this was the first time that he had heard of the issue about the 30 per cent.
93 Mr Davis spoke with Mr Silver again by telephone at 10.35 am about the handing over of leases and licences. According to Mr Silver’s note of the conversation, at that point, “all believes cheques will be drawn and settlement effected as arranged”.
94 Mr Silver gave evidence that he was concerned about the windfall the purchasers would receive if some of the employee entitlements did not have to be paid. That might occur if the company went into liquidation, or there was an incorrect listing of an employee, or if an employee died. His references in correspondence to reservation of rights and negotiations concerning the provisions of clause 18.8 in good faith, with mediation before any litigation were better alternatives than exercising a right to rescind if the matter had not settled. Mr Silver was concerned to preserve the settlement.
95 There were a number of emails exchanged between the lawyers on 30 June concerning the calculation of adjustments for prepayment of liabilities. There were also communications about the calculations in the Statement of Adjustments prepared by Nevett Ford and about the amount of cheques required at settlement. During the morning of 30 June, Nevett Ford sent a number of versions of the Statement of Adjustments to Mr Silver.
96 At 12 .56 pm, Mr McKenna emailed Mr Salamone, stating:
“Can you please advise Harry that the wage entitlement is $371,433 and not $111.430.”
97 Mr Salamone gave evidence that he told Mr Silver that the purchaser wanted to adjust the full amount and not just the tax effect, presumably meaning the amount of the tax deduction that would be obtained. Mr Silver told him to talk to the vendor’s accountant, Mr J Kalb. Mr Salamone sent Mr Kalb an email with details of the settlement and the contract.
98 Mr Salamone gave evidence that the directors of the vendor were keen to settle. He spoke to Mr Unglik and mentioned Mr McKenna’s email. Mr Unglik said that they, ie the vendor, had to settle.
99 Mr Silver advised Mr Salamone to speak to Mr McKenna and tell him that the vendor would allow $371,000 for the adjustment of employee entitlements, but reserve the right to negotiate about clause 18.8 after settlement.
100 Mr Salamone rang Mr McKenna. He believed that in that conversation, he received his acceptance to the following arrangement:
“That we would settle, that the vendors would allow the 371 subject to negotiation of clause 18.8 after settlement of the contract”.
He explained his approach as:
“it was my understanding that John Unglik wanted to settle and it had been going on for a very long time. I think John Unglik’s words to me were, ‘I’m not going to give up a $15 million contract for $300,000. I think let’s try and settle.”[15]
[15]T 200
101 Mr Salamone gave evidence that he sent an email to Mr Silver confirming that the purchasers and the vendor had agreed to allow the $371,000 conditionally and “that clause 18.8 would be still open to negotiation and settle it after the contract[16]”.
[16]T200
102 A few minutes later, Mr Harvey rang Mr Silver and informed him that he had spoken to Mr McKenna about employee entitlements. Mr Silver’s file note records that Mr Harvey informed him that Mr Salamone was convinced that the price had been adjusted as per the contract. It also recorded:
“Barry shares Ray’s discomfort about the allowance.
I note the contract provision is a general, not special, condition. Obviously accepted universally; i.e. there must be some logical accounting rationale. If any concession is made, it is a commercial, not a legal decision as the contract is ‘clear’. The position has been accepted by Leon Davis & Peter Lumb.
Philip will speak to Joe Kalb on the issue.”
103 Mr Harvey said that he did not understand Mr McKenna’s concern. He said that Mr Silver’s advice was to settle on the basis of the vendor allowing the full amount of the employee entitlements and reserving its rights.
104 At 1.25 pm, Mr Harvey rang Mr Silver to inform him that the vendor would settle on the basis of allowing accrued employee entitlements in full: ie in the sum of $371,433. Mr Silver’s file note then states:
“However we reserve all our rights.
I query what will occur if some entitlements not realised.
His advice from Joe Kalb is that accrued entitlements are to be allowed in full.
John Unglik confirms that the accrued employee entitlements will be allowed in full.”
105 At 1.34 pm, Mr Salamone emailed Mr Silver, with a copy to Mr McKenna and others stating:
“Purchaser and Vendor have agreed to make an amendment to the Adjustments Statement as follows.
1 Employee Entitlements. Vendor allows $371,433.
This change to the contract is subject to review of clause 18.8, by both Vendor and Purchaser, after settlement today 30/6/10.
We agree with other adjustments on your Statement of Adjustment.”
106 Mr Silver gave evidence that his understanding was that it was the adjustment of employee entitlements that was being changed and not the contract. There would be a review of the provision following settlement so that it would not be held up.[17]
[17]T 51
107 At 1.35 pm, Mr Davis rang Mr Silver and, according to Mr Silver’s file note, stated that he was instructed that his client was always under the impression during negotiations that accrued employee entitlements would be allowed by the vendor in full. The parties had, in any event, agreed on a full allowance. Mr Silver’s file note states that his instructions were that the allowance would be reviewed post-settlement. He again noted that the condition was a general condition, not special, and that it was uncertain what was to happen to any parts of the allowance for employee entitlements which might prove to be a windfall. Mr Davis acknowledged that these were substantial issues, and stated that he would recalculate cheques to his clients after deducting a further $260,003 from the business contract.
108 At 1.57 pm, Nevett Ford sent a statement of business adjustments to Mr Silver, providing that the vendor allowed the sum of $371,433.00 for employee entitlements.
109 At 1.59 pm, Mr Silver emailed Mr Davis, stating as follows:
“I am instructed to proceed to settlement of the sale of business agreement on the basis that the entire Employee Entitlement of $371,433.00 be allowed to your clients today subject to the following observations and/or conditions:
1Following settlement, the parties are to negotiate the provisions of Clause 18.8 of the Contract in good faith. In default of agreement, I suggest the plaintiff refer any disagreement to mediation before embarking on litigation.
2My client does not agree that it is obliged to allow the Employee Entitlements other than in accordance with the Contract.
3In claiming the total amount (which has not crystallised as a liability) your client has not even suggested a programme for reimbursing any amounts in respect of which any employee loses or foregoes his/her entitlement. By this omission, your client is indicating an intention to benefit from any windfall. Is that correct?
4The concession is available today only. If settlement of the land and business contracts is not effected today at the appointed time, then the position will revert to that which is strictly in accordance with the terms of the contract. Having said that, the allowance is not to be treated as absolute, but subject to the conditions stipulated in this communication and to ensure that settlement is effected today rather than failing to do so as a consequence of this issue being in dispute, which it is.”
110 Mr Harvey, Mr Unglik, Mr Salamone and Mr Lumb were copied into the email Mr Harvey said that he did not take much notice of it.
111 Mr Davis did not recall Mr Silver specifically stating that there would be a reservation of rights. However he agreed in cross-examination that he understood that Mr Silver was seeking to reserve rights, and that he understood that concept.
112 At 2.04 pm, Mr Silver emailed Mr Unglik, Mr Harvey and Mr Salamone, stating:
“Please confirm the attached adjustments in writing to enable me to proceed to settlement. In the absence of your reply within 15 minutes, I will proceed to settlement on the basis that you have agreed … .”
113 Mr Davis spoke to Mr McKenna by phone and told him that once settlement occurred, the terms of, or rights under, the contract merged.
114 At 2.08 pm, Mr McKenna replied to Mr Davis, who had forwarded Mr Silver’s email of 1.59 pm to him, stating, in respect of that email:
“Agreed, we will negotiate tomorrow with the Vendors.”
115 At 2.10 pm, Mr Davis rang Mr Silver in response to his email of 1.59 pm. Mr Silver’s file note of the conversation included the following:
“His client doesn’t agree with the conditions in my email. There is not even a suggestion that any lost entitlements will be reimbursed.
The parties are discussing the issue tomorrow.
I am disappointed there is not even the offer to reimburse lost entitlements.
I reserve my client’s rights. He will email cheque details to me tomorrow.”
116 At 2.21 pm Mr Harvey responded by email to Mr Silver, stating:
“Harry, please proceed as per this instruction.”
117 Mr Harvey stated that his understanding was:
“That we would sign the contracts as per the day – oh sorry, not the contract, settle on the day and any other entitlements would be left to- and I said this to Gary and Ray and Ben and with Philip there on the – that we all wanted to sign. We wanted – they wanted to purchase, we wanted to sell, lets sign them and I said, ‘Leave it to the accountants and the lawyers to sort it out,’ and that was my comment and we went on to other operational matters.’[18]
[18]T 140
118 Mr Harvey in this answer confused the signing of contracts with the settlement of them. He stated that his understanding was that there would be further negotiations after the settlement of the contract.[19]
[19]T 143
119 Settlement was put over to the following day, 1 July, because the purchasers’ cheques were not ready for the settlement. Mr Silver informed Mr Davis at 4.50 pm, stating:
“At your request, I have succeeded in re-arranging settlement for tomorrow at midday.
As advised I reserve all my client’s rights. At the time of writing I am awaiting further instructions.
Please advise whether you have sought and obtained instructions in relation to the adjustment of employee entitlements. I understand this matter will be canvassed directly by the parties.” (highlighting in the original)
120 Mr Davis advised his clients to settle while leaving the question of clause 18.8 unresolved, as there would be less possibility that the transaction could be re-opened.
121 Mr Stone gave evidence that on 30 June he rang Mr Harvey and said “we need to sort this out Barry, we’ll meet in the morning”.[20]
[20]T 386
122 A file note of a conversation between an unnamed employee of Nevett Ford and an unnamed person, who was probably Mr Davis, was in evidence. It stated:
“Will adjust whole amount ie $371,433 - parties have agreed for purposes of settlement but will prob be disputed later.”
123 At 4.52 pm, Mr Salamone emailed Mr Silver and Mr McKenna, with copies to Mr Kalb, Mr Harvey and Mr Unglik, enclosing spreadsheets, and stating:
“As per your advice from Joe Kalb @ Lowe Lippmann accountants, the tax benefit of 30% should be deducted from the leave entitlements adjustment. Please review and comment.”
124 Mr Stone gave evidence that he thought that the deal that he had reached with Mr Harvey was reflected in the terms of the contract. When in late June, Mr McKenna was looking at settlement figures that Mr Davis had forwarded, he learnt the terms of the contract relating to employee entitlements. He telephoned Mr Harvey and said, “Barry, this doesn’t reflect the deal that we did”. Mr Harvey said, “Don’t worry, speak to Harry Silver and get it fixed up[21].” Mr McKenna gave evidence that Mr Harvey:
“concurred with us that yes, we were right, the 370 was the entitlement and that was the amount that should be in the schedule” and
“that he would get it sorted out[22].”
[21]T 385
[22]T 339-340
125 Mr Harvey denied that he told Mr Stone and Mr McKenna that he would sort it out so that they got 100 per cent of the employee entitlements[23].
[23]T 160
126 Mr McKenna also gave evidence that, on 30 June when Mr McKenna showed him Mr Silver’s email of 1:59 pm, he didn’t quite understand it because he had a lot of faith in Mr Harvey. He telephoned Mr Harvey and said: “We need to sort this out, Barry” and “we’ll meet in the morning [24].”
[24]T 386-387
127 Mr Harvey said that he had little memory of the events of 30 June[25]. He gave the following evidence in cross-examination:
“Q- So your evidence is that you don’t recall the issue of employee entitlements being raised at all on 30 June by the purchasers?-- I honestly can’t recall on that – I don’t know. I don’t remember.”[26]
[25]T 167 -170
[26]T173
128 At 7.30 pm Mr McKenna replied to Mr Salamone stating:
“What about if there is a loss – which will be the case in the first year at least – then there is no tax benefit.
This does not assist the future cash flow of the new entity.
Maybe the best alternative is for Austco Enterprises to pay entitlements and all employees start from scratch?
We can discuss in the morning.”
Events on 1 July 2010
129 There were a number of emails exchanged between the solicitors for the parties on the morning of 1 July about matters requiring attention in order for the settlement to occur, but not of relevance to the question of employee entitlements.
130 The representatives of the vendor and purchasers, Mr Stone, Mr McKenna, Mr Harvey, Mr Barwick and Mr Salamone met at the Laverton North premises at about 10.00 am on the morning of 1 July. The meeting had previously been arranged when the settlement was intended to occur on 30 June for the purpose of discussing operational matters.
131 Mr Stone’s evidence was that when he arrived at the boardroom, he was angry about the employee entitlements issue. When he met Mr Harvey he said:
“What the hell’s this all about? We’re going to end up bad friends about this, Barry. We’re better off going into the original where you pay all the entitlements out and do it that way, it’s cleaner.”
Mr Harvey replied:
“Don’t worry, you’ve got your money[27].”
[27]T 387 and 395
132 Mr Stone’s evidence was that if Mr Harvey had not agreed to make an allowance of the whole of the employee entitlements to the purchasers he would have stopped the settlement[28]. He did not ask Mr Harvey to put his statement in writing because he trusted him. He shook hands with Mr Harvey at the end of the meeting and went back to work.
[28] T 387- 388
133 Mr Barwick’s account of the meeting was that Mr Stone said to Mr Harvey:
“It’s not what we had agreed on. Let’s not fall out over this. Let’s not become bad friends.”
Mr Harvey replied:
“Don’t worry. You’ll have your money. You’ve got your money[29].”
[29]T 418-419
134 Mr Barwick left the meeting believing that the issue had been resolved[30].
[30]T 419
135 Mr McKenna gave evidence that Mr Stone and Mr Harvey had been speaking on the way into the meeting and as the persons present sat down he heard Mr Harvey say: “well you’ve got your money haven’t you[31].” He gave evidence that settlement went ahead on the basis that the full employee entitlements would be paid by the vendor to the purchasers, ie as an adjustment to the purchase price.
[31]T 344 and 372
136 Mr Harvey denied making that statement[32]. His evidence of the meeting was that he said:
“we’d settle and it would be negotiated whatever the entitlements were by the legal and accounting people[33].”
[32]T 178 cf T 142
[33]T 177
137 For reasons given below, I do not place much weight on Mr Harvey’s recollection of events.
138 Mr Salamone initially gave evidence that he did not recall what was said between Mr Harvey and the purchasers, but also said that he could recall that “we reserved our rights and left it at that[34].” He had received legal advice not to speak about that issue. He said that he did not recall Mr Harvey say words to the effect “you’ve got the money”, but said that it was not unlike Mr Harvey “to say those kinds - to have that turn of phrase[35].”
[34]T 210
[35]T 238
139 I do not regard Mr Salamone’s evidence as contradicting Mr Stone’s evidence of his conversation with Mr Harvey.
140 Mr Salamone’s summary of the meeting was sent in an email at 2.05 pm to Mr Kalb, Mr Harvey, Mr Unglik and Mr Silver. It stated:
“We’ve had a meeting with the purchasers regarding this issue this morning. Present from Melrina were Gary Stone, Ray McKenna and Ben Barwick. From Austco BH and PS. Ray commented that we would be taking a tax deduction for the employee entitlements - which I refuted as it’s my understanding that in tax accounting, entitlements paid are a tax deduction not those accrued. Nonetheless, I advised that, vendors had conceded the $371K for settlement today, subject to review of clause 18.8 of the sale of business contract. There was tacit agreement, with the additional issue being raised by the purchaser of that fact that in this scenario, the purchaser would be up for additional payroll tax, workcover and superannuation costs. They also admitted not fully understanding/ realising these issues at the time of signing the contract. Didn’t respond to this. I simply stated that, post settlement today, the issue of accounting for employee entitlements, per Cal 18.8, would be dealt with by the parties to the contracts and settled by mutual agreement.
The rest of the meeting was taken up with discussing future operational issues.”
141 The purchasers’ pleading concerning the discussion of the liability for employee entitlements on 1 July included the following:
“Salamone stated that he had been told by the Plaintiff’s solicitor not to discuss the matter because it was still to be resolved after the settlement.”
142 Mr Stone gave evidence that Mr Salamone never said that there was to be a review of clause 18.8. Mr McKenna’s evidence was to the same effect. He said that Mr Salamone stated that he had been advised by the lawyers not to discuss the issue.
143 Mr Davis gave evidence that Mr McKenna telephoned him on 1 July and informed him the parties had met, that the matter would settle that day, that the vendor had agreed to a full allowance of employee entitlements and that after settlement, there would be a discussion between those parties.
144 Settlement occurred at 3.00 pm at the offices of the National Australia Bank in Spencer Street, Melbourne. Mr Silver, Mr Unglik and Mr Lumb, were amongst those who attended.
145 At some point that day, Mr Davis prepared a letter to Mr Stone concerning the settlement. It was probably received by his clients the next day. It included the following passage:
“I note that, the Vendor, despite the terms of the Contract has agreed to allow you a sum equivalent to the entire Entitlements of the Employees. This allowance will be discussed between yourself and the Vendor over the coming days. You will be responsible for those entitlements as and from the date of settlement.”
146 Mr Davis understanding was that the discussions would occur about “bedding in” Mr Harvey and the other employees, who were to continue to work for the new owners. Discussion would also occur about the “operation and practicalities” of the payment of their entitlements “down the track”. Clause 18.8 was not to be renegotiated, but only discussed. The purchasers would want to ” hold their [the vendor’s] hands and assure them that it was all for the best and life would go on[36].”
[36]T 272-273
147 Mr Unglik was not called as a witness.
Events after the settlement
148 Mr Harvey commenced work for the purchasers as operations manager/ consultant on a twelve months contract. He worked in an office next to Mr Barwick’s.
149 Mr Harvey saw Mr Barwick most work days during the months after the settlement, but never told him or Mr Stone or Mr McKenna that the vendor wanted to review, or negotiate about the matter of employee entitlements.
150 The first time that any further mention of employee entitlements occurred was when the vendor’s solicitor sent a letter of demand, dated 25 November 2010, to Mr Davis. It stated:
“We are instructed that at settlement your clients improperly adjusted against our client full employee entitlements when pursuant to clause 18.8 of the Contract of Sale the entitlements should have been reduced by 30% ( an error of $111,430).”
151 On 25 January 2011 the vendor’s solicitors sent a second letter of demand to Mr Davis increasing the demand to the amount of $260,003. The letter rejected any suggestion that the amount claimed had been waived and referred to Mr Salamone’s note of the meeting of 1 July.
152 When the vendor’s letter of demand arrived, Mr Stone rang Mr Harvey and then travelled to Melbourne to see him and asked, “What the hell is this about?” Mr Harvey said that the demand was something that Mr Unglik was “on about”, but said “don’t worry, I’ll get it fixed[37].” Mr Barwick gave similar evidence[38].
[37]T 389, 420
[38]T 420
Conclusions about witnesses
153 I formed the view that all the witnesses were attempting to give evidence of events as they remembered them.
154 However I give less weight to Mr Harvey’s evidence than I do to the other witnesses. He gave evidence that he could not recollect what was said in a number of significant meetings and discussions. He had no involvement in drafting the contract. He did not recall being involved in any meetings or negotiations with the purchasers about the terms of the contract.
155 Mr Harvey did not accept Mr Stone’s account of what said on 1 July[39], and said that that it was not right that he had said the purchaser would allow the full amount at settlement[40]. However his evidence about what was said at the meeting was limited.
[39]T 178
[40]T 176
156 In response to a number of questions, he answered that he could not recall the matter. He could not remember whether Mr Silver gave him a copy of the draft contract[41]. When asked whether he had a conversation about the issue of employee entitlements with Mr Stone and Mr McKenna on 29 June, he answered:
“I can’t remember having it. That’s not to say that we didn’t have it, but I can’t remember[42].”
[41]T 126-127
[42]T 137
157 However he did state that Mr Stone and Mr McKenna’s evidence that he told them he would sort it out so that they got 100 per cent of their employee entitlements was definitely not true.[43]
[43]T 160
158 Mr Harvey could not remember a number of significant matters. He was unable to agree or disagree that the meeting of 4 May occurred.
159 Mr Harvey stated that he could not remember anything of the events that happened on 30 June about employee entitlement he said: “I don’t remember any of that[44].” He gave evidence that his understanding was that the vendor was to settle and that any entitlements were to be negotiated later by the legal and accounting people.
[44]T 167
160 In respect of events after settlement, Mr Harvey could recall Mr Stone raising the fact of the vendor’s letter, but he didn’t remember what he said to Mr Stone in response. His evidence was: “I don’t know. I don’t remember[45].”
[45]T 184
161 When Mr Harvey was asked in cross-examination why, on behalf of the vendor, he did not raise the need for further negotiations in the period after the settlement, he agreed with the proposition that the issue went straight out of his mind. He had never read the terms of clause 18.8.
162 All of these matters mean that I can place little reliance on Mr Harvey’s memory of the detail of any events of significance to this proceeding.
Findings on the evidence
163 I make the following findings of fact arising from the evidence set out above.
164 The solicitors for the parties were aware that the contract contained clause 18.8.
165 Mr Davis, for the purchasers, having requested that clause 18.8 be deleted, overlooked that it that had not been.
166 When Mr Silver, on 15 June, explained the terms of the contract to the persons who were to sign it, he did not refer to the effect of clause 18.8.
167 The directors of the parties paid little attention to the terms of the contract or to the presence of clause 18.8 in it.
168 When Mr Stone and Mr Barwick on 28 or 29 June appreciated the presence of clause 18.8, they decided that they would not settle if they purchasers were liable to pay 70 per cent of the employee entitlements as at the settlement date.
169 They spoke to Mr Harvey about the issue and he agreed that they should not be liable to pay those entitlements.
170 On 1 July, in the conversation between Mr Harvey and Mr Stone at the commencement of the meeting, Mr Harvey told Mr Stone: “you’ve got your money”. Mr Harvey used a few short words. Taken in isolation they might be seen to be generally expressed, as in one sense the purchasers were to get their money. However the statement has to be taken in context, including with regard to the discussions between Mr Harvey and Mr Stone and Mr Barwick on 29 and 30 June. In that context, Mr Harvey’s statement meant that the vendor would make an allowance in favour of the purchasers representing all of the employee entitlements and would not enforce clause 18.8 of the contract.
171 Mr Harvey had authority on behalf of the vendor to bind it by that statement. He was one of two directors, but had been the director giving Mr Silver instructions.
172 If Mr Harvey had not given that assurance the purchasers would not have completed the settlement on 1 July.
173 The parties understood that after 1 July there might be further discussions about clause 18.8 and employee entitlements. I accept that Mr Salamone mentioned that in the meeting of 1 July.
174 The parties did not agree on the ambit, or content, of any such discussions.
175 The vendor did not reserve its rights to enforce the terms of clause 18.8[46]. While Mr Silver used those words in communications on 30 June, the discussion between Mr Harvey and Mr Stone led to a different conclusion, which was that there might be further discussions about clause 18.8 and employee entitlements.
[46] Cf Osborne v McDermott [1998] 3 VR 1,10-11
176 At the most there was an agreement to discuss the clause.
177 After 1 July, neither party sought to hold discussions about clause 18.8 or employee entitlements.
The purchasers’ cash flow issue
178 The vendor raised the issue of the cash flow difficulties that the purchasers might have experienced if they had only received an allowance for 30 per cent of the employee entitlements and had been obliged to pay the vendor the additional sum of $260,003 claimed in this proceeding. The vendor submitted that the purchasers had not understood the operation of the contract until 29 June when they received the statement of adjustments. The purchasers had $357,000 in cash and faced wages bills of about $120,000 per month, when they took over the business. There would have been little money left if they had had to pay an additional $260,000 as part of the purchase price.
179 Mr McKenna gave evidence that there was no tax benefit, in the sense of a windfall for the purchasers, by assuming liability for the employee entitlements. Long service leave was a contingent liability. The purchasers have accounted for the employee entitlements as a contingent liability and have not claimed any tax deductions for employee entitlements that they have paid, that accrued prior to 1 July. They anticipate that they will pay all the accrued long service leave in the future.
180 I do not consider that the issue about cash flow is significant in determining this proceeding. It has no bearing on the discussions held between the parties.
181 In any event, there was evidence that Mr Stone had access to further funds.
Legal Issues
182 The quantum of the amount claimed by the plaintiff is not in dispute. The plaintiff is therefore entitled to recover the amount it claims unless one or more of the defences identified above are established.
183 As the High Court stated in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd:
“ Secondly, in the nature of things, oral agreements will sometimes be disputable. Resolving such disputation is commonly difficult, time-consuming, expensive and problematic. Where parties enter into a written agreement, the Court will generally hold them to the obligations which they have assumed by that agreement. At least, it will do so unless relief is afforded by the operation of statute or some other legal or equitable principle applicable to the case[47].
[47](2004) 218 CLR 471 at [35]
Mutual mistake
184 The first defence requiring consideration is whether the defendants have established a case for rectification of the contract based on a mutual or unilateral mistake.
185 The defendants submitted that the contract should be rectified on the basis of mutual or unilateral mistake to provide for an adjustment to the purchase price of the full amount of the employee entitlements rather than 30 per cent.
186 The defendants submitted that an order for the rectification of the contract on the ground of mutual or unilateral mistake should be made when the parties’ solicitors had overlooked that a clause of the contract did not reflect the agreement of the parties[48]. The defendants argued that the parties had reached agreement at the meeting in May 2010 that the purchasers would assume liability for the accrued employee entitlements from settlement and that the purchase price would be adjusted in their favour by the amount of those entitlements.
[48]See Muriti v Prendergast [2005] NSWSC 949
187 The basis for obtaining rectification based on mutual mistake was described by Mason J in Maralinga Pty Ltd v Major Enterprises Pty Ltd[49] as follows:
“What is of importance is that the purpose of the remedy is to make the instrument conform to the true agreement of the parties where the writing by common mistake fails to express that agreement accurately. And there has been a firm insistence on the requirement that the mistake as to the writing must be common to the parties and not merely unilateral, except in cases of a special class to which I shall refer later.”
[49](1973) 128 CLR 336 at 350
188 Clear and convincing proof of a mutual mistake is required to obtain an order for rectification of a contract. In Franklins Pty Ltd v Metcash Trading Ltd[50], the New South Wales Court of Appeal stated that:
“…If the words of which rectification are sought are clear in meaning on their face, that unlikelihood is compounded — one would not ordinarily expect two lawyers, each professional dealers in language, to make the same mistake about the meaning of words that are clear on their face. However, we know that sometimes even experienced solicitors take or are given inadequate instructions, or misunderstand their instructions, and in consequence misrecord their client’s intention, so these matters are no more than reasons for caution in making the factual findings upon which a rectification order is based.”
[50](2009) 76 NSWLR 603 at 714 [461]
189 The plaintiff submitted that to obtain an order for rectification of contract based on mutual mistake the defendants would have to establish:
(a) a continuing common intention that the contract be expressed in the form that they seek; and
(b) that the parties both were mistaken about the form of the executed contract in the same way.
190 The evidence does not support the conclusion that the parties shared a mistake about the terms of the executed contract. I accept their evidence that both Mr Silver and Mr Davis knew that clause 18.8 was in the contract when it was executed.
Unilateral mistake
191 The defendants also relied on the argument that a unilateral mistake had occurred and that it provided a basis for rectification of the contract.
192 The circumstances in which an order for rectification of a contract based on unilateral mistake will be made were considered by the Court of Appeal in Leibler v Air New Zealand (No.2) to be as follows:
“(i) if one party, A, makes an agreement under a misapprehension that the agreement contains a particular provision which the agreement does not in fact contain; and (ii) the other party, B, knows of the omission and that it is due to a mistake on A’s part; and (iii) B lets A remain under the misapprehension and concludes the agreement on the mistaken basis in circumstances where equity would require B to take some step or steps, depending on those circumstances, to bring the mistake to A’s attention; then B will be precluded from relying upon A’s execution of the agreement to resist A’s claim for rectification[51].”
[51][1999] 1 VR 1. The quotation is from the headnote see per Kenny JA at pp 14-15 [36] cf Winneke P and Phillips JA at p 5 [11]
193 The plaintiff argued that the evidence established that Mr Davis, the defendants’ solicitor, was aware that the contract contained clause 18.8. The evidence does support that conclusion.
194 The purchasers did not read the contract and left it to Mr Davis to advise them about it. His knowledge is to be imputed to them. Mr Davis provided Mr McKenna with a copy of the contract containing clause 18.8 before it was executed and he had the opportunity to read it. Mr Davis was aware that clause 18.8 was in the contract at the date it was executed.
195 The evidence does not support the conclusion that there was a unilateral mistake. Both parties knew what was contained in the contract.
196 The defendants have not established a case for rectification of the contract, based on mutual or unilateral mistake.
Variation of contract
197 The purchasers argued that the contract was varied by the parties on 1 July, so that clause 18.8 provided for an adjustment for the full amount of the employee entitlements rather than 30 per cent of them.
198 The evidence does not establish that the contract was varied by altering clause 18.8 at any time after it was executed on 15 June.
199 In response to this defence, the plaintiff relied on clause 26.1 of the contract which provides:
“This contract may only be varied or replaced by a document duly executed by the parties.”
200 In addition to the operation of clause 26.1, the defence of variation fails for lack of evidence as to the terms of the variation alleged. To prove a contract, or a variation of a contract, there must be certainty as to what the terms of the variation are. The conversation between Mr Stone and Mr Harvey at the commencement of the meeting on 1 July does not provide a basis on which to conclude that the parties had reached agreement on a particular form of words to vary clause 18.8.
201 I find below in dealing with the estoppel defence that the vendor represented that it would not enforce clause 18.8. That finding does not provide a basis for concluding that there was a variation of the contract.
Estoppel
202 The essence of the purchasers’ estoppel defence is, that Mr Harvey on behalf of the vendor, informed the purchasers that the vendor agreed to the full adjustment in their favour of the amount of the employee entitlements contained in the statement of adjustments prepared by the purchasers’ solicitors and would not subsequently pursue additional amounts for employee entitlements. This description expands on the pleading in paragraph 27 (c), but contains its substance, when it is taken with the way the case was argued.
203 The purchasers rely on a promissory or equitable estoppel. To establish such an estoppel, in an existing contractual relationship, the purchasers need to establish:
(a) a clear and unambiguous representation by the vendor that created an expectation in the purchasers that it would not enforce its legal rights;
(b) the representation induced the purchasers to adopt that expectation;
(c) the vendor knew or intended that that the purchasers would act on the expectation;
(d) the purchasers changed their position to their detriment on the basis of that expectation;
(e) it would be inequitable for the vendor to be able to depart from the representation and enforce the contract containing clause 18.8 [52].
[52]Legione v Hateley (1983) 152 CLR 406, 419-421,437, Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, 427- 428
204 I am satisfied that the defendants have proved each of these matters.
205 The evidence establishes that Mr Harvey made a clear and unambiguous representation to Mr Stone at the commencement of the meeting on 1 July that the purchasers would receive at settlement and be entitled to retain the whole of the amount of the employee entitlements. That is the effect of Mr Harvey’s statement, “you’ve got your money” in response to Mr Stone when it is considered in the context of the communications that occurred between the parties on 29 and 30 June. The context also includes Mr Stone’s many years of dealing with Mr Harvey and the trust that he placed in him.
206 In Galaxidis v Galaxidis [53] Tobias JA stated:
“In my opinion, the effect of this Court’s decision in Gray is that even if a representation is insufficiently precise to give rise to a contract( as in the present case) that does not necessarily disqualify the representation from founding a promissory estoppel. Much will depend on the circumstances in which the representation is made and the context against which it is to be considered. In its context, the representation is sufficiently clear and unambiguous if it is reasonable for the representee to have interpreted the representation in a particular way being a meaning which it is clearly capable of bearing and upon which it is reasonable for the representee to rely[54].” (Emphasis in the original)
[53][2004] NSWCA 111 cf Flinn v Flinn [1999] 3 VR 712.
[54](Supra) At [93]
207 The other statements made on 30 June or 1 July that clause 18.8 or its operation would be subject to review or discussion after the settlement had occurred do not alter the fact that Mr Harvey’s representation was clear and unambiguous. They suggest that there would be further discussion about employee entitlements. But Mr Stone, on behalf of the purchasers, made it clear to Mr Harvey that he wanted the issue resolved on 1 July before settlement occurred. In that context Mr Harvey’s response was clear and unambiguous. He was not suggesting that the purchasers had the amount of the employee entitlements until some time in the future when the vendor could demand part of it back, whether that demand followed a review of, or discussions about, clause 18.8.
208 The evidence of Mr McKenna and Mr Stone establishes that Mr Harvey’s statement induced the purchasers to complete the contract.
209 Mr Harvey was the director who gave instructions to Mr Silver and on behalf of the vendor and his statements therefore bind it. The vendor chose not to call the other director and owner of the vendor, Mr Unglik to challenge Mr Harvey’s authority to make the statement.
210 The defendants have established that a clear and unambiguous representation was made by Mr Harvey to Mr Stone.
211 The defendants have established that the representation induced the purchasers to change their position and settle the contract on 1 July. The evidence establishes that it is probable that the purchasers would not have settled on 1 July without a representation in the terms that Mr Harvey made.
212 The defendants have established that the vendor through Mr Harvey knew and intended that they would act on the expectation, created by his representation, to settle the contract on 1 July.
213 The vendor submitted that the purchasers settled on better terms than were contained in the contract, because they did not have to pay the full purchase price payable under the contract on settlement day, but only were required to pay it at a later date, when the later demand was made. However the issue for determination arises from the assurances that the vendor gave the purchasers about the settlement.
214 The purchasers have established that they did suffer detriment. They gave up the opportunity to attempt to negotiate a favourable written variation of the contract containing a term embodying the legal effect of Mr Harvey’s representation. Mr Stone gave evidence that he did not seek anything in writing because he trusted Mr Harvey, he had known him since the 1980s. Both Mr Harvey and Mr Unglik were anxious to settle. If Mr Stone had held out and refused to settle, Mr Harvey may well have put the assurance that he gave Mr Stone in writing, in a form that varied clause 18.8. That possibility was not fanciful or far fetched. The purchasers gave up that opportunity because they accepted Mr Harvey at his word. They lost the chance of achieving that better outcome. In so acting the purchasers acted to their detriment within the accepted meaning of that concept.
215 The detriment that makes an estoppel enforceable is that which the party asserting the estoppel would suffer, as a result of his or her original change of position, if the assumption which induced it was repudiated by the party estopped: Delaforce v Simpson-Cook[55] per Handley AJA The purpose of the estoppel is to avoid or prevent a detriment to a party asserting the estoppel by compelling the opposite party to adhere to the assumption upon which the former acted or abstained from acting: Grundt v Great Boulder Proprietary Gold Mines Ltd[56] per Dixon J. In Donis v Donis Nettle JA stated:
“The object of the exercise is to do equity and for that purpose ‘detriment’ is no narrow or technical concept[57].”
[55][2010] NSWCA 84 at [42]
[56](1938) 59 CLR 641 at [674-5]
[57](2007) 19 VR 577 at 583 [20]
216 The loss of a chance of obtaining a better outcome than that previously agreed can constitute detriment for the purposes of promissory estoppel: see Delaforce v Simpson-Cook[58].
[58](Supra)
217 The Court should enforce a reasonable expectation which the party bound created or encouraged[59] .
[59](Supra) [62]
218 In the circumstances that I have identified, it would be inequitable to permit the vendor to depart from the representation and enforce clause 18.8 of the contract.
Conclusion
219 The defendants have established that the plaintiff, the vendor, is estopped from relying on clause 18.8 of the contract to claim the sum of $260,003 that it seeks in this proceeding.
220 The plaintiff’s proceeding is dismissed.
221 The counterclaim, which sought orders for rectification, is also dismissed.
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