Better Sprinkler Systems P/L v Koussidis No. Scgrg-97-98 Judgment No. S6892

BETTER SPRINKLER SYSTEMS V KOUSSIDIS

[1998] SASC 6892

CIVIL

LANDER J

This is an appeal against a decision handed down by a Magistrate on 17 December 1997.
The appellant, who was the plaintiff in the Court below, is a company which operated a petrol station known as Premier Service Station. The respondent Mr George Koussidis was, of course, the defendant. The appellant claims that it and the respondent agreed for the appellant to supply goods and services to and on behalf of the respondent which were charged to a running account. The appellant claimed that on that account a debt of $30 632.24 had accrued and remained unpaid by the respondent. The appellant waived any entitlement to any amount over $30 000 thereby giving the Magistrates Court jurisdiction in the matter.
The respondent who claimed to be not indebted, said that whilst the account was originally in his name it later became a company account for John Koussidis Homes Pty Ltd (“the Company”) and that the Company assumed the contractual obligations of the account.
The learned Magistrate held:
“The mere fact that either the plaintiff or the defendant chose to leave the account in the original form does not reflect the true position as between the parties; their relationship gradually developed through progressive changes so that it must have been clear that the company had taken over responsibility of the account and the plaintiff’s and company’s behaviour suggests that that is what they believed to be the case.
I am not satisfied therefore that the plaintiff has proved the debt as against the defendant and consequently dismiss the claim.”

The Commercial Arrangement

The appellant pleaded that there was a contractual relationship between the appellant and the respondent which was governed by various express or implied terms of trade, namely: payment of the account by the 14th of each month; an $8.00 account keeping fee; and a monthly service charge of 2.5 per cent to be added in the event of late payment. The appellant proprietor gave evidence that it was the practice of the business, even before the appellant took over the business on 1 July 1985, that overdue accounts were stamped with a rubber stamp which indicated that payment should be by the 14th of the month or else a penalty of 2.5 per cent would be incurred. He said that in 1988 the rubber stamp was no longer used and the default terms were printed out at the foot of a printed account. The terms were only present on the original copy of the account which went to the customer. He said that a letter was sent out to the customers which detailed the terms and conditions of the business including penalties incurred by default payments. He said that dishonoured cheques incurred a $30 fee but this condition was only ever communicated verbally to the respondent.
The respondent in his particulars of defence denied that he was ever aware of any terms of trade. The respondent further claimed in his defence that a man by the name of ‘Alex’ who held himself out as an agent of the appellant entered into an oral agreement with him for the account to be transferred to, and operated in the name of, a company which operated a building business, John Koussidis Homes Pty Ltd. John Koussidis Homes Pty Ltd went into liquidation in September 1995.
In paragraph 8 of its defence the respondent pleaded:
“a).... that John Koussidis Homes Pty Ltd (“the company”) commenced trading in or about November 1989;
b)that, shortly thereafter, the plaintiff, by a person known only to the defendant as “Alex”, who held himself out as being responsible for the conduct of the business known as “Premier Service Station”, entered into an oral agreement with John Koussidis for the account to be transferred to, and operated in the name of, the company.”
The respondent claimed that following that oral agreement the company assumed all responsibility for the conduct of the account and payment of any money due to the appellant. The respondent therefore denied any liability for the account and argued that the appellant had proceeded against the wrong party in that it should have proceeded against John Koussidis Homes Pty Ltd.
The appellant denied in his evidence that there was ever any mention of placing the account in the name of the company John Koussidis Homes Pty Ltd. The respondent said that the first time he received an account at his home address was after “the office closed down” in late 1995.
The appellant said in evidence that he knew that the addresses to which he sent accounts were business addresses and that on occasions he went to these addresses to chase up accounts. Further, he became aware of the name change in the business from G Koussidis Homes & Co Pty Ltd to John Koussidis Homes Pty Ltd.
There were a number of people who worked for the building business John Koussidis Homes Pty Ltd and various people used the account including the respondent, his wife and two employees of the company, a Mr Peter Panousakis and a man named ‘Emmanuel’. It was admitted by the appellant that the people coming into the petrol station and putting goods and services on the account were people involved in the building business.
Notwithstanding the number of persons who used the account the respondent agreed that the accounts which tendered in evidence (P1) only ever had one name and one signature on them - the respondent’s.
The appellant points out that if there was a novation of the contract it must have occurred after 1985 when the appellant took over the petrol station business from the previous owner. In fact, any novation could only have occurred after late 1989 when the Company commenced trading [para 8a defence].
The appellant became aware in late 1995 that a liquidator had been appointed to John Koussidis Homes Pty Ltd.
On some occasions in 1995 the respondent paid cash for petrol. The appellant says that this was because he refused to give the respondent any more credit. However, other amounts were added to the account. For example, there were repairs to the respondent’s wife’s car which was brought in by Mr John Koussidis, the respondent’s son. An amount of $140 was paid by John Koussidis and the balance was debited to the account. The appellant said that he did not prevent all access to the respondent’s account but allowed some amounts to be debited to the account after requiring the respondent to pay cash for some petrol.
The appellant admits that there were discussions and notes relating to the payment of the account which were directed towards Mr John Koussidis, but he says that most of his dealings were with the respondent. The appellant also admitted that Mr John Koussidis had signed a cheque for $1000 in 1993 as a payment on the account. On another occasion Mr John Koussidis had telephoned the appellant and organised for a worker, a man named ‘Dennis’, to have access to the account.
The principal matter in dispute before the learned Magistrate was whether there was an agreement between the appellant, the respondent and the Company that the Company would assume the rights and obligations of the respondent under the original contract. Notwithstanding that an express agreement to novate the contract was pleaded, in fact no such evidence was led at trial.
Nevertheless, the learned Magistrate held that the partner’s relationship developed such that it must have been clear that the appellant had taken over responsibility for the account. His Honour found that the behaviour of the appellant and the Company suggested “that that is what they believed to be the case”.
His Honour did not directly find that the contract between the appellant and respondent had been novated but that is the implication in his finding.
On appeal the appellant’s primary submission was that the learned magistrate was in error in finding that the contract had been novated.
The appellant submitted on appeal that there was no dispute on the evidence as to the following matters:
“a).... The account the subject of the claim was only ever in the name of G Koussidis.
b)The account contained the respondent’s signature throughout (transcript page 71).
c)In some pages where other people had signed the respondent had also signed (transcript page 72).
d)The respondent did not at any time question or raise issue that other signatures had appeared on his account (transcript page 72).
e)It never occurred to the respondent to talk to the appellant about the identity of the account (transcript page 72).
f)When it was bought (sic) to the attention of John Koussidis by a member of his staff that the account was in the name of G Koussidis, he decided to do nothing about it “I just wiped it off as, who cares - it doesn’t matter” (transcript page 80).
g)There was never any correspondence or notice served on the appellant requesting that the account name be changed (transcript page 95).
h)The respondent could offer no explanation as to why the appellant had not been included as a creditor in the liquidation of John Koussidis Homes Pty Ltd (transcript page 96). Mr John Koussidis even gave evidence that on the day of the Administrator’s Meeting he called into the appellant’s service station to get petrol (transcript page 94).”
The appellant also submitted on appeal that the learned magistrate erred in making findings of fact which were inconsistent with a primary finding that the appellant was an honest witness. In his reasons for judgment the learned Magistrate said (at page 5):
“Whilst I formed the view that the plaintiff was an honest witness for whom one could not help but feel sympathy, I am nevertheless satisfied that the arrangement which evolved over many years was more consistent with the defendant’s rather than the plaintiff’s contention.”
Notwithstanding the learned Magistrate’s finding on the appeal of the appellant’s credibility, it still may have been open to conclude that there was a new agreement. A finding that the appellant was an honest witness does not conclusively rule out the existence of a new agreement although it would be incumbent with the respondent’s plea of the oral agreement between Alex and the appellant.
The appellant submitted that because the learned Magistrate accepted the appellant as an honest witness:
“it must follow:
a)That it was accepted that the appellant did not receive any notice that anyone other than the respondent was the account holder (transcript page 6).
b)That the appellant regularly asked the respondent for payment of the account when he called in for petrol (transcript page 21).
c)That the appellant was not aware of John Koussidis Homes Pty Ltd having an Administrator appointed; that it subsequently went into liquidation, and the appellant was not advised of either the administration or liquidation of that company (transcript page 22).
d)That the account was closed because the appellant would not allow any more credit than anything to do with the liquidation of the company (transcript page 23).
e)That the appellant was not invited to become a creditor of the liquidated company (transcript page 6).”
The respondent presented two arguments on the appeal. First, it was argued that the learned Magistrate was not in error in finding that there had been a novation notwithstanding the description of the agreement as “informal”. Secondly, or in the alternative, if this Court was of the opinion that the learned Magistrate was in error in finding a novation, the matter should be remitted to the Magistrates Court to resolve the issue of conflicting evidence as to an alleged oral conversation between the appellant and Mr John Koussidis as to an agreement that the contract be novated. Mr John Koussidis gave general evidence of a conversation he had with the appellant] but the appellant denied any such conversation ever took place.

The Law

A novation occurs where a new contract is substituted for an original contract and in circumstances when the parties to both contracts accept the substitution: Tito v Waddell [1977] 1 Ch 106 at 287. The novation creates a new contract and therefore all the normal requirements for the formation of a contract must be present. There is no reason why a novation cannot be implied so long as the requisite intention is present. In Mutual Export v Asia Express Ltd (1990) 19 NSWLR 285 at 295 Carruthers J held that “there may be tacit acquiescence by one party in the novation of a contract.” (See also Olsson v Dyson (1969)120 CLR 365.
In the present case there was no evidence indicating that there was an express agreement for novation. The respondent claimed in his particulars of defence that there was oral conversation in which the appellant agreed to a novation but no evidence of this conversation was adduced at trial. I will return to this point.
In the absence of any evidence of an express agreement the learned Magistrate must have found there to be an implied novation or inferred a novation from the surrounding facts. Notwithstanding that the usual offer and acceptance cannot be identified, it may still be possible in certain circumstances for a contractual relationship to arise where that relationship is inferred by the parties’ conduct. It is unnecessary to try and identify in every case the precise moment in which a contract has been formed. If a contract is to be inferred by a retrospective examination of the conduct of the parties it is pedantic to look for a precise moment of formation.
McHugh JA (as he then was) held in Integrated Computer Services v Digital Equipment 5 BPR 11, 110 (Hope and Mahoney JJA concurring):
“It is often difficult to fit a commercial arrangement into the common lawyers’ analysis of a contractual arrangement. Commercial discussions are often too unrefined to fit easily into the slots of “offer”, “acceptance”, “consideration” and “intention to create a legal relationship” which are the benchmarks of the contract of classical theory. In classical theory, the typical contract is a bilateral one and consists of an exchange of promises by means of offer and its acceptance together with an intention to create a binding legal relationship. A bilateral contract of this type exists independently of and indeed precedes what the parties do. Consequently, it is an error “to suppose that merely because something has been done then there is therefore some contract in existence which has thereby been executed.” Nevertheless, a contract may be inferred from the acts and conduct of parties as well as or in the absence of their words. The question in this class of case is wether the conduct of the parties viewed in the light of the surrounding circumstances shows a tacit understanding or agreement. The conduct of the parties, however, must be capable of proving all the essential elements of an express contract. Care must also be taken not to infer anterior promises from conduct which represents no more than an adjustment of their relationship in the light of changing circumstances.” [references omitted].
His Honour continued further:
“[I]n an ongoing relationship, it is not always easy to point to the precise moment when the legal criteria of a contract have been fulfilled.”
It is therefore not fatal to the respondent’s case that no precise moment of novation can be identified. There may have been a commercial arrangement whereby the parties accepted that conclusion, that is that the contract had been novated, but that agreement was reached by an understanding by the parties found not in any specific act or agreement but implied by the conduct and/or acts of the parties. The important question therefore is whether there existed in the present case “a tacit understanding or agreement”.

The application of the law to the facts

The learned Magistrate said in his reasons:
“Having considered the respective arguments for some time I have settled on the view that the true arrangement which developed was that the company informally took over the account evidenced by various facts, namely, the number of company people purchasing fuel and personally signing for same, the adoption of the practice of all accounts being paid for by the company and the fact that the defendant was never pursued for any debts until well after it was apparent that the company had no funds.”
It was that reasoning which led him to the conclusion which I have already quoted.
Whilst it is true the accounts were sent to the Company’s address and the appellant chased up the accounts personally on occasions at that address in my opinion that does not necessarily mean that a novation can be inferred. There is nothing unusual about sending an account which is in the name of an individual to his or her business address. Further, there is nothing unusual about the appellant chasing up the account personally at the business premises of the Company. That would be the most likely place to find the respondent during business hours.
The fact that the Company’s employees were authorised to use the account is of more significance. The respondent argued that it should be inferred that because the employees were authorised to use the account it follows that the appellant had accepted that there was an agreement by all necessary parties for the Company to assume responsibility for the account. I do not think that inference arises. It is equally possible that the respondent was content for his personal account to be used by the business. There could well have been some arrangement between the Company and the respondent, whereby the Company would indemnify the respondent. That would also explain why the accounts were paid by the Company. This would put the respondent in the same position he would have been in had there been a novation and the respondent had agreed to be a guarantor. There would be nothing inherently unusual in a small company using an individual’s personal account to purchase goods and services for the company.
The account was only ever in the name of “G Koussidis” and the respondent’s signature was always on the account. It would be surprising that if the Company was the true debtor; first, that the appellant was not informed that the Company had gone into administration and later liquidation; and secondly, that the appellant was not at any time listed as a creditor of the Company after it went into liquidation.
In my opinion there was insufficient evidence to conclude that the appellant agreed to the novation of the contract. Further, there was evidence consistent with the appellant’s case that it was never a creditor of the Company John Koussidis Homes Pty Ltd.
The respondent and the Company may have intended for the Company to assume the rights and liabilities of the contract, but that would not be sufficient of itself to effect a novation. There can be no unilateral novation of the contract. The agreement of all parties is required.
I therefore allow the appeal.
It was put that the matter should be sent back to the Magistrates Court to resolve the question of the alleged oral conversation between the appellant and Mr John Koussidis, but I am of the opinion that such a submission should be rejected.
Whilst the conversation was pleaded there was simply no evidence led on that conversation by the respondent, the appellant was not cross-examined on the conversation. The conversation was not an issue in the trial.
I am of the opinion that the respondent’s application to have the matter sent back to the Magistrate’s Court to hear further evidence should be refused.
In my opinion the appeal should be allowed.
The quantum of the appellant’s claim was not disputed in the respondent’s defence. There seems to be no reason, therefore, why the appellant should not have judgment for the amount claimed.
I will hear the parties as to the judgment, including the question of interest and costs.

[1998] SASC 6892

16 October 1998