Beydoun v Sowden
[2008] SADC 29
•31 March 2008
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
BEYDOUN & ANOR -V- SOWDEN & ANOR
[2008] SADC 29
Judgment of Her Honour Judge McIntyre
31 March 2008
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS
Plaintiffs seek a proper construction of a special condition contained in a Business Sale Agreement - whether there is ambiguity in the special condition - what extrinsic evidence can be considered as an aid to construction.
Held - the special condition is ambiguous - this justifies reference to extrinsic evidence of the surrounding circumstances - limited evidence as to objective circumstances - plaintiffs failed to make out case that special condition held the meaning contended. Plaintiffs claim fails.
Industrial & Employee Relations Act 1994 s71, referred to.
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, applied.
Santos Ltd v American Home Assurance ANZ Insurance Cases 74,863 (60 - 795); Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286; Sportodds Systems Pty Ltd v New South Wales (2003) 133 FCR 63; Forstaff Adelaide Pty Ltd v Hills Industries Limited [2006] SASC 88, considered.
BEYDOUN & ANOR -V- SOWDEN & ANOR
[2008] SADC 29Background
The defendants were Directors of Sowden Technical Solutions Pty Ltd (“STS”). On or about 25 June 2002 the defendants entered into an agreement with the second plaintiff Ramsay Beydoun and/or his nominee, to sell STS.
STS was a computer sales and service business operating at 83 Halifax Street Adelaide. The purchase price was $50,000. Settlement date for the Agreement was 19 July 2002. The plaintiffs were appointed directors of STS on 19 July 2002 and the defendants ceased to be directors on the same date.
The plaintiffs issued the within proceedings on 23 June 2005. Initially Walsh Real Property First National and Kevin Little were named as third and fourth plaintiffs. Proceedings against those defendants were discontinued on 16 February 2006.
Subsequently the proceedings as between the plaintiffs and the first and second defendants were substantially amended and the issues narrowed. The plaintiffs filed an amended statement of claim on 15 January 2008.
The Business Sale Agreement contained a special condition which reads as follows:
All debts incurred prior to June 30th 2002 are the responsibility of the outgoing Directors being Susan and Christopher Sowden.
The plaintiffs now seek a proper construction of the special condition.
The plaintiffs’ statement of claim does not accurately plead the special condition. Paragraph 4 of the statement of claim states:
It was a term of the contract that all debts incurred by the company prior to the 30th June 2002 were the responsibility of the defendants.
The special condition does not contain the words “by the company”. This is significant for reasons I will discuss later.
Paragraph 5 of the statement of claim contends that:
The term of the contract was breached in that
a) the company has creditors as set out in paragraph 6.
b) these creditors have not been paid by the defendants as per the contract term set out in paragraph 4.
The plaintiffs seek declarations that the defendants have an obligation to pay amounts set out in paragraph 6 of the amended statement of claim. These debts are particularised in the pleadings as follows:
a) an unpaid debt owed by the company to the Australian Taxation Office in the sum of $22,506.43.
b) Further to 6a, The Australian Taxation Office has applied interest charges of $12,042.11 as at 18th January 2006. Due to further interest being continuously applied, a total figure is not known at this time.
c) An unpaid debt owed by the company to its employee Gregory Brown for unpaid leave prior to 30th June 2002 and therefore the responsibility of the defendants as set out in paragraph 4. The amount owed is $7,288.40.
The defendants do not agree that they are responsible for these debts. They contend that the special condition related to debts of the company for which the defendants had a personal liability due to directors’ guarantees.
Issues
1. What is the proper construction of the special condition?
1.1 Is the special condition ambiguous?1.2What extrinsic evidence can be relied on as an aid to interpretation?
2. Are the plaintiffs entitled to the relief sought?
Evidence
All parties in this matter were unrepresented. The second plaintiff attended and conducted the claim for the plaintiffs. The first plaintiff took no part in the hearing and, somewhat surprisingly, did not appear to give evidence. The only oral evidence given for the plaintiffs was that of the second plaintiff.
In addition the second plaintiff tendered a number of documents comprising documents related to the earnings of Mr Brown and subsequent South Australian Industrial Relations Commission (“SAIRC”) proceedings relating to Mr Brown,[1] documents relating to the STS debt to the Australian Taxation Office (“ATO”)[2] together with Australian Securities & Investment Commission documents relating to STS[3].
[1] Exhibits P1, P2, P5 and P9
[2] Exhibits P4, P6 and P8
[3] Exhibits P3 and P7
Of concern, given the nature of the dispute, the plaintiffs had considerable difficulty in providing the Business Sale Agreement that is the subject of this claim. Ultimately, after an adjournment to enable the second plaintiff to conduct further searches for this document, the plaintiffs sought to tender an incomplete photocopy of the Business Sale Agreement. After hearing evidence from the second plaintiff concerning the attempts he made to obtain a complete and original copy of the document I allowed the tender of the document[4] but noted that this was somewhat unsatisfactory as it was not the original document nor, more importantly, was it a complete copy of the original as it lacked pages 2 – 3 inclusive and pages 7 – 8 inclusive.
[4] Exhibit P10
Both defendants gave evidence and also called a former employee of STS, Mr Brown to give evidence about his employment, resignation and subsequent SAIRC proceedings to recover unpaid wages and leave entitlements. In addition the defendants tendered two documents, an invoice from their accountant[5] and a handwritten document prepared by the second defendant, Mrs Susan Sowden[6], concerning employee entitlement calculations for the two employees of STS, one of whom was Mr Brown.
[5] Exhibit D1
[6] Exhibit D2
The conduct of the hearing was somewhat difficult given the lack of legal representation, the complexity of the contractual issues and the evidentiary issues.
Construction
Is the special condition ambiguous?
The plaintiffs contend that the special condition is plain and unambiguous. I do not agree.
I consider the condition ambiguous in a number of respects. First, it is not clear what “debts” are encompassed by the condition. They were not defined or limited in any way. The pleadings contend that the requirement was “all debts incurred by the company”. The condition does not however say that. As drafted, it could equally bear the meaning that the defendants press, namely, debts for which the outgoing directors are personally liable.
Second, it is not clear what is meant by the term “incurred”. Does this mean debts due and payable as at 30 June 2002, or does it have some other meaning? If it means debts due and payable as at 30 June 2002, the claim relating to the employee Gregory Brown for unpaid leave prior to 30 June 2002 is not covered by the clause.
Exhibit P5 comprises a transcript of the orders and judgment handed down ex tempore by Industrial Magistrate Farrell in Mr Brown’s proceedings against the plaintiffs and STS Pty Ltd on 26 June 2004. The learned Industrial Magistrate found that that Mr Brown had an entitlement to annual leave pursuant to s71 of the Industrial & Employee Relations Act 1994 and schedule 4 setting out the minimum standards for annual leave under that Act. I quote from the relevant portion of the judgment:
Annual leave not taken in the ordinary course of employment becomes due and payable as at the date of termination of employment.
Counsel for the respondent argued that it would be unconscionable that the respondent be required to meet the claim for annual leave, as much of it had accrued prior to their taking over the business. …The applicant is unable to pursue any claim against the previous directors of the company, as his entitlement to annual leave only arises in this case on the termination of his employment.
In my view the learned Industrial Magistrate was correct in her finding that Mr Brown’s entitlement to payment in lieu of leave, as opposed to his entitlement to take leave, did not arise until the termination of his employment, which occurred after 30 June 2002. I further note that the learned Industrial Magistrate’s decision was upheld on appeal by the Industrial Relations Court in a judgment of Her Honour Judge H W Parsons delivered on 24 January 2005. Specifically I refer to the findings at paragraphs 22, 23, 24 and 25 of that decision and the conclusion:
25.The learned Industrial Magistrate correctly isolated the date of termination of employment as the date when the entitlement to payment on account of untaken annual leave became an enforceable right.
In addition there are difficulties with the amounts owing to the ATO. It is agreed by the parties that the amount owing to the ATO at the time the sale of business occurred was approximately $20,000. Since then, substantial interest has accrued. There is a dispute between the parties as to when the defendants were first notified of the plaintiffs’ position that they were responsible for the amounts owing to the ATO. This raises difficult issues as to whether the interest is a debt “incurred” at 30 June 2002 or whether there is some other basis upon which the plaintiffs could seek payment of the interest. If the plaintiffs can seek interest, is there an issue relating to the plaintiffs’ failure to mitigate this loss?
Third, it is unclear what the word “responsibility” entails. Does it import an obligation to pay or satisfy any debt, or, is it simply referring to a responsibility to provide assistance in dealing with debtors and debts. If it imported an obligation to pay on the part of the outgoing directors it seems somewhat unusual that there was no requirement to hold back a proportion of the purchase price to cover any such debts or to seek some other form of guarantee of payment.
What extrinsic evidence can be relied on as an aid to interpretation?
Given both parties were unrepresented I allowed more latitude in the giving of evidence than would normally be the case. In particular there was evidence from both the second plaintiff and the defendants concerning the negotiations that led to the signing of the Business Sale Agreement. Notwithstanding he took an active part in the negotiations, the first plaintiff did not attend to give evidence.
The second plaintiff gave evidence that there was no discussion of the amounts owing to employees and that he was not aware of the debt to the ATO. The defendants on the other hand have given evidence that they arrived at the original sale price of the business in conjunction with their accountant taking into account the amount required to settle all of the debts arising out of the business including the ATO debt and the amounts to be paid to the employees if it was necessary to terminate their employment on the sale of the business. That sale price was $90,000.
Mr Sowden says that he made full disclosure of the ATO debt and the issue of employee entitlements. He was keen for the employees to retain their employment notwithstanding the sale of the business. He arranged for the plaintiffs to meet his accountant to discuss various financial issues relating to the business including these issues. He further says that, following negotiations, the sale price was reduced to $60,000 to reflect the fact that the company would retain the debt to the ATO and the two existing employees. The ATO debt was approximately $20,000 and the employee entitlements were quantified at approximately $10,000. The plaintiffs however would not accept the revised sale price of $60,000 and indicated that the most they were prepared to offer was $50,000, a figure the defendants subsequently accepted.
The law is succinctly stated by Mason J in Codelfa Construction Pty Ltd v State Rail Authority of NSW[7]:
The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.
It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.
Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties’ presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.
[7] (1982) 149 CLR 337
I consider the language of the special condition to be ambiguous and capable of more than one meaning. Accordingly, evidence of surrounding circumstances is admissible to assist in the interpretation of the contract. I cannot however take into account evidence consisting of statements and actions of the parties reflective of their intentions and expectations. This applies to the evidence of both the second plaintiff and the defendants. The second plaintiff for his part indicated that he specifically wished to have the contract stipulate that all debts prior to July 2002 would be the responsibility of the outgoing directors[8]. Conversely the defendants say that the sale price was reduced to reflect the fact that the plaintiffs were to assume responsibility for the employee entitlements and the company debt to the ATO. They say the clause was included to reflect the fact that the defendants would pay all supplier or creditor debts for which they had assumed personal responsibility by reason of directors’ guarantees.
[8] Transcript [7]
The Business Sale Agreement that has been produced is a standard form contract approved by the Real Estate Institute of South Australia Inc. for the use of its members. It is described as form no. 5001.
Clause 15 of the contract sets out the provisions in relation to special conditions. That clause reads as follows:
15. SPECIAL CONDITIONS
15.1 This Agreement is subject to and conditional upon each Special Condition which is set out in or attached to this Agreement.
15.2 Each party must make every reasonable effort to comply with the requirements of a Special Condition.
15.3 If a Special Condition is not satisfied within the time specified and neither party is in default of such Special Condition then, unless the Special Condition has been waived in writing by the party for whose benefit it was inserted, either party may terminate this Agreement in accordance with the procedure set out in such Special Condition or in the absence of such procedure upon serving written notice of termination on the other party.
15.4 If a Special Condition is not satisfied due to the default of the Vendor or the Purchaser then the party who is not in default may in addition to its other legal rights terminate this Agreement as follows:-
15.4.1 if the Vendor is in default the Purchaser may upon seven (7) days notice in writing to the Vendor terminate this Agreement in which event all monies paid by the Purchaser under this Agreement must be repaid to the Purchaser;
15.4.2 if the Purchaser is in default then the Purchaser’s obligations shall be determined by the provisions in clause 17 of this Agreement.
15.5 If a Special Condition is not satisfied in circumstances where the Purchaser and Vendor have otherwise performed their obligations under this Agreement and termination has occurred in accordance with sub-clause 15.3 of this Agreement then all monies paid by the Purchaser under this Agreement shall be repaid to the Purchaser and all rights and liabilities under this Agreement shall cease.
15.6 In the event of an inconsistency between any of the terms and conditions of this Agreement (including this clause) and any of the terms and conditions of a Special Condition, then the term and condition of such Special Condition shall prevail and apply.
The clause is not of assistance in construing the special condition in this contract however it does appear contemplated by clause 15.3 that a special condition should have a time within it for completion. There is no time limit specified in the subject special condition for satisfaction of the special condition. As I do not have a considerable portion of the contract I am unable to gain any further assistance from it.
It is my view that the clause as drafted is vague and ambiguous. It could bear the meaning contended by either the plaintiffs or the defendants. I have been provided with limited material that assists me to determine the issue one way or the other. The objective facts that I find are as follows:
·On 25 June 2002 the parties entered into a Business Sale Agreement.
·The purchase price was $50,000.
·The date of settlement was 19 July 2002.
·The original sale price was $90,000. This was the evidence of the defendants. The second plaintiff agreed that this was the original sale price[9]. The dispute between the parties was as to the reason the price was discounted.
·The ATO debt at the time of the Business Sale Agreement was approximately $20,000[10] and the employee entitlements were approximately $10,000[11]. Whilst the second plaintiff disputed that he had been provided with a copy, his evidence did not suggest that he disagreed with the amount outlined as the employees’ entitlements[12]. The information is in line with the plaintiffs’ claim seeking an amount of $7,288.40 in respect of Mr Brown.
·The employees and STS, including Mr Brown, continued in their employment following the sale of the company.
[9] Transcript [21]
[10] Exhibit P4
[11] Exhibit D2 and Transcript [51 – 52]
[12] Exhibit D2
As can be seen, the objective facts are somewhat limited. This was the plaintiffs’ case. The plaintiffs have failed to produce the original and complete contract and to call evidence that was reasonably available to assist in the interpretation of the contract, specifically evidence from the first plaintiff. They must bear the consequences of this. Such limited evidence as I have tends to suggest that the contention pressed by the defendants as to the proper interpretation of the clause is correct.
The sale price was reduced substantially from $90,000 to $50,000. The ATO debt and the employee entitlements total approximately $30,000. Reducing the sale price to reflect these debts would account for a major part of the reduction. The second plaintiff asserted that the purchase price was “revised down because there was very little profit showing, not because of any liabilities that came at that point in time.”[13] He further asserted that he knew nothing of the employee entitlements or of the debt to the ATO. He agreed that both plaintiffs met with the defendants’ accountant to discuss the financial position of the company prior to entering into the contract, but says that this meeting did not include a discussion about the company’s liabilities..[14]
[13] Transcript p 21
[14] Transcript p 26
The plaintiffs were keen to retain the employees of the company following the purchase of the business. The second plaintiff gave evidence that the plaintiffs had discussions with both employees and possibly with the first defendant indicating that they wished “to continue with their employment”. He denied any agreement that “employee benefits would pass over”.[15] The first defendant gave evidence that he discussed this issue with both plaintiffs and that he provided the details of the employee entitlements outlined in exhibit D2. The second defendant gave evidence about the preparation of exhibit D2. Mr Brown gave evidence that he had discussions with the first plaintiff about his continued employment. The first plaintiff indicated that he was very keen to retain Mr Brown as an employee and in fact might not proceed with the purchase if he did not remain with the company.[16] Mr Brown was keen to ensure that his entitlements were preserved. He suggested to the first plaintiff that his employment be terminated by the defendants and then he be rehired by the plaintiffs. The first plaintiff did not wish to take this course of action. Whilst he could not recall actually discussing this with the first plaintiff, Mr Brown therefore assumed that “all my entitlements would have carried through”.[17]
[15] Transcript p 14
[16] Transcript p 55
[17] Transcript p 57
Mr Brown’s assumption was not an unreasonable one. As a matter of law, an employee’s entitlements will continue as long as employment continues notwithstanding a change in ownership of a business. It is not unusual for adjustments of purchase price to be made to reflect this. I do not find it credible that the plaintiffs would not have made enquiries nor considered the issue of employee entitlements in the negotiations for the purchase of this business.
I prefer the evidence of the defendants and Mr Brown on this issue. The second plaintiff’s evidence that, notwithstanding the plaintiffs’ desire to retain the employees of the company, there was no discussion of employee entitlements with either the defendants, their accountant or the employees is not credible.
In relation to the ATO debt, the second plaintiff says there was no discussion of this amount whereas the defendants say that there was. I prefer the evidence of the defendants. As indicated above I find it difficult to accept that such a substantial liability of the company was not discussed in the plaintiffs’ meeting with the company accountant. Further, Mr Brown gave evidence that the second plaintiff spoke to him about “the tax situation and how Alan had all these tax credits”.[18] The only tax situation about which evidence is presented is the ATO debt.
[18] Transcript p 55
I therefore find that whatever the special condition means the plaintiffs have not shown that it has the meaning that they contend.
Relief Sought
The plaintiffs are not suing on behalf of the company. The company is deregistered and, from the evidence of the second plaintiff, apparently insolvent. It has not formally been wound up[19] but indicates that the company was deregistered on 18 December 2005. The plaintiffs seek a declaration that the defendants are obliged to pay the amounts owing to the ATO and Mr Brown. I note that this is not the relief provided for in the Business Sale Agreement. The Agreement is subject to and conditional upon “the special condition”. There is a process set out in clause 15 for termination of the Agreement and failure to satisfy a special condition. The plaintiffs have not followed that procedure. Clause 15.4 however does appear to contemplate “other legal rights” in addition to the right to terminate the Agreement. This may include declaratory relief of the type sought by the plaintiffs.
[19] Exhibit P7
The court has a wide discretion relating to declaratory judgments. The courts will not however usually grant declarations unless there is a real, and not merely a theoretical, question before it and unless the person raising it has a real interest to raise it and that the defendant is someone who has a true interest to oppose the declaration[20]. A court will also not usually grant a declaration if there is no utility in the declaration[21]. In exercising the discretion whether to make a declaration a court may take into account any inadequacy of the evidence relating to the declaration[22].
[20] Santos Ltd v American Home Assurance 4 ANZ Insurance Cases 74,863 (60 – 795)
[21] Neeta (Epping) Pty Ltd. v Phillips (1974) 131 CLR 286
[22] Sportodds Systems Pty Ltd –v- New South Wales (2003) 133 FCR 63
Even if I found that the construction pressed by the plaintiffs was the correct construction I do not consider this is an appropriate case for the court to exercise its discretion to grant the declaratory relief sought.
First, the evidence before me concerning the exercise of discretion is inadequate for the reasons outlined above. Second, in relation to the ATO debt, I am not convinced on the material before me that the plaintiffs have a real interest in raising the issue. The ATO debt is a debt of the company. The material tendered by the plaintiffs makes it plain that this is the case. The latest date of the material provided is a statement from the ATO to STS dated 25 November 2006. It is not clear whether the ATO is taking any enforcement action in respect of this debt. It is further not clear whether the ATO intends to take any enforcement action in respect of this debt and if so, whether there is any basis upon which they could or would proceed against the plaintiffs as opposed to STS. Accordingly the liability of the plaintiffs is hypothetical. In order that a declaration is made there must be a real as opposed to a theoretical question[23].
[23] Forstaff Adelaide Pty Ltd v Hills Industries Limited [2006] SASC 88
Conclusion
In conclusion I find that the plaintiffs’ claim fails for the reasons outlined above. There will be judgment for the defendants. I will hear the parties as to costs.
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