Brian Schutz v David Robert Baldock and Colin Sidney Baldock No. SCGRG 93/1422 Judgment No. 4195 Number of Pages 7 Contracts Share Farming Contract Construction

[1993] SASC 4195

COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA PERRY J

CWDS
Contracts - share farming contract - construction - appeal by plaintiff against judgment following trial in the Local Court of the plaintiff's claim for monies due under a share farming agreement - held that on a proper construction of the agreement the learned Magistrate had failed properly to construe and apply the formula set out in the agreement for the calculation of a bonus to be paid to the plaintiff by way of a share of profits.

HRNG ADELAIDE, 20 September 1993 #DATE 20:12:1993
Counsel for Appellant:        Mr G. Patel
Solicitors for Appellant:     Patel and Co
Counsel for Respondents:     Mr S. Manuel
Solicitors for Respondents: Piper Alderman

ORDER
Appeal allowed.

JUDGE1 PERRY J The appellant, who was the plaintiff in the court below, appeals against a judgment given in his favour by a learned Magistrate constituting the Local Court of Tanunda in the sum of $2,679 plus interest. In the Ordinary Summons by which the action was commenced, the appellant sued the defendants, who are the respondents to the appeal, for $17,719.20 which he asserted was due under an agreement described as a share farming agreement. Pursuant to the agreement, during 1989 and the early part of 1990, he worked on a farming property at Saddleworth which the respondents operated in partnership. 2. Put shortly, the appellant complains that in arriving at the amount for which he gave judgment, the learned Magistrate failed properly to construe and apply the terms of the agreement between the parties. 3. The appellant had worked for the respondents on the farm in question since 1979. He began as a farmhand, but as time went by, he became responsible for working the farm, and in particular sowing and harvesting the crops, which were mainly grain. 4. The respondents live in Queensland where they conduct other pastoral interests. Their father, however, lives on the farm at Saddleworth. It is not clear from the evidence what part, if any, the respondent's father, known as Pat Baldock, played in the operation of the farm. 5. In February 1989, the respondent Colin Baldock came to the farm and discussed with the appellant the basis upon which he was to be engaged for the forthcoming year. Pat Baldock was present, as was Mr Wigney, an accountant, and the appellant. The discussion took place in the shearing shed. 6. In previous seasons, the appellant had received 5 per cent of the proceeds of the sale of the grain. Mr Colin Baldock indicated that he wanted to change the arrangement. The appellant went along with that suggestion. Mr Colin Baldock offered on behalf of the respondents to remunerate the appellant at the rate of $6 per hour, to be supplemented by a share of profits. The appellant's evidence was that the precise detail of the profit sharing arrangement was not discussed, although some aspects of it were. The learned Magistrate preferred the evidence of Mr Colin Baldock to the effect that the details, and in particular the method of calculation of the profit sharing, were discussed. I think it likely that the appellant did not take a great deal of notice of the detail of the formula for calculation of the share of profits. His evidence was:
    "At this time I must point out this agreement was being made
    in the shearing shed, and there was people working and I was
    going in and out all the time, so the concentration wasn't
    there a hundred percent." 7. Certainly the appellant was told enough for him to realise that the higher the profits from the farm, the greater would be his remuneration. 8. At all events, within days of that meeting, Mr Colin Baldock wrote out a document which he gave to his father, who in turn passed it on to the appellant. The document ("P1") reads as follows:
    "Formula For Wage Negotiation
    Between Brian Shutz and D.R. and C.S. Baldock and Co. Brian
    to be paid $6 per hour for all work done on behalf of D.R. and
    C.S.B. Brian to be paid 20 per cent of nett profit of D.R. and
    C.S.B (nett profit to be worked out as set out below). Brian to
    be paid 40 per cent of the nett profit of D.R. and C.S.B. on that
    portion of profit over $50,000.
    Nett profit to be worked out as follows:-
    Income - less all costs except for
    (a) Rates and taxes.
    (b) Depreciation to be fixed at $18,000/year being M.V. of
    working plant divided by 7 years.
    (c) F.B.T.
    (d) R.G.B. telephone.
    (e) Travel.
    (f) R.G.B, wages.
    (g) R.G.B. car repairs only (a/c to be operated and paid for
    separately).
    (h) Interest on working capital below start-up figure (eg
    interest on working capital over 1/3/89 O/D figure ($124,000
    to be in nett profit calculation).
    (i) Repairs to R.G.B. House.
    Notes:- How this is to apply.
    Nett profit share will be paid annually to Brian after
    completion of books. This amount being paid as a "bonus" and
    attracts taxation at the marginal rate.
    All share crop agreements to be cancelled with bulk grain
    handling (eg Wheat Board and Barley Board)).
    R.G.B. car to be repaired and account sent to R.G.B. and be
    paid for with a separate cheque to other vehicles so that it
    can be noted in books.
    All interest on money over $124,000 and including header
    loan to be included in nett profit figure." 9. There was considerable debate at the trial as to the status of the document, and as to its proper construction. In particular, the question arose whether it should be regarded as a written agreement between the parties, or as simply a note of what had been agreed orally. 10. Certainly, the heading "Formula for Wage Negotiation" does not suggest that it was intended by Mr Colin Baldock to be an operative agreement between the parties. It is not signed or dated. It is not stamped, although despite that, no objection was taken at the trial to its receipt in evidence. However it is to be construed, it clearly did not comprehend all of the terms of the arrangement between the parties as it does not refer to the nature of the crops to be sown, when they were to be put in, who was to have a say over what was to be sown, what plant was to be used, when the payments of $6 an hour were to be made, and so on. It is clear that if it was to have contractual significance, it could only do so in the context of the writing being part of the agreement, the rest of the terms being either oral or implied. 11. In fact, I think that the word "formula" in the heading of the document, and the content of the document, suggests that it was never intended to define anything other than the terms of remuneration. It seems likely that the parties did not consider that it was necessary to write out the other terms which, no doubt, were intended to reflect the manner in which the property had been worked by the appellant for some years beforehand. 12. The discussion in the shearing shed was confined to a change in the basis upon which the appellant was to be remunerated, and it is not surprising, therefore, that the written document which was subsequently given to him did no more than to record that aspect of the agreement between the parties. 13. There are various ways in which such a document could be construed. It might be regarded in the same way as minutes of a meeting, that is, a record of what had been discussed but not intended to express what had been discussed in contractual form. On the other hand, it might have been intended to be the written contract, treating the preliminary discussion as no more than that. Or it might be construed as a written offer based on the discussion. 14. I think that the proper construction of the document is that it was intended to be a written offer made in extension of the oral discussions which had preceded it. I think it was open to the appellant, if he had chosen to do so, to negotiate further with the respondents after his receipt of P1, but he opted not to do so. Indeed, I doubt that he even put his mind to the possibility of further negotiation. He went on to work on the property during the ensuing year, presumably receiving the $6 per hour referred to in P1. It seems to me that in those circumstances the appellant must be taken to have agreed to work the property on the basis that he be remunerated on the terms set out in P1. 15. The appellant did not work on the property after the end of February 1990. A dispute then arose as to how much the appellant was entitled to. The respondents paid to the appellant $3,948 over and above the wages of $6 per hour. The appellant claimed that on a proper construction and application of the arrangements between them, he was entitled to a further sum being the amount sought in the proceedings. 16. It will be seen from the terms of P1 that the starting point of the calculation provided for in that document was the calculation of the net profit defined as "income - less all costs except for" the various costs which are then set out. Once the net profit was ascertained in that way, the appellant was to receive 20 per cent of the net profit up to a figure of $50,000, and 40 per cent of the net profit, if any, which exceeded that figure. 17. At the commencement of the trial, the learned Magistrate was informed that it was agreed between the parties that the net profit, subject to certain further adjustments which were to be made, was agreed at $25,326. That figure was reached, however, after deducting amounts for depreciation, interest and a sum related to the repair or replacement of the item of equipment known as a boom spray. The only dispute brought to trial, was as to whether or not it was proper to make a deduction in respect of those three items before reaching the net profit figure. 18. In the result, the learned Magistrate found in favour of the appellant only with respect to the boom spray,for which a figure was allowed of $2,200, and allowed also certain other minor adjustments agreed between the parties during the course of the hearing. 19. The calculation upon which judgment was eventually pronounced which allowed for those matters is set out in the following passage in the learned Magistrate's reasons for decision:
    "I now turn to the calculation; it was agreed that the
    commencement profit figure would be $25,326.00. In the course
    of the proceedings it was agreed that the sum of $21,200 I have
    mentioned above, should be taken into account. This meant that
    further interest had to be added and this came to a figure,
    accepted by both parties, of $3,290. The defendants also
    accepted that the header loan interest was not an appropriate
    deduction and therefore the sum of $3,000 also had to be added.
    I have found that the boom spray arms were a capital expense.
    This means that the cost of same, that is, $2,200, should also
    be added to the figures mentioned. In all, this totals, on my
    calculations, a sum of $33,816.00. Mr Wigney in his evidence
    conceded that there was additional interest that should be
    credited to the defendants. It appears that this amount was a
    sum of $681.00. When this is deducted from the sum total I have
    mentioned then a final figure of $33,135.00 is reached. On the
    basis of the calculation in exhibit P1 Mr Schutz was entitled to
    a bonus of 20 per cent of this figure. I calculate this to be
    $6,627.00. Mr Schutz however, it is agreed, has already been
    paid the sum of $3,948.00. The balance therefore is $2,679.00.
    There is a claim for interest and I will hear counsel as to same
    in addition to any application as to costs." 20. The appeal before this Court was confined to two matters only, namely, the questions of the appropriate amount to be deducted for depreciation, and the allowance of interest. Depreciation 21. The problem which arose with respect to this item was as to the proper construction to be given to the words in P1 "(b) Depreciation to be fixed at $18,000 per year being M.V. of working plant divided by 7 years", particularly having regard to the fact that those words appear under the heading "Income - less all costs except for". 22. It appears from the evidence that $18,000 was a figure calculated after dividing the market value (contracted in P1 to M.V.) of the plant likely to be used in the farming operations, amortised over seven years. One year's depreciation was to be brought to account in determining the net profit for a given year on the basis that the profit was produced in part from the use of the plant. However, the words "except for", if given full effect, would preclude the allowance of any depreciation, at least up to the amount of $18,000. 23. At the trial and on the hearing of the appeal, the appellant argued that the figure of $18,000 was intended to indicate that no depreciation was to be allowed for unless the total market value of the working plant divided by 7 exceeded that amount, in which event it was only the amount of the excess which was to be brought to account. 24. That construction cannot have been intended, despite the confusing manner in which P1 is drawn up. There was no suggestion in the evidence that any further plant was to be acquired. In my opinion, P1 should be construed to mean that the figure of $18,000 was to be deducted by way of depreciation before reaching the net profit figure. That the phrase dealing with depreciation appears under the words "except for" was clearly a mistake, as Mr Colin Baldock said in his evidence. 25. In my opinion, the learned Magistrate did not err in his treatment of depreciation, and there is no warrant to interfere with the judgment on that score. Interest 26. Again, the point involved is largely a question of construction, in this case as to the clause relating to interest which reads:
    "(h)Interest on working capital below start-up figure (eg
    interest on working capital over 1.3.89 O/D figure ($124,000
    to be in nett profit calculation)."
    This is to be construed with whatever assistance can be
    derived from the phrase appearing under the heading "Notes:
    how this is to apply.
    All interest on money over $124,000 and including header
    loan to be included in nett profit figure." 27. The figure of $25,326 which was regarded by the learned Magistrate as the appropriate amount from which to commence the calculation of net profit, took into account an amount of interest of $9,240. The passage in the learned Magistrate's reasons for judgment in which he deals with the question of interest is as follows:
    "The next matter to be considered relates to 'interest'.
    In the document exhibit P1 it is stated, (again in part) ...
    'net profit to be worked out as follows; Income - less all costs
    except for ... (h) interest on working capital below start up
    figure (for example, interest on working capital over 1/3/89 ---
    O/D figure $24,000 to be in net profit calculation)'. Also
    incorporated in exhibit P1 is a page headed 'notes: how this is
    to apply'. On this page there is the entry 'all interest on
    money over $124,000 and including header loan to be included in
    nett profit figure'. The parties agree that, on the date of the
    original discussion between the parties, the overdraft figure,
    in relation to defendants' business, was below $124,000. In
    fact, from exhibit P2, it would appear that that figure was not
    reached until 31 March 1989. A sum of $180,000 was brought into
    the account on 26 April 1989. The working capital, appropriate
    to the calculations in this matter, was therefore the difference
    between $180,000 and $124,000, that is $56,000. A sum of
    $21,200 however had to be deducted from that figure since this
    was not regarded as working capital but was used to repay a term
    loan. A further sum of $3,000, relating to a header loan, it
    was also agreed, should not be included as any deduction. What
    still remained outstanding however, was the sum of $14,600 which
    I understand to be bank interest credited to the account and
    interest paid to R.G. Baldock on a loan previously made.
    Mr William's evidence was that this loan was present as at
    1 March 1989 and used by the defendants prior to that date. The
    loan was to advance monies over a period to pay for day-to-day
    expenses in the running of the business. He could not give
    details of the loan however he said that it had been in
    existence for at least five years and it had resulted in $11,000
    being placed into the particular account. The basic argument of
    the plaintiff appears to be that the bank interest and interest
    on the loan I have mentioned above, should not be included as
    this was prior to the commencement of the share farming
    agreement. There was, for example, no evidence that the nature
    of any loan was for fixed capital or working capital but it
    should be agreed that the funds were never borrowed for the
    purpose of the share farming agreement. The submission by the
    defendants was that these two sums of money, mentioned above,
    have been extracted by Mr Williams from the defendant's business
    books. It was stated that all interest paid by defendants during
    the relevant period should be a 'cost' and therefore should be
    deducted from any profit calculation. In exhibit P1, sub
    paragraph (h) there is a reference to 'interest'. The specific
    reference however is to 'interest on working capital'. There
    was no reference to 'other interest' among the list of costs to
    be excluded. Mr William's views on the matters, should they be
    accepted, are that all interest should be taken into the
    calculation. Messrs Wigney and Williams differed in their
    approach, for example, as to what might be regarded as 'working
    capital'. Mr Wigney said he regarded the term as demonstrating
    that it was capital required to run a property on a day-to-day
    basis taking into account the running of variable fixed expenses
    and general working costs on property including labour and
    similar items and would include the overdraft. He did not
    include repairs to fixed assets, plant, equipment and others or
    any purchase of those items. Mr Williams said that the term
    'working capital' would be the difference between current assets
    and current liabilities. I concede that the point is not easy
    to decide however the wording of the sub paragraph suggests to
    me that the figure of $124,000 must be the focal point. It is,
    at least, an argument that interest, for example on working
    capital below the figure of $124,000 was not to be included.
    The two sums mentioned, i.e. totalling $14,600, were apparently
    interest sums relating to the period prior to 1st March 1989.
    They do not appear in exhibit P2. Mr Williams said the figure of
    bank interest, that is $3,600, could therefore have been
    credited before 1st March 1989. I see no reason to reject
    Mr William's evidence in all of the circumstances and in
    particular I do accept that an appropriate way to approach this
    matter is to regard all interest on monies over $124,000 to be
    taken as an expense. Once again the plaintiff bears the onus of
    establishing on the balance of probabilities that this should
    not be so. I do not consider that he has discharged that onus.
    With respect to the two disputed sums of money therefore, that
    is the $11,000 and $3,600, I am therefore disposed to rule in
    favour of the defendant's submissions." 28. The difficulty, of course, is that there is no definition of "working capital" in P1. In reaching the view which he did in that respect, the learned Magistrate was much influenced by the evidence of Mr Williams, the accountant called by the respondents. However, much of the evidence of both Mr Williams and of Mr Wigney should have been ruled inadmissible. It constituted in part evidence of the parties' intentions, and in part an attempt to guide the Court as to the construction of P1, by evidence from the witness box. 29. Be that as it may, it does appear, however, from the evidence of Mr Williams that the interest of $3,600 was bank overdraft interest which had accrued over the previous year, and that the interest of $11,000 was in respect of a loan made by Mr R.G. Baldock to the respondents over the five years prior to 1 March 1989. There was no evidence as to the way in which the loans made by Mr R.G. Baldock had been applied. 30. It appears to me that the reference under the heading "Notes: how this is to apply" to "all interest on money over $124,000 and including header loan" is a clear indication that the interest to be allowed was on the bank overdraft which stood at $124,000 at the time of the discussion which preceded P1 (apart from a separate loan with respect to the header). Approaching the matter in that way, it seems to me that the only amount of interest which should have been allowed was with respect to the sum of $56,000, being the amount by which the sum of $124,000 increased during the period of operation of the farm under the revised arrangements. 31. It follows that the appellant must succeed with respect to that part of the appeal dealing with interest. 32. The adjustment necessary if the appeal is allowed as to the item of interest only, appears in a schedule tendered to the Court by Mr Patel of counsel for the appellant the relevant part of which reads as follows:

    "2.If depreciation of $18,000.00 is held to be deductible as
    (sic) costs and interest of $14,600.00 is held not to
    deductible as cost then the net profit figure of $33,135.00
    would increase to $47,735.00 ($33,135 + $14,600.00)
    Appellant's share of profit will be as follows:
    20 per cent of $47,735.00 + $ 9,547.00
    Less Paid         $ 3,948.00
  $ 5,599.00" 33. Mr Manuel of counsel for the respondents did not join issue with that calculation. 34. This means that the sum awarded by the learned Magistrate (excluding interest) of $2,679 should be increased to $5,599. 35. The learned Magistrate allowed a sum of $1,118 for interest. If that is increased proportionately, having regard to the variation in the judgment figure which I consider to be appropriate, the amount of interest becomes $2,337. 36. I allow the appeal so as to vary the amount of the judgment in favour of the appellant to $7,936 inclusive of interest. 37. I will hear the parties as to costs.