Complete Business Strategies Pty Ltd v AFA Wealth Pty Ltd
[2013] QSC 43
•1 March 2013
SUPREME COURT OF QUEENSLAND
CITATION:
Complete Business Strategies Pty Ltd v AFA Wealth Pty Ltd and Ors [2013] QSC 43
PARTIES:
COMPLETE BUSINESS STRATEGIES PTY LTD
ACN 104 389 924(Plaintiff)
v
AFA WEALTH PTY LTD ACN 097 110 686
(First Defendant)
and
BARBARA LYNNE PAGE
(Second Defendant)
and
MARTIENNE FREETH
(Third Defendant)
FILE NO/S:
BS 3138 of 2012
DIVISION:
Trial Division
PROCEEDING:
Civil Trial
ORIGINATING COURT:
Supreme Court of Queensland
DELIVERED ON:
1 March 2013
DELIVERED AT:
Brisbane
HEARING DATE:
18 and 19 February 2013
JUDGE:
Philip McMurdo J
ORDER:
1. It is declared that pursuant to clauses 3.2 and 5.4 of the contract described as Business Sale Agreement, and dated 8 October 2010 between the plaintiff and the defendants, the plaintiff is entitled to retain the Retention Amount, in the sum of $260,000, which is referred to in clause 3.2 of that contract.
2. Judgment for the plaintiff against the first defendant in the sum of $820,411.
3. The plaintiff’s claim against the second and third defendants is dismissed.
CATCHWORDS:
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH – PERFORMANCE – Where contract for sale of business – where contract required specified turnover across two years – where shortfall entitled purchaser to refund – whether there was a shortfall – whether purchaser entitled to refund – whether clause entitling purchaser to refund amounted to a penalty
TRADE AND COMMERCE – OTHER REGULATION OF TRADE AND COMMERCE – RESTRAINTS OF TRADE – VALIDITY AND REASONABLENESS – PARTICULAR CASES – VENDOR OF BUSINESS – where contract for sale of business – where restraint of trade clause provided for combinations of area and duration restraint – what combination was valid – whether restrain of trade clause was breached
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH – PERFORMANCE – Where contract for sale of business – whether vendor breached contract – whether breaches entitled purchaser to remedies in the form of damages or declaratory relief
TRADE AND COMMERCE – OTHER REGULATION OF TRADE AND COMMERCE – RESTRAINTS OF TRADE – ENFORCEMENT OF AGREEMENT – REMEDIES FOR BREACH OF AGREEMENT – DAMAGES – where breach of restraint of trade clause by vendor in sale of business contract – whether purchaser entitled to damages
Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30; (2012) 290 ALR 595, applied
Dunlop Pneumatic Tyre Co Ltd v New garage and Motor Co Ltd [1915] AC 79, 87, appliedCOUNSEL:
DA Skennar for the plaintiff
The second defendant appeared on her own behalf and on behalf of the first defendant
No appearance for the third defendantSOLICITORS:
Morgan Conley for the plaintiff
The second defendant appeared on her own behalf and on behalf of the first defendant
No appearance for the third defendant
In October 2010 the plaintiff purchased from the first defendant an accounting practice. The second and third defendants were the individuals who, through the first defendant, had conducted that practice. They too were parties to the written contract of sale (“the contract”), where they were described as the Covenantors and became bound equally with the first defendant in some relevant respects.
The contract was dated 8 October 2010 and completed on 14 October 2010. The plaintiff has conducted the practice since then. The plaintiff complains of many breaches of the contract, entitling it to a reduction in the purchase price and a consequent refund of an overpayment of that price as well as damages.
Shortly before the trial, the defendants’ lawyers were given leave to withdraw. At the commencement of the trial, the second defendant appeared but only in response to a subpoena to produce documents. The third defendant did not appear. The second defendant claimed that she had been unaware that the trial was to commence that day. But the dates for trial had been fixed by an order of 11 October 2012, which was made with the consent of the defendants through their then lawyers. Clearly each of the defendants had notice of the trial dates and no defendant sought an adjournment. After producing documents in response to the subpoena, the second defendant said that she did not wish to participate further and the trial proceeded in the absence of the defendants.
The contract
Before going to the specific claims, it is convenient to set out the relevant terms of the contract. The property which was sold was described as the Assets comprising the Business.[1] The term “Business” was defined to mean:
[1]Clause 3.1.
“… the provision of accountancy services and advice to the AFA Clients under the [name of Active Financial Answers] using the Assets …”
The term “Assets” was defined to include relevantly what were described as “the AFA Client List (and the goodwill attaching to the AFA Client List)” and the “AFA Client Rights”. It also included the work in progress of the practice. The AFA Client Rights was defined to mean:
“… the right to provide to the AFA Clients services of a similar type as those which have been provided to the AFA Clients prior to Completion and any other services …”.
The “AFA Clients” were those clients set out in the AFA Client List, which was defined to mean the list of clients which was attached to the contract and also certain other lists which were there described.
The purchase price was $1,300,000. It was agreed that on completion, the plaintiff should retain from the price the so-called Retention Amount,[2] specified as $260,000, to be retained for a period of two years which was described as the Retention Period.[3] This was to be retained against, amongst others, the prospect that the turnover of the practice after completion would not be at least $2.6 million across the two years of the Retention Period. It was agreed that if the purchaser had not invoiced that amount by the end of the retention period, then for every dollar of deficiency there should be $1.00 reduced from the purchase price.[4] The purchaser would be able to set off the amount of the reduction in the price against the Retention Amount and where it was insufficient to cover any reduction, the purchaser would be paid the remainder “as a liquidated debt from the vendor”.[5] The shortfall in billings is now said to have been $1,028,386, which after allowing for the retention amount of $260,000, entitles the plaintiff to be repaid $768,386 by the first defendant.
[2]Clause 3.2(a).
[3]Clause 3.2(b).
[4]Clause 3.2(c).
[5]Clause 3.2(d).
By clause 5.4(a) parties agreed to allocate a value to the work in progress of the practice at completion, described as the Agreed WIP. It is common ground on the pleadings that this amount became $61,655. By clause 5.4(b), the vendor warranted that the Agreed WIP was able to be billed and collected. It was agreed that if any part was unable to be collected by the purchaser, it could set off the shortfall against the Retention Amount.[6] The plaintiff’s case is that there was a shortfall of $52,125.
[6]Clause 5.4(d).
The defendants covenanted not to engage in relevant businesses or activities after completion. The particular covenant which is now relied upon by the plaintiff was that in clause 11.2(a) as follows:
“The Vendor and the Covenantors undertake to the Purchaser that they will not during the Restraint Period in the Restraint Area:
(a)engage in any business or activity which is the same as or substantially similar to and competitive with the Business or any material part of it;”
The term “engage in” for that covenant was defined to mean:
“… participate, assist or otherwise be directly or indirectly involved as a member, shareholder, unit holder, director, consultant, adviser, contractor, principal, agent, manager, employee, beneficiary, partner, associate, trustee or financier.”
The terms “Restraint Period” and “Restraint Area” were each defined alternatively, according to the bounds of what was reasonable. The contract set out a number of combinations of area and period of restraint and the parties attributed a number to a combination, indicating the order of preference, so that the combination which was number one was said to be the parties’ most preferred combination. It was the most extensive in both area and period, the area being Australia and the period being five years. The least preferred combination, which was numbered 30, was for the area of the Sunshine Coast and a period of six months. The defendants’ pleading concedes that a restraint for the Sunshine Coast for a period of one year was reasonable. The plaintiff argues that combination number one was reasonable. It claims that the defendants have breached this provision and seeks damages to compensate for its allegedly lost profits.
Clause 4.3(a)(iii) required the first defendant to make available for collection by the plaintiff, amongst other things:
“… all AFA Client paper files, records and documentation in relation to AFA Client accounting, taxation and business affairs, including all trust deeds, company registers, registration certificates and all other documentation requested by the Purchaser.”
By clause 4.3(b) the first defendant was entitled to keep the original and electronic copies of the AFA Client List and what were defined as the Business Records that it was obliged by law to keep but it was to ensure that such information was kept confidential.
The plaintiff complains that the defendants wrongfully used confidential information, namely the AFA Client List, and seeks injunctions to restrain that further use and to require the defendants to remove the details of clients, defined by the contract to be “AFA Clients”, from all data bases held by them. It also complains that not all of the material required to be provided to the plaintiff under clause 4.3 was provided, but ultimately abandoned its claim for orders requiring further material of that kind to be provided (having regard to the practical difficulties in the supervision and enforcement of such orders).
Clause 3.4 of the contract obliged each of the defendants to refer as many potential clients of the practice as possible to the plaintiff and not to refer any potential clients to another business similar to the subject practice. Although the plaintiff alleges a breach of this provision, no separate relief is sought in consequence of it.
There are also complaints that certain other warranties were breached, although a distinct award of damages is not sought for them. By clause 8.1 each of the defendants gave “the Warranties” as at the date of the contract and for each day up to and including its completion. The term “Warranties” was defined to mean the warranties listed in schedule 6 to the contract. That included a warranty that all information given by the first defendant, its officers, employees or advisers to the plaintiff in the course of negotiations, including information within the “Due Diligence Checklist”, was true and accurate and not misleading. That checklist was set out in schedule 7 to the contract and included information in the form of statements by the second and third defendants that following this sale, they intended to “develop a franchise model for asset protection and wealth creation”. The plaintiff claims that this warranty was breached in that the defendants became involved a competing accounting practice. However, no claim is made for an award for damages for breach of this warranty, distinctly from the damages sought for breach of the restraint of trade in clause 11.2(a).
Shortfall in turnover
The shortfall claimed is established by the affidavit evidence of two directors of the plaintiff, Mr Rule and Mr Burns.[7]
[7]Affidavit of Mr Rule sworn 8 November 2012, paragraph 86 and exhibit PJR 21; affidavit of Mr Burns sworn 22 November 2012, para 48 and exhibit CJB 12.
The contract required the plaintiff, within three months after the expiration of the Retention Period, to provide a detailed account of the AFA client fees to the first defendant and to allow it to inspect all relevant books of account. The affidavit evidence to which I have referred does provide such a detailed account and it was provided within the period of three months as required by the contract. The first defendant pleads that the plaintiff was required to provide all of its books for inspection as a pre-condition to making the claim. The contract did not so provide: rather it permitted the first defendant to inspect the books. There is no basis for a finding that an inspection was denied by the plaintiff.
The Defence also pleaded that the claim was premature. That was true when the defence was filed, because the claim was made before the expiry of the period of two years from the completion date, that is to say before the expiry of the Retention Period. But that defence is no longer available because the period has expired. It was also pleaded that there was no liability to pay such an amount until after 14 February 2013. That seems to have been inspired by the provision of the contract which required the plaintiff to pay the Retention Amount, less any set off under clause 3.2, within four months of the expiration of the Retention Period. That term of the contract is irrelevant because the amount of the deficiency well exceeds the Retention Amount so none of it has to be paid. The contract does not provide that the entitlement of the plaintiff to be paid such of the reduction of the purchase price which is not satisfied by the Retention Amount arises only at some specific point after the expiry of the Retention Period. In any case, the date of 14 February 2013 has passed.
It was further pleaded that by an implied term, the plaintiff was obliged to endeavour to conduct the practice in such a way as to achieve the turnover that had been achieved by the first defendant. But there is no evidence to suggest any breach of such a term.
It was further pleaded that clause 3.2 is a penalty. It is not a provision which is engaged upon a breach of the contract by the first defendant. But the penalty doctrine is not limited to cases of a breach of a contractual promise: Andrews v Australia and New Zealand Banking Group Ltd.[8] The effect of the Defence in this respect is as follows. The practice was valued on the basis of $1.00 for every $1.00 of income of the business in the 2009-2010 year. Upon that basis, the agreed price became $1,300,000. Clause 3.2 required that purchase price to be reduced by $1.00 for every $1.00 for which the income of the practice fell below $2.6 million over a period of two years. Therefore, so it is pleaded, the reduction in price would be disproportionate to the impact upon the value of the practice from its turnover falling below $1.3 million per annum. In effect, the price would fall by $2.00 for every reduction of $1.00 in the average revenue over the two year period. Thus if, on average, the revenue was half of $1.3 million, the vendor would ultimately receive not half of the price, but nothing at all. (It should be noted that by clause 8.8, the maximum amount which the purchaser could recover in respect of all claims under the contract was limited to the purchase price.)
[8][2012] HCA 30; (2012) 290 ALR 595.
However, no basis for relief is demonstrated by this pleading. In substance, the parties agreed that the purchaser was to be assured of an income of $2.6 million over that period. The purchaser was acquiring not an asset which it was to be able to resell at a certain value, but rather a business for which the expected earnings were being underwritten by the vendor. It could be said that this was a payment which the vendor was required to make on non-fulfilment of the condition, namely the receipt of income of at least $2.6 million over the two years. But the question is whether the purchaser’s insistence upon enforcing this contractual entitlement to a guaranteed income would be unconscionable. It would be unrealistic to simply compare the purchaser’s payment of $1.3 million with its assured income of twice that amount, because clearly there were other commercial considerations: the purchase price had to be paid immediately whereas the income was to be received over time and the conduct of the business would involve substantial costs to be borne by the purchaser.
In essence, the parties agreed that $1.3 million should be paid for assets which the vendor guaranteed would produce fees of $2.6 million over the period of two years from the completion of the contract. They agreed that if the assets did not yield that turnover, then the amount to be ultimately paid for the practice should be reduced, dollar by dollar, to make up for the shortfall. Upon the evidence, the amount which the purchaser was to receive upon non-fulfilment of the condition was not extravagant or unconscionable in comparison with the extent to which it might be worse off for the condition not being fulfilled.[9]
[9]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, 87.
It follows that none of the pleaded defences provides an answer to this particular claim and the plaintiff is entitled to the Retention Amount and to be paid by the first defendant the sum of $768,286.
Restraint of trade
The first question here is the extent of the valid restraint, both as to area and as to duration. The evidence demonstrates that although the practice was conducted from the Sunshine Coast, the clients were located throughout Australia and it could not be said that those outside Queensland constituted an insignificant component. I am satisfied that a restraint throughout Australia was reasonable in the interests of the parties.
I am not persuaded that a restraint for more than two years was reasonable. The nature of the business, an accounting practice, meant that existing clients were likely to require services at least every 12 months. That is not to say that every client would go to the accountant within 12 months of the completion of the contract. Some clients might be late in attending to their affairs. A restraint for a period of only 12 months could have permitted the defendants to divert some of the goodwill which had been purchased by the plaintiff. Therefore I accept that a period of two years was reasonable.
The plaintiff points to clause 11.7 of the contract, which contains an acknowledgement by the first defendant that “the prohibitions and restrictions contained in this clause 11 are reasonable in the circumstances and necessary to protect the goodwill of the Purchaser”. But the Court must determine what was reasonable and the defendants’ agreement to the restraint is the reason for the question and not its answer. The plaintiff also seeks to rely upon an acknowledgement by the defendants, within some statements which were attached to the contract, that an “extended” restraint of trade was something which the defendants were “prepared to discuss”. This provides no effective support for the plaintiff’s argument. The plaintiff also refers to the fact the parties attributed almost all of the purchase price to goodwill. Undoubtedly there was goodwill to be protected: hence the reasonableness of some restraint. But the amount which was paid for goodwill does not answer the question of what was a reasonable restraint in the interests of the parties.
An interlocutory injunction was granted until the trial against a breach of this provision. A permanent injunction should not be granted, given the expiry of the restraint which was valid for two years ending last October.
The next question was whether there was a breach of clause 11.2(a). This requires a consideration of the ambit of “the Business”, as defined in the contract. In particular, it involves a consideration of what constituted “accountancy services and advice”. The second and third defendants had made it clear that they intended to carry on or be involved in another business, patronage from others, where they warranted in the contract that they intended to “develop a franchise model for asset protection and wealth creation”. The defendants pleaded that it was this business which they have pursued and denied that any of their activities since the completion of the contract have involved accountancy services and advice. I go then to the evidence of the alleged breaches of clause 11.2(a).
In June 2011, a company called AFA Super Pty Ltd requested the Australian Taxation Office to update the income tax details of an entity called the Alpha Trust, which is an entity listed within schedule 2 of the contract being the AFA Client List. AFA Super Pty Ltd is one of the group of companies controlled by the second and third defendants. This was an attempt to lodge a tax return on behalf of the Alpha Trust, which, I accept, was in the nature of accountancy services. That constituted a breach by the second and third defendants.
The first defendant advertised on its website that it was a “thriving accounting and consulting practice” with “an experienced team of tax professionals who can provide you with tax return preparation services …”. The second defendant denied that this occurred after the completion of the contract but an affidavit of Mr Rule[10] proves that the website was in those terms both in June or July 2011 and in May 2012. This was certainly a promotion of an accountancy practice: but there is no more direct evidence that such a practice was in fact conducted by the first defendant. For example, there are no records of the first defendant which are said to evidence a practice conducted by the first defendant after the completion of the sale.
[10]Sworn 16 May 2012, paragraph 15. The June 2011 website is also proved by paragraph 62 of Mr Rule’s affidavit sworn on 8 November 2012.
On 7 December 2011, the plaintiff received an email from one of its clients, which stated that in June 2011 the third defendant had provided her with tax advice, more specifically advice about capital gains tax on the sale of a property.[11] It is unnecessary here to set out the email. It does not appear that the third defendant became involved in the lodging of any return or submission to the Australian Tax Office. But it does appear that she discussed with the client the likely incidence of capital gains tax when the client was deciding whether to sell the property. Of itself this does not prove a breach by any of the defendants. They were not precluded from having dealings of any kind with anyone who had been a client of the accounting practice.
[11]Mr Rule’s affidavit of 8 November 2012, paragraphs 71 to 73 and exhibit PJR 15 to that affidavit.
The plaintiff contends that the defendants were permitted to retain contact with only those from the AFA Client List who had “received solely life coaching/wealth creation advice”. I have noted clause 4.3(b), by which the first defendant was entitled to keep the original and electronic copies of the AFA Client List. Clause 4.3(b) provided:
“The Vendor is entitled to retain the original and electronic copies of the AFA Client List and the Business Records that it is obliged by law to keep but must ensure that such information is kept confidential.”
The plaintiff submits that this indicates the purpose for which the first defendant was permitted to retain the AFA Client List, which was to satisfy any legal obligation to keep relevant records of what had been its business. That may be accepted but it does not mean that the first defendant was precluded from doing work, outside the nature of accounting services, for clients for whom it had previously provided only accounting services. The contract contains no express terms to that effect and there is no basis for an implied term.
The plaintiff complains about an email of 12 July 2011 which the second and third defendants sent under the name of their new business, “AFA Wealth”.[12] But as I read that email, it clearly distinguished between (on the one hand) the business which they were promoting, which they described as “wealth creation, asset protection, structuring, SMSF [apparently self-managed superannuation fund] strategies and all wealth coaching needs” and (on the other hand) the “accounting and taxation arm of our business” which, the email advised, had been acquired by the plaintiff. This involved no breach of clause 11.2(a).
[12]Exhibit PJR 7 to the affidavit of Mr Rule of 8 November 2012.
On 10 January 2012, the second and third defendants, again for AFA Wealth, emailed their clients in terms which are said to have breached the restraint provision. The email referred to their having formed “a number of new strategic alliances” with “a number of Accounting Franchisees joining us …”. But read as a whole, the email did not offer any accounting services. Instead, it offered services outside that description.
Then there is a complaint about an email sent by the second and third defendants on behalf of AFA Wealth to clients, which promoted the services of a business called “Bookkeeping Angels”, which they said would be “the solution to your bookkeeping and ATO compliance problems”. There was an attached flyer, describing this business as including the services of “registered tax agents” and as a business attending to all of the bookkeeping, GST, BAS, PAYG, payroll and superannuation”. Such services, in my view, were “accountancy services” for the purposes of the term “Business” in the contract. And not only were the second and third defendants promoting this business, it is also established that they were and are the directors of its proprietor, Bookkeeping Angels Pty Ltd. The defence to this allegation was said to be that the accounting practice as conducted by the first defendant had not offered bookkeeping services, so that it was not a service within the term “Business” as defined. However, the services to be provided by Bookkeeping Angels were promoted as more extensive than mere bookkeeping: the flyer described the business as “registered tax agents” and as providing “expert professional advice”. I am persuaded that the conduct of that business would have been a breach of clause 11.2(a). However, the extent to which this business was in fact conducted is not established.
The plaintiff argues that the second and third defendants have participated in a relevant business through a company, AFA Private Wealth Pty Ltd, under a joint venture or something akin to a partnership with an accounting firm called Team Accounting Solutions. A principal of Team Accounting Solutions, Mr Shimana, gave evidence in the plaintiff’s case under a subpoena. I see no reason to doubt the correctness of any of his evidence and the plaintiff does not seem to suggest otherwise. But the plaintiff’s argument, in my view, misstates the effect of that evidence.
According to Mr Shimana, AFA Private Wealth Pty Ltd is a company which carries on business as the trustee of a unit trust. Half of the units are owned by Team Accounting Solutions. The other half is apparently owned by the second and third defendants. Mr Shimana met the third defendant when attending a superannuation seminar in about November 2011. That led to a meeting in February 2012 with the second and third defendants, at which it was decided that a business called AFA Private Wealth would be established. He said that his accounting firm “was effectively to provide its client base to that entity” and that the second and third defendants “were effectively to provide their time and intellectual property to that entity with a view to assisting our clients with any financial or taxation investment type opportunities that they came across or that were presented to them”. The businesses of AFA Private Wealth and Team Accounting Solutions are promoted together. But according to Mr Shimana’s evidence, AFA Private Wealth has a business which is distinct from that of Team Accounting Solutions, both in its ownership and in the nature of its business. It does not conduct an accounting practice and the second and third defendants have no interest in Team Accounting Solutions.
The plaintiff argues that each of the second and third defendants has “engaged in” a relevant business, by participating or being “directly or indirectly involved as a … unit holder, director … partner”. Clearly they are unit holders of the trust of which AFA Private Wealth Pty Ltd is the trustee, the capacity in which it conducts its business. They are also directors of that company. It may be said that in a broad sense, they are partners with Team Accounting Solutions in the business conducted by AFA Private Wealth Pty Ltd. However, its business is not one which is “substantially similar to and competitive with the Business”. The accounting practice of Team Accounting Solutions is such a business. But they are not participants or otherwise involved in that business. The complaint of a breach of clause 11.2(a) which involves Team Accounting Solutions is not established.
The next complaint concerns a company called Twin Vision Pty Ltd. In about May 2012, it changed its registered office from the plaintiff’s office to that of Team Accounting Solutions. A director of Twin Vision Pty Ltd, who is also an employee of the plaintiff’s practice and a former employee of the first defendant in that practice, has told Mr Rule that this was not authorised by the company. Whether or not that is correct, the plaintiff’s complaint seems to be that the second and third defendants have caused this work, namely the provision of a registered office, to be transferred to a rival firm of accountants. It is far from clear that the provision of a registered office constitutes “accountancy services” in the relevant sense. Accountants often provide that service for their clients. But so do lawyers, and it does not become an “accountancy service” from the circumstance that it is provided by an accountant. It may be that this was part of a more extensive service which had been described in the records of the accounting practice before its sale, as “corp sec”. But in any case, the defendants are not involved in the business of Team Accounting Solutions.
A similar complaint is made in relation to a company called Allstate Piloting Pty Ltd, about which I reach the same conclusion.
There is a complaint about an advertisement by the first defendant in the Sunshine Coast Medical Journal in September 2011. It is said that this offered effectively the same services as the accounting practice acquired by the plaintiff. A number of services were offered by this advertisement. One was in the nature of “asset protection”, against the risk of “the Medical Practice activities”. It said that in general, discretionary trusts could achieve that objective. But it also promoted self-managed superannuation funds for that purpose. It gave some explanation of the rules which governed the ownership of property by superannuation funds. It described the defendants’ business as “experienced SMSF Specialist Advisers, Asset Protection Specialists and Wealth Planning Specialists”. I am not persuaded that this offered any of the services falling within the description of “accountancy services”.
The result is that of the many allegations of a breach of clause 11.2(a), only a couple are established, which are the complaints about the so-called Alpha Trust and the promotion of the bookkeeping service. Clearly the defendants have not simply conducted a rival accounting practice. I have not accepted the claim to that effect which is made in relation to Team Accounting Solutions. Clearly also the second and third defendants have been involved in a business which is materially different from that which was acquired by the plaintiff but the same or similar to that which they had told the plaintiff they would conduct after the sale. The plaintiff has had the opportunity in these proceedings to explore, by disclosure and other processes, the records of that business to investigate the extent to which the defendants have been involved in any prohibited activity. There is no case which is sought to be made from the records of that business.
I will return to the question of damages after discussing other allegations of breaches of the contract, because the plaintiff argues that the breaches together caused a loss of profits of a certain order.
The AFA Client List
The relevant evidence here is within an affidavit of Mr Burns,[13] from which I am satisfied that the vendor failed to provide all of the AFA Client List as required by clause 4.3(b) of the contract. Over time the plaintiff was able to identify clients of the practice whose details were not on the information which had been provided by the first defendant. The records of some 521 clients had to be manually entered in the plaintiff’s system because they had not been electronically transferred, and Mr Burns said that as at last November, that process “has been ongoing” (apparently meaning that there may be others). It is not alleged that the unavailability of these records caused clients to be lost to the plaintiff’s practice. Undoubtedly it caused expense to the plaintiff but there is no distinct claim for that expenditure. Rather it seems to be suggested that by not transferring these client details, the first defendant or the second and third defendants were able to more easily compete with the accounting practice. However, the first defendant was entitled to keep records of its work for these clients.
[13]Paragraphs 21 through 37, affidavit sworn 22 November 2012.
The question here is whether there is any compensable loss from the failure to provide a full client list. No distinct loss is claimed or indicated by the evidence. Nor does this matter provide a basis for increasing what might otherwise be an appropriate award of damages (if any) for a breach or breaches of the restraint of trade provision.
Obligation to refer
Although the plaintiff does not seek any specific relief in relation to this alleged breach, it is still the subject of the plaintiff’s final submissions. This obligation concerned potential clients rather than clients of the practice when it was conducted by the first defendant. Should it matter I will record some conclusions about this subject. The first is that the construction of clause 3.4, or alternatively the implication of terms in that respect, pleaded by the defendants in paragraph 33 of the amended defence does not appear to be persuasive. This case was that the defendants’ obligations under clause 3.4 were affected, if not discharged, by alleged conduct of the plaintiff in making remarks derogatory of the defendants and by the plaintiff being unable to provide a satisfactory service. However, a failure to refer clients is not established, let alone the extent of that failure.
By clause 3.4, the defendants also agreed that they would not refer potential clients to another business. The plaintiff says that they referred potential clients to Team Accounting Solutions and to Bookkeeping Angels. Clearly they did encourage people to use the services of Bookkeeping Angels. But the extent to which that promotion had any impact cannot be assessed. I accept that the second and third defendants, in promoting AFA Wealth coincidentally with Team Accounting Solutions, are likely to have referred some new clients to that practice. But again the extent of that referral could not be assessed.
Work in progress
According to the evidence of Mr Burns, only $9,530 of work in progress was able to be recovered. There were several reasons for this deficiency. Some clients and their files were not transferred, some work had already been billed and paid for, some work was not billable, because the work identified in the work in progress schedule was in the nature of things such as archiving and some work related to clients who had left the practice prior to its sale to the plaintiff. I am satisfied by the evidence of Mr Burns that the claimed difference of $52,125 is established.
The defendants pleaded that the plaintiff did not use all reasonable endeavours to collect the outstanding WIP. But there is no evidence to support that case.
Breaches of warranty
The relevant warranty is within paragraph 16.1 of schedule 6 of the contract which is as follows:
“16.1All information given by the Vendor, its officers, employees or advisers to the Purchaser or its officers, employees or advisers in the course of negotiations leading to this Agreement or Completion … is true and accurate in all material respects. None of that information is misleading in any material particular, whether by omission or otherwise. …”
The information presently relevant is within a series of recorded questions and answers in the Due Diligence Checklist which was attached to the contract. Each of those questions and answers related to the second and third defendants’ intentions about the type of business which they would conduct after the sale of this practice. So what was warranted to be true was their then states of mind. The warranties were given as at the date of the contract and for each day up to and including its completion.[14]
[14]Clause 8.1.
The plaintiff says that these warranties were false, as is evidenced by the defendants’ subsequent conduct. It is said that they did involve themselves in another accounting practice which is thereby proof of the falsity of the warranties. I am not persuaded that the warranties were false, that is to say that the defendants misstated their intentions as at October 2010. They did in fact establish a new business of the kind which they had said would be established. In carrying on that business, they have at times crossed the line by providing an accountancy service. But that is not to prove that their warranty was false, especially where that falsity could only have been intentional.
Confidential information
The plaintiff claims that clause 4.3(b) of the contract has been breached, insofar as it requires the first defendant to “ensure that such information [the AFA Client List and the Business Records] is kept confidential”. The plaintiff submitted that the AFA Client List “was provided pursuant to the agreement in circumstances of confidentiality”.[15] But it was provided pursuant to the contract by the first defendant to the plaintiff. Clause 4.3(b) entitled the vendor to retain the original and electronic copies. It is wrong to assess the first defendant’s position as if it had been the party to whom these records were provided.
[15]Submissions on behalf of the plaintiff, paragraph 71.
Its obligation was to keep them confidential. This did not mean that it was prevented from “accessing or using the AFA Client List”, which is what the plaintiff would seek, by a permanent injunction, to restrain the first defendant from doing.[16] As I read clause 4.3(b), the obligation of confidentiality is one to protect the interests of the clients. It is not to prevent the first defendant from having any access or proper use of the material. This claim for a permanent injunction must be refused.
[16]Submissions on behalf of the plaintiff, paragraph 72.
Damages
I return to the claim for damages. There is the one claim for damages for the breach of the restraint of trade and breach of the warranties. However, the failure of the breach of warranties claim does not have any practical impact upon the question of damages for breach of the restraint of trade.
The claim is put upon a premise that but for the breach of clause 11, the revenue for each of the years from the completion of the complaint would have been $1,300,000. This is based upon the proposition that the practice under the new ownership would be expected to derive effectively the same income as had been derived prior to the sale. I accept that the income prior to the sale approximated $1.3 million per annum. The plaintiff concedes that in the ordinary course of things, some clients are lost to a practice each year, although new clients are gained. There was evidence that it was common for the loss to be of the order of five per cent. But that was the experience without any change of ownership. It is difficult to accept that in general, in a relatively small accounting practice such as this, the departure of the two principals would itself have no impact upon the client base and in turn the revenue. Mr Burns explained that there was also the expected effect of referrals. He suggested that if there had been a proper course of referrals by the defendants to the practice, then this would have counterbalanced the five per cent loss of business. But that involves considerable speculation.
From that premise of a yearly income of $1.3 million, the plaintiff argues that any difference between that income and the actual income of the practice must be due to the matters of which complaint is made and ultimately, the defendants’ breach of clause 11. Therefore, for the period of two years following completion of the sale, the losses are claimed on the basis of the difference between $2.6 million and an actual income of $1,571,714, which after allowing for costs or expenses at 35 per cent of gross revenue, represents a loss of profit over those two years of $668,386. For years three to five, damages are claimed upon the difference between $1.3 million and an “anticipated revenue going forward” of $700,000 per annum. Again allowing for expenses at 35 per cent of revenue, the net loss for these years would be $390,000 per year or $1,170,000 in total.
No attempt was made to present an alternative case which identified, for example, the clients who went from the plaintiff’s practice to that of Mr Schimana, and the value in terms of revenue lost of their work. Whilst the fall in revenue has been proved, it has not been established that all or even a certain part of it has passed to any business in which the defendants are said to have been involved.
There may be many explanations for the difference between $1.3 million and the revenue which has been derived by the plaintiff. One which I have mentioned already is the likelihood that some clients would go elsewhere once the principals had left the practice. Another explanation could lie in the differences in the way in which the work was done, before and after the sale. Thirdly, to take one year of income when the business was owned by the plaintiff as proving what is to be expected, year by year, from this practice, seems to be somewhat unreliable.
I am unpersuaded that the loss as claimed by the plaintiff could be even a broad approximation of that loss (if any) which resulted from the instances of a breach of clause 11 which are proved. Counsel argued that alternatively I could make some broad global assessment and substantially discount for the possibilities of other explanations for the fall in revenue. But that seems to me to be such an arbitrary exercise that it could not constitute any fair assessment. I am not persuaded that that is the only way in which the plaintiff could have presented its case. As I have said, there was no attempt in the plaintiff’s submissions to identify the income which, it is suggested, was derived by some entity in which the defendants were involved from performing relevant work.
I must therefore dismiss the claim for damages.
Other relief claimed
The defendant also seeks certain declarations. It seeks a declaration that the term “accountancy services and advice” in the contract includes certain types of work, extensively described within some ten categories. Some of those describe work which is plainly within the relevant term in the contract. Others could be controversial and some are expressed in such general terms that they would not provide the means by which, in an individual set of circumstances, it could be determined whether the work was within the description in the contract. And there is no utility in making a declaration of this kind given my conclusion that the period for the operation of the restraint of trade has passed.
Declarations were also sought as to the plaintiff’s entitlement to the Retention Amount. There will be a declaration as to the plaintiff’s entitlement to keep the Retention Amount. No declarations are otherwise necessary, because it is unnecessary to distinctly declare a plaintiff’s entitlement to an amount for which it will be given judgment.
I should also mention that one of those declarations was to the effect that the plaintiff is entitled to a sum of $1,300,000 pursuant to clause 8.6 of the contract and that the plaintiff is entitled to have recourse to the Retention Amount for this sum (or part of it). As I have discussed, the submissions for the plaintiff did not seek a distinct award of damages for breach of the warranties. Clause 8.6 of the contract provided that the purchaser was entitled to set off the amount of any claim for breach of warranty against the Retention Amount and if that was insufficient to cover the claim, to recover that as a liquidated debt from the vendor “as a reduction of the purchase price”. Clause 8.8 provided that the maximum amount which could be recovered from the vendor in respect of all claims “under this document” was “limited to the Purchase Price”. This seems to have inspired that part of the draft judgment provided by counsel for the plaintiff in which declaration was sought as to the entitlement of that sum of $1,300,000 pursuant to clause 8.6. Given my findings as to there being no breach of warranty and in event no demonstrated loss, clearly nothing is to be awarded under clause 8.6.
The draft judgment also sought an order that the defendants “remove all clients, defined … to be ‘AFA Clients’ from all electronic data bases held by the first, second and/or third defendants”. That order would be inconsistent with clause 4.3(b) by which the vendor was entitled to retain the original and electronic copies of the AFA Client List.
Orders
The plaintiff has established its entitlement to the deficiency in work in progress of $52,125 and the shortfall in turnover of $1,028,286. It is entitled to use the Retention Amount of $260,000 towards those sums. This means that the money judgment in favour of the plaintiff against the first defendant will be in the sum of $820,411. The deficiency in work in progress could be regarded as satisfied out of the Retention Amount so that the money judgment is effectively the balance of the shortfall in turnover. As the entitlement to that money accrued only very recently, it is unsurprising that the plaintiff has not sought interest on that amount.
The claim against the second and third defendants ultimately fails. They are not said to be liable for the amounts payable under clauses 3.2 and 5.4. I have found that they did breach the restraint of trade in some respects but no loss has been proved from which a fair assessment of damages could be made. Subject to any submissions which might be made on costs, this suggests that there should be no order for costs as between them and the plaintiff.
The orders will be as follows:
1. It is declared that pursuant to clauses 3.2 and 5.4 of the contract described as Business Sale Agreement, and dated 8 October 2010 between the plaintiff and the defendants, the plaintiff is entitled to retain the Retention Amount, in the sum of $260,000, which is referred to in clause 3.2 of that contract.
2. Judgment for the plaintiff against the first defendant in the sum of $820,411.
3. The plaintiff’s claim against the second and third defendants is dismissed.
I will hear submissions as to any further orders including costs.
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