| JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA LOCATION : PERTH CITATION : CUSTOMBUILT HOMES PTY LTD -v- DOWELL & ANOR [2003] WADC 121 CORAM : FRENCH DCJ HEARD : 10-13 MARCH 2003 DELIVERED : 30 MAY 2003 FILE NO/S : CIV 1857 of 2001 BETWEEN : CUSTOMBUILT HOMES PTY LTD (ACN 009 393 051) Plaintiff
AND
ASHLEY KEVIN DOWELL
First Defendant
SHOANA LEANNE DOWELL
Second Defendant
Catchwords: Contract - Intention to contract - Whether concluded agreement - Severance - Turns on own facts
Legislation: Nil
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Result:
Judgment for plaintiff for $65,000 Representation:
Counsel:
Plaintiff : Mr M L Bennett
First Defendant : Mr P R Eaton
Second Defendant : Mr P R Eaton
Solicitors:
Plaintiff : Bennett & Co
First Defendant : Biddulph & Turley
Second Defendant : Biddulph & Turley
Case(s) referred to in judgment(s):
Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd [2000] WASCA 27
Brew v Whitlock (No 2) [1967] VLR 803
Thorby v Goldberg (1964) 112 CLR 597
Case(s) also cited:
Axelsen & Ors v O'Brien (1949) 80 CLR 219
Byblos Building Co Pty Ltd v Darlane Pty Ltd & Ors [1999] WASC 248
Conagra International Fertiliser v Lief Investments Pty Ltd (1997) 141 FLR 124
Duskwood Pty Ltd v Bellara Willows Pty Ltd & Ors [2001] WASC 26
Hall v Busst (1960) 104 CLR 206
Masters & Anor v Cameron (1954) 91 CLR 353
Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd's Rep 601
SVI Systems Pty Ltd v Best & Less Pty Ltd & Ors (1001) 187 ALR 302
Tern Minerals NL v Kalbara Mining NL (1990) 3 WAR 486
Terrex Resources NL v Magnet Petroleum Pty Ltd & Ors (1988) 1 WAR 144
Woodside Offshore Petroleum Pty Ltd v Atwood Oceanics Inc & Anor [1986] WAR 253
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Introduction 1 The plaintiff was incorporated in 1989 to operate a home building business using the name Custombuilt Homes that had been trading as a partnership between Gary and Gloria Green. The first defendant had been employed in that business from approximately 1986, initially as a builder's labourer, and then in a management and administrative position. Prior to 1996 he was receiving payment for his services on a profit sharing basis. In June 1996 the first and second defendants formalised this arrangement and bought into the business by becoming shareholders and directors of the plaintiff company. The purchase price for this 50 per cent share of the company was worked out between the Greens and the defendants as $82,500. The defendants were only able to borrow $60,000 so that was paid into the plaintiff's overdraft account and the balance of purchase price was apparently loaned to the defendants by the Greens. Although it was suggested on behalf of the plaintiff in opening that the loan was from the plaintiff to the defendants it appears that the correct position was that the balance of purchase price was an amount left owing in an informal arrangement between the Greens and the defendants. As a result of this injection of working capital the loan account of the Greens with the plaintiff was credited with the sum of $60,000. In 1995 the business was extended to include site works on home building projects being conducted by the plaintiff and operated under the registered business name of Hills Siteworks. Earthmoving equipment was purchased by the plaintiff for use in that business. Over the next few years the first defendant became more involved in that aspect of the business. From approximately November 1998 the business of Hills Siteworks included site work for clients other than projects of the plaintiff. The extent of that was in dispute. 2 The plaintiff experienced difficult financial times after 1996 and partly as a result of that in April 1999 the first defendant wanted to terminate his involvement in the business operated by the plaintiff to work on his own account. This was expressed by the first defendant as "dissolving the partnership". Subsequently there were meetings between the first defendant and Gary Green in relation to what had to be done to bring about this separation. It was agreed that on the defendants leaving they would "take" and operate the business of Hills Siteworks including the earthmoving machinery and the Greens would retain the business of Custombuilt Homes operated through the plaintiff company. In addition, the defendants would relinquish any interest in a separate entity called
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Araluen Building Design Services Pty Ltd. This company had been established to operate a single project in relation to a housing estate in Araluen with Gary Green and the first defendant as the two shareholders and directors. These arrangements were put in place on or about 30 June 1999. The defendants resigned as directors and transferred their shares from the plaintiff and Araluen Building Design Services. The first defendant ceased to work at the plaintiff's premises and started to operate the business of Hills Siteworks independently. Machinery that required a motor vehicle licence was transferred into his name. A notice was compiled and sent to the plaintiff's clients advising of the separation in terms that reflected the arrangement that the Greens retained the home building business operated by the plaintiff with the Dowells independently operating the business conducted under the name of Hills Siteworks. Clients were directed to Gary Green for Custombuilt Homes matters and to Ashley Dowell for Hills Siteworks matters. 3 The plaintiff claims that these arrangements were part of a contract entered into between the plaintiff and the defendants that included the above arrangements and also provided for a financial reckoning arrived at by balancing out respective financial responsibilities to the plaintiff and arising out of the defendants' decision to terminate the joint working relationship they had had with the Greens and go their separate ways. It is claimed that the defendants have breached that contract and moneys due and owing under the terms of that contract have not been paid. 4 The defendants claim that there was not a concluded contract but a long period of negotiation between the parties as to the final balance that has not resulted in any agreement. There is no dispute that no moneys have been paid either by the defendants or by the plaintiff or the Greens at any stage.
The pleadings 5 The original writ dated 23 July 2001 claims that the defendants had agreed to purchase chattels and a business from the plaintiff and had not paid the sum of $118,535. This was increased to the sum of $160,635. The statement of claim filed in September 2001 set out the relevant history of the defendants' purchase of the 50 per cent interest in the plaintiff and the establishment of the business of Hills Siteworks and Araluen Building Design Services Pty Ltd. Paragraph 12 claims that by an agreement made between Gary Green on behalf of the plaintiff and the defendants it was agreed that the separation of their affairs would involve: ·
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· The defendants would purchase the Hills Siteworks from the plaintiff together with the earthmoving equipment involved in that business. The telephone number would be transferred to the defendants.
· The defendants would take an assignment of the equipment loan in relation to the earthmoving equipment after an adjustment to the loan balance.
· The defendants would repay any moneys owing to the plaintiff in the loan account.
· The defendants would resign as directors and shareholders of Araluen Building Design Services.
· The plaintiff would pay 25 per cent of the goodwill in Araluen Building Design Services to the first defendant together with 50 per cent of the value of the assets.
· The defendants would pay to the plaintiff 50 per cent of any overhead expenses incurred by the plaintiff and outstanding as at 30 June 1999.
· The plaintiff would repay to the defendants the initial investment of $60,000 for their resignation as directors and shareholders from the plaintiff.
· The change in the financial position of the plaintiff between June 1996 and June 1999 would be assessed and any profits or losses shared equally between the defendants and the Greens.
· The defendants would pay the plaintiff interest at 8 per cent on any outstanding amounts.
6 The statement of claim alleges that the agreement was made partly orally and partly by conduct or to be implied from the circumstances. The oral agreement was said to have been made at meetings and during phone conversations from 25 April 1999 to November 2000 and to be implied by the conduct of the parties over that period including correspondence, the signing of motor vehicle transfers and the defendants taking over and operating the business of Hills Siteworks. This conduct is claimed to have amounted to a part performance of the contract. The plaintiff claims the
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sum of the amounts said to be outstanding as a result of this agreement set off against amounts admitted by the plaintiff to be due to the defendants. 7 The defence admits that the sum of $82,500 was paid by the defendants for a 50 per cent interest in the plaintiff in June 1996 but claims that that amount was agreed as a result of representations made by the Greens. However, there is no claim for misrepresentation in the defence. 8 The defence claims that the business of Hills Siteworks was extended in November 1998 to include site work for clients other than projects of the plaintiff. Paragraph 12 sets out the arrangements that were agreed would be made to separate the affairs of the business. These were: · The plaintiff would transfer its interest in Hills Siteworks to the defendants including the business name and telephone number.
· The plaintiff would transfer to the defendants plant and equipment to enable it to carry on that business.
· The defendants would resign as directors of the plaintiff and Araluen Building Design Services and transfer their shareholdings to the Greens.
· Paragraphs 13 and 14 of the defence plead that although those arrangements took place discussion as to financial matters was deferred until financial statements were available in March 2000, but that despite prolonged negotiations the parties have been unable to agree what amounts are due as between the parties in relation to the following matters:
· The value, if any, to be attributed to the transfer of the business of Hills Siteworks and the value of the plant and equipment.
· The value of the defendants' interests in Araluen Building Design Services and in a property at Byron Road, Armadale, registered in the Greens' name.
· The liability of the plaintiff to indemnify the defendants as the guarantor of a loan from the ANZ Bank.
·
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· The amounts outstanding as loan accounts in the plaintiff's book of accounts against the defendants' name.
9 In reply the plaintiff joins issue with the defendants although agrees that the parties have been unable to agree on the value of the business of Hills Siteworks, the value of the defendants' interest in Araluen Building Design Services and the amounts outstanding as loan accounts against the defendants.
The issues 10 The plaintiff claims that the essential terms of the contract were agreed and even though a final figure was not available until after the financial statements were prepared this did not mean that the contract was not concluded as the way in which the final balance was to be calculated had been agreed between the parties. It was contended that they had agreed how the final balance was to be struck even though the final sum could not be calculated. The defendants deny that there was a concluded contract and claims that the only thing that was agreed was that the business of Hills Siteworks would be severed from the business conducted by the plaintiff and be operated by the defendants. The defendants would resign from and relinquish their shareholding in the plaintiff and Araluen Building Design Services. The financial consequences of these actions would be negotiated and determined at a future date. 11 During the course of the hearing the issue of alternative claims and remedies was raised with the plaintiff. The plaintiff confirmed that its claim against the defendants was based solely on the alleged contract and there were no alternative claims pursued nor alternative remedies sought in relation to the issues in dispute between the parties. The issues for determination by the Court are therefore confined to whether there has been a contract formed between the parties and what amounts are due under the terms of that contract.
Communications between the parties from April 25 1999 to November 2000. 12 From the date of the first defendant's initial advice that he wished to leave the company on April 25 there followed a period of almost 18 months communication between Green and the first defendant in relation to the arrangements necessary to achieve this. The communications took the form of oral discussions in meetings, by memos
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sent by fax and by letter. Towards the end of the period some of the communication took place through the parties' accountants. The evidence of Green and the first defendant was quite discursive in nature reflecting the close working relationship that had existed between them for some years and the informal structure and arrangements that they had with the plaintiff. Although there was conflict in relation to some of the detail of the communications and conclusions to be drawn from these communications there was a consensus in broad terms on the progress of the discussions during this period. 13 Green commenced his evidence by describing the history of his working relationship with the first defendant and the circumstances in which he became a director and shareholder in the plaintiff company. He explained that the $60,000 paid into the company by the defendants was paid into the overdraft account but was credited to his and his wife's loan account with the plaintiff company. In 1998 the finances of the company were reviewed and the overdraft account which had been used to purchase earthmoving equipment for Hills Siteworks was "broken down by the bank" and part of it transferred to a fully drawn advance of $100,000 to be paid off over a period of 10 years. This fully drawn advance was termed "the equipment loan" in the plaintiffs statements of account. 14 In 1998 and 1999 the plaintiff was not doing well financially although the Hills Siteworks side of the business improved. Green described the first defendant approaching him on 26 April 1999 and advising that he and the second defendant wanted to leave the company at the end of that financial year. He described that meeting as being a very brief one with nothing much more communicated other than the decision to leave. However he stated that the first defendant expressed the idea that he wanted to take the Hills Siteworks part of the business with him and take over that work on his own behalf. It was not clear from Green's evidence whether that was communicated on 26 April or at one of the later meetings. The first defendant said that he had not decided to take the Hills Site Works side of the business at the meeting on 26 April but it was proposed by him at the later meeting in May 1999, and the consensus between himself and Green was that he would take Hills Siteworks and Green would keep Custombuilt Homes and Araluen Building Design Services businesses. 15 Green explained that at some stage it was agreed that both he and the first defendant would prepare a list of matters that had to be resolved and that there was a further meeting in the company office early in May 1999. He stated that at that meeting various items of equipment or machinery
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were noted on an Excel spreadsheet from the depreciation schedule stored in a computer. He stated that he and the first defendant had agreed - "Probably early in the discussions that we would use depreciation values. The only qualification is that any equipment we couldn't agree to be taken at that value would then be sold independently of us and we would split the proceeds". (T41) 16 The first defendant says that he never agreed that the earthmoving equipment would be valued according to the depreciation schedule. He disagreed with that suggestion by Green and said the machines were not worth that much. He said he told Green he did not think that that was how it should be done and he wanted to get advice from his accountant Alan Bradshaw. 17 Green stated that at that early meeting he and the first defendant discussed the value of the company and that they agreed that they would work out the profit and loss of the company for the period in which the first defendant was a shareholder and share it equally. Although Green said he could not recollect the order in which the discussions took place the matters discussed included the following items:- · The Araluen Building Design Services entity was discussed and it was agreed that that entity would stay with Green and the first defendant would withdraw as of 30 June. There was discussion in relation to items in the depreciation schedule for Araluen Building Design Services.
· Materials purchased to be used on Hills Siteworks jobs or building jobs were discussed and it was generally agreed that they would balance each other out and that they would not need to be dealt with separately.
· There was discussion on insurances that were in place. And it was generally agreed that they were matters that needed to be brought into account as at 30 June.
· There was discussion in relation to three building projects that were under construction and there was a consensus that these needed to be brought to account to identify the value of work completed in relation to those projects as at 30 June 1999. Green stated that these discussions took
·
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· place over a series of meetings and that the expectations of both himself and the first defendant was that they had been "very efficient in claiming our progress claims" so that there would be value in the claims that actually hadn't taken place on site. The inference to be drawn from Green's evidence in relation to this matter was that the plaintiff company had "over-claimed" before some of the work was actually completed. He stated that for the purpose of their discussions those amounts were termed pre-payments.
· A property in Byron Road, Armadale, that had been purchased in 1995 by Green and his wife. The plaintiff company had been paying costs in relation to that property and it was agreed that there would have to be some accounting for those payments. Green stated that the discussions were initially just to identify the costs that had been incurred during that period and apportioning half of those costs to himself and his wife. However it was later agreed |that if there had been any profit in the relevant period from 1996 to 1999 that would be shared between the parties. To that end it was agreed that he would make enquiries to obtain valuations for the property.
· There was discussion relating to the methods and timing of notifying clients of the proposed changes.
· Green stated that there were detailed discussions as to how the plaintiff company's loans to the bank were to be dealt with. He stated that it was agreed that with the defendants leaving the business the securities in relation to those loans needed to be adjusted to reflect how the business was changing. As is common with small private companies both Green and his wife and the defendants were joint guarantors of both the overdraft and the equipment loan. He stated that it was agreed that the equipment loan would go with the equipment and that he and his wife needed to be removed as guarantors for that portion of the loan that went with the defendants. At the same time the defendants needed to be removed as security for the overdraft facility. He said that it was a matter of establishing the value of the equipment loan.
·
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· He explained that the equipment loan was basically to be used as the facility to deal with the debt that the defendants would ultimately have with the plaintiff company. That was explained in the following terms: "In essence, there was the potential that the value the Dowells owed to us was less than the equipment loan and if that was the case, we were to furnish them with a payment in relation to the difference between the loan account and the amounts that we had established. Conversely if the amount exceeded the loan account that they would be responsible for the cost beyond the cost of a loan account. It was the facility that we were going to use to do that adjustment." · Green stated that the defendants' loan account with the company was identified and the discussions centred around the proposition that that would be repaid but set off against the $60,000 investment that the defendants had paid into the company when the shares were purchased in 1996. Green stated initially that there was a "perception" that the $60,000 investment and the $55,000 loan account would be repaid. He then went on to say that it wasn't just a perception but it was agreed that the loan account of $55,000 would be repaid and that the $60,000 investment would be reimbursed.
· Green went on to say that the basis for the proposal that the $60,000 investment would be repaid to the defendants was because his discussions with the defendants were concluded on the basis that an assessment would be made of the value of the company from July 1996 to June 1999. The intention of that was that if there had been a profit in that period that would have been divided between them but if as was acknowledged that there was going to be a loss then it had been agreed that loss would be shared equally.
· There were discussions in relation to what Green described the smaller issues such as the Greens' purchase of computer equipment from company funds in May
·
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· 1999 and the disposition of site work signs in the name of Hills Siteworks and in the name of the plaintiff.
· There was discussion in relation to a registered business name of "Upmarket Homes" and discussion in relation to smaller items such as stationery and equipment and outstanding accounts. Accounts such as long service leave and holiday pay accounts needed to be checked. Security deposits deposited with local councils for damage to footpaths also had to be accounted for.
18 The first defendant stated that the meeting in May 1999 was only brief and that the main result was an agreement that the defendants would take the Hills Siteworks side of the business leaving the balance with the Greens. He disputed that there was any discussion at that stage that they would "take" the equipment loan. He stated that the matters to be attended to by both of them were identified and rough notes were made by Green. The first defendant's evidence was that it was at the meeting on 23 June 1999 when there was a longer discussion about what he termed "dissolving the partnership". 19 Green stated that after the initial meetings in May there were some later meetings in June, on approximately June 23 1999. He stated the purpose of that meeting was to get in place matters that needed to be attended to prior to the defendants leaving the company on 30 June. Green described the meeting in June as being a lengthy one of approximately one and a half hours and stated that the discussions initially centred around the items that had been identified as needing to be resolved and agreed in earlier meetings. He stated that one of the major issues was the Hills Siteworks equipment that was going to be taken by the defendants. It was understood that the first defendant would obtain transfer papers so that the equipment could be transferred to the defendants. He stated that it was again agreed that the values to be ascribed to the items of equipment were the depreciation values in the depreciation schedule on the computer. The next major issue was the change in valuation of the company from 1996 to 1999. In relation to the previous discussions regarding the bank loans and transfer of securities the first defendant was going to approach the bank to finalise those arrangements. He stated that there was further discussion and agreement that the $60,000 investment was going to be refunded and the $55,000 loan account repaid by the defendants. He stated that "We had the understanding that we had covered all the major items and the issues that
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would arise would only be minor things." Green stated that he took brief notes during the meeting of the discussion that took place and those notes were tendered (Exhibit 54). 20 The first defendant agreed that the notes on Exhibit 54 were present at the meeting on 23 June. He said Green had the notes at the meeting but part of them had been prepared by Green prior to the meeting. He agreed that the notes reflect the discussions during the meeting. He also said that there was a discussion about working out the difference in the value of the company from 1996 to 1999. He said that it was agreed at the meeting that the defendants would sign over their shares in the plaintiff and Araluen Building Design Services to Green and his wife and resign as directors. He said it was understood at that meeting that "at the end of the day someone was going to have to pay money to the other". He said that when he and Green went through the depreciation schedule it was to identify the items of machinery that he was taking. He denied that he ever agreed to ascribe the depreciation schedule values to the items of machinery. He said it was agreed that he would get transfer forms for machinery that had to be registered as vehicles. He agreed that it was determined that an accurate position as at 30 June 1999 had to be ascertained regarding the three current building jobs. The first defendant denies that there was any discussion or agreement regarding what Green described as "pre-paid jobs". He stated that he could not understand this as progress payments could only be claimed for work completed. He does not accept that he agreed at any stage that the company had "over-claimed" for work that had not been done. The first defendant did agree that there was discussion at that meeting that their loan account with the company would need to be balanced up. 21 The first defendant said that there was a further meeting on 5 August 1999 and it was at that meeting that the issue of the profit on the current building projects was discussed. He said that Green had statements of their financial status entitled "Summary Sheets" but he disagreed with Green's proposal that some account had to be made for the pre-paid amounts. He said that nothing was resolved at the meeting on 5 August and Green was going to get advice from his accountant, Tony Swan. 22 On 30 June 1999 a notice was sent to the plaintiff's clients and suppliers advising of the change in structure as from 30 June (Exhibit 6). That notice advises that the first and second defendants are resigning as directors of the plaintiff company and Gary and Gloria Green are
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resigning as partners in Hills Sitework Specialists. Telephone numbers were adjusted accordingly with notification to Telstra. 23 After 30 June there were further meetings between Green and the defendants. Green stated that the purpose of those meetings was to calculate the value of numbers that were needed to settle matters between them. He stated that there were a number of meetings over a period of three months as from August 1999 to "establish the values of numbers that needed to be put into the equation for finding the final balance for the bank basically." He stated that although they had discussions information was not fully available and the next meeting he recalls was in approximately October 1999. He advised that at that stage the plaintiff was still paying interest on the equipment loan and it was his intention to get the balances resolved so that that loan could be transferred to the defendants. He understood that the first defendant was having discussions with his bank and the bank needed a final figure to use to establish the loan in the defendants' name. However, he stated that the meeting in October was inconclusive as numbers were not available to finalise matters. 24 On 12 October Green received a letter from the first defendant requesting figures in relation to three outstanding contracts and other details. A postscript at the bottom of the letter referred to advice from the bank that their personal guarantees for the plaintiff company's loans could be sorted out by the defendants and the Greens writing to the bank advising that they approved of the other party being dropped off as security. Reference is then made to "us for OD and you for fixed loan." Green responded to this fax by supplying figures as requested. Green stated that there were further meetings and he recalled a meeting early in November 1999 but according to Green he considered that there was a breakdown in the process. He stated that at that meeting the first defendant advised that he had obtained independent values for the equipment and that he considered that those values should be used for the purpose of settlement. He stated that he dismissed that as it not been their agreement. 25 The first defendant gave evidence that he obtained valuations of machinery in October 1999. 26 It appears that there was a meeting arranged for 29 November 1999 but was cancelled by the first defendant in a fax advising that he was not sufficiently prepared. A further fax was sent by the first defendant to Green advising that they needed the balance sheet to 30 June to "enable us
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to dissolve the partnership" and "this needs to be done before we can go any further". As a result of this nothing significant seems to have occurred until the following March when Green sent financial details of the plaintiff and Araluen Building Design Services to the first defendant's accountant, Alan Bradshaw. Green subsequently provided information in relation to the defendants' loan account with the plaintiff. He then received a facsimile from the first defendant on 29 March requesting further details and concluding with a note "with these I can sort out with Alan (Alan Bradshaw) the proposed dissolving of the partnerships". 27 On 26 April 2000 the defendants sent a letter to Gary and Gloria Green containing a "proposal…to finalise details and end our involvement with Custombuilt Homes Pty Ltd and Araluen Building Design". The proposal for settlement contained in that letter listed various items that had been the subject of previous discussions but allocated different values to be taken into account in finalising a financial settlement. It took into account the defendants' initial capital cost and added to that the defendants' estimate of a half share in profits from jobs and assets of the plaintiff company and Araluen Building Design. Some of the calculations are difficult to understand. For example, the balancing of the company loan accounts and the reconciliation of debts in the name of the plaintiff seems illogical. The letter summarises the position as resulting in the plaintiff owing the defendants the sum of $19,718. It is stated that a cheque in that amount will finalise financial matters. 28 Green stated that although he sent the defendant's calculations to the plaintiff's accountant, Mr Tony Swan, for analysis, he did not agree with the figures proposed by the defendants and did not understand how some of the calculations had been made. He stated that the defendants' valuation of the earthmoving equipment at $65,000 was not consistent with the agreement that depreciation values would be used. However, he stated that although that figure of $65,000 was less than the depreciation values he would consider that aspect of the proposal if it would determine matters. Following communications by fax that the plaintiff company's accountants were still looking at the figures a response was sent to the defendants on 26 May 2000. In that letter Mr Gary Green on behalf of the plaintiff company advised the defendants that their proposal of 26 April had been assessed by Mr Tony Swan, the plaintiff company's accountant, and he had evaluated the details and established a settlement figure that was described as a "fair and amicable outcome". The letter stated that although that figure ($111,683) was significantly different from the defendants' assessment it represented an accurate summary of the detail. The letter then stated that if the defendants disagreed then matters put in
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writing would be considered or discussed at a meeting. The letter advises that the main principles are in place although some matters have not been finalised. In principle, it was stated that the value of the company was established at 1996 and then in 1999 and the changes in the value of the company equally apportioned. It then states that after that figure is established there are adjustments to take into account such as the loan account with the plaintiff company, the return of the defendants' initial investment and the payment for the earthmoving equipment based on the defendants' assessment of $65,000. The letter concludes that the calculations result in the defendants owing to the plaintiff company the sum of $111,683. 29 Following that letter there were a number of communications relating to figures for the three current housing projects. In a letter dated 4 August 2000 the defendants described that issue as being "the major issue in the settlement". On 7 August the plaintiff sent detailed information in relation to the costings on those projects. According to those costings over $100,000 worth of work had been in effect "over-claimed". This meant that those moneys had been dealt with as if they had been earned by the plaintiff company prior to 30 June when in fact that work had yet to be completed. 30 On 14 August the defendants' accountant, Alan Bradshaw, sent the defendants' revised assessment of the position to the plaintiff. This assessment estimated that there had been a reduction in the value of the company from 30 June 1996 to 30 June 1999 in the sum of $56,381 producing a debit against the defendants in the sum of $28,190 being a half share. The defendants' 50 per cent share of the net asset position for Araluen Building Design Services was then deducted from that figure as well as a half share in the increase in value in the Byron Road property. The assessment then included a return of the $60,000 investment to the defendants and a payment by the defendants for the purchase of the earthmoving equipment in the sum of $65,000. Apart from some smaller amounts this produced a balance owing by the defendants to the plaintiff in the sum of $8,686. In addition to those calculations the defendants' accountant also provided notes that were said to explain the calculations but appear to respond to some of the figures provided by the plaintiff. 31 On 25 August 2000 the plaintiff's accountant, Mr Swan sent a letter to the defendants seeking clarification. Mr Swan points out that the defendants' calculations have overlooked the repayment of the defendants' loan account with the plaintiff company and the fact that no account has been made of goodwill to be assigned to the Hills Siteworks business yet
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goodwill in the sum of $32,932 had been assigned to the Araluen Building Design Services business. 32 In a response dated 18 September 2000 Mr Bradshaw wrote to Mr Swan providing some clarification of the figures and responding to the queries. The comment on p 2 of his letter that the defendant is unable to see why the loan account with the plaintiff company should be repaid if it was taken into account in determining the value of the business does not seem logical. However, I note that in conclusion Mr Bradshaw states on the basis of the information given to him he considered that "the two parties are poles apart in coming to terms on an amount to be paid to settle the issues between them". He stated that he advised the defendants that they would need to pay some money and suggested that some compromise be reached as it seemed pointless for the parties to continue to incur costs if no agreement was reached. A suggestion was made that Green could give consideration to an amount that he would be prepared to accept to conclude the issue and it was pointed out that the defendants had limited ability to raise substantial amounts of money. 33 On 10 November 2000 Green sent a fax message to the first defendant requesting information as to what the defendants could afford to pay and querying aspects of the defendants' assessments. The message then stated that there were four main issues to be finalised in the current proposal and these included the defendants' loan account with the plaintiff company and the value for the earthmoving equipment. The first defendant responded to this message on 1 December 2000 by advising that he considered that agreement was not going to be reached on the outstanding issues. He advised that the defendants were attempting to sell their home and it was pointed out that any moneys owing could only be paid on that settlement. 34 In a letter dated 6 December 2000 Green confirms that the position is as was set out in the letter of 26 May 2000, namely that a sum of $111,683 was owed by the defendants for the period up to 31 May 2000 and that the defendants' assessments and approach to the calculation of the figures was not understood nor accepted. It was pointed out that before there could be any settlement negotiations the amount owing must be agreed. The letter then concludes by advising that if this "starting point" cannot be concluded in a written agreement by the end of the year 2000 legal action will be instituted to recover the amount owing.
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The accountant's evidence
35 When the writ was subsequently issued in July 2001 the total claimed by the plaintiff was the sum of $118,535. The increase from the original sum claimed was probably due to interest. The writ was subsequently amended to a claim of $160,635. This was the calculation of the total balance contained in a report by Mr Tony Swan dated 15 July 2002. Prior to the trial Mr Tony Swan had died so his report was examined by Mr Trevor Gorey, a chartered accountant, specialising in non-listed business valuations and litigation support. Mr Gorey examined Mr Swan's report and provided what he described as a commentary on that report. He had been provided with relevant documentation including the correspondence between the first defendant and Green and the letters and financial statements from Mr Bradshaw. He also had access to the discovered documents in these proceedings and the pleadings. Mr Gorey's examination of Mr Swan's report confirmed that his approach was according to conventional accounting practice and figures and details were confirmed by supporting documentation where appropriate. In relation to relevant matters at issue Mr Gorey commented that he could not understand why the defendants averaged out the loan accounts in the company's balance sheet contained in the letter of 26 April 2000 and he considered that the full amount owed by the defendants was recoverable by the plaintiff. Mr Gorey stated that he understood that there was an agreement that a calculation would be made on the increase or decrease in the value of the company from the time the defendants took their 50 per cent equity in 1996 to the time they left in 1999. He commented that the basis of calculating the value at those respective dates was not established. However he noted that Mr Swan adopted a basis of net assets and Mr Bradshaw adopted a similar basis in his correspondence. Mr Gorey then noted that adjustments had been made to the accounts of the company to reflect what he called amounts of pre-paid work-in-progress at 30 June taken up as liabilities and a decrease in the value of earthmoving equipment to an agreed value of $65,000. Mr Gorey then commented on the reduction in the value of the company as a result of the pre-paid progress payments. He did note that the calculation of work-in-progress and determination of a level of progress payments received in advance can be subjective and it depends on an assessment of the percentage of completion of the project. He stated that he understood that Green had instructed his building supervisor to check assessments. He had not made detailed calculation of the amounts as he had no reason to question the calculations in Mr Bradshaw's letters and he noted that those had been adopted in Mr Swan's calculations.
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36 In Mr Gorey's opinion there were adjustments to the calculations made by Mr Tony Swan that could be made. The original assessment of $165,000 used by the parties to assess the amount to be paid by the defendants for purchase of shares in the plaintiff in June 1996 could have been used as a valuation of the plaintiff as at 30 June 1996. Mr Gorey also considered that the inclusion of an amount of $100,000 goodwill was not justified by the operating results for the year ended 30 June 1999. He considered that it would be reasonable to expect the defendants to pay for the goodwill of the business of Hills Siteworks. Mr Gorey comments that he understood that it had been agreed that the $60,000 equity invested by the defendants would be repaid. He notes that that is not an amount that should be deducted from the amounts payable to the company by the defendants. Similar comments were made in relation to amounts calculated for the shares in Araluen Building Design Services. In cross-examination Mr Gorey agreed that his understanding of the position from the discovered documents was that there had been a contract and a breach of contract and the purpose of Mr Swan's report and his commentary was to assess the damage. He stated that he had no access to accounting records. He commented that on his assessment of the documents there were some areas in which the parties were in agreement but there were other areas where no agreement at all was shown.
37 Mr Alan Bradshaw has been the defendants' accountant for over 15 years. He advised that he was aware in 1999 that the defendants were planning on severing their ties with the plaintiff and were considering their options. He stated that the first defendant asked him how they should go about doing it and he advised him that he should ensure that he resigned as a director and that the shares were transferred. The first defendant also queried as to how the financial arrangements should be worked out and he advised that the basis of the calculation for leaving the company should be the same basis as the calculation was for him going in. He stated that his understanding was that when the defendants bought into the company in 1996 the valuation was based on assets only with no calculation of liability. As a result of that he stated that his advice to the defendants in 1999 was that the same basis should be applied in calculating the value of the company when they left. He stated that he had a number of meetings with the first defendant in relation to this issue and he had input into the letter that was sent by the defendants dated 26 April 2000. He confirmed that he suggested to the first defendant that he should obtain valuations for the plant and equipment that he was acquiring and that it was not appropriate to acquire them at written down depreciation values.
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38 Mr Bradshaw stated that following the response of 26 May from the Greens and the supply of further information he re-worked the figures and completed a further assessment of the position from the defendants' point of view that is set out in his letter of 14 August 2000 forwarded to the plaintiff. This produced a balance $8,686 owing by the defendants to the plaintiff. He explained that that assessment did not include a repayment of the loan account of $55,551 as on his view that should have been treated as income due to the defendants. However, he stated that on further discussions with the first defendant it was decided that it was too difficult to unravel the circumstances that led to the inclusion of that loan account in the financial statements and that that would not be disputed if an agreement was reached in relation to the overall settlement.
39 In cross-examination Mr Bradshaw conceded that if the $55,000 was not repaid by the defendants it could not properly be regarded as an asset of the plaintiff company and therefore could not be taken into account in calculating the value of the company as at June 1999. 40 There was no challenge to the approach that both the plaintiff's and defendants' accountants appear to have adopted as to how the financial matters should be resolved. It seems unusual that rather than simply calculating the value of the defendants' shares in the plaintiff as at 30 June 1999 the method adopted was to compare that value with the worth of the plaintiff on 30 June 1996. This approach does appear to have complicated what should have been a relatively simple exercise. I found the use of calculations that involved a "debit" or "credit" being thrown into the equation and then divided in half between the plaintiff and the defendants confusing. It was unclear to what extent this was a product of the parties initial attempts at negotiation and to what extent it was a method employed by the accountants. However, it appears that Mr Swan was asked to prepare financial statements on the basis of what he was advised was the agreement between the parties rather than giving initial advice on the best and simplest method to adopt. Although Mr Bradshaw advised the first defendant that he should "go out in the same way that he had gone in" his advice was generally sought in relation to specific items in dispute between the parties. It is significant that both Mr Gorey and Mr Bradshaw had some difficulty in understanding aspects of the way in which the parties had approached the negotiations. As Mr Gorey had pointed out some of the calculations in relation to amounts due by the defendants to the plaintiff were really issues between the defendants and the Greens.
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Conclusions
41 In the statement of claim the plaintiff pleads that the alleged agreement consisted of a number of transactions to bring about a separation of the defendants' legal and financial connections with the plaintiff and in some cases, with Gary and Gloria Green. The alleged agreement was said to have been made partly orally and partly by conduct to be implied in the circumstances. The evidence of what took place from 26 April 1999 to December 2000 was confusing. The explanation from Green and from the first defendant of their discussions and arrangements does not easily lend itself to logical analysis. When the issue first arose at the end of April and in early May 1999 the first defendant and Green talked in terms of basic principles, namely that the defendants would leave the company selling their shares to Green and his wife and operate the business conducted under the name of Hills Siteworks on their own using the earthmoving equipment to be transferred to them from the plaintiff. The financial consequences of these transactions would then be balanced against other financial responsibilities as between the plaintiff and the defendants and Green and his wife. Unfortunately, this relatively simple approach was not pursued. The parties appear to have allowed themselves to get bogged down in trying to sort out all the minor details attendant on the defendants' withdrawal from the company business without first establishing the appropriate mechanism to achieve this and without professional advice. The situation was further complicated by a blurring of the separate entities involved in the whole process. On many occasions the first defendant referred to the process as being one of "dissolving the partnership". It was plain that both the first defendant and Green conducted themselves as if they were in a partnership with little regard to the fact that the plaintiff was a separate entity. Although this is not unusual in private company governance it impedes separation of their financial affairs according to usual accounting practices and logical analysis of their respective rights and responsibilities. 42 By the time the parties reached a stage where they considered it necessary to consult their respective accountants, the question of what had been agreed appeared to be mixed up with the issue of what would be the correct approach to adopt to bring about closure of their financial connections and their accountants were not able to resolve their differences. The confusion that this has caused continued after legal proceedings were commenced and to some extent up to and including the presentation of evidence at trial. In the circumstances of this case and taking into account the relatively small nature of the party's claims against each other it is regrettable that the issues between them could not be
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resolved by means of mediation or perhaps some kind of arbitration proceedings conducted by an independent and suitably experienced accountant. I find that both Green and the first defendant were honest witnesses in the sense that I did not find that either of them were consciously attempting to mislead the Court as to what was actually agreed between them. However, the lack of detailed written records of their meetings and the informality of their communications make it difficult to determine what, if anything, was agreed. On a number of occasions Green used expressions such as "it was our understanding" or "the perception was" that suggest that in relation to a number of issues they may not have communicated with sufficient precision to support a finding that even a broad consensus was reached let alone a concluded and binding contract. 43 There is no doubt that the basic agreement was that the defendants would transfer their shares and directors' positions in the plaintiff and in Araluen Building Design Services to the Greens. The defendants would take with them and operate in their own right the business conducted by the plaintiff under the name Hills Siteworks. In broad terms that is what occurred. The plaintiff transferred ownership of the earthmoving equipment that had been used to conduct the Hills Siteworks business to the defendants. Clients and business associates were advised of these arrangements and telephone numbers and signage relating to Hills Siteworks were taken over by the defendants together with small items of associated tools and stock. The balance of machinery, stock and any businesses or assets directly or indirectly associated with the plaintiff either remained with the plaintiff or (as in the case of the Byron Road property) with the Greens. 44 However the financial consequences of the abovementioned transactions were to be worked out between the parties when the necessary financial information was available and a final balance or settlement figure agreed. 45 This final balance would be set off against the plaintiff's bank loan entitled "The Equipment Loan" which would be "taken over" by the defendants through an arrangement with the bank. This did not mean that this was simply to be taken over as a liability by the defendants but that it would be used as a kind of mechanism to arrange for the payment of the outstanding balance whether that was due to the plaintiff or the defendants. This was the effect of Green's evidence as referred to at p 12 above. Although there was some confusion as to the defendants' position in relation to this equipment loan I find that the only conclusion that could
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be drawn from the arrangements that were made to change the guarantee signatures on the loans was that the defendants would see the bank to transfer the equipment loan into their names. However, I accept that it was not a situation that they were taking over the liability per se but that the final balance would be set off against that equipment loan so that if the defendants owed less than the amount of the loan then moneys would be forwarded to them by the plaintiff but if the total balance was more than the loan then the difference would be forwarded from the defendants to the plaintiff. It is not clear if the defendants made any formal approaches to the bank to see if some kind of "transfer" of the loan equipment was feasible. At one stage the first defendant said the bank would not extend credit because the "partnership" had not been dissolved. 46 Although the process was not made clear, it appears the bank released the defendants as guarantors for the plaintiff's loans. 47 It may be the case that the parties would have reached some compromise if the defendants were able to obtain credit by means of the transfer of the equipment loan or otherwise as was suggested by the plaintiff's counsel in cross-examination. However, that did not happen and I am not persuaded that any inference can be drawn that the defendants decided to renege on the alleged agreement as a result of that. 48 Unfortunately the financial consequences of the defendants' departure from the plaintiff were not worked out at a future time or agreed between the plaintiff and the defendants. This was not just a matter of failing to agree on a final balance or settlement figure, but a failure to agree on the basis on which the final balance figure would be reached. Essentially, the parties did not at any stage reach a real agreement on how their financial entanglements could be unravelled. 49 I am satisfied that the defendants did not agree on the method to be used in calculating the difference in value in the plaintiff during the relevant period, nor to any calculation made during the course of the negotiations. The defendants did not at any stage accept that the value of the plaintiff would be reduced because of the "prepaid" amounts in relation to the then three current building projects. I am also satisfied that the defendants did not agree that their loan account with the plaintiff would be repaid although at one stage the first defendant conceded that it could be something to be taken into account if it would finalise matters. Although it seems obvious that any loan accounts standing against the defendants would have to be repaid, either discretely, or by means of balancing out other financial objections, I am satisfied that the nature of
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the loan and whether in fact it was due and payable was not conceded by the defendant as a discrete matter. 50 I am also not satisfied that the defendants agreed that the depreciation values would be used to calculate a figure to be paid for the earthmoving equipment. Although Green considered that this was an appropriate figure to use I accept the first defendant's evidence that he did not accept this and at a fairly early stage in the negotiations queried the use of depreciation figures and advised Green that his accountant had told him that that was not the appropriate way to value the machinery. The comments made by Green that the equipment would be sold and the proceeds split supports the defendants' evidence that there was no final agreement that depreciation values would be used. I do not accept the plaintiff's suggestion that the fact that he obtained valuations was only for the purposes of motor vehicle registration transfers. The figure of $65,000, being the final balance of those valuations, is the amount agreed to by the first defendant. It has been used by the plaintiff in the calculations for its claim in these proceedings. Although Green stated that this figure was adopted for negotiation purposes and on the basis that it might conclude matters, I find that there was a concluded agreement between the plaintiff and the defendants, that this would be the final purchase price for the earthmoving equipment. I am also satisfied that the transaction whereby the earthmoving equipment was transferred to the defendant at that price was a sufficiently discrete transaction that can be severed from the balance of negotiations that did not translate into an agreement between the parties. An agreement that is independent can be severed from terms that are uncertain because negotiations are incomplete if in all the circumstances it is the intention of the parties that that section will not be affected by the failure of the contract as a whole. The inference that this was the intention of the parties is confirmed by the fact that the machinery was physically transferred to the defendants at the time of leaving the plaintiff company on 30 June 1999 and registration transfer forms signed. The purchase price of $65,000 ultimately agreed to by the plaintiff was one of the few firm figures referred to in the protracted negotiations. I have considered the possibility that the outstanding loan account in the defendants' name could be the subject of a separate agreement and severed from the balance of the negotiations in the same way as the agreement for purchase of the earthmoving equipment. While the difference is more a question of degree I consider that in the circumstances it cannot be said that there is an independent agreement that the loan account be repaid by the defendants. Any concessions made by the defendants in the course of negotiations were closely connected with
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the other matters and cannot be regarded as an independent and severable agreement. (See Brew v Whitlock(No 2) [1967] VLR 803). 51 This is not a case where the parties have agreed on all the essential terms leaving some details or calculation to be worked out later. They have not reached agreement on an essential part, namely the way in which their financial affairs will be concluded. I am satisfied that the parties had a fundamentally different approach to assessing the value of the plaintiff company and to reaching a final determination of the financial matters. In the words used by Mr Bradshaw they agreed some things but on others they were "poles apart". It is significant that Mr Gorey agreed that the documentation he studied demonstrated that in some areas the parties were "showing no agreement at all". Although the Court will try to uphold bargains and to resolve ambiguities it cannot in effect make it a contract for the parties where they have not reached sufficient accord on an essential term. There can be no contract where an essential term is left to be settled by future agreement and those negotiations are not successful. (See Thorby & Ors v Goldberg & Ors (1964) 112 CLR 597). This is not a case such as in Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd [2000] WASCA 27 where there was an ambiguity in terms that could be determined by the Court. 52 While this result leaves the parties in a situation where little has been resolved after lengthy negotiations and litigation I do not consider that there is any alternative in this case. The plaintiff has chosen to make its case solely on the alleged contract which I have found not to have been concluded between the parties with the exception of the purchase of the earthmoving equipment. The plaintiff could have sought alternative remedies, namely the repayment of the purchase price of the equipment and the amount of the outstanding loan account with the defendants irrespective of any contract between the parties. Although that may have elicited a defence by way of set-off or counterclaim it would have been a more straightforward way to proceed. There will be judgment for the plaintiff in the sum of $65,000. |