de Zylva v Hill

NEW SOUTH WALES COURT OF APPEAL

CITATION:
de Zylva v Hill [2009] NSWCA 435

FILE NUMBER(S):
40149/09

HEARING DATE(S):
24 November 2009

JUDGMENT DATE:
23 December 2009

PARTIES:
Christopher de ZYLVA (appellant)
Adam John HILL (respondent)

JUDGMENT OF:
Hodgson JA Basten JA Macfarlan JA

LOWER COURT JURISDICTION:
District Court

LOWER COURT FILE NUMBER(S):
DC 3001/06

LOWER COURT JUDICIAL OFFICER:
Balla DCJ

LOWER COURT DATE OF DECISION:
3 April 2009

COUNSEL:
M B OAKES SC (appellant)
D P ROBINSON SC/ E M PEDEN (respondent)

SOLICITORS:
Neil Lawson & Co (appellant)
Carneys Lawyers (respondent)

CATCHWORDS:
CONTRACT – Measure of damages for breach – No allegation of termination for fundamental breach – Contract between accountants concerning conduct of accountancy business – Breaches by one in failing to devote all his working time to the business, and in failing to endeavour in good faith to mediate disputes – Company through which business conducted wound up on just and equitable ground – Other party awarded damages extending to the loss of the value of his share in the company and the business – Whether such damages within either limb of Hadley v Baxendale (1854) 9 Ex 341
156 ER 145.

LEGISLATION CITED:

CATEGORY:
Principal judgment

CASES CITED:
Hadley v Baxendale (1854) 9 Ex 341; 156 ER 145

TEXTS CITED:

DECISION:
(1) Appeal allowed.
(2) Order 2 below (the judgment on the cross-claim) set aside, and in lieu thereof judgment for Mr Hill against Mr de Zylva for $19,102.31, to take effect as at 3 April 2009.
(3) Mr Hill to pay Mr de Zylva’s costs of the appeal, and to have a certificate under the Suitors’ Fund Act 1951 if otherwise eligible.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40149/09
DC 3001/06
HODGSON JA
BASTEN JA
MACFARLAN JA
23 DECEMBER 2009

Christopher de ZYLVA v Adam John HILL

Judgment

HODGSON JA: This appeal is brought from a decision of Balla DCJ determining a dispute between former partners in an accounting practice. The appellant, Mr de Zylva, had brought proceedings against the respondent, Mr Hill, and Mr Hill had cross-claimed in those proceedings. There was an eleven day hearing in the District Court before the primary judge in March 2009, in which each party was self-represented. The primary judge gave her decision on 3 April 2009. On that day, the primary judge gave judgment for Mr Hill on Mr de Zylva’s claim, gave judgment for $476,492 for Mr Hill on his cross-claim, and ordered Mr de Zylva to pay Mr Hill’s costs of the proceedings. Mr de Zylva appeals from the judgment on the cross-claim.
Circumstances
I will commence with an outline of facts either not in dispute or clearly established.
Prior to 7 May 2004, Mr Hill conducted an accounting practice under the name of Hill and Co Accountants Pty Limited. Mr de Zylva conducted a financial planning business through his company Trade Wins Pty Limited, pursuant to an agreement with Avenue Capital Management Limited. By an agreement dated 7 May 2004, Mr de Zylva purchased half the issued share capital of Hill and Co Accountants Pty Limited (the Company) for $160,000. This agreement concerned both the sale of shares and ongoing relations between the parties. The company itself was not a party to the agreement. In the clauses of the agreement which I will set out, the name “Adam” is a reference to Mr Hill, the name “Chris” is a reference to Mr de Zylva, and the name “Hill” is a reference to the Company.
Clause 2 of this agreement provided as follows:
2. COMMENCEMENT AND TERM
2.1 Commencement
This Agreement commences on 01 April 2004 until terminated as provided in this agreement, or otherwise agreed by the Shareholders.
2.2The parties agree to meet to review the operation and effectiveness of this agreement and the arrangements between them not later than two months before the end of the Initial Period to determine whether and on what terms the agreement is to continue after the Initial Period.
The Initial Period is defined in cl 26.1 to start on the date of the agreement and to end one year later.
Clause 5.2 of the agreement provided that on completion, Mr Hill was required to do a number of things, including:
(c)confer on Chris title to the shares and place Chris in control of fifty per cent (50%) of Hill and the Business and assets of the Business.
Clauses 15 and 16 provided as follows:
15      TRANSFER OF SHARES
15.1    No Disposal of Shares During the Initial Period
The Shareholders may not sell or dispose of any share during the Initial Period.
15.2    Procedure for Transfer of Share
Other than the exceptions set out in clause 3.2 of Schedule 2 of this agreement, after the Initial Period a Shareholder who wants to dispose of all of part of the shares held by it, must deliver a Transfer Notice to the other Shareholders in accordance with Schedule 2 and upon the issue of a Transfer Notice the provisions of Schedule 2 apply.
15.3    Transfer of Shares on Death or Permanent Disability of Shareholder
Adam and Chris will as soon as practicable after Completion execute appropriate Buy/Sell Agreements to permit the other Shareholders to buy the Shares of a Shareholder who dies or becomes permanently disabled.
15.4    Company's Agreements and Arrangements not Affected
In the event that a Shareholder ceases to be a shareholder of Hill, that cessation will not affect any existing agreements or arrangements between the Shareholder and Hill.
16      EVENTS OF DEFAULT
16.1What is an Event of Default
Any of the following constitutes an event of default by a Shareholder:
(a)      If the Shareholder becomes subject to any form of insolvency administration; or
(b)      If the Shareholder is in breach of any material obligation under this agreement and, where that breach is capable of remedy, has failed to remedy it within 28 days after receiving written notice form the Board to do so; or
(c)      If the Shareholder ceases to be a Director or to participate in the management of and/or ceases to control the Shareholder associated with him or her.
16.2Consequences of an Event of Default
Where an event of default under clause 14.l occurs, the Board may at its discretion:
(a)      require the defaulting Shareholder to give a Transfer Notice under Schedule 2; or
(b) recommend to the remaining Shareholders to wind up Hill. Such winding up will be in accordance with the provisions of the Corporations Act.
The Director representing the defaulting Shareholder will not be entitled to vote or participate in the discussion of any resolution under this clause.
Nothing in this clause limits the right of Hill or a Shareholder to recover from a defaulting Shareholder any damages suffered as a result of the event of default.
Clause 20 provided as follows:
20RESTRAINT AND ATTENTION TO COMPANY BUSINESS
Each of Adam and Chris and must not during the term of this agreement and any extension thereof promote, operate, participate in, finance or engage in (whether on his own account or in partnership or by joint venture) or be concerned or interested in (directly or indirectly, or through any interposed body corporate, trust, principal, agent, shareholder, beneficiary, or as an independent contractor, consultant or in any other capacity) any business or operation similar to, or otherwise competitive with the Business, and also during the term of this agreement and any extension thereof must devote all of his working time and attention to the affairs of the Business.
Clause 23 provided as follows:
23      DISPUTE RESOLUTION
23.1    Mediation
(a)      if a dispute arises out of or relates to this agreement, or the breach, termination, validity or subject matter thereof, or as to any claim in tort, in equity or pursuant to any domestic or international statute or law, the parties to the agreement and to the dispute expressly agree to endeavour in good faith to settle the dispute by mediation administered by the Australian Commercial Disputes Centre (ACDC) before having recourse to arbitration or litigation;
(b)      a party claiming that the dispute has arisen, must give written notice to the other parties to the dispute specifying the nature of the dispute;
(c)      on receipt of the notice specified in (a), the parties to the dispute must within seven days of receipt of said notice seek to resolve the dispute;
(d)      if the dispute is not resolved within seven days or within such further period as the parties agree then the dispute is to be referred to the ACDC;
(e)      the mediation will be conducted in accordance with the ACDC Mediation Guidelines which set out the procedures to be adopted, the process of selection of the mediator and the costs involved and which terms are hereby deemed incorporated; and
(f)       this clause will not merge on completion.
Clause 25.11 provided as follows:
25.11 Billings for Work Prior to 1 April 2004
The fees received from all billings issued by Hill after 01 April 2004, but relating to work carried out by Adam’s business entity and Chris’ business entity at any time before 01 April 2004, shall respectively belong to Hill (in the hands of Adam) and to Trade Wins Pty Limited (in the hands of Chris) as pre 01 April 2004 income.
Clause 26.1 contained the following definition of “Business”:
Business means the business of accounting and taxation services (and after completion of this agreement the addition of financial services) and such other business or businesses as the Shareholders agree from time to time.
By late 2004, the relationship between Mr Hill and Mr de Zylva had broken down. Communications concerning possible mediation commenced with an email from Mr Hill of 29 September 2004. A meeting between Mr Hill and Mr de Zylva, with their solicitors, occurred on 5 April 2005, with no success.
On 27 April 2005, Mr Hill filed originating process to have the Company wound up on the just and equitable ground; and such an order was made on 9 May 2005.
A new company associated with Mr Hill purchased the business of the Company from the liquidator for $35,000. No payment was made by the liquidator to Mr Hill or Mr de Zylva as either creditors or shareholders.
Between May 2004 and 9 May 2005, Mr Hill and Mr de Zylva each made drawings from the Company, the amounts being $89,000 in the case of Mr Hill and $86,000 in the case of Mr de Zylva.
Decision of primary judge
Mr de Zylva’s claim was for breach of contract, in particular breach of clauses 5.2(c) and 5.2(d) in that he had not been placed in control of 50 per cent of the business and assets of the Company. The primary judge found neither breach made out. Mr de Zylva also made a claim for misrepresentation, which also failed.
Mr Hill’s claim was for breaches of contract and breaches of the Corporations Act 2001 (Cth). The primary judge was not persuaded that there was a cause of action under the Corporations Act. Mr Hill’s contract claim was pleaded as follows:
4)Pursuant to clause 20 of the written agreement at completion the cross defendant must devote all of his working time and attention to the affairs of the business.
5)In breach of the said term, the cross defendant did not devote all his working time and attention to the affairs of the business thereby causing the cross claimant loss and damage.
6)Pursuant to clause 23.1 of the written agreement at completion the cross defendant must agree to endeavour in good faith to settle a dispute by mediation administered by the Australian Commercial Disputes Centre (ACDC) before having recourse to arbitration or litigation.
7)In breach of the said term the cross defendant did not agree to mediation thereby causing the cross claimant loss and damage.
His claim for damages was pleaded as follows:
12)As a result of the breaches, the cross claimant has suffered the following loss and damage.
Particulars
a)The sum of $90,000 representing loss of earnings
b)The sum of $35,000 paid to the Liquidators to re-purchase the Tax Practice
c)The sum of $20,000 paid to suppliers for miscellaneous costs resulting from re-purchasing the Tax Practice
d)Loss of income due to forced Liquidation
e)Damages for loss of commercial opportunity
f)Loss relating to devaluation of Tax Practice
g)Legal Costs for 2 separate legal proceedings
h)Interest at the prescribed rates from 7 May 2004
In her judgment, the primary judge made adverse credit findings against Mr de Zylva; and she accepted Mr Hill’s evidence over that of Mr de Zylva where there was a conflict.
The primary judge made the following specific findings relating to breaches by Mr de Zylva:
I am satisfied that that from 5 April 2004 to 9 May 2005 Mr de Zylva:
1.was frequently absent from work. Some of the absences were explained (a visit to his parents in New Zealand for two weeks within 10 weeks of starting work, some time giving evidence in unrelated Supreme Court proceedings in July 2004 and for his daughter’s wedding in January 2005) and others were not. There were also days on which he would only come to work for short periods;
2.spent a substantial proportion of the time when he was at the office seeing and working on the files of financial planning clients. He did not send bills from Hill de Zylva Pty Ltd to those clients. He received his remuneration by commissions paid by Avenue to his company Trade Wins. He only passed on $907.50 to Hill de Zylva Pty Ltd.
3.deliberately withheld from Mr Hill information on his financial planning work after Mr Hill noticed that Mr de Zylva’s billings were significantly short of the work shown in his time sheets.
4.deliberately avoided engaging with Mr Hill’s concerns to be able to receive equal drawings from the business for as long as possible. This included failing to respond to Mr Hill’s attempts to refer the dispute to mediation in compliance with clause 23 of their agreement.
……
7.2.1 Clause 20
The evidence establishes that Mr de Zylva engaged in a business operation similar to or otherwise competitive with Hill de Zylva.
Hill de Zylva offered clients financial planning advise. Indeed the newsletter article sent to clients written by Mr de Zylva refers to the practice offering expert financial planning services as a consequence of the merger with Mr de Zylva.
At the same time Mr de Zylva was conducting a separate financial planning business from the Hill de Zylva office during working hours. That business was both similar and competitive with Hill de Zylva in breach of clause 20.
7.2.2 Clause 23
I have found that Mr de Zylva deliberately failed to respond to Mr Hill’s attempts to refer the dispute to mediation in compliance with clause 23 of their agreement.
Mr de Zylva accordingly breached clause 23 of their agreement.
The primary judge made the following findings in relation to damages:
8.3     Loss of earnings.
In the cross claim Mr Hill claimed the sum of $90,000.00 as loss of earnings.
In submissions this was clarified as being Mr de Zylva's drawings which totalled $86,000 after an allowance for taxation which ultimately was not paid and a possible $2,000 error in the calculation of the amount paid to him by a client Mr Stewart.
There was no significant increase in profits while Mr de Zylva worked there after making an adjustment for Mr de Zylva's tax clients who were bought by Mr Hill.
I also take into account that over the relevant period the company continued to pay Mr Salzone for working 2 to 3 days a week. If the contract had been performed this expense would have ended around the time the new partner started work. At the time the agreement was signed Mr Salzone was being paid around $80,000 per annum.
Both of these methods of calculating Mr Hill's loss of earnings are around $86,000.
In these circumstances I find that the amount of $86,000 is one element of the compensation which would place Mr Hill in the same situation, with respect to damages, as If the contract had been performed.
I allow the sum of $86,000.
8.4     Payment to liquidator
Mr Hill claims the sum of $35;000.00 which he paid to the liquidators to repurchase his practice.
I have found that Mr de Zylva's breaches were directly responsible for and culminated in the need to liquidate the company in May 2005. If the breaches had not occurred Mr Hill would not have needed to buy the business back from the liquidator
I allow the sum of $35,000.
8.5     Payments to suppliers
In the cross claim Mr Hill claims the sum of $20,000.00 he paid to suppliers for miscellaneous costs resulting from having to repurchase the practice.
In submissions this was explained as being made up of 2 elements:
1.the sum of $10,000. Mr Hill conceded there was little documentary evidence to support these expenses. They included the costs on the change of name, ACDC and mediation. The matter did not proceed to mediation – the legal costs on the informal settlement conference on 5 April 2005 have been dealt with elsewhere. There is evidence of costs arising from the Supreme Court order – $981.40 to a solicitor acting on the lease, the charges for the lease (including stamp duty) of $150.00 and $399.76 and the Supreme Court filing fee of $1,230.00. These arise from the breaches of the agreement by Mr de Zylva and I allow the total of these sums which is $2,761.00.
2.Mr de Zylva dealt with a client Mr Michael Williams who lived In a remote area in Australia. He paid his tax to Hill de Zylva rather than the Tax Office. Mr de Zylva failed to forward it to the ATO and it formed part of the pool distributed by the liquidator. Mr Hill personally paid the outstanding amount to the ATO of $6,324. I am satisfied that this is a loss sustained by Mr Hill as a direct result of Mr de Zylva's breach and I allow the sum of $6,324.00.
8.6     Loss of Income
This claim was not particularised. I take into account the following:
1.Mr Hill could not regularly attend the office from January 2005 to July 2005. This was caused by Mr de Zylva's breach.
2.In the year ended 30 June 2004 he had a taxable Income from Hill de Zylva of $37,941. His income was reduced because he paid capital gains tax on the sale of the shares to Mr de Zylva. His 2005 and 2006 tax returns are not in evidence.
3.the advertising material for the sale of the shares describes the net profit of the practice (excluding the payment to Mr Salzone) as $245,5000 [sic]. Mr Hill estimated his drawings at between $150,000 and $160,000 before selling his shares to Mr de Zylva. He did draw $89,000 from April 2004 to 9 May 2005.
Compensation for this loss would place Mr Hill in the same situation, with respect to damages, as if the contract had been performed. I estimate that Mr Hill lost six months productivity in 2005. Using the drawings as a benchmark but noting that an allowance should be made for taxation I allow $50,000.
8.7     Damages for loss of commercial opportunity
Mr Hill is concerned that his reputation has been harmed by his company having gone into liquidation and believes it will prevent something happening for him in the future with the Australian Taxation Office. He concedes however that there is no evidence of these matters and I decline to make an award for this head of damage.
8.8     Loss relating to devaluation of the tax practice
Mr Hill says:
1.in April 2004 the practice was worth $320,000 because the plaintiff bought. a 50% share for $160,000.
2.in 2005 he purchased the business from the liquidator for $35,000.
Of course Mr Hill did realise $160,000 when he sold a half share to Mr de Zylva. He accordingly has lost the difference between $160,000 and $35,000 being $125,000. This is evidenced by the business having lost around 700 clients.
I am satisfied that this loss is a consequence of the breach and that compensation in that sum would put Mr Hill, so far as money can do it, in the same situation as if the contract had been performed.
I allow the sum of $125,000.
8.9     Legal costs for two separate legal proceedings
Mr Hill has sought to claim all of his legal costs. I propose to make separate orders, after judgment has been entered in relation to the costs of these proceedings.
I am satisfied that the evidence establishes that Mr Hill has Incurred other legal costs unrelated to the conduct of these proceedings totalling $41,714.26. These costs relate to the AVOs, the informal settlement negotiations, obtaining the Order in the Supreme Court and the purchase of the business from the liquidator. Compensation for this loss would place Mr Hill in the same situation, with respect to damages, as if the contract had been performed.
I allow the sum of $41,714.

In addition, the primary judge awarded interest of $129,693.
Issues on appeal
In the original notice of appeal, Mr de Zylva relied on the following grounds:
Breaches of Contract
1The trial judge erred in finding that the appellant breached clause 20 of the Share Purchase and Shareholders Agreement dated 7 May 2004 (the Shareholders Agreement), which included a devotion of working time to the affairs of the business conducted by Hill de Zylva Pty Ltd.
2The trial judge should have held that by operation of the definition of "Business" in clause 26.1 of the Shareholders' Agreement, time devoted by the appellant to the provision of financial services to clients, was time devoted to the affairs of the business within clause 20 of the Shareholders' Agreement.
3The trial judge erred in finding that the appellant breached clause 23 of the Shareholders' Agreement, which provided for ACDC mediation of disputes.
4The trial judge should have held:
(a)      that the appellant and the respondent waived compliance with this clause by holding a 6 hour informal mediation on 5 April 2005;
(b)      that this mediation did not result in resolution of differences between the appellant and the respondent;
(c)      that neither the appellant nor the respondent thereafter sought to activate clause 23;
(d)      that on 27 April 2005 the respondent filed an application to wind up Hill de Zylva Pty Ltd on the just and equitable ground, which act constituted a recognition by the respondent that resolution of differences between the appellant and the respondent were past remedy by mediation; and
(e)      the application to wind up Hill de Zylva Pty Ltd proceeded unopposed by the appellant on 9 May 2005.
Piercing the corporate veil
5The trial judge erred in piercing the corporate veil and deciding that a distinction between the respondent and Hill de Zylva Pty Ltd was artificial.
6The trial judge should have held that damages suffered by Hill de Zylva Pty Ltd (if any) were not damages suffered by the respondent, and that the respondent's damages (where losses were suffered by Hill de Zylva Pty Ltd because of breaches by the appellant of his obligations to Hill de Zylva Pty Ltd) were limited to the impact on drawings by the respondent from Hill de Zylva Pty Ltd.
Loss of earnings $86,000
7The trial judge erred in awarding damages of $86,000 for loss of earnings.
8The trial judge should have held that there was no damage under this head because the respondent's drawings during the association with the appellant exceeded half his drawings before selling 50% of the shares in Hill de Zylva Pty Ltd to the appellant.
Cost of repurchase of the practice from the liquidator
9The trial judge erred in awarding damages of $35,000 for the cost of repurchase of the practice from the liquidator.
10The trial judge should have held that the loss claimed was too remote, and that the expense was not that of the respondent but of the new Hill & Co Pty Ltd incorporated by the respondent which purchased the practice from the liquidator.
Payments to suppliers $2,761
11The trial judge erred in awarding damages of $2,761 being:
(a)      legal costs associated with the informal mediation on 5 April 2005;
(b)      legal costs associated with the premises lease to the new Hill & Co Pty Ltd after Hill de Zylva Pty Ltd had been wound up; and
(c)      the Supreme Court filing fee on the winding up application.
12The trial judge should have held that each of these sums was not a loss caused by any breach of the Shareholders' Agreement or each was too remote.
Williams tax payment $6,324
13The trial judge erred in awarding damages of $6,324.
14The trial judge should have held this sum was not a loss caused by any breach of the Shareholders' Agreement or was too remote.
Loss of income $50,000
15The trial judge erred in awarding damages of $50,000 for loss of income.
16The trial judge should have held that such loss, if it occurred, was not caused by any breach of the Shareholders' Agreement.
17Alternatively, the trial judge should have held that the respondent/cross claimant had failed to establish loss under this head through not satisfying the onus of proof, in that the respondent did not put into evidence his income tax return for the year ending 30 June 2005.
18If damages under this head are allowable, the trial judge failed to give adequate reasons in that:
(a)      the trial judge took into account the period from 10 May to July 2005, being a period after the accounting business had ceased, Hill de Zylva having been wound up on 9 May 2005;
(b)      the trial judge failed to take into account the respondent's renderings during the period 1 January 2005 to 9 May 2005;
(c)      the trial judge attributed the respondent's non-attendance at the office to the appellant's breach without stating how the non-attendance was causally connected to a breach;
(d)      the trial judge wrongly attributed the respondent's reduced income for the year ending 30 June 2004 to payment of capital gains tax on the sale of half the shares in Hill de Zylva Pty Ltd to the respondent
19If damages under this head are allowable, the trial judge should have held that there was no damage because the respondent's drawings of $89,000 during the association with the appellant exceeded half his drawings before selling 50% of the shares in Hill de Zylva Pty Ltd to the appellant.
Loss on devaluation of tax practice $125,000
20The trial judge erred in awarding damages of $125,000 for loss on devaluation of the tax practice.
21The trial judge should have held that the loss claimed was too remote or not caused by any breach of the Shareholders' Agreement.
22The trial judge should have held:
(a)      that the definition of the "Initial Period" in clause 26.1 of the Shareholders' Agreement had that period running to the first anniversary of the date of the Shareholders' Agreement in relation to shareholder arrangements between the appellant and the respondent;
(b)      clause 2.2 of the Shareholders' Agreement provided for an agreement to meet to determine whether and on what terms the arrangements between the appellant and respondent were to continue after the Initial Period;
(c)      after 7 May 2005 neither the appellant nor the respondent was under any obligation to the other to supply services to Hill de Zylva Pty Ltd (there never being a service agreement with Hill de Zylva Pty Ltd and either the appellant or the respondent);
(d)      after 7 May 2005 neither the appellant nor the respondent could be restrained from dealing with former clients of Hill de Zylva Pty Ltd;
(e)      after 7 May 2005 either the appellant or the respondent could sell his shares in Hill de Zylva Pty Ltd;
(f)       whatever goodwill there was in Hill de Zylva Pty Ltd was a wasting asset which was exhausted by 7 May 2005 being the first anniversary of the Shareholders' Agreement.
23If damages under this head are allowable, then the trial judge should have found that it was obvious that the Shareholders' Agreement would not continue beyond the Initial Period and:
(a)      that therefore there was no damage; or
(b)      if there was damage, then it should have been discounted to reflect the wasting nature of the asset.
24If damages under this head are allowable, then the respondent should have brought to account the value of the practice in the new company Hill & Co Pty Ltd.
Legal costs for two separate legal proceedings $41,714
25The trial judge erred in awarding damages of $41,714 being:
(a)      the respondent's costs on the AVO's;
(b)      the respondent's costs on settlement negotiations;
(c)      the respondent's costs on obtaining the winding up order; and
(d)      the respondent's costs on purchasing the business of Hill de Zylva Pty Ltd from the liquidator.
26The trial judge should have held that each of these sums was not a loss caused by any breach of the Shareholders' Agreement or was too remote, and in the case of (d) was not a cost of the respondent but rather a cost of the new company Hill & Co Pty Ltd.
Interest calculation
27The trial judge erred in the calculation of interest in the following ways:
(a)      the rate should have been calculated at 9% from 6 March 2009;
(b)      in the calculation of the number of days;
(c)      in the commencement date for interest on the loss of income claim.
At the hearing of the appeal, he was given leave to rely on the following additional grounds:
28If there was a breach of clause 20 or clause 23 of the Shareholders’ Agreement, the trial judge erred in assessing damages on the basis of the agreement having been terminated following breach of an essential term.
29If there was a breach of clause 20 or clause 23 of the Shareholders’ Agreement, damages should have been assessed on the basis that there was no breach of an essential term.
At the hearing of the appeal, Mr Hill conceded that he was not entitled to damages in respect of the payment to the Tax Office, and was not entitled to costs other than the costs of the winding-up. Those concessions were properly made.
The question of whether the primary judge was in error in piercing the corporate veil will be considered, so far as necessary, in relation to individual issues concerning damages.
I will consider in turn the following issues:
(1)Breach of clause 20.
(2)Breach of clause 23.
(3)Loss of earnings May 2004 to May 2005.
(4)Loss of value of shares.
(5)Costs of winding-up proceedings.
(6)Loss of earnings January to July 2005.
Breach of clause 20
Insofar as the primary judge found that Mr de Zylva was frequently absent from work, and worked short days on some days, Mr Oakes SC provided a detailed analysis of the document in support of that finding provided to the primary judge by Mr Hill, in order to show that breach in those respects was not made out.
As regards the primary judge’s finding that Mr de Zylva spent substantial office time working on financial planning clients, Mr Oakes submitted that this was contemplated in the definition of “business” in the agreement, and that in any event financial planning had to be conducted through Mr de Zylva’s company Trade Wins, because of the need for access to a licence. Accordingly, he submitted that there was no breach of cl 20 but at most an issue of lack of full accounting to the Company.
Mr Robinson SC for Mr Hill submitted that the primary judge had in addition found that Mr de Zylva had breached cl 20 in failing to devote all his time and attention to the business in that:
(a)the business had lost around “700 clients”;
(b)Mr de Zylva had “limitations in dealing with clients” and “focussing on the issue at hand”; and
(c)Mr de Zylva had “little interest in files” and gave Mr Salzone, the employed accountant, work of his own clients to do.
Mr Robinson also submitted that the primary judge had found that Mr de Zylva had breached an implied promise in cl 20, namely a promise that each party would not take any action that would be inimical to the other party devoting all their time and attention to the business, in that the primary judge accepted that Mr de Zylva:
(a)tried to intimidate Mr Hill from early 2005;
(b)was an “extremely difficult person to deal with”;
(c)was “volatile, highly strung and on occasion very difficult to deal with”;
(d)“started to threaten Mr Hill” from around December 2004/January 2005; and
(e)by his conduct he caused a liquidator to be appointed to the Company.
Dealing first with the additional breaches contended for by Mr Robinson as noted in par [31], the existence and breach of the implied promise he referred to was neither pleaded nor found by the primary judge. As regards the suggested additional breaches of the express promise as noted in par [30], the findings referred to by Mr Robinson were not made by the primary judge as findings of breach of cl 20; and in my opinion they could not, without some explanation and further findings, amount to findings of breach of cl 20.
As regards the primary judge’s finding that Mr de Zylva was “frequently absent from work”, there was no explicit finding made by the primary judge that cl 20 was breached thereby. The analysis undertaken by Mr Oakes shows that it is unlikely that such a finding would be justified; and I am not prepared to make a finding of breach in those terms.
However, in my opinion, the finding of the primary judge that Mr de Zylva breached cl 20 by working for financial planning clients was justified. The primary judge generally accepted Mr Hill’s evidence, which I would understand to include his evidence that Mr de Zylva had said he would do financial planning work for his own clients in his own time (Red 31U); and the primary judge also noted an email from Mr de Zylva of 15 July 2004 (Red 33F) in which he asserted that he retained financial income from his own client base. The primary judge found that Mr de Zylva “spent a significant amount of time at the Hill de Zylva office doing their work” (Red 33I); and in respect of that work, it is clear that Mr de Zylva intended that it be for his own benefit, not for the benefit of the Company, and that he so treated it. In respect of financial planning work he received commissions of $29,383 (Red 31R), from which he accounted to the Company for only $907.50. Mr Oakes raised a question as to whether some of the $29,383 might be excluded from the agreement under cl 25.11; but in my opinion there would have been an evidentiary onus on Mr de Zylva to show this, which was not discharged.
Breach of clause 23
Mr Oakes submitted that there was in fact an informal mediation on 5 April 2005, and that there was therefore no breach of cl 23.
In my opinion, the primary judge’s finding of breach of this clause has not been shown to be in error. There was a document satisfying the requirements of a notice under cl 23.1(b), namely a letter dated 22 December 2004 (Blue 765-6); and it was well open to the primary judge to find that Mr de Zylva did not “endeavour in good faith to settle the dispute by mediation administered by the Australian Commercial Disputes Centre”, as required by cl 23.1(a).
Loss of earnings
In my opinion, the reasoning of the primary judge to her figure of $86,000 is not supportable.
The total drawings of Mr de Zylva could not, in my opinion, be the measure of the damages to Mr Hill from Mr de Zylva devoting some of his time to Trade Wins’ business.
To the extent that the primary judge’s findings are supported by payments to Mr Salzone, this seems to proceed on an assumption that, if Mr de Zylva had not devoted some of his time to Trade Wins, then nothing would have been paid to Mr Salzone. That assumption was not made good. In addition, although Mr Salzone may have been receiving about $80,000 per annum at the time the agreement was signed, it appears that during the period in question he was working two or three days a week at $250 per day (Blue 89); and that in the period 1 July 2004 to 31 May 2005 he was actually paid $16,617.26 (Blue 2399Q). Accordingly, if the measure of damage to Mr Hill was based on the amounts paid to Mr Salzone, those damages would appear to amount to his one-half share of about $20,000, that is, $10,000.
Mr Robinson submitted that damages may be quantified by taking the amount the earnings should have been, namely about $450,000, and the actual earnings in the period 1 July 2004 to 7 May 2005 of about $390,000, showing a shortfall of about $60,000. Mr Hill’s half share of this would be about $30,000. However, there was no finding to that effect. There was no finding that any such shortfall was due to the breach of cl 20 that was found, rather than anything else. No consideration was given to whether an increase in gross earnings might involve some increase in expenses.
In my opinion, the only reasonably reliable way of quantifying damage to Mr Hill is to say that, if Mr de Zylva had not breached cl 20, he would have earned for the Company what he actually earned for Trade Wins; and then award damages amounting to one-half of that, that is, $14,237.75.
Loss of $160,000
Mr Robinson submitted that the agreement of May 2004, whereby Mr de Zylva purchased a half-share for $160,000, showed that Mr Hill’s half interest in the Company was worth $160,000. This was lost entirely because of the winding-up.
Mr Robinson did not seek to uphold the primary judge’s findings on a payment of $35,000 to the liquidator and a loss of the value of the business of $125,000. In my opinion, that concession was correct: The evidence could not in my opinion justify a finding that the business, as purchased from the liquidator, was worth only $35,000, particularly when Mr Hill did not give evidence as to what its earnings were after it was purchased by his new company.
The question is whether Mr Hill’s loss of the value of his share in the Company is recoverable as damages for the particular breaches found by the primary judge.
It is important to note that there was no allegation in the pleading that the breaches amounted to fundamental breaches of contract, justifying termination by Mr Hill. No such claim was made at the hearing and there was no finding by the primary judge to that effect. Accordingly, the commencement of the winding-up proceedings cannot be treated as an acceptance by Mr Hill of a fundamental breach or repudiation of contract by Mr de Zylva. In those circumstances, in my opinion the question of recoverable damages must be approached in terms, not of damages for loss of the benefit of the contract, but rather in terms of damages consequential on particular breaches, in accordance with Hadley v Baxendale (1854) 9 Ex 341; 156 ER 145 (at 151); that is, damages:
such as may fairly and reasonably be considered either arising naturally, that is, according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.
As regards Mr de Zylva’s breach of cl 20 in doing around $29,000 worth of work for his own benefit, rather than for the benefit of the Company, in Company time, this not being considered as a fundamental breach justifying rescission, and in circumstances where the consequences of breach are dealt with in cl 16 of the agreement, in my opinion the winding-up of the Company and total loss of value of the shares cannot be considered as being within either limb of Hadley v Baxendale.
As regards the breach in failure to endeavour in good faith to settle the dispute, there is no finding by the primary judge as to what would have happened if there had been such an endeavour, that is, whether the parties would have reached any agreement and if so what agreement. Mr Robinson properly conceded it was unlikely that any agreement would have been reached. In my opinion, the best that could possibly have been done on this basis would have been to assess some damages based on the loss of a small chance of reaching an agreed settlement, with some assessment of likelihoods as to a range of possible settlements. This was not attempted by the parties or by the primary judge.
In those circumstances, in my opinion this Court can do no more than rule that Mr Hill has not made out a case on the basis of which substantial damages for the breach of the promise to mediate can be found.
Costs of the winding-up
In my opinion, the same considerations apply to the costs of the winding-up. There are no findings as to whether a bona fide attempt to mediate would have been successful to avoid the incurring of those costs, or as to any loss of a chance.
Loss of earnings January to July 2005

Mr Robinson sought to uphold damages under this heading on the basis of findings by the primary judge to the effect that intimidation by Mr de Zylva prevented Mr Hill working productively over this period.
As stated earlier, no breach of contract by reason of intimidation or similar conduct was ever pleaded, and no breach of contract was found in those terms.
I see no basis on which damages under this heading can be awarded for the breaches that were actually found by the primary judge.
Conclusion
It follows from the above that the appeal should be allowed, that Mr Hill should be ordered to pay Mr de Zylva’s costs of the appeal, and should have a certificate under the Suitors’ Fund Act 1951 if otherwise eligible.
I would set aside the judgment below on the cross-claim, and in lieu thereof give judgment for $14,237.75 plus interest from August 2004 (approximately the middle of the period between May and November 2004 when the relevant commissions were earned). I will be ordering that the judgment take effect as at 3 April 2009, and would allow 30 months at 9% pa and 14 months at 10% pa, giving interest of $4,864.56, and making a total of $19,102.31.
As regards costs below, Mr Hill remains entitled to the costs of the claim, and at least some of the costs of the cross-claim. There is a question as to whether there are any severable costs that should reduce Mr Hill’s entitlement to costs. My view is that it is difficult if not impossible to identify such severable issues and to identify costs attributable to those severable issues. Further, I think it is difficult if not impossible to determine what costs are attributable to Mr de Zylva’s claim and what costs are attributable to Mr Hill’s cross claim, particularly in circumstances where both parties were unrepresented. In my opinion the appropriate costs order at first instance is that Mr de Zylva pay Mr Hill’s costs of the proceedings, as ordered by the primary judge.
Accordingly, I propose the following orders:
(1)Appeal allowed.
(2)Order 2 below (the judgment on the cross-claim) set aside, and in lieu thereof judgment for Mr Hill against Mr de Zylva for $19,102.31, to take effect as at 3 April 2009.
(3)Mr Hill to pay Mr de Zylva’s costs of the appeal, and to have a certificate under the Suitors’ Fund Act 1951 if otherwise eligible.
BASTEN JA: I agree with the orders proposed by Hodgson JA and with his Honour’s reasons.
MACFARLAN JA: I agree with Hodgson JA.
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LAST UPDATED:
24 December 2009

[2009] NSWCA 435

23 December 2009

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