Delaney v Delaney

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL COURT

COMMERCIAL LIST

S ECI 2020 02847

SEAN ANTHONY DELANEY	First Plaintiff
SKILDALE PTY LTD	Second Plaintiff
v
PATRICK JOSEPH DELANEY and others (according to the Schedule attached)	Defendants

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JUDGE:	LYONS J
WHERE HELD:	Melbourne
DATE OF HEARING:	26-29 October 2020, 2 and 4 November 2020, 1 December 2020
DATE OF JUDGMENT:	28 June 2021
CASE MAY BE CITED AS:	Delaney v Delaney
MEDIUM NEUTRAL CITATION:	[2021] VSC 365

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CONTRACT – Heads of Agreement for sale of units and shares – Whether concluded binding agreement or subject to more formal agreement – Category (iii) in Masters v Cameron considered – Construction of provisions of the Heads of Agreement – Whether uncertainty of provisions meant no concluded binding agreement and/or unenforceable – Construction of clause that ‘it is proposed [that taxation and accounting implications] would be settled by [each party’s accountant] in a mutually beneficial taxation outcome’ – Clause gave opportunity for accountants to agree a mutually beneficial outcome exercising independent judgment in good faith and not acting on direction of their clients or solely in the interests of their clients – No relevant uncertainty in provisions – Concluded binding agreement.

MISLEADING CONDUCT – Competition and Consumer Law Act 2010 (Cth) sch 2 (‘Australian Consumer Law’) (s 18) (s 4) – Representations as to turnover and profitability of business – Whether representations made relate to future matters – Alleged falsity of representations as to turnover and profit – Pleading requirements – Whether current representations made –Whether representations false or misleading – No falsity established – Many representations superseded by further information about turnover and profit.

EQUITY – Unconscionable conduct – Whether party under special disadvantage due to various factors – No special disadvantage established – In any event, no unconscientious advantage taken – Party has independent legal and accounting advice.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr P Collinson QC with Ms E Dias	Lander & Rogers Lawyers
For the First and Second Defendants	Mr A Schlicht	MW Law

TABLE OF CONTENTS

1... INTRODUCTION AND SUMMARY...................................................................................... 1

2. . ISSUES AND EVIDENCE.......................................................................................................... 2

3... JOINT ASSETS OF SEAN AND PAT...................................................................................... 7

3.1 ... Delplant Group.................................................................................................................... 7
3.2 ... Botanic Ridge Properties.................................................................................................... 9

4 .. BUSINESS OF DELPLANT..................................................................................................... 10

4.1.... Nature of the Business...................................................................................................... 10
4.2 ... Relationship between Sean and Pat................................................................................ 10
4.3 ... Financial Performance to 30 June 2019........................................................................... 13

5. . SEPTEMBER AND DECEMBER 2019................................................................................... 17

5.1 ... The 2 September 2019 Letter............................................................................................ 19
5.2 ... The 11 September 2019 Meeting...................................................................................... 21
5.3 ... The 20 September 2019 Letter.......................................................................................... 30
5.4 ... The 4 December 2019 Email............................................................................................. 35

6. . JANUARY TO APRIL 2020...................................................................................................... 41

6.1 ... The 10 January 2020 Letter............................................................................................... 41
6.2 ... The 24 February 2020 Letter............................................................................................. 46
6.3.... The 12 March 2020 Meeting............................................................................................. 50

7... MAY 2020..................................................................................................................................... 59

7.1 ... The 22 May 2020 Email..................................................................................................... 59
7.2 ... The 25 May 2020 Letter..................................................................................................... 62
7.3 ... The 27 May 2020 Meeting................................................................................................. 68
7.4 ... Terms of the HoA.............................................................................................................. 77

8. . JUNE 2020.................................................................................................................................... 80

9... HOA ISSUES.............................................................................................................................. 88

9.1 ... The Submissions................................................................................................................ 88
9.2.. Relevant Law...................................................................................................................... 91
9.3 ... Analysis of Issues 1 and 2................................................................................................. 99
9.3.1 .. Context of the HoA............................................................................................... 99
9.3.2 .. The form and language of the HoA.................................................................. 100
9.3.3 .. Identity of parties: submissions and analysis.................................................. 103
9.3.4... Identity of the purchaser: submission and analysis....................................... 105
9.3.5... What is being sold and/or purchased: submissions and analysis............... 107
9.3.6... Restraint of trade................................................................................................. 109
9.3.7... Clause 4(b): submissions and analysis............................................................. 111
9.3.8... Extension to deadline: submissions and analysis........................................... 112
9.3.9... Clause 5................................................................................................................. 112
9.3.9.1 Submissions............................................................................................. 112
9.3.9.2 Analysis: clause 5 and intention to be bound.................................... 116
9.3.9.3 Analysis: is clause 5 enforceable?........................................................ 119

9.4 ... Conclusions on the HoA Issues..................................................................................... 121

10. MISLEADING CONDUCT.................................................................................................... 121

10.1.. General Matters................................................................................................................ 121
10.2.. Representations Not Alleged to Be False..................................................................... 125
10.3.. Representations as to Future Matters........................................................................... 127
10.4.. Superseded Representations.......................................................................................... 132
10.5 . Addressing the Misleading Conduct Claims.............................................................. 134
10.6.. The Alleged Turnover Misrepresentations.................................................................. 134
10.7.. The Alleged Profit Misrepresentations........................................................................ 140
10.8.. The Alleged Margin Misrepresentations..................................................................... 145
10.9.. The Alleged Work Misrepresentations........................................................................ 151

11. UNCONSCIONABILITY....................................................................................................... 157

12. REDUNDANCY....................................................................................................................... 161

13. CONCLUSION......................................................................................................................... 165

HIS HONOUR:

INTRODUCTION AND SUMMARY
Sean Delaney (‘Sean’), the first plaintiff, and Patrick Delaney (‘Pat’), the first defendant, are brothers. In 1988, together with their brother Joseph, they established what has become known as the Delplant group. The Delplant group provides construction services on pipeline assets, in particular for land subdivision, predominantly in the Casey and Cardinia region of South East Melbourne. There are a number of companies and trusts within the Delplant group. Many are defendants to this proceeding, including Delplant Pty Ltd (‘Delplant’), which is the third defendant.
Since 2007, when Joseph sold his interest, Sean and Pat have owned the Delplant group in equal shares. For the most part:
(1) the interests of Sean are held through Skildale Pty Ltd (‘Skildale’) as trustee of Sean’s family trust called the Galway Family Trust; and
(2) the interests of Pat are held through Pat Delaney Constructions Pty Ltd (‘PDC’) as trustee of Pat’s family trust called the Delway Family Trust.
Skildale and PDC are the second plaintiff and the second defendant respectively.
In addition to the Delplant group, Sean and Pat, through the Galway Family Trust and the Delway Family Trust, have interests in large tracts of land in Botanic Ridge near Cranbourne, Victoria.
Over time there has been a breakdown of the relationship between Sean and Pat. By a heads of agreement signed on 27 May 2020 (the ‘HoA’), Sean agreed to buy Pat’s interests in the Delplant group for $10 million. In this proceeding, Sean now seeks to enforce that HoA.
In his defence, Pat disputes that the HoA was intended to be legally binding or that the HoA is enforceable. Relevantly, Pat contends that key terms of the HoA are uncertain, including the identity of the parties to the HoA, the identity of the purchaser and the assets to be transferred, and cl 5 which proposed that the resolution of taxation and accounting implications would be settled in a ‘mutually beneficial taxation outcome for both parties’ by the accountants for each of Sean and Pat.
Further, Pat alleges that prior to entering into the HoA, Sean (on his own behalf and on behalf of Delplant) misrepresented the financial position of the Delplant group, in particular, its estimated net profit, turnover and profit margin for the financial year ended 30 June 2020 (‘FY 2020’). He contends that, if he had known of the real financial position, he would not have entered into the HoA to sell his interests for $10 million. Pat also claims that it would be unconscionable to enforce the HoA. As a result of these claims, he seeks that the HoA be set aside or, alternatively, damages.
Finally, two days before the HoA was executed, Sean in his position as Managing Director of Delplant made Pat’s position as Operations Manager redundant. This issue was addressed in the HoA. However, if the HoA is not enforceable, Pat seeks his proper redundancy entitlements from Delplant in the sum of $393,915.
For the reasons that follow, I have concluded that:
(1)      the HoA was intended to be legally binding and is enforceable;
(2) the claims for misleading conduct and unconscionable conduct have not been established; and
(3)      it is not necessary to consider the claim for a redundancy payment.
As a result, I will order specific performance of the HoA. However, as part of ordering specific performance, I consider that the accountants of the parties ought be given the opportunity to reach a mutually beneficial outcome for the resolution of taxation and accounting consequences of the sale for both Sean and Pat. I will hear from the parties as to the time within which this should take place.
ISSUES AND EVIDENCE
As noted above, Sean and Skildale were the plaintiffs to this proceeding. They, along with Delplant, were also defendants to the amended counterclaim dated 30 July 2020 (the ‘counterclaim’) of the first and second defendants, namely Pat and PDC. However, no appearance was filed on behalf of Delplant. For convenience, I will refer to Sean and Skildale (including in their capacity as defendants to the counterclaim) as ‘the plaintiffs’ unless indicated to the contrary. Further, as noted above, in addition to Pat and PDC, the plaintiffs joined other entities in the Delplant group as the third to tenth defendants in this proceeding. However, no appearance was filed on behalf of those defendants. As a result and for convenience, I will refer to Pat and PDC as ‘the defendants’ unless indicated to the contrary.
The plaintiffs called following witnesses:

(1) Sean, the first plaintiff;

(2) Zvonko Maric, the accountant engaged by Sean to assist him with the dispute with Pat and who was appointed the accountant for a number of companies in the Delplant group in November 2019;

(3) Jonathan Allen, the solicitor engaged by Sean to assist him with his dispute with Pat; and

(4) James Delaney (‘James’), Sean’s son who works for the Delplant group though employed by Skildale.

The defendants called the following witnesses:

(1) Pat, the first defendant;

(2) Joseph Lidonnici, the former accountant of the Delplant group who was then engaged by Pat to assist him in the dispute with Sean; and

(3) Grant Darling, the solicitor for the first and second defendants.

It is appropriate that I say something briefly about each witness. However, before doing so, I note that many of the allegations in this case relate to statements not made by or to Sean or Pat, but made by professional advisers to professional advisers on behalf of each of them. As I set out below, many of the representations are based upon letters sent by Mr Maric or on meetings between Mr Maric and Mr Lidonnici. Further, at the meeting on 27 May 2020 when the HoA was executed, while Sean and Pat were present, they were never in the same room and only communicated through each of their solicitor: Mr Allen and Mr Darling. These unusual circumstances raise issues of not only whether the alleged representations were made but how they were understood and whether they were conveyed to, and relied upon by, the defendants.
Sean is a successful, shrewd and determined businessman. I formed the view that he is keen to display his authority within the Delplant group. As I set out below, he was very much involved in the negotiations for the purchase of Pat’s interests, including through Mr Maric. In evidence, Sean was keen not only answer to questions but to argue his case. Further, on occasions I found his evidence unconvincing. For example, he made much of the fact that he was reducing his involvement and working hours in the Delplant group for health and other reasons during the period when he was negotiating the purchase of Pat’s interests. For my part, I did not find convincing Sean’s evidence that his involvement and working hours were reducing to the extent he claimed in correspondence during the relevant period in 2019 and 2020. This and other evidence caused me to view Sean’s evidence with some caution.
As to Mr Maric, most of his evidence related to his attempts to negotiate an agreement with Mr Lidonnici. I formed the view that Mr Maric was an honest witness. However, consistent with my comments above, his role in negotiating for the purchase of Pat’s interests was to act in accordance with Sean’s instructions. By way of example, no letter was sent by Mr Maric without Sean’s express approval. By way of further example, Sean gave Mr Maric talking notes for Mr Maric’s meeting with Mr Lidonnici on 12 March 2020. These were produced in the course of Mr Maric’s evidence. However, I have concluded that, for the most part, Mr Maric satisfied himself as to the basis of statements he made in relation to the future performance of the Delplant group in these negotiations.
Mr Allen gave evidence in relation to the events on the day the HoA was signed. I found Mr Allen to be an honest witness, although his recollection of the events of that day were far from clear.
James gave evidence about his and Sean’s relationship with Pat when Pat worked at Delplant. He also gave evidence in relation to the events on the day the HoA was signed. James, like his father, sought to argue a case in his evidence. Of course, given that he continues to work at Delplant, he is very much interested in the outcome of this proceeding.
I found Pat to be generally an honest witness. While Sean’s skills lay in co-ordinating the business and development of the Delplant group, Pat’s skills lay in the operational side of the group. I formed the view that Pat was less shrewd than Sean. While Pat was an honest witness, I found that some of his evidence on key issues was unconvincing or at least inconsistent. For example, his evidence about whether he was informed at the 27 May 2020 meeting that the net profit of the Delplant group would be $2.4 million[1] was far from clear and at times inconsistent. He said that no figures were discussed on that day. He later said that Mr Darling told him that Sean was representing on that day that profit would be $2.4 million. However, Mr Darling did not give evidence that he was told on 27 May 2020 that the profit would be $2.4 million.
[1]One of the representations alleged in [22] of the counterclaim.
I also found Mr Lidonnici to be an honest witness. For the most part, his answers were straightforward and direct. If he disagreed with a premise, he could express the reason why in his answer. He was consistent in much of his evidence. However, there was one exception, namely in relation to the meeting with Sean and Mr Maric on 11 September 2019. His evidence in this regard was inconsistent with his contemporaneous file note and difficult to understand. It appears that he may have been conflating subsequent events with events which took place on 11 September 2019.
Mr Darling appeared defensive in his answers to questions, often providing very qualified answers to straightforward questions. I am unsure why this is so. It may be his manner. It may be that he was also acting for and advising the defendants in relation to this proceeding. However, I generally accept his evidence notwithstanding the way in which he gave it.
Documents referred to by counsel in the court book in the course of the trial were tendered into evidence unless objection was taken.
A list of issues was proposed by me during the course of the trial. The issues relating to claims under the Australian Consumer Law (‘ACL’) were not agreed between the parties in light of the pleadings and the way the case was conducted. As a result, I have not found it necessary to address all these issues. I will deal with these issues further below. However, it is appropriate I set out the list of issues with the areas of disagreement between the parties:

1 Does the heads of agreement dated 27 May 2020 (‘HOA’) give rise to a binding agreement, having regard of the third category in Masters v Cameron and the issues raised in Q2 (1) to (8)?

2
Is the HOA unenforceable because:

(1)     the parties include South East Plant Hire Pty Ltd of which the signatories to the HOA are not directors;

(2)     it fails to address the identity of the purchaser or purchasers;

(3)     it fails to identify what is being sold and/or purchased;

(4)     it fails to address the consequences of a failure to pay the amounts in cl 3 including which party is to make the payment;

(5)     cl 2 is uncertain and it purports to bind Pat Delaney’s ‘family’ who are not parties to the HOA;

(6)     cl 4(b) is uncertain as any Further Agreement is to include ‘any additional terms that the parties may reasonably require’;

(7)     cl 5 is uncertain as it provides that ‘it is proposed’ that tax and accounting implication[s] ‘would be settled by Mr Maric and Mr Lidonnici in a mutually beneficial taxation outcome for both parties’;

(8)     The date for the Further Agreement was suggested to be altered to 5 July 2020 (CB731).

3 Did the plaintiffs make the representations alleged in paragraph 22 of the Defence and Counterclaim dated 30 July 2020? [Noting the Plaintiffs’ contention that only the representations alleged to be false in [25] are relevant for determination]

4 Did the representations in [22] of the counterclaim relate to future matters? [Noting the Plaintiffs’ contention that this is not an issue for determination]

5 Were the representations false and untrue as alleged in [25] or, in so far as they related to future matters, were there no reasonable grounds for making them? [Noting the Plaintiffs’ contention that the latter is not an issue for determination]

6 Did the first defendant act in reliance upon the representations in entering into the HOA, including having regard to the information in 5(k) of the reply?

7 If yes to 5 and 6, if the representations were not made, would the first defendant have entered into the HOA?

8 Is it unconscionable in equity to enforce the HOA by reason of the matters alleged in [29] of the counterclaim and [12] of the reply?

9 In the event that the HOA is not binding or enforceable, did Sean Delaney as Managing Director of Delplant wrongfully make Pat Delaney’s position as Operations Manager redundant on 25 May 2020?

10
If yes to 9:

(1)     is he entitled to be reinstated; or alternatively

(2)     what redundancy payments is he entitled to?

JOINT ASSETS OF SEAN AND PAT
3.1 Delplant Group
As noted above, the Delplant group consists of a number of different companies and trusts. For the most part, the interests of Sean are held via the Galway Family Trust and the interests of Pat are held via the Delway Family Trust. The structure of the Delplant group is set out in Annexure A (the ‘Delplant chart’). Both Sean and Pat accepted the structure in the Delplant chart as correct as at 27 May 2020. It was not in dispute at trial that each of Sean and Pat and their advisers were familiar with the structure of the Delplant group at all relevant times. I note for completeness that Sean and Pat each personally own shares in Delplant Properties Pty Ltd (‘Delplant Properties’), Mt Salazia Developments Pty Ltd (‘Mt Salazia Developments’) and Hervet Pty Ltd (‘Hervet’).
The main businesses of the Delplant group are:

(1) a civil construction company, Delplant;

(2) a heavy haulage company called Delplant Haulage Pty Ltd (‘Delplant Haulage’); and

(3) a plant hire company called South East Plant Hire Pty Ltd (the ‘SEPH Company’).

Delplant was founded in 1988 and is the company that undertakes the civil construction and maintenance works.
Delplant Haulage was formed in the mid-1990s. At the beginning it provided transport services to Delplant. Now over 85% of its transport services are provided to third parties. Its Operations Manager, Michael Collins, has a 20% interest in Delplant Haulage.
The SEPH Company supplies plant and equipment to Delplant and Delplant Haulage. The SEPH Company was established in 2019. Previously, the plant hire business was conducted by a partnership between Sean and Pat, called the South East Plant Hire Partnership (the ‘SEPH Partnership’). The assets of the SEPH Partnership were sold to the SEPH Company in 2019. The only asset of the SEPH Partnership is an outstanding loan from the SEPH Company for that plant and equipment.
In addition, and as is evident from the Delplant chart, the Delplant group (via Delplant) has an interest in a joint venture with Fulton Hogan, which is a large construction infrastructure business, and BECA, which is an engineering group (the ‘JV’ or ‘FHDB’). Delplant has a 29% interest in the JV. The JV commenced in October 2013 when it was awarded a five year contract to undertake infrastructure works for South East Water in the Cardinia/Casey corridor. The contract was then extended by a two-year extension until 1 October 2020. Sean said that the JV has received ‘tacit’ approval for a further extension of 18 months until April 2021. Sean said the contract currently sits with South East Water’s Managing Director and board.
There is also a company in the Delplant group called Delplant Properties. Its only asset is the property at 20 Vesper Drive, Narre Warren — the former business premises of the Delplant group — valued at $4-4.5 million (the ‘Vesper Drive property’).
3.2 Botanic Ridge Properties
Pat and Sean and their wider family also have interests in land in Botanic Ridge. These interests are set out in Annexure B.
Sean gave evidence that the Delaney family bought property in Botanic Ridge both on its own and in conjunction with the Torossi family. Two parcels of land were owned by the Delaney family, namely:

(1) 89 Browns Road, owned by Pat Delaney senior as trustee of the PJD Pastoral Trust (the ‘PJD Trust’); and

(2) 99 Browns Road, owned by Derrymore Farm Holdings Pty Ltd as trustee for the Derrymore Farm Holdings trust (the ‘DFH Trust’).

Sean gave evidence that the PJD Trust is a discretionary trust of which Sean and Pat are both beneficiaries. The DFH Trust is a unit trust in which the units are held by Skildale and PDC.
Two properties were owned by the Delaney families and the Torossi families, namely at 101 Browns Road and 248 Smiths Lane. As a result of significant disagreements with the Torossi family, a settlement was achieved in 2019. I note that the settlement terms took the form of a heads of agreement dated 19 September 2019 (the ‘Leederville HoA’). The Leederville HoA is relevant to this proceeding because it was subsequently used in preparing the HoA on 27 May 2020. In any event, the result of the settlement with the Torossi family was that these two properties were then transferred to Mt Salazie Pastoral Co Pty Ltd and Smiths Lane Pastoral Co. Pty Ltd.
None of these four properties (which I will refer to as the ‘Botanic Ridge properties’) have been developed. Their combined value exceeds $100 million.
BUSINESS OF DELPLANT
4.1 Nature of the Business
Sean has been the Managing Director since 1992. As Managing Director, Sean has been and is responsible for the overall business of the Delplant group including administration, finance, tenders and contracts.
Pat was the Operations Manager from 1998 until Sean made him redundant on 25 May 2020. Pat is a registered plumber. Prior to establishing the Delplant group, he worked with his father who operated a civil engineering business. As Operations Manager, Pat was responsible for operations and maintenance of the Delplant group.
I note in passing that Pat and Sean drew low salaries. For FY 2019 and FY 2020, each claimed a salary of $80,000. It seems likely this was for taxation reasons, which appears of some significance in the structure and operation of the Delplant group. However, until late 2019, each took a monthly advance of distributions of $15,000 per month. I will deal with the circumstances in which these advances ceased further below.
Sean’s son, James, has been working for the business since 2015. His services are provided via Skildale. James is responsible for managing plant and equipment. James was brought in to support Sean’s role. Pat’s son, Tom, also works for the business.
In addition to the directors, there has been an executive team of the Delplant group since at least 2017. As at 2017, the executive team comprised Steve Clowes, the Construction Manager, Phil Micah, the Construction Manager of the JV, and Tracy Maggs. Ms Maggs left in 2019.
The number of staff employed by the Delplant group has varied. In late 2018, it had around 61 full-time staff. In about February 2020, the Delplant group had approximately 40-43 full-time staff.
4.2 Relationship between Sean and Pat
Sean gave evidence that from about 2015 or 2016, he planned to reduce his work hours to 2-3 days a week. He said his decision to scale back his work hours was related to some health issues, in particular, some heart issues. They were not identified in the evidence. No medical reports were tendered. Sean said that in practice he has not been able to achieve a real reduction in his working hours. He said that even when he is not at the office he is on call. However, this evidence is inconsistent with the letter written on his behalf dated 20 September 2019, which records his reduced role as: ’Sean already at .5 and looking to reduce further’. I note that letter was written in the context of Sean’s attempts to pay a lower price for Pat’s interests in the Delplant group.
As I set out above, I found Sean’s evidence about the reduction in his involvement and hours working at the Delplant group unconvincing. I do not accept that he was only working .5 FTE (full time equivalent) in September 2019. In my view, his statements at the time were made to assist with the purchase of Pat’s interests in the Delplant group for the benefit of Sean and his family. Further, in my view, they were made in a context where Sean’s reduction in working hours was likely to have an effect on the value of the business of the Delplant group. This is because the value of the business would need to be determined on the basis that both Pat and Sean would leave soon after any deal was done.
Sean and Pat both gave evidence that, from at least 2016, the relationship between them was strained. The reason for this was not really identified in the evidence. Sean said that from 2016 the relationship between Sean and Pat got worse and worse. He said Pat blamed him for everything.
Further, from at least 2016, Pat was suffering from health issues. In 2017, he suffered two heart attacks and was subsequently diagnosed with a kidney disease called vasculitis. He gave evidence that the disease is still treated with medication which causes, among other things, mood swings and tiredness. I note that the minutes of a board meeting of Delplant dated 15 August 2017 record that Pat was having ‘major surgery’ in October 2017 and that post-surgery he would not be performing his role as Operations Manager.
Sean said that he was aware that Pat had heart issues. However, he did not have detailed knowledge. He said that whenever he asked Pat would always change the subject to something else.
Sean said that, from about 2016, Pat had indicated he wanted out of the business. It is recorded, in part, in an email from Pat to Sean dated 24 March 2016. I note that Pat stated in that email that Sean had forced such a decision on him. Further, in an email dated 28 March 2016, Pat stated that he would be the ‘sacrifice’. That was consistent with the evidence Pat gave at trial. On the evidence before me, by 2019, Sean and Pat were not really speaking to each other at work. I accept that evidence. I also accept Sean’s evidence that the breakdown of the relation between Sean and Pat was having an impact on key staff who indicated they would find it difficult to continue in the business if the issue between them was not resolved.
From at least 2016, there were discussions as to the basis upon which Pat might leave the business. Over time Mr Lidonnici took part in this process on Pat’s behalf. Mr Lidonnici had been the accountant for the Delplant group and for both Sean and Pat from about 1996. From about 2014 or 2015, Mr Lidonnici was no longer engaged by some entities in the Delplant group or by Sean and his interests. However, he remained the accountant for Delplant until Sean decided to terminate his remaining engagement by Delplant in mid-July 2019. After that time, Mr Lidonnici continued to advise the Pat interests.
Those discussions from 2016 involved consideration of the value of the Delplant group, including plant and equipment, the Vesper Drive property and goodwill. For example, Mr Lidonnici received an email from Sean dated 27 October 2017, which suggested an agreed value for plant and equipment, a valuation of the Vesper Drive property at $2.8 million, and 50% of goodwill at $3.5 million or 25% of profits for 3 years. Sean suggested this would be payable from Delplant as a consultant fee to Pat. This offer was not accepted.
4.3 Financial Performance to 30 June 2019
For the last 10 years, the bulk of the work of the Delplant group has been undertaken in the growth corridor that exists within the municipalities of Casey and Cardinia. That work constituted 90% of the business of the Delplant group. Sean described this area of greater Melbourne as Delplant’s ‘sweet point’. Sean used the term ‘red 23’ to refer to the concentration of the Delplant work in this area. Apparently, that is a reference to former cricketer Shane Warne’s favourite gambling number.
Most of Delplant’s work comes from five major clients, including Winslow, Tarmac, the Brown Property Group, and Lojac Constructions (‘Lojac’). These clients comprise 80-90% of the Delplant group’s turnover.
In early 2019, Mr Lidonnici prepared an estimated value of the business of the Delplant group based upon the financial data of the group for the period from 2009 and 2018. This was prepared for the purpose of discussions for the sale of Pat’s interests in the Delplant group, which took place in March and April 2019 between Sean and Mr Lidonnici. Mr Lidonnici provided a copy to Sean in April 2019. There was no allegation that the financial data contained in this document was not accurate. The key financial data was as follows:

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

Sales

21,904,318

18,724,544

18,492,772

14,648,923

15,663,694

15,801,625

13,064,627

13,465,656

15,761,351

17,480,486

Cost of Sales

13,547,152

11,602,151

10,932,299

9,936,666

10,500,807

11,254,166

9,482,792

9,541,118

10,925,454

12,818,320

Gross profit

8,357,166

7,122,393

7,560,473

4,712,257

5,162,887

4,547,459

3,581,835

3,924,538

4,835,897

4,662,166

Delplant Haulage Dividend

-

13,497

-

54,923

16,816

11,211

16,816

-

18,939

-

FHDB JV Distribution

580,000

-

1,160,000

580,000

-

-

-

-

-

-

Other Income

248,145

220,024

252,063

241,942

493,962

237,559

175,124

242,076

492,702

202,565

Expenditure

1,983,526

1,634,055

1,700,034

1,422,599

1,668,286

1,368,665

1,312,112

1,316,044

1,608,885

1,084,522

Actual Profit/-loss before Income Tax

7,201,785

5,721,859

7,272,502

4,166,523

4,005,379

3,427,564

2,461,663

2,850,570

3,738,653

3,780,209

Maintainable Net Profit/-Loss before Income Tax

6,554,858

5,600,532

5,950,948

3,383,375

3,789,401

3,313,507

2,298,785

2,700,864

3,557,101

3,529,611

As is evident, there was a reduction in turnover and therefore profit in FY 2011 and FY 2012. However, there was a steady increase in turnover and profit from FY 2013 to FY 2018. Relevantly:
(1) the sales within the Delplant group, excluding the JV distribution and Delplant Haulage dividend, exceeded $14,000,000 each year from FY 2013, with sales for FY 2018 of $21,904,318; and
(2) the maintainable net profit for FY 2016 to FY 2018 ranges between $5,600,532 and $6,554,858; and
(3)through the entire period, the profit margin of the business was generally between approximately 20-30%.
Thus, in the period for FY 2016 to FY 2018, the profit of the business of the Delplant group was increasing.
However, Sean gave evidence that, from early 2019, he became concerned about the future profitability of the Delplant group. Sean said that the profitability of the Delplant business depended upon continuing land sales, in particular, in Cardinia and Casey. If sales dropped, then turnover was likely to decrease in the next two years. This is because it took 18 months to 2 years between the sale of land and the settlement of land. The work of the Delplant group was undertaken during this period after the sale had been made. As a result, he said that often the Delplant group might be busy at that point in time, but have a poor forecast for the future.
In this regard, Sean relied upon the program review and other documents he prepared in March 2019, which were circulated to Pat and the executive group by emails in mid-March 2019. Attached to those emails was an adjusted program of Delplant works. Also attached to those emails were tables which noted that land sales were decreasing while prices were increasing. One table prepared by the HIA Economics Group related to a similar situation in FY 2010, following the global financial crisis. Sean said that reduced sales in 2010 resulted in a reduction in Delplant turnover and profit in FY 2011 and FY 2012. Other tables prepared by Core Logic noted decreases in sales but increases in prices in 2018.
In his email dated 12 March 2019, Sean referred to this as a ‘light globe moment’. He wrote:
‘light globe moment’ how is it that we are still somewhat busy yet poor forecast? We all know that property market is in the middle of the largest price adjustment since at least 91/92, we are currently busy due to sales locked away (Developer land sales office) dating back to 2017 and still early 2018. Economic analysts predict that the bottom for sales will be later this year, post settlements (how many defaults?) of record lot numbers July to October 2019. Post that land sales s [sic] is predicted to be flat for 2020 and 2021.
New business development, tendering and winning work is our number one priority.
These emails were prepared about the time that discussions were taking place between Sean and Mr Lidonnici about the sale of Pat’s interests in the Delplant group. Indeed, by an email dated 8 March 2019, Mr Lidonnici requested an offer from Sean based upon Sean’s statements that Sean would like Pat out of Delplant. Mr Lidonnici requested a proposal for an ‘[a]ll in number’ for all of Pat’s interests in the Delplant group. Sean replied by email dated 19 March 2019, only offering to acquire Pat’s interest in the Vesper Drive property. By an email dated 24 March 2019, Mr Lidonnici rejected Sean’s offer on Pat’s behalf, noting that Pat was looking for an offer for the sale of all of Pat’s interests in the Delplant group.
It was put by counsel for the defendants that Sean was not truly concerned about the future profitability of the Delplant group at this time and that the statements made by Sean in these emails were very much influenced by Sean’s desire to purchase Pat’s interests at the least possible price. While I am conscious that these emails were prepared at about the time discussions were taking place about the sale of Pat’s interests in the Delplant group, I do not accept that Sean’s concerns about the future profitability of the Delplant group were not honestly held. My view in this regard is confirmed by the business records of the Delplant group produced in the second half of 2019 set out below. Further and significantly, the defendants did not put forward any objective contemporaneous documentary or other evidence which would contradict the matters set out in Sean’s program review and other documents prepared in mid-March 2019, including the adjusted program of Delplant works.

Following this email exchange, there were meetings between Sean and Mr Lidonnici on 29 March 2019 and 3 April 2019. The contents of those meetings are not directly relevant to the issues in dispute in these proceedings. However, it appears that the value of the Delplant group and, in particular, the value of its goodwill was an issue even at this time. For example, Mr Lidonnici’s notes of the meeting on 29 March 2019 record, in the context of the issues between Sean and Pat, that:
6. JL [Mr Lidonnici] discussed that Delplant will always have a goodwill value
7. SD [Sean] not prepared to accept to pay Good will [sic] and will start a SD Constructions
I have understood the issue referred to in item 7 of these notes to be a reference to Sean leaving the Delplant group to start his own construction company. Further, Mr Lidonnici’s notes of the meeting on 3 April 2019 record that:
14. SD [Sean] stated that he wouldn’t consider paying for Goodwill after the last best 3 years as it would be a difficult period going forward.
JL [Mr Lidonnici] advised that the history of Delplant speaks for itself, and Delplant will always make money.
SD [Sean] stated that turnover would drop to $12-15M and Delplant will have net profit drop to 10-15%.
JL [Mr Lidonnici] suggested that Delplant would still make at least $2M per year
15. SD [Sean] did not make comment on the $2M profit per annum suggestion.
I note in passing that Sean sent an email to Pat and the executive team dated 29 May 2019. It provided an adjusted program of Delplant works to late May 2019. It recorded, among other things, that Delplant was running seven construction crews which included a crew for the JV. It also recorded that:
I expect that prior to Melb Cup our shape will be 6no total crew, 2 x water/gas, 3 x sewer and 1 x FHDB.
…
March industry reports are in and news is that annualised sales are running at circa 5,000 lots PA, industry needs min’ 15,000 lots plus PA. … We are now fully tied to the success within the land sales office.
…
New business development, tendering and winning work is our number one priority. Combination water/gas will be hard to secure, especially for 2 crews in a tight market place, need to secure ‘gas only’ opportunities.
SEPTEMBER AND DECEMBER 2019

As I have said, there were a series of negotiations between Sean and Mr Lidonnici on behalf of Pat in an attempt to resolve the dispute between Sean and Pat. By mid-2019, Pat had engaged solicitors, Andrew Gray & Associates (‘Andrew Gray’), to assist in this process. These negotiations continued in the second half of 2019 and until the HoA was executed on 27 May 2020. These negotiations are most relevant to the claims made by the defendants under the ACL based upon representations as to the financial position of the Delplant group.

There are number of issues relating to the ACL claims, in particular for misleading conduct. I will address them in detail in section 10. For present purposes I wish to note them briefly.

First, the defendants relied upon 30 separate representations in [22] of the counterclaim, which took place on 10 occasions between 2 September 2019 and 27 May 2020 when the HoA was executed (the ‘relevant period’). Many of the 30 representations alleged relate to representations of projected profit and turnover for FY 2020 made at various points during the relevant period (the ‘FY 2020 projections’).

Second, the plaintiffs admitted that many of those representations were made but denied that they were false (or were alleged to be false) or that the defendants relied upon them. As a result, in the following factual sections, I will only make findings about the representations that are not admitted.

Third, the alleged falsity of the alleged misrepresentations, as set out in [25] of the counterclaim, is quite limited. It is far less than the scope of the 30 misrepresentations alleged. Paragraph [25] provides that:

The representations were false and untrue in that:-
(a)the nett [sic] profit for year end 30 June 2020 was $5.1 million and not $1.5 million and/or $2.4 million;

(b) turnover was $18.8 million and not $12-14 million;
(c)the work had not dried up as sales revenue for the second half of the financial year ended 30 June 2020 was as a percentage marginally higher than in the corresponding period for year end 30 June 2019;

(d) profit margin was not 7-10% but 27.1%.

Fourth, the plaintiffs contended that many of the representations alleged, in particular the FY 2020 projections, related to ‘future matters’. However, the defendants did not plead or rely upon s 4(1) of the ACL in seeking to establish the falsity of these representations. The plaintiffs submitted that, as a result, it was not open to make findings of breaches of the ACL in respect of any alleged representations which related to future matters.

Fifth and related to the fourth issue, the representations alleged relate to the FY 2020 financial information and projections for turnover, profit and profit margins at particular times during the relevant period. However, the plea of falsity in [25] of the counterclaim and the trial proceeded on the basis that, if the financial information or projection provided was not the same as that in fact achieved for FY 2020, then the relevant FY 2020 projection was false and misleading.[2] That premise is not consistent with liability for misleading and deceptive conduct under the ACL.[3] Indeed, it is the very reason for, and it highlights the significance of, pleading or relying on s 4(1) of the ACL.
[2]Relevantly, counsel relied upon the draft statement and financial summary for FY 2020 prepared in early to mid-July 2020 (the ‘July 2020 draft statements’) both in cross-examination and final submissions to establish that FY 2020 financial information and projections provided in September 2019, December 2019 and January 2020 were false: see, eg, [66], [68] and [70] in the defendants’ written closing submissions dated 23 November 2020 (the ‘defendants’ written closing submissions’). Counsel also relied upon a Delplant project sales summary dated 8 July 2020 (the ‘July project sales summary’).
[3]Fubilan Catering Services Ltd v Compass Group (Australia) Pty Ltd [2007] FCA 1205, [546] (French J) (‘Fubilan’).

Sixth and related to the fifth issue, as the alleged representations themselves reveal, updated FY 2020 financial information and projections were provided to the defendants over the course of FY 2020 up until the HoA was executed, as further financial information was available. On the evidence before me set out below, the plaintiffs provided updated financial information in addition to that pleaded and which materially affects the claims made.

For example, [25(b)] of the counterclaim alleges that turnover for FY 2020 was ‘$18.8 million and not $12-14 million’. As set out below, it is alleged in [22(b)(i)] of the counterclaim that the plaintiffs represented in September 2019 that that the turnover for FY 2020 would be $12-15 million. However, there is no dispute on the evidence that the defendants were provided with updated turnover projections of $16.7 million (excluding the JV) in early March 2020. As a matter of common sense and logic, and legal principle, it is difficult to understand how the defendants could rely upon projections provided in September 2019 when updated projections were provided in February and March 2020.

I will address the third to sixth issues further in section 10. I will now return to the events giving rise to the claims in this proceeding.

5.1 The 2 September 2019 Letter

By letter dated 27 August 2019, Andrew Gray wrote to Sean, proposing that Sean acquire Pat’s interests in the Delplant group for $19,292,752 (the ‘27 August 2019 letter’). This was on the basis that the Delplant group (comprising Delplant, Mt Salazia Developments, the Mt Salazia Development Unit Trust (the ‘Mt Salazia Trust’), Protace Pty Ltd (‘Protace’), SEPH, Delplant Haulage and the Vesper Drive property) was valued at $38,585,504. The 27 August 2019 letter noted that, while the affairs of the Delplant group involved a large and complex group of companies and trusts, the majority of Sean’s interests were owned by Skildale in its capacity as trustee of the Galway Family Trust, and the majority of Pat’s interests were owned by PDC in its capacity as trustee of the Delway Family Trust. A response was requested within 10 days of the date of the letter.

Mr Maric replied by letter dated 2 September 2019 (the ‘2 September 2019 letter’). Mr Maric advised that he did not consider that a value of $38,545,504 was reasonable. The letter stated that that Sean would be ‘delighted to sell his 50% interest’ in the Delplant group to Pat for $18,292,752, being $1 million less than Pat’s offer.

The 2 September 2019 letter also provided:

With respect to Delplant Pty Ltd, I do understand there is an untenable daily working relationship between Sean & Patrick with no genuine prospect of reconciliation. Working together in this business, into the future or for much longer is not a viable option for Sean, this was clearly conveyed to Patrick in a meeting on 16 February 2019.
Mr Sean Delaney has indicated that these open tensions have played heavily in the resignation of key personnel of the business, including Alastair Garlick who has already departed and Tracy Maggs who tendered her resignation last week. He also advised that more recently, other key staff have indicated that they will leave the business if these matters are not quickly resolved between the Directors. He conveyed that key staff stated that ‘they are tired of being caught up in the middle of these management disputes’ and that ‘it has become impossible for key staff to complete their job to their best ability with Directors having varying opinions of how serious matters should be dealt with’, referring to employee relations, Occupational Health and Safety and the like.
I am also advised that there are no significant contract works scheduled and the volume of activity by the major customers has diminished rapidly with a substantial reduction in income and profit forecast for 2020 FY and beyond. Given the above circumstances I believe a speedy resolution is of paramount importance in order to preserve the value for all shareholders.
Please note, should agreement not be attainable in the near future and given the unworkable nature of their business relationship, the Directors will need to consider a scaling down of operations and an orderly cessation of the business. I expect this will have a detrimental financial impact on all parties.

The 2 September 2019 letter is relied upon in [22(a)] of the counterclaim. That paragraph alleges that, by this letter, Mr Maric represented to the solicitors for Pat that Sean, on his own behalf and on behalf of Delplant, had advised:

(i)that due to the tensions between Sean and Pat, key staff had indicated they would leave the business if matters were not resolved quickly between the directors;
(ii) there are no significant contract work scheduled and the volume of activity by the major customers has diminished rapidly, with a substantial reduction in income and profit forecast for 2020 FY and beyond;
(iii) should agreement not be attainable in the near future and given the unworkable nature of their business relationship, the directors will need to consider a scaling down of operations and an orderly cessation of the business.

I will refer to these as the ‘2 September 2019 representations’.

In their reply and defence to counterclaim dated 6 August 2020 (the ‘reply’), the plaintiffs admitted that the 2 September 2019 letter contained the 2 September 2019 representations.

Mr Maric said that the information relating to the Delplant group in the 2 September 2012 letter was provided by Sean. Sean gave evidence that the statements contained in the 2 September 2012 letter reflected the views he held at the time. As to current and future contract work, he gave evidence consistent with his belief set out in section 4.3 above. He also noted that during this period one of Delplant’s major customers, Lojac, had been completing two significant projects called Brompton Estate and Pavillion Estate. Although his evidence was not entirely clear, I have concluded that his evidence was to the effect that Delplant had achieved sales to Lojac of $8 million in FY 2019, and that this would reduce significantly in FY 2020 and would reduce further in FY 2021. I generally accept this evidence. Further, the chart of the status of Delplant’s top 10 projects attached to an email from Sean to Mr Maric dated 10 September 2019 indicated that, at this time, the Pavillion Estate and Brompton Estate projects were approximately 90% and 60% complete.

5.2 The 11 September 2019 Meeting

There was a meeting between Sean, Mr Maric and Mr Lidonnici at the offices of Delplant on 11 September 2019 (the ‘11 September 2019 meeting’). In [22(b)] of the counterclaim it is alleged that, at this meeting, Sean and Mr Maric represented on behalf of Sean and Delplant that:

(i) Delplant would achieve an annual turnover of $12-15 million for the 2020 financial year;

(ii) profit at best would be $2 million;
(iii) at best, a multiple of three times would be used for the calculation of goodwill;
(iv) good profit margins were over and they would only achieve margins in the range of 7-10% at best.

I will refer to these as the ‘11 September 2019 representations’. In the reply, the plaintiffs denied that these representations were made. As a result, it is necessary to make findings about what was said at this meeting.

Prior to the meeting, by email dated 10 September 2019, Sean provided Mr Maric and Mr Lidonnici with information for the meeting relating to projected sales. These included a:

(1) summary of project sales to August 2019 (the ‘August project sales summary’);

(2) summary of the status of work for each of the key clients of Delplant; and

(3) chart of the status works remaining for the top 10 projects as at September 2019.

As to the August project sales summary, Sean gave evidence that he prepared this in early September 2019. This summary excludes sales to the JV. It recorded as follows:

Month by Month Comparison – Calendar Years 2018 - 2019

Month 2018 2019 Variance ($) Variance (%)

Jan $     1,271,653.71 $     1,328,286.85 $         56,633.14 4.45%

Feb $     2,132,977.55 $     1,657,738.77 -$        475,238.78 -22.28%

Mar $     1,890,105.72 $     1,459,764.87 -$        430,340.85 -22.77%

Apr $     2,123,212.62 $     1,836,177.39 -$        287,035.23 -13.52%

May $     2,295,895.01 $     2,661,099.58 $         365,204.57 15.91%

Jun $     1,644,974.26 $     1,376,566.11 -$        268,408.15 -16.32%

July $     2,467,837.01 $     1,459,092.22 -$      1,008,744.79 -40.88%

Aug $     2,102,720.41 $     1,001,434.89 -$      1,101,285.52 -52.37%

Sep $     2,055,911.61

Oct $     2,387,987.45

Nov $     2,138,705.86

Dec $     1,078,577.14

Annual $     23,590,558.35 $     12,780,160.68

Avg. Sales $     1,965,879.86 $     1,597,520.09

Jan to August 2018

$   15,929,376.29

Jan to August 2019 $   12,780,160.68

YTD Difference -$     3,149,215.61 -20%

As to the chart of remaining works, it indicated that the majority of projects were at least 75% completed, with only two projects less than 50% completed.

On the evidence before me, I have no reason to doubt the accuracy of the information contained in these documents at the time they were prepared. In my view, these contemporaneous documents are consistent with a substantial reduction in sales. Based on the calendar year from January to August 2019, there was a drop in sales of $3,149,251.61 or 20% compared to the previous year. More alarmingly, in June, July and August 2019 there was, on average, a reduction in sales of approximately 36% compared to the same months in the previous year. Unless this reduction was corrected, this would be likely to result in a substantial reduction in the sales and profit forecast for FY 2020.

I note at this stage that the information contained in the August project sales summary and subsequent project sales summaries compared the results for each month with the results of the previous year. Sean gave evidence that this was appropriate because the work undertaken by the business was affected by many matters, including the seasons and the time of year. I accept Sean’s evidence that it was appropriate to compare the results for a month or period with the results of the same month or period in a previous year.

As is evident, the primary purpose of the 11 September 2019 meeting was to discuss the value of the Delplant group for the purposes of Sean purchasing Pat’s interests. This was in light of the valuation of $38,585,504 referred to in the 27 August 2019 letter. This involved a consideration of the goodwill of the Delplant group.

At the 11 September 2019 meeting, Mr Lidonnici provided Sean and Mr Maric with his estimates of the value of the business to justify the offer contained in the 27 August 2019 letter. His estimate was based on a valuation of the business at two dates: one at 10 April 2019 of $32,019,330, and one at 12 August 2019 of $38,585,504. These valuations included a component of goodwill which was based upon the financial data for FY 2017 to FY 2019. Based on these three years, he calculated a three-year average maintainable net profit of $6,806,926.11. Using a multiple of 3 resulted in a goodwill of $20,420,778. This was included in the valuation as at 12 August 2019. Using a multiple of 2.5 resulted in a goodwill of $17,315.

Further, at the 11 September 2019 meeting, Sean produced a copy of the report of Cullen Capital dated 13 November 2007 (the ‘Cullen report’), which provided a valuation for the Delplant group at the time Sean and Pat purchased Joseph’s interest. It was submitted that this was relevant because it highlighted that goodwill consisted of both personal goodwill, attributable to the combined personal attributes of the directors, and commercial goodwill, which reflected the value of a business in excess of its tangible and identifiable intangible assets minus personal goodwill. Sean stressed that, if he bought Pat out, he would not remain in the Delplant group for long, which meant there was little personal goodwill. I note in passing that a copy of the Cullen report was sent by email by Sean to Mr Maric and Mr Lidonnici on 20 September 2019.

Sean prepared handwritten notes of that meeting. Those notes record that:

(1) Sean stated that moving forward sales would be in the range of $1-$1.5 million per calendar month, with a smaller market, increased costs, increased competition and margins under pressure;

(2) in this context, Sean provided copies of the ASIC reports of Jaydo Construction Pty Ltd (‘Jaydo’) and Califam Constructions Pty Ltd (‘Califam’), noting that:

(a) the profits for 2016 and 2017 for Jaydo were 6.07% and 6.96%;

(b) the profits for 2017 and 2018 for Califam were 9.3% and 13.5%; and

(3) discussions then centred on ‘FMEs’ (future maintainable earnings) for Delplant. They note sales of $14.5 million and a margin of 12-15% with ‘JL circa $2m x 3 years’.

Mr Lidonnici prepared typed notes based upon handwritten notes taken on that day. As I understood his evidence, it was his practice to prepare handwritten notes during a meeting and often have them typed soon after that meeting. His handwritten notes were not in evidence. The typed notes recorded, among other things:

1. If no resolution, SD [Sean] advised he would liquidate.
2. Delplant has no GW as per previous Valuation done by Cullen Capital – (Valuation to come).
3. Zvonko suggested valuation of goodwill to be all inclusive/no extra for P & E (JL [Mr Lidonnici] advised must have + P & E).
4. SD [Sean] suggested that Delplant will go to industry margins (7%-10%).

5. SD [Sean] not around, will look at putting in management.
6.Zvonko suggested that he has looked at business/construction sales and low multiples, hard to find buyers.
7.Zvonko believes Delplant cannot be valued on past due to work program ahead (no long term works planned).
8.Zvonko advised Delplant will produce $12 - $15M per year and achieve low margins/ say $2M - multiple at best 3x = $6M G/W.

The evidence before me was that Sean provided copies of the financial statements of Jaydo and Califam at this meeting. Sean’s handwriting appears on the first page of each of these documents. The handwritten notes on the Califam financials record that for 2017 there was a profit of 9.3% and for 2018 there was a profit of 13.5%. The handwritten notes on the Jaydo financials record that for 2016 there was a profit of 6.07% and for 2017 there was a profit of 6.96%.

Sean gave evidence that he provided these financial statements to rebut any suggestion that Delplant should be operating in areas other than the Casey/Cardinia area. He said that it showed that the profits outside this area were less than profits within the area. By contrast, Mr Lidonnici gave evidence that these financial statements were provided to show that the maintainable profits of Delplant would be more like the industry margins reflected in these financial statements. Mr Lidonnici gave evidence, consistent with his file note, that Sean said those margins were in the range of 7-10%.

Mr Maric gave evidence that Sean presented these financial statements and referred to the percentages recorded on them in Sean’s handwriting as examples of industry margins. He said that Sean said Delplant’s margins would be difficult to achieve and would not be achieved moving forward in light of competitive pressures. However, he did not give evidence, and it was not put to him, that the range of 7-10% was referred to in the context of industry margins.

As to the purpose of which the Jaydo and Califam statements were provided, I prefer the evidence of Mr Maric and Mr Lidonnici. I do not accept the evidence of Sean that these financial statements were provided to rebut any suggestion that Delplant should be operating in areas other than the Casey/Cardinia area.

Sean gave evidence that his comments about sales moving forward were not directed at FY 2020 but the future maintainable earnings of Delplant moving into the foreseeable future. He gave evidence that he said that this was in the range of $1.2-1.5 million per month. He said that a future maintainable earnings of $2 million was discussed in this context. However, he acknowledged that this was less than the profit made in the last 10 years.

Mr Maric gave evidence that he and Mr Lidonnici agreed that a multiple of 3 would be appropriate. As to the future maintainable earnings figure of $2 million, at first, his evidence in chief suggested this figure may have been suggested by Sean. In cross-examination, he confirmed that he presented the future maintainable earnings figure of $2 million as plausible maintainable earnings going forward in a changed Delplant. This was in the context that Sean expressed his views at the meeting about the difficulty in achieving historic margins and the likelihood of returning to industry margins. However, he noted that future maintainable earnings were not necessarily the same as profit. Mr Maric said that the $2 million was based upon an expectation that the future revenue would be in the order of $15 million. He acknowledged that this was significantly less than the turnover of the previous year. However, this was in a context of calculating future maintainable earnings in light of the current and future prospects of the business of the Delplant group, including Sean and Pat leaving the business.

As to the reference to profit margins for Delplant, while Mr Lidonnici’s notes suggest that Sean said that Delplant would go to industry margins of 7-10%, Sean denied that he stated at this meeting that profit margins of the Delplant group would go to industry margins of 7-10%. Rather, Sean gave evidence, consistent with his file notes, that a margin of 12-15% was discussed in the context of future maintainable earnings for the purpose of determining the goodwill of the Delplant group. In fact, he said that he initially talked about 13-16% as the appropriate profit margin.

Mr Maric gave evidence that, in the context of goodwill, Sean referred to an appropriate profit margin of 12%, 13% or 14%. He gave evidence that he suggested a margin of 11%. This is notwithstanding that Sean’s notes refer to a margin of 12-15%. He said this was a professional judgment based upon his assessment of the current and future prospects of the business, including Sean and Pat leaving the business and a new management structure being required which would diminish a significant part of the profits. While I generally accept this evidence, I do not accept he referred to a profit margin of 11% at this meeting. As set out in section 5.3 below, it is the percentage referred to as the ‘maintainable net profit’ percentage in the letter from Mr Maric to Mr Lidonnici dated 20 September 2019 (the ‘20 September 2019 letter’). He may have been confused in this regard.

Mr Lidonnici gave evidence to the effect that, in his discussions with Mr Maric at the 11 September 2019 meeting, he was ‘always talking profit… not an FME’. He said the discussions centred around how bad the Delplant group was going to be in FY 2020 and he was told ‘if something can’t get resolved, Sean’s out’. He gave evidence, in substance, that he was told that, based upon a turnover of $14-15 million and a 7-10% profit margin, profit for the Delplant group for FY 2020 was only going to be $1.5 million.

The figure of $1.5 million as the yearly profit is not referred to in the notes of Mr Lidonnici or Sean. Indeed, it is inconsistent with the reference to future maintainable earnings in the notes of both Mr Lidonnici and Sean. Further, when it was put to Mr Lidonnici that if he applied a mid-range of 12-15% to $14.5 million (as set out in Sean’s notes) he would achieve a figure of $2 million, he agreed. In cross-examination, Mr Lidonnici also agreed that where his notes refer to ‘$12-15M per year’ he was being told this was for FY 2020 and future years. I note in passing that the figure of $1.5 million as the ‘maintainable net profit’ is referred to in the subsequent 20 September 2019 letter from Mr Maric.

In his evidence, Mr Lidonnici acknowledged that in order to determine future maintainable earnings it would be necessary to consider the profit a business was going to make over the ensuing years of the business in the hands of the purchaser. However, in the case of Delplant, he said the average profit over the past 20 years was $4 million and he could not accept a figure of $2 million. In my view, this evidence strongly suggests that it is more likely than not that a figure of $2 million was discussed at this meeting. This figure is also confirmed by the contemporaneous file notes.

Further, Mr Lidonnici acknowledged that they discussed at the meeting that, moving forward, Pat would not be at the Delplant group and Sean said he wanted to reduce his hours. However, he gave evidence that in his view, while this might cause some effect on Delplant’s profit and profit margins, it was not going to drop by 40-50%.

I found Mr Lidonnici’s evidence in relation to these aspects of the 11 September 2019 meeting both unclear and inconsistent with the contemporaneous documents. In my view, his evidence was consistent with his focus on the actual performance of the Delplant group based upon the financial statements which he had analysed for the purpose of the valuation he had prepared for Pat. However, that focus was inconsistent with his file notes and the file notes of Sean which record, in the context of estimating goodwill, future maintainable earnings of $2 million. It is also inconsistent, for the most part, with the evidence of Sean and Mr Maric in relation to these matters. As a result, I generally prefer the evidence of Sean and Mr Maric in relation to these matters.

In these circumstances, I have concluded that Mr Maric stated, in the context of calculating a goodwill value and the maintainable profits of the business in circumstances where a new management structure would be required, that, assuming a turnover of $12-15 million per year and a margin of 12%-15%, profit would be in order of $2 million per year which, with a multiple of 3, would result in a goodwill value of $6 million.

I have also concluded that Sean stated that Delplant’s good profit margins would not be achieved moving forward and would likely return to industry margins in the range of 7-10%. In this regard, I prefer the evidence of Mr Lidonnici in relation to this issue. It is consistent with his file notes and oral evidence. Further, the statement is generally consistent with the handwritten percentages written by Sean on the Jaydo and Califam financial statements. It is also relevant to my finding that it was never directly put to Mr Maric that Sean made statements to this effect. However, my finding only relates to the discussion of the Delplant group in the context of it returning to industry margins in the future, not in the context of discussing goodwill which is the subject of my findings in the previous paragraph.

The statements which I have found are not the same as the 11 September 2019 representations. Relevantly, the statements which I have found to have been made by Mr Maric were made in the context of calculating the value of goodwill and the maintainable profits of the business, and not statements of predictions of the turnover, profit and profit margin for FY 2020. It is significant that these representations were made to Mr Lidonnici, who is a qualified accountant. I am not satisfied that a reasonable person in his position would have understood the statements made at this meeting in relation to turnover and profit as projections for FY 2020. Further, the statement which I have found to have been made by Sean was related to a future period and not FY 2020.

The evidence of Pat about what he was informed about this meeting was inconsistent. In evidence in chief, Pat gave evidence that Mr Lidonnici reported to him after that meeting what was said about expected net profit, namely that it would be ‘in the high tens … percentage wise’ and that turnover would be down to $14 million. He said he was told that things were ‘getting grim’. In cross-examination, Pat said his answers related to the 12 March 2020 meeting and that he had no specific recollection about Mr Lidonnici speaking to him about what was said at the 11 September 2019 meeting. Pat then said he recalled that Mr Lidonnici told him that Sean was reporting that things were ‘not going very well’.[4] Mr Lidonnici did not give any evidence about what he reported to Pat.
[4]T469.23.

5.3 The 20 September 2019 Letter

After the 11 September 2019 meeting Mr Maric sent the 20 September 2019 letter. In that letter Mr Maric set out Sean’s position in relation to the disputed valuation of the Delplant group. The letter addressed a number of different topics, including goodwill, plant and equipment, the JV, Delplant Properties, Delplant Haulage and cash reserves.

The letter contained four options for the realisation of the Delplant group, excluding Delplant Haulage, in an annexure. Those options were based upon a market valuation, an offer by Sean, an orderly wind up and/or liquidation.

Based upon a market valuation, the annexure stated that the total market value of the assets, excluding Delplant Haulage, was $14,896,235. This included a goodwill of $3,850,000. Based upon Sean’s offer, the annexure stated that the total market value of the assets, excluding Delplant Haulage, was $15,796,235. This included a goodwill of $4,500,000. Based upon an orderly wind up or a liquidation, the annexure stated the total market value of the assets, excluding Delplant Haulage, was $10,075,878 and $9,125,878, respectively.

Under the heading ‘Goodwill’, the letter stated:

Please note, over recent years Delplant has enjoyed significant workloads and profits that coincided with the largest residential building boom in the State’s history. The subsequent collapse in land sales numbers has had a significant adverse flow on effect to Delplant’s current sales and profitability.
You may be aware of the reduced role of the founding directors, Sean already at .5 and looking to reduce further and with Pat exiting. The business faces difficult times re-adjusting, a new structure inclusive of senior executives is required moving forward. With the new structure in mind, it is expected that future profitability of the business would be at a minimum and in line with Delplant’s peers. At the moment work in progress is basically ‘hand to mouth’, currently they have book work through to Christmas, as always business success is linked to the sales office.
Further to the Cullen Capital Valuation dated 13 November 2007 provided to you, where it was identified that the Delplant business has a high degree of personal goodwill (as opposed to commercial goodwill). We believe that still to be the case and diminishing rapidly.
As explained in the meeting, Delplant are at the end of the largest construction cycle the South East corridor has ever experienced and the recent history of profits have evaporated. The realistic projections for 2020 and beyond is significantly lower. I do not believe there is any Goodwill Value in the open market with this economic outlook and current market conditions.
Notwithstanding the above comments and recognising that Sean is the only realistic purchaser of the business, we acknowledge that there is some intrinsic value to him. I believe the best-case goodwill valuation scenario is calculated as follows:

Revenue & Profit Projections

For the Year Ended 30/06/2020

Maintainable Base Revenue

14,000,000

Maintainable Net Profit

11%

1,540,000

Goodwill Multiple

2.5

3,850,000

In [22(c)] of the counterclaim, it is alleged that by the 20 September 2019 letter, Mr Maric represented on behalf of Sean and Delplant that:

(i) the collapse in land sales numbers has had a significant adverse flow-on effect to Delplant’s current sales and profitability;
(ii) the business faces difficult times readjusting, a new structure inclusive of senior executives is required moving forward. With the new structure in mind, it is expected future profitability of the business would be at a minimum and in line with Delplant’s peers;

(iii) at the moment, work in progress is basically ‘hand to mouth’;
(iv) profit projections for the year ended 30 June 2020 is $1,540,000.

I will refer to these as the ‘20 September 2019 representations’. In the reply, the plaintiffs admitted that the 20 September 2019 letter contained representations to the effect set out in [22(c)(i)]-[22(c)(iii)]. They denied that the letter contained the representation set out in [22(c)(iv)]. They alleged that the letter expressed ‘the opinion that the best case goodwill valuation scenario should be calculated based on a Maintainable Net Profit of $1,540,000’. This is because of the context in which the statement about profit projections was made, in particular under the heading ‘Goodwill’.

In this regard, Mr Maric gave evidence that the heading immediately above these figures entitled ‘Revenue & Profit Projections For the Year Ended 30/06/2020’ was a mistake. He gave evidence in effect that the figures under the heading related to his views about the maintainable base revenue and maintainable net profit expectations over an extended period of time. However, Mr Maric did not subsequently inform Mr Lidonnici of this mistake. Mr Lidonnici was not asked about his understanding of this part of the 20 September 2019 letter. However, he acknowledged that these figures related to maintainable base revenue and maintainable net profits.

Pat’s evidence was unclear. Initially, he gave evidence that Mr Maric was conveying that the maintainable net profit over future years would be $1.54 million. However, he later gave evidence that he understood it to be referring to FY 2020. I will make findings in relation to the nature of the representation alleged in [22(c)(iv)] and whether that representation was made later in the reasons.

Mr Maric gave evidence that the figures entitled ‘Revenue & Profit Projections For the Year Ended 30/06/2020’ represented his assessment at the time based on the information provided to him by Sean. He was questioned, in particular, about his assessment of 11% and maintainable net profit of $1.54 million in light of previous years’ profit. He said it was based on his estimate of future maintainable profits having regard to the business to date, the current state of the business (including that much of the contracted works had been performed) and the fact that going forward it was unlikely that both Sean and Pat would be involved in the business. He said that, if the two key personnel were no longer present, or were present to a reduced degree, the Delplant group would have to recruit senior managers and pay them a significant amount. This is in the context where Pat and Sean drew low salaries as set out in [37] above. I accept that evidence.

There was some communication between Sean and Mr Lidonnici between late September and late November 2019. Relevantly, on 18 October 2019, Mr Maric provided Mr Lidonnici with the project sales of Delplant for the period July 2019 to September 2019 (the ‘September project sales summary’). Again, it excluded sales to the JV. Like the August project sales summary, it listed the monthly project sales for each month between July 2018 and June 2019 and compared them with the monthly project sales for each month between July 2019 and September 2019. It recorded as follows:

Month by Month Comparison – Financial Year 2019-20

Month FY2018-19 FY2019-20 Variance ($) Variance (%)

July $     2,467,837.01 $     1,459,092.22 -$      1,008,744.79 -40.88%

Aug $     2,102,720.41 $     1,429,896.23 -$        672,824.18 -32.00%

Sep $     2,055,911.61 $     1,292,123.00 -$        763,788.61 -37%

Oct $     2,387,987.45

Nov $     2,138,705.86

Dec $     1,078,577.14

Jan $     1,328,286.85

Feb $     1,657,738.77

Mar $     1,459,764.87

Apr $     1,836,177.39

May $     2,661,099.58

Jun $     1,376,566.11

Annual $     22,551,373.05 $     4,181,111.45

Avg. Sales $     1,879,281.09 $     1,393,703.82

July to Sept 2018

$     6,626,469.03

July to Sept 2019 $     4,181,111.45

YTD Difference -$     2,445,357.58 -37%

A copy of this document and the ‘Delplant AR Sales Reports’ for the months of August and September 2019 were provided to Pat on 21 October 2019. On the evidence before me, I have no reason to doubt the accuracy of the information contained in these documents at the time they were prepared. In my view, these contemporaneous documents are consistent with a substantial reduction in sales, in particular, in July, August and September 2019 compared to 2018 of $2,445,357.58 or 37%. Once again, unless this reduction was corrected, this would be likely to result in a substantial reduction in the sales and profit forecast for FY 2020. Further, I note that the September project sales summary increased the actual sales figure for August 2019 from $1,001,434.89 (as included in the August project sales summary) to $1,429,896.23. Thus, updated figures, whether good or bad, were being provided.

In all these circumstances, I am not satisfied on the evidence before me that the current margin representations were misleading or deceptive, or likely to mislead or deceive. To the contrary, I am satisfied that it is more likely than not that the current margin representations were true at the time each of them was made.

Further, even if I am wrong in my conclusion that it is not open for me to make any findings in respect of the future margin representations, I am satisfied that the matters set out in [517]-[518] above provide a reasonable basis for each of the future margin representations made in September 2019. In addition, any representation as to future profit margins made in September 2019 was overtaken by subsequent statements relating to future profit and future profit margins. I refer to my comments in section 10.4 above.

Fourth, in light of these findings, it is unnecessary to deal with issues of reliance and causation. As a result, I do not intend to do so. However, in so far as the current margin representations were made in the period up to and including January 2020, I note that updated financial information and projections, including as to profit and profit margins for FY 2020, were provided in late February and early March 2020 as set out in section 10.4 above. I also refer to my comments in [490] and [510] above.

10.9 The Alleged Work Misrepresentations

The defendants submitted that the following representations were false because, as alleged in [25(c)] of the counterclaim, the work had not dried up as sales revenue for the second half of FY 2020 was, as a percentage, marginally higher than in the corresponding period for FY 2019:

(1) the representation alleged in [22(a)(ii)], made in the 2 September 2019 letter, that ‘there are no significant contract work scheduled [sic] and the volume of activity by the major customers has diminished rapidly, with a substantial reduction in income and profit forecast for 2020 FY and beyond’. The plaintiffs admitted that this representation was made;

(2) the representation alleged in [22(c)(i)], made in the 20 September 2019 letter, that ‘the collapse in land sales numbers has had a significant adverse flow-on effect to Delplant’s current sales and profitability’. The plaintiffs admitted that this representation was made;

(3) the representation alleged in [22(c)(iii)], made in the 20 September 2019 letter, that ‘at the moment, work in progress is basically “hand to mouth”’. The plaintiffs admitted that this representation was made;

(4) the representation alleged in [22(d)(i)], made in the 4 December 2019 email, that ‘sales were down by 30%’. The plaintiffs admitted that this representation was made;

(5) the representation alleged in [22(d)(v)], made in the 4 December 2019 email, that ‘the full impact is yet to arrive as much of the YTD revenues are still run-off sales from older projects’. The plaintiffs admitted that this representation was made;

(6) the representation alleged in [22(d)(vi)], made in the 4 December 2019 email, that ‘there were bleak business conditions and prospects for Delplant Pty Ltd’. The plaintiffs admitted that this representation was made;

(7)the representation alleged in [22(e)(i)], made in the 10 January 2020 letter, that ‘for the first quarter 2020 FY, project sales were down 30% and profit down 66% on the corresponding period for 2019 FY’. The plaintiffs admitted that this representation was made;
(8)the representation alleged in [22(e)(ii)], made in the 10 January 2020 letter, that ‘for the first 6 months 2020 FY, project sales down 29% on the corresponding period for 2019 FY’. The plaintiffs admitted that this representation was made;

(9) the representation alleged in [22(e)(iii)], made in the 10 January 2020 letter, that ‘the 2020 FY sales are projected to be $14.7 million, down from 24.4 million’. The plaintiffs admitted that this representation was made;

(10) the representation alleged in [22(h)], made in the 22 May 2020 email, that ‘right now, the business is fast approaching rock bottom, virtually no work in hand and effectively no plan to turn that around. No surprise then to learn that our most senior managers are looking for fresh opportunities elsewhere, other civil sectors are active and will bounce shortly due to both Federal and State increased infrastructure funding… Now is the time for you to step aside (resign) and clear the path for others’. The plaintiffs admitted that this representation was made;

(11) the representation alleged in [22(i)], made in the 25 May 2020 letter, that ‘revenue has already fallen in excess of 30% and drop in revenue is likely to exceed 50% by end of June, beyond that the picture is very bleak’. The plaintiffs admitted that this representation was made;

(12) the representation alleged in [22(j)(ii)], made at the 27 May 2020 meeting, that that ‘conditions were bleak’. The plaintiffs denied that this representation was made; and

(13) the representation alleged in [22(j)(iii)], made at the 27 May 2020 meeting, that ‘turnover and profitability were diminishing rapidly’. The plaintiffs denied that this representation was made.[85]

[85]Once again, I have placed in italics the representations which the plaintiffs alleged relate to future matters. I will address the underlined representations in the following paragraph.

As is evident, I have addressed a number of these representations in the context of the turnover representations, the profit representations or the margin representations. It is unnecessary to consider those representations again in the context of the allegation in [25(c)] of the counterclaim. Rather, I will only address the representations which are underlined above. Consistent with my analysis above, in respect of these representations I will address:

(1) whether each of these representations were made;

(2) whether any of these representations relate to future matters as alleged by the plaintiffs. These have been identified in italics in the previous paragraph;

(3) whether any of these representations were false; and

(4) to the extent necessary, whether the defendants have established that any of these representations were relied upon by Pat and/or caused Pat to enter into the HoA.

First, all of the underlined representations are admitted by the plaintiffs.

Second, as to future matters, the plaintiffs submitted that the representation in italics extracted from [22(d)(v)] of the counterclaim relates to future matters. I disagree. On balance, I consider that this is a representation of current matters, namely the current opinion of Mr Maric.

Third, I will now address the falsity of the underlined representations (the ‘current work representations’). The defendants alleged in [25(c)] of the counterclaim that the current work representations were false and untrue in that the ‘work had not dried up as sales revenue for the second half of the financial year ended 30 June 2020 was as a percentage marginally higher than in the corresponding period for year end 30 June 2019’. As set out above, this allegation also proceeds on the false premise that the representation as to the projected sales prospects at a particular time was false because the sales revenue subsequently and actually achieved for the relevant period was different.

Relevantly, the defendants have not established on the evidence before me that each of the current work representations was false or misleading at the time each of them was made. As set out in the detailed chronology in sections 5 to 7 above, the plaintiffs produced and relied upon contemporaneous financial documents in support of statements about the financial affairs of Delplant and projections at the time those statements were made.

In respect of the current work representations made in the 20 September 2019 letter, relevantly, the representations in:

(1) [22(c)(i)] that ‘the collapse in land sales numbers has had a significant adverse flow-on effect to Delplant’s current sales and profitability’; and

(2) [22(c)(iii)] that ‘at the moment, work in progress is basically “hand to mouth”’,

the defendants have not satisfied me that any of these representations were misleading or deceptive, or likely to mislead or deceive, at the time they were made.

I refer to my comments and findings in [56]-[58], [61], [78] and section 5.2, in particular, at [81]-[85] relating to the August project sales summary and the chart of remaining works. I also refer to my findings in section 5.3, in particular, at [116]. In this context, I wish to note that I consider that a representation to the effect that work is basically ‘hand to mouth’ is in the nature of puffery in the context of the information provided to the defendants, both in correspondence and in the course of meetings during this period, as set out in sections 5.2 and 5.3 above. As a consequence, I consider that this representation does not give rise to an actionable representation.

In respect of the current work representations made in the 4 December 2019 email, relevantly, the representations in:

(1) [22(d)(v)] that ‘the full impact is yet to arrive as much of the YTD revenues are still run-off sales from older projects’; and

(2) [22(d)(vi)] that ‘there were bleak business conditions and prospects for Delplant Pty Ltd’,

the defendants have not satisfied me that any of these representations were misleading or deceptive, or likely to mislead or deceive, at the time they were made.

First, in my view, they are either statements of current fact or current opinion. In either event, I am not satisfied the statement of fact was false or the opinion was not honestly held or did not have a reasonable basis.

To the contrary, I have formed the view that the full impact of market changes was yet to arrive on the business of Delplant generally and conditions were far from good for the Delplant group. I refer to:

(1) my comments and findings in [56]-[58], [61], [78] and section 5.2, in particular, at [81]-[85] relating to the August project sales summary and the chart of remaining works;

(2) my findings in section 5.3, in particular, at [116] and at [117]-[118] in relation to the September project sales summary;

(3) my findings in section 5.4 and, in particular, the September 2019 income statements referred to at [125]-[129] above, and the November project sales summary referred to at [137]-[139] above; and

(4) my findings in relation to the September project sales summary referred to at [117]-[118], and the email dated 2 December 2019 circulating the adjusted programme of works referred to at [120].

Further, and in any event, I consider that the representation in [22(d)(vi)] that business conditions and prospects were ‘bleak’ is puffery and is not an actionable representation.

In respect of the current work representation made in the 22 May 2020 email, relevantly, the representation in [22(h)] to the effect that the business was fast approaching rock bottom with virtually no work in hand and effectively no plan to turn that around, the defendants have not satisfied me that it was misleading or deceptive, or likely to mislead or deceive, at the time it was made. I refer to:

(1) my findings in relation to the information provided in the February project sales summary and the chart of remaining works as at 10 March 2020 in [185]-[189], and the email from Mr Lidonnici to Pat dated 11 March 2020 attaching the comparison chart in [192]-[194]; and

(2) the evidence concerning the position and future of the Delplant group at the time these representations were made in light of the COVID-19 pandemic on the Delplant business, as set out in [208]-[211], section 7.1, in particular at [215]-[221], and section 7.2, in particular at [224]-[227].

It is important to note that, as set out in [187] above, the chart of works as at 10 March 2020 recorded that a significant proportion of the work for Delplant’s top 10 projects had been completed by 10 March 2020. Significantly, it was not put to Sean that there were other works in the pipeline between February and May 2020 other than those recorded in that chart of remaining works. There was much uncertainty created by the COVID-19 pandemic in the business community, including Delplant, during this period. As set out in [224] above, that uncertainty remained throughout May 2020 including at the time of the 25 May 2020 and 27 May 2020 representations. On the evidence before me, it was the Federal Government’s announcements in response to the COVID-19 pandemic in early June that lead to an increase in the projected works for Delplant.

Further, and in any event, I consider that the representation in [22(h)] that the business was fast approaching ‘rock bottom’ is puffery and is not an actionable representation.

In all these circumstances, I am not satisfied on the evidence before me that the current work representations were misleading or deceptive, or likely to mislead or deceive.

Fourth, in light of these findings, it is unnecessary to deal with issues of reliance and causation. As a result, I do not intend to do so. However, I refer to my comments in [490] above. I also refer to my comments in [531] and [538] above.

UNCONSCIONABILITY
In [29] of the counterclaim, the defendants alleged that the behaviour of Sean, Mr Maric and/or Mr Allen makes it unconscionable to enforce the HoA on the following grounds:
(a) the matters pleaded in paragraph 22 herein;
(b) the fact that Pat was suffering from illness and was obtaining treatment;
(c)that on 25 May 2020 Sean unilaterally and without notice retrenched Pat after more than 30 years in Delplant;
(d)that Sean then called a meeting on 24 hours notice for 27 May 2020 and refused to allow the accountants to attend;
(e)that despite repeated requests by Pat and/or his advisors Sean refused to provide up to date financials of Delplant and the Delplant group;
(f)threatened to liquidate Delplant and the Delplant group if Pat didn’t sell his interest.
Little was said in final submissions by the defendants in respect of the claim that the HoA should not be enforced on grounds of unconscionability. I was not taken to any authorities which would support a finding of unconscionable conduct in these circumstances. However, the submissions proceeded on the basis that Sean was acting in a superior bargaining position and took advantage of Pat’s disadvantaged position.
The plaintiffs submitted that, in order to set aside a contract based upon unconscionable conduct, the Court needs to find that the claimant ‘by reason of some condition or circumstance is placed at a special disadvantage vis-à-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created’.[86] The plaintiffs submitted that the circumstances of this case did not establish either any special disadvantage or that the plaintiffs took unfair or unconscientious advantage of any special disadvantage.
[86]Relying on Commonwealth Bank of Australia Ltd v Amadio (1983) 151 CLR 447, 462 (Mason J) (‘Amadio’).
As to the factors relied upon by the defendants:
(1)first, the plaintiffs denied the representations alleged in [22] of the counterclaim were misleading or deceptive for the reasons set out above;
(2)second, insofar as the defendants relied upon Pat’s health issues, there was no evidence that those conditions affected his mental capacity or will. The plaintiffs noted that Pat had been a director and the Operations Manager of the Delplant group for a considerable period and there were no issues about his ability to function in these roles;
(3)third, insofar as the defendants relied upon Pat’s redundancy, the plaintiffs submitted that the redundancy was genuine and, in any event, did not give rise to any special disadvantage of a kind that is relevant to a claim for unconscionable conduct;
(4)fourth, the plaintiffs disputed that the evidence was that Sean refused to allow the accountants to attend the 27 May 2020 meeting;
(5)fifth, the plaintiffs denied any refusal by Sean to provide financial records. In any event, they submitted Pat had acquired considerable knowledge of the business of the Delplant group in his capacity as director; and
(6)sixth, the plaintiffs denied that any threats to liquidate were unfounded. They submitted that any such ‘threats’ were merely expressions of opinion as to the likely outcome if the brothers did not resolve their differences.
The relevant principles relating to equitable unconscionability were restated by the High Court in Thorne v Kennedy (‘Thorne’).[87] Unconscionable conduct in equity arises where the will of the innocent party, even if independent and voluntary, is the result of the disadvantageous position in which he or she is placed and the other party unconscientiously takes advantage of that position.[88]
[87] (2017) 263 CLR 85, 102–4 [37]–[40] (Kiefel CJ, Bell, Gageler, Keane and Edelman JJ) (‘Thorne’).
[88]Thorne (n 87) 104 [40], quoting Amadio (n 86) 461 (Mason J).
In Thorne, the majority stated that it was necessary to establish that:
(1)the innocent party was subject to a special disadvantage ‘which seriously affects the ability of the innocent party to make a judgment as to the innocent party’s own best interests’; and
(2)the other party must unconscientiously take advantage of that special disadvantage: this has been variously described as requiring ‘victimisation’, ‘unconscientious conduct’ or ‘exploitation’.[89]
[89]Thorne (n 87) 103 [38].
It is also generally necessary to establish that the other party knew or ought to have known of the existence and effect of the special disadvantage.[90]
[90]Ibid.
The nature of the special disadvantage will depend upon the facts of each case. In Commonwealth Bank of Australia Ltd v Amadio (‘Amadio’), the special disadvantage was of elderly migrant parents with limited education who trusted their son: the Court concluded the special disadvantage was the ‘outcome of their reliance on and their confidence in their son’.[91] In other cases factors such as sickness, age, infirmity and lack of assistance where assistance is necessary have also been held to constitute a special disability.[92]
[91]Amadio (n 86) 464 (Mason J). See also 476–7 (Deane J, Wilson J agreeing).
[92]Blomley v Ryan (1956) 99 CLR 362, 405 (Fullagar J), 415 (Kitto J).
As to the requirement to not unconscientiously take advantage of a plaintiff’s special disadvantage, Deane J in Amadio (with whom Mason and Wilson JJ agreed) noted that, where it was evident to the defendant bank in that case that the transaction was prima facie unfair and ‘unconscientious’ for the defendant to proceed with it, the onus was cast upon the defendant to show that the transaction was ‘in point of fact fair, just and reasonable’.[93] Deane J reiterated this in Louth v Diprose where he said:
It has long been established that the jurisdiction of courts of equity to relieve against unconscionable dealing extends generally to circumstances in which (i) a party to a transaction was under a special disability in dealing with the other party to the transaction with the consequence that there was an absence of any reasonable degree of equality between them and (ii) that special disability was sufficiently evident to the other party to make it prima face unfair or ‘unconscionable’ that that other party procure, accept or retain the benefit of, the disadvantaged party’s assent to the impugned transaction in the circumstances in which he or she procured or accepted it. Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable: ‘the burthen of shewing the fairness of the transaction is thrown on the person who seeks to obtain’ or retain the benefit of it.[94]
[93]Amadio (n 86) 479.
[94](1992) 175 CLR 621, 637.

In my view, the defendants have not established either that Pat was under a special disadvantage on 27 May 2020 or that the plaintiffs took advantage of any such disadvantage. This is substantially for the reasons advanced by the plaintiffs. However, there are a few issues I wish to emphasise.
As to the alleged special disadvantage, to the extent that the defendants rely upon the fact that the representations alleged in [22] of the counterclaim were misleading and deceptive, for the reasons set out in section 10 above, I am not satisfied that any of the representations alleged in [22] of the counterclaim, if made, were misleading or deceptive or likely to mislead or deceive.
Second, on the evidence before me, Pat was not suffering from any physical or mental condition which affected his ability to make a judgment as to his own best interests about entering into the HoA. Nor do I consider that his redundancy in the lead up to the 27 May 2020 meeting gave rise to a special disadvantage, let alone one which seriously affected the ability of Pat to make a judgment in his own best interests about entering into the HoA. In addition, I am not satisfied that any threats to liquidate were unfounded in light of the breakdown of the relationship between Sean and Pat.
Further, to the extent that it is relevant, I am unable to make any finding on the evidence before me that there was any refusal to allow accountants to attend the 27 May 2020 meeting. In any event, as set out above, Pat was represented by an independent legal adviser at the 27 May 2020 meeting and had access to his independent accountant, Mr Lidonnici, during the course of that day. In all these circumstances, I am unable to conclude that Pat was under any special disadvantage which affected his ability to make his own decisions in his own best interests as he saw them on 27 May 2020 in relation to the HoA.
As to any alleged unconscientious exploitation by the plaintiffs of Pat on 27 May 2020, I reject that submission on the basis that there is no evidence to support it. As set out above, Sean is a shrewd and determined businessman. However, that is far from concluding that he took unconscientious advantage of Pat on 27 May 2020, let alone with knowledge of the special disadvantage alleged. I note again that Sean did not speak to Pat during the course of the meeting on 27 May 2020: they each communicated through his respective independent solicitor. Further, to Sean’s knowledge, Pat consulted with his solicitor and accountant during the course of that day.
As a result, the claim in equity to refuse to enforce the HoA due to unconscionable conduct must be dismissed.
REDUNDANCY
In the counterclaim, it is alleged that:
(1) Delplant wrongfully made Pat’s position redundant and Pat should be reinstated as the Operations Manager of Delplant;
(2) further, insofar as the HoA purports to deal with redundancy payments, it is not enforceable as Delplant is not a party to the HoA; and
(3) Pat is entitled to proper redundancy payments (which were not quantified in the counterclaim).
Issues 9 and 10 of the issues for determination at trial were framed in light of these allegations. However, in the course of the trial, the defendants did not pursue a claim that Pat be reinstated. Thus, the only claim was for Pat’s proper redundancy entitlements.
Further, in final submissions, the defendants did not contend that the provision of the HoA relating to redundancy payments was unenforceable on the basis that Delplant was not a party to the HoA. In any event, for the reasons set out in section 9.3.3 above, I am satisfied that Delplant was a party to the HoA. In summary, this is because Delplant was named as a party to the HoA and the HoA dealt with matters which affected Delplant. Each of Sean and Pat were directors of Delplant at the time the HoA was executed. As noted above, cl 1(b)(vii) of the HoA expressly provided that Pat ‘resigns immediately with his last day being 30^th of June 2020. There is no applicable redundancy payment’. The defendants accepted that, if the HoA was enforceable, then by reason of cl 1(b)(vii) Pat could not pursue his claim for redundancy payments. As I have concluded that the HoA is enforceable and Delplant is a party to it, it is unnecessary to consider Pat’s claim for redundancy entitlements.
However, for completeness, I note that at trial the defendants relied upon a summary of redundancy entitlements of Pat prepared by Mr Lidonnici, totalling $393,915 (the ‘defendants’ redundancy calculation’). The basis upon which the defendants’ redundancy calculation was prepared by Mr Lidonnici was not made clear on the evidence or in submissions. Relevantly, the defendants’ redundancy calculation was based on a notice period of five weeks and a redundancy period of 52 weeks. It also proceeded on the basis that Pat’s redundancy entitlements were to be calculated based not only on Pat’s salary at the time he was made redundant of $69,160, but also on the monthly payments of $15,000 to Sean and Pat which ceased in late December 2019.
There are three matters to note in relation to these calculations. First, the appropriateness of a 52 week period was not made clear in evidence (other than the fact that Pat had worked at Delplant for 37 years) or in submissions. Second, it is not clear why payments of $15,000 per month were included. Mr Lidonnici conceded that this had ‘nothing to do with law’ but was based upon what he considered Pat and Sean were supposed to earn to bring them to a ‘market salary’. The appropriateness of proceeding in this way was not made clear in the evidence or submissions. Third, and related to the second point, on the evidence before me, the payments of $15,000 per month were dividends or distributions to each of Skildale and PDC. This is based upon the Westpac payment statements, dated December 2017 and August 2019, from the account of Mt Salazia Developments relevantly recording payments to Skildale and ’Pat Delaney Investments’ and ‘P & K Delaney’. On this basis, I am unable to conclude that these payments form part of Pat’s income as Operations Manager. Further, Mr Lidonnici acknowledged that these payments were not made to reflect personal exertion income but for tax minimisation purposes.
By contrast, the plaintiffs contended that any redundancy entitlements of Pat were to be based upon the Building and Construction General On-site Award (the ‘Award’) tendered by the plaintiffs, which applied in substitution of the Fair Work Act 2009 (Cth) (‘Fair Work Act’). While counsel for the defendants did not contend that the Award did not apply, the plaintiffs did not make clear to me the basis upon which they contended the Award applied. While I am prepared to accept that the work of the Delplant group relates to the ‘on-site building, engineering and civil construction industry’ referred to in cl 4.1 of the Award, it is not clear to me how the Award applied to Pat given the provisions of cl 4 and the classifications in sch B of the Award.
The plaintiffs submitted that:
(1)under the Award, Pat was entitled to a notice period of five weeks and a redundancy period of eight weeks, totalling $17,290; and
(2)under the Fair Work Act, Pat was entitled to a notice period of five weeks and a redundancy period of 12 weeks, totalling $22,610.
Given that it is not clear to me whether the Award applied to Pat, I would have ordered five weeks’ notice and 12 weeks redundancy.
Further, the plaintiffs submitted that Pat was not entitled to long service leave under the Award or the Fair Work Act. This was because the plaintiffs contended that Pat’s long service leave entitlement was held by CoINVEST Limited (‘CoINVEST’), the trustee of many long service leave funds. By contrast, Mr Lidonnici calculated Pat’s long service leave entitlement at $120,797 based upon a reference in the balance sheet of Delplant for FY 2019 to a liability for ‘Provision for Long Service Leave’. The precise basis upon which this amount was calculated was not made clear in the evidence or in submissions. However, as set out above, it would appear to include the payments of $15,000 per month.
The provision for long service leave in the FY 2019 balance sheet of Delplant was recorded as $119,393 for FY 2018 and $178,845 for FY 2019. The amount for FY 2018 corresponded with an extract from the books of Delplant entitled ‘Long Service Leave Provision – June 2018’ (the ‘June summary’) produced by Mr Lidonnici. It included an amount for each Delplant employee including Sean and Pat. It recorded a liability to Pat of $33,791, based on 29 years of service with 965.47 hours or 25.2 weeks of long service owing.
Sean gave evidence that the reference to long service leave in the FY 2019 balance sheet and in the June summary was an error. He said it was a provision only and not an entitlement. He said that Delplant had made quarterly contributions to CoINVEST since 1989, which included the contributions for Pat and a partial contribution for Sean. As a result, he gave evidence that Pat’s only entitlement to long service leave is against CoINVEST.
Mr Lidonnici, who was the accountant of Delplant for many years until mid-July 2019, and was thus familiar with both its accounting and business practices, said that this entitlement was separate to the contributions made by Delplant to CoINVEST. He also said that any CoINVEST entitlements would be separately recorded in the books of Delplant. The plaintiffs put to Mr Lidonnici that the reference to the provision for long service leave in the FY 2019 accounts was an error. He disputed this, replying that, if it was an error, it was an error that has been included in the accounts of Delplant for 20 years. He said that Sean went to great lengths to be able to qualify partially for CoINVEST and for Pat to be able to qualify, and to continue to qualify, for the normal long service leave from Delplant.
I am satisfied on the balance of probabilities that Pat is at least entitled to the long service leave amounts referred to in the June summary. It is supported by the balance sheet of Delplant for FY 2019. I am unable, on the evidence before me, to conclude that those accounts were in error. To the extent that Sean gave evidence to that effect, I do not accept it. It is a liability owed to Pat according the records of Delplant. I can see no provision of the Award which would prevent Pat’s entitlement to that sum.
Thus, if it were necessary, I would have determined Pat’s proper redundancy entitlements as a payment of $22,610 and a payment of $33,791 for long service leave.
CONCLUSION
As a result, the plaintiffs have been successful not only in relation to the contractual issues which are the subject of the statement of claim but also in respect of the claims that were the subject of the counterclaim.
However, there is one final matter I wish to address. I am not satisfied that prior to the termination of the HoA the accountants for the parties were given a proper or adequate opportunity to reach a mutually beneficial taxation outcome for both the plaintiffs and the defendants. As set out in section 8 above, while some information was exchanged for the purpose of reaching such an outcome, particularly after 5 June 2020, no detailed consideration of a mutually beneficial taxation outcome ever took place. I am conscious that this may have been because the defendants purported to terminate the HoA. However, in the circumstances of this case, I consider that it is appropriate that the accountants for the parties are given a proper and adequate opportunity to reach a mutually beneficial taxation outcome as envisaged by cl 5 of the HoA. As a result, I intend to impose such a condition as part of the order for specific performance.
In my view, a reasonable period of time needs to be provided not only for the exchange of relevant information but also for the accountants to attempt to reach such an outcome. I note that the HoA provided in effect for a 14 day period between execution and the date in cl 6 of the HoA. However, in my preliminary view, given the passage of time and the time of year of this judgment, equity would impose a period in the order of 28 days. I will hear further from the parties in this regard.
I wish to emphasise, consistent with my comments in section 9.3.9 above, the accountants in taking part in this process are to exercise independent judgment. They may have regard to their clients’ particular interests but not solely their clients’ interests. The accountants are to exercise that judgment in good faith to reach a mutually beneficial taxation outcome and not act on the direction of their respective clients.
For completeness, and for the avoidance of doubt, I do not consider that cl 3(b) of the HoA provides a general discretion to Sean’s solicitors to identify the purchaser of Pat’s interests in the Delplant group. Absent any resolution of these issues between the accountants pursuant to cl 5 of the HoA, or other agreement between the plaintiffs and the defendants, the purchaser is Sean and/or Skildale.
In the absence of agreement between the parties, I will list the matter to address the form of order in the proceeding (including any timetable for the provision of necessary and relevant information in order for the accountants to undertake the task entrusted to them by cl 5 of the HoA) and any issues of costs.

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SCHEDULE OF PARTIES

S ECI 2020 02847

BETWEEN:

SEAN ANTHONY DELANEY	First Plaintiff/First Defendant by Counterclaim
SKILDALE PTY LTD	Second Plaintiff/Second Defendant by Counterclaim
- and -
PATRICK JOSEPH DELANEY	First Defendant/First Plaintiff by Counterclaim
PAT DELANEY CONSTRUCTIONS PTY LTD	Second Defendant/Second Plaintiff by Counterclaim
DELPLANT PTY LTD	Third Defendant/Third Defendant by Counterclaim
DELPLANT HAULAGE PTY LTD	Fourth Defendant
DELPLANT PROPERTIES PTY LTD	Fifth Defendant
PROTACE PTY LTD	Sixth Defendant
HERVET PTY LTD	Seventh Defendant
TRENCHBOX PTY LTD	Eighth Defendant
MT SALAZIA DEVELOPMENTS PTY LTD	Ninth Defendant
SOUTH EAST PLANT HIRE PTY LTD	Tenth Defendant

ANNEXURE A

ANNEXURE B

1	Does the heads of agreement dated 27 May 2020 (‘HOA’) give rise to a binding agreement, having regard of the third category in Masters v Cameron and the issues raised in Q2 (1) to (8)?
2	Is the HOA unenforceable because: (1) the parties include South East Plant Hire Pty Ltd of which the signatories to the HOA are not directors; (2) it fails to address the identity of the purchaser or purchasers; (3) it fails to identify what is being sold and/or purchased; (4) it fails to address the consequences of a failure to pay the amounts in cl 3 including which party is to make the payment; (5) cl 2 is uncertain and it purports to bind Pat Delaney’s ‘family’ who are not parties to the HOA; (6) cl 4(b) is uncertain as any Further Agreement is to include ‘any additional terms that the parties may reasonably require’; (7) cl 5 is uncertain as it provides that ‘it is proposed’ that tax and accounting implication[s] ‘would be settled by Mr Maric and Mr Lidonnici in a mutually beneficial taxation outcome for both parties’; (8) The date for the Further Agreement was suggested to be altered to 5 July 2020 (CB731).
3	Did the plaintiffs make the representations alleged in paragraph 22 of the Defence and Counterclaim dated 30 July 2020? [Noting the Plaintiffs’ contention that only the representations alleged to be false in [25] are relevant for determination]
4	Did the representations in [22] of the counterclaim relate to future matters? [Noting the Plaintiffs’ contention that this is not an issue for determination]
5	Were the representations false and untrue as alleged in [25] or, in so far as they related to future matters, were there no reasonable grounds for making them? [Noting the Plaintiffs’ contention that the latter is not an issue for determination]
6	Did the first defendant act in reliance upon the representations in entering into the HOA, including having regard to the information in 5(k) of the reply?
7	If yes to 5 and 6, if the representations were not made, would the first defendant have entered into the HOA?
8	Is it unconscionable in equity to enforce the HOA by reason of the matters alleged in [29] of the counterclaim and [12] of the reply?
9	In the event that the HOA is not binding or enforceable, did Sean Delaney as Managing Director of Delplant wrongfully make Pat Delaney’s position as Operations Manager redundant on 25 May 2020?
10	If yes to 9: (1) is he entitled to be reinstated; or alternatively (2) what redundancy payments is he entitled to?

2018	2017	2016	2015	2014	2013	2012	2011	2010	2009
Sales	21,904,318	18,724,544	18,492,772	14,648,923	15,663,694	15,801,625	13,064,627	13,465,656	15,761,351	17,480,486
Cost of Sales	13,547,152	11,602,151	10,932,299	9,936,666	10,500,807	11,254,166	9,482,792	9,541,118	10,925,454	12,818,320
Gross profit	8,357,166	7,122,393	7,560,473	4,712,257	5,162,887	4,547,459	3,581,835	3,924,538	4,835,897	4,662,166
Delplant Haulage Dividend	-	13,497	-	54,923	16,816	11,211	16,816	-	18,939	-
FHDB JV Distribution	580,000	-	1,160,000	580,000	-	-	-	-	-	-
Other Income	248,145	220,024	252,063	241,942	493,962	237,559	175,124	242,076	492,702	202,565
Expenditure	1,983,526	1,634,055	1,700,034	1,422,599	1,668,286	1,368,665	1,312,112	1,316,044	1,608,885	1,084,522
Actual Profit/-loss before Income Tax	7,201,785	5,721,859	7,272,502	4,166,523	4,005,379	3,427,564	2,461,663	2,850,570	3,738,653	3,780,209
Maintainable Net Profit/-Loss before Income Tax	6,554,858	5,600,532	5,950,948	3,383,375	3,789,401	3,313,507	2,298,785	2,700,864	3,557,101	3,529,611

Month by Month Comparison – Calendar Years 2018 - 2019
Month	2018	2019	Variance ($)	Variance (%)
Jan	$ 1,271,653.71	$ 1,328,286.85	$ 56,633.14	4.45%
Feb	$ 2,132,977.55	$ 1,657,738.77	-$ 475,238.78	-22.28%
Mar	$ 1,890,105.72	$ 1,459,764.87	-$ 430,340.85	-22.77%
Apr	$ 2,123,212.62	$ 1,836,177.39	-$ 287,035.23	-13.52%
May	$ 2,295,895.01	$ 2,661,099.58	$ 365,204.57	15.91%
Jun	$ 1,644,974.26	$ 1,376,566.11	-$ 268,408.15	-16.32%
July	$ 2,467,837.01	$ 1,459,092.22	-$ 1,008,744.79	-40.88%
Aug	$ 2,102,720.41	$ 1,001,434.89	-$ 1,101,285.52	-52.37%
Sep	$ 2,055,911.61
Oct	$ 2,387,987.45
Nov	$ 2,138,705.86
Dec	$ 1,078,577.14
Annual	$ 23,590,558.35	$ 12,780,160.68
Avg. Sales	$ 1,965,879.86	$ 1,597,520.09
Jan to August 2018		$ 15,929,376.29
Jan to August 2019		$ 12,780,160.68
YTD Difference		-$ 3,149,215.61	-20%

Maintainable Base Revenue	14,000,000
Maintainable Net Profit	11%	1,540,000
Goodwill Multiple	2.5	3,850,000

Month by Month Comparison – Financial Year 2019-20
Month	FY2018-19	FY2019-20	Variance ($)	Variance (%)
July	$ 2,467,837.01	$ 1,459,092.22	-$ 1,008,744.79	-40.88%
Aug	$ 2,102,720.41	$ 1,429,896.23	-$ 672,824.18	-32.00%
Sep	$ 2,055,911.61	$ 1,292,123.00	-$ 763,788.61	-37%
Oct	$ 2,387,987.45
Nov	$ 2,138,705.86
Dec	$ 1,078,577.14
Jan	$ 1,328,286.85
Feb	$ 1,657,738.77
Mar	$ 1,459,764.87
Apr	$ 1,836,177.39
May	$ 2,661,099.58
Jun	$ 1,376,566.11
Annual	$ 22,551,373.05	$ 4,181,111.45
Avg. Sales	$ 1,879,281.09	$ 1,393,703.82
July to Sept 2018		$ 6,626,469.03
July to Sept 2019		$ 4,181,111.45
YTD Difference		-$ 2,445,357.58	-37%

[2021] VSC 365

28 June 2021