Ferntree Gully Autos Pty Ltd v Werner Motoring Group Pty Ltd
[2012] VCC 1286
•21 September 2012
| IN THE COUNTY COURT OF VICTORIA | Revised |
AT MELBOURNE
CIVIL DIVISION
COMMERCIAL LIST
GENERAL DIVISION
Case No. CI-11-02792
| FERNTREE GULLY AUTOS PTY LTD (ACN 145 562 401) | Plaintiff |
| v | |
| WERNER MOTORING GROUP PTY LTD (ACN 106 875 709) and GAVIN JOHN WERNER | Defendants |
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JUDGE: | HER HONOUR JUDGE KENNEDY | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 6 & 7 September 2012 | |
DATE OF JUDGMENT: | 21 September 2012 | |
CASE MAY BE CITED AS: | Ferntree Gully Autos Pty Ltd v Werner Motoring Group Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2012] VCC 1286 | |
REASONS FOR JUDGMENT
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Catchwords: Commercial- Construction of Sale of Business Agreement of motor car dealership (SBA)- nature of seller’s rights to return of funds from Toyota for unclaimed services and interest under the “Toyota Service Advantage” program – whether payback/interest payments were intended to be transferred to the plaintiff purchaser under the SBA – no such intention where parties intended for purchaser to enter its own replacement agreement with Toyota
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M. McNamara | White Cleland Pty Ltd |
| For the Defendant | Mr J. Twigg | Vadarlis & Associates |
HER HONOUR:
1 The current proceeding arises out of the sale of a Toyota dealership pursuant to a Sale of Business Agreement between the first defendant seller and the plaintiff purchaser made on or about 10 September 2010 (SBA). The second defendant, Mr Werner, was the sole director/guarantor under the SBA with the sale completed on 4 November 2010.
2 The plaintiff issued the proceeding in March 2012 seeking various amounts outstanding pursuant to the SBA. The first defendant has also filed a Counterclaim.
3 The parties are to be congratulated for substantially expediting the outstanding matters between them so that it was agreed, subject to the first defendant’s Counterclaim, that the first defendant owes the plaintiff the sum of $167,316.53, and the second defendant owes the plaintiff the sum of $160,816.53 (because the guarantee did not cover an extra claim against the seller).
4 The sole remaining issue between the parties concerned amounts received by the purchaser under a program known as the “Toyota Service Advantage Program” (“the TSA”) which are the subject of the seller’s Counterclaim. Under this program, amounts were paid by the seller into a fund held by its franchisor, Toyota Motor Corporation of Australia (“Toyota”), prior to the completion date, and coincidentally with the seller’s purchase of a Toyota car for sale. Subsequent to the completion date, Toyota has returned various amounts to the purchaser to which the seller claims entitlement. These amounts consist of two types of payments. The first arises where a service has not been performed or claimed. Where this occurs, the relevant amount of the claim is not refunded to the vehicle owner. Instead, after 39 months from registration an amount equal to the claim value is automatically returned to the original dealer (the “auto paybacks”). The second amount claimed consists of interest payable on the fund held by Toyota and paid on a yearly basis.
5 The parties have agreed that the quantum of the auto paybacks monthly payments from 4 November 2010 to 30 June 2012 was $257,563.06. Further, that the TSA interest was $46,630.49 and $33,185.47 for the calendar years 2010 and 2011, respectively. The total claimed (to June 2012) was thereby $337,379.02[1] with declaratory relief sought in relation to future payments.
[1]First Defendant’s Particulars of Loss dated 7 September 2012
6 The sole issue between the parties was whether the seller’s entitlement to these amounts was transferred under the SBA as the purchaser maintains, or whether, instead, they should be returned to the seller in reduction of the plaintiff’s claim.
7 In order to resolve this issue, however, it is important to characterise what the seller was actually entitled to, prior to determining whether it was transferred pursuant to the SBA.
Nature of Seller’s rights under its Dealer Agreement
8 An unexecuted Toyota Dealer Agreement (TDA) was tendered into evidence. However, the evidence of Mr Werner was that the document generally contained the terms and conditions that were actually executed by both Toyota and the seller (the latter as the “Dealer” ). The TDA therefore provided the best evidence available to the court as to the terms of the pre-existing franchise arrangements between the seller and Toyota.
9 The recitals to the TDA record that the Dealer has experience in the operation of motor vehicle dealerships and has applied to Toyota to be appointed as an authorised dealer (recital B). Further that this agreement “sets out the terms on which Toyota appoints the Dealer as an authorised dealer in Toyota Products” (recital C).
10 Pursuant to clause 1.1, Toyota appoints the Dealer as an authorised dealer in Toyota products. The appointment is to operate the Dealership at the Locations for the term of this agreement. “Dealership” is defined as the Toyota motor vehicle dealership business conducted by the Dealer pursuant to this agreement (clause 39.1).
11 However, although the agreement imposes conditions on the operation of the “Dealership”, the contractual obligations are imposed on the individual Dealer. There are also provisions which make it clear that the identity of the Dealer/nominated “Dealer Principal” is significant (for example, those dealing with Toyota’s reputation [see clauses 1.4-6] and those dealing with the Dealer Principal [clause 5]).
12 There are specific provisions which deal with the formalities that must take place if there is to be a transfer of the Dealer Agreement or any of the Dealer’s rights under the agreement (clause 30). Thus, the Dealer must give Toyota written application (clause 30.1) and may only transfer the agreement with Toyota’s written consent (clause 30.4). Moreover, if there is a transfer, pursuant to clause 30.9, the Dealer acknowledges and agrees that a transferee “has no rights under this agreement against Toyota and is not entitled to receive any payment under this agreement from Toyota.”
13 Clause 2.6 provides for various ways the agreement may finish, including by formal termination under clause 32. However, although the seller no longer conducts a Toyota dealership, there was no evidence before the court that the TDA had in fact been formally terminated.
Incorporation of Manual
14 There is no specific reference to the TSA program in the TDA although clause 9.1 provides that the Dealer must comply with the Manuals. “Manuals” is further defined very broadly and includes all manuals related to the operation or management of Toyota motor vehicle dealerships (clause 39.1).
15 Relevant manuals were thereby incorporated as part of the contractual relationship between the seller and Toyota. Further, although not appearing in an index attached to the TDA, a manual with the heading “Toyota Service Advantage” and described as a “Dealer Operations Manual” was accepted into evidence (the Manual).
16 Page 2 of the Manual states that “this Toyota Service Advantage Operations Manual is issued by TMCA [Toyota] under the Toyota Dealer Agreement.” Consistent with this statement, both parties accepted that the court should consider the Manual in terms of defining the pre-existing arrangements between Toyota and the seller.
17 In the Overview section the Manual contains the following:
“With every new vehicle sold Toyota Service Advantage provides capped service pricing on the standard scheduled services under normal operating conditions for the first three years or 60,000km, whichever should occur first. This is possible due to a unique system of Dealer contributions to a fund held by TMCA on their behalf. Each Service Advantage service is therefore subsidised by the Dealer network.” (emphasis added)
18 Under the heading of “Dealer Terms & Conditions” (page 2), the Manual further details the terms and conditions of the TSA. It provides that any failure of a Dealer to comply with its obligations under the Program will breach the Toyota Dealer Agreement. It then provides for various Dealer undertakings which include an undertaking that all dealerships are to charge eligible customers no more than the Vehicle Service Cap. It states that in consideration of these undertakings, TMCA “will pay the Dealership the monies referred to in this Manual, at the times specified in this Manual.”
19 In the “Program Outline” set out at page 7 of the Manual states that, in the course of the Program, TMCA would contribute towards the costs of servicing for all eligible services when returned to a Toyota Dealer service workshop. Where an eligible service was not performed or claimed, however, the relevant claim value “cannot be refunded to the owner.” After 39 months from first registration, “these funds will automatically be returned to the original retail/selling Dealership.”
20 Page 48 of the Manual states:
Funds Management
Funds relating to the Toyota Service Advantage Program will be managed by TMCA. TMCA will separately account for those funds, and will only use those funds for purposes relating to the Program.
TMCA will also contribute monies (“TMCA Contribution”) to the fund equal to the notional interest that the funds could have accrued if invested in an interest bearing account (on terms detailed later in this section). All such “interest” will be referred to as remittance and will be dealt with as agreed between TMCA and Dealer Council.
Reports will be produced from time to time and will be presented to the Dealer Council detailing the various methodologies used in this process.
Unclaimed Services
In line with the Toyota Service Advantage Program policy, any unclaimed services will be distributed to the original vehicle retailing Dealer. Any unclaimed service funds will be held until the expiration of the relevant vehicle’s 39 month claim eligibility period.
It is the intention to clear all unclaimed service funds on a monthly basis and distribute to the original retailing Dealer. (emphasis added)
21 The Manual therefore includes an obligation on Toyota to return the auto paybacks and pay interest on the fund. There is some interchange of the use of the terms “Dealer” and “Dealership” in the Manual. However, given the Manual is issued under the TDA, the obligation of Toyota to return auto paybacks and to pay interest on the fund is properly characterised as a contractual obligation owed to the seller under the TDA.
22 The court also received oral evidence from Mr Werner as to how the TSA worked in practice. This evidence added little to the terms of the TDA and the Manual, but was generally consistent with those documents and will be included for the sake of completeness.
23 Thus, Mr Werner explained that the dealer would pay a premium as part of the purchase price when it purchased the vehicle from Toyota at the wholesale point, with the result that the wholesale price of the cars was increased accordingly. If the car later required servicing and the person chose to take their car to a Toyota dealership, those funds (contributed to by the dealer) would be drawn down so that eligible customers were only required to pay a reduced capped price for each service carried out under the program. The purpose was to keep servicing capped so as to attract return clientele. Mr Werner explained that some customers were ineligible for TSA though dealers paid the money on all cars purchased. However, if a rental car company, for instance, purchased a car, instead of fund money being used, it was returned back to the Dealer.
24 Under cross-examination Mr Werner agreed that there were in fact three types of payments that were made by Toyota out of the TSA fund. Firstly, there was an amount known as the TSA auto payback which was the payment made at the end of a 39 month period post-registration of a car (in relation to unclaimed services). Secondly, there was an interest component and, finally, there was the servicing component. This last payment occurred if a customer took an eligible vehicle back to a Toyota dealer for a service in eligible circumstances. The customer would pay a capped price for the service and Toyota would then pay the dealer who conducted the service an amount from the TSA money. However, the servicing dealer did not necessarily need to be the dealer who sold the car provided the dealer was an authorised Toyota dealer.
25 It remains to consider whether Toyota’s contractual obligations to pay auto paybacks/interest to the seller under the TDA was transferred under the SBA.
SBA
Nature of agreement
26 Recital A records that the Seller carries on the Business using the Assets, the Property, the Leased Equipment and the Employees.
27 Pursuant to Clause 2.1, the Seller agreed to sell the Business to the Buyer free from encumbrances and the Buyer agrees to buy the Business from the Seller for the Purchase Price on the terms of this document.
28 Clause 2.2 is entitled “title, property, risk and profits” and provided that until Completion, the Seller was entitled to the takings and profits, and must bear all outgoings and expenses of the Business, but on and from the Completion date, the Buyer was so entitled and needed to bear all outgoings and expenses incurred on and from the Completion date.
29 Pursuant to clause 3.1 the Purchase Price is calculated as the value of the “Net Assets” which included the Goodwill Value at $11 million.
General definitions
30 Clause 1.1 contained various applicable definitions as follows:
· the terms “Assets” meant :
each asset forming part of the Business or used in connection with the Business including each asset comprised in the:
(a) Goodwill….
(k) the rights of the Seller under each Contract……
but does not include any Excluded Asset.
· The term “Business” meant the Seller’s business of namely:
(a)a new motor vehicle dealership in Toyota vehicles carried on and conducted by the Seller as franchisee from the property;
(b)a used motor vehicle dealership incorporating internet car sales, the sale of services parts and parts and reconditions of motor vehicles; and
(c) selling finance and insurance products,
and (except where the context requires otherwise) also means all of the Assets.
· “Contract” was defined as meaning :
any agreement, arrangement, contract, covenant, deed, instrument, lease, licence, security, trust, understanding or undertaking (including any for use of intellectual property of any person) not yet fully performed at Completion which the Seller entered into in the ordinary course of the Business and which it will be desirable for the Buyer to have the benefit of to conduct the Business including each Contract specified in Schedule 5 (including the benefit of each warranty of a manufacturer, seller or supplier of any fixture on the Property or of any item of Stock, Plant and Equipment, Leased Equipment or Intellectual Property and the benefit of each guarantee of a contract or arrangement within this definition and any contract entered into by the Seller as permitted by Clause 6), but excluding:
(a) any contract in respect of Trade Credit;
(b)any contract, such as an insurance policy or employment contract, which is an Excluded Asset; and
(c)any contract such as a loan agreement which relates to a liability of the Business.
31 Schedule 5 sets out some specified contracts which included the (defined) Property Leases and “other Contracts” the latter including each other contract or arrangement of the Seller relating to the Business.
Provisions with regard to the TDA
32 Specific reference to the seller’s TDA was included in the SBA as a defined term. Thus, the “Dealer Agreements” was defined as “the Toyota Dealer Agreement between Toyota Motor Corporation Australia Limited and Werner Motoring Group Pty Ltd. ”
33 Clause 7.4 is entitled “Interdependence” and provides that the Buyer is not obliged to complete unless it is satisfied that each party to the Dealer Agreements and the Property Leases:
(a) has authorised and entered into an effective assignment of those arrangements to the Buyer on terms and conditions satisfactory to the Buyer in its absolute discretion (or entered into new arrangements with the Buyer); and
(b) is ready, willing and able to perform pursuant to those assigned or replaced agreements at and from Completion.
34 This clause thereby entitled the Buyer to avoid completion unless the Dealer Agreement and Property Leases were either assigned or new “replacement” arrangements entered into.
35 In terms of assignment, clause 22.1 provides that on Completion the Seller assigns to the Buyer each Contract and the rights of the Seller under each Contract, and the Buyer assumes the obligations of the Seller under each Contract.
36 Importantly, then, clause 22.1 contemplates the assignment of entire contracts, rather than the assignment of individual rights, with the rest of clause 22 making detailed provision for the mechanisms by which an assignment of a contract is to be effected (including by novation, by sub-contracting, and otherwise). Clause 9.18 of the Seller’s Warranties (contained in Schedule 1) also contain detailed warranties about the features of each “Contract” which would be necessary for the Buyer to receive in the event it was taking an assignment.
37 However, there was no evidence adduced of any assignment of the TDA to the purchaser in this case. Rather, the SBA contained a condition precedent that directly concerned the TDA.
38 Thus, clause 5.1 provides that the obligations of the parties with respect to Completion are subject to satisfaction (or waiver in accordance with clause 5.2) of the following conditions:
(b)(ii) the Manufacturer entering into a new franchise agreement with the Buyer to be effective from the Completion Date on terms and conditions reasonably acceptable to the Buyer…
39 The SBA therefore clearly contemplated that, in the case of the TDA, the purchaser was to enter a replacement agreement with Toyota rather than take an assignment.
40 Although no such agreement was tendered, it was common ground that the purchaser, consistent with its new dealer code, had entered into a new franchise agreement with Toyota, in compliance with the condition precedent.
Other Evidence
41 Before resolving the issue between the parties, it is necessary to refer to some other evidence adduced in the case.
42 Apart from the agreements themselves, the plaintiff sought to lead evidence of surrounding circumstances, namely, of the accounting treatment of the auto paybacks and interest in the accounts of the seller. In the course of that evidence being received, Mr Werner also gave evidence of a pre-contractual discussion as to the treatment of these payments.
43 In Western Export Services Inc v Jireh International Pty Ltd,[2] Gummow, Heydon and Bell JJ reiterated the position established by Codelfa Constructions Pty Ltd v State Rail Authority of NSW[3] that a court is not to have regard to surrounding circumstances to construe unambiguous language.
[2][2011] HCA 45
[3](1982) 149 CLR 337
44 However, even if that evidence is considered on the basis that the agreement was ambiguous and/or that it tends to establish objective background facts known to both parties,[4] I do not consider that it assists in the construction of the SBA.
[4]See Codelfa v State Rail Authority (1982) 149 CLR 337 at p352
45 The evidence of Mr Werner was that he recorded the interest payment for 2009 and the monthly TSA auto payback amounts between December 2009 and May 2010, as part of the total figure given for “other income” in the Management Accounts provided to the purchaser.
46 Despite this, however, he agreed under re-examination that the general ledgers and tax invoices which gave the breakdown of the “other income” total (and clearly detailed the inclusion of the TSA amounts) were not actually provided to the purchaser. Further, he confirmed that the projections for 2010 to 2014 provided to the purchaser did not include income from the advantage rebate, but contained the specific notation “Income Does not Include Advantage Rebate.”
47 Even if the seller’s treatment was known to both parties, the seller’s treatment of the amounts does not resolve the real issue as to whether the parties intended for the payments to be transferred under the terms of the SBA.
48 In any event, given the absence of a breakdown of the “other income” figure, and given the statement accompanying the projections, I am unable to be satisfied that the seller’s (subjective) treatment of the payments was clearly known to both parties.
49 In terms of the pre-contractual discussions, Mr Werner gave evidence of a discussion with a Mr Howson, the managing director of Automotive Holdings Group, the owner of the plaintiff.
50 Mr Werner claimed that he and Mr Howson “agreed” it was difficult to ascertain what the advantage rebate payments might look like because the program was still quite young, so he had left them out of the projections. “Later on”, when they were talking about finishing the deal, he asked how they were going to deal with this and Mr Howson said, “they would pay them to me as they arrived when my portions became due.” He therefore took him at his word and didn’t bother getting it into the contract as it appeared to him that the money was his from previous sales he had made.
51 Under cross examination Mr Werner agreed that he did not recall when this conversation took place, whether it was by telephone or face to face, or whether there was more than one conversation about TSA.
52 Although the defendants did not seek to rely on this evidence as constituting any separate cause of action based on an alleged “misrepresentation” claim, the plaintiff then called Mr Howson. He claimed that he had a first meeting with Mr Werner in January/February 2010. At that time he was discussing how he applied a multiple to income to arrive at a figure for goodwill. In this context, Mr Werner asked him how he would handle the warranty or the TSA moneys provided and he said, “well , this is our first meeting, it was in the first hour.” He also said this was taken into account on the income provided into the business. He denied saying that ASG would pay the TSA money back to Mr Werner.
53 Under cross examination, Mr Howson said that once he had the initial conversation he passed the matter to Mr Williams, his strategy and development manager, who was the person responsible for negotiating the terms of the agreement.
54 Mr Werner’s recollection was vague on detail. I also accept Mr Howson’s evidence that what occurred at this time was very preliminary and within “the first hour” in January/February 2010.
55 In these circumstances, I am unable to be satisfied that any promise was made as alleged by Mr Werner. Moreover, given the SBA was not finalised until many months later in September 2010, anything that was said was in the realm of “preliminary” discussions, which have been superseded by the actual language of the SBA itself.
56 It follows that, even if the evidence of surrounding circumstances is considered, it does not assist in the construction of the SBA, which should be determined according to the common intention of the parties determined objectively at the date the contract was concluded.[5]
[5]MLW Technology Pty Ltd & Anor v May [2005] VSCA 29 at [49]
57 The primary source of eliciting such common intention is the words of the contract themselves to which I will now return.
Resolution
58 The plaintiff did not point to any clause in the SBA which specifically referred to the seller’s rights to auto paybacks/interest under its TDA. However, the plaintiff submitted that those payments were transferred under the SBA by reason that:
(a)they were included within the concept of “Business” purchased under clause 2.1 given they were an integral part of the Seller’s new motor vehicle dealership and further were associated with the sale of “services”;
(b) the payments were part of the Assets description by reason of being “Goodwill” and/or part of the “Goodwill Value”;
(c)the payments were part of the Assets by reason of being “rights of the Seller” under a “Contract” as that term was defined.
59 In terms of clause 2.1, there is some circularity with the terms “Business” and “Assets.” Thus, the term “Business” is really defined by reference to what the Seller was doing, but “also means all of the Assets.” “Assets” are themselves then defined by reference to whether they formed “part of the Business”, or were “used in connection with the Business” with particular examples cited.
60 It is certainly true that the Seller’s TDA had been used as part of the pre-existing new motor vehicle dealership, and was further associated with the delivery of services. Nevertheless, as clause 5.1(b)(ii) makes clear, the purchaser was not intending to operate under the old franchise agreement (by transfer or otherwise), but was bound to conduct the dealership “as franchisee” under a completely new arrangement. Seen in this light, although the purchaser was to engage in a new motor vehicle dealership in Toyota vehicles, and was to provide ongoing servicing, the parties did not intend that this was to involve operating under the Seller’s TDA. Indeed, it would flout “business common sense”[6] for the purchaser to be operating under two TDAs.
[6]MLW at [51]
61 The plaintiff also sought support from various other clauses such as clause 7.2(a) which required the Seller at Completion to give the Buyer title to the “Business” and to each “Asset”; reference was also made to the passing of title/property/risk and profits clause 2.2(b), suggesting that the purchaser was entitled to the taking and profits of the “Business” after the Completion date.[7]
[7]Reference was also made to the warranties contained in clauses 9.21 and 9.22
62 However, none of the clauses cited enlarge the concept of “the Business” which, for reasons already provided, did not include the former TDA. They therefore did not assist the plaintiff.
63 Insofar as “Goodwill” is concerned, it is defined as “the goodwill of the Business together with the exclusive right, so far as the Seller can grant the same, for the Buyer to represent itself as carrying on the Business as successor to the Seller.” “Goodwill Value” was defined as the value attributed to the Goodwill, being $11 million.
64 The plaintiff referred to the oft cited definition of goodwill found in the speech of Lord Lindley in Inland Revenue Commissioners v Muller & Co’s Margarine Ltd,[8] wherein his Lordship described goodwill as something that “adds value” to a business, and as being “inseparable from the business.”
[8][1901] AC 217 at 235 cited in Federal Commissioner of Taxation v Murray (1998) 193 CLR 605 at 613
65 However, again, the (old) TDA did not “add value” to the Business under the SBA which the parties clearly contemplated would be governed by the new franchise arrangement.
66 In relation to contracts, Assets specifically included the “rights of the Seller” under each “Contract” as that term was defined (in part (k) of the definition).
67 The use of the term “rights of the Seller” is noteworthy. Although a reference to the plural generally includes the singular under clause 1.2(b), the specific terms of clauses 7.4 and 22 clearly contemplate that there will be a full assignment of all of both the rights and obligations insofar as “Contracts” are concerned.
68 More critically, the definition of “Contract” (in clause 1.1) provided that, in order for the rights under a Contract to be included, the Contract must be such that “it will be desirable for the Buyer to have the benefit of to conduct the Business…” Given the clear intention for the purchaser to conduct its business under its own replacement franchising agreement I do not consider that the seller’s rights to auto paybacks/interest under its TDA are desirable in order for the purchaser to conduct the “Business”, as that term is properly understood.
69 It follows that I do not consider that the seller’s rights to auto paybacks/interest under its TDA were intended to be included as a “Contract” pursuant to the SBA.
70 In my view, then, having examined all of the provisions of the SBA, reasonable business people in the position of the parties[9] would not have intended the SBA to convey the seller’s rights to auto paybacks/interest under the TDA. Rather, consistently with clause 5.1(b)(ii), the purchaser was to conduct its business under its own replacement franchise arrangement, which was to completely govern the relations and rights as between the buyer and Toyota, (including its rights to participate in the TSA programme).
[9]CCP Australian Airships Ltd v Primus Telecommunications Pty Ltd [2004] VSCA 232 at [9] per Nettle JA
71 If confirmation is necessary, the SBA clearly intended that, insofar as there was to be an assignment of the TDA, the entire contract was to be assigned, rather than individual contract rights. This is made clear by clause 7.4, which contemplates that there is either an assignment of the (entire) TDA contract or a completely new “replacement” arrangement (as in fact has occurred). Clause 22.1 also contemplates an assignment of both the rights and obligations of entire “Contracts.”
72 In such circumstances, there was no intention to carve out and convey the seller’s rights to auto paybacks/interest under its own TDA with Toyota which were left untouched by the SBA.
Conclusion
73 The plaintiff is entitled to the sum of $167,316.53 against the first defendant and the sum of $160,816.53 against the second defendant.
74 However, the first defendant is entitled to the sum of $337,379.02 on its Counterclaim.
75 I will otherwise hear from the parties as to the form of final orders to reflect these reasons.
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