Fowler v Hedley
[2007] WADC 189
•1 NOVEMBER 2007
FOWLER & ORS -v- HEDLEY & ANOR [2007] WADC 189
| DISTRICT COURT OF WESTERN AUSTRALIA | Citation No: | [2007] WADC 189 | |
| Case No: | CIV:6/2004 | 22-25 JANUARY 2007 | |
| Coram: | WAGER DCJ | 31/10/07 | |
| PERTH | |||
| 29 | Judgment Part: | 1 of 1 | |
| Result: | Judgment for the plaintiffs | ||
| PDF Version |
| Parties: | MURRAY FOWLER IRENA JOHNSON IAN THOMAS HEDLEY LYNNE AILEEN HEDLEY |
Catchwords: | Contract Conditions precedent Contract of employment Turns on own facts |
Legislation: | Nil |
Case References: | Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 Gregory & Anor v MAB Pty Ltd (1989) 1 WAR 1 Masters v Cameron (1954) 91 CLR 353 |
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
- IN CIVIL
- IRENA JOHNSON
First Plaintiffs
MURRAY FOWLER
Second Plaintiff
AND
IAN THOMAS HEDLEY
LYNNE AILEEN HEDLEY
Defendants
Catchwords:
Contract - Conditions precedent - Contract of employment - Turns on own facts
Legislation:
Nil
(Page 2)
Result:
Judgment for the plaintiffs
Representation:
Counsel:
First Plaintiffs : Mr M Rynne
Second Plaintiff : Mr M Rynne
Defendants : Mr H O Moser
Solicitors:
First Plaintiffs : Tottle Partners
Second Plaintiff : Tottle Partners
Defendants : Andreas Papageorge
Case(s) referred to in judgment(s):
Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95
Gregory & Anor v MAB Pty Ltd (1989) 1 WAR 1
Masters v Cameron (1954) 91 CLR 353
(Page 3)
1 WAGER DCJ: The first plaintiffs who are the owner trustees of the Fowler Investment Trust conducted business under the registered name of Margaret River Distributors ("MRD") and claim that they entered into an agreement with the first defendants who conducted the business of Down South Wholesalers ("DSW") for the defendants to purchase MRD. The first plaintiffs claim that it was also agreed that the second plaintiff, Mr Fowler, would work in the defendant's business following the sale. The plaintiffs claim that the sale of MRD took place on 23 January 2003.
2 The defendants deny that there was any agreement with the first plaintiffs to purchase MRD and claim that a contract was not entered into on 23 January 2003. Discussions in relation to a possible purchase of MRD had commenced however a final and unconditional agreement between the parties had not been reached.
3 The defendants claim that the agreement was conditional upon the first plaintiffs providing proper and accurate figures for MRD's operations for the year of 2002 so that a figure in relation to the value of MRD's goodwill could be agreed. The defendants plead that a second condition that the plaintiffs failed to meet was to deliver all relevant stock to the defendants. A written contract including confirmation of the agreed value of goodwill was also required to be drafted and signed by the parties. The defendants claim that there was no agreement for sale with the first plaintiff given that the conditions were not met.
4 The second plaintiff claims that the defendants were in breach of his employment contract. The defendants deny that a contract of employment whereby the second plaintiff was to be employed for a three year period at $35,000 per annum plus 10 per cent of all gross sales above $50,000 per month ever existed.
The evidence
5 Both Mr Fowler and Ms Johnson gave evidence on behalf of the plaintiffs. The second defendant, Mr Hedley, and an employee, Mr Harlowe, gave evidence on behalf of the defendants.
6 It is common ground that MRD and DSW were both businesses that supplied hospitality products to the hospitality industry in the Margaret River region. Mr Fowler ran MRD from his property at Rosa Brook and had leased a Ford Econovan to collect supplies from Perth and to pack and make deliveries. MRD had been operating since 1999.
(Page 4)
7 Mr Hedley ran DSW from Margaret River. He had run unrelated businesses of a gymnasium in 1985 and a computer ribbon company in 1987. He commenced DSW as a carpet cleaning business in 1996 and changed the business in 2000 so that its core business was to provide hospitality supplies. Mr Hedley had left the "financials" of DSW to his accountant. His priority in business had been getting on and running the business.
8 Both Mr Fowler and Mr Hedley were aware of each other's business dealings. Following a casual meeting and discussion in 2002 Mr Hedley telephoned Mr Fowler and arranged for the two to meet to discuss the structure of a proposed joint business. Both agreed that there was competition in the area of hospitality supply deliveries and that it would be financially advantageous for the two businesses to combine.
9 It is generally agreed that meetings between Mr Hedley and Mr Fowler followed. Mr Fowler kept records of dates of contact with Mr Hedley in his 2002 diary and these dates are not disputed.
10 The 2002 diary records the following contact dates:
21 October 2002
15 November 2002
22 January 2003
11 Mr Fowler estimates that the stocktake relevant to MRD was completed on or about 31 January 2003. Mr Fowler injured his back in the course of carrying out duties as part of his employment on 14 February 2003. Mr Fowler and Mr Hedley stopped working together in March of 2003.
Meeting on or about 21 October 2002 – the plaintiff's evidence
12 Mr Fowler attended a meeting at Mr Hedley's premises in Margaret River. Mr Hedley asked him to supply financial trading profit and loss figures for 2001, the Business Activity Statements (BAS) for the financial year ending 30 June 2001 and a customer and vendor list for MRD.
(Page 5)
13 Mr Fowler told Mr Hedley the following:
1. MRD stock was worth $35,000 to $40,000
2. The Econovan was worth $13,000
3. On the advice of his accountant the goodwill of MRD was $35,000
4. The turnover for 2001 was $145,000
14 In cross-examination Mr Fowler agreed that he had written in the notes section of his 2002 diary:
Stock - $35,000 - $40,000
Vehicle/van - $13,000
Business value - $35,000
T/over 2001 - $145,000
T/over 2002 - $165,000
Net Profit 2001 $35,000
Net Profit 2002 ( )
15 Mr Fowler states that he could not remember when he wrote the notes. He denies providing the notes to Mr Hedley at the meeting on 21 October 2002 and says that the figures he provided were the figures relevant to the BAS statements for the financial year ending 30 June 2001 and the figures relating to the MRD turnover. Mr Fowler denies the provision of figures for 2002 of a turnover of up to $179,000 and denies that the alleged 2002 figures arose from double accounting and were provided to Mr Hedley to make MRD's figures look better. Mr Fowler also denies that he had ever said that his mark up on stock items at delivery was 35 per cent to 40 per cent.
16 Mr Fowler agrees in cross-examination that the correct net profit for MRD for the financial year ending 30 June 2001 was approximately $24,000. A trust expense of approximately $10,000 should have been deducted from the business records to accurately reflect the financial position of MRD and this had not been deducted from a document allegedly provided to Mr Hedley. Mr Fowler denies that he had ever said that the business had a net profit of $50,000 (that is, a net profit of $1,000 per week). He also denies ever guaranteeing a net profit of $50,000 per annum from MRD.
(Page 6)
The first meeting on or about 21 October 2002 – the defendant's evidence
17 Mr Hedley gave evidence that Mr Fowler had written notes down when he attended the meeting consistent with the notes recorded in his 2002 diary and that the notes reflected "stuff" that Mr Fowler had spoken to his accountant about. Mr Hedley accepted these figures and accepted Mr Fowler's information. Mr Fowler told him that the value of MRD stock was approximately $40,000 and that the value of the van was approximately $15,000. Mr Fowler said that his accountant had established that the goodwill of MRD was $35,000 based on a turnover of approximately $165,000 to the end of the 2002 financial year.
18 Mr Hedley's evidence is that he was not interested in the financial figures of MRD for the year prior to 2002 because he needed to know how the business was going at the time of the discussions. Mr Hedley considered that the profitability of the business could change rapidly because customers could be poached and there was a lot of competition.
19 Mr Hedley's evidence is that Mr Fowler had talked of a mark up of 30 per cent to 40 per cent and that Mr Fowler had said quite clearly that some of the items in stock at MRD had sold for a mark up of more than 45 per cent.
20 Mr Hedley denies seeing any documents relating to MRD at the first meeting. As a result of the verbal information provided by Mr Fowler Mr Hedley calculated that MRD was making an operating profit of approximately $75,000. Mr Hedley thought that he would be able to employ Mr Fowler, operate the van, pay workers' compensation and pay insurance from the operating profit and that, with the two businesses working together and being based in town together with economies of scale and reduced transport costs, the defendants could reach a point of actually making a profit.
21 Mr Hedley calculated that an operating profit of $75,000 less expenses equalled a net profit of $50,000 per annum. He considered that an appropriate sum for the goodwill of MRD was the value of 6 months net profit being $25,000. In cross-examination Mr Hedley set out the way in which he had chosen to calculate this sum. There is no evidence that he sought professional advice from an accountant in relation to his calculation of the net profit.
22 Mr Hedley asked Mr Fowler if he was certain that this was the type of money that he was earning and Mr Fowler said "I guarantee you that is what I was earning" (T183). It is unclear when Mr Hedley asserts that
(Page 7)
- this comment was made. In evidence he refers to the comment being made in the context of the first meeting, however he later clarifies that the comment may have been made in January 2003. It is Mr Hedley's evidence that he thought he was being clever at the time because he believed the figures Mr Fowler provided to him were accurate given that Mr Fowler was a hard worker and a nice guy. Further Mr Hedley assumed that the figures would be accurate because Mr Fowler would be working with him in the future and there would be repercussions for Mr Fowler if the figures that he provided were inaccurate. Mr Hedley states that he basically made it pretty clear to Mr Fowler that the figures had to be substantiated and that he was asking to be provided with figures relevant to the end of June 2002. There is no clear evidence that he specified precisely what documents he required in order to clarify this.
23 Mr Hedley's evidence is that at the first meeting Mr Fowler had said that there was no problem with him providing financial figures relating to MRD but that he was behind in his paperwork and was still entering sales figures relevant to the 2002 period. After the first meeting Mr Hedley faxed the following letter dated 23 October 2002 to Mr Fowler:
"Gidday Murray
Further to our telephone conversation yesterday here are some of the points in more detail
· Margaret River Distributor's goodwill value $25,000
· A 30 per cent sharing holding in Down South Wholesale goodwill
· This investment will be protected by contract meaning that after a minimum period you could recoup the full amount (suggested period 2 years)
· The goal would be to make the investment grow by (and) increasing the goodwill value of DSW
· Salary package $35,000 includes superannuation
· Commission structure all sales over $50,000 p/month you would receive a flat 10 per cent
- · This will be reviewable depending running costs for stock etc e.g. if sales were $60,000 you would receive an added $1,000 income
…
Murray –
As the business grows your income will grow obviously.
It would take a serious effort to achieve the rewards.
The ball will be in your court.
Margaret River Distributor's Stock
· Stock value $40,000
· Down South Wholesale initial purchase of stock will be $20,000 remainder of stock to be paid for as sold with every effort to clear ASAP
Vehicle – lease payments taken over a residual payout at end
· Murray to be provided with a vehicle to drive to and from business (van, car or truck)
Down South Wholesale – (Mission Statement)
· Target turnover $100,000 per month
· To operate as a professional ….. run outfit using latest communication, accounting and distribution technology
· To have the ability to move into new markets
· All staff to be trained in all areas of the business e.g. technical, accounting, sale, purchasing and distribution (myself included)
Murray – there are many questions in concerns you may have please list them and fax me.
Regards,
(Page 9)
- Ian"
24 Mr Fowler did not reply in writing.
The second meeting on or about 15 November 2002 – the plaintiff's evidence
25 Mr Fowler's evidence is that the 30 June 2002 stocktake records indicated that he had overestimated the value of MRD stock. In November 2002 he clarified with Mr Hedley that the stock value was actually $25,000 to $30,000. Mr Fowler states that an agreement to pay $24,000 for the stock plus an additional amount in relation to any stock received over and above the value of $24,000 was reached. Mr Fowler said that an agreement of:
Goodwill of 25 per cent or $25,000
Shareholding reduced to 25 per cent and 3 years before payment
An employment contract of $35,000 per annum plus 10 per cent of sales over $50,000 per month
was reached and that both parties were satisfied with the agreement.
26 In evidence Mr Fowler says that he understood that both parties had the option of paying out their shareholding and obtaining the value of the shareholding being 25 per cent of the goodwill of the business based on the turnover and on the net profit of the business. Mr Fowler says that he understood that he was bound to accept 25 per cent of the goodwill in the future even if 25 per cent was a figure that was less than $25,000. In cross-examination however Mr Fowler confirms that in fact the November agreement was that he alone would receive 25 per cent of the goodwill and that the $25,000 sum was the minimum he would receive. Mr Fowler says that Mr Hedley had advised him in November 2002 that he would use the services of Damien Brennan, solicitor, to draw up the contract of sale and the contract of employment. The agreed handover sale date and the date of employment was 13 February 2003. Mr Hedley had shaken hands with Mr Fowler to confirm the agreement and had agreed to keep in touch prior to 13 February 2003. After the agreement was reached Mr Hedley travelled to Tasmania in December 2002 returning to the Margaret River are on 10 January 2003. Mr Fowler and Mr Hedley then met and agreed to bring the date of sale and the date of the commencement of the contract of employment forward to 23 January 2003.
(Page 10)
27 In cross-examination Mr Fowler says that he did not know why the date of on or about 12 December 2002 had been pleaded as being the date when the agreement was reached. Contrary to the pleadings, he states that the terms and conditions of the contract of sale and the contract of employment had been finalised on 15 November 2002. Mr Fowler denies telling customers and suppliers of the impending sale or merger prior to 23 January 2003.
The second meeting on or about 15 November 2002 – the defendant's evidence
28 Mr Hedley states that in November 2002 he was still confident that Mr Fowler would provide him with the 2002 figures and that Mr Fowler appeared to be running around madly to ensure that this happened. Despite not receiving the 2002 figures Mr Hedley was confident of the figures and thought that the figures previously provided were accurate. Mr Hedley had decided to make a start on the joint business and "that was it" (T186). Mr Hedley states that he did not receive the requested financial documents in November 2002 and he rang Mr Fowler from Tasmania at the end of December/beginning of January and told him to get the financial documents. Mr Hedley wanted the documents so that "we can sit down when I get back" (T186). That is, so that an agreement could be finalised.
29 Mr Hedley denies that an agreement that Mr Fowler would receive 25 per cent or $25,000 of the goodwill from the sale of the business was reached in November 2002. Mr Hedley's evidence is that any agreement for sale was always conditional on receiving the 2002 figures so that a goodwill price could be set. The agreement was also conditional on seeing the stock and drafting the agreement. Without the stock and without the figures Mr Hedley could only rely on what Mr Fowler had told him. He agreed that although he had not received the requested documentation, he had no reason to doubt the figures Mr Fowler had previously provided.
30 Mr Hedley did not receive any documents or additional figures from Mr Fowler, however when he returned to the Margaret River area in January 2003 he found that Mr Fowler had told customers and suppliers of a pending sale. Mr Hedley was concerned that the news of a sale would compromise the operation of each of their business interests and so he suggested that the two businesses amalgamate on 23 January 2003, being approximately two to three weeks earlier than the date that had been anticipated. Mr Hedley denies that an agreement in relation to the
(Page 11)
- purchase of MRD and an agreement in relation to Mr Fowler's employment had been reached prior to 23 January 2003.
23 January 2003 – the plaintiff's evidence
31 Mr Fowler states that on 23 January 2003 Mr Hedley:
Was very satisfied with the amount of stock MRD had and accepted that given that the sale date had been brought forward by two weeks Mr Fowler had only completed approximately 80 per cent of MRD's final stocktake by 23 January 2003
Was provided with the Econovan and transfer papers
Arranged to transfer the name of MRD to the defendants
Agreed that Mr Fowler's employment for the defendants commence
Mr Fowler provided the following documents to Mr Hedley on or before 23 January 2003:
(a) MRD sales and receivables figures to 30 June 2002
(b) MRD MYOB sales and receivable figures to December 2002
33 Mr Hedley paid two outstanding debts to suppliers on the first plaintiff's behalf in lieu of payment for stock. The two accounts totalled approximately $11,500. Mr Fowler understood that Mr Hedley still owed him a minimum of $12,500 in order to pay the agreed sum of $24,000 for the MRD stock. No sum over and above $11,500 was ever paid for the stock.
23 January 2003 – the defendant's evidence
34 Mr Hedley's evidence is that Mr Fowler commenced working in the Margaret River premises on 23 January 2003. The discussions in relation to an agreement were that the first defendants would:
Pay $20,000 for stock
(Page 12)
- Take over the Econovan payments
Employ Mr Fowler for $35,000 per annum plus 10 per cent of sales (based on $50,000 plus sales per month)
35 Although reluctant to agree, Mr Hedley admits that the change of business name reflecting that MRD would be operated by the first defendants was registered on 23 January 2003.
36 Mr Hedley states that in January 2003 Mr Fowler brought some 2001 financial documents to him rather than the 2002 figures that he had requested. Mr Hedley describes Mr Fowler as being very disorganised and said that on the figures that were provided in January 2003 the profitability of MRD was not looking good. Mr Hedley describes Mr Fowler as being a nervous wreck so he sent him home to accurately complete the documentation for MRD up to December 2002. This documentation was, on Mr Hedley's evidence, never forthcoming.
The draft business purchase agreement – Damien Brennan solicitor
37 The draft contract of sale was received by fax to Mr Hedley's premises on 13 February 2003. Mr Fowler made corrections to the draft and said that he returned the draft to Mr Hedley. Mr Hedley's evidence is that the amended draft was never returned to him.
38 Mr Fowler says that after the parties reached agreement on 15 November 2002 Mr Hedley undertook to instruct Mr Brennan to draft the legal documents. Mr Hedley denies that this occurred and says that he did not instruct Mr Brennan to prepare draft documents until after Mr Fowler commenced working at the Margaret River premises in January 2003, consistent with there being no agreement in 2002.
39 The draft contract of sale received on 13 February 2003 is as follows:
"WHEREAS:
…
B The vendor has agreed to sell the business to the purchaser on the terms contained in this agreement.
C The parties agreed that the date of sale should come into affect from the sale date.
…
- (c) Sale date 'means 1st February 2003'
- 2. Agreement to sell
The vendor agrees to sell and the purchaser agrees to purchase the business comprising of the following assets:
(a) the goodwill of the business;
(b) the business name;
(c) the chattels, the plant equipment, fixtures and fittings of the business as are set forth in Schedule 1;
(d) the stock in trade of the business;
…
3. Sale Price
The vendor agrees to sell and the purchaser agrees to purchase the business and the assets included in the sale for a price of twenty five thousand ($25,000) for goodwill and the value of stock in trade as provided in this agreement in clause ( ).
4. Deposit
The purchaser shall pay to the vendor within seven days of the date of the execution of this agreement the sum of twenty thousand ($20,000) as and by way of part payment for the business.
5. Balance of Purchase Price
The balance of the purchase price and all other amounts payable by the purchaser shall be paid in the following manner:
(a) in relation to the stock in trade and payment thereof:
(i) The sum of twenty thousand dollars ($20,000) paid as set forth in paragraph 4 hereof shall be in part payment of the value of the stock in trade.
(ii) The value of the stock in trade (as ascertained pursuant to clause 7 hereof) shall be paid for by the purchaser to the vendor as and when such
- stock (which stock shall be the stock set forth in Schedule 3 hereof) as sold by the purchase in the normal course of business.
- (b) With respect to the ascribed goodwill value of the business, namely the sum of twenty five thousand dollars ($25,000) referred to in clause 3 hereof:
(i) The parties agree that this sum shall not be paid by the purchaser to the vendor at settlement.
(ii) In consideration of the purchaser not paying the agreed goodwill sum of twenty five thousand dollars ($25,000) to the vendor at the sale date the parties agree that the vendor shall receive an undivided twenty five per cent (25%) interest in the goodwill of the business as from the sale date.
(iii) At the expiration of 3 years from the sale date the vendor shall be entitled to request from the purchaser payment from the purchaser of an amount equal to one undivided quarter share of the goodwill of the business or twenty five thousand dollars ($25,000) which sum is the higher.
(iv) Notwithstanding the preceding paragraph the vendor shall not be obliged to request the payment referred to in the preceding sub-clause at the expiration of the 3 years from the sale date.
…
6. Purchaser of Motor Vehicle
(a) The parties agree that one of the items in Schedule 1 of this agreement shall be the 1998 Ford Econovan … registered in the name of the male vendor.
7. Stock in Trade
(a) The vendor agrees to sell and the purchaser agrees to purchase the vendor's saleable stock in trade ("the Stock") in the possession of the vendor at the sale date at its value determined pursuant to this clause. The purchaser agrees
- to purchase stock for a total value not exceeding thirty thousand dollars ($30,000) ("the maximum stock").
- (b) The purchaser shall not be required to purchase from the vendor:
(i) Damage defective or obsolete stock when these are not saleable at full retail price in the ordinary course of business for the business.
…
8. Contractual Agreements
…
(c) The vendor agrees not to cancel terminate or vary the terms of any contractual arrangement referred to in this clause between the date of this agreement and the sale date except with the purchaser's written consent.
…
13. Purchaser to Re-employ Male Vendor
The purchaser hereby covenants and agrees with Murray Fowler that the purchaser shall enter into an Employment Agreement with Murray Fowler a copy of which deed is attached to this agreement.
…
EXECUTED AS A DEED:
Signed and witnessed
[ ]"
Dealings after 14 February 2003 – the plaintiff's case
40 Mr Fowler injured his back in the course of his employment on 14 February 2003. After 14 February 2003 Mr Hedley raised concerns about the value of the turnover for February 2003 in light of the previous
(Page 16)
- turnover figures provided and projected for MRD. Mr Hedley continued to request that Mr Fowler provide him with the 2002 trading figures. It is Mr Fowler's evidence that in February 2003 he provided Mr Hedley with the sales and receivables figures and a spreadsheet that he had done up for the 2002 figures. He understood Mr Hedley's concern to be that the 2003 turnover figures did not correspond with the figures that he had previously provided and Mr Fowler asserts that the only reason why the documents were required by Mr Hedley after 23 January 2003 was to assist Mr Hedley to compare the turnovers of the previous business and the new business. However in cross-examination Mr Fowler states that the documents were provided to support the business sale.
41 Mr Fowler says that he did not recall Mr Hedley asking for the profit and loss statements of MRD for the financial year ending 30 June 2002 and could only recall Mr Hedley asking for the 2001 return. Mr Fowler does not recall what documents he was asked to provide to show turnover and he does not recall when he was asked for the 2002 trading figures, however he clarifies that he was asked for the 2002 figures in February 2003. In cross-examination Mr Fowler confirms that Mr Hedley had asked for the turnover figures towards the end of October 2002 because "he indicated to me he needed those figures to formulate the goodwill value of the business" (T153). Mr Fowler did not consider that the 2002 documents affected the agreement that was ultimately reached in November 2002 and states that the reason why he delivered documents to Mr Hedley in mid-February 2003 was because Mr Hedley was concerned about the turnover of February 2003 which did not correspond with the turnover figures Mr Fowler had provided or estimated for the 2001 period. Mr Fowler's evidence is unclear and contradictory in relation to the date of provision of documents and the motivation for the provision of documents relating to 2002.
42 On a Sunday afternoon in March 2003 Mr Hedley told Mr Fowler that he was no longer required as an employee of the defendants and that Mr Fowler would be charged with trespassing if he re-entered the MRD premises. No further payments were made by the defendants to the plaintiffs after this date.
Dealings after 14 February 2003 – the defendant's evidence
43 Mr Hedley states that he was never shown all of the 2002 financial figures for MRD. He received the sales and receivables journals for January to March 2002 and April to July 2002 but not for the period of
(Page 17)
- July to September 2002. Mr Hedley says that he returned the BAS statements to Mr Fowler and made and retained a copy of the 2001 profit and loss statements. He did not receive documents relevant to the period of late 2002 despite repeated requests and demands.
44 In mid-March 2003 Mr Hedley rang Mr Fowler and told him to stay at home to get the figures done and not to come back into the office until the figures were completed. The sales conducted by the joint business were not reaching Mr Hedley's projections for February 2003. The February 2003 sales were approximately $35,000 plus GST, however Mr Hedley had budgeted on sales in excess of $40,000 for this period.
45 On 10 March 2003 Mr Hedley wrote to Mr Fowler indicating that the defendants wanted to keep the business name and the signage for MRD because they had already ordered stationery in that name. Mr Fowler denied ever receiving this letter.
46 Mr Hedley chose to change the business name back from MRD in late March 2003. In March 2003 Mr Hedley also sent letters to business customers and suppliers indicating that he was no longer affiliated with Mr Fowler or with the business that had been known as MRD. Mr Hedley subsequently instructed Mr Damien Brennan solicitor to advise Mr Fowler that the business name MRD was available again should Mr Fowler choose to trade under that name in the future. Mr Fowler's evidence is that he did not receive any correspondence from Mr Brennan in relation to the availability of the business name MRD.
47 On 9 October 2003 the first defendants sold the business. The goodwill component of the sale was agreed in the sum of $100,000.
MRD stock – the plaintiff's evidence
48 Mr Fowler started to bring stock to Mr Hedley's premises on 21 January 2003 by using a trailer he had obtained to move the hot water systems however the process of moving the stock was not completed until a later date. Mr Fowler says that he gave Mr Hedley the original stock sheet recording the number and value of items delivered, but that he did not keep a copy of the sheet for himself. Mr Fowler denies that the stock taken to Mr Hedley's premises was in poor condition and asserts that it was a minority of items only that were unsaleable. "No charge" was recorded against the details of the items in poor condition in the stocktake. Mr Fowler's evidence is that stock was moved to the defendant's premises before the stocktake was completed. He confirms that the value of the
(Page 18)
- stock delivered to Mr Hedley in January 2003 was approximately $24,000.
49 Ms Rena Johnson gave evidence that on 22 January 2003 she assisted Mr Fowler to take stock to the defendant's business premises. Ms Johnson says that it took several days to move the stock and she was unsure of the date on which the final stock was delivered. It was her evidence that the stock was counted before it left the Rosa Brook premises so that all stock had been accounted for when it was placed in the defendant's premises. Ms Johnson stacked boxes of the stock onto the bottom floor of the defendant's premises on the first day of stock delivery. On the second day of moving stock she stacked boxes on both the bottom floor and on the mezzanine floor and she agrees that the quality of stock on the mezzanine floor was not great. Ms Johnson says that the stock housed on the mezzanine floor had "no charge" recorded against it on the stocktake sheet.
MRD's stock – the defendant's evidence
50 Mr Hedley did not view the MRD stock until after it was delivered. He describes it being of poor condition and limited value. On final delivery Mr Fowler handed an illegible tally to Mr Hedley in relation to the stock. Mr Hedley handed the tally back to Mr Fowler because it was illegible. Mr Hedley considered that the majority of the stock was unsaleable and estimates that the value of the stock was equal to or below the $11,500 he had paid to the two suppliers on MRD's behalf.
51 John Louis Harlowe gave evidence that he had worked for the defendants from approximately the fourth week of January 2003 until 25 April 2005. Mr Harlowe has an unclear recollection about the quality and quantity of the stock, however he recalls that on one occasion he came to Mr Hedley's premises and helped move stock out of the van driven by Mr Fowler. On this occasion he took stock upstairs with Mr Fowler and maybe with Mr Hedley. Mr Harlowe describes some of the stock as being opened, squashed, dented and dusty. The stock stayed upstairs until a later date when Mr Hedley and Mr Harlowe went through the stock. Mr Harlowe says that most of the stock was just no good and that quite a few boxes had little bits and pieces in them. The stock that was no good was eventually taken to the tip on a trailer. The good quality stock remained at the first defendant's premises. This stock was referred to as old stock. Mr Harlowe would go through the old stock if something was needed for an order. Mr Harlowe did not estimate the value of the stock.
(Page 19)
The employment contract – Mr Fowler
52 Mr Fowler's evidence is that he commenced employment with the first defendants on 23 January 2003 however his employment was terminated on 7 March 2003. He describes the employment contract as follows: (T20, T25)
"Question: What did you discuss so far as your employment was concerned?
Answer: Your Honour we had talked about the figure of $35,000 or thereabouts. The commission structure was around the 10 per cent of total sales per month. We talked about the vehicle we had utilised in the business. I'm pretty sure that was about all."
53 Mr Fowler was injured in the course of his employment in a work related accident on 14 February 2003 and was declared unfit for work from that date until 26 May 2003 by Dr Gavan White (Exhibit 12). Notwithstanding his injury he returned to work on 17 February 2003 and continued working for the first defendant until termination.
54 Mr Fowler claimed workers' compensation wages due to his injury for a three week period from 7 March 2003. He commenced looking for other work after 30 March 2003 and secured employment with the Margaret River company on 25 July 2003 at a salary of $215 per week.
55 The draft employment agreement prepared by Mr Brennan refers to a commencement date of 1 February 2003 and an expiry date of 31 January 2006. These dates were not adopted by Mr Fowler in evidence. The commencement date was, on his evidence, 23 January 2003. There is no evidence in relation to a termination date.
The employment contract– the defendant's evidence
56 Mr Hedley states that there was no agreement in relation to Mr Fowler's employment because an agreement in relation to the sale of the business had not been finalised given that the conditions precedent to the sale had not been met. Mr Fowler was therefore working on a casual basis and his employment was terminated in mid-March 2003.
(Page 20)
The Law
57 The plaintiff's claim that a binding contract in relation to the sale of MRD was complete in November 2002 because agreement had been reached in relation to the value of the goodwill, the structure by which stock would be paid for had been agreed and there was no requirement that the agreement be evidenced in writing for the contract to be binding.
58 The defendants claim that the contract was not concluded because the three conditions namely the value of the goodwill, the price to be paid for the stock and the completion of a written agreement had not been met.
59 In Masters v Cameron (1954) 91 CLR 353 the High Court considered whether a contract for the sale of land that was subject to the preparation of a formal contract of sale which was acceptable to the solicitors on terms and conditions that had been set out was a concluded contract. It was held that it was not.
60 Three classes of negotiations or agreements where a formal contract had yet to be drafted were considered:
1. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect.
2. It may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document.
3. The case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.
61 In each of the first two cases it was held that there was a binding contract however it was held that the third case did not disclose a binding contract because each party reserved for himself the right to retire from the contract, if, on looking at the formal contract, he found that although it may represent what he said, it did not represent what he meant to say (Dixon CJ, McTiernan J, Kitto J p 360 to p 362).
(Page 21)
62 In this case, the plaintiffs submit that a binding contract has been reached. The defendants submit that this matter falls into the third category and that the parties have the right to retire from the contract.
63 When determining the intention of the parties to a purported contract what has been said or done by the parties needs to be construed objectively. In Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 at 105 - 106 Gaudron, McHugh and Hayne JJ said:
"Although the word 'intention' is used in this context, it is used in the same sense as it is used in other contractual contexts. It describes what it is that would objectively be conveyed by what was said or done, having regard to the circumstances in which those statements and actions happened Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 348-353 per Mason J; Royal Botanic Gardens v Domain Trust and South Sydney City (2002) 76 ALJR 436; 186 ALR 289. It is not a search for the uncommunicated subjective motives or intentions of the parties."
64 There is a presumption that parties to a commercial arrangement intend to create legal obligations.
65 A party's duty to act honestly and in good faith extends beyond the making of an agreement. If a party deliberately fails to provide accurate documents in order to hide the true position from another party then the agreement would not be binding. (Gregory & Anor v MAB Pty Ltd (1989) 1 WAR 1.)
66 The plaintiffs submit that all dealings with the plaintiffs were honest and carried out in good faith. The defendants submit that the plaintiffs deliberately failed to provide documents requested so that the true financial position was unclear and that the purported agreement, if one was made, is therefore not binding.
Findings of fact
67 Although Mr Hedley had previous business dealings prior to DSW the dealings were of a very different type from a hospitality supplies business. It is not challenged that Mr Hedley set up the business of a gymnasium in 1985 and a computer ribbon company in 1987 (a business that would have, in any event, had a limited future), but there is no evidence of his precise role in the businesses. Mr Hedley states that he left the "financials" of DSW to his accountant and was more concerned
(Page 22)
- with getting on and running the business. Accordingly, although Mr Hedley had more experience at running businesses than Mr Fowler, there is no evidence that he had a high level of business acumen.
68 Mr Hedley wanted to expand DSW and considered that expansion was a way to be profitable. He was aware of the dangers of competition in the area of hospitality supplies in the Margaret River area. He believed that economies of scale offered by an amalgamated business would lead to greater profitability for a number of reasons including that the time spent in and the expense involved in MRD travelling to Perth to collect supplies would be removed and the business would operate from the more central location in Margaret River as opposed to Rosa Brook.
69 No evidence is led about Mr Fowler's business acumen. Mr Fowler's role in MRD was to drive to Perth in the Econovan and collect hospitality supply items that he subsequently supplied to businesses in the Margaret River area. It was a very simple business. There is no suggestion that he had any knowledge of business dealings beyond his role in MRD and his lack of business knowledge is demonstrated by his misunderstanding of the alleged agreement (being 25 per cent of the goodwill) when asked about the goodwill component of the contract of sale in examination-in-chief.
70 Although I am satisfied that Mr Fowler understood that an agreement had been reached and understood the agreement at the time (in cross-examination he was able to clarify the precise nature of that agreement when it was put to him), his total lack of understanding of the way in which a business operated was apparent from his answers in examination-in-chief.
71 There is no evidence that Mr Hedley physically visited the plaintiffs' business operations or examined stock stored at Rosa Brook at any time. Mr Hedley relied solely on information provided to him by Mr Fowler in relation to the operations of MRD.
72 Both Mr Fowler and Mr Hedley agreed that figures were provided by Mr Fowler at the first meeting in September 2002. Mr Hedley's evidence is that those figures were all recorded in Mr Fowler's 2002 diary in the notes section. Mr Fowler denies that he referred to these figures at the first meeting. The figures recorded in the diary are the same as the ones referred to by Mr Hedley and are listed in the same order that Mr Fowler refers to them in evidence. There is no other reasonable explanation as to why these figures would be recorded by Mr Hedley other than that the
(Page 23)
- figures from the diary were provided to him by Mr Fowler at the September 2002 meeting. The figures included goodwill of $35,000 and a turnover for 2002 of $165,000.
73 I accept that Mr Hedley made his calculations on the profitability of MRD from the figures noted in Mr Fowler's 2002 diary. Mr Hedley acknowledges that he accepted the figures at face value because he assumed that Mr Fowler would be honest given the likelihood of Mr Fowler's ongoing involvement in the business and because he knew Mr Fowler to be a hard worker and a nice guy. Mr Hedley did not obtain advice about the figures from an accountant despite his evidence that he had left the "financials" to an accountant. Mr Hedley chose to carry out calculations based on the figures in order to reach his own conclusions about profitability. There is no evidence that the way in which he set about this task is accurate or appropriate and it is unclear why he chose to deduct or add figures.
74 Mr Hedley was keen to proceed with the purchase of MRD and made assumptions when determining that the amalgamation would be a profitable thing to do. I accept that Mr Hedley asked to see documents relating to the figures of MRD for 2002 however I reject that he was not prepared to enter into an agreement prior to the provision of the 2002 figures.
75 The letter sent by Mr Hedley to Mr Fowler dated 23 October 2002 (Exhibit 4) sets out the matters that Mr Hedley took into account in formulating an offer to purchase MRD. There is no mention of a proposed condition that 2002 financial documents relating to MRD were to be provided to Mr Hedley prior to an agreement being reached in relation to the sale. Although the October 2002 letter is not a final proposal the letter is evidence of the defendant's motives and intentions in relation to a proposed agreement.
76 It is Mr Hedley's evidence that Mr Fowler said he would guarantee $50,000 net profit being $1,000 per week however Mr Hedley concedes in cross-examination that this statement may not have been made to him until January or February 2003. It is conceded that the figure of $35,000 was received by Mr Hedley prior to November 2002 however there is no unchallenged evidence that the $50,000 figure was provided to Mr Hedley in 2002.
77 Mr Fowler denies putting forward the figure of $50,000 net profit. The stand alone figure of $50,000 is not recorded in the 2002 diary.
(Page 24)
- Mr Hedley calculated $25,000 being 6 months net profit using his own formula and the figure of $25,000 was offered as goodwill as a result of his calculation.
78 I do not accept that the figure of $25,000 was offered by Mr Hedley subject to the provision of further financial details for the year 2002. I accept Mr Fowler's evidence that in November 2002 Mr Hedley had offered and Mr Fowler had accepted a goodwill component of $25,000.
79 Prior to November 2002 Mr Fowler advised Mr Hedley that the plaintiffs had overestimated the value of the stock held by MRD. It is Mr Hedley's evidence that the nature of the hospitality supply business was a dynamic one and that the level of trade could fluctuate rapidly. The trade for MRD was directly related to the stock collected from Perth that was subsequently supplied to the hospitality industry. Accordingly, it would be almost impossible to set a firm figure for the value of the stock held by MRD on which both parties could agree until the date of a stocktake. An agreement that a minimum sum be paid as part of the agreement for the sale of the stock and that an additional amount be paid if the stock was of a greater value reflects the fluctuating nature of the hospitality supply business. I find that an agreement whereby a lump sum of $20,000 would be paid and then adjustments would be made was reached on or about 15 November 2002.
80 The only evidence in relation to the necessity for the agreements for sale and employment to be in writing as a condition of the contract is contained in Mr Hedley's fax to Mr Fowler dated 23 October 2002. Mr Hedley states:
"This investment will be protected by contract meaning that after a minimum period you could recoup the full amount (suggested period 2 years)."
81 Objectively, Mr Hedley is offering protection to the plaintiffs in relation to their investment. The suggestion that a contract would provide protection is made because the defendants have indicated that no payment would be made in relation to goodwill for a number of years. There is no suggestion that a written contract was required by the defendants to protect the defendants' interests.
82 Mr Fowler's evidence is that Mr Hedley advised that he would instruct Damien Brennan, Solicitor, to draft a document reflecting the agreements following the meeting on 15 November 2002. Mr Hedley's evidence is that he did not instruct Mr Brennan at this time and did not
(Page 25)
- advise Mr Fowler that he would be instructing Mr Brennan until 2003 because there was no agreement in November 2002.
83 There is no evidence of the date on which Mr Brennan actually received instructions however the contents of the draft agreement received at the defendant's premises on 13 February 2003 is consistent with the agreement Mr Fowler says was reached on 15 November 2002. The draft agreement sets out:
The quantum set for goodwill (agreed at $25,000)
There is no clause in the draft agreement relating to a condition precedent that financial documents be provided to the defendant prior to any finalisation of the agreement
A minimum agreed purchase price for stock of $20,000 (as opposed to $24,000) is set and any stock over and above the value of $20,000 is to be paid for when it has sold be the defendants. This clause is consistent with nature of MRD's business.
84 The draft agreement does not refer to a date on which the agreement comes into effect. Both parties agree that the two businesses amalgamated on 23 January 2003. On that date the defendants:
Arranged for the transfer of the name of MRD
Agreed that Mr Fowler's employment commenced
Were provided with the Econovan and transfer papers
Were advised that approximately 80 per cent of the stocktake had been completed
85 The parties continued to discuss the agreement and the running of the business after 15 November 2002. It is not unreasonable that there would be discussions in relation to the day-to-day running of a joint business after an agreement to purchase the business is finalised. Given the nature of the business and the fact that Mr Hedley was out of the State prior to the amalgamation there may have been more discussions than would usually occur between a purchaser and a vendor. The discussions may have been of a repetitive nature in light of the limited business acumen of the parties.
86 The plaintiffs plead that the agreement was reached on or about 12 December 2002 however in evidence Mr Fowler said that the agreement was reached on 15 November 2002. Given Mr Fowler's lack of sophistication I accept that repetitive discussions took place following the
(Page 26)
- agreement of 15 November 2002 and that discussions probably occurred on 12 December 2002.
87 I accept that relevant financial documents from 2002 relating to MRD were not provided to the defendants until January or February 2003. Some documents were not provided at all. The documents would have been of assistance in relation to the day-to-day running of the business particularly the projected profit and loss for February 2003 however the late provision of the documents did not disrupt the agreement reached by the parties.
Existence of an agreement
88 The value of MRD's goodwill was finalised on or about 15 November 2002. Although 2002 financial documents in relation to MRD were not provided as requested the defendants had agreed to proceed with the sale. The plaintiffs' failure to provide full details of MRD's operations for 2002 was due to the plaintiffs' poor business acumen however the plaintiffs acted honestly and in good faith.
89 The plaintiffs' were not required to provide further financial information to the defendants nor were the parties required to execute a written agreement. The verbal agreement reached on or about 15 November 2002 was binding.
90 The defendants proposed a goodwill component of $25,000. This was accepted by the plaintiffs. There was no requirement for financial documentation in relation to 2002 to be provided to the defendants in order to settle the value of the goodwill.
Stock of MRD
91 Four witnesses gave evidence in relation to the stocktake for MRD in January 2003. There is no evidence that Mr Hedley ever visited Rosa Brook, nor is there any evidence that he examined the stock the subject of the stocktake. Mr Hedley's evidence was that he was not involved in the stocktake and that apart from receiving an illegible tally, he did not examine the stock at the time that it was delivered to his premises.
92 Although the evidence of Mr Fowler, Ms Johnson and Mr Harlowe varies in relation to the dates when stock was brought to the defendants' premises and the location where the stocktake was recorded, all three witnesses confirm that some of the stock was of poor quality and of no value when delivered and that the delivery of the stock took a number of
(Page 27)
- days. Mr Hedley states that the poor stock was definitely not put on the mezzanine floor and that all stock was delivered to the ground floor. Mr Harlowe however, who was employed by the defendants, states that some stock was placed on the mezzanine floor. Mr Fowler, Ms Johnson and Mr Harlowe all refer to a number of trips being made from Rosa Brook to the defendants' premises in relation to the delivery of the stock. Mr Harlowe refers to only one trailer load eventually being taken to the tip and states that the other items were retained as old stock that may have be used in relation to ongoing orders.
93 Mr Fowler's evidence is that the trailer was used to transport stock to the defendant's premises in January 2003. Given that a number of trips were required in order to move the stock to the defendants' premises I accept that a smaller quantity of stock was ultimately removed from the defendant's premises because the trip to the tip was a single trailer trip only. I also accept that some items had been recorded as "no charge" in relation to the stocktake.
94 The plaintiff's stocktake total is for $24,000 however this included all of the stock that was on MRD's books and I accept that some of the stock would not be able to be sold at full value. The defendants paid a total of $11,533.18 to creditors of MRD. Given the evidence in relation to the quantity and quality of stock I do not accept its value as $24,000 however I do accept that its value was greater than $11,500. Accordingly doing the best I can and relying on the evidence of Mr Harlowe, I find that the stock provided to the defendants by the plaintiffs in January 2003 was valued at approximately $20,000.
Contract of Employment
95 In evidence-in-chief Mr Fowler set out his understanding of the contract of employment at (T20):
"Question: What did you discuss so far as your employment was concerned?
Answer: Your Honour we had talked about the figure of $35,000 or thereabouts. The commission structure was around the 10 per cent of total sales for the month. We talked about the vehicle we had utilised in the business and I'm pretty sure that was about all."
(Page 28)
96 In his facsimile to Mr Fowler dated 23 October 2002 (Exhibit 4.1) Mr Hedley noted:
"Salary package $35,000 includes superannuation
Commission structure all sales over $50,000 p/month
You would receive a flat 10 per cent
This would be reviewable depending running costs for stock etc
e.g. if sales were $60,000, you would receive an added $1,000 income
Commission on solar hot water systems will be paid separately."
97 There is no evidence from any witness that the employment agreement was to run for a period of 3 years. The three year period is only referred to in the draft individual workplace agreement (Exhibit 10.2) prepared by Mr Brennan. The draft individual workplace agreement states:
"IT IS HEREBY AGREED AS FOLLOWS:
1. DURATION OF AGREEMENT
This agreement shall commence on the 1st day of February 2003 and shall expire on the 31st day of January 2006."
98 The parties agreed to commence the employment contract on the same date that the business contract commenced being 23 January 2003. Accordingly the commencement date on the individual workplace agreement is inaccurate and there is no evidence in relation to the accuracy of the completion date of the draft contract.
99 Mr Fowler's group certificate for the year ending 30 June 2003 records that he commenced employment with Mr Hedley trading as Down South Wholesalers on 23 January 2003 and that payments were made to him until 7 March 2003. A sum of $296 is recorded as being withdrawn for taxation. Mr Fowler claimed 3 weeks wages from the defendants from the date of dismissal being 7 March 2003. Mr Fowler states:
(Page 29)
- "I claimed for three weeks wages due to the fact that from the time I had been dismissed, it would have been impossible for me to go to another employer, apply for a job and honestly say that I didn't have a physical injury." (T49)
100 Mr Fowler does not say that the defendants are responsible for his remuneration and employment after this period.
101 Although the employment agreement is pleaded as running for a three year term the evidence presented at trial does not support the pleading. The onus is on the second plaintiff to prove the terms and conditions of the agreement. That onus is not satisfied on the evidence because there is no evidence that there was an agreement for employment for a period of three years.
102 The workers compensation final medical certificate relating to Mr Fowler in respect of an examination on 6 June 2003 indicates that Dr Gavan White was of the opinion that as from 26 May 2003 Mr Fowler was fit for work and had total capacity for work because of resolution of pain and disability. There is no evidence in relation to why workers compensation was paid for a three week period only. The only information provided in Exhibit 13 indicates that the claim for compensation was settled by agreement.
103 Mr Fowler was therefore fit and able to seek employment after 26 May 2003, being two and a half months after the date upon which his employment with the defendants was terminated. I do not consider that the second plaintiff is entitled to any further claim for compensation from the defendants in relation to the termination of his employment with the defendants.
104 Accordingly, I make the following orders:
1. The defendants pay to the first plaintiffs the sum of $25,000 being 25 per cent of the goodwill component arising from the sale of the business on 9 October 2003.
2. The defendants pay to the first plaintiffs the sum of $8,500 being the sum owed for the provision of stock from MRD.
3. The defendants pay to the second plaintiff $296 in unpaid wages and $363 in unpaid superannuation.
0