James Honner Nominees P/L v Linke & Linke No. DCCIV-98-1770

JAMES HONNER NOMINEES P/L v LINKE & LINKE
[2001] SADC 31

Judge Allan
Civil

This case concerns the Stansbury Holiday Motel (“the motel”).
At all relevant times, the plaintiff was the owner of the motel. The plaintiff and the defendants entered into a contract in the period leading up to 1 December 1996 whereby the motel was to be operated by the defendants for the period 1 December 1996 to 30 November 1997. The dispute between the parties goes to the terms of that contract.
The plaintiff’s claim is for $46,921.44, being what it says is due to it pursuant to the terms of the contract. For their part, the defendants counterclaim the sum of $2,620 being for what they say is due to them pursuant to the terms of the contract.
The issues arising for determination between the parties will be determined by findings as to the terms of the contract. It is unnecessary to make findings as to all the terms of the contract. It is sufficient to make findings about only those terms which are necessary to decide the issues between the parties.
Over the years, the motel has been operated by various people pursuant to an agreement with the plaintiff. The plaintiff’s affairs, so far as they relate to the motel, have been conducted at all relevant times by Anthony Honner and his wife, Sue. Mr Honner seems to have been the principal decision maker so far as the motel is concerned, with Mrs Honner attending to more of the clerical matters associated with it.
In May 1995, the plaintiff inserted a notice in “The Advertiser” seeking “(a) couple with marketing experience in Tourism” to manage the motel. The defendants saw the advertisement and were interested. At the time, they were living in the Barossa Valley and were in secure employment. They were interested in changing their work and lifestyle. Accordingly, they made contact with Mr Honner and negotiations were entered into.
Various meetings were held between the defendants and Mr and Mrs Honner. The stage was reached where the defendants were about to enter into an agreement with the plaintiff to operate the motel, but, in the end, they decided against it. I will say more about that in a moment.
In September 1996, Mr Honner contacted the defendants to see if they would be interested in operating the motel. The defendants were interested and, thereafter, various discussions took place. Eventually, on 1 December 1996, the defendants commenced to operate the motel. They moved in shortly before that date. The defendants operated the motel until 30 November 1996; vacating the premises in about the middle of November.
The facts I have just recited are not really in dispute. As I have indicated, the real dispute between the parties goes to the terms of the contract entered into by them, and it is to that which I now turn.
At the outset, it is necessary that I make some findings about credibility, because, although there is a significant amount of agreement as to the sequence of relevant events, there is conflict in the evidence on significant matters as to the nature of the contract entered into; conflicts which can only be resolved by findings based on credibility.
Mr and Mrs Honner and the defendants all gave evidence. Mr Honner and Mrs Linke gave most of the relevant evidence for the respective positions of the parties. Mrs Honner’s evidence was not so significant on important matters and the same can be said for the evidence of Mr Linke. In a general sense, I prefer the evidence of Mr and Mrs Linke to that of Mr and Mrs Honner. I particularly prefer the evidence of Mrs Linke to that of Mr Honner. She gave her evidence in a direct, forthright way and I have no doubt she was doing her best to give an accurate account of matters as she recalled them. I was not impressed by Mr Honner as a witness. He tended to be evasive, tailored his answers to meet the issues in the case as he understood them and tended to argue the plaintiff’s case from the witness box. I have no hesitation in preferring the evidence of Mrs Linke to that of Mr Honner on all matters where there is a conflict between them. Her evidence is a reliable basis for findings of fact. Similarly, Mr Linke struck me as a patently honest witness. He also did his best to give an accurate account of things. Mrs Honner’s evidence on relevant matters was not the product of as much controversy as that of her husband and, by and large, I thought she did her best to recall accurately relevant events. I have reached these conclusions on credibility against the background of the evidence as a whole, including those matters about which there is really no dispute. I proceed to make further findings of fact.
Mr Honner spoke to Mrs Linke on 19 September 1996 about the possibility of the defendants operating the motel. He was keen to secure them as operators. He said as much and asked Mrs Linke what he would need to do to get her and her husband to do it. Mrs Linke told him that they were not interested in running it on the basis proposed the previous year.
In 1995, Mr Honner had in mind, and put to the defendants, that they would enter into an agreement with the plaintiff in the form of what he called the standard motel agreement (“the standard motel agreement”). This agreement was in the following form:

“MOTEL AGREEMENT
This Share Motel Agreement in respect of Stansbury Holiday Motel between James Honner Nominees Pty. Ltd., the owner, and  the share operators of the Motel, serves to outline the conditions to be honoured by both parties.
The arrangement shall be terminated if the total proceeds from any on year falls below the equivalent dollar value of 60% occupancy, having allowed for normal CPI annual increases in tariff.
All decisions on tariff, capital expenditure and replacements over $1000 in value to be by mutual agreement.
Insurance and Public Risk Policies will be taken our in the name of the owner and the cost reimbursed by the operator. The operator will also take out an insurance policy covering such areas as Public Risk, Loss of Income to themselves and the owner, Worker’s Compensation and Self-Employed Sick and Accident. The operator expressly states that it is not an employee or servant of the owner and hereby indemnifies the owner in respect of any action, in respect of employment, taken by the operator.
The owner shall receive 45% of the gross occupancy proceeds to cover its investment in the Motel and rental on the house. This shall be calculated and paid at the end of each month. An appropriate monthly statement, as well as the daily chart with all details, shall be furnished showing all incomings and outgoings as a clear record to the owner’s satisfaction. The balance shall be apportioned in the following manner:-
......... 1.     25% of gross occupancy to the operators out of which Wages, Group Tax, Workcover and other costs incidental to the employees shall be taken
2.20% towards all running costs, including Council Rates, normal insurance, ETSA., Gas, E&WS., telephone, painting, maintenance, pool, etc.; not less than one-quarter of this amount to be spent annually on replacements. $1000 for car maintenance to come out of the 20% running costs.
......... 3.     10% of the 60% occupancy to be spent on new items in each year. This can include such things as steps to the beach, pop-up sprinklers but not replacements which are covered above. Any surplus arising at the end of each year due to a higher occupancy rate to be retained by the operator.

All income and outgoings in respect of the provision of meals and any kitchen replacements and expansion to be a separate account and the responsibility of the operator. Replacements and expansion equipment to be vested in the Motel Inventory.
The owner shall not sell or offer for lease the Motel to any other party without first offering the same to the operator on the same terms and conditions as those to be offered to any other party. The operator to be given reasonable time to consider the purchase of lease of the Motel.
When the share operator vacates the Motel, the Inventory of the Motel contents must match the Inventory signed at the time of this Agreement, with the addition of any new items purchased in accordance with 3. above; the operator to compensate the owner for items missing at their current replacement value.
The owner, in no way, takes any responsibility in respect of the taxation liabilities that may arise to the operator as a consequence of this Agreement or any conduct arising from the carrying our of this Agreement.”

The substantial reason that the defendants had not entered into an agreement in the above form in 1995 was that, although the agreement talked in terms of percentages, the defendants, despite their requests, were not given any figures by Mr or Mrs Honner on which they could make a judgment as to the meaning of the percentages; particularly as to what they would be likely to make by way of income. Mr Honner refused to make this information available, saying it was confidential to the previous operators concerned. He did suggest, however, that the defendants should speak to the current operator and they did so. The information they got from the current operator did not make the proposition look attractive. Mr Honner kept saying to them that, if they could achieve an occupancy rate of 60%, they would all do well. It was the lack of knowledge about the figures which, naturally enough, eventually led to the defendants deciding not to enter into an agreement in the form proposed. I accept that Mrs Linke was keen at all times to enter into the agreement and that, in the end, it was Mr Linke who decided that they should not enter into any agreement in the absence of relevant statistical information about how the motel had been operating.
When Mrs Linke spoke to Mr Honner on 19 September 1996, she told him that she and her husband would not be interested in entering into an agreement in the form of the standard motel agreement. On 19 September 1996, on behalf of herself and her husband, and after discussion with him, Mrs Linke wrote to Mr and Mrs Honner setting out the basis on which they would be prepared to enter into an agreement to operate the motel. The letter was in the following terms:
“As per our discussion earlier today, the following details are to be included in our agreement.
1.     Assured income of $34,000 paid weekly.
2.     Residence at no cost.
3.     All power, phone, rates etc to be paid from business.
4.     $1,000 per 1% increase over 40% occupancy to be paid at the end of the first 12 month period.
5.     Assurance of sufficient funds made available for hire of staff for busy times and for Managers to have annual leave and other recreation time off.
6.     The agreement and remunneration to be renegotiated at the end of the first 12 months.
Also as discussed, we would not be available until the beginning of December. We would need to be moving in to the residence 30th Nov - 1st Dec. I look forward to hearing from you soon.”
The defendants were keen to ensure that any contract entered into whereby they were to operate the motel contained a provision which provided them with a guaranteed income of $34,000. The letter makes this clear and it also was made clear on the occasions thereafter when the terms of the proposed contract were discussed. Mrs Linke and Mr Honner had a conversation within a day or two of the letter of 19 September 1996, and Mr Honner agreed that such a term was to be included.
After the letter of 19 September 1996, various conversations took place between Mr and Mrs Honner and the defendants, including an occasion when the defendants visited the motel.
On 30 September 1996, Mrs Honner faxed to the defendants a letter in the following terms:
“Following is the Motel agreement which does not include your names as they would need to be full Christian names for the formal documents. Could you please add the names? Please post back one copy & retain one.
Our computer has “crashed” and while waiting for repair I am unable to reprint the agreement as I would like. In the interim, we have added your conditions which all four of us can sign. We should each sign each page and initial any changes. We will print the agreement in the near future if everyone is happy.
As you have mentioned annual leave over the phone, to be two to three weeks and bits and pieces here and there, our belief is that when you have settled in to Stansbury you will find suitable people capable of managing the Motel in your absence. This would be covered in the wages area of the agreement.
The agreement is the one in current use with the deletion of the holiday bookings area and the exception that James Honner Nominees will be financially responsible for provision of the cost of ingredients which should be approximately 1/3 of the charge for the meal. The income from meals would be credited to James Honner Nominees but transferred to you to fulfil the guarantee of $34,000 per annum. If there is any shortfall, we are prepared to make up the difference. Any excess above the guarantee can be used at the end of the year for replacements you may require in the kitchen.”
The common seal of the plaintiff was affixed to the letter and Mr and Mrs Honner had put their signatures adjacent to it. A copy of the standard motel agreement accompanied the letter. The common seal of the plaintiff was affixed to that document also and, as with the letter, Mr and Mrs Honner had signed adjacent to it. Also included with the letter was a copy of that part of the defendants letter of 19 September 1996 containing the six points. The common seal of the plaintiff was affixed to that document also and Mr and Mrs Honner had signed adjacent to it.
The defendants, thinking that the plaintiff had agreed to the six points contained in their letter of 19 September 1996, signed the copy of the standard motel agreement and that part of the letter of 19 September 1996 containing the six points and sent them, along with the letter of 30 September 1996, to their accountant, Barry Swan.
Mr Swan was concerned about the contents of the documents and, after tendering certain advice to the defendants, retained possession of the documents and wrote to Mr and Mrs Honner in the following terms on 15 October 1996:

“Re: Jeff & Bronny Linke
Stansbury Holiday Motel
Anthony and I have suggested to Jeff and Bronny that it would be ideal to see the final agreement after the various changes to:-
- Delete the 60% occupancy
- Provide for $34000 min. net in yr 1.
- Provide for standard agreement from Yr 2 - Yr4
- Provide for 5% + increase in occupancy per year,

rather than be signing a much amended and initialled original agreement. Could you please fax a copy of the “finalised” proposed agreement to my office.
Clearly Jeff & Bronny are very keen to finalise arrangements and my office is currently drafting Partnership Applications (tax file No. etc) for them.
I am ‘in and out’ of my office this week but will contact you within the next day or so.
I propose to visit the Motel in late November prior to the 1st December start date to help Jeff & Bronny with accounting requirements.
We have a place at North Beach Wallaroo and so have an appreciation of the Peninsular.”

I mention that, on 14 October 1996, Mr and Mrs Honner forwarded to the defendants a copy of their letter of 30 September 1996 with a post script added and signed by them. The post script was in the following terms:-
“P.S. While the traditional agreement is the core to the success of the Motel for both parties, we can accommodate your concerns by accepting a 5% improvement in occupancy per year coupled with CPI room rate rises over a four year period.”
On 24 October 1996, Mr and Mrs Honner forwarded to the defendants an agreement to which the common seal of the plaintiff was affixed and which they had signed. The document was in the following form:

“MOTEL AGREEMENT
This Share Motel Agreement in respect of Stansbury Holiday Motel between James Honner Nominees Pty. Ltd., the owner, and Jeffrey Brian and Bronwyn Edna Linke, the share operators of the Motel, serves to outline the conditions to be honoured by both parties.
The arrangement shall be terminated if the total proceeds from any one year falls below the equivalent dollar value of 60% occupancy, having allowed for normal CPI annual increases in tariff.
All decisions on tariff, capital expenditure and replacements over $1000 in value to be by mutual agreement.
Insurance and Public Risk Policies will be taken out in the name of the owner and the cost reimbursed by the operator. The operator will also take out an insurance policy covering such areas as Public Risk, Loss of Income to themselves and the owner, Worker’s Compensation and Self-Employed Sickness and Accident. The operator expressly states that it is not an employee or servant of the owner and hereby indemnifies the owner in respect of any action, in respect of employment, taken by the operator.
The owner shall receive 45% of the gross occupancy proceeds to cover its investment in the Motel and rental on the house. This shall be calculated and paid at the end of each month. An appropriate monthly statement, as well as the daily chart with all details, shall be furnished showing all incomings and outgoings as a clear record to the owner’s satisfaction. The balance shall be apportioned in the following manner:-
......... 1. 25% of gross occupancy to the operators out of which Wages, Group Tax, Workcover and other costs incidental to the employees shall be taken
2.20% towards all running costs, including Council Rates, normal insurance, ETSA., Gas, E&WS., telephone, painting, maintenance, pool, etc.; not less than one-quarter of this amount to be spent annually on replacements. $1000 for car maintenance to come out of the 20% running costs.
......... 3. 10% of the 60% occupancy to be spent on new items in each year. This can include such things as steps to the beach, pop-up sprinklers but not replacements which are covered above. Any surplus arising at the end of each year due to a higher occupancy rate to be retained by the operator.

All income and outgoings in respect of the provision of meals and any kitchen replacements and expansion to be a separate account and the responsibility of the operator. Replacements and expansion equipment to be vested in the Motel Inventory.
The owner shall not sell or offer for lease the Motel to any other party without first offering the same to the operator on the same terms and conditions as those to be offered to any other party. The operator to be given reasonable time to consider the purchase of lease of the Motel.
When the share operator vacates the Motel, the Inventory of the Motel contents must match the Inventory signed at the time of this Agreement, with the addition of any new items purchased in accordance with 3. above; the operator to compensate the owner for items missing at their current replacement value.
The owner, in no way, takes any responsibility in respect of the taxation liabilities that may arise to the operator as a consequence of this Agreement or any conduct arising from the carrying our of this Agreement.
Exceptions to the primary agreement are:
In the first year, the income of $34000 p.a. is guaranteed, paid weekly by the owner if the income from the 25% column and meals income is insufficient.
For each 1% increase in occupancy over 40% occupancy, $1000 to be paid at the end of the first 12 months.
In bringing the occupancy of the Motel from 40% to 60%, the owners will not invoke the termination arrangement at 60% if the Motel is improving in occupancy at the rate of 5% per annum for 4 years.”

The defendants did not sign the document. They considered it did not accurately record what they had agreed to; and Mrs Linke told Mr Honner as much when she spoke to him on the telephone shortly after receiving it.
On 29 November 1996, a meeting took place at the motel between the defendants and Mr and Mrs Honner. Mr Swan was also there. Discussions took place over a lengthy period about a number of things. Mr Swan had prepared a cash book for use by the defendants. This was to be, and it was used as, the financial record of the motel during the time the defendants operated it.

The defendants agreed to supply the plaintiff with a monthly statement as to the state of the business. The computer at the motel had been programmed to provide such a statement in a form which suited Mr Honner and which accorded with the percentage amounts contained in the standard motel agreement. Mrs Linke entered information from the cash book into the computer each month for the purpose of supplying the monthly statements to the plaintiff, but the cash book, which was maintained by Mr Linke, remained the financial record of the motel; the monthly reports being no more than that.
No formal document setting out the terms of the contract between them was ever signed by the parties. The defendants operated the motel, drew one twelfth of the sum of $34,000 per month, reported to the plaintiff monthly in the form agreed and paid to the plaintiff the difference between the income and the expenses. The defendants did not pay any rent for the accommodation used by them at the motel. There had been no discussion about rental. It is, of course, mentioned in the six points contained in the letter from the defendants to the plaintiff of 19 September1996.
Prior to the defendants commencing to operate the motel, there was an occasion when Mr Honner and Mrs Linke discussed the meals provided in the motel and Mr Honner told her that one of the “lurks” of running the motel was that she and her husband would be able to eat out of the motel. There was no suggestion by Mr Honner or, for that matter, Mrs Honner, that the defendants would have to pay for the food consumed by them; and, during their occupancy of the motel, they did not do so.
There seems to be no real dispute that the total income of the motel during the period the defendants ran it was just over $180,000. It is agreed that the expenses of the business were about $107,000. It is also agreed that the plaintiff received $42,221.16 during this period by way of income from the motel.
The defendants moved out of the motel on 16 November 1996. They arranged for a person to run it to the end of November on their behalf. They did not take any money by way of assured income from the motel after they left.
It is agreed that, during the time they ran the motel, the defendants achieved an occupancy rate of 42.12%.
The plaintiff concedes that the defendants were to receive a guaranteed, or assured, remuneration of $34,000 for the period they operated the motel; and there is no dispute that the period of the contract, whatever its terms and conditions, was one year; from 1 December 1996 to 30 November 1997. Effectively, apart from the money retained by the defendants against the sum of $34,000, the plaintiff received the income from the motel less the expenses incurred in the making of it.
The plaintiff’s claim against the defendants is substantially based on the assumption that the terms contained in the standard motel agreement became terms of the contract between the plaintiff and the defendants. There is no need for me to set out the way in which the plaintiff has calculated it’s claim; it being sufficient to say that it is based on the terms of the standard motel agreement. On the facts as I have found them, I am not satisfied that the terms contained in the standard motel agreement became part of the contract between the parties; and, to put it bluntly, that is really the end of the plaintiff’s claim.
The defendants made it clear to the plaintiff at the outset, and from time to time thereafter, that they would not agree to entering into a contract which contained such terms; rather, the basis of the contract was to be the six points set out in their letter of 19 September 1996. I have no trouble in accepting that the plaintiff was keen to have the terms of the standard motel agreement included as terms of the contract between it and the defendants; but the defendants resisted it’s attempts to do so and made their position perfectly clear to the plaintiff. It is true that the defendants supplied the monthly statements to the plaintiff in a form which coincided with the terms contained in the plaintiff’s standard motel agreement, but, as I have indicated, that was only done by them to meet a request from the plaintiff and does not in any way indicate that those terms were part of the contract entered into between the parties.
The plaintiff alleges that it was part of the contract between the parties that it was to receive the income from the provision of meals at the motel, going on to claim that the defendants, by eating out of the motel, thereby reduced the profit from that source and should, therefore, compensate the plaintiff for such loss. There is sense in which it was part of the contract that the plaintiff would receive the income from the provision of meals; but not in the sense proposed by the plaintiff.
I am not satisfied that there was any particular term of the contract between the parties relating to meals, save that I am satisfied that it was part of the contract that the defendants were permitted to eat out of the motel at no cost to them. The profit from the provision of meals was, in fact, paid to the plaintiff; as was all the profit from the operation of the motel save for the amount retained by the defendants by way of their guaranteed income. In that context, I am satisfied that it was an implied term of the contract between the parties that the profit from the operation of the motel would be paid to the plaintiff after the deduction of the guaranteed income to the defendants; and the defendants complied with that term of the contract.
The plaintiff alleges that the defendants were profligate when it came to the payment of wages to third parties for work done in the motel; saying that the defendants did not do sufficient work themselves. I am not satisfied, on the evidence, that such was the case. Mr Honner expressed a view as to the level of outside labour which would be required for the cleaning of rooms, saying it was more than the amount paid for such labour by the defendants. He based his calculations, and the plaintiff’s claim under this head, on the terms of the standard motel agreement; but, as I have already said, I am not satisfied that those terms were part of the contract between the plaintiff and the defendants. I am satisfied, however, that it was an implied term of that contract that the amount expended by the defendants on outside labour would be reasonable. I am not satisfied on the material before me that the amounts so expended were unreasonable. I mention that such an implied term of the contract was not pleaded; the plaintiff confining it’s case on this point in the way I have mentioned.
As part of it’s claim, the plaintiff asks that the defendants pay to it an amount equal to two accounts outstanding from the period during which the defendants operated the motel; one from Boral Engergy and the other from Telstra. Apart from anything else, I think the view I have taken of this matter means that this part of the plaintiff’s claim must fail: such amounts were to be paid out of the business subject to the defendants receiving their guaranteed income. The amount is properly payable by the plaintiffs; but, whatever, it is not payable by the defendants.
The plaintiff claims the sum of $150 for deposits received by the defendants and not accounted by them; $100 from some people called La Rosa and $50 from some people called Baumann. The claim in respect of La Rosa was abandoned and, on the evidence, I am unable to make any findings about the matter of Baumann.
For these reasons, the plaintiffs claim fails and will be dismissed. I turn to a consideration of the counterclaim.
The defendants claim $2,120 for a bonus which, it is said, is due to them pursuant to the contract between the parties for achieving an occupancy rate of 42.12%, being 2.12% over an occupancy rate of 40% and $500 for curtains supplied by the defendants in the residence at the motel. The plaintiff admits liability to pay the sum of $500.
I am satisfied, and find, that it was a term of the contract between the parties that the plaintiff would pay to the defendants the sum of $1000 for each 1% occupancy rate achieved over 40% during the period of the contract: such a term was proposed by the defendant in their letter of 19 September 1996 and clearly accepted by the plaintiff. There is no dispute, as I have said, that the occupancy rate achieved by the defendants was 42.12%. The plaintiff is critical of the way in which this was achieved, saying, in effect, that the defendants unilaterally lowered the tariff rates in order to do so; alleging that it was a term of the contract that room tariffs would not be altered without it’s consent. The plaintiff relied on a term contained in the standard motel agreement for that purpose. I repeat that I am not satisfied that the standard motel agreement forms part of the contract between the plaintiff and the defendants. I think that is the end of the matter and that the defendants’ claim under this head must succeed; but I mention that I accept the evidence of Mrs Linke that, not only were the tariff rates not altered, but that there was no discussion as to who could fix the rates.
For these reasons, the counterclaim succeeds. There will be a judgment on the counterclaim for the defendants in the sum of $2,500. As I have mentioned, the defendants claim the sum of $2,120 in respect of the bonus, but they are only entitled to $1000 for each 1% over the 40% and not a part of $1000 for a percentage increase of less than 1%.
The claim of the plaintiff will be dismissed. The defendants will have judgment against the plaintiff on the counterclaim for the sum of $2,500.
I will hear counsel as to costs.

[2001] SADC 31

8 March 2001