Leocon Pty Ltd v Angus Clyne Australia Pty Ltd - [2022] SADC 104

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
LEOCON PTY LTD v ANGUS CLYNE AUSTRALIA PTY LTD
[2022] SADC 104
Judgment of his Honour Judge Slattery (ex tempore)
18 August 2022
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - FORMATION OF CONTRACTUAL RELATIONS
The parties entered into a verbal agreement for the merger of their businesses, for the relocation of the joint businesses to new premises and for the sharing of costs. A term of that agreement required that, upon retirement of the sole director of the respondent, the business of the respondent would be transferred to the applicant.
In breach of the agreement, the director of the respondent abandoned the business and then set up in business in competition with the applicant. The respondent failed or refused to pay for business expenses as required under the agreement.
The applicant obtained judgment against the respondent and seeks an assessment of damages based, inter alia, upon the financial statements of the respondent as well as the costs and expenses incurred by it in the relocation of the business and the conduct of the joint business.
Whether in the assessment of damages, it is appropriate to assess the profit made by the respondent and so the damages suffered by the applicant by making adjustments to the deductible expenses claimed by the respondent in the calculation of income according to the position that would have pertained if the contract was fulfilled.
Whether it was appropriate to assess lump sum damages and costs.
Held:
1. In the calculation of damages, it was permissible for the court to assess claimed costs deduction of the respondent by comparison to the position that would have pertained if the contract had been fulfilled.
Orders accordingly.
2. It was appropriate and within the discretion of the court to assess costs on a lump sum basis.
Orders accordingly.
Hadley v Baxendale [1854] 156 ER 145, discussed.
Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; 174 CLR 64, considered.

LEOCON PTY LTD v ANGUS CLYNE AUSTRALIA PTY LTD
[2022] SADC 104

On 4 June 2021 the applicant, Leocon Pty Ltd (Leocon), filed a claim against Angus Clyne Australia Pty Ltd (Angus Clyne), in this Court seeking damages for breach of contract. Angus Clyne did not defend the claim.
Leocon applied for and obtained a default judgment in relation to liability, with damages to be assessed by the Court. On 9 July 2021 the Court awarded judgment in favour of Leocon, with relief to be assessed.
Angus Clyne has not defended the claim, it has also not attended any hearings, or in any other way has it participated in the proceedings.
In December 2021, the Court issued a subpoena to produce documents to the sole director of the respondent. The documents sought to be produced included financial returns and other financial documents of Angus Clyne. Those documents were produced, they are in evidence before me and they have informed the judgment that I have arrived at in the course of these proceedings.
On 23 June 2022 a judge of this Court made an order that this claim by the applicant for the assessment of damages be determined primarily on the papers, with time allocated for short submissions.
I have now received detailed written submissions from Leocon which reads in evidence the affidavit of Mr Leonardo D'Agostino sworn 20 July 2022; that affidavit has been marked as Exhibit A1 in these proceedings.
Following a query raised by me in relation to the claim for damages it became necessary for Mr D'Agostino to give viva voce evidence to clarify one aspect of the damages claimed. The factual matters which are not in dispute in the proceedings are that from April 2018 Angus Clyne and Leocon through their directors, negotiated the terms of an agreement by which each of them would effectively join their businesses together and to share profit and expenses for their businesses. It appears that there was some obvious symmetry between the two businesses.
Although there was an agreed variation in the terms of the parties' initial agreement, ultimately the parties agreed to share occupancy costs and front-end employee costs. Initially, Leocon was responsible for 60 percent of those costs, and Angus Clyne was responsible for 40 percent of those costs. That agreement changed when Leocon became responsible for 64 percent of those costs, and Angus Clyne 36 percent of those costs. This was a further agreed variation of the parties’ bargain.
The parties agreed that they would each operate from a shared location at 87 Unley Road, Parkside. A term of the agreement was that the businesses would operate together until such time as Ms Clyne, the Director of Angus Clyne, would retire and upon her retirement the business of Angus Clyne would be assigned to Leocon.
The agreement between the parties was verbal and the parties initially performed their part of the agreement and in particular, I am satisfied that Leocon performed the terms of the contract. In about December 2018 Angus Clyne agreed to close its business trading as Cutting Edge. This was due to its lack of income and the costs required to keep it going.
The profit-sharing agreement between the parties has not been fulfilled by Angus Clyne, which has not paid to Leocon 50 percent of the net profit generated by it between January 2019 and August 2019. On the initial assessment, 50 percent of that net profit amounted to $16,449.55. Leocon claims 50 percent of the properly adjusted net profits and that issue became the subject to some further evidence that I have received.
Leocon also incurred about $89,191.80 in relocation expenses for the benefit of Angus Clyne. Not only has Angus Clyne not made any contribution to those expenses it has also failed to assign its business to Leocon. I am satisfied that those expenses for relocation were necessarily incurred.
Angus Clyne also failed to make payments for occupancy expenses in accordance with the terms of the contract. It became a term of the parties’ agreement that those costs would be allowed to accumulate for only a short period of time, however by early 2019 Leocon and Angus Clyne both agreed those costs could no longer accumulate.
On 16 January 2019 Leocon issued an invoice No.84725 to Angus Clyne for the amount of $4,657.32. This amount was to be received by Leocon as an entitlement under the profit-sharing agreement between the parties. Leocon planned to allocate this amount towards Angus Clyne's portion of the occupancy expenses.
A further invoice was issued in relation to the profit-sharing agreement (which was paid) however, between April 2018 and August 2019 Angus Clyne made only one payment in relation to occupancy costs. Its unpaid occupancy costs amount to $44,922.02. All the employee costs incurred between April 2018 and July 2019 have been paid.
Ms Clyne informed Leocon in August 2019 that she was ready to retire from the business. Consistent with the parties’ initial agreement, Ms Clyne, as a director of Angus Clyne, agreed to assign to Leocon the business of Angus Clyne on 1 September 2019. All the requirements stipulated by Angus Clyne in relation to this assignment were complied with by Leocon. For example, it was agreed that Leocon would upgrade its existing software to incorporate the Angus Clyne software and customer base; that Leocon would be responsible for advertising once the business had merged. In accordance with that agreement Leocon incurred $2,100 in expenses for the upgrading of their software for the assignment of the business. It was also agreed between Leocon and Angus Clyne that Angus Clyne would complete all its existing work on/before the assignment date.
By August 2019 it was realised that Ms Clyne was not actively participating in the work of the business and was frequently absent. For reasons of which have never been explained, Ms Clyne also did not assign the business of Angus Clyne to Leocon on 1 September 2020 as had been agreed; that assignment has never taken place.
From July 2019 Ms Clyne has not returned to the shared business premises from which the businesses of Angus Clyne and Leocon were conducted. It is apparent on the evidence that Angus Clyne no longer operates from that shared location. However, Leocon has, by virtue of that occupation, continued to operate from that shared location, notwithstanding that Angus Clyne did not complete all of its existing work for the customers before the assigned date. As a result, it became necessary for Leocon to complete all of the existing work for Angus Clyne, however all of the payments generated from those further orders completed by Leocon were paid by the customers to Angus Clyne. Invoices were then rendered by Leocon to Angus Clyne in relation to work done. The total of those invoices was $11,546.89; those amounts have never been paid.
The evidence before me in the affidavit of Mr D'Agostino, Exhibit A1, satisfies me that from about September 2019 Angus Clyne began operating from an alternative location in competition with Leocon. It appears that Ms Clyne has not retired from the business at all. I am satisfied of that fact because the evidence before me satisfies me that in about September 2019 a customer, Centennial Park, contacted Leocon and requested all work in progress that had been contracted to be done by Leocon now be transferred back to Angus Clyne. Leocon had commenced providing services for Centennial Park in 2019. Centennial Park had previously been a customer of Angus Clyne. The work for Centennial Park was commenced to be done by Leocon based upon a purchase order was received on 9 September 2019 from Centennial Park directed to Leocon. This was the order that Centennial Park were now directing to be done by Angus Clyne.
There were then a number of email exchanges of 17 September 2019 and 20 September 2019 which are Exhibits LD33 and LD34 to Exhibit A1, the affidavit of Mr D'Agostino. Following those emails and in September 2019, Centennial Park contacted Leocon and requested that all work in progress be transferred back to Angus Clyne. Since that time Centennial Park have not engaged Leocon to perform any further work.
In its claim for damages Leocon identifies separate heads of damage, namely; claims for unpaid profit-sharing; relocation costs; occupancy costs; merger expenses; and other losses and unpaid profits. Leocon contends and I accept that those heads of damage could be broadly identified as falling into one of two categories. The first being out of pocket expenses incurred by Leocon and the second, future losses being profits that Leocon would have received from the respondent's business. Leocon relies upon the well- established principles set out in the decision in Hadley v Baxendale.[1]
[1] [1854] 156 ER 145.
In the assessment of damages for a breach of contract Leocon is entitled to receive such damages as may fairly and reasonably be considered as arising naturally according to the usual course of things from the breach, or alternatively, and this is the second limb in the rule in Hadley v Baxendale, as may reasonably be supposed to have been in contemplation of both parties at the time they made the contract as the probable result of the breach of it. The rule in Hadley v Baxendale forms part of the law of Australia and it is well understood. In any event, it is a common sense rule and it requires the court to bring notions of commercial reality to the assessment of damages.
I am satisfied that out‑of‑pocket costs that have been incurred in the context of the agreement between the parties which has been breached are properly to be treated as reliance damages and will form part of the damages claim of Leocon. So much is apparent from the decision of the High Court of Australia in Commonwealth v Amann Aviation Pty Ltd,[2] especially at [26].
[2] [1991] HCA 54; 174 CLR 64.
I am satisfied that Leocon is entitled first to be restored to the position it would have been in but for the breach of contract. It has incurred costs which are described as reliance damages and those costs have been incurred in the performance of the contract. I consider those costs may all be described as reasonable expenditures incurred in reliance upon the defendant's promises.
I earlier indicated there has been a default judgment in this matter, that this is an assessment of damages and so no contrary position has been put by Angus Clyne in relation to the assessment of damages. The evidence before me from Mr D'Agostino satisfies me that it was reasonable for Leocon to incur expenses under the terms of the parties’ contract and in particular in reliance upon the promise of Angus Clyne through Ms Clyne, that after a period of time she would assign the business of Angus Clyne to Leocon. There is no challenge to the reasonableness of the expenses that have been incurred. I am satisfied that those expenses have been incurred and they are reasonable.
Claims are also made for unpaid profits. Leocon contends that not only has Angus Clyne breached the contract between the parties by failing to assign its business to Leocon on 1 September 2019 or on any other date, but it has continued to trade in competition with Leocon until at least June 2021.
Earlier in these reasons, I identified that, following the delivery of a subpoena authorised by this court, Angus Clyne delivered up profit and loss statements for the years ended 30 June 2020 and 30 June 2021. For the purposes of this discussion, it is only necessary to refer to the 2021 return, because, in the usual course, it shows the results for the previous year, 2020. That document commences at page 258 of the affidavit of Mr D'Agostino, Exhibit A1 in the evidence before me, and comprises Exhibit LD30 to that affidavit.
I am satisfied from the material within the affidavit that, in breach of the contract between the parties, Angus Clyne and Ms Clyne failed to fulfil the terms of the contract, by failing to comply with the contractual obligation of the assignment of the business of Angus Clyne from the company to Leocon. No explanation has ever been given for that fundamental failure by Ms Clyne and Angus Clyne. I am also satisfied that, at a minimum, in the period until June 2021, Angus Clyne competed with the business of Leocon. This was a further breach of contract, and as a result, further losses have been incurred by Leocon. This was a further fundamental failure of Ms Clyne and Angus Clyne to comply with the terms of the contract.
The failure by Ms Clyne to assign the business of Angus Clyne to Leocon is a fundamental breach of contract. The business of Angus Clyne continued to be conducted, and as a result, under the terms of the contract, the profits generated by Angus Clyne in the conduct of its business should have been shared with Leocon.
In the 2020 financial year, Angus Clyne reported a profit before income tax of $24,208. In the 2021 year, that same company reported a profit before income tax of $18,240. That company has not, at a minimum, accounted to Leocon for a portion of that profit.
I refer now to the document at page 259 of the Exhibit A1. I raised with counsel that, having regard to the expenses that were there reported as having been incurred by Angus Clyne and which are accounted for as business expenses, there was a double up of expenses that would not otherwise have been incurred if Angus Clyne had performed its part of the contract. Examples are accountancy fees, legal costs, and hire of plant and equipment. I asked for evidence to be led in relation to those claimed costs and whether those costs would otherwise be incurred in the same amount if the contract was fulfilled. I am satisfied from the viva voce evidence of Mr D'Agostino, that the accountancy fees that were incurred by Angus Clyne would have been substantially less, bearing in mind that the business accountancy expenses would have been paid by the joint business and would have been a joint expense. Mr D'Agostino satisfied me that the highest level of accountancy fees that he has ever paid for the business of Leocon was in the amount of $3,000.
Mr D’Agostino gave evidence which I accept, that, for the 2020 year, there should be a reduction in the amount of $5,000, and for the 2021 year, a reduction in the amount of $2,000 for accountancy fees said to have been incurred by Angus Clyne. As for this expense and all of these other expenses, they were incurred ordinarily in the set up of a new Angus Clyne business and so would be initially higher than may be the case at say, years three or four. They are thus artificially high and must be adjusted back to the costs that would have been incurred if the contract was fulfilled by Angus Clyne. In relation to bank charges, Mr D'Agostino informed me that bank charges were not incurred, and therefore there should be a deduction of $1,700 for the 2021 year, and $2,000 for the 2020 year. Similarly, he gave evidence, which I accept, that computer software maintenance for the 2021 year should be reduced to $1,500, and for the 2020 year, should be $2,000.
Mr D'Agostino informed me that none of the work was contracted out as it was all done in the business of Leocon, and therefore there should be an exclusion of the sum of $800 for the 2021 year, and $1,000 for the 2020 year. Mr D'Agostino gave evidence, and I accept, that there was no plant and equipment hired, and therefore there should be a reduction of expenses of $700 for the 2021 year, and $2,000 for the 2020 year, on the basis that all of the plant and equipment necessary for the conduct of the two businesses was available. He also gave evidence, which I accept, that due to the financial arrangements made by Leocon, it was not necessary to incur an interest expense, that no interest was paid and therefore any interest paid to Westpac was interest over and above that which was necessary for the purposes of the conduct of the business pursuant to the agreement between the parties. There should therefore be an allowance of $1,700 made in relation to the 2021 year and $4,000 made for the 2020 year.
Legal costs are claimed as an expense. If the contract had been performed there would be no necessity for legal costs to be incurred and there should be an allowance of $5,000 for the 2021 year and $2,800 for the 2020 year.
Mr D'Agostino then gave evidence in relation to repairs and maintenance. He said that a figure of $5,455 as claimed in the 2021 year was extraordinarily high. His evidence was that in the usual course something like $300 might be paid for repairs and maintenance. He gave evidence which I accept that the appropriate allowance would be in this instance in the amount of $455, and therefore an allowance of $5,000 in respect of those costs needs to be made.
Mr D'Agostino gave evidence and I accept, that there would be no storage fees paid or payable because all storage was available on the premises that was occupied and would have been available in the event that the contract had been fulfilled. It is therefore necessary to make an adjustment of $1,400 for each of the 2021 and 2020 years.
The telephone expenses were also unnecessarily incurred because the provider of telephone services for the joint business was on a fixed price contract and there would be no need for further telephone expenses to be incurred. An allowance of $1,500 should be made for the 2021 year and an allowance of $1,000 should be made for the 2020 year.
The total reduction of expenses for the 2020 year is in the amount of $21,300 and the total reduction in expenses for the 2020 year was in the amount of $21,200. Therefore, both of those amounts, respectively for each year, may be added back to the profit before income tax. The total adjustment is $42,500.

I am therefore satisfied that the losses sustained by Leocon as a result of the breach of contract of Angus Clyne was in the amount of $161,386. I am also satisfied that Leocon suffered these losses as a result of the breach of contract and by virtue of the failure by Angus Clyne to continue within the agreement and separately to have conducted a business after September 2019 in competition with the business of Leocon. This amount for the accounting for profit should not be divided in half because Ms Clyne announced that she would retire from the business in September 2019 and so there was no obligation to apportion, notionally or otherwise, 50% of this adjustment to Ms Clyne.
I am satisfied that these losses, properly adjusted, are in the amount of $84,948.
Upon the total of the damages award I allow interest of $23,800 being at a rate of 5% from 1 September 2019.
I turn to costs and disbursements. I may, within the exercise of my discretion, fix an order for costs in a lump sum. I am satisfied that there have been disbursements of $1,200 in relation to the commencement of these proceedings. I have received submissions from Mr Campbell in relation to the total costs incurred. It is within my discretion to fix a lump sum for costs and I have received submissions on that basis. I can see no reason why an assessment of costs should await the decision of the Court with all of its attendant expenses and delay. I am satisfied that a proper allowance on a party/party basis for costs is in the amount $29,200, inclusive of disbursements. I so order.
I make the following orders:
1.Judgment for out-of-pocket losses in the amount of $161,386.00.
2.Judgment for future losses in the amount of $84,948.00.
3.Pre-judgment interest from 1.9.2019 at a rate of 5 percent per annum in the amount of $23,800.00.
4.Costs and disbursements in the amount of $29,200.00.