Montgomery v My FootDr (Aust) Pty Ltd

[2021] NSWDC 439

District Court

New South Wales

Medium Neutral Citation:

Montgomery & Anor v My FootDr (Aust) Pty Ltd [2021] NSWDC 439

Hearing dates:

11, 12, 13 August 2021

Date of orders:

25 August 2021

Decision date:

25 August 2021

Jurisdiction:

Civil

Before:

Russell SC DCJ

Decision:

(1)   Judgment for the defendant.

(2)   Reserve the question of the costs of the proceedings, including reserved costs.

(3)   Grant leave to the parties to approach my Associate by email within seven days to fix a further date for any argument on costs.

Catchwords:

CONTRACT – dispute over payment of deferred purchase price – agreement to settle that dispute by appointing an independent auditor – whether auditor’s report was final and binding

Category:

Principal judgment

Parties:

Kevin Montgomery (First Plaintiff)
Kemcare Pty Ltd (Second Plaintiff)
My FootDr (Aust) Pty Ltd (Defendant)

Representation:

Counsel:
A Crossland (Plaintiffs)
D Robertson (Defendant)

Solicitors:
Attwood Marshall Lawyers (Plaintiffs)
Colin Biggers & Paisley (Defendant)

File Number(s):

2019/00380408

Judgment

Introduction

1. The plaintiffs carried on a podiatry business. In November 2016 the plaintiffs agreed in writing to sell the business to the defendant. The purchase price was $500,000. The amount of $400,000 was payable on completion of the contract and the remaining $100,000 was a deferred purchase price, to be adjusted and determined in accordance with a formula in the written agreement.

2. In September 2017 a dispute arose between the parties over whether or not the defendant was liable to pay the final instalment of $100,000 to the plaintiffs.

3. By correspondence between the parties in the period May 2018 to November 2018, the parties reached an agreement to resolve their dispute. They jointly engaged an accountant to conduct an audit of a particular document required by their agreement.

4. The plaintiffs submitted that the report produced by that accountant in September 2019 was a final and binding report which obliged the defendant to pay $89,072.24 plus $3,000 for the fees of the accountant, a total of $92,072.24.

5. The defendant submitted that the September 2019 report was not a final and binding report and that no obligation has arisen to make any payment of the deferred purchase price.

6. It is a great shame that the sensible settlement mechanism agreed upon by the plaintiffs did not lead to a resolution of their differences many years ago. All parties have no doubt spent a multiple of the amount in issue upon their legal costs. The parties have incurred the expense of 12 interlocutory hearings, a mediation, a three-day trial and a Court Book (“CB”) which ran to 804 pages.

7. Counsel for the plaintiffs submitted that it was never intended that the parties could argue about the figure payable “till the cows come home”. Unfortunately that is what has happened for the last four years. Two cows branded “Plaintiffs” and “Defendant” have now been herded into the District Court. Only one of those cows will be released to the grassy uplands and the other will be going to the abattoir.

The Business Sale Agreement

8. On 1 November 2016 a written Business Sale Agreement (“BSA”) was executed by the parties (CB 311-366). The plaintiffs sold their podiatry business to the defendant. By cl 4.1 of the BSA the defendant was required to pay the “Purchase Price” at “Completion”. The BSA provided that the total purchase price was $500,000. The first $400,000 was a cash component to be paid upon completion. The balance of $100,000 was known under the BSA as a “Deferred Purchase Price”.

9. By cl 4.3 of the BSA the defendant had to deliver to the plaintiffs a document known as a “Deferred Purchase Price Period Balance Sheet” (“DPPP Balance Sheet”). Based upon this document a “Clawback Amount” was to be determined in accordance with a formula set out in cl 4.3(1)(iii) of the BSA. If the Clawback Amount was negative, then there was no adjustment to the Deferred Purchase Price. If the Clawback Amount was positive, then the Deferred Purchase Price would be reduced by the Clawback Amount.

10. Clause 4.3 contained a mechanism for the plaintiffs to object to the amount put forward by the defendant in the DPPP Balance Sheet. The plaintiffs had to set out details of each matter in dispute. If the parties could not agree, then cl 4.3(e) provided a mechanism for the defendant to have its DPPP Balance Sheet audited.

Dispute about the Clawback Amount

11. The parties did fall into dispute about the appropriate Clawback Amount.

12. On 19 July 2017 the defendant sent the required DPPP Balance Sheet to the plaintiffs (CB 369).

13. Solicitors who then acted for the plaintiffs sent a Dispute Notice dated 30 August 2017 (CB 374-377).

14. The defendant then sent a response dated 7 September 2017 (CB 381-385).

15. The plaintiffs’ solicitors sent a further letter dated 28 September 2017 disputing the points raised by the defendant (CB 391-392).

16. By an email dated 5 October 2017 the defendant proposed to the plaintiffs that it would engage the defendant’s auditor to prepare an audit of the DPPP Balance Sheet (CB 393-394).

17. By an email dated 10 October 2017 the plaintiffs indicated to the defendant that they did not wish to proceed in pursuing the matter (CB 402).

18. By an email the next day 11 October 2017 the solicitors for the plaintiffs informed the defendant that their client had now provided instructions to retract the email dated 10 October 2017 and wished to proceed to resolve the issue (CB 403).

19. By an email dated 28 November 2017 the plaintiffs indicated that they required an independent auditor to finalise the auditing of the dispute, and not the defendant’s auditors (CB 404),

20. By an email dated 28 November 2017 the defendant indicated that it regarded its own auditors as independent (CB 404),

21. By an email dated 30 November 2017 the plaintiffs said that they did not accept that the defendant’s auditors were independent and that there would be a conflict of interest if they audited the DPPP Balance Sheet (CB 405).

Proposal to Resolve the Dispute about the Clawback Amount

22. A letter dated 18 April 2018 from the plaintiffs’ solicitor Mr Charles Lethbridge (CB 406-420) sent to the defendant an unfiled Supreme Court Summons and Commercial List Statement. The letter gave the defendant 14 days to agree to the following:

“1.   That the BSA included the implied terms referred to at paragraph 12 of the ‘Plaintiff’s Contentions” section of the draft Commercial List Statement.

2.   That the parties will appoint an independent expert to prepare each of the statements required by Cl 4.3 of the BSA in a form that meets the requirements of the BSA, including as per the implied terms.

3.   That the parties will have the opportunity to make representations to the independent expert according to a timetable acceptable to the expert.

4.   You will provide our client with documents of the business that it requests and which are reasonably required to make representations to the expert. You will provide the documents with time to allow our client to make representations or [sic] the expert. The expert will adjudicate any dispute about whether the documents are reasonably required.

5.   The parties will be jointly liable for the expert’s costs and will pay half each.

6.   If the parties cannot agree to an independent expert within 14 days of agreeing to the above terms, they will approach the Institute of Public Accountants and ask that it appoint one or recommend one, and the parties will accept that recommendation.”

23. The letter concluded by saying that such a process would be far less costly than approaching the Supreme Court.

24. By an email dated 2 May 2018 the defendant disagreed with the scheme which had been suggested to resolve the matter. The email said:

“We are however more than happy for Mr Montgomery to engage a reputable auditor, one which meets the independence requirements for an auditor under the Corporations Act, but this is to be at his own costs [sic]. We will provide all reasonable information which is relevant to the business sold under the BSA, to the appointed auditor. We offer this on the basis that your client accept the outcome of the audit and that the final audited balance sheet resolves this matter.”

(CB 421-422)

25. By letter dated 29 May 2019 the plaintiffs said that they “accepted” the offer set out in the email of 2 May 2018 subject to certain conditions, being:

“1.   That prior to the auditor commencing work, you will produce documents, as requested by us in writing, concerning the work arrangements (during the relevant period) of people said to be employed by MyFootdr in the business that was purchased. Kemcare undertakes to keep any such document confidential except that it may show those documents to its legal representatives and to the auditor.

2.   The parties may make submissions, suggest enquiries and provide documents to the auditor within a time frame set by the auditor.

3.   If the audit results in My Footdr owing money to our client pursuant to the terms of the Business Sale Agreement, My Footdr will reimburse to our client the costs of the audit within 14 days of the audit being completed.”

(CB 423-424)

26. As counsel for the plaintiffs conceded, this was not the acceptance of an offer resulting in the formation of a binding contract. It was simply a step in such negotiations.

27. Mr Donlon of Donlon Consulting was proposed by the plaintiffs as the independent expert to be appointed by the parties.

28. By an email dated 1 June 2018 the defendant requested the details and credentials of Mr Donlon (CB 425).

29. By an email dated 7 June 2018 the plaintiffs advised that Mr Donlon was not a registered auditor under the Corporations Act, but he was an experienced auditor with sufficient expertise and capacity to undertake the task (CB 426).

30. By an email dated 25 June 2018 from Mr Donlon to the plaintiffs’ solicitor Mr Charles Lethbridge (CB 429-430) Mr Donlon provided information regarding his qualifications and independence. This information was passed on to the defendant by Mr Lethbridge.

31. By an email dated 25 June 2018 the defendant indicated that it was “happy with Mr Donlon to undertake the audit”. The defendant noted that its previous offer dated 2 May 2018 was made on the following bases:

“1.   The costs of the audit would be paid by your client.

2.   We will provide all reasonable information which is relevant to the business sold under the BSA, to the appointed auditor.

3.   We offer this on the basis that your client accepts the outcome of the audit and that the final outcome of this audit resolves this matter.”

(CB 446)

32. An email sent at 9.22am on 26 June 2018 by Mr Lethbridge to the defendant (CB 447) drew attention to the conditions in the counter offer made by the plaintiffs on 29 May 2018 (CB 423-424) which were:

“1.   That prior to the auditor commencing work, you will produce documents, as requested by us in writing, concerning the work arrangements (during the relevant period) of people said to be employed by MyFootdr in the business that was purchased. Kemcare undertakes to keep any such document confidential except that it may show those documents to its legal representatives and to the auditor.

2.   The parties may make submissions, suggest enquiries and provide documents to the auditor within a time frame set by the auditor.

3.   If the audit results in My Footdr owing money to our client pursuant to the terms of the Business Sale Agreement, My Footdr will reimburse to our client the costs of the audit within 14 days of the audit being completed.”

33. The email said that unless those conditions were accepted the plaintiffs would go ahead with the proposed Supreme Court litigation.

34. In an email sent at 6.33pm on 26 June 2018 (part of DX 3) the defendant said:

“This is all fine with the exception of the following ‘Provide documents to the auditor within a time frame set by the auditor’. We have a business to run, the information needed could be onerous on us to collect and as such the time frame that the auditor may consider reasonable may not work for us. We propose that the time frame be 15 business days.”

35. Mr Lethbridge sent an email to the defendant dated 28 June 2018 which said:

“Our client is agreeable to your proposed amendment set out in your email below.

We will instruct the auditor accordingly. We trust that moving forward our client will not be required to continuously threaten litigation in circumstances where you are non-responsive to ours or the auditor’s request for documents/information in accordance with the terms of settlement.”

(CB 450)

36. At that point an agreement was reached between the parties to resolve the dispute about the Clawback Amount. I will refer to this agreement reached as the “Settlement Agreement”.

Findings concerning the Settlement Agreement

37. I find that the terms of the Settlement Agreement were:

1. Mr Donlon was appointed as an expert to prepare each of the statements required by cl 4.3 of the BSA. The parties referred to this exercise as an “audit”.

2. The parties would have the opportunity to make submissions, suggest enquiries and provide documents to Mr Donlon.

3. The defendant would provide documents within 15 business days of any request for documents made by Mr Donlon.

4. Both parties would accept the outcome of the final audited balance sheet produced by Mr Donlon.

5. The plaintiffs would pay Mr Donlon’s fees in the first instance.

6. If the audit resulted in the defendant owing money to the plaintiffs, the defendant would reimburse the plaintiffs for the costs of the audit within 14 days of the audit being completed.

Performance of the Settlement Agreement

38. After the formation of the Settlement Agreement on 28 June 2018 the parties engaged in correspondence in relation to information regarding wages (CB 451-454). The parties also engaged in correspondence regarding the settlement of an appropriate letter of instructions to Mr Donlon (CB 455-470).

39. The parties eventually agreed upon the terms of a letter of instructions dated 8 November 2018, which was sent jointly by Mr Lethbridge and Mr Coote on behalf of the defendant to Mr Donlon (CB 473-474).

40. The letter dated 8 November 2018 said:

“The purpose of this letter is to instruct you to conduct an audit of the document which is enclosed with this letter behind Tab 1 and which is referred to hereafter as the ‘Deferred Purchase Price Period Balance Sheet’ (‘DPPP Balance Sheet’ for short).”

41. The joint letter of instructions also enclosed a copy of the BSA and set out the parties’ understanding of the mechanism for calculating the Clawback Amount.

42. The letter concluded as follows:

“Acting pursuant to the BSA, the Purchaser served the DPPP Balance Sheet enclosed behind Tab 1. The Vendor disputes it. Since that dispute has arisen, the parties have departed from the BSA to the extent that they have agreed to the following:

1.   The parties will jointly engage you to undertake the audit of the DPPP Balance Sheet;

2.   The Vendor will (in the first instance at least) pay your fees for the audit;

3.   The parties can make submissions and provide documents, suggest enquiries and also provide documents to you within 15 days of any request for documents made by you.”

43. The document behind Tab 1 was the DPPP Balance Sheet produced by the defendant and disputed by the plaintiffs (CB 475-476). While the BSA described this document as a balance sheet, and so did the parties, it is headed “Profit & Loss Statement Tweed Heads”. The document set out details of the revenue, cost of sales and gross profit. The document then set out details of other expenses and concludes that the appropriate Clawback Amount is $100,000. If that calculation by the defendant of the Clawback Amount was correct, then nothing was payable by the defendant to the plaintiffs as the Deferred Purchase Price.

44. Mr Donlon wrote to Mr Lethbridge by a letter dated 19 December 2018 (CB 539-540). He set out information which he required to start work on the audit.

45. Mr Lethbridge sent an email dated 21 December 2018 (CB 541) to the defendant enclosing the letter from Mr Donlon dated 19 December 2018. That email requested the defendant to provide the information and documentation sought by Mr Donlon.

46. The defendant sent an email dated 9 January 2019 (CB 544-567) to Mr Lethbridge enclosing financial material.

47. Mr Lethbridge sent the material provided by the defendant to Mr Donlon by an email dated 14 January 2019 (CB 568).

48. Mr Lethbridge sent the plaintiffs’ response to the material provided by the defendant, by an email to Mr Donlon dated 16 January 2019 (CB 612).

49. Mr Donlon produced a report dated 20 May 2019 (CB 616-635). Mr Donlon calculated the Clawback Amount for the purposes of cl 4.3(a)(iii) of the BSA to be $180,262.04. In practical terms this meant that there was no money payable by the defendant for the Deferred Purchase Price (PX 4, par 20).

50. A copy of the report dated 20 May 2019 was sent by Mr Donlon to Mr Lethbridge. Mr Donlon did not send the report to the defendant. Mr Donlon explained (PX 4, par 20) that he was not aware that Mr Coote was the defendant’s nominated representative, so he sent the report to Mr Lethbridge and understood that he would provide it to the defendant. Mr Lethbridge did not send a copy to the defendant.

51. Mr Montgomery sent an email to Mr Donlon at 8.59am on 21 May 2019 (part of DX 1) which said:

“Hi Michael

Thank you for your help with my case. I will take no further action in the matter. Could you please invoice me at your convenience.”

52. Later on 21 May 2019 Mr Donlon sent a copy of the email from Mr Montgomery to Mr Lethbridge (part of DX 1).

53. By an email sent at 2.26pm on 21 May 2019 (part of DX 1) Mr Lethbridge said to Mr Donlon:

“Hi Michael

He sent me a similar email prior to my talking to him on the basis that he read your report and thought it was not a good result for him. I have informed him that your report is good for him. We will be in touch.”

54. As counsel for the defendant put it in final submissions, it is difficult to understand why Mr Lethbridge thought that the report was good for the plaintiffs, when it resulted in a nil payment by the defendant to the plaintiffs.

55. On 22 May 2019 Mr Lethbridge telephoned Mr Donlon to discuss his report (CB 697). On 24 May 2019 Mr Donlon telephoned Mr Lethbridge to discuss his report (CB 697).

56. On 24 May 2019 Mr Donlon sent an email to Mr Lethbridge (CB 636) which said:

“A couple of quick questions either you may be able to answer or may need a response from your client:

1.   The budget figures used in the comparison statement who supplied those.

2.   In the settlement was there:

a.   a stock value

b.   any adjustment for LSL, HP for those staff that went with the new owner.”

57. Mr Montgomery sent an email at 1.05pm on 27 May 2019 (part of DX 1) to Mr Donlon which said:

“Hi Michael

As previously stated, I thank you for your work whilst you have been having a very hard time.

I am not bitter about the outcome and was always going to be content whatever the result. I can say however, that I do not understand the result at all.

…

Could you explain in the most simple way possible your findings please?

…”

58. On 27 May 2019 at 1.40pm Mr Donlon sent an email to Mr Lethbridge (CB 637) as follows:

“My apologies for not getting the attached to you this morning as promised.

However I needed to read the Agreement in full and my weekend did not go to plan.

It is now complete with a different outcome due to one schedule.”

59. With that email was sent a report dated 27 May 2019 (CB 638-658), which was in similar form to the report dated 20 May 2019. The report contained an opinion (CB 641-642) completely different to that expressed in the earlier report. The report of 27 May 2019 calculated the Clawback Amount as “-$135,285.48”. The report noted that any reduction in the Deferred Purchase Price was to be the lesser of the Deferred Purchase Price or the Clawback Amount or zero if the Clawback Amount was negative. Thus the report came to the conclusion that the amount of reduction in the Deferred Purchase Price was nil. This meant that the defendant would be obliged to pay the full $100,000 of the Deferred Purchase Price.

59. At this point it should be noted that Mr Lethbridge did not send to the defendant copies of the documents referred to in pars 51, 52, 53 and 57 above. Nor were those documents part of the Court Book prepared by Mr Lethbridge. The documents were only obtained by the defendant because they were produced just prior to the commencement of the hearing by Mr Donlon pursuant to a subpoena.

60. Mr Lethbridge sent a letter to the defendant dated 31 May 2019 (CB 659-660) which enclosed Mr Donlon’s revised report dated 27 May 2019. The letter asserted that in accordance with Mr Donlon’s report the Deferred Purchase Price would not be reduced and the defendant must pay the plaintiffs $100,000 plus $3,300 for Mr Donlon’s fees. The letter demanded payment of $103,300 within seven days.

61. The defendant responded by an email dated 31 May 2019 to Mr Lethbridge (CB 661). This email disputed that the auditor should have made a large adjustment to wages. It said:

“As previously note [sic] we were happy to rely on the advice of the auditor if they acted independently, per the requirements of the Corporations Act. However, we believe this report is contrary to this and we suggest you and the auditor re-read the contract, read all emails and adjust the report accordingly.

We will not be making payment in relation to this matter.”

63. By an email dated 4 June 2019 Mr Lethbridge wrote to the defendant (CB 689) stating that if the sum of $103,000 [sic] was not paid within seven days then proceedings would be commenced against the defendant for its breach of the Settlement Agreement and recovery of that sum of money. The email concluded:

“We note in passing that Myfoot Dr [sic] has no defence whatsoever. The agreement between the parties was that the conclusion reached by the auditor would be final and binding.”

64. On 7 June 2019 the defendant sent a long email to Mr Donlon and Mr Lethbridge (CB 692-694). The email set out in detail those matters in the report of Mr Donlon dated 27 May 2019 which the defendant disputed. It provided detailed financial information and reasons in support of the matters in dispute.

65. The email said:

“Please note that we do not see this report as being finalised given the points above. Furthermore we were not provided with a draft report to allow us to provide input or provide additional information that may have been missing. Please note that we are still happy to provide further information if required and also sit with you to discuss the correct scoping of the work as I feel you may not have been given the incorrect scope [sic] to work under.

It would also be good to get an itemised bill showing the work completed in relation to this matter. I’m also interested to understand the interaction you have had with the Seller and his representatives during this process as the interaction with us has been minimal. Given we hold the actual data for the period being audited I would have thought we would have been interacted with you [sic] more than we have.”

66. By an email dated 7 June 2019 Mr Lethbridge wrote to Mr Donlon (CB 695), with a copy to the defendant, as follows:

“Dear Mr Donlon,

Further to Mr Coote’s email, you should not be addressing the matters he raises or otherwise respond to it unless there is a joint direction by the parties.

This is consistent with your joint appointment.”

67. I pause to record that that was not the approach taken when Mr Lethbridge unilaterally communicated with Mr Donlon after the 20 May 2019 report and before the 27 May 2019 report. These communications resulted in a $100,000 turnaround in the end result expressed by Mr Donlon, without the defendant being part of any “joint direction” to address the matters raised with Mr Donlon by Mr Lethbridge.

68. By an email dated 10 June 2019 the defendant wrote to Mr Lethbridge, with a copy to Mr Donlon, (CB 696) and said:

“Thanks Charles

I agree that the joint approach was agreed between both parties. I’m assuming this was also the first time you reviewed the report and that you hadn’t been privy to any other conversions [sic] or draft reports which were not brought to our attention. Can you please confirm my assumption is correct?”

69. By an email dated 11 June 2019 Mr Lethbridge wrote to the defendant, and Mr Donlon (CB 697) as follows:

“Dear Mr Coote and Mr Donlon,

The purpose of this email is to record the process by which Mr Donlon came to provide his report on 27 May 2019 to Mr Coote and myself.

On 20 May 2019 I received by email a copy of a report of the same date from Mr Donlon (attached). I phoned Mr Donlon on 22 May and asked if he could explain the report as I had difficulty understanding it, which he did.

On 24 May 2019 I received a phone call from Mr Donlon – he said he needed to consider issues he had not looked at within the context of his report. Later that day, Mr Donlon sent an email to me with a number of questions from Mr Montgomery which I forwarded to Mr Montgomery (see attached). Mr Montgomery provided the below answers to those questions (below in red). On 27 May 2019 I received from Mr Donlon a report of the same date which was subsequently provided to Mr Coote (attached).

I propose that Mr Donlon send the parties an email confirming the substance of the events and conversations above.”

70. On 13 August 2019 Mr Donlon sent an email to Mr Lethbridge and to the defendant (CB 742-744). An attachment to the email was a two-page list of information required by Mr Donlon. Mr Donlon said:

“If any of the queries are considered confidential and not for disclosure to other parties, please indicate as such, but the information contained may be important in determining any changes to the submitted report.

Points raised by the various parties to the submitted report will be responded to either in changes to the report if needed or with an appropriate explanation once a review of these queries and the information supplied has been done.

…

Should either party be of the opinion that additional information not requested in the list will be of assistance in a review of the Report, do not hesitate providing same [sic].”

71. Mr Montgomery responded to the queries raised by Mr Donlon in an email dated 14 August 2019 (CB 745-748).

72. The defendant responded to the queries raised by Mr Donlon in an email dated 25 August 2019 (CB 749-752).

73. Mr Montgomery provided further information and a reply to the defendant’s response by an email dated 28 August 2019 (CB 753).

74. By an email dated 3 September 2019 Mr Donlon informed Mr Lethbridge as follows:

“Sorry for the delay. The public holiday did not help.

I have now received the responses from each party including the subsequent email from your client and the comments therein. Just need a chance to read the responses and determine if any are applicable such as to effect [sic] the information contained in my report.”

(CB 755)

75. By an email dated 13 September 2019 Mr Donlon wrote to Mr Lethbridge and to the defendant as follows:

“Attached is my reply to the additional extensive information provided by the entities involved in this matter.

Do [sic] to the extent of the information provided, I considered it needed a written response.

Attached to the letter are two schedule [sic] –

1.   disclosing changes to the Average Yearly EBTDA.

2.   amended calculations on the Clawback Amount.”

76. Attached to the email was a letter from Mr Donlon to both parties dated 13 September 2019 (CB 778-783). This is the letter which the plaintiffs submit constituted a final report which obliged the defendant to pay money to the plaintiffs. The defendant submits that this letter is not a final report and that thus any obligation to pay money to the plaintiffs has not been finalised and for that reason no monies are presently due.

Donlon Letter dated 13 September 2019

77. The letter dated 13 September 2019 from Mr Donlon dealt with the following topics:

1. Accounting method.

2. Cost of goods sold.

3. Salary and wages.

4. Annual leave and long service leave.

5. Other expenses.

6. Changes in operations.

7. Conclusion.

78. There are many indications in the letter dated 13 September 2019 that it does not express a final and concluded view by Mr Donlon. Those indications are underlined in the following passages:

1. Under the heading “Cost of Goods Sold” the following is stated:

“It is also noted that in the GL extract, there is a stock adjustment figure of $19,017.62 which increases the stock on hand as at 30^th June 2017.

…

If the amount was not introduced as stock provided from the merger with “Balance Podiatry” or adjusted in the said Statement then applying it to the annualised figures similar to the other adjustments would affect the outcome of profit significantly.

The amount has been treated in this manner unless information is provided to the contrary such as confirmation that:

1.   The adjustments during the year were relevant to the stock of the clinic in review and not due to the merger; and

2.   The end of year adjustment was accounted in the amounts shown for cost of good [sic] or is unrelated to the clinic in review.”

(Emphasis added)

2. Under the heading “Salary and Wages” the following is stated:

“The annualised professional salary as disclosed have [sic] been accepted in full unless there is information provided that:-

The professional salary figures been not been adjusted [sic] to reflect the same level of professional staff as prior to acquisition including the salary to the Seller for the period of his involvement.

Or

The professional salary figures include those of the Seller and the other two Professionals as well as the graduate.

The information supplied in respect of the above could affect the level of leave and superannuation expenses disclosed in the Statement.”

(Emphasis added)

3. Under the heading “Other Expenses” the letter said:

“The representative of the Purchaser was of the opinion certain expenses excluded in the Report should have been included as part of normal trading. His point has been taken into account and certain expenses will be included when and if an Amended Report is prepared. The point overlooked in his comments was that the excluded expense was also excluded from the comparison results. The level at which those expenses are included will be subject to adjustment to reflect the realistic level of cost and the comparison figures will be introduced as disclosed.”

(Emphasis added)

4. Under the heading “Changes in Operations” the letter said:

“The comments provided referred to the merger with ‘Balance Podiatry’. There is no information supplied as to whether that merger affected the situation. The only confirmation needed is that there are no significant expenses or income including but not exclusively [sic] to wages long service leave and holiday pay incorporated in the Profit and Loss Statement provided. (Refer to comments on stock above). This would include carryover expenses from the other party and paid for by the merged entity. A confirmation from the Purchaser on this matter under the current circumstances would be acceptable for the purpose of my report.”

(Emphasis added)

79. Those portions of the letter underlined above suggest that the letter dated 13 September 2019 was not a final and conclusive audit, but rather was a step towards that goal. Clearly Mr Donlon was seeking further information or confirmation of assumptions which he made.

80. The “Conclusion” set out at the end of the letter dated 13 September 2019 is also an indication that the letter was not a final and conclusive audit. The letter said:

“For the purpose of review, we have attached to this letter an extract from the original Report amended to reflect the changes discussed above and the resultant calculation there on [sic]. If an Amended Report is required for the purpose of this matter, it will be prepared containing the calculations as set out in the attachments.

If the parties to this matter wish to discuss or raise points in raised [sic] in the Letter, do not hesitate to discuss the matter with Writer [sic].”

(Emphasis added)

81. Those portions of the Conclusion underlined above also point to Mr Donlon not providing a final and conclusive report. He speaks of “the purpose of review”. He speaks of preparing an Amended Report if that is required. He speaks of further discussion with the parties who should not hesitate to contact him. None of these steps would be appropriate or necessary if the letter dated 13 September 2019 constituted a final and binding report.

82. Mr Donlon gave evidence about the preparation of the letter dated 19 September 2019 in his affidavit sworn on 13 February 2021. The plaintiffs tendered pars 40-46 of this affidavit (part of PX 4). The plaintiffs did not tender par 47, but the defendant did (DX 6). Mr Donlon said in par 47:

“I did not regard my Third Report as being a final report. However, I did not consider it appropriate to prepare a revised report on the unilateral instruction of My FootDr, as I was jointly instructed by the parties.”

83. In an annexure to the letter dated 13 September 2019 (CB 783) Mr Donlon calculated the Clawback Amount as “-$10,927.76”. He then calculated the amount of reduction of the Deferred Purchase Price as $10,927.76.

84. It is on the basis of this last figure that the plaintiffs formulate the quantum of their damages. Deducting $10,927.76 from the Deferred Purchase Price of $100,000 gives an amount payable of $89,072.24. The plaintiffs also claim the $3,000 fee which they paid to Mr Donlon for his work. When added to the amount which the plaintiffs assert is payable under the BSA, the total claim brought by the plaintiffs is $92,072.24. The plaintiffs also claim interest and costs.

Subsequent to the Donlon Letter dated 13 September 2019

85. The defendant sent an email on 13 September 2019 to Mr Donlon with a copy to Mr Lethbridge (CB 784-785). The letter set out in detail the complaint of the defendant in relation to “one major error” in the report, relating to cost of goods sold. This email was a direct response to the request clearly made by Mr Donlon in his letter dated 13 September 2019 for the parties to provide further information if they saw fit.

86. By an email dated 18 September 2019 from Mr Lethbridge to the defendant and Mr Donlon (CB 786) Mr Lethbridge requested Mr Donlon not to respond to the defendant’s email of 13 September 2019.

87. Nothing then happened for almost two months. Mr Lethbridge wrote to the defendant by a letter dated 12 November 2019 (DX 4). The letter referred to Mr Donlon’s letter dated 13 September 2019 and enclosed a draft District Court Statement of Claim seeking a “Deferred Payment” of $100,000 and a further $3,000 for Mr Donlon’s fees. The letter indicated that the plaintiffs wished to reach a compromise settlement of the matter, but if not then the Statement of Claim would be filed.

88. The response was an email dated 13 September 2019 from the defendant to Mr Lethbridge (CB 787). It was noted that the defendant had not seen any updated report after additional information had been provided to Mr Donlon. The letter said:

“Given Mr Donlon’s report was not finalised, and still included a number of errors, this matter is ongoing.

I look forward to hearing from Mr Donlon and seeing an updated draft audit report for review.”

89. Mr Lethbridge responded with an email to the defendant dated 13 November 2019 (CB 788). The email said:

“The purpose by [sic] the parties agreeing that Mr Donlon prepare a report after submissions from the parties (which is what occurred) was to bring finality to the dispute. That has occurred. We take the view that the report delivered by Mr Donlon resolves the dispute and we do not intend to ask him to do any more work.

We do not consider in the circumstances that you have any right to ask him to undertake further work either, nor decide unilaterally that his report is incomplete.”

90. The defendant responded by an email dated 28 November 2019 to Mr Lethbridge, with a copy to Mr Donlon (CB 789). The letter said:

“You have clearly instructed Mr Donlon to do no further work. This was not discussed with us or agreed. I find this behaviour unethical and contrary to the agreement we had in place.”

91. On 26 November 2019 Mr Montgomery sent an email to Mr Donlon (Part of DX 1) which said:

“Hi Michael

Thank you for your help. In finalising the matter, could you send me your invoice and I can pay by EFT immediately. Thanks again.”

92. On 27 November 2019 Mr Donlon sent his invoice to Mr Montgomery by email (part of DX 1).

93. On 28 November 2019 Mr Montgomery sent an email to Mr Donlon confirming that the invoice had been paid (part of DX 1).

94. The documents referred to in pars 90, 91 and 92 above were not in the Court Book and were only obtained by the defendant upon subpoena from Mr Donlon, just before the hearing commenced.

95. On 3 December 2019 the plaintiffs commenced these proceedings against the defendant.

Conclusion

96. The case for the plaintiffs is that the Donlon letter dated 13 September 2019 was a final audit of the DPPP Balance Sheet and thus a binding determination that the Clawback Amount was negative: Amended Statement of Claim pars 10-11.

97. In oral submissions counsel for the plaintiffs said, in relation to the Donlon letter dated 13 September 2019:

“Now, this is where we say the dispute comes to an end. Because that amount is the amount which we say is owing based on a final calculation, and it is binding. And it is the product of the supply of consideration information over a considerable period of time. And it was the product of a process by which both parties were at liberty to say what they wanted.” (Tcpt 57 - 45-49)

98. For reasons set out in pars 78-81 above, I find that the Donlon letter dated 13 September 2019 was not a final audit of the DPPP Balance Sheet. As a consequence there has never been a final and binding determination of the Clawback Amount and the amount payable as the Deferred Purchase Price.

99. There will be a judgment for the defendant on the plaintiffs’ claim.

100. Besides arguing that the Donlon letter dated 13 September 2019 was not a final binding report as required by the Settlement Agreement, the defendant also raised the following defences:

1. The Donlon letter dated 13 September 2019 was not prepared by Mr Donlon acting as an independent expert by reason of the making of, and the contents of, the ex parte communications between the plaintiffs and their solicitor and Mr Donlon: Amended Defence par 12(i)(ii).

2. The plaintiffs breached the terms of the Settlement Agreement by unilaterally instructing Mr Donlon to cease any further work on the audit and by engaging in the ex parte communications with Mr Donlon: Amended Defence par 12(i)(iii).

3. It was an implied term of the Settlement Agreement that the Clawback Amount had to be calculated without material error; the Donlon letter dated 13 September 2019 contained material errors so it was not an audit in accordance with the Settlement Agreement: Amended Defence par 14(b).

101. Because the plaintiff has failed to establish that the Donlon letter dated 13 September 2019 was a final, binding and conclusive audit and because this means that the defendant has successfully defended the proceedings, I do not need to consider these additional defences.

Orders

102. The parties agreed that I should deliver judgment and give both sides the opportunity to address further on the question of costs, including reserved costs.

103. In the current circumstances of the COVID-19 lockdown of Greater Sydney, the parties have very sensibly agreed that this judgment will be delivered by the making of orders in Chambers and the publication of the judgment on the Caselaw website.

104. My orders are:

1. Judgment for the defendant.

2. Reserve the question of the costs of the proceedings, including reserved costs.

3. Grant leave to the parties to approach my Associate by email within seven days to fix a further date for any argument on costs.

**********

Decision last updated: 25 August 2021