Moore Stephens Adelaide Pty Ltd v Wyka Consulting Pty Ltd - [2014] SADC 131

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
MOORE STEPHENS ADELAIDE PTY LTD v WYKA CONSULTING PTY LTD & ANOR
[2014] SADC 131
Judgment of His Honour Judge Barrett
27 June 2014
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS - OTHER MATTERS
The plaintiff purchased the accounting practice from the defendants. The second defendant became part of the plaintiff's practice. Half the consideration was paid at settlement and the other half secured by vendor finance. The parties agreed to a clawback formula dependent upon the second defendant achieving a level of professional fees billed. The plaintiff purchaser was required to serve on the defendants a notice of achieved fees. The defendants dispute the enforceability of the notice served on them by the plaintiff and thus the claimed clawback.
Held: The notice of achieved fees is enforceable. The second defendant is liable to pay to the plaintiff the sum calculated in the notice.
Corporations (South Australia) Act 1990 , referred to.
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, considered.

MOORE STEPHENS ADELAIDE PTY LTD v WYKA CONSULTING PTY LTD & ANOR
[2014] SADC 131

The parties to these proceedings are accountants.
The second defendant sold to the plaintiff his accountancy practice which he operated under the name 2IC Management. The first defendant is the successor company of 2IC Management. Since the proceedings were instituted the first defendant has gone into liquidation. As a consequence the proceedings against the first defendant are automatically stayed under the provisions of the Corporations (South Australia) Act 1990. The plaintiff continues the proceedings against the second defendant. For convenience I will refer to the second defendant’s company as “2IC Management”. That is the name used by the witnesses.
Each party contends the other breached the terms of the Business Sale Agreement (“BSA”) which they executed on 25 October 2011.
Background
In late 2011 the parties were negotiating about the terms of the proposed agreement for the sale and purchase of the second defendant’s accountancy practice. Centrally, for the purpose of these proceedings were the negotiations about the manner in which the consideration was to be paid. Broadly speaking the consideration was going to be the sum equivalent to the second defendant’s annual fees. The second defendant asserted that the annual fees were of the order of $1.4 million. As a result of various adjustments it was agreed that the plaintiff would pay $1.2 million. Mr Gouskos, who was a director of the plaintiff at the time, and who gave evidence on behalf of the plaintiff, said that he conducted the due diligence for the plaintiff at the time of the negotiations. He had reservations about the claimed annual fees of $1.4 million and, as a result, the plaintiff sought to safeguard its interests by proposing, and ultimately agreeing, that the consideration be paid in two ways; half in cash at settlement, and the other half by way of vendor finance. Accordingly, $600,000 was paid at settlement and $600,000 was to be paid to the defendant over a period of time with a clawback agreement.
The clawback agreement is central to the dispute between the parties. The plaintiff says that it complied with the terms of the agreement and the defendant has failed to comply with its terms. The consequence of the clawback agreement is that, not only does the plaintiff not owe any of the balance of the purchase price to the defendant, but the defendant owes the plaintiff money.
The defendant says that the plaintiff has not complied with the terms of the clawback agreement and has wrongly repudiated the contract. The plaintiff repudiated the contract by unilaterally stopping payment of interest and seeking repayment of one month’s interest already paid.
The defendant asserts that the plaintiff owes him the balance of the purchase price and other monies improperly withheld.
Issues in Trial
Which, if any, party breached the BSA?
What are the consequences of any breach of the agreement?
The Clawback
The parties included a clawback mechanism in the BSA[1]. The mechanism sought to adjust the payment of that part of the consideration which was subject to vendor finance. It was agreed that an adjustment might be made at two dates described respectively as the First and the Second Adjustment Date. Those dates were, respectively, the final days of year 2 and year 3 of the Agreement, viz 25 October 2013 and 25 October 2014.
[1] Annexure A to the BSA, Exhibit P1 tab 17.
The adjustment was to be determined by reference to the fees charged by the defendant to clients in the relevant period. More specifically, the adjustment was to be determined by the extent by which the defendant’s fees exceeded or fell short of $1.4 million. If his fees exceeded that sum there was a formula which provided for the plaintiff to pay the defendant more than the agreed consideration. If the fees fell short, $2 would be deducted from the outstanding consideration for each $1 by which the fees fell short of $1.4 million dollars, ie a “2 for 1 clawback”.
Critical to the operation of the clawback mechanism was the determination of the fees rendered by the defendant in the relevant period. The process of determining those fees at the First Adjustment Date (“FAD”), viz 25 October 2013, is the point of dispute between the parties in this case. For the purpose of determining that dispute it will be necessary to construe the relevant terms of the Agreement and to make findings of fact about the relevant acts of the parties.
The Trial
Before turning to the construction of the agreement and the findings of fact, I say something of the evidence lead at trial. Until the addresses of both parties the second defendant was unrepresented. He was unrepresented while the evidence was given. Two witnesses gave evidence on behalf of the plaintiff - Mr Fusco, the managing director of the plaintiff, and Mr Gouskos, now a director of a company related to, but distinct from, the plaintiff. Mr Gouskos was a director of the plaintiff company at the time of the acquisition of 2IC in 2011.
The second defendant, Mr Richmond, gave evidence himself and he called Mr Anderson, who was managing director of the plaintiff at the time of the BSA, and Mr Mansfield, who was part of 2IC, and who moved with him to the plaintiff after the BSA.
During the evidence stage of the trial the defendant’s focus in the evidence he gave, in the evidence he called and in his cross-examination of the plaintiff’s witnesses was on matters which have assumed less, or no prominence in the addresses, and ultimately in the trial. The defendant plainly regards the 2 for 1 clawback as unfair, but that is not an issue in the trial. It was part of the Agreement. The defendant sought to demonstrate that the plaintiff did not provide enough human resources to enable him to achieve the fees necessary to avoid the adverse clawback. That is not now an issue in the trial.
I say something about the witnesses. The evidence of the plaintiff’s witness Mr Gouskos and the defendant’s witnesses Messrs Anderson and Mansfield are now largely uncontroversial. I have no reason to doubt anything they said. Equally, so far as Mr Fusco and Mr Richmond are concerned, I do not reject anything either of them said. While each was sensitive, and somewhat reticent, about certain topics, I find that both were essentially truthful and reliable. While I do not entirely accept Mr Jenner’s submission that nothing really turns on the oral evidence given at trial, I think it is true that the issues in the trial are to be resolved by reference to the objective construction of the BSA and the relatively uncontroversial facts which bear on that Agreement.
The lead-up to the FAD
After the BSA there was set up a department in the plaintiff’s practice in which Mr Richmond, and those of his staff who came with him, (including Mr Mansfield), serviced the 2IC clients who also came with him. The object of that exercise was to offer a degree of continuity of service to the former 2IC clients. At the same time it was understood that the so called 2IC clients would be introduced to the practitioners from the plaintiff’s firm so that, as time went by, the practices would be fully amalgamated.
The plaintiff maintained a separate ledger for the 2IC clients, partly with the object of keeping the defendant’s fees separate and more easily identified when it came to the calculation of his achieved fees at the two adjustment periods.[2]
[2] T85.
The defendant was paid a consultancy fee for the work he was doing. In addition he was being paid monthly instalments of interest on the balance of the consideration which was subject to the vendor finance.
In February 2013, some four months after the first anniversary of the BSA and some eight months before the FAD, Mr Fusco approached Mr Richmond to discuss with him what promised to be a shortfall of achieved fees at the FAD. There was an exchange of emails between the two men on that topic between early December 2012 and the meeting in February 2013.[3] The plaintiff attached to one of the emails a client summary of the defendant’s clients, setting out a line by line list of fees rendered in respect of each client.[4] A summary sought to set out the fees actually charged for the first year, (that is October 2011 to October 2012), the fees charged between October 2012 and the end of January 2013, and the predicted achieved fees for the balance of that year, (that is from February to October 2013). It had been agreed between the parties that the achieved fees for the purpose of the calculation at the FAD would be the average of the fees rendered in the two years. This was an agreed variation of the BAS. That favoured Mr Richmond because his fees in the first year exceeded those in the second year.
[3] Exhibit P1 tabs 21-23.
[4] Tab 22.
Adopting that approach, the summary presented by Mr Fusco at his meeting with Mr Richmond in February 2013 predicted that at the FAD there might be a shortfall of achieved fees of $356,762. The summary went on to calculate that if the clawback were to be applied to that predicted shortfall there would be a clawback of $713,523. If that were to occur the balance owing by the plaintiff to the defendants would be wiped out entirely. Only $600,000 was owing. If the predicted clawback was realised at the FAD the defendants would owe the plaintiff money.
Later in February 2013 Mr Richmond produced a seven page email effectively responding to the plaintiff’s summary.[5] It is not necessary to dwell on its contents because it does not bear directly on the issues in the trial. The tenor of the email was a complaint about various aspects of the plaintiff’s operations. Mr Richmond complained particularly about the unfairness of the 2 for 1 clawback.
[5] Exhibit P2, tab 25.
In response to that email Mr Fusco reproduced Mr Richmond’s email adding his responses to each comment by the defendant.[6] This reply was apparently discussed by Mr Fusco and the defendant and others in the practice in early April 2013.
[6] See tab 26.
I mention the events of December 2012 to April 2013 only for these purposes:
·       they demonstrate that the defendants had received some advance warning that there might be a shortfall in the achieved fees at the FAD.
·       they demonstrate that Mr Richmond did not at that time dispute the general suggestion of a prospective shortfall of fees.
·       Mr Richmond did not at that time question the adequacy of the materials provided in support of the contention that there might be a shortfall of fees.
I acknowledge immediately that the exercise did not purport to be the calculation of achieved fees which was to occur on FAD. It was no more than what might be described as a “rain check” on the level of fees being charged by the defendant, roughly halfway to the FAD .
Mr Richmond’s failure at that time to challenge the accuracy of the figures cannot be taken as an admission of a shortfall at the FAD .
Mr Richmond’s failure at that time to challenge the adequacy of the supporting documentation cannot be taken as any acknowledgement of the adequacy of the supporting documentation at the FAD .
What those events did however do was to draw to Mr Richmond’s attention well before the FAD that:
1.      his fees were being recorded by the plaintiff on a line by line summary of fees charged to each client;
2.      it appeared that there might be shortfall at the FAD ; and
3.      if the shortfall was approximately as predicted, the plaintiff’s debt to him would be totally extinguished. In fact he would owe money to the plaintiff.
Events around the FAD
The FAD was 25 October 2013. In the period before that the plaintiff and Mr Richmond had been in discussions. Those discussions, at least from Mr Richmond’s point of view, were about amending the BSA. I think it is plain that Mr Richmond was concerned about the possibility that he would be in a desperate financial situation by the FAD if, as predicted in February 2013, his achieved fees were well short of $1.4 million.
An exchange of emails between Mr Fusco and Mr Richmond on 15 October makes that clear.[7] In his email to Mr Richmond sent at 7.18 pm that day, Mr Fusco refers to Mr Richmond’s earlier suggestions about a review at the end of the third year, not the second year, and a review based on an achieved level of $1.3 million, rather than $1.4 million. Further, Mr Richmond had asked that the 2 for 1 multiplier not be applied. While referring to those suggestions by Mr Richmond, Mr Fusco reiterated the need to calculate the fees at the end of the second year.
[7] Exhibit P2, tab 35.
In his reply email sent at 10.02 pm that same day, Mr Richmond speaks, among other things, of his concerns about his financial position if the 2 for 1 clawback is activated.
This is the last exchange of communications between the parties before the FAD. This exchange assumes importance in the cases of each party. The BSA says that the FAD is the final day of Year 2[8], that is 25 October 2013.
[8] Annexure A, part (a).
Annexure A, part (b) of the BSA provides that within five days before that date the plaintiff should determine the achieved fees and give notice specifying those fees. In addition, the plaintiff must specify the basis for calculating those fees and enclose certain supporting materials. Thus the notice should be given by 20 October 2013.
It is common ground between the parties that no notice was given by the agreed time.
Mr Richmond asserts that in failing to give the notice by the agreed date the plaintiff is in breach of the agreement.
The plaintiff denies that it breached the contract by failing to give the notice by the agreed date. The plaintiff says that Mr Richmond agreed to delay the date of the notice because a short delay until the middle of November meant that invoices rendered to the end of October would be included in his achieved fees. In his email to Mr Richmond at 7.18 pm on 15 October Mr Fusco refers to some of the discussions about variation of the agreement which have obviously been taking place. The email ends as follows:
Accordingly what I recommend, considering we are two weeks away from the end of October 2013, is that we calculate the year two calculation, per the agreement, and sit down with you to discuss the outcome. Unless we quantify the position we are unable to make an informed decision. The calculation may be finalised within the first two weeks of November and if the figures stack up then an interest payment may be made at the end of month, as occurred in the previous month. I reiterate that we all want to work with you to resolve the matter so that all parties benefit. If you wish to discuss the matter further prior to preparation of the year two calculation please do not hesitate to contact me.
Mr Richmond replied to that email at 10.02 pm the same day. He began his response by saying:
I appreciate the sentiments of your email and hope we can work towards a win:win.
While Mr Richmond’s email is not an express agreement to defer the calculation for two weeks, that is the clearest implication. The deferral was in his interests. The email goes on to express concern about the 2 for 1 clawback but I think it is plain he has agreed to defer the adjustment notice until the middle of November.
There are what the defendant describes as three purported notices, ie three notices purporting to be notices of achieved fees contemplated by Annexure A(b) of the BSA. They are said to be notices on 21 November 2013, 27 December 2013 and 30 January 2014.
I set out the provision (b) of Annexure A in the BSA:
Determination of Achieved Fees
Within 5 Business Days before each Adjustment Date, the Buyer shall determine the Achieved Fees and shall give notice to the Seller specifying:
(i)the Achieved Fees; and
(ii)the Buyer’s basis for calculating the Achieved Fees,
together with all necessary evidence, invoices and other documents required for the Seller to verify the Achieved Fees.
Mr Fusco said he met with Mr Richmond in the week beginning 19 November 2013 after Mr Richmond had been absent interstate. He presented to him a memo[9] which set out the plaintiff’s estimate of Mr Richmond’s achieved fees and the suggested consequences of the shortfall which it asserted. (Mr Richmond noted on his copy of this memo[10] that the memo was handed to him at the meeting which was on 21 November 2013. I accept that as the correct date of the meeting.)
[9] Exhibit P2, tab 36.
[10] Exhibit D3, tab 22.
The memo asserted that the average fees for the first two years ending on 31 October 2013 fell short of $1.4 million by $398,268. Applying the 2 for 1 clawback that figure became $796,536. That wiped out the $600,980 of the balance of consideration owed by the plaintiff, leaving the defendant owing the plaintiff $195,556. Added to that, the plaintiff claimed that interest of $132,217 paid by the defendant up to 30 October 2013 could be recouped. The memo asserted that the defendant owed the plaintiff a total of $327,773.
Mr Fusco said that at that meeting he provided Mr Richmond with documents supporting the calculations. Those documents were MYOB spreadsheets of the sort appearing behind T41 of Exhibit P2. Those spreadsheets contained line-by-line fees charged by Mr Richmond to each client.
Mr Jenner criticised Mr Fusco’s evidence on this topic on the basis that Mr Fusco said imprecisely that he produced documents “in the nature of MYOB spreadsheets”. I do not accept that criticism. I think that a fair reading of Mr Fusco’s evidence[11] is that, while he was not saying that the MYOB spreadsheets behind Tab 41 were the actual spreadsheets he produced on 21 November 2013, they were in that form. Mr Richmond did not dispute Mr Fusco’s evidence on that topic.
[11] T99.
I find that on 21 November 2013 Mr Fusco produced to Mr Richmond the above memo together with MYOB spreadsheets setting out in a line-by-line format the fees charged by Mr Richmond to each client in the relevant period.
The achieved fees in the memo of November for the first year were $1,130,796 and for the second year $872,668, with the average being $1,001,732. It is to be remembered that the agreement did not provide for the achieved fees to be averaged in this way. The parties had orally agreed that variation. The written agreement simply provided that the calculation should be based upon the difference between the achieved fees for the second year and $1.4 million. The agreed variation was favourable to the defendant. He does not dispute that that variation was orally agreed.

It is not clear what was said by the parties at the meeting on 21 November but Mr Richmond challenged the calculation in an email. The email was from him to Mr Fusco dated 27 November 2013[12] but I accept Mr Richmond’s note on that email that a hard copy of the email was placed on Mr Fusco’s desk on 25 November. In particular Mr Richmond said in that email:
I don’t accept the summary as a fair reflection of the Achieved Fees for the first two years. To enable me to assess this in more detail can you please arrange for a report which provides the information as set out on the attached spreadsheet. This will enable us to identify any other clients that have mysteriously not had an invoice raised for work performed.
[12] Exhibit D3, tab 23.
Mr Richmond concludes the email by referring to discussions about varying the agreement. He did not provide a notice of his estimate of the achieved fees as contemplated by paragraph (c)(ii)
It is plain that the parties were engaged in ongoing discussions about varying the agreement. I referred earlier to the email from the defendant on 15 October expressing his concerns about the looming financial problems for him if the 2 for 1 clawback was activated. In his evidence Mr Fusco acknowledges that discussions about varying the agreement were taking place. In fact he produced a marked up, but unsigned, amendment to the agreement which provides that the FAD would be at the end of the third year rather than at the end of the second. He said he produced that to Mr Richmond at a meeting between them in early December.[13] It seems that the agreement was never executed.
[13] T111.
The next correspondence between the parties was on 27 December 2013. It would appear that no documentation was sent to Mr Richmond in response to his email of 25 November challenging the calculation and asking from more documentation. The plaintiff sent the defendant two emails on 27 December. The first would appear to have been sent at 10.46 am on that day.[14] That email notified Mr Richmond that the FAD had passed on 21 October 2013 and accordingly the interest payment paid for November should not have been paid. The November interest payment would be deducted from Mr Richmond’s consultancy fee for December.
[14] Exhibit P2, tab 40.
The second email appears to have been sent at 12.46 pm.[15] The email is somewhat confusing. It repeats the assertion that there is a negative adjustment to be made of $195,556. It asserts that Mr Richmond must provide a reply within five business days, but says that the plaintiff is prepared to extend the time for his response until 31 January 2014. The email concludes that the vendor finance debt would be extinguished if the above adjustment is confirmed. Thus this email of 27 December purports to be a notice pursuant to paragraph (b) of the BSA annexure. The email attaches the same adjustment calculation that had been discussed at the November meeting and attaches the MYOB documents for the relevant period.
[15] Exhibit P2, tab 41.
Mr Richmond responded to the Plaintiff’s email in an email at 11.20 am on Saturday 28 December 2013. He threatened legal action if his consultancy fee was not paid in full. He repeated his earlier rejection of the plaintiff’s calculation of the achieved fees. He did not provide his own calculation as contemplated by the agreement. Mr Jenner argues that Mr Richmond did not provide his own calculation because he did not have the documents necessary for him to do so. Mr Britten-Jones submits that Mr Richmond had already been provided with adequate documents. Further, he had access to the plaintiff’s staff to get any material he needed. The agreement required him to produce his own calculation of the achieved fees, something he has never done. Mr Richmond concluded his email by proposing that there be no adjustment as at the FAD.
The plaintiff sent an email to Mr Richmond at 9.27 pm on the same day (Saturday 28 December) asserting that Mr Richmond had never “denied the MSA achieved fees calculation”. The plaintiff sought to enforce the clawback. It is not really correct that Mr Richmond did not “deny” the plaintiff’s calculations. In his email of 25 November, he had effectively challenged the calculation.[16] On the other hand Mr Richmond had not asserted his own estimation of the achieved fees.
[16] Exhibit D3 tab 23.
In that email Mr Richmond had asked for “a report which provides the information as set out on the attached spreadsheet”. It is not clear what sort of report he was asking for, but he was seeking further documentation.
On 8 January 2014, Mr Richmond issued a notice of breach[17] and on 24 January a notice of demand.[18]
[17] Exhibit D3 tab 37.
[18] Exhibit D3 tab 38.
On 30 January, the plaintiff sent an email[19] which purports to be a notice of the achieved fees enclosing a document headed “Detailed Billings Report for Dept – Geoff” for the period 31 October 2011 to 31 October 2013.
[19] Exhibit D3 tab 39.
In an email dated 31 January 2014[20] Mr Richmond wrote a “without prejudice” letter giving notice that he did not accept the plaintiff’s achieved fees and that he was unable to provide his achieved fees because he had not been provided with sufficient documents.
[20] Exhibit D3 tab 40.
On 4 February 2014 Mr Richmond sent the plaintiff a notice of termination of the BSA.[21] He vacated his office taking work and documents with him which are the subject of the plaintiff’s claim for orders of restraint.
[21] Exhibit P2 tab 54.
Discussion
Part (b) of the annexure provided for the requirements of a notice of the achieved fees to be given by the plaintiff. The notice required by the Agreement had three components as follows:
1)it had to be given by 20 October 2013 (the time requirement);
2)it had to specify the achieved fees (The achieved fees requirement);
3)it had to specify the plaintiff’s basis for calculating the achieved fees “together with all necessary evidence, invoices and other documents required for the seller to verify the achieved fees” (the supporting materials requirement).
The defendant submits that the 21 November notice failed to comply with the first and third requirements. I have already dealt with the time requirement. The defendant submits that the plaintiff failed to comply with the supporting materials requirement. The plaintiff did not produce the invoices supporting the fees. Mr Jenner submits that the words of the BSA mean that it was essential for the plaintiff to produce the invoices. The word “necessary” appearing before “evidence” applied only to evidence. It did not apply to “invoices”. The invoices had to be supplied irrespective of whether they were required by the defendant to verify the achieved fees.
I do not accept that submission. I think that a fair reading of the sentence “... together with all necessary evidence, invoices and other documents required...” is that the word “necessary” is to be read in conjunction with “required for the seller to verify the achieved fees”. So read, the plaintiff need produce only the evidence, invoices and documents which are necessary for, or required for, the defendant to verify the achieved fees. It is for the court to determine what evidence, invoices and documents it was necessary for the plaintiff to provide in the circumstances. I appreciate that the parties did not, as they could have, included the words “reasonably necessary” However, I think that a fair reading of the words implies reasonableness in the provision of supporting material. Otherwise a totally unreasonable requirement might be made by the defendant effectively to avoid the consequences of the agreement. He could, for example, have demanded that the plaintiff retrieve from each client the original invoices sent to them. Such a demand would be absurd and unreasonable. That does not mean that it would not in certain circumstances be reasonable to require the provision of invoices but the test is reasonableness. It is an objective test.[22] It remains then for me to determine whether the notice of 21 November met the supporting materials requirement.
[22] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 [40].
In my view the MYOB documents did meet the supporting materials requirement. It is to be remembered that those materials were records of the bills that either Mr Richmond himself had sent, or those in his separate department had sent. Those records had been kept separate from the other sections of the plaintiff. The documents were familiar to Mr Richmond. They were in the same format as the documents provided in February 2013. They set out in a line by line fashion the bills rendered by Mr Richmond in respect of each client in the relevant period. In response Mr Richmond sought “a report” but the nature of the report was never made clear. In fact the so called report sent by the plaintiff in January has the same features as the MYOB documents - that is, a line by line list of clients and bills rendered. It is true that the shortfall calculated in the January document is different from the notices in November and December. In fact the shortfall is worse for Mr Richmond. However in my view the different format and the different shortfall in the January documents do not demonstrate the inadequacy of the materials provided in November. I reject Mr Jenner’s submission that these differences demonstrate the inadequacy of the earlier materials.
In my view the notice rendered by the plaintiff in November met the requirements of Part (b) of the BSA. Upon receipt of that notice Mr Richmond was obliged to provide his own estimate of achieved fees. He has never done that.
I must say that the plaintiff’s conduct after issuing the November notice confused the issue. I think that instead of the plaintiff focusing on the requirements of the agreement, Mr Fusco sought to “engage” Mr Richmond. He put it in those terms. His engagement led him to reissue the notice in December. I have already noted that it is plain that both parties were continuing to have discussions about varying the agreement. There was talk about deferring the adjustment date to the end of the third year rather than the second. The marked up variation to that effect was produced to Mr Richmond but never signed by either party. There was talk about the plaintiff not pursuing Mr Richmond for overpaid interest in the event that the clawback wiped out the outstanding principal owing to the defendant. Mr Richmond was continually protesting the unfairness of the 2 for 1 clawback. It is understandable the parties behaved as they did. I accept Mr Fusco’s evidence that the plaintiff’s wanted to retain Mr Richmond as part of the organisation. Having acknowledged that, it is confusing that on 27 December the plaintiff should send Mr Richmond two emails. In the first at 10.46 am the plaintiff is telling Mr Richmond that the November interest payment will be deducted from his consultancy fee because the clawback has been activated. In the later email of at 12.46 pm the plaintiff reasserts the shortfall calculation and gives Mr Richmond until 31 January 2014 to reply. This was certainly an unusual way to engage Mr Richmond. Mr Richmond’s response was understandable.
However confusing the events were after November, I think the consequences of the events in November are clear enough. I find that the plaintiff gave the defendant a valid notice of achieved fees. The notice met the requirements of the agreement. Mr Richmond failed to provide his own estimate of achieved fees as required by paragraph (c)(ii) of the agreement. In those circumstances he is deemed by virtue of paragraph (c)(i) to have accepted the plaintiff’s estimate of achieved fees.
Upon the achieved fees being confirmed by operation of paragraph (c)(i), the clawback adjustment in paragraph (d) comes into effect. The notice rendered by the plaintiff provided the clawback calculation. The calculation wiped out the principal owing by the plaintiff to the defendant and required the defendant to pay money to the plaintiff.
The sum to be paid by the defendant to the plaintiff is governed by clause 2(b)(ii). No interest was payable by the plaintiff from the time of the FAD. Interest already paid had to be refunded. The defendant had to pay the shortfall calculated by the clawback. Clause 26.8 of the Service Agreement, executed by the parties on the same day as the BSA, gave the plaintiff the right to set off monies owing by the defendant. The plaintiff exercised that right on 27 December 2013 when it deducted the November interest from the defendant’s December consultant’s fee. That was over a month after serving the November notice which set out the achieved fees. In my view a month was a reasonable period for the defendant to respond with his own estimate of achieved fees.
In its statement of claim the plaintiff seeks damages of $362,183 plus interest. That figure is not the one set out in the November notice, which was $327,773, but is the one in the later notice sent in January. In my view that claim is untenable. The figure deemed to be the one accepted by Mr Richmond pursuant to paragraph (c)(i) of the agreement is the November one. Accordingly I find that Mr Richmond is liable to pay the plaintiff $327,773.
Restraints
In its statement of claim the plaintiff seeks orders of restraint against both defendants. Although I have received supplementary written submissions from both parties on the topic of the restraints I will hear the parties further on those topics.
Orders
I enter judgment for the plaintiff against the defendant in the sum of $327,773.
I will hear the parties on the topics of the restraint, interest and costs.