MW Accounting Pty Ltd v Tenni
[2014] VCC 1541
•14 November 2014
| IN THE COUNTY COURT OF VICTORIA | Revised (Not) Restricted |
AT MELBOURNE
COMMERCIAL LIST
EXPEDITED CASES DIVISION
Case No. CI-14-01481
| MW ACCOUNTING PTY LTD & ANOR | Plaintiffs |
| v. | |
| GRANT TENNI & ANOR | Defendants |
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JUDGE: | His Honour Judge Anderson | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 25 - 28 August 2014 | |
DATE OF JUDGMENT: | 14 November 2014 | |
CASE MAY BE CITED AS: | MW Accounting Pty Ltd & Anor v. Tenni & Anor | |
MEDIUM NEUTRAL CITATION: | [2014] VCC 1541 | |
REASONS FOR JUDGMENT
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Catchwords: Contract – Sale-Back Agreement of clients of an accounting practice – Agreement by purchaser to make exclusive referrals for financial planning services to a company associated with the vendor – Extent of purchaser’s obligations – Whether obligations breached.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr L. Wirth | Behan Legal |
| For the Defendants | Mr B. Devanny | Lamplugh McIntosh |
HIS HONOUR:
1The two plaintiff companies are part of the MW Group. The directors of the companies are Mr Nicholas Maikousis and Mr Jonathan White. The first plaintiff, MW Accounting Pty Ltd (“MW Accounting”), operates an accounting practice. The second plaintiff, MW Planning Pty Ltd (“MW Planning”), has an Australian Financial Services Licence and provides financial planning services.
2MW Accounting refers its clients to MW Planning for financial planning services. MW Group has, in recent years, acquired a number of accounting firms through MW Accounting, with a view to providing a source of clients for MW Planning.
3In about November 2011, MW Accounting acquired the accounting practice of the defendants, Grant Tenni and Tenni & Associates Pty Ltd (the trustee of the Tenni Family Trust). The practice was known as Tenni Grindley & Associates.
4Tenni Grindley & Associates had operated in association with Vantage Accounting, the accounting practice of Mr Ron Kurcharski. Vantage Accounting was also purchased by MW Accounting and Mr Tenni and Mr Kurcharski both acquired shares in the MW companies.
5Mr Tenni gave evidence that there were a total of about 430 clients who, with their associated entities, constituted about 600 files transferred to MW Accounting in 2011. Mr Tenni said that in 2013, he bought back a lesser number of clients and files. Mr White produced a “MYOB list of clients Grant [Tenni] took with him on 1 May 2013” which had “192 companies, trusts or superfunds and 695 individuals”. There is considerable duplication of surnames and addresses on the list which suggests that there may not necessarily be a significant difference between the parties. Certainly, not much was made of these differences at the trial.
6The former practice of Tenni Grindley & Associates operated as part of MW Accounting. Mr Tenni and two other staff members continued to provide accounting services from an office in Boronia.
7During the next 12 months or so, the accounting clients of the former practice of Tenni Grindley & Associates were approached by Mr Tenni and the other staff at the Boronia office to ascertain whether they had existing financial advisers and whether they would be interested in MW Accounting referring them to MW Planning.
8Between February 2012 and February 2013, Mr Tenni and the other staff members at Boronia referred a total of 48 clients to MW Planning for financial planning services. Following the referrals, a total of 23 clients engaged MW Planning to provide financial planning advice and 21 clients purchased insurance products through MW Planning. A commission of $100 was paid by MW Planning in respect of each referral to a financial planner, to an insurance specialist or to MW Planning’s mortgage people.
9After about twelve months, Mr Tenni expressed his dissatisfaction with the financial return he was receiving from the new arrangements within MW Accounting. He entered into discussions with Mr White, and later with Mr Maikousis and Mr Kucharski, to attempt to resolve the matter.
10Whilst various options were considered, it appeared to all parties that a process by which Mr Tenni effectively “bought back” all or a substantial part of the defendants’ former clients was the only feasible way of reaching an agreement. From MW Accounting’s perspective, the important issues in such an arrangement were the number of clients transferred, the purchase price and the continued referral of Mr Tenni’s accounting clients to MW Planning for financial planning services.
11In their amended statement of claim, the plaintiffs asserted that, “in the course of negotiations for the sale-back of the accounting business” to the defendants, Mr Tenni “represented that he and Tenni Pty Ltd [Tenni and Associates Pty Ltd] would and intended to continue to market proactively financial planning services to clients and refer clients exclusively to MW Planning for financial planning services”. The plaintiffs pleaded that the representations “were contained in various emails sent by Tenni to Kucharski, Maikousis and/or White and in the Sale-Back Agreement [and] in conversations and meetings between Tenni and… Kucharski, Maikousis and/or White, which took place between late 2012 and May 2013”.
12A written agreement (“the Sale-Back Agreement”) was entered into between the parties in 2013, and is dated 1 May 2013. The Agreement had the effect of selling back to the defendants a substantial part of the accounting clients acquired by MW Accounting in 2011.
13Clauses 2.2(g) and (h) of the Sale-Back Agreement provided as follows:
“2.2 Completion of the sale and purchase of the sale shares under this clause 2 is conditional on: …
(g) TT [The Tenni Trust Pty Ltd] agreeing to provide all financial planning referrals to MWP [MW Planning] exclusively for a period of three (3) years from completion. Should TT pass any referrals or encourage any associate or related party to pass any referrals for all financial referrals to a third party that is not party to MWP then TT agrees to remunerate MWP with a capital sum equivalent to the market value of that client had they been referred to MWP.
(h)MWP agrees to pay TT 30% of the first years revenue for all Financial Planning work within 60 days of MWP being paid such commissions fees or brokerage. For the purposes of understanding no revenue will be paid to TT in the second or subsequent years”.
14In their amended statement of claim, the plaintiffs assert that clause 2.2(g) “required [the defendants] to market proactively financial planning services to clients and to refer clients exclusively to MW Planning for financial planning services for a period of three years from 1 May 2013”.
15Following the Sale-Back Agreement in May 2013:
a.Mr Tenni asserts that in the first few months a total of four referrals were made and that, thereafter, no referrals were made because the clients the defendants bought back were, or would have been, unresponsive to approaches;
b.the plaintiffs allege in their statement of claim that the defendants:
i.failed to “market proactively” financial planning services to the clients sold-back by the plaintiffs;
ii.marketed to these clients financial planning services, for which the defendants would receive a financial benefit;
iii.provided financial planning services themselves to these clients.
16As a consequence, the plaintiffs claimed the loss and damage quantified in the expert report of Mr George Kompos dated 15 August 2014, totalling $349,453 and comprising:
a.$126,428 income loss suffered by MW Planning;
b.$223,026 capital loss suffered by MW Planning.
17The claims are made by the plaintiffs:
a.on the basis that the pre-agreement negotiations constituted actionable representations, including as to the defendants’ future intentions, in breach of s. 18 of the Australian Consumer Law. The representations were said to have induced the plaintiffs to enter into the Sale-Back Agreement;
b.on the basis of the defendants’ breach of clause 2.2(g) of the Sale-Back Agreement.
18The issues for determination in the proceeding are whether:
a.Mr Tenni, on behalf of himself and Tenni & Associates, made the representation to the plaintiffs as alleged;
b.the plaintiffs entered into the Sale-Back Agreement induced by, and in reliance upon, the representation;
c.the defendants failed:
i.to market proactively MW Planning’s financial services to their clients;
ii.to refer their clients exclusively to MW Planning for financial planning services;
d.the defendants’ failure to do the acts referred to in either (c)(i) or (ii) constituted:
i.misleading and deceptive conduct in breach of the Australian Consumer Law;
ii.a breach of clause 2.2(g) of the Sale-Back Agreement;
e.MW Planning and/or MW Accounting suffered loss and damage as a consequence of the defendants’ misleading and deceptive conduct and/or the breach of clause 2.2(g) of the Sale-Back Agreement.
Negotiations in early 2013
19In early 2013, Mr Tenni was concerned about the financial returns he was receiving after transferring his accounting business to the MW Group. The problems appear to have arisen largely because Mr Tenni apparently believed that he should be entitled to all debts and work in progress of his business at the time of the sale.
20On 19 February 2013, Mr Tenni met with Mr White, Mr Maikousis and Mr Kucharski. They discussed three possible options for Mr Tenni:
a.MW Planning buying out Mr Tenni’s share in MW Accounting and Mr Tenni remaining with MW Accounting as an employee (Option 1);
b.the arrangement continuing as it was (Option 2);
c.Mr Tenni buying back some or all of the clients he had sold to MW Accounting (Option 3).
21The parties eventually settled on Option 3, whereby MW Accounting sold back to Mr Tenni most of his former clients. Mr White’s preference had been Option 1, although he considered that if agreement could not be reached with Mr Tenni, the parties would revert to Option 2.
22On 6 March 2013, Mr White, in referring to Option 3 in an email to Mr Tenni, said that it would involve:
a.Mr Tenni “providing a list of clients you propose to take”;
b.calculating “their asset value” which would be “based on the current value of the business based on current revenue received”.
23On 7 March 2013, Mr White and Mr Tenni discussed by email the financial returns Mr Tenni would derive from the continued referral of clients to MW Planning for financial planning services. Under Option 1, Mr White suggested in an email dated 12 March 2013, “the conditions will be that a minimum of 50 FP [financial planning] referrals per annum, 1 per week, are provided to Planning, Insurance or Finance”.
24In an email dated 15 March 2013, Mr Tenni summarised the options, particularly 1 and 3. One element of option 3 he said was that, “I continue to refer business to MW’s advisory business”. Mr Tenni said, in the email, that he had “elected to accept Option 3 and demerge my business from MW Accounting”. This “offer” was rejected by Mr White.
25On 19 March 2013, Mr Tenni wrote to Mr White confirming “a conversation with Jon [White] this morning…that we have agreed that I will be leaving the business as detailed in the list of clients, with the terms as per the attached”. The “terms” included that, “Referrals to MW to have an amount of 30% of the premium generated to MW Advisory, paid to Grant’s firm”.
26Although Mr White said in evidence that he could not recall the conversation, it is likely that a general understanding along the lines of Option 3 was reached at that time, because of the similarity of the matters included in the email and the final terms of the Sale-Back Agreement.
27On 2 April 2013, Mr Maikousis in an email to Mr Tenni, wrote, “On the 18th March, you advised us of your intention to demerge the business. After agreement in principle, it was subject to you securing the funding. It is now the 2nd April and have not had any confirmation that you have secured the funding”.
28The email led to heated exchanges between Mr White and Mr Tenni, recorded in emails the following day. Mr Maikousis took over the negotiations from Mr White on behalf of the MW Group. On 10 April 2013, Mr Tenni met with Mr Maikousis and Mr Kucharski for what Mr Tenni recorded as a “demerger meeting”. The meeting primarily discussed the cost to Mr Tenni of the clients he wished to take with him, and how he would finance the purchase.
29In an email dated 15 April 2013, Mr Maikousis, in discussing how Mr Tenni might meet the proposed purchase price, suggested the “Payment of say $50k-$60k plus agreement to payment terms will mean that you continue to trade as MW Accounting until the debt is paid, I’m thinking financial planning referrals can be used to reduce the debt and interest payable as a offset. You agree to continue to provide FP work in the future and are restrained from trying to move clients FP or Accounting”.
30On 16 April 2013, Mr Tenni responded to the financial matters raised by Mr Maikousis. In addition he said, “I am comfortable to provide FP work for a referral fee/rate of 30%, as previously discussed with Jon. We can have an agreement drawn up to cover the FP”.
31On 29 April 2013, Mr Tenni in an email to Mr Maikousis wrote, “Nick, any ideas on incentive for financial planning that makes it attractive to continue referring after the initial agreed period? E.g. 10% of ongoing renewals”.
32By 30 April 2013, it appears that the parties had broadly reached agreement and were discussing by email the form of notification to the clients that Mr Tenni would take with him as part of the “demerger”. Mr Tenni proposed that the brief notification include that, “Ron Kucharski and his team at the MW Group will continue to manage your ongoing investment, finance, superannuation and insurance needs”.
33An email from Mr Maikousis on 1 May 2013 noted that, “obviously we cannot settle this until final terms/agreement has been reached”. Mr Tenni was informed that as regards the Agreement, “Michelle [Cassidy, MW Group Office Manager] will work with you regarding the detail”.
34In an email to Ms Cassidy on 7 May 2013, Mr Tenni referred to the agreement that had been reached for a three year period of Mr Tenni “referring clients to MW for MW advisory work” and returned to his suggestion of “a 10% ongoing fee of commissions received” for “referring clients to MW for MW advisory work”. Mr Tenni said that, “If I am going to be referring exclusively to the organisation there have to be measures that allow the termination of the agreement if the results [ie. the success achieved by MW Planning in writing business] aren’t satisfactory [or] if payment is not made in a timely manner”.
35On 8 May 2013, Mr Maikousis responded saying that the 10% component would be “an administrative nightmare… Based on my calculations we are talking about $2k-$3k here”. Mr Maikousis rejected Mr Tenni’s suggestion that the referral agreement might be terminated if MW Planning did not receive a satisfactory level in writing business from the referrals. He said, “you need to trust that Ron and I will do our absolute best to secure the business”.
36On 9 May 2013, a draft agreement was sent by Mr White to Mr Tenni. Mr Tenni suggested changes to the draft. These were apparently agreed by Mr White and a “final agreement” was sent to Mr Tenni on 10 May 2013.
37The only conversations prior to the execution of the Sale-Back Agreement relied upon by the plaintiffs were the meeting on 19 February 2013, at which the three options were raised and discussed and an unspecified meeting or meetings in early 2013 to which Mr White referred in his evidence. When asked when he started talking about financial planning referrals, Mr White answered, “from day one, from the very start…if he [Mr Tenni] was going to buy back the business, which is what his option had been, we probably hadn’t been talking about it in detail until he made his mind up that’s what he wanted to do and buy the business back…That was the caveat so to speak over the whole thing is the financial planning referral”.
38Mr White told Mr Tenni that “there was no way we were going to do this agreement without financial planning referrals” [TS 51;14]. Mr White said that there were emails to that effect. Mr Tenni, in his evidence, agreed that he “knew from the discussions that the referrals were the central part of the deal from MW's perspective” and stated, “They were a reason that they said they wouldn't do the deal unless that was added onto it”. Mr Tenni said that he accepted “the proposition that the deal would not have happened without the referrals”.
Post-agreement referrals
39After 1 May 2013, the date the Sale-Back Agreement bears, the only recorded planning referrals to MW Planning by Mr Tenni’s business were:
Date Clients Referrer 9 May 2013 Brad & Kerry Hutchinson Emma 22 May 2013 Christine & Darren Carter Emma 22 June 2013 Christine Nichols Emma 5 August 2013 Jeffrey Preston Emma
40In June 2013, Mr Tenni distributed to his clients “invitation information” he said had been “sent” to him by Drapac. The invitations were for “information evenings where key details of our latest investment offering, Drapac Stars & Stripes I and II, will be made to the general public via a formal presentation”. The presentations were to be held on 3 and 4 July 2013. Mr Tenni’s email to clients concluded, “Please RSVP to me, or if you contact Jodie at Drapac directly please ensure you let her know you are a client of ours”.
41Following the distribution of this email to Mr Tenni’s clients, MW Planning cancelled Mr Tenni’s Authorised Representative status under its Australian Financial Services Licence. Mr White gave as the reasons, in an email to Mr Tenni dated 2 August 2013, that “Drapac has never been nor never will be an approved product on the MW List, the reasons for this are simple, there is no independent research on his investments and they have not been graded by any research house, that means if something does go wrong we have no PI to support any claim”.
42Mr Tenni said that he did not find out until August 2013 that MW Planning had removed his authorised representative status in June. Mr Tenni said that he had had authorised representative status since 1984, first with AMP, then Vantage and after 2011 with MW Planning. Mr Tenni said that this enabled him “to fully work with the client to not just help them with their accounting requirements but to provide them with an overall service including looking at their life insurance, their retirement needs, reviewing their superannuation”.
43Mr Tenni gave evidence that he “joined Interprac in November [2013] as a financial planner”. When Mr Tenni found out he was no longer an authorised representative of MW Planning, “I was concerned that I may have been advising clients”. Mr Tenni said he did not “send financial planning work to anyone else in Interprac”. He said that, “since I joined them I have written no financial planning business at any rate but it enables me to talk to my clients with the full relationship with my clients of being an accountant and a financial planner and talking about the full self-managed superannuation funds”.
44Further disputes arose. On 4 October 2013, Mr Tenni, in an email to Mr Kucharski, complained that MW had “sent me an invoice for another client that they have lost”, whom Mr Tenni said had “taken his business elsewhere”. Mr Tenni said that as a consequence, he was advising Mr Kucharski “that no members of MW is welcome in our office, and no member of MW will be allowed access to any of our clients”. In relation to a client, William Maile, who had apparently been referred to MW Planning, Mr Tenni said he would tell him not to see Mr Maikousis, although Mr Tenni also said, “We will not be referring him to any other organisation”.
45On 7 October 2013, the MW Group sent a “breach notification” to Mr Tenni. The document is not in evidence although it is obvious from subsequent correspondence that the “notification” alleged that the defendants had breached clause 2.2(g) of the Sale-Back Agreement.
46Mr Tenni’s solicitors responded to the breach notification by email on 22 October 2013 stating, “our client’s obligation under clause 2.2(g) is solely to refer potential Financial Planning clients as defined under the [Agreement] and not to refer these clients to a third party that is not MWP”.
47In an email on 23 October 2013, Mr White posed the following question to the defendants’ solicitors, “Perhaps you could ask your client to explain why as an unlicensed adviser he has established a unit trust for retail clients and then facilitated them investing into a wholesale overseas property investment for which he has invoiced the property investment which is a managed investment scheme for a fee based on funds invested by those clients”. This was a reference to the Drapac Stars and Stripes investment.
48Mr Tenni said in evidence that he has established the trust which was the vehicle for his clients to invest in Drapac. He said that all but four of the investors had previously invested in Drapac investments. Mr Tenni received, what was described as, a “capital raising fee” of $43,312.50 from Drapac for introducing the investors.
49The defence admitted that Mr Tenni had “been paid approximately $263 for carrying out financial planning services with respect to two clients”. Mr Tenni admitted in evidence that he had performed financial advice work for Mr and Mrs Arnott and had also transferred investments for another accounting client, Mr William Maile.
The misleading and deceptive conduct claim
50Clause 13.8 of the Sale-Back Agreement provides that it “is the entire agreement of the parties about the subject matter of this Agreement and supersedes any representations, negotiations, arrangements, understandings or agreements and all other communications”.
51There is no dispute that during negotiations leading up to the Agreement, the MW Group representatives said “the referrals were the central part of the deal from MW’s perspective” and that if this was not part of the Sale-Back Agreement, they “wouldn’t do the deal”. The Agreement reflected this understanding by the inclusion of clauses 2.2(g) and (h).
52The plaintiffs allege in their amended statement of claim, both in respect of the alleged representations and clause 2.2(g) of the Agreement that the effect was:
a.as to the representation, the defendants “would and intended to continue…
b.as to the clause of the Agreement, the defendants “were required…
to market proactively financial planning services to clients and to refer clients exclusively to MW Planning for financial planning services”.
53It is difficult, particularly where the pleadings are so similar, to see how the alleged representation would have “induced” the plaintiff to enter the Sale-Back Agreement. The representation is pleaded as one going to future matters. It is alleged that at the time the representation was made, the defendants “did not have any intention of continuing to market proactively financial planning services to clients and refer clients exclusively to MW Planning for financial planning services”.
54I consider that there is no evidence which justifies a finding that the specific representation alleged was made by Mr Tenni on behalf of the defendants. The plaintiffs rely upon email communications and, statements “made in conversations and meetings”.
55I have referred to the only relevant conversation relied upon by the plaintiffs. Mr Tenni’s concession in cross-examination that, in discussion, it was made clear that MW Planning would not “do the deal without the referrals”, does not assist the plaintiffs to establish a claim based on matters beyond what was specifically agreed by the defendants in the contract.
56The email communications, similarly, contain nothing that would support the formulation of the representation advanced by the plaintiffs; that it specifically required the defendants to “market proactively” the financial planning services offered by MW Planning.
57The specific processes agreed to by the parties as operating after the sale-back are contained in clause 2.2(g) of the Agreement. The financial benefits to the defendants from the referrals and the extent of those benefits, and set out in clause 2.2(h). In my view, the cause of action based upon alleged representations has not been made out.
Alleged breach of clause 2.2(g)
58Clause 2.2(g) of the Sale-Back Agreement must be interpreted in light of the whole of the agreement reached by the parties. The parties by the pleadings and submissions of their counsel, have suggested two very different meanings:
a.the plaintiffs submit that the clause imposes a broad obligation on the part of the defendants . The plaintiffs plead that the clause “required [the defendants] to market proactively financial planning services to clients and to refer clients exclusively to MW Planning”;
b.the defendants contend that:
i.there was no positive obligation to “market proactively” to their clients, MW Planning as a provider of financial planning services; and
ii.the clause only involved referrals to third parties, and the provision of financial planning services by the defendants to the accounting clients bought-back by them was not prohibited.
59Clause 2.2 is prefaced by the words, “Completion of the sale and purchase of the Sale Shares under this clause 2 is conditional on…” Clause 2.5 provides that, “The parties must each use their best endeavours to satisfy in a timely manner the Conditions set out in clause 2.2”.
60Clause 2.4 recognises that certain conditions in clause 2.2 (clauses 2.2(c) and 2.2(e), but not 2.2(g)) “are for the benefit of all parties”. It is apparent, however, that clause 2.2(g) is solely for the plaintiffs’ benefit.
61Accordingly, the clause might be read as providing that, “The MW companies agree to the purchase of The Tenni Trust shares in MW accounting on condition that The Tenni Trust uses its best endeavours to provide in a timely manner all financial planning referrals to MW Planning”.
62Reading in these additional words would, at best, make the clause only marginally stronger. In my view, there is no warrant for construing a positive requirement upon the defendants that they “market proactively” financial planning services, with a view to referring clients to MW Planning.
63On the other hand, there is little basis for the narrow interpretations of “referrals” submitted on behalf of the defendants. Mr Devanny of counsel contended for the defendants that “referrals” involved three parties, the referrer [Mr Tenni’s company], the client and the referee, whom Mr Devanny said must necessarily be a third party and would not include “self-referrals”, or the performance of financial planning work by the defendants for their accounting clients.
64The second part of clause 2.2(g) provides the consequences that follow if “financial planning referrals” are made “to a third party that is not a party to MWP”. In that event, MW Planning must be paid “a capital sum equivalent to the market value of that client had they been referred to MWP”. In the circumstances, the defendants submit, the reference to “referrals to MWP” in the first part of the clause, should be construed as limiting “referrals”, to “referrals to a third party”.
65However, the first part of the clause refers to “all Financial Planning referrals”, not as the second part does to “all financial planning referrals to a third party that is not party to MWP”. The wording in the second part of the clause is clumsy. The words “a third party that is not party to MWP” presumably should be read as “not a party [related] to MWP”.
66The second part of the clause in fact contains the words “any referrals for all financial planning referrals to a third party…” These words only make sense if they read, “any referrals for all financial planning
referrals[services] to a third party…” or “anyreferrals for allfinancial planning referrals to a third party…”.67The plaintiffs, however, claim damages from the defendants as a result of two matters:
a.the fact that financial planning services were provided by the defendants to their own clients;
b.the failure to actively refer their clients to MW Planning, as had been the case with those clients after they had been acquired by MW Accounting in 2011.
68The plaintiffs have not quantified their loss in relation to third parties solely in accordance with the second part of the clause, i.e. “the market value of that client had they been referred”. Presumably, this would be the capital loss suffered by MW Planning if it had been engaged by the client and provided financial planning services or products to the client and then wished to on-sell those clients to a third party.
69In the circumstances, there is probably a sufficient degree of ambiguity in what is meant by the clause to go beyond the words used in the clause or other parts of the Agreement, and to look to whatever assistance can be garnered from the surrounding circumstances known to the parties when the document was executed and the purpose and object of the transaction.
70If such an exercise were warranted, it would be appropriate to have regard to the following matters:
a.the fact that the defendants’ clients were acquired by MW Accounting as a source of financial planning referrals for MW Planning;
b.during the period the clients were managed for MW Accounting by Mr Tenni and the staff of the former accounting business, a number of referrals had been made which resulted in the provision of financial planning services to almost 50% of those clients;
c.during the negotiation of the Sale Agreement, Mr Tenni understood that it was important to the plaintiffs that after the sale of the clients to the defendants, the defendants would continue to refer to MW Planning clients who were interested in obtaining financial planning services;
d.during the negotiations, one matter discussed was a minimum level of referrals (50 per annum referred to in the email dated 12 March 2013). Another matter, was the possible payment to the defendants for business from the financial planning services provided by MW Planning which generated a financial return to MW Planning beyond the first year, as an incentive to the defendants to refer clients. Neither of these matters was included in the final Sales Agreement. Clause 2.2(h) specifically provided that “no revenue will be paid to TT in the second or subsequent year”.
71Whilst there was an expectation that clients would be referred by the defendants to MW Planning after the sale-back, clause 2.2(g) only provided for:
a.the exclusive referral of the clients for financial planning to MW Planning for three years;
b.a financial penalty in respect of referrals to third parties who were not MW Planning.
72The plaintiffs did not run their case on the basis that the alleged breach was limited to referrals to third parties and that its damages should be calculated in accordance with the second part of the clause. The plaintiffs have relied upon evidence that establishes that there has been a failure by the defendants to “exclusively” provide all financial planning referrals to MW Planning. This includes the following:
a.the defendants provided financial advice to Mr and Mrs Arnott at some time after November 2013, and had transferred Mr Maile’s investments for him;
b.the defendants received a “capital raising fee” from Drapac in respect of investments in products by the defendants’ clients in circumstances where the defendants had directed the attention of the clients to those products;
c.Mr Tenni denied that the Drapac investment by his accounting clients and the transfer of Mr Maile’s investments involved the giving of financial planning advice;
d.the defendants made no referrals to MW Planning, apart from the 4 referrals made by Emma prior to 5 August 2013;
e.the defendants prevented access by representatives at MW Planning to the business premises of the defendants’ practice after 4 October 2013.
73Even if no account were taken of the likelihood that during the currency of clause 2.2(g), the defendants’ accounting practice has provided financial planning services to its own clients (quite apart from the Drapac investors, Mr and Mrs Arnott and Mr Maile), I consider that the actions of the defendants in failing to make any more than four referrals to MW Planning, constituted a breach of the contractual provision.
74I do not accept the evidence of Mr Tenni that the reason “there were no further referrals from my client [was that] they weren’t interested in being referred” and that he “wasn’t going to go shoving financial planning down every single client’s throat”. Whilst it is likely that fewer referrals would have resulted than during the previous 18 months, it is improbable that Mr Tenni would have not been able to make any referrals, whilst Emma made four between May and August 2013.
Assessment of the first plaintiff’s loss and damage
75The plaintiffs claim damages of $349,453 comprising income losses of $126,428 and a capital loss of $223,026 over the three year period of the Sale Agreement. To calculate these losses, the plaintiffs rely upon a report dated 15 August 2014 by Mr George Kompos, a forensic accountant.
76The defendants objected to the admission of the report on the basis that it did not rely upon any particular expertise or experience of Mr Kompos. It was submitted that the report simply involved assumptions which Mr Kompos was instructed to apply by the plaintiffs’ solicitors.
77Further, it was submitted that the report lacked credibility because a draft report dated 11 August 2014, less favourable to the plaintiffs, was altered by Mr Kompos following representations by the plaintiffs’ solicitors. Access by defendants’ counsel to the original report and the correspondence between the solicitors and the witness was originally resisted on the basis that the material was subject to legal professional privilege. This objection was later withdrawn and the documents were made available to the defendants.
78The plaintiffs claim that the following matters are relevant to the calculation of the loss of income:
a.the defendant had an accounting client base of at least 430 clients and 600 files at the time of acquisition by the MW Group in November 2011;
b.in the first 12 months following the acquisition, 48 clients were referred to MW Planning;
c.23 of these clients were provided with financial planning services by MW Planning which resulted in MW Planning earning $48,000 in fees of which 70% constituted profit in the first year and 100% in following years;
d.21 of the clients (some of the same clients who obtained financial planning services) were sold insurance policies for which MW Planning earned fees of $52,000 in the first year as a once only commission followed by 10% annual trailing commissions;
e.these client would become MW Planning’s clients for life unless “poached” by the defendants;
f.following the Sale-Back Agreement in May 2013, it could be assumed that the defendants “would continue to market proactively the plaintiffs’ financial planning and other services to their clients and would continue to refer clients exclusively” to the plaintiffs;
g.not “a single financial planning referral” was provided by the defendants to the plaintiffs following the Sale-Back Agreement;
h.MW Planning “would have received referrals and marketed services” to at least 23 clients “in each of the 3 years” following the date of the Sale-Back Agreement;
i.MW Planning “would have been able to market life insurance services” to at least 21 clients during each of the three years “following the date of the agreement”.
79The assessment of “the market value or capital sum” which could have been received had the clients been sold at or subsequent to the end of the three year period, also depended upon similar matters as those used to calculate the income losses.
80The conclusions reached by Mr Kompos were primarily based on the information provided to him and by application of the assumptions he was instructed to accept. Whilst Mr Kompos was able to verify some of the historical financial information provided, from his own examination of the relevant books of account of the plaintiffs, in my view he had limited means of assessing the likely accuracy of the assumptions he was asked to apply in reaching his conclusions as to the plaintiffs’ likely losses.
81The critical factors in the calculations were the levels of referrals and take up of clients, and therefore the fees which might have reasonably been expected that MW Planning would earn. These are matters which in large part depended upon the conclusions which might reasonably be drawn from the experience during the first year after the acquisition and the receptiveness of the remaining clients to referrals for financial advice.
82From the clients of the defendants purchased by MW Accounting in November 2011, between February 2012 and February 2013, 48 referrals were made for clients to see MW Planning for possible financial planning services. From these referrals, 23 clients were provided with services and 21 (including some overlapping of clients) with insurance products.
83Mr White, and also Mr Maikousis, gave evidence that:
a.if each accountant “made 50 referrals…in a year, one a week, that’s pretty good”;
b.a take up rate of approximately 50% from referrals was to be expected;
c.it was an integral part of the MW Group’s strategy to purchase accounting firms as a fertile source of potential financial planning clients;
d.this was the reason that Mr Tenni’s accounting practice had been purchased;
e.they both anticipated that after the Sale-Back Agreement in May 2013, Mr Tenni’s clients would provide a substantial number of referrals in the three year period following the Agreement;
f.MW Group published a document for both its accounting and administration staff headed, “Tips for filling in a client referral form”. The document advised staff to persistently pursue accounting clients with a view to them accepting a referral to MW Planning. It is likely, in my view, that if the directions in the document were followed, there would be little scope for subsequent follow up.
84Mr Tenni clearly understood that the continued referral of his clients following the “demerger” was important to the plaintiffs. Mr Tenni gave evidence that the maintenance of the level of referrals which had been experienced in the first 12 months after acquisition was unlikely. Their clients had little potential as a source of referrals, because:
a.most had already, “over the previous 27 years” to May 2013 been “canvassed for financial planning services”; MW Planning had “got the best – the cream of the crop”;
b.a large number of the clients had been clients who had an existing relationship with a financial planner, specifically Mr Stopford from AMP. The “rest of my clients”, who had not been referred to MW Planning, “were already looked after elsewhere”.
85Mr Tenni’s evidence on these matters gained some credibility from the document, “Tips for filling in a client referral form”. Further, I consider that Mr White and Mr Maikousis overstated the likely number of referrals following Mr Tenni’s departure from the MW Group:
a.Mr White said that Mr Tenni’s “firm” had provided “one to two [referrals] a week”, “up until he departed”. In fact, the rate of referrals for the twelve months from February 2012 to February 2013 was less than one a week;
b.Mr White said that MW Accounting now has a client base of approximately 1400. Of the about 200 new clients MW Planning gets every year, “probably 50 to 60 come from [MW] Accounting a year”. Based on these figures, Mr White said that he was “absolutely” confident that MW Planning “would be able to secure a similar number of clients from the Tenni practice year after year for three years, as had been previously referred from Mr Tenni”;
c.Mr Maikousis said that the “conversion” or “acceptance” rate for clients referred by an accountant for financial planning advice was “in excess of 90 per cent”. However, for Mr Tenni’s clients brought into MW Accounting, the rate was less than 50 per cent for the first 12 months;
d.Mr Maikousis said that Mr Tenni could “easily” have “maintained 50 new referrals say per year”.
86In my view, Mr Kompos’ analysis, and the assumptions upon which it is based, are significantly inflated. Further, Mr Kompos’ opinion in his first report dated 11 August 2014 was that the total income loss of MW Planning likely over the three years following the Sale-Back Agreement was $80,183 and the capital loss was $31,871. Mr Kompos was persuaded by the plaintiffs’ solicitors that these assessments were wrong. Mr Kompos’ evidence of the reasons why he changed his opinion were unconvincing. Whilst conceding that there were “substantial changes” between the draft report and the final report, Mr Kompos described the process as an “update” of his report.
87One change made by Mr Kompos between reports was, in his calculation of the capital loss, to increase the “revenue multiple” from 0.8 to 1.75. In my view, little basis existed which would justify that change. The multiple of 1.75 depended on a subjective analysis of only six transactions. Mr Kompos, when asked whether this was “sufficient to get a meaningful average” replied, “Well, that’s the evidence I had available to me, so that I did the best with the evidence of market transactions that I could”.
88It is always a matter of concern when a party having engaged an expert witness, who after agreeing to be bound by the relevant code of conduct, is subject to pressure or persuasion to change the report the expert has prepared. In the present case, I consider that the second report can be given little credibility.
89However, having been satisfied that the defendants breached clause 2.2(g) of the Sale-Back Agreement, it was probably inevitable that, as a consequence, MW Planning would have suffered loss.
90In the first 12 months after the acquisition, almost half of the 48 referrals resulted in the opportunity for MW Planning to earn fees or commissions for the provision of financial planning services. After the “demerger”, four referrals were initially made and Mr Tenni himself entered the field by providing services akin to the provision of financial services which did or were likely to have resulted in fees and commissions to his practice.
91It is probable also, that there would have been many more referrals to MW Planning if the defendants had adhered to a broader interpretation of the Sale-Back Agreement, although probably not nearly as many as in the first 12 months after the acquisition of Mr Tenni’s accounting practice in 2011.
92I consider that, in those circumstances, I should assess the loss and damage suffered by the plaintiffs as a consequence of the defendants’ breach of the Agreement at two-thirds of the total income and capital loss calculated in Mr Kompos’ first report, being $74,703.
Defendants’ counterclaim
93The defendants counterclaimed for damages as a result of what they alleged was the plaintiff’s failure to comply with clause 9 of the Sale-Back Agreement, constituted by the plaintiffs’ failure to give notice to the defendants “of the dispute they allege against them, which forms the subject matter of the allegations contained in the Statements of Claim”.
94The alleged breach was also pleaded in the defence as a matter which “estopped or barred” the plaintiffs from “obtaining the relief sought” for the alleged breaches by the defendants of the Sale-Back Agreement. These aspects of the defence and the counterclaim were not abandoned by the defendants, although no evidence was led as to the quantification of any damages and little or no argument was advanced in relation to the matters of defence to the plaintiffs’ claim, the counterclaim, or the defence to counterclaim.
95In the circumstances, the most the defendants could hope to achieve as relief on the counterclaim would be nominal damages, I consider that it would be more appropriate to simply dismiss the counterclaim.
Proposed orders
96The following orders will be made:
a.Judgment for the plaintiffs against the defendants that the defendants pay to the plaintiffs the sum of $74,703.
b.Judgment for the plaintiffs against the defendants that the defendants’ counterclaim be dismissed.
c.The defendants must pay the plaintiffs’ costs of the proceeding including the counterclaim, and any reserved costs, to be assessed by the Costs Court in default of agreement.
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Certificate
I certify that the preceding 19 pages are a true copy of the reasons for decision of His Honour Judge Anderson delivered on 14 November 2014.
Dated: 14 November 2014
Catherine Kusiak
Associate to His Honour Judge Anderson
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