Naaman v Sleiman
[2015] NSWCA 259
•1 September 2015
|
New South Wales |
Case Name: | Naaman v Sleiman |
Medium Neutral Citation: | [2015] NSWCA 259 |
Hearing Date(s): | 12 August 2015 |
Decision Date: | 1 September 2015 |
Before: | Meagher JA at [1]; |
Decision: | (1) Appeal as against the first respondent dismissed with costs. |
Catchwords: | DAMAGES – contract – whether promisee had an accrued right to payment in the future following termination for promisor’s repudiation – promisee’s right to payment in the future contingent upon his further performance of executory obligations – no unconditional right to payment vested as at date of termination – whether payment obligations survived termination – payment obligations not intended to survive termination – loss of bargain damages – absence of claim for wrongful dismissal does not preclude claim for damages for loss of bargain following termination |
Legislation Cited: | Corporations Act 2001 (Cth) ss 471B, 500, 601AH |
Cases Cited: | ACN 078 272 867 Pty Ltd (in liq) v Deputy Commissioner of Taxation; Binetter v Deputy Commissioner of Taxation [2011] HCA 46; 86 ALJR 4 |
Texts Cited: | J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (7th ed 2006, LexisNexis Butterworths) |
Category: | Principal judgment |
Parties: | Anthony Naaman (Appellant) |
Representation: | Counsel: |
File Number(s): | 2015/12508 |
Decision under appeal: | |
Court or Tribunal: | Supreme Court of New South Wales |
Jurisdiction: | Equity Division |
Citation: | Naaman v Sleiman [2014] NSWSC 1869 (24 December 2014) |
Before: | Stevenson J |
File Number(s): | 2009/289622 |
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
JUDGMENT
MEAGHER JA: I agree with Gleeson JA.
WARD JA: I have had the advantage of reading in draft the reasons of Gleeson JA. I agree with his Honour's reasons and the orders proposed.
GLEESON JA: The appellant, Mr Naaman brought proceedings against the first respondent, Mr Peter Sleiman, claiming the proceeds of sale of a unit at Parramatta and against the second and third respondents, Jaken Properties Australia Pty Ltd (Jaken Properties) and Jaken Property Group Pty Ltd (in liquidation) (Jaken) claiming a liquidated sum of $2 million under a deed, or alternatively damages for breach of the deed in that amount. The primary judge (Stevenson J) concluded that all of Mr Naaman’s claims should be dismissed: Naaman v Sleiman [2014] NSWSC 1869. In a further judgment his Honour ordered that, subject to the costs orders made in relation to specific matters, Mr Naaman should otherwise pay Mr Sleiman’s and Jaken Properties’ costs of the proceedings: Naaman v Sleiman (Supreme Court (NSW), Stevenson J, 10 March 2015, unrep).
Mr Naaman has appealed against: (a) the order dismissing his claim against Jaken Properties and Jaken and (b) the costs order made in favour of Mr Sleiman and Jaken Properties. There is no appeal against the order dismissing Mr Naaman’s claims against Mr Sleiman.
For the reasons which follow, I have concluded that the appeal against the costs order in favour of Mr Sleiman should be dismissed with costs. The appeal should otherwise be allowed, the orders dismissing the proceedings against Jaken Properties and Jaken be set aside and a new trial on the quantification of damages be ordered.
The relevant facts
Prior to 15 July 2005, Mr Naaman was the Chief Executive Officer of four companies described as the “Phantom Group of Companies” (the Phantom Group). He was neither a director nor shareholder in any of those companies. The sole director and shareholder was Mr Selwyn Barnard. The Phantom Group provided security services to the hospitality industry. Mr Naaman was also a director and owned 90% of the issued shares in a company known as “Adult Education Academy Pty Ltd” (Adult Education). Mr Wheeler held the balance.
Mr Naaman negotiated with Mr Sleiman the sale of the issued shares in Adult Education and the four companies in the Phantom Group to Jaken, a company associated with Mr Sleiman.
On 15 July 2005, Mr Naaman entered into three agreements with Jaken.
The first was a Share Sale Agreement by which Mr Barnard, Mr Wheeler and Mr Naaman agreed to sell all of their respective shares in the Phantom Group and Adult Education to Jaken for $200,000. The purchase price was apportioned as to $3.00 for the shares in Adult Education and the balance roughly equally in respect of the shares in the four companies in the Phantom Group.
The second was a Deed of Guarantee and Restraint (the Deed) between Mr Naaman and Jaken, whereby in consideration of the payment by Jaken of $2.9 million, Mr Naaman agreed to (a) guarantee the accuracy of certain warranties and representations provided by Mr Barnard, the vendor, to Jaken in relation to the Phantom Security and Adult Education Academy businesses (the Businesses) under the Share Sale Agreement; (b) restrain [sic] from acting in competition with the Businesses for a period of two years; and (c) provide introductions and assistance to the Businesses in securing new clients.
The third was a Services Agreement between Mr Naaman and Jaken to provide managerial services to the Businesses for an initial period of two years for an annual fee of $100,000.
Jaken entered into the Deed expressly in its capacity as trustee for the Sly Fox Family Trust. That trust was a discretionary trust constituted by a trust deed made on 21 June 2005 between Mr Kostas Augerinos as settlor and Jaken as trustee. The specified beneficiary and the default beneficiary was Mr Peter Sleiman.
The Deed provided that the sum of $2.9 million was payable by Jaken to Mr Naaman in instalments over 24 months (cl 3.1), subject to Jaken’s right of set off under cl 3.2. This clause provided that Jaken may deduct by way of set-off any part of the amount of $2.9 million against any claim it may have against either Mr Barnard in relation to the Share Sale Agreement, or Mr Naaman in relation to the guarantee provided in cl 4 of the Deed.
Jaken paid to Mr Naaman amounts comprising the first two instalments totalling $900,000. On 20 June 2006, Jaken, in a letter from its solicitor, informed Mr Naaman that it would not be making the next instalment payment of $500,000 that was due on 15 July 2006 and that it would set off that amount and any amounts payable to Mr Naaman against losses alleged to have been incurred by Jaken as a result of the “failure” of representations made by Mr Naaman. On 11 July 2006, Mr Naaman, in a letter from his solicitor, informed Jaken that it was in material breach of the Deed and gave notice that he thereby terminated the Deed and would seek damages for breach of contract.
On 13 February 2007, Jaken retired as trustee of the Sly Fox Family Trust and Mr Sleiman, as appointor under the trust deed, appointed Jaken Properties as the new trustee of that trust. Shortly thereafter, on 27 February 2007, Jaken entered into a creditors’ voluntary winding up and a liquidator was appointed.
The final version of the pleading relied upon by Mr Naaman was a further amended statement of claim filed on 17 November 2014 (FASOC). In his claims for relief, Mr Naaman claimed judgment against both Jaken Properties and Jaken in the sum of $2 million. In addition he made a claim for damages and equitable compensation. He also sought declaratory relief against Jaken and Jaken Properties claiming to be subrogated as a trust creditor to Jaken’s rights of indemnity as the former trustee of the Sly Fox Family Trust against the assets of that trust. A separate claim was made against Mr Sleiman to account to Mr Naaman for the net proceeds of sale of a property at Church Street, North Parramatta.
The primary judge’s reasons
Relevant to the appeal, the primary judge held that Jaken had repudiated the Deed and that Mr Naaman had elected, as he was entitled, to accept the repudiation, terminate the Deed and sue for damages: at [72]-[75]. Those findings were not ultimately challenged on appeal by Jaken Properties (tcpt CA at 32, lines 18-25).
The primary judge found that Mr Naaman had agreed by cl 7.3 of the Deed and in cross-examination that his relationship with Jaken was that of an employee: at [88]-[89]. He concluded that Mr Naaman’s claim for damages must be determined in accordance with the principles relevant to contracts of employment: at [90]. Reference was made to the High Court’s decision in Automatic Fire Sprinklers Pty Ltd v Watson [1946] HCA 25; 72 CLR 435 and passages in the judgments of Latham CJ at 450 and Dixon J at 463, for the proposition that an employee has no claim to remuneration for work not yet done or for remuneration not yet earned.
His Honour accepted that Mr Naaman made no claim for wrongful dismissal, nor could he, as he was not dismissed: at [94]. His Honour held that even if Mr Naaman was wrongfully dismissed he would not be entitled to remuneration for work not done and remuneration not yet earned: at [95]. His Honour’s dispositive reasons for dismissing Mr Naaman’s claim for $2 million are contained at [96]-[97] as follows:
96. There is no claim for accrued rights, such as unpaid instalments of the amount to be paid under the Deed of Guarantee and Restraint; payment was made in full up to 11 July 2006, albeit sometimes late. The whole of Mr Naaman’s claim is for future payments, which would have become due and payable on a series of dates starting on 15 July 2006; but by then, he had withdrawn his services.
97. It follows, in my opinion, that Mr Naaman has no entitlement to recover the instalments that fell due for payment after 11 July 2006 and thus no entitlement to the $2 million that he claims in the proceedings.
Amendments to notice of appeal
Mr Naaman sought leave at the hearing to file an amended notice of appeal. Some of the amendments were opposed by Mr Sleiman and Jaken Properties. The Court refused to allow those amendments to which objection was taken and indicated it would give its reasons in its judgment. My reasons for joining in the orders of the Court refusing leave to make those amendments are as follows.
First, insofar as Mr Naaman sought to amend to challenge the costs order made at first instance in favour of Mr Sleiman, the amended notice of appeal did not state any grounds which asserted error in his Honour’s discretionary decision with respect to costs. Mr Naaman’s separate claim against Mr Sleiman had been dismissed by his Honour. The award of costs in favour of Mr Sleiman was unexceptional. The general rule is that costs follow the event, unless it appears to the Court that some other order should be made: Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 42.1. It was necessary for Mr Naaman to identify error by his Honour of the kind identified in House v The King [1936] HCA 40; 55 CLR 499. No such error was asserted. The proposed amendment was without foundation.
Secondly, insofar as Mr Naaman sought declaratory relief with respect to Jaken’s entitlement to indemnification out of the assets of the Sly Fox Family Trust, and that Mr Naaman would be subrogated to that entitlement, similar relief had been claimed in the amended statement of claim but ultimately was not in issue, as his Honour recorded: at [12]. His Honour could not be criticised, let alone fall into error, for not dealing with a matter which was common ground between the parties.
There was a further difficulty with the proposed amendment. It had the potential to affect the rights of third parties, who had not been joined or given notice of the proposed declaratory relief sought by Mr Naaman in this Court. Notice of the proposed amendment had not been given to the liquidator of Jaken or its creditors. The liquidator had an interest in the terms of any declaratory relief as did any other creditors, who may claim to be “trust creditors” of Jaken.
In particular, if Jaken’s right of indemnity against the trust assets of the Sly Fox Family Trust which are now held by Jaken Properties is insufficient to meet the claims of all trust creditors of Jaken, questions of priority would need to be determined: see ReSuco Gold Pty Ltd (in liq) (1983) 7 ACLR 873; Re ADM Franchise Pty Ltd (1983) 7 ACLR 987; cf J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (7th ed 2006, LexisNexis Butterworths) at [2115]. None of these matters had been addressed in the Court below and it was inappropriate for them to be raised for the first time on appeal.
Issues on appeal
In his amended notice of appeal, Mr Naaman challenged his Honour’s findings that the appellant was an employee and therefore not entitled to damages in respect of remuneration not yet earned (ground 1), and that the claim for future payments was for work not performed, rather than for damages for breach of contract (ground 2).
Although Mr Naaman joined Mr Sleiman as first respondent to the appeal and sought to set aside the costs order in favour of Mr Sleiman at first instance, ultimately Mr Naaman did not pursue this relief against Mr Sleiman (tcpt CA at 39, lines 45-48).
Mr Naaman’s remaining case on appeal raised two issues. First, whether as a matter of construction of the Deed, Mr Naaman had an accrued right to receive $2 million from Jaken as at the date of termination of the Deed, and, if not, whether Jaken’s ongoing payment obligations survived the termination of the Deed.
Secondly, and alternatively, whether Mr Naaman had a claim for damages for breach of the Deed by repudiation, that is, a claim for damages for loss of bargain. This alternative claim was met with an objection by Jaken Properties that it had not been pleaded or raised at trial. Whether the damages claim had been squarely raised at trial and acquiesced in by Jaken Properties was contentious in this Court.
An understanding of how Mr Naaman’s claim was advanced at trial requires a reference to the material provisions of the Deed, the pleadings, and the parties’ written and oral submissions in the Court below.
The Deed
The recitals to the Deed stated:
A. Jaken is purchasing the Phantom Security and the Adult Education Academy (the "Businesses") from Mr Selwyn Barnard ("Barnard") under a separate share purchase agreement (the "Sale Agreement") executed on or about the date of this Deed.
B. Naaman is associated with the Businesses.
C. In consideration of the payment of $2,900,000 (the "Amount"), Naaman agrees to:
(a) guarantee the accuracy of the warranties and representations provided by Barnard under the Sale Agreement including without limitation the warranties as to the revenue projections;
(b) restrain from acting in competition with the Businesses for a period of two years; and
(c) provide introductions and assistance to the Businesses in securing new clients.
For a period of two years (the "Term") from the date of Completion of the Sale Agreement (the "Effective Date") on the terms and conditions of this Deed.
It was common ground that the “Effective Date” was 15 July 2005.
Clause 2.1 of the Deed provided:
In consideration of the payment by Jaken of the Amount, Naaman agrees to:
(a) guarantee the accuracy of the warranties and representations provided by or on behalf of Barnard in connection with the Sale Agreement in accordance with clause 4;
(b) comply with the terms of the restraint set out in clause 5; and
(c) provide introductions and assistance to the Businesses in securing new clients in accordance with clause 6.
Clause 3 of the Deed provided:
3.1 Subject to clause 3.2 Jaken agrees to pay the Amount to Naaman in the following instalments:
(a) $400,000 on the Effective Date;
(b) $500,000.00 6 months from the Effective Date;
(c) $500,000.00 12 months from the Effective Date;
(d) $500,000.00 18 months from the Effective Date; and
(e) $1,000,000.00 24 months from the Effective Date.
(f) An additional $500,000.00 at the end of term if the total billable hours for The Security Businesses increase from the billable hours at the effective date by an amount of 5000 hours per week. For an increase of 2500 billable hours per week a payment of $250,000.00 would apply.
3.2 Jaken may deduct by way set off any part of the Amount against any claim it may have against either Barnard in relation to the Sale Agreement, or Naaman in relation to the guarantee provided in clause 4 below.
3.3 In the event of the death of Mr Anthony Naaman during the term of this agreement, all remaining payments due and payable under this agreement will be made to Louise Natasha Naaman.
Clause 4 contained the guarantee and indemnity given Mr Naaman in respect of the truth, accuracy and completeness of the warranties and projections provided by or on behalf of Mr Barnard in connection with the Share Sale Agreement. Clause 4.4 provided that the guarantee and indemnity contained in cl 4 were continuing and were irrevocable and remained in full force and effect for a period of two years from the date of the Deed.
Clause 5.1 contained the restraint against Mr Naaman acting in competition with the Businesses, without first obtaining the written consent of Jaken.
Clause 6 of the Deed specified the services to be provided by Mr Naaman to Jaken. Relevantly, Mr Naaman agreed that for the Term he would use all reasonable endeavours to:
(a) Promote the Businesses to prospective clients for their services; and
(b) Provide introductions to personnel of the business to potential clients known to him.
Clause 7.1 of the Deed provided:
All obligations of the parties which are capable of surviving the termination of this Deed will so survive.
Somewhat curiously the Deed provided (cl 7.3) that the parties specifically agreed that the Deed was intended to create the relationship of employer and employee between them and not any other relationship, in particular that of principal and contractor, or as partners. By contrast, the Services Agreement provided (cl 2.4) that it was a contract to provide services as an independent contractor and not intended to create a relationship, amongst other things, of employment.
The pleadings
In the FASOC, after pleading the material terms of the Deed (referred to as the Guarantee Agreement) (paras 18 and 19), it was asserted that:
from about 15 July 2005 Mr Naaman became and remained entitled to receive payment of $2.9 million pursuant to recital C and cl 3.1 of the Deed (para 24).
notification was given to Mr Naaman on 20 June 2006 that Jaken did not intend to make the instalment payment of $500,000 that was due and payable on 15 July 2006 (para 26).
Mr Naaman treated Jaken’s refusal to make the instalment payment as an anticipatory breach of the Deed (para 27).
on or about 11 July 2006, Mr Naaman notified Jaken that it had breached the agreement by refusing to pay the instalment of $500,000 on 15 July 2006, that the Deed was terminated due to Jaken’s breach and Mr Naaman intended to seek damages from Jaken (para 28).
in breach of the Deed, Jaken failed to pay Mr Naaman the balance of the instalment payments of $2 million that remained due and payable pursuant to cl 3.1 in recital C of the Deed (para 29) [emphasis added].
in the premises, Jaken became indebted to Mr Naaman for the sum of $2 million (para 30).
as a result of Jaken’s breach of the Deed, Mr Naaman had suffered loss and damage (para 31). The only particulars of loss and damage stated that Mr Naaman had not received payment of the balance of the instalment payments of $2 million that remained due and payable pursuant to cl 3.1 of the Deed [emphasis added].
The parties’ opening submissions, statement of issues and closing submissions
At trial, the parties provided their written outline of submissions and a statement of the “real” issues shortly prior to the hearing.
Mr Naaman’s written outline of submissions dated “12 December 2015” [sic – 2014] stated in para 51 that the claim for $2 million was made on a twofold basis. The first was as a debt owed pursuant to the Deed. Alternatively, it was advanced as a claim for damages for breach of contract, with a footnote reference to paras 30 and 31 of the FASOC. As already noted, these paragraphs of the FASOC claimed a debt of $2 million, or damages, particularised as the instalment payments of $2 million that remained due and payable under cl 3.1 of the Deed [emphasis added].
That alternative claim for damages was advanced in para 56 as follows:
Alternatively, the claim for $2,000,000.00 is made as a claim for damages, which survives the termination which was founded on Jaken Property Group's breach. The measure of the damage is that required to put the plaintiff in the position he would have been in if Jaken Property Group had not breached and was held to its contractual obligation to pay $2.9 million. That is to say, the plaintiff is entitled to damages for loss of the Jaken Property Group's performance of the Contract.
On 15 December 2014, counsel for Mr Sleiman and Jaken Properties provided a statement of the real issues between the parties. It is appropriate to set out in full the relevant part concerning the Deed, which was referred to as the “Guarantee Agreement”:
Termination of the Guarantee Agreement
3. On what basis, as a matter of law, did the Guarantee Agreement come to an end on or about 11 July 2006:
(a) Termination by Mr Naaman by reason of any breach of contract or wrongful repudiation of that agreement by the Former Trustee or;
(b) termination by the Former Trustee by reason of wrongful repudiation of that agreement by Mr Naaman in the solicitor's letter dated 11 July 2006 or breach of warranty (re no Queensland licence); or
(c) abandonment?
4. Is the monetary consequence of 3(a), (b) or (c), as the case may be, such as to entitled [sic] Mr Naaman to damages in the sum of $2 million or any and if so what other sum?
The trial commenced on 15 December 2014. In his oral opening, counsel for Mr Naaman identified the issue raised by Jaken Properties as being whether Mr Naaman’s solicitor’s letter of 11 July 2005 constituted a repudiation of the Deed by Mr Naaman with the consequence that he was not entitled to either the sum that was to be paid under the Deed, or damages for any breach.
Reference should also be made to the parties’ closing submissions.
In his written closing submission, Mr Naaman identified in para 3, the third issue requiring resolution to be:
Whether, in the event the liability to pay the Amount of $2.9 million did not survive termination, whether the plaintiff is entitled to damages for the 3rd defendants breach [sic]. The relevant breach being the anticipatory breach said to have arisen from or be evidence by the 20 June letter [sic].
Mr Naaman’s submissions continued by asserting in para 17 that, in the alternative to the debt claim, his “right to damages for breach in any event survived the termination of the Guarantee Agreement”. It was further contended in para 18 that Jaken repudiated or renounced its obligations under the Deed. The consequence was said, in para 26, to be:
The damage flowing from the breach, calculated by reference to what the Plaintiff would have received if the 3rd defendant was held to its bargain, is $2 million.
In oral closing argument, counsel for Mr Naaman submitted that the claim was advanced as a debt claim because the obligations “survived”, or as damages. As to damages, counsel contended that “it’s damages in the context of the obligation to pay the money surviving, or it’s a question of what is our loss arising from the breach”. As to the assessment of loss, counsel submitted that the defendants were not entitled to any reduction on the $2 million.
In reply, counsel for Jaken Properties contended that whether Mr Naaman could sue for damages depended on whether he had an “accrued right”, and repeated his earlier submission that no moneys were outstanding under the Deed as at the date of termination.
As will appear, there was a lack of precision in the submissions of both parties. If an obligation to pay money survived termination of the Deed, then Mr Naaman would have been entitled to claim a liquidated sum, rather than his claim being described as one for damages. On the other hand, a claim for damages for loss of bargain following termination of the Deed did not depend on whether Mr Naaman had an accrued right as at the date of termination.
Disposition of the appeal
First issue: Mr Naaman’s claim for $2 million
Mr Naaman asserted on appeal that he had an accrued right to receive $2 million from Jaken. It was submitted in oral argument that the right to payment of $2 million accrued on the termination of the Deed (tcpt CA at 19, line 36).
Next, Mr Naaman pointed to cl 7.1 of the Deed (set out at [37] above), and contended that Jaken’s payment obligations under cl 3.1 were capable of surviving termination of the Deed. It was submitted that the expression “termination” in cl 7.1, was to be understood as referring not only termination in the sense of the Deed coming to an end (that is, upon expiration of the Deed), but also termination by the parties in accordance with their legal entitlements.
Claim to an accrued right
The critical question is whether the obligation to pay the balance of the instalments under cl 3.1 (totalling $2 million) arose before termination of the Deed. If Mr Naaman had an accrued right to payment of the instalments before termination of the Deed, such right would not be divested by his election to accept the repudiation by Jaken and bring the Deed to an end. The principle was explained by Dixon J in McDonald v Dennys Lascelles Ltd [1933] HCA 25; 48 CLR 457 at 476-477:
When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected.
The same principles apply following termination for repudiation: Heyman v Darwins Ltd [1942] AC 356 at 399; Johnson v Agnew [1980] AC 367 at 396 (Lord Wilberforce), citing with approval the statement of Dixon J in McDonald v Dennys Lascelles Ltd at 476-477.
In Carter’s Breach of Contract (2011, LexisNexis Butterworths), Professor J W Carter states the principle in Article 12.3 (at [12-10]) as follows:
Any right which unconditionally accrued to either party prior to an election to terminate the performance of the contract for breach or repudiation, or as a consequence of such election, is not divested by the election.
In Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (in liq) [1936] HCA 6; 54 CLR 361, the joint judgment of Dixon and Evatt JJ at 379-380 considered what is involved in the sudden termination of an executory agreement under which liabilities are accruing from day to day. With respect to a liability to pay a liquidated demand it was said:
In general the termination of an executory agreement out of the performance of which pecuniary demands may arise imports that, just as on the one side no further acts of performance can be required, so, on the other side, no liability can be brought into existence if it depends upon a further act of performance. If the title to rights consists of vestitive facts which would result from the further execution of the contract but which have not been brought about before the agreement terminates, the rights cannot arise. But if all the facts have occurred which entitle one party to such a right as a debt, a distinct chose in action which for many purposes is conceived as possessing proprietary characteristics, the fact that the right to payment is future or is contingent upon some event, not involving further performance of the contract, does not prevent it maturing into an immediately enforceable obligation.
As explained by Basten JA in FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 at [192] (Beazley JA agreeing), the passage in the joint judgment of Dixon and Evatt JJ in Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (in liq) makes a clear distinction between:
… a right to payment in the future which is contingent upon an event which does not involve further performance of a contract and one which does. It is only in the former case that an accrued right can be said to have arisen. That distinction returns one to the terms of the contract in order to determine whether a future contingency depends upon the further performance of the contract.
In the present case, Mr Naaman’s right to payment in the future of the instalments under cl 3.1 was contingent upon his further performance of his obligations contained in the Deed, specifically his executory obligations not to compete with the Businesses (cl 5) and to provide introductions and assistance to the Businesses in securing new clients (cl 6). The terms of the Deed, in particular, recital C, the stated consideration in cl 2 and the executory nature of Mr Naaman’s obligations under cls 5 and 6, make plain the interdependence between Jaken’s obligation to pay the amount of $2.9 million by the instalments specified in cl 3.1 and its entitlement to receive performance by Mr Naaman of his executory obligations under cls 5 and 6.
Since the specified dates for payment of the future instalments under cl 3.1 had not fallen due, it is not possible to say that an “unconditional” right to a payment vested in Mr Naaman, as at the date of termination of the Deed in the sense identified in McDonaldv Dennys Lascelles Ltd. Nor was it contended by counsel for Mr Naaman that termination of the Deed had the effect of accelerating the time when the future instalments were to be paid by Jaken Properties (tcpt CA at 19, line 46 – 20, line 4). That concession was properly made. There was no provision in the Deed for acceleration of the payment for the future instalments, in the event of termination by the parties in accordance with their legal entitlements.
The primary judge was correct to conclude that Mr Naaman did not have an accrued right as at the date of termination to receive payment of the future instalment under cl 3.1 of the Deed.
Did cl 3.1 survive termination of the Deed
Whether a term of a contract is intended to operate or apply after termination depends on the construction of the contract. Counsel for Naaman submitted that cl 3.1 of the Deed survived termination because the payment obligation was relevantly unqualified, other than with respect to the permitted deduction the subject of cl 3.2, which is not relevantly applicable.
Here, as already indicated, the terms of recital C and cl 2.1 made plain that the stated consideration for Jaken’s payment of the amount of $2.9 million was Mr Naaman’s performance of his obligations to give the guarantee (cl 4), not to compete with the Businesses (cl 5) and to provide services to the Businesses (cl 6). The last two obligations were executory and did not survive termination of the Deed. Upon Mr Naaman’s election to terminate the Deed for Jaken’s repudiation, both parties were discharged from further performance of the contract: McDonald v Dennys Lascelles Ltd at 476-477.
Counsel for Mr Naaman accepted that this was the case with respect to the obligation to provide services under cl 6 (tcpt CA at 19, lines 7-12), but submitted that the position was different with respect to the non-compete covenant under cl 5 (tcpt CA at 19, lines 16-33). The latter submission should be rejected. Nothing in the terms of the Deed supports the view that the non-compete covenant was intended to apply or operate after termination of the Deed, in circumstances where Jaken was discharged from its future payment obligations. Moreover, the restraint contemplated the possibility of consent by Jaken to Mr Naaman acting otherwise than in accordance with the restraint. It could not have been in the reasonable contemplation of the parties, viewed objectively, that once the Deed no longer existed, Mr Naaman could still seek or that Jaken might provide written consent to waiver of the restraint.
Clause 7.1 does not assist Mr Naaman. Clause 7.1 is directed only to those terms of the Deed which are “capable” of surviving termination of the Deed. In the circumstances to which it applies, cl 7.1 requires the ascertainment of those terms that the parties otherwise intended to operate or apply following termination of the Deed.
Assuming favourably to Mr Naaman that the expression “termination” in cl 7.1 includes termination by the parties in accordance with their legal entitlements, cl 7.1 does not have the consequence that a contractual term which otherwise is not intended to operate or apply following termination, does so operate or apply. For the reasons already given, the obligations of Jaken to pay the future instalment amounts specified in cl 3.1 are not intended to operate or apply after termination of the Deed.
It follows, in my view, that the primary judge was correct to reject Mr Naaman’s claim for a liquidated sum of $2 million.
Second issue: Damages for loss of bargain following termination
The ruling principle according to which damages for breach of contract are awarded is that the damages should put the promisee in the same situation with respect to damages, so far as money can do it, as it would have been in had the broken promise been performed: Clark v Macourt [2013] HCA 56; 253 CLR 1 at [106] (Keane J), citing amongst other cases, Robinson v Harman (1848) 1 Exch 850 at 855; and Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; 236 CLR 272 at [13].
In Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; 166 CLR 245 at 260, Mason CJ said “once termination due to the defendant’s wrongful conduct is established the plaintiff is entitled to damages for loss of bargain”. See also Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd [2008] HCA 10; 234 CLR 237 at [58].
Loss of bargain damages represent the difference at the date of assessment between the value to the promisee of the unperformed obligations of the promisor relative to the contract price which the promisee has agreed to pay or provide: Carter’s Breach of Contract at [13-02].
It has been said that expectation damages are the combination of expenses justifiably incurred in the performance of a party’s contractual obligations and any amount by which gross receipts would have exceeded those expenses. The second amount is referred to as “net profit”: Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54; 174 CLR 64 at 81 (Mason CJ and Dawson J). See also North Sydney Leagues’ Club Ltd v Synergy Protection Agency Pty Ltd [2012] NSWCA 168; 83 NSWLR 710 at [46] and [82] (Beazley JA).
In the present case, Mr Naaman particularised his claim for damages for breach of the Deed by reference to the value of the unperformed obligations of Jaken to pay future instalments totalling $2 million. No attention was given at trial to the expenses justifiably incurred in the performance of Mr Naaman’s obligations to provide services under cl 6 and the amount by which gross receipts would have exceeded those expenses. Nor was any defence of failure to mitigate loss pleaded or relied upon by Jaken Properties.
Mr Naaman’s alternative claim for damages was advanced at trial upon the basis that Jaken’s payment obligations under cl 3.1 either “survived” termination of the Deed, or as damages for loss of bargain following termination. For the reasons already given, only the latter was open to be claimed by Mr Naaman. In this regard, Jaken Properties correctly acknowledged in its statement of the real issues (set out at [43] above), that the damages to which Mr Naaman might be entitled were not necessarily the sum of $2 million. Yet, in oral closing submissions, Jaken Properties took the erroneous position that Mr Naaman’s damages claim depended upon him establishing an “accrued right” to the amount of $2 million. This conflated any entitlement to a liquidated sum or damages for breach of contract occurring before termination with any entitlement to loss of bargain damages following termination: McDonald v Dennys Lascelles; Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 at 849 (Lord Diplock).
His Honour approached Mr Naaman’s claim by reference to the principles in Automatic Fire Sprinklers v Watson, on the basis that the Deed recorded the parties agreement that the relationship between them was that of employer and employee, and that Mr Naaman had acknowledged that he was an employee in cross-examination. It is unnecessary to address whether the acknowledgement in cl 7.3 of the Deed, or the “admissions” made in cross-examination were determinative of the “services” provided by Mr Naaman to Jaken being provided under a relationship of employer and employee: see Hollis v Vabu Pty Ltd [2001] HCA 44; 207 CLR 21 at [58] in relation to the status of such a contractual acknowledgement.
Assuming in favour of Jaken Properties that his Honour’s characterisation of the relationship is correct, the error, with respect, is that it does not follow from the absence of a claim by Mr Naaman for wrongful dismissal, that he had no entitlement to claim damages for loss of bargain following termination. It can be accepted that there was no actual dismissal of Mr Naaman as an employee. That however did not preclude him from bringing a claim for damages for loss of bargain, which the Full Federal Court described in Walker v Citigroup Global Markets Australia Pty Ltd [2006] FCAFC 101; 233 ALR 687 at [85] as “damages for breach of contract by repudiation”, in contrast to a claim for wrongful dismissal.
Automatic Fire Sprinklers Pty Ltd v Watson is concerned with the effect of a wrongful dismissal upon a contract of employment and the rights, remedies and obligations of a servant wrongfully dismissed. Nothing in Automatic Fire Sprinklers Pty Ltd v Watson precludes an employee in the position of Mr Naaman, who was not dismissed, from making a claim for damages for loss of bargain.
Mr Naaman’s essential complaint is that his alternative claim for damages was not addressed by the primary judge. This should be accepted.
To be fair to the primary judge, a claim for loss of bargain damages had not been expressly particularised as a head of damage under para 31 of the FASOC, and the articulation of Mr Naaman’s damages claim in his written and oral submissions was expressed in terms apt to confuse. Mr Naaman referred to the damages interchangeably (and incorrectly) as an amount of $2 million which “survived” the termination of the Deed, and (correctly) as damages for loss of Jaken’s performance of the Deed. The latter is to be taken to be a claim for damages for loss of bargain. This claim was not addressed.
It has been said that “if a plaintiff has suffered damage of a kind which is not the necessary and immediate consequence of the wrongful act, he must warn the defendant in the pleadings that the compensation claimed will extend to this damage”: Perestrello E Companhia Limitada v United Paint Co Ltd [1969] 1 WLR 570 at 579 (Lord Donovan), cited in Barnes v Forty Two International Pty Ltd [2014] FCAFC 152; 316 ALR 408 at [121] (Beach J). In Barnes v Forty Two International Pty Ltd, the applicant was not permitted to maintain a claim for damages for “loss of opportunity” which had not been identified in their pleading, opening or pursuit of their case. The present case is different.
Here the pleading in paras 27, 28 and 31 of the FASOC, supplemented by Mr Naaman’s written and oral submissions, gave sufficient notice, in my view, of a claim for damages for loss of bargain. This may be taken to be the necessary and immediate consequence of the claim for damages for breach of the Deed, in circumstances where it had been alleged that Mr Naaman had elected to terminate the Deed in response to Jaken’s “anticipatory breach”.
No objection was taken at trial by Jaken Properties to the description of that claim in Mr Naaman’s submissions as being outside the pleadings or particulars, albeit it seems that Jaken Properties did not fully appreciate the damages claim which it had to meet, partly at least because of its own erroneous view: see [72] above. Had it done so, one might have expected some investigation by Jaken Properties of the expenses incurred by Mr Naaman in providing services to Jaken, and possibly a defence of failure to mitigate loss. Nonetheless, it should be inferred from the statement of real issues and the absence of any objection to the claims for loss of bargain damages, that Jaken Properties acquiesced in the case being run outside of the particulars given in respect of the damages claim: Banque Commerciale SA (En Liqn) v Akhil Holdings Ltd [1990] HCA 11; 169 CLR 279 at 287.
Under the UCPR, r 51.53(1), the Court may order a new trial on the ground of error of law or any other ground if it is satisfied that some substantial wrong or miscarriage has been thereby occasioned. Here there was an error of law because Mr Naaman’s claim for damages for loss of bargain was not addressed. That claim is certainly not hopeless and for that reason a substantial miscarriage of justice has occurred.
Leave to proceed against Jaken
At the hearing of the appeal it become apparent that Mr Naaman had not obtained leave to proceed against Jaken which was in liquidation. Leave is necessary: Distinctive FX 9 Pty Ltd v Statewide Developments Pty Ltd [2012] NSWCA 393. The relevant provision is s 500(2) of the Corporations Act 2001 (Cth) in respect of a creditor’s voluntary winding up, and s 471B in respect of a court winding up.
By notice of motion filed in court on 12 August 2015, Mr Naaman sought leave to proceed against Jaken pursuant to s 471B, and orally pursuant to s 500(2). Evidence was provided in the form of an email from the solicitor for the liquidator to Mr Naaman’s solicitors, that the liquidator neither consented to, nor opposed the orders sought in the appeal, save as to costs.
Jaken is a proper party to the proceedings and it is appropriate that there be a grant of leave to proceed against Jaken as a company in liquidation. Having regard to the outcome of the appeal it is unnecessary to impose the usual condition of such grant of leave that no step be taken to enforce any judgment which might be obtained against Jaken without the prior leave of the Court.
The reason for the equivocation by counsel for Mr Naaman as to whether s 471B or s 500(2) is the applicable provision seems to arise from the fact that, at first instance, the order made on 10 May 2013 granting leave to proceed against Jaken was expressly made pursuant to s 471B of the Corporations Act. However, an order made under s 471B assumes that Jaken was subject to court winding up under Pt 5.4B of the Corporations Act. I doubt that assumption is correct. The factual position appears to be an follows.
Jaken entered into a creditor’s voluntary winding up and a liquidator was appointed, according to an ASIC search which was in evidence, on 27 February 2007. Jaken was subsequently deregistered on sometime after 7 November 2011. On 14 March 2013, an order was made by Registrar Musgrave that Jaken’s registration be reinstated pursuant to s 601AH(2) of the Corporations Act, and that Mr Mark Cooper was appointed liquidator. The power to appoint a liquidator arises under s 601AH(3)(d), which enables the Court to make any other order it considers appropriate. See Stone v ACN 000 337 940 Pty Ltd [2008] NSWSC 1058; 6 DDCR 128 at [24]-[26] (Barrett J); J P Morgan Portfolio Services Ltd v Deloitte Touche Tohmatsu [2008] FCA 433; 167 FCR 212 at [10] (Stone J); In the matter ofERB International Pty Ltd (deregistered) [2014] NSWSC 200 at [38]-[40] (Brereton J).
Under earlier legislation upon the Court declaring a dissolution void – a concept not identical to s 601AH(5) – a company which had been dissolved upon completion of a voluntary liquidation would, upon the dissolution being declared void, be reinstated as a company in voluntary liquidation: Kenney v McCann (1992) 7 WAR 329 (Owen J).
It has been said that when the registration of a company is reinstated under the Corporations Act, s 601AH(5) provides for continuity of existence not continuity of form, although in the absence of any contrary order, continuity in form would follow reinstatement: Binetter v Federal Commissioner of Taxation [2011] FCA 1195; 198 FCR 49 at [21]-[23] (Stone J); ACN 078 272 867 Pty Ltd (in liq) v Deputy Commissioner of Taxation; Binetter v Deputy Commissioner of Taxation [2011] HCA 46; 86 ALJR 4 at [41] (Heydon J).
So far as the materials before this Court indicate, it does not appear that any order has been made that the form of winding up will, upon reinstatement of Jaken’s registration, differ from that when the company was deregistered, that is, a creditor’s voluntary winding up. In those circumstances, upon reinstatement of Jaken’s registration, the applicable provision for grant of leave to proceed would be s 500(2) of the Corporations Act.
Conclusion and orders
The appeal concerning the costs order involving Mr Sleiman was ultimately not pressed and this part of the appeal should be dismissed with costs.
The appeal should otherwise be allowed as against Jaken Properties and Jaken, the order dismissing the proceedings against those parties be set aside and a new trial on the quantification of damages be ordered.
As to costs of the appeal between Mr Naaman and Jaken Properties, both were partly responsible for the trial having miscarried, because of their failure to direct attention to the relevant principles concerning a claim for damages for loss of bargain following termination. In the circumstances, I consider that the appropriate order is that those parties each pay their own costs of the appeal. The costs of the proceedings at first instance, as between those parties, should await the outcome of the retrial on the quantification of damages.
Accordingly, I propose the following orders:
(1) Appeal as against the first respondent dismissed with costs.
(2) Leave is granted to the appellant to proceed with the appeal against the third respondent, Jaken Property Group Pty Ltd (in liquidation), pursuant to s 500(2) of the Corporations Act 2001 (Cth).
(3) Appeal allowed as against the second and third respondents.
(4) Set aside the orders made by Stevenson J on 24 December 2014, insofar as the plaintiff’s claim for damages for loss of bargain following termination of the Deed was dismissed as against the second and third defendants.
(5) Set aside order 4 made by Stevenson J on 10 March 2015, insofar as the plaintiff was ordered to pay the second defendant’s costs of the proceedings.
(6) Each of the appellant and the second respondent pay their own costs of the appeal.
(7) The proceedings be remitted to the Equity Division of the Supreme Court for determination of the quantification of damages for loss of bargain following termination of the Deed.
(8) The costs at first instance as between the plaintiff and the second defendant be determined following the outcome of the retrial on the quantification of damages.
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