Naaman v Sleiman
[2014] NSWSC 1869
•24 December 2014
Supreme Court
New South Wales
Medium Neutral Citation: Naaman v Sleiman [2014] NSWSC 1869 Hearing dates: 15, 17-18 December 2014 Decision date: 24 December 2014 Jurisdiction: Equity Division Before: Stevenson J Decision: Plaintiff's claim dismissed
Catchwords: CONTRACT - construction - whether contract of employment - to what damages plaintiff entitled when terminated contract of employment - defendant paid plaintiff's mortgage - common ground defendant subrogated to mortgagee's rights - whether defendant entitled to balance of proceeds of sale Cases Cited: Australia Mutual Provident Society v Allan (1978) 52 ALJR 407
Automatic Fire Sprinklers Pty Ltd v Watson (1946) 72 CLR 435
Cochrane v Cochrane (1985) 3 NSWLR 403
Fitzgerald v Masters (1956) 95 CLR 420
Ghana Commercial Bank v Chandiram [1960] AC 732
Hollis v Vabu Pty Ltd [2001] HCA 44; 207 CLR 21
Massey v Crown Life Insurance Co [1978] 1 WLR 676
Plaimar Ltd v Waters Trading Co Ltd [1945] ALR 469
Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25; 9 BPR 17, 521Texts Cited: N Seddon, R Bigwood and M Ellinghaus, Cheshire and Fifoot Law of Contract, (10th Aust ed 2012)
R P Meagher, J D Heydon and M J Leeming, Meagher, Gummow & Lehane's "Equity: Doctrines and Remedies" (4th ed, 2002)
I Neil and D Chin, The Modern Contract of Employment, (2012, Lawbook Co)
C Sappideen, P O'Grady, J Riley and G Warburton, Macken's Law of Employment, (7th ed, 2011, Lawbook Co)Category: Principal judgment Parties: Anthony Naaman (Plaintiff)
Peter Sleiman (First Defendant)
Jaken Properties Australia Pty Ltd as trustee for the Sly Fox Family Trust (Second Defendant)
Jaken Property Group (In Liquidation) Third Defendant)Representation: Counsel:
H Woods with M Char (Plaintiff)
J C Kelly SC with D P O'Connor (First and Second Defendants)
Solicitors:
KB Legals Pty Ltd (Plaintiff)
Logan Fox (First and Second Defendants)
SRM Lawyers (Third Defendant)
File Number(s): SC 2009/289622
Judgment
Introduction
Prior to 15 July 2005, the plaintiff, Mr Naaman, and Mr Craig Wheeler were the directors of Adult Education Academy Pty Ltd. Mr Naaman held 90 of the 100 issued shares in Adult Education. Mr Wheeler held the balance.
Adult Education then provided security training services to the entertainment, club and hotel industries.
Prior to 15 July 2005, Mr Naaman was the chief executive officer of Phantom Security Pty Ltd, Phantom Security Retail Pty Ltd, Phantom Australasia Pty Ltd and Phantom Man Power Pty Ltd (which Mr Naaman described as the "Phantom Group of Companies"). Mr Naaman was not a director of, nor had any shareholding in any of the Phantom Group. The sole director and shareholder of those companies was Mr Selwyn Barnard.
The Phantom Group of Companies provided security services to the hospitality industry.
At that time, the first defendant, Mr Sleiman was operating another business in the security industry under the name "AVS Group Australia"
In June and July 2005, Mr Naaman negotiated with Mr Sleiman to sell the shares in Adult Education and the Phantom Group (and thus, in effect, the businesses carried on by those companies) to a company associated with Mr Sleiman, the third defendant, Jaken Property Group Pty Ltd ("the Former Trustee"). The Former Trustee was then the trustee of the Sly Fox Family Trust.
To give effect to that sale, on or about 15 July 2005, Mr Naaman (and Messrs Wheeler and Barnard) entered into three agreements with the Former Trustee, namely a "Share Sale Agreement", a "Deed of Guarantee and Restraint", and a "Services Agreement".
I will return to the detail of those agreements below.
On 13 February 2007, the second defendant, Jaken Properties Australia Pty Ltd ("the Current Trustee") became the trustee of the Sly Fox Family Trust. On 27 February 2007, the Former Trustee was placed into voluntary liquidation.
As the case was finally developed in closing submissions, two issues arose for consideration.
The first was whether Mr Naaman is entitled to recover from the Former Trustee the sum of $2 million that he claims is, in the events that have happened, due to him pursuant to the Deed of Guarantee and Restraint.
It is common ground that if Mr Naaman is entitled to recover that sum from the Former Trustee, then the Former Trustee is entitled to indemnity from the assets of the Sly Fox Family Trust in respect of that liability, and that Mr Naaman will be subrogated to that entitlement.
The second issue was whether Mr Naanam is entitled to recover from Mr Sleiman any part of the proceeds of sale of an industrial unit formerly owned by Mr Naaman in Church Street, Parramatta ("the Unit"). The Phantom Group of companies had conducted business from the Unit.
Background to the 15 June 2005 agreements
In June 2005, Mr Naaman was contacted by Mr Scott Taylor, who introduced himself as the national manager of the AVS group of companies. Mr Taylor suggested that he and Mr Naaman meet. A short time later Mr Naaman met Mr Taylor who introduced him to Mr Sleiman as "the owner of the AVS group".
Mr Sleiman said words to the effect:
"Look, I'm not going to beat around the bush, we want to buy your company. I am the sort of person that when I make up my mind about something there's no turning back."
Mr Naaman replied by saying:
"...if I do want to sell it won't be cheap."
And:
"...it will cost you around $4M."
Mr Naaman also said, referring to the Unit:
"I also want to include my Parramatta office [that is, the Unit] in the sale."
A further meeting took place on 7 or 8 July 2005. Mr Naaman, Mr Sleiman, Mr Taylor and Mr Naaman's accountant, Mr Darren Dickenson were present.
The following conversation took place:
Mr Sleiman: "What's the best price you can do?
Mr Naaman: About $3.5M.
Mr Sleiman: Look, I'll be happy with $3M.
Mr Dickenson: Let's have the price at $3M with a $500,000 bonus if the business keeps on growing the way it is.
Mr Sleiman: Ok then but there will be two contracts. A contract for sale for $200,000 and a Deed of Guarantee and Restraint.
Mr Naaman: Why two contracts?
Mr Sleiman: The one for $200,000 is going to be the one the tax man knew about and the other contract nobody would know about and I intend to pay that in cash.
Mr Naaman: Ok then.
Mr Sleiman: I can pay you $400,000 on the day that we sign. I propose to pay $1.5M through instalments of $500,000 each six months from the date of the contract and the balance of $1M two years from the date of the contract. I will also pay the additional $500,000 bonus at the end of the two year period, if payable...in addition, to give comfort about instalments and to ensure that the business continues as is, I wish to have you engaged as the CEO of the company. I will pay you $2000 per week but you'll have to invoice our company as a contractor. I'm buying this business and I don't want anything changed."
Later Mr Naaman said, referring to the Unit:
"In regard to my office you will be getting the property included at that price subject to the present mortgage. I will require you as part of the sale to make all mortgage payments on it until all monies are paid."
Mr Sleiman agreed.
Thus, the "deal" between Mr Naaman and Mr Sleiman was that Mr Sleiman, or an entity associated with him, would buy what the two men referred to as "your" (that is, Mr Naaman's) business for a total of $3.1 million. In his opening submissions, Mr Woods, who appeared for Mr Naaman said that "in July 2005 [Mr Naaman] negotiated with [Mr Sleiman] to sell his security businesses for $3.1 million". Mr Woods described Mr Naaman as the "proprietor and principal stakeholder" of the businesses. It is not, however, clear on the evidence why Mr Naaman and Mr Sleiman regarded the businesses as Mr Naaman's to sell, or indeed, what authority Mr Naaman had to negotiate for the sale of the businesses. He was the majority shareholder in Adult Education but had no interest at all in any of the Phantom Group.
However that may be, Mr Sleiman's legal advisers prepared the Share Sale Agreement, the Deed of Guarantee and Restraint and the Services Agreement. The documents were executed on or about 15 July 2005. As I set out below, pursuant to those agreements, the shares in all the companies were sold to the Former Trustee for $200,000. Of that amount, only $3 was attributable to the shares in Adult Education. The balance was attributed to the shares in the Phantom Group companies.
Mr Naaman makes no application to have any of the agreements rectified and does not suggest they were a sham. Such rights as Mr Naaman has against Mr Sleiman or the Former Trustee must be determined in accordance with the terms of the documents he chose to execute at the time.
Before considering Mr Naaman's two claims further, I will set out the relevant terms of the three 15 July 2005 agreements.
The 15 July 2005 agreements
Share Sale Agreement
The parties to the Share Sale Agreement were Mr Naaman, Mr Wheeler, Mr Barnard and the Former Trustee.
The agreement recited that Mr Barnard was the owner of all the issued shares in each of the Phantom Group of Companies and that Mr Naaman and Mr Wheeler were the registered holders of the shares in the Adult Education.
Pursuant to the Share Sale Agreement, Messrs Barnard, Wheeler and Naaman agreed to sell all of their shares in each of those companies to the Former Trustee for a total price of $200,000.
The purchase price was to be apportioned as follows:
(a) $50,000 for the shares in Phantom Security Pty Ltd;
(b) $50,000 for the shares in Phantom Security Retail Pty Ltd;
(c) $50,000 for the shares in Phantom Man Power Pty Ltd;
(d) $49,997 for the shares in Phantom Australasia Pty Ltd; and
(e) $3 for the shares in Adult Education.
Curiously, cl 12.3 of the agreement provided:
"Whilst the parties specifically agree that it is intended that this Agreement will create the relationship of employer and employee between them, they state that it is not their intention to create any other relationship, in particular, the relationship of principal and contractor or the relationship of partners."
This clause was obviously inserted in the Share Sale Agreement by mistake (see [84] below). That fact is said to be relevant to an identical provision which appears in the Deed of Guarantee and Restraint.
There is a dispute, which I need not resolve, as to whether the $200,000 share sale price was ever paid. Mr Naaman does not, and could not, seek to recover any part of that sum in these proceedings.
Deed of the Guarantee and Restraint
The parties to the Deed of Guarantee and Restraint were Mr Naaman and the Former Trustee.
That document recited:
"A. [The Former Trustee] is purchasing the Phantom Security and the Adult Education Academy (the "Businesses") from Mr Selwyn Barnard ("Barnard") [sic] 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 [sic] 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 is common ground that the "Effective Date" was 15 July 2005.
Clause 2 of the document was in the following terms:
"In consideration of the payment by [The Former Trustee] 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 was in the following terms:
"3.1 Subject to clause 3.2 [The Former Trustee] 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 [The Former Trustee] 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"
Clauses 4, 5 and 6 made more detailed provision for the "obligations" of Mr Naaman summarised in cl 2.
Thus clause 4 provided:
"4 Guarantee
4.1 Naaman acknowledges that [The Former Trustee] has entered into the Sale Agreement at the request of Naaman in reliance, amongst other things, upon Naaman [sic] and this document to assure the accuracy and completeness of the warranties and representations provided by or on behalf of Barnard in connection with the Sale Agreement including without limitation the warranties and representations as to revenue projections for the Businesses. Accordingly, Naaman unconditionally and irrevocably guarantees to [The Former Trustee] the truth, accuracy and completeness of the warranties and projections. Without limiting the foregoing Naaman further covenants to [The Former Trustee] that it will use its best endeavours to ensure Banard's [sic] compliance with all the terms of the Sale Agreement.
4.2 Naaman unconditionally and irrevocably indemnifies, and agrees to keep indemnified, [The Former Trustee], its officers, servants and agents against all loss or damage suffered or incurred by it relating directly or indirectly to any breach of any warranty contained in the Sale Agreement or any representation made by or on behalf of Barnard in connection with the Sale Agreement.
4.3 The liability of Naaman under this clause is a principal [sic] unconditional and absolute obligation and is not abrogated, prejudiced or adversely affected by the granting of time, credit or any other forbearance, indulgence or concession to Naaman or to [The Former Trustee] or by any other dealing, matter or thing which, but for this provision, could or might operate to abrogate, prejudice or adversely affect such liability including, (without limitation), the actual or alleged invalidity or unenforceability of any provisions of the Sale Agreement.
4.4 The guarantee and indemnity contained herein is a continuing guarantee and indemnity and is irrevocable and remains in full force and effect for a period of two year [sic] from the date of this document."
Clause 5 provided:
"5 Restraint
5.1 For the purpose of protecting [The Former Trustee] in respect of the benefits to be derived by it from the sale by Barnard of the Businesses, Naaman covenants with [The Former Trustee] that the [sic] Naaman shall not, without first obtaining the written consent of [The Former Trustee]:
(a) within a period of 2 years from the date of this Deed anywhere in Australia;
(b) within a period of one year from the date of this Deed anywhere in Australia;
(c) within a period of 2 years from the date of this Deed in the States of NSW and Queensland;
(d) within a period of one year from the date of this Deed in the States of NSW and Queensland;
either directly or indirectly participate in any business providing service similar to or in competition to the Businesses or procure, induce or advise any client of the Businesses to sue [sic: use] the services of any competitor of the Business.
5.2 During the period referred to in clause 5.1, Naaman shall not induce or attempt to induce any Employee to leave employment with the Business or to enter into employment with any other person, firm or corporation other than [The Former Trustee].
5.3 Each of the covenants contained in clause 5.1 is to be construed as a separate independent covenant severable from all other covenants contained in clause 5.1. If any of the separate covenants is found to be void, invalid or otherwise unenforceable such unenforceability does not affect the validity of enforceability of any of the other separate covenants.
5.4 It is intended by the parties that the restraints contained in this clause operate to the maximum extent.
5.5 Naaman acknowledges that the duration, extent and application of the respective restrictions contained in this clause are not greater than is reasonably necessary for the protection of the interests of [The Former Trustee] in the Businesses but that, if such restriction is adduced by any court of competent jurisdiction to be void or unenforceable but would be valid if part of the wording of this clause was deleted and/or the period was reduced, those restrictions apply with such modifications as may be necessary to make this clause valid and effective.
5.6 In the event of any breach by Naaman of its obligation under this clause then, in addition, and without prejudice to any other remedy which [The Former Trustee] may have, [The Former Trustee] is entitled to seek and obtain injunctive relief in any court of competent jurisdiction."
And cl 6 provided:
"6 Introduction Services
Naaman agrees that for the Term he will 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."
Clauses 7.1 and 7.3 were in the following terms:
"7 General
7.1 All obligations of the parties which are capable of surviving the termination of this Deed will so survive.
...
7.3 Whilst the parties specifically agree that it is intended that this Deed will create the relationship of employer and employee between them, they state that it is not their intention to create any other relationship, in particular, the relationship of principal and contractor or the relationship of partners."
Clause 7.3 was in identical terms to clause 12.3 of the Share Sale Agreement (except for substituting "Deed" for "Agreement").
Services Agreement
The Services Agreement was also made between Mr Naaman and the Former Trustee.
The recitals were in the following terms:
"A. [The Former Trustee] is the owner of the Phantom Security and the Adult Education Academy (the "Businesses").
B. [The Former Trustee] wishes to engage Naaman to provide managerial services to the Businesses.
C. Naaman has expertise in providing those Services and has agreed to provide them to [The Former Trustee] in accordance with this Agreement."
Pursuant to the Services Agreement, the Former Trustee engaged Mr Naaman to provide "the Services" for an initial period of two years for an annual "fee" of $100,000.
The "Services" were defined as:
"General day to day management of the existing Phantom Businesses in accordance with the directions of the [The Former Trustee] and Board [sic] of those companies. These duties will include without limitation client services, marketing and various admin duties."
As I will discuss below, in cross-examination, Mr Naaman described himself as having been the "chief executive officer" of the relevant business after 15 July 2005.
Clause 2.4 of the Services Agreement (inconsistently with cl 7.3 of the Deed of Guarantee and Restraint):
"2.4 This Agreement is a contract to provide services as an independent contractor and is not intended to create a relationship of employment, partnership, joint-venture or agency between Naaman and [The Former Trustee] and neither party may hold itself out as being so related."
The Unit at Church Street, Parramatta
Mr Naaman alleges that "collateral to" the Deed of Guarantee and Restraint and the Services Agreement he agreed to transfer the Unit to Mr Sleiman.
Mr Naaman claims that it was an express oral, or alternatively an implied, term of that collateral agreement that:
(a) the "businesses" would continue to operate and be run from the Unit;
(b) Mr Sleiman would responsible for the mortgage repayments which Mr Naaman was required to make to his then mortgagee, CKM (Mortgages) Limited in respect of the Unit; and
(c) the transfer of the Unit from Mr Naaman to Mr Sleiman was conditional upon the Former Trustee making all payments required to be made by it pursuant to the Deed of Guarantee and Restraint.
The term in sub paragraph (a) of the preceding clause was not pressed by Mr Woods in closing submissions. The existence of the term in sub paragraph (b) is common ground. There is a dispute about the existence of the term in sub paragraph (c).
The following matters, however, are not in dispute.
On 28 October 2005, Mr Naaman appointed Mr Taylor as his attorney under power in respect of dealings in relation to the Unit.
On 4 November 2005, Mr Sleiman paid CKM Mortgages all the monies owed to it under its mortgage over the Unit ($131,942.58). CKM Mortgages provided Mr Sleiman's then solicitors with a discharge of mortgage and the certificate of title.
On 1 December 2005, Mr Naaman, by his attorney under power Mr Taylor, sold the Unit to third parties for $255,000.
That sale completed on 19 December 2005. Mr Sleiman was paid the net proceeds of sale, $252,850.
Events thereafter
Between 15 July 2005 and 16 May 2006, the Former Trustee paid Mr Naaman $900,000 pursuant to the Deed of Guarantee and Restraint (being the amounts referred to in 3.1(a) and (b) of that deed).
On or about 18 May 2006, Mr Naaman attended a meeting with Mr Sleiman, Mr Taylor and others during which the following conversation took place between Mr Naaman and Mr Taylor:
Mr Taylor: "Due to downturn of the business we are not going to pay you what the original agreement was.
Mr Naaman: What do you mean? What are you going to pay?
Mr Taylor: We are going to send the figures to our lawyers and he will get back to you with our proposal tomorrow."
On 20 June 2006 the solicitors for the Former Trustee wrote to Mr Naaman's solicitors as follows:
"We are instructed that a Deed of Guarantee ("the deed") and restraint was entered into between the parties in conjunction with a Share Sale Agreement and Services Agreement. These Agreements related to the purchase of a security business from your client by our client.
As part of the deed our client was required to pay your client an amount of $2,900,000.00 in instalment from 15 July 2005. These payments were subject to a guarantee also incorporated in the Deed to previous correspondence in this matter particularly your letter of 8 June 2006.
Clause 3.1 of the deed provided inter alia as follows:
Subject to clause 3.2 [The Former Trustee] agrees to pay the Amount to Naaman in the following instalments:
'(a) $400,000.00 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.'
Clause 3.2 of the deed provided as follows:
' [The Former Trustee] 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.'
The guarantee provided inter alia at clauses 4.1 and 4.2 as follows:
'4.1 Naaman acknowledges that [The Former Trustee] has entered into the Sale Agreement at the request of Naaman in reliance, amongst other things, upon Namaan [sic] and this document to assure the accuracy and completeness of the warranties and representations provided by or on behalf of Bernard in connection with the Sale Agreement including without limitation the warranties and representations as to revenue projections for the Businesses. Accordingly Naaman unconditionally and irrevocably guarantees to [The Former Trustee] the truth, accuracy and completeness of the warranties and projections...
4.2 Naaman unconditionally and irrevocably indemnifies, and agrees to keep indemnified, [The Former Trustee], its officers, servants and agents against all loss or damage suffered or incurred by it relating directly or indirectly to any breach of any warranty contained in the Sale Agreement or any representations made by or on behalf of Bernard in connection with the Sale Agreement.'
To date our client has paid your client an amount of $800,000.00 in accordance with the deed.
The representations made by your client was that the business at the time of sale was turning over an amount of over $187,000.00 per week.
This representation was relied on by our client in negotiating the purchase price for the business. It has now become clear to our client that the representation was false and misleading. Your client provided written evidence as to the representation.
The turnover for the business has steadily declined. We are instructed that the figures for the periods 3 April 2006 to 12 June 2006 have been as follows:
1. Week ending 3 April 2006 $66,629.05
2. Week ending 10 April 2006 $75,532.08
3. Week ending 17 April 2006 $74,941.15
4. Week ending 24 April 2006 $67,887.31
5. Week ending 1 May 2006 $73,105.81
6. Week ending 8 May 2006 $64,240.56
7. Week ending 15 May 2006 $60,692.55
8. Week ending 22 May 2006 $66,575.05
9. Week ending 29 May 2006 $49,984.56
10. Week ending 5 June 2006 $52,573.56
11. Week ending 12 June 2006 $54,356.56
The actual turnover has dropped well below the representations made by your client. Our client is of the view that the amount paid to date well exceeds the value of the business purchased from your client. To date our client has lost in excess of One million dollars as a result of the failure of representations made by your client. The next payment under the deed of $500,000 is due and payable in 15 July 2006. Accordingly our client proposes to set off this amount and any other amounts payable to your client.
Naturally your client still has the ability to increase the turnover as he provides the services to our client pursuant to the Services Agreement which involves the day to day running of the Phantom businesses. If your client can achieve the same, then our client will consider reviewing their position in this matter."
On 11 July 2006, Mr Naaman's solicitors sent to the Former Trustee's solicitors a letter in the following terms:
"Our client...holds your client in material breach of the Deed of Guarantee and Restraint executed on July 15, 2005 for non-payment of monies as required under the terms of the deed. Our client...denies your client's assertions that he has made any misrepresentations or has engaged in misleading and deceptive conduct as alleged by your client. We are instructed by Mr Naaman who was engaged as a contractor with your client that at no stage has it ever been raised by your clients that he in fact engaged in misrepresentations or misleading and deceptive conduct.
In view of your client's breaches of the Deed of Restraint and Guarantee [sic] dated July 15, 2005 we hereby give notice that our client...terminates the said deed and our client...will seek damages for breach of contract.
We are instructed that your client is also in breach of the Share Sale Agreement for non-payment of the purchase price. We are instructed that monies paid by your client have been paid towards the consideration owing to Mr Naaman under the Deed of Indemnity of Guarantee and Restrain. We are instructed to also commence legal action for breach of the share sale agreement.
Since your client contracted in the capacity as trustee of the Slyfox [sic] Family Trust our clients will also pursuant to Section 197 Corporations Act 2001 hold Mr Peter Sleiman personally liable for any damages they may suffer."
Other proceedings
On 28 July 2006, the Former Trustee commenced proceedings against Mr Naaman and Mr Wheeler seeking damages and other orders arising from the alleged soliciting by Mr Naaman and Mr Wheeler of clients and employees of the security business.
On 18 August 2006, the Former Trustee discontinued those proceedings.
On 6 November 2006, Mr Naaman commenced proceedings against the Former Trustee claiming $2 million that he contended remained payable under the Deed of Guarantee and Restraint.
Thereafter the Current Trustee was appointed as trustee of the Sly Fox Family Trust.
On 27 February 2007, the Former Trustee was placed into voluntary liquidation.
Thereafter Mr Naaman's proceedings were stayed, and subsequently dismissed.
Mr Naaman's claim for $2 million
By its solicitors' letter of 20 June 2006, the Former Trustee asserted that:
(a) Mr Naaman had represented "at the time of the sale" that the turnover of "the business" was over $187,000 per week;
(b) that representation was "false and misleading";
(c) the turnover for the weeks commencing 3 April 2006 to 22 May 2006 was considerably less than $187,000 per week;
(d) the Former Trustee had lost in excess of $1 million "as a result of the failure of representations made by your client"; and
(e) accordingly, the Former Trustee did not propose to make the payment of $500,000 due under the Deed of Guarantee and Restraint on 15 July 2006 and proposed to "set off this amount and any other amounts payable to your client".
The letter concluded by stating that the Former Trustee would "consider reviewing their position" if Mr Naaman was able to "increase the turnover" as a result of his involvement in the day to day running of the business.
Before me, Mr Kelly SC, who appeared with Mr O'Connor for Mr Sleiman and the Current Trustee, did not seek to justify the allegations made in the letter of 20 June 2006, whether by proving that Mr Naaman had made the representations alleged, or by proving that any such representations were false or misleading.
Thus, Mr Kelly did not seek to justify the Former Trustee's statement that it did not propose to pay to Mr Naaman the $500,000 due on 15 July 2006.
In my opinion, notwithstanding the Former Trustee's statement that it would "consider reviewing" its position, this threat amounted to an anticipatory breach by it of an essential term of the Deed of Guarantee and Restraint. The letter also made clear that the Former Trustee proposed to fulfil its obligations under the Deed of Guarantee and Restraint in a manner substantially inconsistent with its obligations under that document, and an unwillingness, manifested before performance fell due, to perform the contract in accordance with the terms. In those circumstances, in my opinion, the Former Trustee committed an anticipatory repudiation of its obligations under the contract (see generally the discussion in N Seddon, R Bigwood and M Ellinghaus, Cheshire and Fifoot Law of Contract, (10th Aust ed 2012) at [21.12] and [21.13]).
That left Mr Naaman with a choice. He could refuse to accept the Former Trustee's repudiation of the contract, declare himself ready, willing and able to perform the contract and insist that the Former Trustee do the same.
Alternatively, Mr Naaman could accept the repudiation, rescind the contract and sue for damages.
It is clear from the terms of his solicitors' letter of 11 July 2006 that he elected for the second option. Thus Mr Naaman, through his solicitors, asserted that the Former Trustee was in "material breach" of the Deed of Guarantee and Restraint and, "in view of your client's breaches" terminated the agreement.
His evidence in cross-examination made clear that, from that moment he was no longer prepared to comply with his obligations pursuant to cl 2.1(c) and cl 6 of the agreement to provide introductions and assistance in relation to the business or to promote the businesses to prospective clients.
Thus he gave this evidence in cross-examination:
Q. "You understood, did you not, so far as the deed of guarantee and restraint were concerned, that agreement recorded that the relationship between yourself and [The Former Trustee] was that of employer and employee?
A. Yes.
Q. You saw yourself as being an employee of [The Former Trustee] at least for the purpose of doing the work that is set out in paragraph 2.1, for example, providing introductions and assistance, securing new clients, that work, yes?
A. Yeah, that's right, yes. Yes. Yes.
Q. You regarded yourself as an employee for the purpose of performing those functions, correct?
A. Yes.
Q. And entitled therefore to leave the job if you wished?
A. To leave the job?
Q. If you wished?
A. If I wanted to, yes.
Q. That's what you did by your letter of 11 July 2006?
A. You know, being employed and being under the contractual agreement that both parties have to abide to, I see as different things. He was employing me and paying me a salary as the CEO for Phantom. He was supposed to oblige by the documentation and the contract that he signed [off] paying me on time and the moneys that was coming to me, which didn't happen.
Q. In layman's language, on 11 July 2006 you decided to quit?
A. Actually, I didn't really decide to quit, it was actually Scott Taylor who suggested that I go seek legal advice.
Q. So you went and got legal advice?
A. Yes.
Q. You had the benefit of that legal advice when this letter of 11 July went out?
A. Yes.
Q. And you quit?
A. Well, yeah, yeah, you can say that, yeah."
Earlier, Mr Naaman had given this evidence:
Q. "Is this right, on and from 11 July 2006, you ceased to do any work of any description for the third defendant in these proceedings, [The Former Trustee]?
A. That's correct.
...
Q. On and from 11 July 2006, you ceased altogether providing any introductions and any assistance to the businesses when it came to securing new clients?
A. That's right.
Q. Ceased absolutely?
A. Yes.
Q. You see (b) where it says, "Comply with the terms of the restraint set out in clause 5," on and from 11 July 2006 you ceased absolutely to comply with the terms of that restraint?
A. Yes.
Q. You didn't regard yourself as being bound by it in any way?
A. Well I wasn't bound by it as much as he was bound - paying me the moneys that were owed to me.
Q. Sure, but just leaving the argument aside for one moment, the fact of the matter is that on and from 11 July 2006 you regarded yourself as being completely freed of any such restraint?
A. Yeah I had, I had every good intention to - under these agreements, to do well by the business but--
Q. If--
A. But - let me finish please. But when you don't get paid for something, right, and you've been advised by the - his national manager for me to get legal advice because they wanted to have a look at how much the company is worth now and decide what they're going to pay me after an agreement is already signed, well you know what, are you going to stick around?"
By cl 7.3 of the Deed of Guarantee and Restraint, Mr Naaman agreed that his relationship with the Former Trustee, for the purpose of that agreement, was as an employee.
Contractual statements of this kind "are not of themselves determinative, as parties cannot deem the relationship between themselves to be something it is not" (per McHugh J in Hollis v Vabu Pty Ltd [2001] HCA 44; 207 CLR 21 at [58]).
The position was summarised by Lord Denning MR in Massey v Crown Life Insurance Co [1978] 1 WLR 676 at 679 as follows:
"The law, as I see it, is this: if the true relationship of the parties is that of master and servant under a contract of service, the parties cannot alter the truth of that relationship by putting a different label on it.
...
On the other hand, if their relationship is ambiguous and is capable of being one or the other, then the parties can remove that ambiguity, by the very agreement itself which they make with one another. The agreement itself then becomes the best material from which to gather the true legal relationship between them." (cited with approval by the Privy Council in Australia Mutual Provident Society v Allan (1978) 52 ALJR 407 at 409)
See generally I Neil and D Chin, The Modern Contract of Employment, (2012, Lawbook Co) at [1.190] and C Sappideen, P O'Grady, J Riley and G Warburton, Macken's Law of Employment, (7th ed, 2011, Lawbook Co) at [2.340].
Mr Woods suggested that this provision must have been inserted in the Deed of Guarantee and Restraint by mistake. Mr Woods pointed to the fact that an identical provision appears in the Share Sale Agreement (see [30] above) and that, by the Services Agreement Mr Naaman had agreed with the Former Trustee to provide day to day management, marketing and administrative duties to the Former Trustee for an annual fee of $100,000 (albeit as an independent contractor and not as an employee: see cl 2.4 set out at [49] above.)
Mr Woods also drew attention to cl 3.3 of the Deed of Guarantee and Restraint (see [37] above) which provides that if Mr Naaman died during the term of the agreement, the "remaining payments" were to be made to Louise Natasha Naaman (who I assume to be his wife).
These are peculiar provisions. It does seem obvious that the inclusion of cl 12.3 in the Share Sale Agreement was a mistake as that document dealt with the sale of shares in the various companies and had nothing to do with the provision by Mr Naaman, or anyone else of services (whether as an employee or otherwise).
It is also peculiar that Mr Naaman agreed to provide services to the Former Trustee both under the Deed of Guarantee and Restraint (as an employee to promote the business and provide introductions) and under the Services Agreement (as an independent contractor to provide management, marketing and administrative duties).
Further, the provision in the Deed of Guarantee and Restraint that payments be made to Mrs Naaman in the event of Mr Naaman's death during the term of the agreement seems hard to reconcile with the parties' agreement that the relationship between the Former Trustee and Mr Naaman was to be "employer and employee".
But these are the terms to which Mr Naaman agreed. As I have said, he does not contend they are a sham or should be rectified. Mr Naaman agreed to provide his services to the Former Trustee pursuant to two different agreements; the Deed of Guarantee and Restraint and the Services Agreement. In each agreement he promised to provide different services and placed a very different price on the provision of those services; $2.9 million over two years in the Deed of Guarantee and Restraint and $200,000 over the same period in the Services Agreement. In one case (the Deed of Guarantee and Restraint) he described himself as an employee. In the other (the Services Agreement) he described himself as an independent contractor. In those circumstances, it seems to me that this is just the situation in which "the agreement itself becomes the best material from which to gather the true relationship between the parties" (see [81]).
It is true that there is authority for the proposition that the literal meaning of terms of the contract may not be applied if to do so would lead to an absurd result (for example Fitzgerald v Masters (1956) 95 CLR 420 at 426-7 and Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25; 9 BPR 17, 521). However I do not see any absurd results following from the parties' in the agreement in the Deed of Guarantee and Restraint that Mr Naaman was an employee.
Mr Naaman made no such assertion. Indeed, he agreed in cross-examination that he did regard himself as an employee of the Former Trustee (see [77] above).
In those circumstances I accept the submissions of Mr Kelly that Mr Naaman's claim for damages following his termination of the Deed of Guarantee and Restraint must be determined in accordance with principles relevant to contracts of employment.
In that regard, Mr Kelly submitted that the relevant principles were "comprehensively and authoritatively stated" by the High Court in Automatic Fire Sprinklers Pty Ltd v Watson (1946) 72 CLR 435.
Mr Kelly drew my attention to the following passages in the judgment of Latham CJ at 450:
"...where a servant is bound by a contract the terms of which are such that he is not entitled to claim any remuneration unless he serves for a specified period, and his employer wrongfully dismisses him before he has become entitled to be paid his wages, he is not entitled to any remuneration under the special contract because he has not earned it in accordance with its terms. He may claim on a quantum meruit for the value of the work which he has done in the broken period, but he can do this only if the special contract is no longer open, and therefore if he has exercised his right to accept the breach or repudiation by the master as discharging the contract...
... if an employer wrongfully dismisses a servant and persists in refusing to allow him to do the work for which his contract of employment provides, the position is that the only remedies which the servant has (apart from electing to regard the contract as discharged and thereby releasing himself from any obligations of the contract, and, if he chooses, suing upon a quantum meruit where he has done work for which he has not been paid) are, (1) an action for the enforcement of any rights which have accrued under the contract, eg, for wages earned in accordance with the terms of the contract but not paid; and (2) an action for wrongful dismissal. There is authority that when he sues for wrongful dismissal an allowance may be included in the damages awarded which might, if the servant had so elected, have been recovered upon a quantum meruit upon an indebitatus count...".
In the same case Dixon J said at 463:
"In certain forms of executory contract, where the promise of one party is to pay the other money in consideration of his transferring property, of his doing work, of his serving the former as his master, and, perhaps, of his providing other tangible things or definite services, the money to be paid is regarded as the price of or reward for the property or service when and so often as the transfer of the one or the performance of the other affords an executed consideration. In these contracts the promise to pay the price or reward is not construed as a simple obligation to pay a sum or sums at a future date, supported solely by a consideration consisting in the corresponding promise to transfer the property, do the work, serve, or provide the things or services by the other party, so that a mere readiness and willingness on the one side of the latter to perform his part is enough to entitle him to the payments, notwithstanding that, whether, owing to the fault of the former or without fault on either side, the property is not transferred, the work is not done, the relation of master and servant ceases, or the things or services are not provided. The most familiar example is that of the sale of goods. There the common understanding of an agreement to sell is that it is the goods and not the promises to deliver that are to be paid for. The result is that, if the seller tenders goods in accordance with his contract but the buyer rejects them, in breach of his contract, the seller cannot sue for the price; his remedy is for unliquidated damages for non-acceptance - cp. Plaimar Ltd v Waters Trading Co Ltd [1945] ALR 469 at p 474."
As Mr Kelly submitted, Mr Naaman makes no claim for wrongful dismissal in the present case. Nor could he; he was not dismissed. The evidence is that Mr Naaman saw himself as an employee for the purpose of doing the work required by cl 2.1 of the Deed of Guarantee and Restraint, believed that he could leave the job if he wished; and, after Mr Taylor suggested that he obtain legal advice and he had the benefit of legal advice, he quit his employment with effect on 11 July 2006.
Even if Mr Naaman was wrongfully dismissed - and he makes no such claim - the only remedy he has at common law (apart from electing to treat the contract as discharged, thus releasing himself from any obligations of the contract) is an action for the enforcement of any rights which have accrued (such as unpaid wages) and an action for wrongful dismissal. He would not be entitled to remuneration for work not done and remuneration not yet earned.
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.
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.
In those circumstances, I need not consider the further and alternative submission made by Mr Kelly, that the parties abandoned the Deed of Guarantee and Restraint.
The proceeds of sale of the Unit
It is common ground that, having paid out the amount owing by Mr Naaman to CKM Mortgages, and thus effecting a discharge of Mr Naaman's mortgage to that company, Mr Sleiman was subrogated to CKM Mortgages' rights under the mortgage (see R P Meagher, J D Heydon and M J Leeming, Meagher, Gummow & Lehane's "Equity: Doctrines and Remedies" (4th ed, 2002) at 351-362 and in particular at [9-060]) where it is stated:
"It is not open to doubt that where a third party pays off a mortgage he is presumed, unless the contrary intention appears, to intend that the mortgage shall be kept alive for his own benefit." (citing Ghana Commercial Bank v Chandiram [1960] AC 732 at 745; Cochrane v Cochrane (1985) 3 NSWLR 403 at 405).
The matter which divided the parties was whether Mr Sleiman was entitled to retain the entire proceeds of sale, over and above an amount equal to the debt of CKM Mortgages, to which he had become subrogated.
Ultimately, the only basis upon which Mr Naaman sought to contest Mr Sleiman's entitlement to the whole of the proceeds of sale of the Unit was his contention that it was a term of his agreement with Mr Sleiman that Mr Sleiman's entitlement to the transfer of the Unit was conditional upon him making all payments required under the Deed of Guarantee and Restraint (see [51(c)] above).
I do not accept that this was a term of the agreement.
Mr Naaman relied upon Mr Sleiman's agreement to the requirement specified by Mr Naaman which I have set out at [20] above ("I will require you as a part of the sale to make all mortgage payments on it until all monies are paid").
I regard that evidence as equivocal.
The reference to "until all monies are paid" could just as easily be a reference to "all monies" payable under the mortgage as to monies payable to Mr Naaman under the Deed of Guarantee and Restraint.
Mr Naaman also relied upon a conversation that he had with Mr Sleiman and Mr Taylor in late September or early October 2005 to the following effect:
Mr Naaman: "You were supposed to keep up the mortgage payments until the unit was sold or you worked out what you wanted to do with it.
Mr Sleiman: I will arrange the sale of the unit and the payout and discharge of the mortgage. Let's not transfer the unit into my name if I'm going to sell it. I do not want to pay the stamp duty. I'll leave it in your name and I will get Scott Taylor to obtain a power of attorney from you over the unit.
Mr Naaman: Until all the monies you owe are paid to me, you must make all mortgage payments if I agree to this. You take the unit subject to the mortgage. You must pay all monies owing to me.
Mr Sleiman: I agree. I will get the power of attorney drawn up."
That conversation is certainly consistent with Mr Naaman's contention and, because Mr Sleiman was not called to give evidence, it is not contradicted.
However, I find Mr Naaman's conduct in executing a power of attorney in favour of Mr Taylor and permitting the sale of the Unit and the payment of its entire proceeds to Mr Sleiman impossible to reconcile with any belief by Mr Naaman that it was a term of his agreement with Mr Sleiman that Mr Sleiman's entitlement to the Unit, and thus its sale proceeds, was in some way conditional upon the Former Trustee's payment, in the future, of the instalments referred to in the Deed of Guarantee and Restraint. The sale of the Unit was completed on 19 December 2005. On that date the Former Trustee had paid approximately $550,000 of the $900,000 then payable under the Deed of Guarantee and Restraint. It appears to me to be inconceivable that Mr Naaman would have permitted Mr Sleiman to retain the whole proceeds of sale of the Unit if, as he now contends, it was a term of his agreement with Mr Sleiman concerning the Unit that the Former Trustee make all of the payments called for by the Deed of Guarantee and Restraint.
For those reasons, Mr Naaman's claim against Mr Sleiman in respect of the proceeds of sale of the Unit fails.
Conclusion
For these reasons Mr Naaman's claims should be dismissed.
I will hear submissions from the parties as to costs.
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Decision last updated: 24 December 2014
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