Rae v Beddison Corporation Pty Ltd

[2009] NSWSC 27

CITATION:	Rae v Beddison Corporation Pty Ltd [2009] NSWSC 27
HEARING DATE(S):	2, 3 and 4 February 2009
JUDGMENT DATE :	10 February 2009
JUDGMENT OF:	Harrison J
DECISION:	The parties are directed to bring in short minutes of order reflecting these reasons for judgment.
CATCHWORDS:	CONTRACT – sale of shares in recruitment company – provision in agreement for payment of purchase price by two instalments – calculation of second instalment tied to company profit in the twelve months post-sale – whether purchaser entitled to reduce the second instalment by excluding items of income and including expenses – adjustment of contract price in accordance with terms of agreement
CATEGORY:	Principal judgment
PARTIES:	Wendy Florence Rae (Plaintiff) Beddison Corporation Pty Ltd (Defendant)
FILE NUMBER(S):	SC 15074 of 2007
COUNSEL:	F P Carnovale (Plaintiff) M J Slattery QC with D R Meltz (Defendant)
SOLICITORS:	Brown Wright Stein Lawyers (Plaintiff) Gadens Lawyers (Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION

HARRISON J

10 February 2009

15074 of 2007 Wendy Florence Rae v Beddison Corporation Pty Ltd

JUDGMENT

1 HIS HONOUR: From 28 May 1993 to 19 December 2005 Wendy Rae & Associates Pty Ltd ("the company") carried on a recruitment agency business specialising in the supply of both temporary and permanent workers and staff for clients. On 19 December 2005 the plaintiff, who was the owner of the whole of the issued capital in the company, sold all of her shares in it to the defendant ("Beddison Corporation") in accordance with a Deed for Sale of Shares ("the agreement") bearing that date. The purchase price under the agreement was $975,000, subject to the possibility of an adjustment downwards depending on the company's financial results for the 12 months following the date of the agreement. In circumstances and for reasons that are both uncontroversial and irrelevant, it was subsequently agreed that the relevant 12 month period for the purposes of these calculations should expire on 30 November 2006 rather than on 19 December 2006.

2 The purchase price was payable to the plaintiff in two instalments. The first instalment of $217,000 was referred to in the agreement as the Purchase Price Initial Amount. It was due and payable on the date of the agreement and was paid on that day. The second instalment, referred to in the agreement as the Purchase Price Deferred Amount, was payable on 19 January 2007. Provided that the company achieved a target profit (as defined in the agreement) of at least $275,636 over the following 12 months, the second instalment was to be $758,000 and was calculated at the rate of 2.75 times the target profit of $275,636. However, in the event that the company failed to achieve the target profit by the end of the 12 month period, the second instalment would be adjusted downward at the rate of 2.75 times the amount of the profit shortfall.

3 In these circumstances the precise manner in which the company's profit was to be calculated obviously became a matter of critical importance to the plaintiff and the defendant. Accordingly, the agreement contained specific provisions dealing with what was to be treated as income of the company on the one hand and what were to be treated as allowable expenses of the company on the other hand.

4 On 11 October 2007 the defendant paid the plaintiff $599,121.15. The defendant contended that on a proper interpretation of the agreement the target profit had not been achieved by 30 November 2006 as required and that it was entitled to reduce the second instalment from $758,000 to only that sum. This was disputed by the plaintiff who thereafter sued for what was in effect the full amount of the second instalment. These proceedings are concerned with that dispute and with the question of the proper interpretation of the specific provisions of the agreement dealing with the income and expenses of the company.

5 In the events that have occurred, that dispute has been confined within a relatively small compass. Subject to what appears below, it is limited to four principal areas that can be conveniently discussed under the following headings:

1. Interest received by the company;

2. Recruitment costs;

3. Manager's salary adjustment;

4. Bonuses.

Interest received by the company

6 After the sale of her shares to the defendant, the plaintiff withdrew her working capital as she was entitled to do. The defendant was therefore required to fund the company and did so by the injection of funds apparently provided by entities associated with the defendant. In the year following the sale the company earned $4,809.16 in interest on its credit balances from time to time. The defendant argues that this should not be treated as income of the company for adjustment purposes. The plaintiff contends that it should.

7 During the time when the plaintiff was running the company she helped to fund its operations in part by accumulating capital and then crediting interest earned on that capital on the income side of the accounts. The defendant submits that the terms of the agreement operate to produce a different result for adjustment purposes.

8 "Dividend Amount" is defined to mean $279,825. Clause 5.4 of the agreement required the defendant upon completion to cause the company to pay the plaintiff an amount not less than the Purchase Price Dividend Advance Amount of $160,000, and satisfy the dividends in full. There is no dispute that the plaintiff was paid the sum of $279,825 in satisfaction of this obligation. The defendant contends that this payment "denuded the [company's] business of working capital". Indeed, the plaintiff agreed in evidence that she was "removing the working capital of the business".

9 The defendant contended that the plaintiff's removal of her capital from the company in this way, and the requirement that it had necessarily to be replaced with the defendant's capital "was quite outside the normal operations of the [company's] business and was abnormal". In support of this contention the defendant pointed to a series of concessions made by the plaintiff that the exchange of capital in the way that occurred was solely the product of the sale of her shares and was not something that she would normally have done. The plaintiff also agreed that it was an abnormal event for her to take her money out and for someone else's money "to be put in". She agreed that it would not normally have happened in the way that she ran the business and was "in ordinary language an abnormal event".

10 The agreement defined the Purchase Price Profit Actual Amount as "the net profit of the Company before tax adjusted for abnormals (if any), to be determined in accordance with Accounting Standards, but excluding any charge or item of expense attributable to Excluded Items, for the period commencing on the Completion Date and ending on the first anniversary of the Completion Date". (The defendant originally advanced an argument under the present heading that drew upon the definition of Excluded Items but expressly, and in my view quite understandably, abandoned that argument during final submissions).

11 The defendant argued in these circumstances that it became necessary to adjust the net profit of the company "for abnormals" to exclude interest earned on the defendant's injection of capital as an abnormal event. The defendant submits that as a matter of ordinary English, the interest income earned on that capital was an abnormal item and that its removal by the defendant was appropriate. To do otherwise according to the defendant would be to reward the plaintiff for interest on capital advanced on its behalf solely as the result of removal of capital by her.

12 I disagree. "Accounting Standards" is defined in the agreement to mean "the accounting standards and practices adopted by the Company down to and including 30 June 2005, subject to adjustment in accordance with clause 1.4". Clause 1.4 is not presently relevant. It was not contested that interest income was and had been part of the company's ordinary pre-tax profit down to and including 30 June 2005.

13 The agreement properly understood speaks of abnormal items. The defendant's argument seeks to expand the meaning of the word "abnormals" in the agreement from abnormal items for accounting purposes to abnormal events such as those properly conceded by the plaintiff. However, the so-called abnormality of a capital withdrawal and capital injection in the scheme of an agreement that expressly contemplated and entitled the plaintiff to do what she did is neither an abnormal item in an accounting sense nor in my opinion an abnormal event in the scheme of the present transaction. Interest income does not become an abnormal item simply because the source of the funding changes. The income earned by the defendant as interest on its capital should have been accounted for by it as income for the purposes of the relevant adjustment.

Recruitment Costs

14 Shortly after the defendant acquired the plaintiff's shares in the company, four of its five staff left. This was so notwithstanding that under the agreement the plaintiff worked at the company on a part-time basis on a reduced salary of $30,000 plus superannuation. The defendant operated from Victoria and had no connection with New South Wales other than by virtue of its acquisition of the shares in the company. It therefore became necessary for competent replacement staff to be engaged. In order to find such staff, the company engaged the services of an external recruitment agency. New staff were located in this fashion and the company engaged them. The external recruitment agency billed the company $34,476.32, which the company paid. That sum was included as an expense in the adjustment accounts. It is not in issue that the sum was properly expended or that the sum was reasonable. The only issue is whether or not it should be included in the Purchase Price Profit Actual Amount in the Adjustment Accounts.

15 It was the plaintiff's contention that this expense was of a type that had never previously been incurred by the company, presumably because the plaintiff herself had recruited staff as required. Accordingly, recruitment costs should be excluded from the Purchase Price Profit Actual Amount having regard to the terms of the agreement, and in particular to the definitions of "Accounting Standards" and "Excluded Items". The former definition has been referred to previously. "Excluded Items" are defined as follows:

"' Excluded Items ' includes any class or category of expense not incurred by the Company prior to 30 June 2005, and without limitation, includes the amount of any dividend declared and payable by the Company after the Completion Date and any expense incurred in relation to:

(a) any writedown or writeoff of the value of stock or debtors;



(b) interest incurred by the Company;

(c) licence fees, royalties or similar charges paid or payable by the Company to the Purchaser or any Related Corporation of the Purchaser; or

(d) management or similar fees paid or payable by the Purchaser to any Related Corporation of the Purchaser;"

16 The plaintiff submitted that the recruitment costs amounted to a class or category of expense not incurred by the company prior to 30 June 2005. The plaintiff's evidence was that expenses of that kind paid to external recruitment consultants had never previously been incurred. The plaintiff submitted that the words "class or category" were two words with the same meaning and referred to a particular kind of expense that is normally recognised in the accounts when it is incurred. In this case there was no such class or category and accordingly recruitment costs fell within the definition of excluded item.

17 In contrast the defendant contended that the company had prior to 30 June 2005 incurred a "class" of employee recruitment related expenses. For example, there was evidence that Messrs Buckland and Henneberry were recruited by means of the placement of advertisements in the press or with on-line recruitment organisations such as Seek. It was submitted that the plaintiff herself had committed time and resources to the preparation of the advertisements used for that purpose. There was other evidence of the expenditure of in-house time and resources directed towards recruitment of staff from time to time. This was not a matter of controversy.

18 The plaintiff was cross-examined about these matters. She conceded that the costs incurred in this way were incurred "in the process of recruitment of these permanent staff" and "in the same manner as if [she were] interviewing through an agency". The defendant submitted that the effect of the plaintiff's evidence was that what was done by her in-house corresponded to what occurred through the use of an agency. For example, the defendant referred to the following passage of the plaintiff's evidence at transcript page 48:

"Q. Your preference as a competent manager was not to use an external agency but you thought you were pretty good and you could do it yourself?
A. Exactly.

Q. But that was, in effect, your own judgment about your abilities versus those of others, wasn't it? You thought you were better than many agencies, didn't you?
A. Considering I had 28 years experience, I suppose I had a lot going for me.

Q. That was one of the bases of your judgment, that you had a particular set of skills and you tended therefore to do it yourself?
A. Exactly.

Q. But you would agree with me, would you not, that whether they did it as competently as you or not, that you expected that the very things that the agency would do would be exactly the same as the things that you would do, isn't that right?
A. Not necessarily.

Q. Well, the model would be pretty similar, wouldn't it?
A. Alison Watts has commented in e-mail all the agencies do is shift people around.

Q. Just answer the question, please. You would expect that the model of what the agency, indeed as you saw the agency at work, was trying to do was perhaps not as competent as you but nevertheless the same sort of structure and model as you would adopt to recruit employees, isn't that right?
A. Yes.

Q. And that the only difference here is that what was going on was that whereas that was usually done by you because of your judgment about your competence, you were well aware that this particular task was being outsourced in the first half of 2006, weren't you?
A. Mmm mmm, mmm mmm."

19 The principal point of difference between the parties was whether or not costs that had never previously been included as a separate line item in the accounts, because they had in effect been absorbed within or under some other more general expenditure and therefore had not been specifically itemised or individually identified, were or were not a class or category of expense "not incurred by the Company" before the relevant date. In my opinion, the evidence established that the company had incurred expenses in relation to recruitment of staff. What the company had not done was to pay external consultants to perform this task. The class or category of expense – that is to say, expenditure on recruitment, had previously been incurred, although not by way of the retainer of an external agency. Whether incurred internally or externally, the same class or category of expense had previously been incurred and became an expense that the defendant was entitled to bring to account for the purposes of the relevant adjustment under the agreement.

Manager's salary adjustment

20 In November 2005, when the plaintiff and Mr Beddison were negotiating for the sale of the company's shares, they made an agreement. The agreement was oral. It was agreed that, in the calculation of the adjusted profit for the 12 month post-sale period, there would be a limit on the amount that could be included as an expense for the salary payable to any new manager that the company employed in that period. The agreed sum was $75,000. What remained unclear, and requires determination in these proceedings, is first, whether the sum of $75,000 is inclusive or exclusive of superannuation and secondly, whether or not it was agreed that an adjustment would only be made if and when the company employed a new manager and only in respect of the period from the start of the new manager's employment to the end of the 12 month post-sale period on a pro rata basis.

21 A new manager was in fact appointed for the period from June to 30 November 2006 and the only dispute between the parties in respect of that period relates to the superannuation issue. There remains a dispute with respect to the first six-month period. The plaintiff contends that a new manager was not employed during that period and she argues that the oral agreement did not permit the defendant to include notional costs at the agreed rate in the adjustment calculation. The dispute about whether the "agreed" sum includes or excludes superannuation applies in this case as well. There is an additional issue that may arise, which the plaintiff propounds, concerning the enforceability of the oral agreement in any event having regard to an "entire agreement" clause in the agreement. This is discussed below.

22 The starting point is a comparison of the versions of the oral agreement for which the plaintiff and the defendant respectively contend. The plaintiff gave evidence in paragraph 41 of her principal affidavit about this in the following form:

Rae: "I believe that an annual salary package of $75,000 is all that is necessary to pay a new manager."

Beddison: "I plan to grow this business. The person I employ must have the capacity to really push the business ahead, so I may have to pay more."

Rae: "I fully understand that. However, it's not necessary to do that to run the business as it currently stands."

Beddison: "I see your point. I'll agree to limit the annual salary package of the new manager to $75,000 for our purposes. If I choose to pay a larger package it will be at my expense."

Rae: "That's fine."

23 Mr Beddison said at paragraph 5 of his affidavit of 12 January 2009 that his best recollection of the conversation was as follows:

Rae: "I will keep working but I will take a salary of $30,000 so that I can keep costs down. I will only work a few days a week and I will work less hours."

Beddison: "If that is what you want to do then I agree but it's less than your market rate. I will need to appoint a manager for the business"

Rae: "I would only pay a manager $75,000. I'm concerned you'll put in a very expensive manager which will affect my payout."

Beddison: "I am not going to find anyone to fill that role for $75,000. I need someone competent. None of my management staff work for that kind of money. I know I won't find anyone in Sydney to work as senior manager for $75,000 per annum."

Rae: "OK. My concern is that I don't get any additional expenses from the Beddison Group of companies for WRA. This affects my payout."

Beddison: "I don't know whether we will transfer someone in from the Beddison Group or recruit from outside, but I do know I won't get anyone for $75,000. I'll agree to cap the management charge for this position at $75,000 regardless of what we pay the person or whether it be an internal person or we recruit somebody from outside. In order to get someone at that level I'll have to pay a lot more than $75,000 but I will carry any additional amount over the $75,000 management charge cap at my expense regardless of who performs the job and what we pay them. I won't charge more than that in your earn out. I'll cover any difference."

Rae: "OK. My concern is that I don't get high expenses from the Beddison Group of companies for WRA."

Beddison: "The $75,000 cap will protect you from that."

24 The plaintiff denied this conversation.

25 At paragraph 6 of the same affidavit Mr Beddison said that a little while later, in a separate conversation in late November or early December, he spoke to the plaintiff as follows:

"6. I have asked Alison Watts to manage WRA. She is presently General Manager of Hoban and will be responsible for integrating WRA into our group of companies. You and the staff at WRA will report to her. Alison works out of Melbourne and will come up to Sydney as needed. She will take immediate control of the business."

26 In his affidavit of 9 May 2008 Mr Beddison referred to paragraph 41 of the plaintiff's principal affidavit and offered the following comments that should be noted:

"20. I refer to paragraph 41 of the Rae Affidavit. I do not agree with the contents of paragraph 41 of the Rae Affidavit. I agree with the substance of the conversation referred to in paragraph 41 of the Rae affidavit, save that I stated the annual salary package would be $75,000 plus super. The context of the discussion was that as a new manager needed to be appointed for WRA, it was agreed between Wendy Rae and myself that there would be an allowance in accounts for the manager's salary of $75,000 plus super. There was never any expectation on my part that we would be able to recruit a manager at that salary. It was clearly going to be a significantly higher salary."

27 This is to be compared with what Mr Beddison said in paragraph 7 of his 12 January 2009 affidavit on this topic:

"7. Insofar as superannuation is concerned I do not have any recollection of a conversation where the words " plus super " were expressly used in relation to the position of the senior manager for the business of WRA. However, prior to the discussion about the position of the manager, Ms Rae and I had been discussing other more junior employees of the business, including their salaries. With each of these employees, Ms Rae referred to them as earning a "salary", which was prior to the addition of a superannuation component. When we came to discuss the position of the manager of the business, the conversation was the same. The conversation did not refer to a package including superannuation. As with the other employees, the word used was "salary". The word package was not used and the inclusion of superannuation was not referred to."

28 The evidence given by the plaintiff about this topic is at paragraph 4 of her affidavit of 8 December 2008 as follows:

"4. The expression "salary package" is (and has for many years been) widely used in the recruitment industry to mean the minimum salary and other benefits to which an employee is entitled as of right under the terms of his or her employment. It does not matter whether the minimum entitlements are described as "salary" in the employment contract. The expression "salary package" is used to denote that the minimum entitlements can comprise a number of items which, together, form the package. A minimum or guaranteed "bonus" is an amount to which the employee is entitled as of right and therefore it forms part of his or her "salary package". In addition, contributions to a superannuation fund, as required by the law or the contract of employment, are regarded in the recruitment industry (and have been for many years) as components of an employee's salary package."

29 The defendant submitted that the words that Mr Beddison asserted formed part of his conversation with the plaintiff in paragraph 5 of his affidavit of 12 January 2009, to the effect that he would carry any additional amount over $75,000 regardless of who performs the work and what they may be paid, and whether they come from inside or outside the company, demonstrate that what was being discussed was an accounting exercise authorising the making of a notional entry for the manager's salary and adjustment under the agreement on the same basis. The defendant submitted in these circumstances that as long as (presumably managerial) services of some value were provided to the company, this conversation released it, in effect, from the need actually to sign up a manager as one of its employees. The defendant argued that the terms of the oral agreement should be construed as showing that the parties reached what the defendant described as a conventional figure that would be deducted as an expense no matter what happened and no matter who was employed by the company as a manager or whether they were employed at all.

30 The defendant also emphasised that there was an acceptance in these proceedings that an appropriately qualified manager could not be obtained for only $75,000. This had the effect of giving support to the suggestion that the discussion of that sum was purely arithmetic and hypothetical and not tied to any associated expectation on the part of either the plaintiff or Mr Beddison that the employment of an actual manager was necessary before the sum of $75,000 could be used in the adjustment process.

31 In the events that occurred, the company did employ a new manager, Roslyn Martin, who commenced work for the company in June 2006. The plaintiff submitted that on a proper construction of the November 2005 oral agreement, the parties agreed to make an adjustment only if and when a new manager was employed by the company and then only in respect of the period from the start of the new manager's employment to the end of the 12 month post-sale period on a pro rata basis. Accordingly, the defendant was entitled to bring to account in the adjustment exercise only that proportion of $75,000 that corresponded with or equated to her actual period of employment with the company regardless of what she was paid over and above that sum in fact.

32 In my opinion the oral agreement with respect to what was contemplated by the sum of $75,000 should be decided in favour of the plaintiff. The parties to the conversation were discussing a cap or upper limit upon the amount that the defendant could bring to account in the adjustment process. Mr Beddison himself contends, and it does not appear to be in dispute, that an appropriately qualified manager of the business could not be recruited for that sum. The sum was therefore not being discussed as what some anticipated manager of the business would receive because no anticipated manager of the business would be employed for that amount. The conversation was directed to limiting the amount that the defendant could use to reduce the profit of the company in accordance with the formula in the agreement. As Mr Beddison said, "I'll agree to cap the management charge for this position at $75,000 regardless of what we pay the person". He also said, "I will carry any additional amount over the $75,000 management charge cap at my expense". Finally Mr Beddison said, "I won't charge more than that in your earn out. I'll cover any difference". These are words whose meaning and effect are not in my view readily susceptible to misunderstanding or doubt. The words "regardless of what we pay the person" are unqualified and must mean to include the payment of benefits such as superannuation. The same must be true of the words "I'll cover any difference".

33 I am fortified in this view for another reason as well. As will be apparent, Mr Beddison has given two conflicting versions of whether or not the words "plus super" were used in his conversations with the plaintiff. At paragraph 20 of his affidavit of 9 May 2008, Mr Beddison agreed "in substance" with what the plaintiff said in paragraph 41 of her affidavit, where the words "plus super" were not used. However, Mr Beddison asserts that he did in fact use them. By way of contrast, in paragraph 7 of his affidavit of 12 January 2009 he said "I do not have any recollection of a conversation where the words "plus super" were expressly used". Exactly why this unexplained change in the evidence should occur is difficult to understand. It is at least consistent with the accuracy of the version given by the plaintiff on the issue of whether the words "plus super" were used or not.

34 Both parties attempted to explain what they would each have understood to be conveyed by expressions such as "salary" and "salary package". These explanations were to my mind in each case self serving and unhelpful. This seems to me in the present circumstances particularly to be so for the reason that, as I have found, the context of the conversations in which these words are said to have been used was the setting of a limit or cap on the amount available to the defendant in the adjustment exercise and was not a discussion about precisely what the proposed manager of the business was going to be paid in fact.

35 With respect to the issue of whether or not the defendant was to be entitled to bring to account notional or conventional costs of a new manager before he or she was appointed, the same conversations make it clear on any version that what the parties were discussing related to the cost of a new manager, not management costs. The plaintiff's version of the conversation speaks about "a new manager". Mr Beddison agrees in substance with this version. Mr Beddison said he did not know whether he would transfer someone in from the Beddison Group or recruit from outside. At paragraph 20 of his affidavit of 9 May 2008 Mr Beddison said, "[t]he context of the discussion was that . . . a new manager needed to be appointed for WRA". At paragraph 7 of his affidavit of 12 January 2009 Mr Beddison again said, "[t]he context of the discussion was that . . . a new manager needed to be appointed for WRA". Presumably this repetition was not inadvertent. This was not a discussion about the allocation of responsibilities to an internal employee for the purposes of managing the business until a suitable full-time manager could be found. Nor was it in my opinion a discussion that contemplated the notional adjustment of the cost associated with such a secondment for the purposes of the agreement.

36 The defendant submitted that work performed by Alison Watts as an acting manager meant that it was "beside the point" that she was not actually employed as such because the oral agreement contemplated a notional accounting entry. It also submitted that the plaintiff's interaction with her demonstrated or evinced recognition by the plaintiff that Ms Watts was in all respects acting or operating for relevant intents and purposes as if she were the new manager, and that Ms Watts fulfilled "a managerial role". For the reasons earlier set forth, I consider that these submissions are beside the point and I reject them.

37 The defendant is only entitled to adjust the salary of Roslyn Martin and only at the rate of $75,000 per annum all-inclusive.

38 The plaintiff contended, in the event that the issue of the notional cost of the manager were decided against her, that she would wish to argue that cl 17(1) of the agreement would operate to exclude evidence of the oral agreement and the defendant's reliance upon it. That clause provided as follows:

"17(1) This Agreement embodies the entire agreement between the parties with respect to the subject matter of this Agreement and supersedes any prior negotiation, arrangement, understanding or agreement with respect to the subject matter or any term of this Agreement."

39 The defendant did not invoke this clause for any purpose and the plaintiff only sought to do so in circumstances that no longer prevail. It is therefore unnecessary to consider it further.

Bonuses

40 Determination of this issue does not give rise to any contested issue of fact. Upon my understanding of the way in which this issue was ultimately argued, that includes an abandonment by the plaintiff of any challenge to the entitlement to bonuses because of either some invalidity affecting the exercise of any discretion to pay them at all or as a result of the terms of the relevant employees' contracts of employment that allegedly authorised their payment. The only question that arises for determination is how the adjustment under the agreement operates with respect to the treatment of bonuses having regard to the way in which bonuses were historically treated in the accounts of the company.

41 In December 2006 and January 2007 the company paid bonuses totalling $25,723.11 to three employees (Roslyn Martin, Cathleen Jennings and Mark Redmond) for the quarter ended 31 December 2006. It also paid a bonus in December 2006 to another employee (Paula Hunt) for the 12 months ended 30 November 2006. The superannuation contribution on the bonuses was also paid at this time. The plaintiff contends that even though these payments were made, the bonuses cannot all be included as expenses in the calculation of the Purchase Price Profit Actual Amount. The defendant contends otherwise.

42 The plaintiff accepts that the $8,000 bonus and related superannuation paid to Paula Hunt in December 2006 should be included as an expense in the calculation of the profit for the 12 month post-sale period because it properly relates to that period. However, the plaintiff submitted that the agreement did not authorise the accrual of unpaid bonuses. That was said to follow from the definitions of "Purchase Price Profit Actual Amount" and "Accounting Standards". In summary, the 12 month post-sale period accounts must be prepared in accordance with the accounting standards and practices adopted by the company up to and including the year ended 30 June 2005. The plaintiff's oral evidence was to the effect that in the years prior to the agreement the company paid bonuses quarterly in the month following the end of each quarter to which they related but that it was the company's practice not to accrue unpaid bonuses. An exception to that practice was made in the accounts for the four months ended 31 October 2005, which was the only occasion when unpaid bonuses were accrued. If the company's accounting practices up to June 2005 were such that it did not accrue unpaid bonuses in its accounts, then according to the plaintiff's submission those practices must be followed for the 12 month post-sale accounts.

43 The plaintiff relied upon the following evidence given by her in cross-examination as support for these submissions:

"Q. One of the features of bonus payments which is a pretty natural feature of bonus payments is that you've really got to look at the overall performance for a particular period of time of the employee before you can assess the bonus. It just makes common sense, doesn't it? You are smiling because you agree?
A. Yes.

Q. If you are paying a bonus for, let's say, a quarter ending 30 June 2009, this year, starting on 1 April and ending on 30 June, it would be actually impossible to pay it before 30 June and to do so fairly, wouldn't it?
A. Exactly.

Q. Because the hard work of the employee during that quarter could result in a major placement occurring at 5.00pm on 30 June; isn't that right?
A. Uh-huh.

Q. And that the true assessment of the worth of the employee over the quarter to the business is only able to be assessed when that last contract is taken into account?
A. Correct.

Q. And that that has to be done at some time probably after midnight on 30 June, the end of the quarter, doesn't it?
A. Uh-huh.

Q. So it is in fact an inevitable feature of the assessment of bonus payments for good employees that the assessment and calculation of the bonus has to occur after the end of the period. Isn't that right?
A. That's correct.

Q. But you know in your own experience in this business before December 2005 that when you were assessing a bonus payment for 30 June in a particular year, paying it somewhere in the next quarter, you knew that you were assessing it for the prior quarter, didn't you?
A. Correct.

Q. And that it is part of good business practice that you, in effect, pay bonuses on a regular basis in one quarter after the quarter to which they relate normally?
A. Uh-huh.

Q. And depending on the efficiency and workload, that is often done within the first fortnight of the next quarter, sometimes a bit later?
A. Yes.

Q. But in every sense of the word, if such a system is being followed, you would agree, would you not, that the payment of a bonus early in the second quarter based upon the performance of the employee in the first quarter is related in the ordinary use of the word to the employee's performance in the first quarter, isn't it?
A. That's correct.

Q. And if you go back, for example, to the schedule 2 document that I took you to in the contract back at page 102, if you look at those and the evidence of the formula at the bottom of page 102, to the extent that you ran a bonus system as your system ran, looking at item 1, "The company allows a minimum amount of $10,000 per year as commission to be shared among the consultants", but what would happen is that at the end of the year the $10,000 would be set aside and some assessment would be made after the end of the relevant financial year as to what each of the consultants had contributed and the pool would be distributed fairly among them. Is that right?
A. Depending on each individual's performance on a quarterly basis, yes.

Q. But that was inevitably done as an after balance date event?
A. At the end of each quarter, yes.

Q. Then in item 2 the same thing happened for the administration manager; is that right?
A. That's correct.

Q. If you look now to page 109, the place where I started on this subject of bonuses, do you see the $58,000 there?
A. Yes.

Q. You're accruing that bonus in that period in respect of a combination of that period and prior periods, aren't you, or just that period?
A. That is a gift from me, a bonus from me to my staff as a thank-you based on the years of experience as broken down.

Q. But it was accrued by you because you thought that was normal and appropriate?
A. Yes.

Q. In the accounts that were being closed at that time?
A. Yes.

Q. So it doesn't matter when the payment was made, it was appropriate business practice and one of your practices to accrue it within the same period, within the period that was being closed?
A. We didn't normally accrue bonuses, no.

Q. They were normally just wound up in salaries, were they?
A. No, they were paid at the end of each quarter. It was not a practice to accrue bonuses at the end of each financial year, no.

Q. They were paid in fact more frequently than that, weren't they?
A. Quarterly, yes.

Q. So at least to the extent that there was some sort of accrual done, it didn't matter when the payment was but the accrual occurred in effect before the closure of these last accounts and covering probably not just the four months of those accounts but earlier times as well?
A. No, that would be the four months.

Q. Sorry?
A. It was simply the four months.

Q. I suggest to you it was not abnormal to, in effect, pay a bonus to those employees even after that period but accrue it within the period. Isn't that right?
A. There was a $5,000 bonus in addition paid in the month of October to Kelly and to Michelle in addition to that $58,000.

Q. Leaving aside the additional amount, the answer is otherwise yes?
A. That the money was accrued? It was not specifically accrued. It was just paid when it was due.

Q. What you appear to have done here is to accrue this amount of bonuses before the closure of the period; isn't that right?
A. That is correct.

Q. And you may have paid those bonuses during the period or after 31 October, it does not matter, but you accrued it within the period, didn't you?
A. Because of the sale of the business, yes.

Q. That's something you certainly chose to adopt as one of your practices, didn't you, even for sale purposes?
A. For the sale purpose it was appropriate to do so."

44 Bonuses were necessarily calculated at a time after the expiration of the period in which they were earned. The plaintiff's evidence about the practices of the company was that they were not ordinarily accrued. Bonuses were brought to account when paid. That was the accounting practice adopted by the company up to 30 June 2005. This seems to be clear from the plaintiff's evidence. There was no evidence to the contrary. It seems to me that the contentious bonuses must be treated in the same way for the purposes of the adjustment under the agreement. Accordingly, unless otherwise agreed between the parties, for the purposes of those adjustment calculations the defendant is not in my opinion entitled to the benefit of bonuses earned but not paid, upon the basis that they have been accrued, prior to 30 November 2006.

Orders

45 Having regard to the manner in which it was agreed I should approach the matters in dispute, it is appropriate that I simply direct the parties to bring in short minutes of order to reflect the final balance of accounts between them and any order necessary to give effect to an entitlement to a verdict in a specific amount.

46 There remains as well the question of costs upon which final submissions may be necessary at some convenient time following a consideration of these reasons for judgment. I should observe that the amount in issue in these proceedings is on any view disproportionate to the costs that have undoubtedly been incurred by both parties in the prosecution of their respective positions in this litigation. It may well be in these circumstances that a resolution of the question of costs is possible without the requirement of any further argument or order of the Court.

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