Re Knaggs, A.D. v Ex parte Kurland, R.

[1985] FCA 220

Re: ALAN DOUGLAS KNAGGS
Ex Parte: RICHARD KURLAND And: DESMOND LIVINGSTONE NICHOLL as Trustee of the
Estate of Alan Douglas Knaggs
No. P366 of 1985
Contract

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF NEW SOUTH
WALES AND THE AUSTRALIAN CAPITAL TERRITORY
Beaumont, J.

CATCHWORDS

Contracts - formation of contract - negotiations - no formal document

Equity - equitable lien - monies paid in anticipation of contract being formed.

Hewett v Court (1983) 57 A.L.J.R. 211 - con.

HEARING

SYDNEY
#DATE 31:5:1985

ORDER

1. Application dismissed.

2. Applicant to pay respondents' costs.

Note: Settlement and entry of orders is dealt with in

Order 36 of the Federal Court Rules.

JUDGE1

This is an application by Mr. Richard Kurland for an order for specific performance of an alleged contract for the sale to him of the assets comprised in a solicitor's practice, the solicitor, Mr. Alan Douglas Knaggs, recently having been adjudicated bankrupt. Mr. Kurland makes an alternative claim for a declaration that he is entitled to an equitable lien or charge over the assets of Mr. Knaggs' practice to secure the repayment to Mr. Kurland of monies advanced by him in connection with the purchase. These applications are resisted by Mr. Knaggs and by his trustee, Mr. Desmond Livingstone Nicholl. For his part, Mr. Nicholl has made an application in the proceedings for a declaration that the transfer to Mr. Kurland of any asset of Mr. Knaggs' practice is void as against him as trustee by reason of either the relation back or preference provisions of the Bankruptcy Act, 1966.

1. Mr. Kurland, having practised as a solicitor in South Africa for 12 years, is in the process of seeking admission as a solicitor of the Supreme Court of New South Wales. Towards the end of 1984, in response to his enquiry of the Law Society of New South Wales as to the availability for sale of a solicitor's practice, Mr. Kurland was referred to Mr. Knaggs, who practised at Milsons Point under the name Douglas Knaggs & Co., but whose practising certificate granted pursuant to the Legal Practitioners Act, 1898 (N.S.W.) (as amended) had been withdrawn. Mr. Kurland was also told that the Law Society had appointed a receiver of Mr. Knaggs' trust account but that Mr. Knaggs was appealing against the withdrawal of his practising certificate.

2. Mr. Kurland approached Mr. Knaggs in late October or early November 1984 and it was agreed that Mr. Kurland should be employed in the practice as a "legal executive" or clerk with a view to the possibility that he might acquire the practice from Mr. Knaggs. This matter was discussed intermittently between the parties in early November 1984. According to Mr. Kurland, in a discussion with Mr. Knaggs on 13 November 1984, it was agreed that Mr. Kurland could acquire either the whole or half of the practice; that the practice was to be valued by an independent accountant to be nominated by Mr. Knaggs; that because Mr. Kurland was not qualified to practice, if the Law Society did not appoint a "locum" until he qualified, he was to have the right to nominate a solicitor to conduct the practice; and that debtors were to be excluded from the sale.

3. Mr. Knaggs, in his evidence, agreed with much of Mr. Kurland's version of this conversation but, according to Mr. Knaggs, no mention was made of the possibility of the appointment of a locum. On the contrary, Mr. Knaggs said, Mr. Kurland claimed that he expected to be admitted by the end of January 1985. (In fact, Mr. Kurland's application for admission is still pending.) Mr. Kurland's version is supported by draft heads of agreement drawn up by the parties dated 20 November 1984. Para.3 of that document provided:
   
   

"Since Kurland will not be able to practise in his own right until February, 1985 or later, then in the interim Kurland will arrange for the practice of Douglas Knaggs and Co. to continue as Solicitors, namely by taking on a locum or a future partner who will be the sole practitioner for the time being."

1. Shortly thereafter, Mr. Knaggs arranged for Mr. Cooney, chartered accountant, to value his practice for the purpose of the arrangement arrived at by the parties. However, after discussing the matter, Mr. Cooney later declined to accept the retainer, saying that a conflict of interest prevented him from acting.

2. In November or December 1984, Mr. Kurland paid to Mr. Knaggs or at his direction the sum of $9,000.00 on account of the purchase price to be paid for the acquisition of the practice or a share thereof. However, for reasons which were not clearly explained in the evidence, in the middle of December the parties came to a very different arrangement to that under consideration, for on 17 December they executed a memorandum of agreement in these terms:
   
   

"This agreement is made on the 17th day of December, 1984, between ALLAN DOUGLAS KNAGGS, of Unit 5, 50 Carabella Street, KIRRIBILLI, Solicitor, of the one part, and RICHARD KURLAND of 62 Torokina Ave., ST. IVES, of the other part;

1. KNAGGS shall sublet to KURLAND the area comprising the Lavender Bay side office and the next adjoining partitioned room on the northern side of Knaggs' premises at Suite 204, 4 Cliff Street, MILSONS POINT, with effect from 17th December, 1984.

2. If KNAGGS' practising certificate is determined then the sublease may at KNAGGS' option be forthwith determined by him by notice in writing to KURLAND, giving him one week to vacate the subleased premises.

3. The rental shall be $1,100.00 per month, and this shall include not only rental, but also payment for the use of the telephone, furnishings and equipment, stationery, receptionist, document exchange membership/usage, photocopying machine, general area where photocopying machined is located, tea making facilities and a proportionate share of all other facilities, furnishings, plant and equipment to be used by KURLAND in conjunction with KNAGGS.

4. Rental shall be payable in advance each month, the first payment to be made 17th December, 1984, and subsequent payments on the 17th of each and every suceeding month.

5. The rental payments may be offset by KURLAND against any balance outstanding from time to time of the amount of $9,000.00 which KURLAND has lent and advanced to KNAGGS, in anticipation of the purchase by KURLAND of a share or the whole of the business Douglas Knaggs and Co., depending on the outcome of KURLAND'S admission and KNAGGS' statutory committee proceedings, but which intended arrangement the parties have now agreed, shall be abandoned in favour of the present arrangement.

6. Neither party shall seek to attract business from the other in the sense of any approach to or contact by the other's clients. However, it is envisaged that parties may from time to time request each other to take over aspects of the work of each.

7. KURLAND undertakes to pay so much of the account of Accountancy Placements which was incurred to investigate the feasibility of the purchase of DOUGLAS KNAGGS AND CO. KNAGGS undertakes to pay so much of the account of Accountancy Placements which was incurred to update and/or correct the books of KNAGGS and incurred in conducting the normal business of DOUGLAS KNAGGS AND CO.

8. KNAGGS shall repay the loan due by him to KURLAND at the rate of $750.00 per week, commencing 17th December, 1984.

9. Neither party shall use in any way any information obtained hitherto about the other's business affairs and KURLAND shall forthwith return to KNAGGS any papers or copies papers obtained by him from KNAGGS' practice."

1. According to Mr. Kurland, towards the middle of January 1985, upon his complaining to Mr. Knaggs about his failure to make the payments required by the memorandum of agreement, Mr. Knaggs offered no excuse, whereupon Mr. Kurland suggested that the agreement in the memorandum be ignored and the previous arrangement reinstated. Mr. Kurland's evidence in chief of this discussion was as follows:
   
   

"And again using the first person as best you can who said what during that conversation?---I said to Knaggs, 'You haven't complied with this agreement.' His answer was just to shrugg his shoulders He did not comment, exactly what he said, but he just took that statement lying down. I said, 'Then we regard that agreement as not having been entered into,' and he said, 'Yes.' I said, 'then we continue as we were before?' and he said, 'Yes.' Then I said to him. 'Now, what is going to happen about the receptionist's wages?' - she had not been paid - so once more he put just a smile on his face and a shrug type of thing. So I said, 'This is what I am prepared to do. I will until the practice is transferred to my nominee, until we determine the value of the practice, I will pay the expenses. I will advance the money to you to pay the expenses, and against that whatever you get in you have got to repay me. All the amounts which are dealt with in this way would be on account of whatever purchase price. If there is any balance outstanding that way it would be on account of purchase price to be determined by the independent associate to be nominated by me.'"

1. According to Mr. Knaggs, a conversation along the lines alleged by Mr. Kurland did take place but occurred later - he says in the middle of March 1985. I accept the evidence of Mr. Knaggs on this aspect. (The date of this conversation could be material because of the time at which Mr. Kurland first became aware that bankruptcy proceedings were pending against Mr. Knaggs, a matter to be dealt with later.) Mr. Knaggs said in his evidence in chief that they decided to "resurrect the old agreement for sale which had never been committed to writing in any way and to engraft that to the ... lease ... in the Memorandum of 17 December 1984 but at a slightly different rental because the area to be taken ... was ... larger". Mr. Knaggs also agreed to Mr. Kurland's opening a bank account into which cheques payable to Mr. Knaggs were to be paid upon their endorsement by him in favour of Mr. Kurland. It was agreed that Mr. Kurland would be at liberty to operate this account and it was understood that he would apply the proceeds towards the outgoings of Mr. Knaggs' practice.

2. In addition to the operation of the bank account, Mr. Kurland, in the months of January and February 1985 (at least) paid a number of creditor of the practice, in particular, salaries of the staff. Although there is a dispute as to the amount paid, it is common ground that substantial amounts were disbursed by Mr. Kurland on behalf of Mr. Knaggs: it is agreed that, if it becomes material, the precise amount can be the subject of a separate inquiry so that only questions of principle need be resolved at this stage.

3. At the end of March 1985, efforts were made by the parties to prepare a document to reflect their arrangement. Mr. Knaggs prepared a draft agreement which was submitted to Mr. Kurland who suggested various amendments to the draft.

4. Clauses 1, 2 and 3 of the draft (ignoring Mr. Kurland's amendments) were as follows:
   
   

"1) Following the agreement of 17th December 1984, KNAGGS and KURLAND reverted to the arrangement for the sale by KNAGGS to KURLAND recited in paragraph 5 of the Memorandum of 17th December 1984.

2) The terms of that sale are that, in the event of the cancellation of KNAGGS's Practising Certificate, or otherwise the inability of KNAGGS to practice, then KURLAND would purchase the whole of KNAGGS's practice; but that if KNAGGS's Practising Certificate and ability to practice were left intact, then KURLAND would purchase one half of the practice.

Each of the modes of sale in the preceedings paragraph, were, and are, were to be dependent upon KURLAND's admission as a Solicitor.

3) The price to be paid by KURLAND for

(either) one half of the practice, or the whole of the practice, is to be determined and certified by a mutually satisfactory accountant, or in the absence of such an accountant, then by an accountant to be appointed by Messrs. ALLMAN & COONEY of Milsons Point."

1. In late March and early April, correspondence was exchanged between the parties which ultimately led to Mr. Knaggs withdrawing from any further discussions: first, on 29 March, Mr. Knaggs wrote to Mr. Kurland as follows:
   
   

"I am not prepared to negotiate to sign anything with you until you regularise a few of the problems you have caused me.

If you will sign the foot of this letter to confirm:

(a) you will not ever again approach any Client of mine to encourage the Client to take work elsewhere;

(b) you are not holding any papers or other property of mine;

(c) you will continue with the agreement between us for sale by me of half or the whole practice, for which you have paid me an initial $9,000,

negotiations can proceed, for reinstatement of the sub-lease.

I have told the accountant Kemp to call and value the practice and will keep in touch with you."

1. Next, on 1 April, Mr. Kurland responded:
   
   

"Thank you for your letter dated 29th March

1985. Although I do not admit that I have caused you any problems, I am prepared to confirm that

(a) I will not approach clients of yours to take work elsewhere

(b) that I do not hold papers or other property of yours

(c) I will continue the agreement for sale by you of your practice for which I have already paid you $9,000 on account."

1. Finally, on 2 April, Mr. Knaggs wrote to Mr. Kurland as follows:
   
   

"It seems to me out of the question to re-commence negotiations with you for a sub-lease.

You have stated in your letter of yesterday, Monday lst April 1985, that you hold none of my papers and yet I know categorically that you do, having seen them in your possession.

I require you to deliver to me the above-mentioned documents and my keys and to vacate my premises by the end of the day and not to return."

1. Some reference should be made to Mr. Knaggs' financial position and Mr. Kurland's knowledge of that position at the relevant time. Mr. Knaggs was in financial difficulty from at least November 1984. It is apparent that he needed funds at that stage to be able to conduct his practice. Although Mr. Knaggs told Mr. Kurland in late 1984 that he proposed to realise some assets so as to ease the liquidity crisis then facing him, the fact that the loan of $9,000.00 was needed to keep the practice afloat at that stage must have then indicated to Mr. Kurland that it was at least probable Mr. Knaggs was unable to pay his debts as they fell due. In any event, Mr. Knaggs was served with a bankruptcy petition in the last week of January and informed Mr. Kurland of that fact forthwith. This is, of course, well before the purported resurrection in March of the earlier arrangement.

2. In my opinion, questions of bankruptcy and specific performance apart, Mr. Kurland has failed to establish the existence of a valid contract to purchase the practice or any part of it.

3. In the first place, the history of the matter indicates that, as one would expect in such a case, it was the intention of the parties that, until the terms of a formal contract had been agreed upon and such a contract executed, no binding agreement should come into existence. In other words, in my opinion, the case is one of the third class described by Dixon, C.J., McTiernan and Kitto, JJ. in Masters v. Cameron (1954) 91 CLR 349 at pp 361'-2. It is true that the High Court was there concerned to construe the language used by the parties and, in particular, the phrase "subject to contract" there employed. However, in the principal authority there discussed, Rossiter v. Miller (1878) 3 App Cas 1124, Lord Blackburn spoke (at p 1149) of the parties' intention as disclosed by "the true construction of the evidence" (see 91 C.L.R. at p.362) and there is no reason to suppose that this evidence should be confined to the words used by the parties: it is open to the Court to infer that intention from the actions of the parties as well as from what they have said.

4. In the present case, the subject matter of the negotiations was complex and therefore would ordinarily be the subject of a formal, signed contract. This appeared to be the intention of the parties, as gathered from their conduct, in particular, their attempts to reduce the arrangement to a formal document (cf. Sindel v. Georgiou (1984) 55 ALR 1 at p 4).

5. In my opinion, the conduct of the parties evinced an intention that neither party was to be bound unless and until a suitable formal document was drawn up and executed. Since that stage of negotiation was never reached, it must follow that no binding contract ever came into existence.

6. I should add that a number of other defences were raised but, in the circumstances, it is unnecessary to consider them.

7. I turn next to the claim made by Mr. Kurland for a declaration that he is entitled to an equitable lien or charge over the assets of the practice to secure the repayment of monies advanced to Mr. Knaggs or paid on his behalf. Mr. Kurland submits that the reasoning in Hewett v. Court (1983) 57 ALJR 211 supports the grant of such relief.

8. In my opinion, the reasoning in Hewett may be distinguished for present purposes. There, although not specifically enforceable, a contract for the supply of the house did come into existence and the payments for which a lien was upheld were made on account of that contract which dealt with the specific property subjected to the lien. In the present case, there is no contract and thus no specific property to which equity could attach the lien or a charge. The case is rather one of payments made by Mr. Kurland in the knowledge of Mr. Knaggs' financial difficulties but without the benefit of any contractual commitment. It is thus a case of monies advanced on account of negotiations which have failed and for which, it may be said, the bankruptcy laws do not, but should, provide some measure of protection as is done in the context of an insolvent company (see Furey, "The Validation of Transactions Involving the Property of Insolvent Debtors" (1983) 47 Modern Law Review 257).

1. In the event, Mr. Kurland can establish no claim to any equitable relief. It is therefore unnecessary to deal with Mr. Nicholl's application.

2. In the result, I propose to dismiss Mr. Kurland's application. I make the following orders noting that the undertaking to the Court given by Mr. Knaggs to McGregor, J. on 16 May 1985 is no longer operative.
   
   

1. Application dismissed.

2. Applicant to pay respondents' costs.