Riboni v Tropeano
[2007] VSCA 99
•23 May 2007
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No. 12915 of 1990
| PAOLO RICARDO RIBONI |
| v. |
| SAMUEL JOHN TROPEANO and ROCK TEMPONE |
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JUDGES: | BUCHANAN, NETTLE and ASHLEY JJA | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 27 February 2007 | |
DATE OF JUDGMENT: | 23 May 2007 | |
MEDIUM NEUTRAL CITATION: | [2007] VSCA 99 | |
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Contract – Sale of business – Fresh evidence on appeal – Documents available at trial – Business not carried on in the usual and ordinary course pending settlement – Damages for breach of restraint of trade clause.
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr P R Riboni in person | |
For the Respondents | Mr A W Sandbach with Mr I W D Upjohn | Septimus Jones & Lee |
BUCHANAN and NETTLE JJA:
This proceeding arose from the purchase by the appellant of a suburban accountancy practice conducted by the respondents.
The negotiations for the transaction commenced in August 1988. In the course of the negotiations the appellant had access to the records and accounts of the practice. The contract of sale was executed on 17 January 1989. The price was fixed at $514,000. The appellant paid $380,000 to the respondents on obtaining possession of the practice on 23 January 1989 and under the agreement promised to pay the balance of $134,000 on or before 9 January 1990. The appellant also executed a promissory note in an amount of $134,000 to secure payment of the balance. The agreement provided that the purchaser was to pay interest at the rate of 18 per centum per annum on any amount due and unpaid under the agreement.
The appellant failed to pay the balance due under the agreement. The respondents brought this action claiming the sum of $134,000 and interest under the agreement, and, in the alternative, payment of the sum of $134,000 pursuant to the promissory note. In his defence and counter-claim the appellant raised a number of defences and claims.
At the conclusion of the trial the trial judge gave judgment in favour of the first-named respondent against the appellant in an amount of $104,000 together with interest under the contract at the rate of 18 per centum per annum, judgment in favour of the second-named respondent against the appellant in an amount of $30,000 together with interest under the contract at the rate of 18 per centum per annum and judgment in favour of the appellant against the first-named respondent for damages for breach of a restraint of trade clause in the sale agreement in an amount of $81,551.75 together with interest under the Supreme Court Act 1986. His Honour ordered that the judgment obtained by the appellant be set off against the judgment obtained by the first-named respondent. In addition the trial judge gave judgment for the appellant against the respondents for damages for breach of contract in the sum of $1. The sum of $1 represented nominal damages for breach of a warranty that a balance sheet in a schedule to an agreement accurately stated amounts due in respect of certain contingent liabilities of practice. The trial judge found that the breach occasioned the appellant no loss because the liabilities had been disclosed to him before the contract was made.
Fresh Evidence
At the outset of the hearing of the appeal the appellant sought leave to adduce fresh evidence. We refused the application and said that we would state our reasons for doing so when we determined the appeal. Our reasons are as follows.
The evidence consisted of some ten documents. The first document was lost recently when the appellant gave it to a stationer for copying. The appellant has deposed that the document was given to him by the vendors’ agent prior to the appellant’s purchase of the accountancy practice and showed the amount of fees earned by the practice and the charge-out rates for its staff. Those amounts appear to be inconsistent with other information supplied by the respondents prior to the execution of the contract of sale.
The basis upon which it is contended that the evidence should now be received is the statement by the appellant that the “document was not available to me during the trial and it has now been discovered amongst the documents which were held by my then solicitors, Marshall Dent, in 1990.”
The appellant, who was not legally represented at the trial or on appeal, has given no explanation for his failure to obtain and produce the document at the trial. Its existence was known to him, for he says that it was originally given to him. He has given no account of any efforts he made to produce it at trial. As the High Court said, in Commonwealth Bank of Australia v Quade[1], the unsuccessful party who wishes to adduce fresh evidence on appeal must persuade the appellate court that his failure to produce the evidence at trial was due to no lack of reasonable diligence on his part. The appellant has not discharged that burden.
[1](1991) 178 CLR 134 at 141.
The appellant has conceded that the remaining documents were available to him at trial, but were not part of his case. He frankly stated that, hampered as he was by a lack of legal knowledge and assistance to find and marshal documents, he did not present at trial the evidence which he now wishes to lead.
In our opinion the evidence is not admissible. Simply put, the exercise of reasonable diligence on the part of the appellant would have produced the documents at trial. It is a pity that the appellant is not versed in the law. It is a pity that no-one helped him present his case at trial. But that is not a basis for allowing a party to make a new case on appeal with the benefit of the experience of the trial. The appellant is bound by the manner in which he conducted his case below.
Only four of the original issues raised by the defence and counter-claim and canvassed at the trial remain alive.
Accuracy of Profit and Loss Account
The first is raised by a ground of appeal which the appellant was granted leave to add at the hearing of the appeal. The new ground is:
“The trial judge erred in failing to find that the fees of $479,273 stated in the profit and loss account were over stated by the sums of $32,000 and $23,432.”
The profit and loss account was one of the documents provided by the respondents to the appellant during the course of the negotiations for the sale of the practice and, according to the appellant, induced him to enter into the contract and agree to pay the price of $514,000. The profit and loss account tendered in evidence bore the following notation, which was signed by the second-named respondent:
“These figures represent a true and correct record of the 1987 tax return figures and the 1988 trading figures of Tropeano Tempone and Associates.”
The origin of the contention that the amount of fees earned in the practice in the year which ended on 30 June 1988 was overstated by $32,000 is another document, which the appellant says he found when he took over the practice and which he has described as a copy of an income tax return of the partnership between the respondents. That document recorded fees in an amount of $447,273, whereas the amount of fees set out in the profit and loss account was $479,273.
The fact that there was another document containing an amount for the fees earned in the practice which differed from the profit and loss account warranted by the respondents did not prove the fact that the appellant was required to establish, namely, that the profit and loss account understated the amount of fees earned by the practice. The document relied upon by the appellant was a photocopy. Certain printed words, which may have been on the original and appeared in part of the copy, perhaps because of the way the paper was folded when copied, suggested that the form was a tax return. In his oral evidence the second-named respondent was unable to say that the document was lodged as part of the firm’s tax return. He could not locate the tax return. Neither could the appellant. The trial judge noted that no investigation was made to demonstrate that the warranted figures were incorrect and concluded:
“Mr Riboni has failed to prove that the certified profit and loss statement was incorrect in relation to the fees received … “
In our view his Honour was entitled to come to that conclusion. In doing so he had the advantage of seeing and hearing the witnesses.
The sum of $23,432 was part of the sum of $479,273 stated in the warranted profit and loss account to be the fees earned by the practice. The appellant contended that the sum constituted “any unusual or non-recurring item” and was caught by the warranty in clause 19(d) of the agreement that:
“Any profits disclosed in the Accounts were not affected by any unusual or non-recurring items.”
“The Accounts” were those contained in schedule 9 of the agreement. Schedule 9 in the appeal book contains a sheet bearing the following words:
“Attached Profit and Loss Statement for year ended 30 June, 1988 have been prepared in accordance with generally accepted accounting principles and are true and correct and no events have occurred since that date which would materially effect the results disclosed.”
There is, however, no profit and loss account in the appeal book, but only a balance sheet. For present purposes we will treat the profit and loss account signed by the second-named respondent as that which the parties intended to be included in schedule 9. That appears to have been the way in which the account was treated at trial by the parties and the trial judge.
The sum of $23,432 represents the fees earned as a result of the firm enlisting clients in a tax minimisation scheme on the last day of the financial year. The second-named respondent in his evidence denied that the item was non-recurring. He said:
“But in any event I didn’t see it as a non-recurring item anyway. I’ve done similar schemes, tax minimisation schemes and they are just a part and parcel of accounting fees.”
This evidence was accepted by the trial judge, who concluded that the appellant had not established that the fees constituted unusual or non-recurring items. In our opinion it has not been shown that his Honour erred.
Work in Progress
The second matter concerned the manner in which the respondents dealt with work in progress on the eve of the transfer of the practice to the appellant.
Clause 3 of the sale agreement provided that the appellant would account to the respondents for the amounts he collected from debtors of the practice outstanding at the date of settlement. The value of work in progress, that is, work in respect of which invoices had not been sent to clients, would accrue to the appellant. Clause 1(iii) of the agreement provided that the appellant was to acquire “all work in progress as at the date of settlement listed in schedule 2 hereof.” The schedule only contained the words, “work in progress – to be supplied.” In fact no amount or other information was supplied.
In November and December 1988 the respondents made a concerted effort to complete outstanding work and despatch invoices. The second-named respondent said in the course of cross-examination:
“We billed out as many clients as we could finish because we didn’t want to leave any work in progress … “
From a trading analysis conducted by the respondents, it appears that the value of work in progress on 1 October 1988 was $90,113. The value of work in progress at settlement was $8,412. The respondents’ trading analysis discloses that in the twelve months prior to 1 October 1988 the value of work in progress varied between $123,776 and $25,086. The average for the year to 10 October 1988 was $85,948 a month.
The appellant claimed that the respondents’ treatment of work in progress constituted a breach of clause 19(h) of the sale agreement.[2] By the clause the respondents warranted:
[2]He also claimed that the respondents orally represented to him that the value of work in progress he would acquire at settlement of the purchase would be $100,000. The trial judge held that no such representation was made.
“Since the 30th day of June 1988, the business has been carried on in the ordinary and usual course and without limiting the generality of the foregoing there has not been:
(i)any material alteration to the terms of employment of its executives or employees;
(ii)any liability or obligation incurred or agreed to be incurred or any assets disposed of or agreed to be disposed of otherwise than in the ordinary course of business;
(iii)any capital expenditure;
(iv)any loans made by the Partnership; or
(v)any operational expense incurred or agreed to be incurred which is of an unusual nature or abnormal amount having regard to the customary business practices applicable to the business.”
The trial judge rejected the claim. He said:
“The effect of the activity in November-December 1988 was to reduce the amount of the work in progress which was purchased, which was to be determined as at the date of the contract. Mr Riboni signed the contract without having the amount ascertained. To increase the work and send out invoices in that manner in my opinion was not a breach of clause 19(h). The business was being carried out in the ordinary and usual course, no increase in liability occurred as a result of the activity and what happened came about as a result of increased efficient activity in the firm.”
In our opinion in November and December 1988 the respondents did not carry on the practice in the manner contemplated by the opening words of clause 19(h). The respondents did not suggest that at any other time in the history of the practice the task of converting work in progress to invoiced fees had been attacked as it was in the twilight of the respondents’ stewardship. The accounts of the practice demonstrate that on no occasion in the period covered by the accounts had the value of the work in progress slumped to a level approaching that to which the respondents took it in the last days of their control of the practice.
Of course, prima facie, it is in the ordinary course of business to attempt to increase the rate at which one bills for work in progress and thereby to convert work in progress to debtors and debtors to cash at bank. Accordingly, in our view, it was not necessarily a breach of clause 19(h) for the respondents to bill for work in progress in a higher than usual amount or at a greater than usual rate. It is only when clause 19(h) is construed in context that it appears to include an obligation to maintain at least some level of work in progress. And the context implies that what was required was maintenance of a level of work in progress that was not materially different to the level shown in the 30 June1988 accounts.
Clause 19(i) provides that:
“The Vendors represent warrant and undertake to the Purchaser as an inducement to the Purchaser to enter to this Agreement, and it is a condition of this Agreement that, save as disclosed herein, each of the warranties hereinafter contained is at the date hereof and will at the settlement date be completely true and accurate and not misleading in any way, as follows:
…
(i) No material change has [o]ccurred in the assets and liabilities shown in the Accounts.”
“The Accounts” were defined as the accounts for the year of income ended 30 June 1988 which were annexed to the agreement. Work in progress was one of the assets shown in those accounts. As we see it, therefore, the respondents were bound by the clause to ensure that the value of work in progress at the date of settlement was not materially different to the value of work in progress shown in the accounts.
Counsel for the respondents argued that the only sensible construction of the obligation imposed by clause 19(i) was as an obligation to avoid material changes in net assets, with the result that it would not be a breach of covenant if a material part of the work in progress were converted by billing to debtors. As he would have it, the change in composition of assets would not matter because the decline in work in progress would be matched by the increase in debtors, and so the value of net assets would remain unaltered. But in our view that contention ill-accords with the nature and purpose of the Agreement.
No doubt, in some contexts, an obligation on the part of a vendor of a business to avoid a material change in assets might sensibly be construed as an obligation to avoid a material change in net assets. That would likely be so if it appeared as a matter of objective circumstance that a purchaser under a contract of sale of business was not concerned about the form of the assets of the business. A possible example is a purchaser under contract of sale of business which provides for the purchaser to take fixed assets and work in progress and also debtors and cash at bank. Looking at such a contract objectively, one might conclude that it would not be of concern to the purchaser if the figure for work in progress were materially reduced by the time of settlement, because the reduction in work in progress would be matched by a corresponding increase in debtors or cash at bank.
But under the agreement with which we are concerned, the appellant was to take only the fixed assets and work in progress and the respondents were to have the value of both debtors and cash at bank. Consequently, upon an objective analysis[3] the clear implication is that the value of work in progress at settlement was a matter of real concern to the respondent. Looking at the contract in that light, and giving to it the meaning which one might suppose that honest and reasonable business men would ascribe to it,[4] the logical conclusion is that a “material change in assets and liabilities” for the purposes of clause 19(i) was intended to include a material change in the composition of assets and liabilities and so, therefore, to require that the value of work in progress at the settlement date be not materially different to the value of work in progress shown in the accounts.
[3]Maggbury Pty Ltd v Hagele Australia Pty Ltd (2001) 210 CLR 181 at 188[11].
[4] Cohen & Co. v. Ockerby & Co. Ltd (1917) 24 CLR 288 at 300; Schenker v Maplas Equipment and Services Pty Ltd [1990] VR 834 at 840; Di Dio Nominees Pty Ltd v Brian Mark Real Pty Ltd [1992] 2 VR 732 at 742.
That conclusion is reinforced by the consideration that the appellant was short of capital and, as the respondents well knew, entered into the agreement assuming that there would be sufficient revenue coming in from the business to fund instalments of the outstanding purchase price.[5]
[5]DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 429.
With respect to his Honour’s observation that the appellant executed the sale agreement although the contemplated particulars of work in progress were missing from schedule 2, we do not think that the parties’ rights and duties with respect to work in progress were intended to be governed exclusively by the terms of schedule 2. In our opinion the existence of clause 1(iii) did not operate to remove work in progress from the ambit of the warranty in clause 19(h). Further, we do not think that the failure of the parties to supply the information contemplated by clause 1(iii) founded an inference that the parties intended that the respondents owed no contractual duties to the appellant in respect of their treatment of work in progress. Looking at the agreement objectively, we consider that it would fly in the face of commercial common sense for the parties not to have intended the value of work in progress be a material part of the agreement. Clause 19(i) manifests their intention that it be material.
We come back then to the construction of clause 19(h) in the context of clause 19(i). As a matter of contractual construction it is necessary to read each clause of the agreement in the context of the other and in the context of the agreement as a whole.[6] To that extent, the meaning of each clause is informed by the meaning of each other clause and derives its meaning from it. So, while in another context an obligation to conduct a business in the usual course could permit of a broad discretion for change, the obligation imposed by clause 19(h) in the context of this agreement is seen as more restrictive than that. Read in the context of clause 19(i) - and the broader context of an agreement for the appellant to acquire only fixed assets and work in progress – it appears to us to have required no less continuity in the pattern of business than would yield work in progress at the settlement date not materially less than the figure shown in the accounts. Indeed, if we may say so with respect, the point is encapsulated in the words employed by the judge below (albeit that they led his Honour to a different and in the end, in our view, incorrect conclusion):
“The purpose of the sub-clause [clause 19(h)] is obvious. The accounts which were relied upon were to 30 June 1988 and it was important in the interests of [the appellant] as a purchaser that the business was conducted in much the same way in the following six months so that the accounts formed a reasonably solid basis for a forecast as to future performance of the business.”
[6]Bowes v Chaleyer (1923) 32 CLR 159 at 170.
It follows, in our view, that the respondents’ breach of clause 19(h) lay in failing to conduct the business sufficiently in the ordinary course to achieve a value of work in progress at the settlement date not materially different to the value shown in the accounts. Accordingly, the damages to which the appellant is entitled for the breach of covenant should be calculated on that basis.
The value of work in progress as shown in the accounts was $39,127.00 (among total assets of $209,128.69 and net assets of $150,374.43). The value of work in progress at the date of settlement was only $8,412. The difference of $30,715 thus represented almost 15% of total assets and almost 19% of net assets, and on any analysis was material. Consequently, we consider that the amount of that difference is the amount of damages to which the appellant is entitled for breach of clause 19(h).
That does not necessarily mean that any deviation from the figure shown in the accounts would have been recoverable. A few thousand dollars either way of the figures shown might not have been material. As we construe clause 19(h), in light of clause 19(i), it allowed for a degree of flexibility which could not be pinned down to the exact cent or even hundred dollars. But when there is a material difference, as there plainly was here, it appears that the covenant has been breached and, doing the best one can to assess the damages in those circumstances, the only sensible datum is the figure shown in the accounts. The amount is substantially less than the sums identified in paragraph [21], above, but in our view is the amount which is produced by the terms of the sale agreement.
Damages for breach of restraint of trade clause
The third matter agitated on appeal was the appellant’s contention that the trial judge’s award of damages for breach of the restraint of trade clause in the agreement did not fully compensate the appellant for the loss he sustained by reason of the breach.
Clause 7 of the sale agreement provided:
“The vendors shall not:-
(a)at any time in the future practice [sic] as Accountants for any client(except Atlantis International Pty Ltd) for whom work has been performed by either of the Vendors at any time in the three years prior to the date of settlement.
(b)practice as Accountants within the area specified by the map attached to this contract and marked as schedule 8 for the period of three years from the date hereof.”
The trial judge held that the term contained in sub-clause (a) had been breached by the first-named respondent.
His Honour found that a firm of accountants in which the first-named respondent was a partner sent letters to clients of the practice between 20 May 1991 and October 1991 and as a consequence acquired the work of 34 clients of the practice. The appellant said that he had thereby lost $81,551.75 in income from those clients.
The trial judge accepted the appellant’s estimate and awarded him that sum as damages for breach of clause 7(a) of the sale agreement. The sum represented the income that could have been obtained from the former clients of the practice who became clients of the first-named respondent’s new firm. The appellant contended in this Court that he was entitled to recover under clause 7 damages representing the value of the custom of all clients lost to his practice as the result of actions by the first-named respondent, whether or not the first-named respondent acted as the accountant of those clients.
At trial the appellant put forward a list of clients he said he had lost as the result of the first-named respondent’s actions, ascribing a value to each of the clients on the list. Apart from the clients poached from the first-named respondent were clients said to have been lost to the practice because the first-named respondent contacted clients and accused the appellant of wrong doing before the Australian Society of Certified Practising Accountants and the Australian Taxation Agents Board. In all, the value of the work of the clients who ceased to be clients of the practice was said to be $166,264.75.
By clause 7 of the sale agreement the respondents undertook not to act as accountants for any clients of their former practice and not to practice as accountants within a specified area for a term of three years. The clause did not cover the loss of clients who chose to engage accountants other than the respondents or one of them. The value of clients lost for a range of reasons which were not tied to the cause of action pleaded by the appellant was not recoverable as damages for breach of clause 7 of the sale agreement.
Equitable set off
The final matter concerns the interaction of the relief to which the parties are entitled. In his defence the appellant claimed to set off any damages he recovered for breach of the terms of the sale agreement by the respondents against the balance of the price claimed by the respondents. He did so in order to reduce or extinguish the sum which, under the sale agreement, attracted an obligation to pay interest at the rate of 18 per centum per annum.
For the reasons we have stated, we are of the opinion that the appellant is entitled to total damages for breach of the agreement in the amount of $112,266.75 together with interest. As against that, there is the claim in which the respondents succeeded below for $134,000 for instalments of the purchase price outstanding under the Agreement. The judge observed that it was his preference that the appellant’s claim for damages for breach of the agreement be set off in reduction of the respondents’ claim but his Honour was concerned that because only one of the respondents had acted in breach of the restraint of trade provisions, the appellant was only entitled to damages as against that respondent. With respect, we do not think that is a problem.
We have set out above clause 7(a) of the agreement. Clause 18 of the agreement provided:
“In this Agreement unless the context otherwise requires the singular shall include the plural and vice versa words denoting gender shall include each of the other genders and all covenants and agreements by the respective parties if consisting of more than one person or company shall be deemed to mean and include such persons jointly and each of them severally and references to a person include a body corporate the trustees for the time being of any trust fund and every other entity
and the expression ‘the Vendor’ and ‘the Purchaser’ and ‘the Trustee’ shall include their respective successors transferees heir and legal personal representatives.” (Emphasis added)
In our view, the combination of these clauses produced a covenant by the respondents jointly and each of them severally that neither the respondents jointly nor either of them severally would at any time in the future practise as Accountants for any client (except Atlantis International Pty Ltd) for whom work had been performed by either of the respondents at any time in the three years to the date of settlement. Consequently, both respondents were jointly and severally liable for any breach by one or other of them of the covenant not to carry on practice and hence both were jointly and severally answerable for the damages to which the appellant was held entitled for breach of that covenant.
In the result, we are of the view that the appellant’s claim for $112,266.75 should be set off in reduction of the respondents’ claim for $134,000, leaving a balance due to the respondents of $21,733.25 and, consistently with the decision of the judge below, that amount should bear interest at the rate of 18% specified in clause 13(a) of the Agreement, to be computed from 10 January 1990 to the date of judgment.
Accordingly, we would allow the appeal, set aside the judgments and orders made below on 30 June 2005 and in lieu thereof give judgment for the respondents in the sum of $21,732.25 with interest pursuant to clause 13(a) of the sale agreement from 10 January 1990 in an amount of $67,933.53. We will hear the parties as to the orders for costs which should be made.
ASHLEY JA:
I agree, for the reasons given by Buchanan and Nettle JJA, that this appeal should be disposed of in the manner which their Honours propose.
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