Richmond v Moore Stephens Adelaide Pty Ltd
[2015] SASCFC 147
•29 September 2015
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
RICHMOND v MOORE STEPHENS ADELAIDE PTY LTD
[2015] SASCFC 147
Judgment of The Full Court
(The Honourable Chief Justice Kourakis, The Honourable Justice Blue and The Honourable Justice Stanley)
29 September 2015
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH - REPUDIATION AND NON-PERFORMANCE - REPUDIATION - WHAT AMOUNTS TO REPUDIATION
EQUITY - EQUITABLE REMEDIES - INJUNCTIONS - CONSIDERATIONS UPON WHICH COURT EXERCISES DISCRETION - IN GENERAL
TRADE AND COMMERCE - TRADE AND COMMERCE GENERALLY - RESTRAINT OF TRADE - RESTRAINT BY AGREEMENT - VALIDITY AND REASONABLENESS - IN GENERAL - VALIDITY
Appeal against judgment in the District Court granting final injunctive relief to enforce a restraint clause.
The appellant’s company entered into related agreements with the respondent for the sale of its accountancy practice and the provision of accounting services in the ongoing practice. Each agreement contained a restraint clause.
The sale price of the business was dependent on the level of achieved fees over the first three years. If average annual achieved fees fell below $1.4 million, the sale price was to be $1.4 million less the deficit or twice the deficit depending on the year. If average annual achieved fees exceeded $1.4 million, the purchase price was to be $1.4 million and the appellant’s company was entitled to a bonus equal to the excess. The agreement prescribed a mechanism for the parties to nominate and negotiate to agree the level of achieved fees at the end of the second and third years.
After the end of the second year in October 2013, disputes arose concerning the quantum of achieved fees and whether they had been fixed under the fee fixing mechanism prescribed in the agreement. The respondent contended that the achieved fees had been fixed by default and this justified its ceasing to pay interest on the balance of the purchase price.
The appellant contended that the respondent defaulted in the payment of interest resulting in an acceleration of payment of the balance of the purchase price, and the respondent’s breaches or repudiation justified termination of the agreements in which event the restraint clauses ceased to be operative. The appellant contended that in any event the restraint clauses were void for uncertainty or as being in restraint of trade.
The trial Judge upheld the respondent’s contentions and granted an injunction restraining the appellant from soliciting or performing work for various named clients or soliciting employees of the respondent.
Held Blue J (Kourakis CJ and Stanley J agreeing):
1. The trial Judge erred in finding that the parties agreed on 15 October 2013 to extend time for the respondent to give notice of achieved fees (at [120]).
2. Nevertheless, time was not of the essence and the respondent’s notice of achieved fees given on 21 November 2013 was valid (at [131]-[139]).
3. Observations on the approach to construction of commercial contracts (at [90]-[101]).
4. The appellant’s company’s notice in response given on 25 November 2013 was valid (at [143]).
5. The quantum of achieved fees was not fixed under the fee fixing mechanism at any time up to 4 February 2014 (at [147]).
6. The respondent breached the Business Sale Agreement by ceasing to pay interest with effect from November 2013 (at [152]).
7. The appellant’s company was not entitled to give notice accelerating payment of the balance of the purchase price (at [172]-[176]).
8. The breaches by the respondent in failing to pay interest did not entitle the appellant to terminate and did not amount to repudiation of the agreements (at [190]).
9. The appellant and his company did not validly terminate the agreements on 4 February 2014 (at [191]).
10. There is no rule of law that contractual terms cannot be enforced by a party whose breach or repudiation has led the other party to terminate the contract: which contractual terms survive such a termination depends on the contractual intention (at [197]).
11. The restraint clauses survived termination of the agreements by the respondent but would not have done so if the appellant had validly terminated them for breach or repudiation (at [215], [222]).
12. There is no reason in equity not to enforce the restraint clauses (at [225]-[227]).
13. The restraint clauses are not void for uncertainty (at [230], [234]).
14. The restraint clauses insofar as they are sought to be enforced are not void as being in restraint of trade (at [243], [249]).
15. Insofar as the injunction referred to specific clients, it was not justified by the evidence (at [252]-[265]).
16. The clause in the Service Agreement imposing restraints on Mr Richmond was on its proper construction confined to clients with whom Mr Richmond, as opposed to his company, had direct or indirect dealings (at [268]).
17. The injunction should be limited to clients belonging to 18 client groups with whom Mr Richmond had direct and indirect dealings (at [270]).
18. Appeal allowed for the limited purpose of modifying the terms of the final injunctions (at [278]).
Bankruptcy Act 1966 (Cth), referred to.
Boone v Eyre (1779) 1 H Bl 273; Carr v JA Berriman Pty Ltd ( 1953) 89 CLR 327; Campbell v Jones (1796) 6 TR 570; General Billposting Company Limited v Atkinson [1909] AC 118; Geraghty v Minter (1979) 142 CLR 177; Glynn v Margetson & Co [1893] AC 351; Gollin & Co Ltd v Karenlee Nominees Pty Ltd (1983) 153 CLR 455; Investors Compensation Scheme Ltd. v West Bromwich Building Society [1998] 1 WLR 896; Kaufmann v McGillicuddy (1914) 19 CLR 1; Measures v Measures Brothers Ltd [1910] 2 Ch 248; McDonald v Dennys Lascelles (1933) 48 CLR 457; Moore Stephens Adelaide Pty Ltd v WYKA Consulting Pty Ltd & Anor (No 1) [2014] SADC 131; Moore Stephens Adelaide Pty Ltd v WYKA Consulting Pty Ltd & Anor (No 2) [2014] SADC 154; Moore Stephens Adelaide Pty Ltd v WYKA Consulting Pty Ltd & Anor (No 3) [2015] SADC 4; NE Perry Pty Ltd v Judge [2002] SASC 312, (2002) 84 SASR 86; Photo Production Ltd v Securicor Transport Ltd [1980] AC 827; Pordage v Cole (1669) Wms Saunders 319, 85 ER 449; Project Blue Sky v Australian Broadcasting Authority [1998] HCA 28, 194 CLR 355; Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (In Liq.) (1936) 54 CLR 361; Zhu v Treasurer of New South Wales (2004) 218 CLR 530, discussed.
Associated Newspapers Ltd v Bancks (1951) 83 CLR 322; Australian Hardwoods Pty Ltd v Commissioner for Railways [1961] ALR 757 ; Automatic Fire Sprinklers Pty Ltd v Watson ( 1946) 72 CLR 435; Dowsett v Reid ( 1912) 15 CLR 695; Francis v Lyon (1907) 4 CLR 1023; Freeth v Burr (1874) LR 9 CP 208; Fullers’ Theatres Ltd v Musgrove (1923) 31 CLR 525; Green v Sommerville (1979) 141 CLR 594; Holland v Wilsthire (1954) 90 CLR 409; Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26; Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited [2007] HCA 6, (2007) 233 CLR 115; Legione v Hately (1983) 152 CLR 406; Louinder v Leis (1982) 149 CLR 509; Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286; Mehmet v Benson (1965) 113 CLR 295; Moschi v LEP Air Services Ltd [1973] AC 331; Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444; Paynter v James (1867) LR 2; Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Australia) Pty Ltd (1980) 144 CLR 300; Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; Rock Refrigeration Ltd v Jones & Anor [1997] 1 All ER 1; Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5, (2002) 240 CLR 45; Westfield Management Limited v AMP Capital Property Nominees Limited [2012] HCA 54, (2012) 247 CLR 129, considered.
WORDS AND PHRASES CONSIDERED/DEFINED
"Time is of the essence"
RICHMOND v MOORE STEPHENS ADELAIDE PTY LTD
[2015] SASCFC 147Full Court: Kourakis CJ, Blue and Stanley JJ
KOURAKIS CJ: I join in the orders proposed by Blue J for the reasons given by him.
BLUE J: This in an appeal against judgment in favour of the plaintiff in an action in the District Court to enforce a restraint clause.
On 25 October 2011, the appellant Geoffrey Richmond and his company WKYA Consulting Pty Ltd (WKYA) entered into related agreements with the respondent Moore Stephens Adelaide Pty Ltd (Moore Stephens) for the sale of WKYA’s accountancy practice and for WKYA by three key professional staff to provide professional accounting services to Moore Stephens.
The purchase price of the business was prima facie $1.4 million.[1] However, if Achieved Fees over the first three years were less than $1.4 million per annum, the purchase price was to be reduced at least dollar for dollar under a complex formula (the price fixing mechanism). Conversely, if Achieved Fees over the first three years were more than $1.4 million per annum, a bonus was payable to WKYA on a dollar for dollar basis. A mechanism was prescribed for the purchaser to nominate its calculation of Achieved Fees within a prescribed time, the seller to respond within a prescribed time and for the parties to negotiate if there was a disagreement (the fee fixing mechanism). $700,000 of the purchase price (as adjusted under the price fixing mechanism) was payable four years after completion of the purchase.
[1] Plus GST. All figures quoted are exclusive of GST unless otherwise appears.
The agreements each contained restraint clauses whereby WKYA and Mr Richmond agreed not to solicit or deal with clients of the acquired business or with whom they had dealings on behalf of Moore Stephens respectively and not to solicit employees of the acquired business.
Disputes arose concerning the quantum of Achieved Fees. Moore Stephens contended that they had been fixed by default and this justified its ceasing to pay interest on the balance of the purchase price. WKYA and Mr Richmond contended that this was a default resulting in their electing to accelerate payment of the balance of the purchase price and Moore Stephens’ failure to pay it justified their termination of the agreements.
Moore Stephens sued Mr Richmond in the District Court to enforce the restraint clauses. The trial Judge held that they were enforceable and granted an injunction restraining Mr Richmond from soliciting or dealing with named clients with whom he allegedly had dealings on behalf of the business and from soliciting employees.
The appeal raises the following issues or steps in the reasoning process:
1.Did the parties agree on 15 October 2013 to extend time for Moore Stephens to give notice of Achieved Fees?
2.Did Moore Stephens give a valid notice of Achieved Fees on 21 November 2013?
3.Did WKYA give a valid notice of disagreement in response on 25 November 2013?
4.Was the quantum of Achieved Fees fixed under the fee fixing mechanism at any time up to 4 February 2014?
5.Was Moore Stephens in breach of the Business Sale Agreement by ceasing to pay interest with effect from November 2013?
6.Was WKYA entitled to give notice accelerating payment of the balance of the purchase price in the amount of the prima facie purchase price due to non-payment of interest?
7.Did WKYA and Mr Richmond validly terminate the agreements on 4 February 2014?
8.Did the restraint clauses survive termination of the agreements if effected by WKYA and Mr Richmond for breach or repudiation?
9.Are there discretionary reasons in equity not to enforce the restraint clauses?
10.Are the restraint clauses void for uncertainty?
11.Are the restraint clauses void as being in restraint of trade?
12.Are the terms of the injunction too wide?
Background
Mr Richmond is a chartered accountant. He owned a company originally called 2IC Management Pty Ltd but now called WKYA Consulting Pty Ltd (WKYA). Up to October 2011, the company carried on an accountancy business under the name “2IC Management” (the 2IC business). As at October 2011, the 2IC business had approximately 100 client groups.
Moore Stephens carries on an accountancy business in South Australia under the name “Moore Stephens”. As at October 2011, Moore Stephens had approximately 500 client groups.
The Business Sale Agreement
The Business Sale Agreement provided for WKYA to sell to Moore Stephens its accountancy business. Mr Richmond was also a party. The purchase price (the Purchase Price) was $1.4 million adjusted upwards or downwards to apportion income and expenditure (the Unadjusted Purchase Price) and potentially adjusted downwards based on future revenue (the fees adjustment). Completion was to take place on 28 October 2011.
The Purchase Price was payable by instalments:
· $700,000 adjusted under clause 10 to apportion income and expenditure (the income apportionment) plus GST of $140,000 payable within approximately three months of completion; and
· $700,000 adjusted under Annexures A and I by the fees adjustment (the Second Instalment amount) payable on 28 October 2015.
The Purchase Price was to be adjusted first at the end of the second year (the first milestone) and secondly at the end of the third year (the second milestone).[2] The Second Instalment amount was then payable at the end of the fourth year. The Purchase Price could be adjusted below but not above $1.4 million.
[2] Special Conditions (Annexure I) clause 2 and Annexure A clauses (d) and (e).
The adjustment to the Unadjusted Purchase Price at the first milestone was to be equal to two times the shortfall (if any) of average annual Achieved Fees generated by the acquired business (Achieved Fees) in the first two years[3] below the target of $1.4 million.[4]
[3] The Business Sale Agreement as executed provided that the average would be used if fees in year 2 exceeded fees in year 1 and otherwise only fees in year 2 would be used. However, it is common ground that the Agreement was varied to provide that the average was to be used in all cases.
[4] Special Condition 2 and Annexure A clauses (d) and (e).
If there was no adjustment at the first milestone, the adjustment at the second milestone was to be equal to the shortfall (if any) of Achieved Fees generated in the third year[5] by the acquired business below $1.4 million.[6] If there was an adjustment at the first milestone, the Unadjusted Purchase Price as adjusted at the first milestone was to be reduced by the shortfall or increased by the excess of Achieved Fees generated in the third year[7] by the acquired business compared to the average first two years’ fees (subject to the cap of $1.4 million).[8] The operation of the price fixing mechanism can be illustrated by an example in which average Achieved Fees for the first two years were $1.2 million. If Achieved Fees for the third year were $1.2 million, the Purchase Price would be $1.0 million; if Achieved Fees for the third year were $1.1 million the Purchase Price would be $0.9 million; and if Achieved Fees for the third year were $1.3 million the Purchase Price would be $1.1 million.
[5] Unless year 3 fees exceeded year 2 fees, in which case it was to be the average annual fees over the first three years.
[6] Special Condition 2(a) and Annexure A clauses (d) and (e).
[7] Unless year 3 fees exceeded year 2 fees, in which case it was to be the average annual fees over the first three years.
[8] Special Condition 2(a) and Annexure A clauses (d) and (e).
For the purpose of the adjustment calculation, Achieved Fees were defined to mean fees billed less fees written off plus fees generated by MSA Financial Services in respect of clients of the acquired business.[9]
[9] Special Condition 2(a) and Annexure A clause (a).
The adjustment at the first milestone was to be determined by the following steps.
1.Moore Stephens was to give to WKYA “within five business before” 28 October 2013 a notice specifying the Achieved Fees and basis for calculating them and all necessary evidence, invoices and other documents required for WKYA to verify them (a clause (b) notice).[10]
2.WKYA was to give to Moore Stephens within five business days thereof notice accepting or not accepting the Achieved Fees specified by Moore Stephens (a clause (c)(i) notice).[11]
3.If WKYA gave notice accepting, or failed to give notice not accepting, the Achieved Fees specified by Moore Stephens within the five business days, the Achieved Fees specified in the Moore Stephens notice were treated as confirmed and binding on all parties for the purpose of determining the amount (if any) of the adjustment to the Unadjusted Purchase Price.[12]
4.If WKYA gave notice not accepting the Achieved Fees specified by Moore Stephens within the five business days:
(a) WKYA was to give notice to Moore Stephens specifying its estimate of the Achieved Fees and basis for calculating them (a clause (c)(ii) notice);[13]
(b) Moore Stephens and WKYA were to negotiate in good faith to agree an amount for the Achieved Fees;[14] and
(c) upon and only upon such agreement, the Achieved Fees agreed were to be treated as confirmed and binding on all parties for the purpose of determining the amount (if any) of the adjustment to the Unadjusted Purchase Price.[15]
[10] Special Condition 2(a) and Annexure A clause (b).
[11] Special Condition 2(a) and Annexure A clause (c)(i).
[12] Special Condition 2 and Annexure A clause (c)(i).
[13] Special Condition 2 and Annexure A clause (c)(ii)(A).
[14] Special Condition 2 and Annexure A clause (c)(ii)(B).
[15] Special Condition 2 and Annexure A clause (c)(ii)(C).
Once the amount of the Achieved Fees was confirmed and binding, the Unadjusted Purchase Price was automatically adjusted as summarised above.[16]
[16] Special Condition 2 and Annexure A clauses (d) and (e).
It is common ground on appeal that, if the parties negotiating in good faith could not reach agreement, the Achieved Fees could be determined objectively by a court of competent jurisdiction for the purposes of the agreement.
The same mechanism, mutatis mutandis, was prescribed for determining the adjustment at the second milestone.
Interest calculated on the highest monthly balance of the outstanding Second Instalment Amount was payable on the last day of each month at 10 percent per annum for the first year, 11 percent per annum from the second year, 12 percent per annum for the third year and 14 percent per annum for the fourth year.[17]
[17] Special Conditions clause 1(c).
If the Unadjusted Purchase Price was reduced, interest since 28 October 2011 was to be recalculated retrospectively and WKYA was to refund to Moore Stephens the difference.[18]
[18] Special Conditions clause 2(b)(i)(C) and (ii)(C).
If Moore Stephens failed to make any payment due under the Business Sale Agreement within 14 days of written demand or in defined insolvency events or supervening illegality, WKYA could elect by notice to make the whole of the Second Instalment Amount outstanding at that time immediately due and payable.[19]
[19] Special Conditions clause 1(g).
WKYA and Mr Richmond each agreed under clause 14 for ascending periods up to 28 October 2015 within ascending areas up to the State of South Australia not directly or indirectly to participate or be interested in:
· accepting from or performing for a person who was a customer of the acquired business before 28 October 2011 any business of the kind ordinarily forming part of the business;[20]
· soliciting or accepting a request from such a customer for the goods and/or services supplied by the acquired business;[21]
· enticing or attempting to entice an employee of the business from continuing to be employed in the business.[22]
[20] Clause 14(f)(ii) and (iii).
[21] Clause 14(f)(iv).
[22] Clause 14(f)(v).
The restraint clause was to survive termination or expiry of the Business Sale Agreement.[23]
[23] Clause 26.5.
Any breach or default by Moore Stephens or WKYA of a related agreement was to constitute a breach of the Business Sale Agreement and vice versa (the cross default provisions).[24]
[24] Clause 18(c)(iii) and (iv).
Either party could terminate for default before or at completion if not remedied within ten business days after service of a notice of default.[25] The Business Sale Agreement did not otherwise provide for termination by either party.
[25] Clause 20.
Time was expressed to be of the essence in the Business Sale Agreement unless otherwise specified.[26]
[26] Clause 32(a).
The Service Agreement
The Service Agreement provided for the engagement by Moore Stephens of WKYA as an independent contractor to provide by Mr Richmond and Mr Mansfield and conditionally by Mr Mather or an alternative accountant accounting services reasonably requested by Moore Stephens from time to time for the term of the Service Agreement. In return, WKYA was entitled to payment of $299,775 per annum while Mr Mather or an alternative accountant remained employed by WKYA and $248,000 per annum upon their obtaining the requisite visa to transfer his employment to Moore Stephens.[27] Mr Richmond was also a party to the Service Agreement.
[27] Clauses 3, 5 and 10 and the First Schedule Parts 2 and 3.
WKYA was required to generate billable fees of at least $150,000 in respect of Mr Richmond, $300,000 in respect of Mr Mansfield and $259,000 in respect of Mr Mather while employed by WKYA.[28] The Service Agreement proceeded on the assumption that all other professional staff formerly employed by WKYA would transfer their employment to Moore Stephens.
[28] Clause 4(i) and the First Schedule Part 5.
Mr Richmond agreed to procure WKYA to perform its obligations under the Service Agreement and the Business Sale Agreement.[29]
[29] Clause 13.2(a).
The parties’ objective was that Achieved Fees of the acquired business exceed $1.4 million per annum. Each party was obliged to use reasonable endeavours to achieve that objective.[30]
[30] Special Condition 3 contained in the Fourth Schedule.
If no adjustment to the Purchase Price occurred under Special Condition 2 of the Business Sale Agreement, a bonus was payable to WKYA equal to the difference between average Achieved Fees for the first three years and $1.4 million.[31] It is common ground on appeal that the fee fixing mechanism prescribed in the Business Sale Agreement applied to fix Achieved Fees for the purpose of the bonus clause and that if the parties negotiating in good faith could not reach agreement on the Achieved Fees, they could be determined objectively by a court of competent jurisdiction for the purposes of the Service Agreement.[32]
[31] Special Condition 4 contained in the Fourth Schedule.
[32] Clause 22.
The term of the Agreement was defined to end on the date on which it was terminated in accordance with its terms.[33] It provided for termination with immediate effect by Moore Stephens in defined events or if WKYA failed to remedy a default after 14 days written notice.[34] It did not otherwise provide for termination by either party.
[33] Clauses 2, 28.1 and the First Schedule Part 4.
[34] Clause 19.1(a) and (b).
Each of WKYA and Mr Richmond agreed under clause 23 for ascending periods up to three years after termination within ascending areas up to Australia not directly or indirectly to:
· solicit or deal with (or endeavour to solicit or deal with) clients of Moore Stephens during the term of the Service Agreement with whom the party had had direct or indirect dealings as part of its engagement or persons to whom it or Moore Stephens had made a presentation or whose business it or Moore Stephens had actively pursued;[35] and
· solicit or endeavour to solicit from Moore Stephens any person who was or within 12 months before 28 October 2011 had been employed or otherwise contracted by Moore Stephens.[36]
[35] Clause 23(b)(ii).
[36] Clause 23(b)(i).
Specified clauses, including the restraint clause, were to survive termination or expiry of the Service Agreement.[37]
[37] Clause 26.5.
WKYA agreed to execute the Business Sale Agreement at the same time as the Service Agreement. Moore Stephens was not bound under the Service Agreement until both agreements had been executed by all three parties and completion occurred under the Business Sale Agreement.[38]
[38] Clause 1.
Performance of the agreements
Completion of the purchase of the 2IC business took place on 28 October 2011. Moore Stephens took over the employment of staff engaged by WKYA as at 27 October 2011 except for Mr Richmond, Mr Mansfield and Mr Mather who worked as consultants via WKYA under the Service Agreement.
Mr Richmond was in charge of a separate department within Moore Stephens and staff formerly engaged by WKYA continued to work in that department providing accounting services to the former clients of WKYA (although in due course those clients were also introduced to the principals of Moore Stephens).
Moore Stephens in due course paid to WKYA the amounts referred to at the first dot point of [12] above. In addition, it was agreed that $99,020 should be offset against the Second Instalment Amount which became $600,980 instead of $700,000 subject to the fees adjustment.
In February 2013, Mr Richmond was given spreadsheets showing billed fees by client for his department between 1 November 2011 and 31 October 2012 totalling $965,806, work in progress at year end totalling $118,118 and partner adjustments totalling -$2,867 and showing billed fees by client between 1 November 2011 and 31 January 2012 totalling $225,168. He was given a summary calculation showing total fees and work in progress for year 1 of $1,083,923 and the projected equivalent for year 2 of $1,002,554 giving an average of $1,043,239 for the first two years. This was well below the target of $1.4 million.
On 21 February 2013, Mr Richmond sent an email to Mr Gregg, a principal of Moore Stephens. He said that he had not produced the level of fees expected and knew he needed to suffer as a result. He asked Moore Stephens to agree to amend the Business Sale Agreement to change the clawback ratio for the adjustment to the Purchase Price at the first milestone from two times to one times the fee shortfall. There were several further communications on this topic between February and September 2013.
On 30 September 2013,[39] Mr Richmond sent an email to Mr Fusco copied to the other partners in which he put the following proposal:
I would like interest to be paid from 1st November 2013 through until 31st of October 2014 based on fees purchased at $1.3m (a reduction of $100k). At that date we calculate the average fees earned for the 3 years, without any 2 times multiple. Interest is then calculated over the 3 years of the vendor finance compared to interest paid and adjusted off the capital based on this final calculation.
[39] He originally drafted the email on 11 September but did not send it until 30 September 2013.
On 15 October 2013, Mr Fusco replied:
We benefit from your knowledge and experience in the industry and look forward to you finishing your time in the industry with MSA. We would rather work with you than against you to come to a fair resolution for all parties involved.
Further to your request at amending the agreement to reflect, in your words, “[Mr Fusco then set out the passage from Mr Richmond’s email extracted at [43] above]”, may work if the fees generated to date are similar to the targeted fees outlined in the agreement.
Accordingly what I recommend, considering we are two weeks away from the end of October 2013, is that we calculate the Year 2 calculation per the agreement, and sit down with you to discuss the outcome. Unless we quantify the position we are unable to make an informed decision. The calculation may be finalised within the first two weeks of November and if the figures stack up then an interest payment may be made at the end of month, as has occurred in the previous month.
I reiterate that we all want to work with you to resolve the matter so that all parties benefit.
If you wish to discuss the matter further prior to preparation of the Year 2 calculation, please do not hesitate to contact me.
On 15 October 2013, Mr Richmond replied:
Thanks Peppe, I appreciate the sentiments of your email & hope we can work towards a win:win.
My concern is the “year 2 calculation per the agreement”.
I know you believe the fees generated are significantly below target fees & if that means you intend to apply the clawback at 2 times then a significant reduction in interest payments would put me in a serious financial problem.
This was discussed many months ago & I thought the plan was to explore some form of incentive/variation to make it work for all of us.
It concerns me why we need to wait until after 31st October to discuss possible solutions. I’ve got my fingers crossed.
On 21 November 2013, Mr Fusco met with Mr Richmond. He gave to Mr Richmond a summary calculation and spreadsheets (the November fee calculation) in a similar format to the February documents. The summary calculation showed average fees for years 1 and 2, fees shortfall, clawback and overall shortfall as follows:
Year 1 Year 2
Fees billed $1,035,275 $1,065,983
End of year WIP +$135,703 -$19,778
PCG Reconciliation -$37,576
Credits raised for Invoices as original -$2,606 -$73,537
Invoice not charged
Total $1,130,796 $872,668
Average $1,001,732
Target $1,400,000
Shortfall -$398,268
Multiple 2.00
Clawback $796,536
Estimated amount outstanding in vendor finance $600,000
Surplus/(Shortfall) -$195,556
The spreadsheets showed fees and work in progress by client from 1 November 2011 to 31 October 2013. Mr Fusco did not provide any documents in support of the reductions described in the summary calculation as “PCG Reconciliation” (the PCG reduction) or “Credits raised for Invoices as original Invoice not charged” (the Invoice Credit reductions).
On 27 November 2013, Mr Richmond sent an email to Mr Fusco. He said that he did not accept the summary as a fair reflection of Achieved Fees for the first two years and to enable him to assess this in more detail requested a report in the format of an attached spreadsheet showing client name and fees split between business services and audit. Mr Fusco did not reply to this email.
On 27 December 2013 at 10.46 am, Mr Fusco sent an email to Mr Richmond attaching a formal letter addressed to Mr Richmond and WKYA the original of which he left in Mr Richmond’s office. The letter said that Moore Stephens had overpaid the vendor finance interest for November of $5,509 under the Business Sale Agreement and now offset it against the consultancy fee for December of $13,970 under the Service Agreement.
On 27 December 2013 at 12.46 pm, Mr Fusco sent an email to Mr Richmond attaching a formal letter addressed to Mr Richmond and WKYA the original of which he left in Mr Richmond’s office. The letter said:
As you are aware, the First Adjustment Date under the Business Sale Agreement between Moore Stephens Adelaide and 2IC Management (as it then was) has passed.
We have assessed the Achieved Fees for year 1 and year 2 and have determined that a Falling Situation applies.
This means that a 2 times multiple adjustment applies based on Year 2’s Achieved Fees.
This is an adjustment of $195,556.
Note that the above adjustment does not take into account bad debts which we would like to discuss further with you, for example Trevor Bond Group.
Under the agreement, your confirmation of these numbers is required. We enclose the relevant spreadsheet and documents for this purpose.
Under ordinary circumstances, you are required to do this within 5 Business Days, however, given the time of year, we are prepared to extend the time for your response until 31 January 2014.
We note that based on the above adjustment (if it is confirmed), the vendor finance debt will be extinguished, you will have to repay any interest we have paid to you, you must refund to us some of the First Instalment Amount – we can discuss this in due course.
The original of the letter enclosed a fee calculation (the December fee calculation) containing the same summary calculation and spreadsheets as the November fee calculation. It also enclosed new documents showing the calculation of the PCG and Invoice Credit reductions.
On 28 December 2013, Mr Richmond sent an email to Mr Fusco saying inter alia that he disagreed with Moore Stephens’ calculations.
On 28 December 2013, Mr Fusco sent a responding email in which he contended that the Achieved Fees calculation contained in the November fee calculation had been confirmed because Mr Richmond’s 25 November email denying the calculation was not sufficient to prevent confirmation, there was a significant shortfall in Achieved Fees, and Moore Stephens would cease paying any further interest post 31 October 2013.
Moore Stephens did not pay interest to WKYA at the end of December 2013.
On 8 January 2014, Mr Richmond sent an email to Mr Fusco attaching a formal letter requiring Moore Stephens to rectify its breach by not paying interest at the end of December and deducting the November interest previously paid from the December service fee.
On 24 January 2014, Mr Richmond sent an email to Mr Fusco attaching a formal notice by WKYA giving notice under Special Condition 1(g) to the Business Sale Agreement that the whole of the Second Instalment Amount of $600,980 plus interest was due and payable and demanding payment by 3 February 2014.
On 30 January 2014, Mr Fusco sent an email to Mr Richmond attaching an updated fee calculation (the January fee calculation) containing a new summary calculation together with a spreadsheet in the form of the pro forma spreadsheet splitting fees between business services and audit attached to Mr Richmond’s email dated 27 November 2013. The January fee calculation contained small increases in the figures for fees billed for years 1 and 2 more than offset by a deduction of $30,957 on account of fees written off.
On 31 January 2014, Mr Richmond sent a letter to Moore Stephens saying that, because of Moore Stephens’ failure to give notice of Achieved Fees within five business days of 31 October 2013, there was no adjustment or clawback at the first milestone. He gave notice that he did not accept the Achieved Fees specified in the 30 January 2014 email and said that Moore Stephens had failed to provide all necessary evidence, invoices and other documents required to verify the claimed Achieved Fees.
On 4 February 2014, Mr Richmond sent an email to Mr Fusco attaching a notice of termination by WKYA of the Business Sale Agreement and associated agreements. The notice stated that, by reason of inter alia Moore Stephens’ failure to pay the Second Instalment Amount demanded on 24 January, Moore Stephens had repudiated the Business Sale Agreement and associated agreements and WKYA accepted the repudiation and terminated them.
On 4 February 2014, Mr Richmond vacated his office and over the next eight days several clients engaged him instead of Moore Stephens to provide accounting services.
On 21 February 2014, a Judge of the District Court granted an interlocutory injunction restraining WKYA and Mr Richmond inter alia from soliciting the custom of or providing accountancy services to any Client (as defined in the Service Agreement) except for those Clients who by 12 February 2014 had engaged or unequivocally indicated their intention to engage WKYA or Mr Richmond to provide accounting services as evidenced in affidavits filed by Mr Richmond and from soliciting or endeavouring to solicit away from Moore Stephens any person employed by Moore Stephens. The action was listed for an early trial which commenced on 14 April 2014.
On 11 March 2014, WKYA was placed in liquidation and no further steps were taken in the action against it.
The trial and reasons for judgment
In the action, Moore Stephens sought a final injunction restraining Mr Richmond from acting in breach of the restraint clauses in the Business Sale Agreement and Service Agreement until 4 February 2016 being two years after termination of the Service Agreement.[40]
[40] Moore Stephens also sought judgment for monies payable by Mr Richmond pursuant to the Business Sale Agreement but ultimately accepted that it was precluded from sustaining such a judgment because Mr Richmond had entered into a personal insolvency agreement under Part X of the Bankruptcy Act 1966 (Cth).
Mr Richmond contended that the restraint clauses:
1.did not survive termination of their respective agreements if as he contended they were terminated for breach or repudiation by Moore Stephens;
2.should not be enforced in equity if as he contended Moore Stephens committed essential or serious breaches of or repudiated their obligations under them;
3.were void for uncertainty; or
4.were void as being in restraint of trade.
The trial proceeded in April and May 2014. Mr Fusco, his predecessor Mr Anderson and Mr Richmond gave evidence.
On 27 June 2014, the Judge delivered reasons for judgment on issues 1 and 2 identified above and deferred consideration of issues 3 and 4 and relief pending further submissions.[41] The Judge held that WKYA and Mr Richmond, and not Moore Stephens, breached the Business Sale Agreement, leading to a conclusion that they repudiated their obligations under the Business Sale Agreement and the Service Agreement and the agreements were validly terminated by Moore Stephens for repudiation.
[41] [2014] SADC 131.
The Judge held that on 15 October 2013 the parties agreed to extend the time for Moore Stephens to give a clause (b) notice until the middle of November 2013 and the notice given on 21 November 2013 fell within the extended time.[42]
[42] [2014] SADC 131 at [39].
The Judge held that the spreadsheet attached to the notice given on 21 November 2013 comprised “all necessary evidence … and other documents required for the Seller to verify the Achieved Fees” within the meaning of clause (b) and the provision of invoices was not necessary in the circumstances for a valid clause (b) notice.[43]
[43] [2014] SADC 131 at [62]-[64].
The Judge held that WKYA’s 27 November 2013 response was not a valid clause (c) notice because it did not specify WKYA’s estimate of Achieved Fees.[44] There was therefore deemed agreement on Moore Stephens’ specification of Achieved Fees.[45] Moore Stephens was entitled to stop paying interest on the Second Instalment Amount and to set off the amount owing for a refund of the November 2013 interest against the December 2013 service fee.[46] WKYA and Mr Richmond were not entitled to terminate the agreements and repudiated their obligations under them on 4 February 2014.[47]
[44] [2014] SADC 131 at [64].
[45] [2014] SADC 131 at [66].
[46] [2014] SADC 131 at [67]-[68].
[47] [2014] SADC 131 at [68].
On 4 September 2014, after hearing further submissions from the parties on issues 3 and 4 identified above, the Judge delivered reasons for judgment on those issues and deferred consideration of the terms of final injunctions pending further submissions.[48] The Judge held that on their proper construction the restraint clauses survived termination of their respective agreements.[49]
[48] [2014] SADC 154.
[49] [2014] SADC 154 at [21]-[22].
The Judge held that, if Moore Stephens had breached the Business Sale Agreement by failing to pay interest, the breach would not have been such a fundamental one as to vitiate the agreement.[50]
[50] [2014] SADC 154 at [23].
The Judge held that the restraints were not void for uncertainty[51] and were reasonable given the purchase price of the accountancy practice and the time it might take for Moore Stephens to form relationships with WKYA’s long-term clients.[52]
[51] [2014] SADC 154 at [24].
[52] [2014] SADC 154 at [24].
On 17 December 2014, the parties made further submissions on the terms of final injunctions. Moore Stephens sought an injunction based on the wording of the restraint clause in the Service Agreement until 4 February 2016 being beyond the expiration of the restraint clause in the Business Sale Agreement.
On 23 January 2015, the Judge delivered reasons for judgment on the terms of the final injunction.[53] The Judge held that the terms should reflect the wording of the restraint clause in the Service Agreement and rejected Mr Richmond’s contention that the wording was too vague to be appropriately used in an injunctive order.[54]
[53] [2015] SADC 4.
[54] [2015] SADC 4 at [21].
The Judge held that it was appropriate that the injunction identify the clients in respect of whom Mr Richmond was restrained rather than being expressed in generic terms reflecting the wording of the restraint clause.[55]
[55] [2015] SADC 4 at [24].
The Judge found that Moore Stephens had sufficiently proved that Mr Richmond had had dealings with the clients identified in the list proffered by Moore Stephens.[56]
[56] [2015] SADC 4 at [22]-[23].
The Judge held that the application of the injunction should not be excluded in respect of those clients excluded from the February 2014 interlocutory injunction[57] on the ground that they had become or unequivocally indicated their intention to become clients of Mr Richmond.[58]
[57] See [61] above.
[58] [2015] SADC 4 at [25].
On 12 February 2015, a District Court Judge stayed the operation of the injunction in respect of two client groups pending the appeal to this Court against the judgment.
The appeal
Mr Richmond contends that the Judge erred in concluding that the parties agreed on 15 October 2013 to extend the time for Moore Stephens to give the clause (b) notice and in concluding that the 21 November 2013 notice was a valid clause (b) notice. He contends consequentially that, no valid clause (b) notice having been given, the time for adjustment of the Unadjusted Purchase Price at the first milestone passed and it remained at $1.4 million until the second milestone.
Mr Richmond contends in the alternative that the Judge erred in concluding that WKYA’s clause (c) notice was invalid. Achieved Fees to the first milestone were therefore never fixed under the clause (c)(ii)(B) mechanism up to 4 February 2014 and Moore Stephens’ new clause (b) notices given on 27 December 2013 and 30 January 2014 successively reset time running for a clause (c) response.
Mr Richmond contends that it follows that Moore Stephens was in breach of the Business Sale Agreement by failing to pay the December 2013 interest and recouping the November 2013 interest; the WKYA 8 January 2014 notice validly demanded payment of that interest; and Moore Stephens’ failure to comply with that demand within 14 days comprised an “Event of Default” within the meaning of Special Condition 1(a).
Mr Richmond contends that, by reason of Moore Stephens’ failure to rectify the default within 14 days, WKYA was entitled to accelerate payment of the Second Instalment Amount outstanding at that time pursuant to Special Condition 1(g), that amount was the balance of the Unadjusted Purchase Price being $600,980 and WKYA’s 24 January 2014 notice validly accelerated and demanded payment of $600,980.
Mr Richmond contends that Moore Stephens’ failure to pay $600,980 within 10 days comprised a breach of an essential term of or repudiation of the Business Sale Agreement entitling WKYA to terminate both it and the Service Agreement which it validly did on 4 February 2014.
Mr Richmond contends that the restraint clauses do not survive termination for breach or repudiation by Moore Stephens.
Mr Richmond contends in the alternative that the restraint clauses are void for uncertainty or void as being in restraint of the trade.
Mr Richmond contends in the final alternative that the terms of the final injunction are too wide or not justified by the evidence.
Moore Stephens takes issue with each of Mr Richmond’s contentions. It contends that it can in any event rely on the restraint clause in the Business Sale Agreement if it cannot rely on the restraint clause in the Service Agreement.
On the hearing of the appeal, Mr Richmond submitted that Moore Stephens could not rely on the restraint clause in the Business Sale Agreement because during the December 2014 hearing it sought an injunction in terms of and supported by the restraint clause in the Service Agreement and Moore Stephens had not filed a notice of contention as required by rule 285(4) of the Supreme Court Civil Rules 2006 (SA). On the hearing of the appeal, this Court dispensed with the requirement that Moore Stephens file a notice of contention on the basis that it would be ordered to pay Mr Richmond’s costs thrown away as a result of its not having filed a notice of contention.
Mr Richmond contends that, by its submissions during the December 2014 hearing, Moore Stephens abandoned its claim based on the restraint clause in the Business Sale Agreement and cannot now advance such a claim on appeal. That submission should be rejected. The evidence at trial was completed and the parties’ cases closed in April 2014. The Judge held in his first and second reasons for judgment that both restraint clauses were enforceable and left to the final hearing only the question of the terms of the injunction to be granted. There is and can be no suggestion by Mr Richmond that he was prejudiced in the conduct of his case in the District Court.
Moore Stephens’ submissions during the final hearing cannot be characterised as an abandonment of its claim based on the restraint clause in the Business Sale Agreement. The situation is loosely analogous to a party making an election between inconsistent remedies. If on appeal the party fails in relation to the remedy for which it elected, it is not precluded from seeking the alternative remedy on appeal. While injunctions based on the Service Agreement and Business Sale Agreement were not legally inconsistent so as to invoke election principles, if on appeal it should be decided that Moore Stephens was not entitled to a remedy based on the Service Agreement, it is not precluded from seeking a remedy based on the Business Sale Agreement.
Construction of the agreements
Many of the issues raised on appeal involve the construction of the Business Sale Agreement and Service Agreement.
The construction of a contractual provision (like a statutory provision) involves consideration of the text, context, evident purpose and fairness of the provision.[59]
[59] Project Blue Sky v Australian Broadcasting Authority [1998] HCA 28, 194 CLR 355 at [69]-[71] per McHugh, Gummow, Kirby and Hayne JJ; Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5, (2002) 240 CLR 45 at [10] per Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ and [68]-[70] per Kirby J; Westfield Management Limited v AMP Capital Property Nominees Limited [2012] HCA 54, (2012) 247 CLR 129 at [27] per French CJ, Crennan, Kiefel and Bell JJ.
In a commercial contract, a court will take into account the evident business purpose of the contract and the provision and, to the extent possible and permissible, give a provision a business like construction rather than necessarily a literal one.[60]
[60] Glynn v Margetson & Co [1893] AC 351 and 355 per Lord Herschel LC and 357 per Lord Halsbury; Gollin & Co Ltd v Karenlee Nominees Pty Ltd (1983) 153 CLR 455 at 464 per Mason, Murphy, Brennan, Deane and Dawson JJ; Zhu v Treasurer of New South Wales (2004) 218 CLR 530 at [83] per Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ.
This approach applies particularly, but not exclusively, to contracts which contain boilerplate provisions. In Glynn v Margetson & Co,[61] Lord Herschel LC (with whom Lord Halsbury LC, Lord Macnaghten and Lord Shand agreed) said:
Where general words are used in a printed form which are obviously intended to apply, so far as they are applicable, to the circumstances of a particular contract, which particular contract is to be embodied in or introduced into the printed form, I think you are justified in looking at the main object and intent of the contract and in limiting the general words used, having in view that object and intent.[62]
Lord Halsbury LC (with whom Lord Macnaghten and Lord Shand agreed) said:
Looking at the whole of the instrument, and seeing what one must regard, for a reason which I will give in a moment, as its main purpose, one must reject words, indeed whole provisions, if they are inconsistent with what one assumes to be the main purpose of the contract.[63]
[61] [1893] AC 351.
[62] At 355.
[63] At 357.
In Gollin & Co Ltd v Karenlee Nominees Pty Ltd,[64] Mason, Murphy, Brennan, Deane and Dawson JJ said:
That construction of the lease… has something to commend it on the ground of the literal interpretation of the words used. It has little to commend it on the grounds of commercial efficacy or common sense.[65]
[64] (1983) 153 CLR 455.
[65] At 464.
In Investors Compensation Scheme Ltd v West Bromwich Building Society,[66] Lord Hoffmann (with whom Lord Goff of Chieveley, Lord Hope of Craighead and Lord Clyde agreed) said:
The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of "legal" interpretation has been discarded. The principles may be summarised as follows:
(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the "matrix of fact," but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax.
(5) The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in The Antaios Compania Neviera S.A. v. Salen Rederierna A.B:
". . . if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense."[67]
[66] [1998] 1 WLR 896.
[67] At 912-913. (Citations omitted)
In Zhu v Treasurer of New South Wales,[68] Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ said:
It was necessary to construe the Deed Poll so as to avoid it making commercial nonsense or working commercial inconvenience. Its commercial purpose – the purpose of reasonable persons in a position of TOC and the plaintiff – was relevant. That, in turn, required attention to “the genesis of the transaction, the background, the context, the market” in which the parties were operating as known to both parties.[69]
[68] (2004) 218 CLR 530
[69] At [83]. (Citations omitted)
In Re Sigma Finance Corp (in administrative receivership),[70] Lord Mance SCJ (with whom Lord Hope DP and Lords Scott and Collins SCJJ agreed) said:
In my opinion, the conclusion reached below attaches too much weight to what the courts perceived as the natural meaning of the words of the third sentence of clause 7.6, and too little weight to the context in which that sentence appears and to the scheme of the Security Trust Deed as a whole. Lord Neuberger was right to observe that the resolution of an issue of interpretation in a case like the present is an iterative process, involving "checking each of the rival meanings against other provisions of the document and investigating its commercial consequences". Like him, I also think that caution is appropriate about the weight capable of being placed on the consideration that this was a long and carefully drafted document, containing sentences or phrases which it can, with hindsight, be seen could have been made clearer, had the meaning now sought to be attached to them been specifically in mind. Even the most skilled drafters sometimes fail to see the wood for the trees, and the present document on any view contains certain infelicities, as those in the majority below acknowledged. Of much greater importance in my view, in the ascertainment of the meaning that the Deed would convey to a reasonable person with the relevant background knowledge, is an understanding of its overall scheme and a reading of its individual sentences and phrases which places them in the context of that overall scheme. Ultimately, that is where I differ from the conclusion reached by the courts below. In my opinion, their conclusion elevates a subsidiary provision for the interim discharge of debts "so far as possible" to a level of pre-dominance which it was not designed to have in a context where, if given that pre-dominance, it conflicts with the basic scheme of the Deed.[71]
Lord Collins SCJ (with whom Lord Mance and Lord Hope DP SCJJ agreed) said:
In complex documents of the kind in issue there are bound to be ambiguities, infelicities and inconsistencies. An over-literal interpretation of one provision without regard to the whole may distort or frustrate the commercial purpose. This is one of those too frequent cases where a document has been subjected to the type of textual analysis more appropriate to the interpretation of tax legislation which has been the subject of detailed scrutiny at all committee stages than to an instrument securing commercial obligations…
The instrument must be interpreted as a whole in the light of the commercial intention which may be inferred from the face of the instrument and from the nature of the debtor's business. Detailed semantic analysis must give way to business common sense.[72]
[70] [2010] 1 All ER 571.
[71] At [12]. (Citations omitted)
[72] At [35], [37]. (Citations omitted)
The Business Sale Agreement and Service Agreement are complex documents. They employ drafting techniques that give rise to difficulties or ambiguities of construction. They contain cross-references between the two agreements stemming from the fact that commercially there was a single bargain, but the division of terms between the two legal agreements gives rise to difficulties of construction.
The Business Sale Agreement contains three sets of terms in the body of the agreement and Annexure A and Annexure I that cross refer to each other that create difficulties that might have been avoided by a single set of terms. The three sets of terms each contain definitions that create difficulties that might have been avoided by incorporating some of the definitions into the substantive provisions. These difficulties are compounded by the fact that in some cases circularity is created by the use of the definitions. The same difficulties arise in relation to the Service Agreement.
The Service Agreement contains no provisions for termination other than for default and then only at the instance of the Principal.
Both agreements contain extensive boilerplate provisions which have not been adapted to the circumstances of the commercial bargain between the parties, the particular terms of the agreements or particularly complex elements of both the commercial bargain and the legal terms of the agreements.
By reason of these features, the agreements contain various infelicities of the type referred to by Lord Mance SCJ in Re Sigma Finance Corp (in administrative receivership) in the passage extracted above, calling for caution in the manner identified by Lord Mance SCJ in relation to the literal meaning and effect of various provisions of the agreements.
Effect of termination of agreements
Mr Richmond contends that the restraint clauses did not survive termination if effected for breach or repudiation by Moore Stephens; the agreements were in fact terminated for breach or repudiation by Moore Stephens; therefore the restraint clauses did not survive termination.
Moore Stephens takes issue with the major premise and the minor premise. It is convenient to address the minor premise first.
Termination of agreements
Mr Richmond contends that he and WKYA validly terminated the agreements on 4 February 2014 for breach by Moore Stephens in failing to pay the Second Instalment Amount then due and payable of $600,980. Due to the cross-default provisions in clause 18(c), the same breach also comprised a breach of the Service Agreement justifying its termination. The amount of $600,980 had become payable under clause 1(g) of the Special Conditions to the Business Sale Agreement because Moore Stephens failed to pay within 14 days of demand the November and December 2013 interest payments.
These contentions in turn depend upon the parties’ respective contentions concerning the Judge’s conclusions on the alleged agreement to extend time for giving a clause (b) notice and the validity of the respective clause (b) and clause (c) notices given by the parties.
Agreement to extend time
The Judge held that, by the 15 October 2013 email exchange, the parties entered into an agreement to extend the time for Moore Stephens to give the clause (b) notice until mid-November 2013. Mr Richmond contends that the Judge erred in reaching this conclusion.
Mr Fusco’s email of 15 October 2013 must be understood against the background that, assuming the parties followed the timetable prescribed by clauses (b) to (d) of Annexure A, it was likely to take until at least mid-November 2013 in any event before Achieved Fees had been agreed.
The starting point is uncertain due to the drafting of clause (b) which provides that the notice is to be given “within 5 Business Days before each Adjustment Date”. Construed literally, this would entail that it was to be given in respect of the first adjustment between 21 and 28 October 2013. Given that the Achieved Fees the subject of the notice were to include all invoices rendered up to and including 28 October 2013, it must have been evident when the parties entered into the Business Sale Agreement that it would be impractical if not impossible for the Buyer to complete the calculation by 28 October 2013. Moreover, there is no evident purpose in specifying any number of days before the adjustment date. It is likely that the true intent was that the notice was to be given within five business days of each Adjustment Date.
In addition, it was the practice of Moore Stephens to calculate fees to calendar month end and Moore Stephens had in February 2013 calculated Achieved Fees to 31 October and not 28 October 2012 with the acquiescence of Mr Richmond. Mr Richmond himself expressed the relevant deadline in his notice of 31 January 2014 as “within 5 business days of 31 October 2013”. While this subsequent conduct cannot affect the proper construction of clause (b), it does evidence a collateral agreement that the first and second milestone dates were to be 31 October instead of 28 October. Even if there was no such collateral agreement, both parties acted on that basis and this affects their state of mind assessed objectively as at 15 October 2013 when the email exchange occurred.
Whatever the proper construction of clause (b) as to time, it is likely that the parties proceeded on the basis that the clause (b) notice was not due until 7 November and WKYA’s clause (c) notice was therefore not due until 14 November 2013. Even if Moore Stephens’ notice was due by 28 October 2013, WKYA’s response under clause (c) would not have been due until 4 November 2013 and it was likely that the parties would take at least two weeks to negotiate agreement on Achieved Fees under clause (d) if there were any disagreement.
Mr Fusco’s email of 15 October 2013 must also be understood against the background that he was responding to Mr Richmond’s 30 September 2013 email proposing amendment to the Business Sale Agreement involving a change to the interest payable for November 2013 to October 2014 and a change to the formula for calculating the clawback.
On its face, Mr Fusco’s email of 15 October 2013 did not propose any change to the timing of the clause (b) notice or the clause (c) notice nor did it propose any amendment to the Business Sale Agreement. It is consistent with there being no change to that timing and with Mr Richmond’s proposed amendments being discussed in mid-November after the parties had followed the existing mechanism and timing (as they understood it) to agree the Achieved Fees in accordance with Annexure A.
Given that the putative agreement was not express, Moore Stephens must establish that it arises by necessary implication and for this purpose exclude as unlikely the alternative hypothesis. While the existence of clause 32(g) of the Business Sale Agreement requiring amendments to be in writing executed by all parties would not preclude the parties entering into a collateral agreement, the existence of that clause requires greater caution in finding that the parties intended to enter into such an agreement by mere implication.
Mr Fusco’s proposal was that the year 2 calculation be calculated “per the agreement”, which is counter to any change to the agreement.
If the parties had intended to agree to extend the time for giving the clause (b) notice, it may be expected that they would have been precise in defining the period of the extension as opposed to the vague expression “the calculation may be finalised within the first two weeks of November”.
Mr Richmond’s responding email referring to waiting until after 31 October to discuss possible solutions is entirely consistent with the parties not intending to vary the timing prescribed by Annexure A.
Moore Stephens contends that an agreement to extend time can be inferred from the conduct of the parties after 15 October 2013 whereby WKYA and Mr Richmond did not contend that the notice given on 21 November 2013 was out of time and on the contrary responded to it on its merits. It may be observed in passing that, if this contention were good, the parties’ conduct after receipt of Mr Richmond’s response on 27 November 2013 should equally lead to an inferred agreement that the time for WKYA to respond to the 21 November 2013 notice was extended until it was provided with a spreadsheet in the form requested or Moore Stephens indicated that it would not provide such a spreadsheet. Equally, if this contention were good, the parties’ conduct on and after 27 December 2013 should equally lead to an inferred agreement that the time for WKYA to respond was deferred to the end of January 2014 and then on 30 January 2014 to five business days after 30 January 2014. However, Moore Stephens’ contention should be rejected because the parties’ conduct is equivocal and indeed more consistent with the parties taking the view that the time specified by clause (b) was not critical.
The Judge erred in concluding that the parties entered into an agreement on 15 October 2013 to extend the time for Moore Stephens to give the clause (b) notice.
Validity of clause (b) notice
Mr Richmond contends that time was of the essence for Moore Stephens to give the clause (b) notice and on the most favourable construction of the clause that time expired on 7 November being two weeks before the notice given on 21 November 2013. Mr Richmond relies for this purpose on clause 32(a) of the Service Agreement.
Mr Richmond also contends that it was essential to the validity of a clause (b) notice that it be accompanied by all necessary evidence, invoices and documents required by WKYA to verify the Achieved Fees and the notice given on 21 November 2013 did not do so because no vouchers were provided in respect of the PCG and Invoice Credit reductions and no client invoices were provided.
Clause 32(a) of the Business Sale Agreement provided:
Unless otherwise specified, time is of the essence in this Agreement.
Traditionally, the common law classified contractual terms as either essential (“conditions”) - breach of which entitled the other party to terminate the contract - or non-essential (“warranties”) – breach of which entitled the other party only to damages.[73] The common law now recognises “intermediate” terms which operate as if they are essential terms in respect of sufficiently serious breaches and as if they are non-essential terms in respect of less serious breaches,[74] but this does not detract from the fundamental difference between an essential and non-essential term being entitlement to terminate.
[73] Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 at 322 per Dixon, Williams, Webb, Fullagar and Kitto JJ.
[74] Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26.
A distinction is drawn between the substantive aspect and the temporal aspect of a breach of a term in determining essentiality the purpose of termination for breach. If performance of a condition is required strictly in accordance with the time prescribed by the contract, it is said that time is of the essence. In Carr v JA Berriman Pty Ltd,[75] Fullagar J (with whom Williams, Webb and Kitto JJ agreed) said:
Where a contract contains a promise to do a particular thing on or before a specified day, time may or may not be of the essence of the promise. If time is of the essence, and the promise is not performed on the day, the promisee is entitled to rescind the contract. If time is not of the essence of the promise, the promisee is not entitled to rescind for non-performance on the day. If either (a) time is not originally of the essence or (b) time being originally of the essence the right to rescind for non-performance on the day is lost by election, the promisee can generally speaking only rescind after he has given a notice requiring performance within a specified reasonable time and after non-compliance with that notice.[76]
[75] (1953) 89 CLR 327.
[76] At 348-349. (Citations omitted)
The general approach of equity, which prevails over the contrary common law rule, is that there is a presumption that time is not of the essence unless the contrary intention is expressed or necessarily implied.[77] The purpose of clause 32(a) is to express a contrary intention in relation to conditions the breach of which entitles the other party to terminate. Clause 32(a) has no application to the fee fixing mechanism contained in clause (b) of Annexure A which does not amount to a condition or fix a time for performance of substantive obligations but merely addresses the time for taking a procedural step.
[77] Louinder v Leis (1982) 149 CLR 509 at 524-525 per Mason J (with whom Gibbs CJ, Stephen and Wilson JJ agreed).
Merely because clause 32(a) has no application does not answer the question about the consequences of a late clause (b) notice. That depends on the proper construction of clause (b). That construction in turn depends on the text, context, evident purpose and fairness of the provision in accordance with the construction principles identified above.
In the context of statutory interpretation, in Project Blue Sky v Australian Broadcasting Authority,[78] the High Court said:
An act done in breach of a condition regulating the exercise of a statutory power is not necessarily invalid and of no effect. Whether it is depends upon whether there can be discerned a legislative purpose to invalidate any act that fails to comply with the condition. The existence of the purpose is ascertained by reference to the language of the statute, its subject matter and objects, and the consequences for the parties of holding void every act done in breach of the condition.[79]
[78] (1998) 194 CLR 355.
[79] At [91] per McHugh, Gummow, Kirby and Hayne JJ.
In Gollin & Co Ltd v Karenlee Nominees Pty Ltd,[80] the High Court had earlier applied a similar approach to contractual construction. The High Court held that, even if the clause in the lease in that case providing for rent review by reference to valuations had expressly required each party to appoint a valuer within a specific time, it would not as a matter of construction without more have made appointment within that time a condition of validity.[81]
[80] (1983) 153 CLR 455.
[81] At 468 per Mason, Murphy, Brennan, Deane and Dawson JJ.
Clauses (b) and (c) and the chapeau to (d) of Annexure A provide:
(b) Determination of Achieved Fees
Within 5 Business Days before each Adjustment Date, the Buyer shall determine the Achieved Fees and shall give notice to the Seller specifying:
(i) the Achieved Fees; and
(ii) the Buyer’s basis for calculating the Achieved Fees,
together with all necessary evidence, invoices and other documents required for the Seller to verify the Achieved Fees.
(c) Confirmation of Achieved Fees
Upon receipt of the notice under paragraph (b), the Seller must verify the Achieved Fees specified in that notice and the Seller shall either:
(i) give notice within 5 Business Days to the Buyer accepting the Achieved Fees specified in the Buyer’s notice (failing which notice of acceptance is deemed to be given). Upon receipt of that notice by the Buyer, the Achieved Fees shall be confirmed and binding on all of the Parties; or
(ii) give notice to the Buyer not accepting the Achieved Fees specified in the Buyer’s notice, in which case:
(A) the Seller must give notice to the Buyer specifying:
(1) the Seller’s estimate of the Achieved Fees; and
(2) the Seller’s basis for calculating the Achieved Fees;
(B) the Buyer and the Seller shall liaise and negotiate in good faith to agree an amount for the Achieved Fees; and
(C) upon such agreement (and only upon such agreement), the Achieved Fees shall be confirmed and binding on all of the Parties.
(d) Adjustment After Achieved Fees Agreed
Once the amount of the Achieved Fees is confirmed and binding under paragraph (c), the Parties agree that the Unadjusted Purchase Price will be decreased and adjusted by the Adjustment Amount (if any) calculated in the following manner…
The text, context and evident purpose of clause (b) and Annexure A as a whole evince a clear intention that giving the notice within the specified time is not essential to the validity of a clause (b) notice. Clause (c) provides that, if the Seller does not give notice within five business days in response to the Buyer’s notice, there is a deemed acceptance: by contrast clause (b) does not prescribe consequences of the Buyer not giving notice within five business days before each Adjustment Date.
There is no evident reason why it should be critical to the validity of a clause (b) notice that it be given within the specified time. The structure of Annexure A results in interest remaining payable on the balance of the Unadjusted Purchase Price unless and until agreement is reached on Achieved Fees. The parties must have contemplated that there was likely to be an iterative process between Buyer and Seller as to information to be provided in relation to calculating and agreeing Achieved Fees. Such a process is contemplated by clause (c)(ii).
Imposition of a strict time limit as a condition of validity would have potentially very serious consequences in terms of the purchase price in the context in which that purchase price was not to be determined for three years after completion and there were no objective reasons for extreme urgency. It is very unlikely that the parties intended that strict compliance be required with clause (b) as a condition of validity.
The second adjustment to the Unadjusted Purchase Price to be made at the end of year 3 will operate in favour of the Seller pursuant to clause (e) if Achieved Fees in year 3 exceed those in years 1 and 2. This must have been in the reasonable objective contemplation of the parties when entering into the Agreement. It would not be in the interests of the Seller that the mechanism instigated by a clause (b) notice not be invoked in such circumstances merely because the Buyer was late in giving notice or the notice did not strictly comply with the requirements of clause (b).
The existence of the latent ambiguity in the timing specified by clause (b) identified at [110] above further suggests that the parties did not consider that strict compliance with the time limit was essential to validity of a clause (b) notice.
The situation is broadly analogous to the rent review clause considered by the High Court in Gollin & Co Ltd v Karenlee Nominees Pty Ltd[82].
[82] (1983) 153 CLR 455.
Similar considerations lead to the conclusion that on its proper construction strict compliance with clause (b) by providing all necessary evidence, invoices and other documents required for the Seller to verify Achieved Fees is not required for a notice to be valid.
While on its proper construction there are some temporal and content requirements under clause (b) for validity of a notice by the Buyer, the notice given on 21 November 2013 was not so late or so unsupported by evidence or documents as to be invalid. In particular, as the PGC reduction had been previously agreed between the parties, it was not essential to the validity of the notice that any documents be provided in support of it. While Mr Richmond was entitled to call for documents in support of the Invoice Credit reduction, those documents had been previously supplied in respect of year 1 and their absence in respect of year 2 was not fatal to the validity of the notice. While Mr Richmond might reasonably call for client invoices in some circumstances, they were not required to be supplied with the notice as a condition of validity.
The Judge’s conclusion that the 21 November 2013 notice was a valid clause (b) notice should be upheld.
Validity of clause (c) notice
The Judge held that it is essential to the validity of a clause (c) notice that it specify WKYA’s estimate of Achieved Fees and the failure to do so by 28 November 2013 resulted in deemed acceptance of Moore Stephens’ figure for Achieved Fees specified on 21 November 2013.
The deeming of acceptance in the absence of notice accepting Achieved Fees is contained in subclause (i) of clause (c) and not in subclause (ii) which contains the requirement that the Seller give notice specifying its estimate of Achieved Fees. The requirement to give that notice is contained in the first of paragraphs (A) to (C) which are expressed after the obligation contained in the chapeau to subclause (ii) that the Seller give notice of non-acceptance of Achieved Fees specified in the Buyer’s notice.
The fee fixing mechanism under clauses (b) to (d) contemplates an iterative process between Buyer and Seller in which information is exchanged. If it is contemplated that the Seller may request information from the Buyer required to calculate Achieved Fees, it cannot be expected that the Seller must always have specified the Seller’s own estimate of Achieved Fees within five business days of receipt of a clause (b) notice. The reasons for rejecting the construction of clause (b) advanced by Mr Richmond have equal application to the construction of clause (c) advanced by Moore Stephens.
The Judge erred in concluding that WKYA’s 27 November 2013 response was not a valid notice of non-acceptance under clause (c).
Subsequent steps to fix Achieved Fees
Upon receipt of WKYA’s 27 November 2013 clause (c)(i) notice, Moore Stephens did not respond contending that the request for a spreadsheet in the attached format was unnecessary or unreasonable or that WKYA was obliged at that point to provide its own estimate of and basis for calculating Achieved Fees pursuant to clause (c)(ii)(A) or that the parties should proceed to negotiate pursuant to clause (c)(ii)(B). The position was allowed to drift until 27 December 2013.
On 27 December 2013, Moore Stephens gave to WKYA a fresh clause (b) notice and extended the time for a response to 31 January 2014. Moore Stephens does not contend that, if Achieved Fees had not already been fixed in November 2013, there was a deemed acceptance of the fees nominated in the fresh notice because WKYA did not respond to its second notice within five business days.[83]
[83] It is clear that the parties entered into a collateral agreement to extend time for the clause (c) response to 31 January 2014 and Moore Stephens would have been estopped by its 27 December 2013 representation from contending otherwise.
On 30 January 2014, Moore Stephens gave to WKYA a fresh clause (b) notice showing a different amount for Achieved Fees. WKYA had until 6 February 2014 to respond to the 30 January 2014 notice. Before the deadline, the Business Sale Agreement had been terminated either by WKYA on 4 February or by Moore Stephens on 5 February 2014.
Achieved Fees for the purpose of the first milestone were never fixed pursuant to clauses (b) to (d) of Annexure A.
Consequences of no fixing of Achieved Fees
Mr Richmond contends that, on their proper construction, clauses (c)(ii)(C) and (d) provide that there is no adjustment to the Unadjusted Purchase Price unless and until Achieved Fees are confirmed and binding by reason of the Seller giving notice accepting the figure specified by the Buyer, the Seller not giving a valid clause (c)(i) notice within five business days of the Buyer’s valid clause (b) notice, agreement between the parties under clause (c)(ii)(C) or a court of competent jurisdiction determining the amount of Achieved Fees as objective fact.
Mr Richmond’s contention is not contested by Moore Stephens and should be accepted as it reflects the plain meaning and effect of clauses (b) to (d).
At no point up to and including 4 February 2014 was the Unadjusted Purchase Price adjusted by reference to Achieved Fees.
Moore Stephens had an ongoing obligation to pay interest based on the balance of the Unadjusted Purchase Price.
Moore Stephens acted in breach of the Business Sale Agreement by failing to pay interest at the end of December 2013 and by recouping the November 2013 interest previously paid against the service fee payable at the end of December 2013 under the Service Agreement.
Event of Default
Special Condition 1(a)(i) defines Event of Default as follows:
Event of Default means the occurrence of any one or more of the following events in respect of the Buyer:
(i)non payment: that person fails to make within 14 days of written demand any payment due under this Agreement;
(ii)non performance: that person fails or refuses to observe or perform any of the obligations or requirements of it under this Agreement and such default is not remedied within 14 days of that person receiving notice requiring the default to be remedied; or
(iii)bankruptcy or insolvency: that person commits an act of bankruptcy, becomes insolvent, enters into any scheme of receivership or administration or goes into liquidation; or
(iv)illegality: the continued performance of the obligations of that person under this Agreement contravenes any applicable statute, ordinance, proclamation, rule, order, regulation, moratorium or decree of any governmental or other authority, or those obligations become unenforceable in whole or in part; or
(v) execution or distress: any execution or distress is levied against that person or any judgment obtained against that person remains unsatisfied;[84]
[84] (Emphasis in original)
Barwick CJ said:
If the clause were unreasonable in any of the circumstances in which according to its terms properly construed it could operate, it could not be supported in my opinion, by ignoring or treating as outside the contemplation of the parties an occasion or event which fairly fell within the terms of the clause because it was an unlikely possibility. …
On the footing that the majority partner as the covenantee was entitled to protect the whole goodwill, cl. 21 is not, in my opinion, an unreasonable protection of that goodwill. It is limited in time and space.[114]
Gibbs J (with whom Aickin J agreed) said:
Considerable reliance was placed by the appellants on the provisions of cl. 17. It was pointed out that, under that clause, the partnership might be determined because of some improper, indeed criminal, act of the respondents, and it was said that it was unreasonable that, in those circumstances, the appellants, being the innocent party, and exercising the right to determine the partnership because of the respondents' default, should be prevented from carrying on a similar business of their own. It should, however, be observed that cl. 17 does not materially alter the situation already brought about by cl. 3. Under that clause, the partnership may be determined by a party who has defaulted in his obligations as well as by a party whose conduct has been entirely above reproach. The only change effected by the inclusion of cl. 17 is that when one party is in default the others may determine the partnership immediately upon notice, rather than on fourteen days' notice. The answer to the appellants' arguments that the respondents may be in default under the deed and yet enforce the restraint lies in the principles of equity. He who comes to equity must do equity, and parties who seek equitable relief by injunction to enforce a covenant in restraint of trade "cannot obtain such relief unless they allege and prove that they have performed their part of the bargain hitherto and are ready and able also to perform their part in the future": Measures Brothers Ltd v Measures, cited in Kaufman v. McGillicuddy.[115]
Stephen J reached a similar conclusion for similar reasons.
[114] At 180, 182.
[115] At 187. Citations omitted.
In Photo Production Ltd v Securicor Transport Ltd,[116] the House of Lords reaffirmed the primacy of the parties’ intention, determined as a matter of construction of the contract, in determining whether a contractual provision is intended to survive termination for breach or repudiation by the party in whose favour the provision operates.[117]
[116] [1980] AC 827.
[117] At 844-846 per Lord Wilberforce (with whom Lord Keith of Kinkel and Lord Scarman agreed), 848 and 850-851 per Lord Diplock and 853 per Lord Salmon. See also Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Australia) Pty Ltd (1980) 144 CLR 302 at 305-307 per Lord Wilberforce delivering the judgment of the Privy Council.
Mr Richmond contends that General Billposting Company Limited v Atkinson is authority for the proposition that it is a rule of law that a party who has repudiated a contract leading to its termination by the innocent party can never enforce a restraint clause expressed to operate after termination and this was endorsed by the High Court in Kaufman v McGillicuddy. Mr Richmond’s contention should be rejected because the question whether the restraint clause survives must depend on the proper construction of the contract. This was the approach adopted by the Court of Appeal in Measures v Measures Brothers Ltd which was cited with approval by the High Court in Kaufman v McGillicuddy and by Gibbs J, with whom Aickin J agreed, and Stephen J in Geraghty v Minter. To the extent that Lord Collins’ judgment in General Billposting Company Limited v Atkinson might be read as suggesting that there is a rule of law regardless of the parties’ intention as manifested in the contract that restraint clauses cannot survive termination for repudiation by the party in whose favour they operate, this might be explained by the fact that in 1909 the common law had not yet been clarified that termination for repudiation does not operate by way of rescission ab initio.[118]
[118] See Rock Refrigeration Ltd v Jones & Anor [1997] 1 All ER 1 at 15 per Phillips LJ.
The Business Sale Agreement
Clause 14(j) of the restraint clause in the Business Sale Agreement provides:
The provisions of this Clause 14 survive the termination or expiry or satisfaction of this Agreement.
It is a question of construction whether the reference to “termination” includes a termination by the Seller for breach or repudiation by the Buyer.
If the purchase price under the Business Sale Agreement had been a fixed sum such as $1.4 million regardless of future events, on the proper construction of clause 14(j) the restraint clause would not have survived termination by the Seller for breach or repudiation before completion but would have survived termination after completion. This is because in the first case the substantive consideration for the restraint clause would not have been provided but in the second case it would have been provided.
However, under the Business Sale Agreement the amount of the purchase price was not to be fixed until three years after completion. Until that time, the Seller was subject to a potential reduction in the purchase price depending on the Achieved Fees generated by the acquired business over the first three years. Early termination might result in the Seller receiving a lower consideration for the sale of the business than if the agreement proceeded to its full term. The Business Sale Agreement and the Service Agreement are inextricably intertwined in the manner summarised at [220] below and it is unlikely that the restraint clause in one agreement was intended to survive termination for breach or repudiation but not in the other.
On the proper construction of the Business Sale Agreement, clause 14 does not survive termination by the Seller for breach or repudiation before the expiration of 3 years.
The Service Agreement
Clause 26.5 of the Service Agreement provides:
Clauses 4(b), 4(e), 5, 6, 9(f), 10(b), 11, 12, 13, 14, 15, 16, 18, 19.2, 22, 23, 24, 25 and 26 survive the termination or expiry of this Agreement.
It is a question of construction whether the reference to “termination” includes a termination by the Service Provider for breach or repudiation by the Principal.
On the one hand, many of the clauses apart from clause 23 to which clause 26.5 refers are clauses that on the proper construction of the agreement are intended to survive termination for breach or repudiation by the party seeking to enforce them. Unless there is good reason to construe clause 26.5 otherwise, it is likely that a uniform approach is intended to be taken to all clauses to which it refers.
On the other hand, the prospect of WKYA earning a bonus under the Service Agreement was dependent in a practical sense upon the continuing engagement of WKYA to provide services thereunder for the first three years. In a commercial sense, the substantive consideration for the restraint clause in the Service Agreement was the continuing engagement of WKYA to provide services thereunder for the first three years.
In addition, there are several extrinsic and intrinsic links between the Business Sale Agreement and the Service Agreement. Breach of one agreement automatically amounts to breach of the other. The prospect of Achieved Fees of $1.4 million per annum over the first three years being achieved by the acquired business and WKYA thereby earning the maximum purchase price under the Business Sale Agreement was likely to be impacted in a practical sense by its continuing engagement to provide the Services under the Service Agreement for the first three years.
The Service Agreement does not contain any express provisions for termination apart from termination by Moore Stephens for breach under clause 19. It cannot have been intended by the parties that, absent such termination for breach, they were bound by the agreement for eternity. In the circumstances, it was an implied term of the Service Agreement that it was terminable after three years by either party on giving reasonable notice of termination to the other party.
On the proper construction of the Service Agreement, clause 23 does not survive termination by the Principal for breach or repudiation before the expiration of 3 years.
Enforcement in equity of restraint clause
Mr Richmond contends that the restraint clauses should not be enforced in equity by injunction because Moore Stephens did not perform its part of the bargain due to its breaches of the Business Sale Agreement and Service Agreement.
Specific performance is a discretionary equitable remedy depending on considerations of justice and fairness.[119] Specific performance will usually be refused on the ground of lack of mutuality to compel a defendant to perform a contractual obligation when the plaintiff is unable or unwilling to perform a contractual obligation upon which the defendant’s obligation is dependent or which is so related to the defendant’s obligation as to make it unfair or unjust to compel performance by the defendant in the absence of performance by the plaintiff.[120]
[119] Dowsett v Reid (1912) 15 CLR 695 at 705-706 per Griffith CJ; Fullers’ Theatres Ltd v Musgrove (1923) 31 CLR 525 at 549 per Issaacs and Rich JJ.
[120] Australian Hardwoods Pty Ltd v Commissioner for Railways [1961] ALR 757 at 762 per Lord Radcliffe delivering the judgment of the Privy Council; Mehmet v Benson (1965) 113 CLR 295 at 308 per Barwick CJ and 314 per Windeyer J; Legione v Hately (1983) 152 CLR 406 at 449 per Mason and Deane JJ.
Moore Stephens breached the Business Sale Agreement by failing to pay the December 2013 and January 2014 interest payments and recouping the November 2013 interest payment. However, on the proper construction of the Business Sale Agreement, the restraint obligations of WKYA and Mr Richmond were not dependent on the payment of interest. The two obligations were not so related as to make it unfair or unjust to compel performance by the defendant in the absence of performance by the plaintiff.
Moore Stephens breached the Service Agreement directly by short paying the December 2013 service fee and indirectly by the breaches of the Business Sale Agreement referred to in the previous paragraph. However, on the proper construction of the Service Agreement, the restraint obligations of WKYA and Mr Richmond were not dependent on payment of the service fee or compliance with the Business Sale Agreement as to the payment of interest. The two obligations were not so related as to make it unfair or unjust to compel performance by the defendant in the absence of performance by the plaintiff.
Mr Richmond puts a different contention in relation to exercise of the discretion in respect of the restraint clause in the Business Sale Agreement. He contends that, if Moore Stephens is only liable to pay less than $500,000[121] compared to the Unadjusted Purchase Price of $1.4 million and has received the benefit of Achieved Fees of $1.68 million, the discretion should be exercised to deny the grant of an injunction. This does not comprise good reason to exercise discretion against the grant of an injunction. If the consideration payable under the Business Sale Agreement is less than the Unadjusted Purchase Price of $1.4 million, this is the result of the operation of the price-fixing mechanism in the Business Sale Agreement itself and to a lesser extent the decision by Mr Richmond to purport to terminate the two agreements.
Validity of restraint clauses: uncertainty
[121] $799,020 less $327,773 claimed by Moore Stephens to be repayable in its November fee calculation.
Service Agreement
Mr Richmond contends that clause 23 of the Service Agreement is void on the ground of uncertainty. The restraint clause precludes Mr Richmond from soliciting the custom of or dealing with any Client of Moore Stephens. The term “Client” is defined by clause 28.1 of the Service Agreement:
Client means, in respect of a Party:
(a) that is the Principal, any person who is a client of the Principal and/or any related body corporate of the Principal during the Term and with whom that Party had direct or indirect dealings as part of its engagement;
(b) any person to whom that Party and/or any related body corporate of that Party within 12 months prior to the expiry (or earlier termination) of the Term has either made a presentation or whose business that Party and/or the Principal and/or any related body corporate of that Party and/or the Principal has actively pursued.
Mr Richmond contends that the expression in paragraph (a) “direct or indirect dealings” is not defined and is too uncertain to be enforceable. Likewise, the expression in paragraph (b) “the Principal has actively pursued” is too uncertain to be enforceable.
Mr Richmond’s contentions should be rejected. While an inquiry would need to be conducted to ascertain whether Mr Richmond had had “direct or indirect dealings” with a client in his capacity as a consultant and hence the denotation of that expression, in context the concept of “dealings” and the concept of “direct or indirect dealings” have a clear connotation. The same applies to clients who had been actively pursued.
Business Sale Agreement
Mr Richmond contends that clause 14(f)(v) of the Business Sale Agreement is void on the ground of uncertainty. It precludes Mr Richmond from:
enticing or attempting to entice any employee of the Business from continuing to be employed in the Business, on behalf of the Seller or any other person, firm or company
The term “Business” is defined by clause 30 to mean:
the accounting practice and business carried on by the Seller from the Premises…
Mr Richmond contends that the clause is nonsensical because the Business is defined to be the business carried on by WKYA, it ceased to carry on that business and to employ staff on the date of completion and thereafter no employee could therefore be enticed away from the Business.
This contention should be rejected. It is clear from the context of the agreement as a whole that the references to “the Business” are to the business that was carried on by WKYA as at the date of the agreement which business was to be transferred to the Buyer and to continue to be carried on by the Buyer as contemplated by various provisions of the Business Sale Agreement. It is apparent that the definition of “the Business” in clause 30 does not have a temporal restriction and encompasses the business that after completion will have formerly been conducted by WKYA and will now be conducted by Moore Stephens. Thus, for example, clause (a) of Annexure A defines Achieved Fees in terms of fees billed by Moore Stephens in respect of “the Business”, which is clearly not a reference to the Business carried on by WKYA.
Validity of restraint clauses: restraint of trade
Service Agreement
Clause 23(b)(i) of the Service Agreement precludes Mr Richmond from soliciting the custom of or dealing with a person who is a client of Moore Stephens during the term of the agreement with whom he had had direct or indirect dealings as part of his engagement or persons to whom he, WKYA or Moore Stephens had made a presentation or whose business they had actively pursued. Clause 23(b)(ii) precludes Mr Richmond from soliciting or enticing away employees or former employees of Moore Stephens within twelve months before completion.
These restraints operate for cascading periods ranging from three years to two years and down to 3 months after termination of the Service Agreement within cascading areas ranging from Australia down to 10 kilometres from the site the Principal carries on business.
Mr Richmond contends that the Judge erred in finding that clause 23 was reasonable in reference to the interests of the parties because the Judge impermissibly took into account the sale of goodwill under the Business Sale Agreement. Because clause 23 is contained in the Service Agreement, the Judge should have had regard only to the relationship of principal and contractor under the Service Agreement. Mr Richmond points to the fact that the Business Sale Agreement contains its own restraint clause (clause 14).
If the Business Sale Agreement and Service Agreement had been unrelated and independent, it may be assumed that it would have been impermissible for the Judge to have had the regard that his Honour did. However, the two agreements are inextricably intertwined and interdependent. In the circumstances, it is artificial to differentiate between them in the manner contended by Mr Richmond. The Judge was entitled to have regard to the overall circumstances under both agreements in assessing the reasonableness of the restraint clause under the Service Agreement.
Mr Richmond contends that in any event it was not reasonably necessary that he be restrained for more than one year after termination from soliciting or dealing with clients of Moore Stephens.
In NE Perry Pty Ltd v Judge,[122] this Court held that the principal factor to be considered in circumstances such as the present is the time required to break the connection between employee or consultant and the clients.[123]
[122] [2002] SASC 312, (2002) 84 SASR 86.
[123] At [28]-[30] per Doyle CJ, [72]-[73] per Bleby J and [101] per Besanko J.
Evidence was given at trial that Moore Stephens had contact with approximately 75 percent of clients on an annual basis to prepare annual financial statements and tax returns; in general terms Mr Richmond had long-standing relationships with his former clients which continued while he was engaged at Moore Stephens; and two years was needed to build up a relationship with a client.
Clause 23 does not preclude Mr Richmond from working as an accountant, but only from soliciting the custom of or dealing with clients and soliciting or enticing away employees.
In the circumstances, no error has been demonstrated in the Judge’s conclusion that a period of two years after termination comprised a reasonable restraint.
Business Sale Agreement
Clause 14(f)(ii) to (iv) of the Business Sale Agreement precludes Mr Richmond from soliciting or accepting business from or performing business for a former customer of WKYA of the kind ordinarily forming part of the business. Clause 14(f)(v) precludes Mr Richmond from enticing away employees of Moore Stephens who were formerly employees of WKYA.[124]
[124] Clause 14(f)(i) purports to preclude Mr Richmond from carrying on a business which may compete with the acquired business but Moore Stephens did not seek to enforce that provision.
These restraints operate for cascading periods of four years, three years, two years and one year after completion within cascading areas ranging from South Australia down to within 10 kilometres of Melbourne Street, North Adelaide.
As at February 2014 when the Business Sale Agreement was terminated, two years and three months had elapsed since completion. Mr Richmond contends that it was not reasonable in the interests of the parties that he be restrained for more than two years and three months from completion.
The reasonableness of the restraint is to be assessed prospectively as at the date of the agreement and not retrospectively as at the date of enforcement. It is to be assessed prospectively by reference to the contingencies as at the date of the agreement and not by reference to contingencies that have subsequently transpired.
If the Business Sale Agreement had provided for a simple sale with no future connection between purchaser and vendor, it is likely that a restraint period in excess of two years would not have been reasonable in reference to the interests of the parties. However, due to the interlinking provisions of the Business Sale Agreement and Service Agreement and the implied term referred to at [221] above, WKYA and Mr Richmond were to continue to work in the acquired business for at least three years after completion of the sale. On the proper construction of the Business Sale Agreement, the restraint clause would not continue to operate upon termination by the Seller due to breach or repudiation by the Buyer before the expiration of three years.
In the circumstances, no error has been demonstrated in the Judge’s conclusion that a period of four years after completion comprised a reasonable restraint.
Terms of injunction
Clients in respect of whom injunction applies
Mr Richmond contends that the Judge erred in attempting to identify by name those clients with whom he had direct or indirect dealings at Moore Stephens within the meaning of the Service Agreement and instead the injunction should have been expressed in generic terms to restrain soliciting and dealing with any clients with whom Mr Richmond had direct or indirect dealings at Moore Stephens.
Mr Richmond contends that the Judge erred in making a finding of fact that he had direct or indirect contact at Moore Stephens with each of the clients named in the annexure to the formal judgment.
Mr Richmond contends that, if this error is made out but he otherwise fails in his appeal against the final injunctions, the final injunctions should be expressed in generic terms or alternatively, if this Court considers it preferable that the injunction identify clients by name, this Court should determine with which clients of Moore Stephens Mr Richmond had relevant dealings.
Moore Stephens supports the Judge’s factual finding that Mr Richmond had direct or indirect contact at Moore Stephens with each of the clients named in the annexure to the formal judgment. Moore Stephens puts an alternative contention (not argued at first instance and not decided by the Judge) that on its proper construction the restraint in the Service Agreement applies to clients with whom WKYA (not Mr Richmond) had dealings or alternatively to clients with whom either WKYA or Mr Richmond had dealings. This alternative construction raises a question of law and Mr Richmond does not oppose its being raised for the first time on appeal.
In his Honour’s reasons for judgment, the Judge made a finding that the evidence identified in the written submissions of Moore Stephens established that there was direct or indirect contact by Mr Richmond with the clients in his department and that those clients’ names appeared in the annexure to the draft judgment proffered by Moore Stephens.[125]
[125] [2015] SADC 4 at [23].
Moore Stephens relied upon Mr Fusco’s evidence that WKYA’s staff continued to be responsible at Moore Stephens for providing accounting services to former WKYA clients;[126] Mr Anderson’s evidence that Mr Richmond was involved in the ongoing services of former WKYA clients including those notionally allocated to Mr Anderson;[127] and Mr Richmond’s evidence that he had a longstanding relationship with many of the clients and that relationship continued after the sale with a lot of them although there were a number that became put off.[128]
[126] T85/5-9.
[127] T322/31-36.
[128] T327/19-36.
The annexure to the formal judgment lists 55 client groups. The evidence adduced by Moore Stephens on which the Judge relied was too vague and general to prove that Mr Richmond had had dealings with any one client. The Judge erred in including the list of clients identified in the annexure to the formal judgment on the basis of the evidence adduced at trial.
Nevertheless, for the reasons given by the Judge, it was preferable in the interests of certainty that the injunction identify clients by name rather than generically by reference to whether there had been relevant dealings with them.
For the purposes of the appeal, the parties agreed that, if this Court decided that the Judge erred is his approach to identifying clients with whom Mr Richmond had dealings, this Court should decide the question of construction raised by Moore Stephens’ alternative contention. The parties agreed for this purpose that Mr Richmond personally had direct or indirect dealings with 18 client groups identified in Schedule 1 to an Agreed Statement of Facts[129] and these clients should be included if the Court accepts Mr Richmond’s construction. The parties agreed for this purpose that Mr Mansfield had direct dealings with 26 client groups identified in Schedule 2 to the Agreed Statement of Facts and these client groups should also be included if the Court accepts Moore Stephens’ construction.
[129] Together with two additional client groups in addition to the 16 listed in Schedule 1.
Clause 23(b)(i) relevantly provides:
… the Service Provider shall not during the Term and for the periods mentioned in paragraph (b)(vi) of this Clause… solicit the custom or deal with (or endeavour to solicit the custom or deal with) any Client of the Principal
Clause 13.2(b) relevantly provides:
The Consultant… acknowledges and agrees that the provisions of Clauses … 23 shall apply mutatis mutandis to the Consultant in the same way as they apply to the Service Provider.
Read together, clauses 13.2(b) and 23(b)(i) relevantly provide:
… the Consultant shall not during the Term and for the periods mentioned in paragraph (b)(vi) of this Clause… solicit the custom or deal with (or endeavour to solicit the custom or deal with) any Client of the Principal
Clause 28.1 relevantly provides:
Client means, in respect of a Party:
(a) that is the Principal, any person who is a client of the Principal and/or any related body corporate of the Principal during the term and with whom that Party had direct or indirect dealings as part of its engagement;
(b) any person to whom that Party and/or any related body corporate of that Party within 12 months prior to the expiry (or earlier termination) of the Term has either made a presentation or whose business that Party and/or the Principal and/or any related body corporate of that Party and/or the Principal has actively pursued.
Read literally, the reference in paragraph (a) of the definition of Client in clause 28 to “Party” would be to the Principal, ie Moore Stephens. However, this would be nonsensical and neither party advances that construction.
Moore Stephens contends that, for the purposes of the restraint imposed on Mr Richmond, the reference in paragraph (a) of the definition of Client to “Party” is to WKYA. Mr Richmond contends that it is to Mr Richmond.
Moore Stephens contends that the reference in the definition of Client to “its engagement” must be to the engagement of WKYA because the Service Agreement does not provide for the engagement of Mr Richmond. Moore Stephens contends that, because of the use of the pronoun “its” in the phrase “its engagement”, the word “Party” earlier in the paragraph must be WKYA.
Moore Stephens’ construction should be rejected. It is significant that the chapeau to the definition of Client includes the words “in respect of a Party”. This strongly suggests that the definition of client depends on the identity of the Party on whom the relevant obligation is imposed. Here, the relevant obligation is cast upon Mr Richmond and not upon WKYA. On Moore Stephens’ construction, those words are otiose. Moreover, paragraph (a) refers to “that Party” which must be the Party referred to in the chapeau. It is noteworthy that paragraph (b) makes no reference to “its engagement” or any equivalent to found the argument advanced by Moore Stephens in respect of paragraph (a). There is no reason to read the reference to “that Party” in paragraph (b) other than as a reference to the party upon whom the relevant obligation is imposed and there is no reason to construe “that Party” in paragraph (a) as having a different connotation to the same phrase in paragraph (b).
In light of these considerations, it is evident that the words in paragraph (a) “its engagement” when the relevant obligation is imposed on Mr Richmond are used in the sense that under the Service Agreement Mr Richmond is required to be engaged by WKYA which in turn is engaged by Moore Stephens to provide services to clients of Moore Stephens and in this sense there is an engagement of Mr Richmond pursuant to which Mr Richmond has dealings with Moore Stephens’ clients. From the perspective of the clients, Mr Richmond would be seen as being engaged directly by Moore Stephens albeit legally he was engaged indirectly by Moore Stephens via WKYA.
On the proper construction of the Service Agreement, the restraint imposed upon Mr Richmond not to solicit clients was confined to clients with whom Mr Richmond had direct or indirect dealings.
Moore Stephens puts an alternative contention that it should be inferred from the fact that Mr Richmond was the directing mind and will of WKYA and the fact that Mr Mansfield was engaged by WKYA that Mr Richmond necessarily had direct dealings with all clients with whom Mr Mansfield dealt. That contention should be rejected for the reasons given at [256] above.
The final injunction granted by the Judge insofar as it relies on the restraint clause in the Service Agreement, should be varied by removing reference to all clients other than clients belonging to the 18 client groups that it is agreed had direct or indirect dealings with Mr Richmond. The restraint clause in the Business Sale Agreement which has effect until 28 October 2015 would justify an injunction in relation to a broader group of clients, albeit the restraint is expressed in slightly different terms. The parties should be heard as to the wording of the injunction in light of their matters.
Exclusion of 10X business services and Straight Talk services
Mr Richmond contends that the Judge should have limited the injunction to soliciting or dealing with clients for the purpose of the provision of accounting or tax services other than the provision of “10X business services” or “Straight Talk services” as defined in minutes of order proffered by him to the Judge. Mr Richmond contends that the Judge should also have excluded from the injunction the provision of “10X business services” and “Straight Talk services” as defined.
Mr Richmond proposed that “10X business services” be defined to mean business coaching, financial plan preparation, trading performance reporting, budget and cash flow preparation, financial advice, seminar provision, goal setting consulting and general business direction consulting. He proposed that “Straight Talk services” be defined to mean marketing, public relations, finance broking, management consulting and board advisory services.
Mr Richmond points to the fact that the 10X business had been for sale before October 2011 and Moore Stephens chose not to purchase it. Mr Richmond points to the fact that the Straight Talk Group conducted business during the currency of the Business Sale and Service Agreements.
The oral evidence adduced at trial concerning the activities of 10X Limited as at October 2011 was sparse. Mr Fusco gave evidence that 10X provided coaching services to two or three of Moore Stephens’ clients. The oral evidence concerning the activities of Straight Talk Group Pty Ltd was also sparse. Mr Richmond gave evidence that it conducted a business coaching and consulting business that worked side by side with WKYA at Moore Stephens.
Mr Richmond’s fifth affidavit was tendered at trial. Mr Richmond said that 10X Limited owned a business coaching model that provided seminars, financial reporting, coaching, goal setting and general business direction. It granted franchises to a Moore Stephens related company and to WKYA to operate the model but the franchises failed. In October 2012, Straight Talk Group Pty Ltd took over those businesses. That company thereafter provided coaching services as well as marketing, public relations services, finance broking, financial strategies, management consulting and board advisory services.
Mr Richmond in his affidavit said that there was a considerable amount of work performed by the 10X businesses and Straight Talk Group which may be performed by accountants within an accounting practice.
Mr Richmond’s contention that “10X business services” or “Straight Talk services” as defined should be excluded from the operation of the injunction should be rejected. Some of those services as defined are capable of being regarded as accounting services of the type conducted by Moore Stephens and WKYA’s business acquired by Moore Stephens in 2011. On the other hand, Moore Stephens accepts that the reference in clause 23(b)(i) of the Service Agreement to soliciting the custom of or dealing with a client is limited to soliciting or dealing with them as an accountant. The injunction should be explicitly limited to soliciting or dealing with clients for the purpose of providing accounting services.
Conclusion
The appeal should be allowed to the limited extent of altering the clients named in the annexure to the formal judgment and limiting the injunction to soliciting or dealing with clients for the purpose of providing accounting services. The appeal should otherwise be dismissed.
STANLEY J: I agree with the orders proposed by Blue J and with his reasons.
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