Roadrunner Industries Pty Ltd v Connell - [2018] VCC 73

IN THE COUNTY COURT OF VICTORIA

AT MELBOURNE

COMMERCIAL DIVISION

Revised
Not Restricted
Suitable for Publication

GENERAL LIST

Case No. CI-14-00756

ROADRUNNER INDUSTRIES PTY LTD

Plaintiff

BRET CONNELL

and

REBECCA CONNELL

and

LOTRUB PTY LTD

and

PAUL GERARD LOUGHNAN

and

PAMELA ANN DORWARD

and

LOUGHWARD PTY LTD

First Defendant

Second Defendant

Third Defendant

Fourth Defendant

Fifth Defendant

Sixth Defendant

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JUDGE:	HER HONOUR JUDGE MARKS
WHERE HELD:	Melbourne
DATE OF HEARING:	29, 30, 31 August and 7 September 2017
DATE OF JUDGMENT:	14 February 2018
CASE MAY BE CITED AS:	Roadrunner Industries Pty Ltd v Connell & Ors
MEDIUM NEUTRAL CITATION:	[2018] VCC 73

REASONS FOR JUDGMENT

CONSTRUCTION OF CONTRACT – Sale of business – Nature of instalment payments required to be made by the purchaser – Whether the payments were payments of the purchase price or repayments of a loan made to the purchaser by vendor at settlement to enable vendor to pay purchase price.

TRUSTS – Whether business held in trust by purchaser until all instalment payments made – Whether fourth defendant knowingly received trust property.

Judgment: For the fourth defendant.

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APPEARANCES:	Counsel	Solicitors
For the plaintiff	Ms M Rozner	Tribeca Legal
For the fourth defendant	Mr A Donald	Whyte Just & Moore Lawyers

HER HONOUR:

Introduction

On 27 October 2006, Roadrunner Industries Pty Ltd (‘Roadrunner’) agreed to sell its motor radiator and car servicing business carried on in Pakington Street, Newtown, Victoria, to Bret Connell and Rebecca Connell.
The business was then operating under two business names, one of which was ‘Greater City Car Care Geelong’ (‘the GCCC business name’).
The contract required the purchasers to make regular payments for the next ten years. The nature of those payments is disputed, as discussed below.
Settlement was on 1 November 2006.
Mr and Mrs Connell started to operate the business.
On 3 November 2006, the contract was novated so that Lotrub Pty Ltd (‘Lotrub’), a company Mr and Mrs Connell had set up, was substituted as purchaser.
Lotrub operated the business until 2009. The telephone number that Roadrunner had been using in operating the business was transferred to Lotrub, who continued to use that number (‘the GCCC telephone number’).
Lotrub made regular payments under the contract to Roadrunner until April 2008. From then on, Lotrub was in financial difficulty. It fell behind in making payments due under the contract.
On 14 May 2009, Roadrunner’s solicitor, Coulter Roache, sent what purported to be a default notice under clause 5 of the contract to Mr and Mrs Connell. It described the contract as being between Mr and Mrs Connell and Troy Bancroft (the director of Roadrunner). It said that:
…
2.On 1 February 2009 you fell in arrears of payment under the Contract.
3.To date, you are in arrears of $2,280. The rate of interest applicable to be paid is 13%.
4.The vendor puts you on notice that you have 7 days to remedy the default and make payment.
5.If this amount is not forthcoming within 7 days, the vendor will exercise his discretion under Clause 5(b)(i) and repossess the business.
…
8. Should this Notice not be complied with, the Contract is ended.
The arrears were not paid.
By 9 April 2009, Lotrub had ceased to run the business. Mr Connell went with Paul Loughnan, a friend of his, to the business premises. Various items were taken away. Amongst those items, relevant to this case, was a hard drive which Mr Loughnan removed from a computer. The hard drive contained some business records.
While they were at the premises, Mr Connell made a telephone call to Telstra. He either arranged for the disconnection of the GCCC telephone number, which Mr Loughnan then arranged to have registered in his name, or Mr Connell arranged for the transfer of the GCCC telephone number to Mr Loughnan. Nothing turns on which of these ways the GCCC telephone number came to be in Mr Loughnan’s name. Relevantly, it had been registered in the billing name of Lotrub, and after this call it was put into Mr Loughnan’s billing name. Mr Loughnan later arranged for the GCCC telephone number to be redirected to a telephone number being used by his own car repair business, European Affair. People who made calls to the GCCC telephone number (which was still advertised as Roadrunner’s number) thus then had their phone calls picked up by someone at European Affair.
Lotrub had operated the business using the GCCC business name. On 3 November 2006, it had been registered under the names of Mr and Mrs Connell and Lotrub. However, by April 2009 the registration of the GCCC business name had lapsed. On 14 April 2009, Mr Loughnan arranged for the GCCC business name to be registered in his name.
Roadrunner says Mr Loughnan’s actions in taking the hard drive and using the GCCC telephone number and GCCC business name deprived Roadrunner of the opportunity to repossess the business, which the contract allowed it to do if instalment payments were not made.
Roadrunner says that on the proper construction of the contract, Lotrub held the business in trust until it had paid all instalments due under the contract to Roadrunner. It says what was held in trust included the GCCC business name, GCCC telephone number, and client records contained on the hard drive.
Roadrunner sues Mr Loughnan on the basis that it says Mr Loughnan knew when he took the GCCC business name, GCCC telephone number and hard drive, that Lotrub held the business on trust for Roadrunner, and that Roadrunner was a creditor of the business. It says that the effect of his actions was that he took the business and wilfully failed to enquire whether it was available for the taking. It says that he took the business as a volunteer, and, as the business was being held at that time by Lotrub on trust for Roadrunner, he knowingly received trust property.
Roadrunner claims damages of $83,000 plus interest under the contract, being the amount remaining due by Lotrub under the contract.
This case proceeded between only Roadrunner and Mr Loughnan. Other claims and defences initially pleaded were not pursued by close of trial, including an equitable lien claim and seeking an account of profits. The claims and defences remaining to be considered are set out in the further amended statement of claim filed on 1 September 2017, and the further amended defence filed on 4 September 2017.
The principal issue in this case is whether or not Roadrunner retained a beneficial interest in the business after November 2006, when settlement of the sale contract occurred.
Mr Donald, Counsel for Mr Loughnan, submits that Roadrunner sold the business to Mr and Mrs Connell (later novated to Lotrub) on the basis of lending the purchasers the purchase price for the business. He says that the contract provides for the purchase price to be paid by the purchasers at settlement; for that amount to be loaned to the purchasers by the vendor so they could pay for the business at settlement; and for the loan to be repaid by the purchasers over the next ten years. The payments required by the contract were repayments of that loan. Roadrunner did not retain any interest in the business after settlement date, and so cannot successfully sue Mr Loughnan for anything relating to the alleged assets of the business. If Mr Donald is correct, that is the end of the action.
Ms Rozner, Counsel for Roadrunner, submits that the contract should be construed such that there was no loan, but instead the contract required the purchase price of the business to be paid for by instalments, and should be construed such that the business was held on trust by Lotrub until all instalments had been paid. If that is correct, then the rest of the claims fall to be considered.

THE CONTRACT

The contract dated 27 October 2006 is between Roadrunner and Mr and Mrs Connell. It is common ground that on 3 November 2006 there was a novation such that Lotrub became purchaser in place of Mr and Mrs Connell.
The contract was prepared by Roadrunner’s solicitors, Coulter Roache.
The contract provides that:
The Vendor sells and the Purchaser buys:-
the business including the assets in Schedule A (the business) for the price
and the marketable stock of the business (the stock) for the value of the stock
upon the condition in this Contact. [sic]
GENERAL CONDITIONS
The general conditions provide, relevantly:
…
2.      Ownership And Completion
(a)The Vendor must have the right to sell the business on the day of sale.
(b)(i)        The Vendor must transfer the business and the stock to the Purchaser at the settlement date free from all encumbrances.
(ii)       Parties must perform the obligations in this Contract by the settlement date unless otherwise indicated.
(iii)      Ownership of the business passes when the whole of the price is paid.
(c)The Vendor must deliver the assets to the Purchaser on the settlement date in the same state of repair (fair wear and tear excepted) as at the day of sale and in proper working order unless otherwise agreed.
(d)The Vendor must sign all documents prepared by the Purchaser and do whatever else is necessary for the Vendor to do to enable the transfer on settlement date of any:-
business name
equipment hire Contract in Schedule B
quotas and franchises
services connected to the premises including the business telephone number
licences, permits, approvals and registrations necessary for the business.
(e)The Purchaser must indemnify the Vendor against breach of any Contract in Schedule B which occurs after the settlement date.
(f)The Vendor must give the Purchaser quiet possession of the business.
3. Payments
(a)  The Purchaser must pay:-
(i)the deposit to the Vendor’s agent on the date specified in the particulars; and
(ii)       the residue on the settlement date.
All money payable under this Contract other than the deposit may be paid to the Vendor, the Vendor’s Solicitors, or at the Vendor’s direction.
(b)Deposit money received by any person must be held as a stakeholder as if Division 3 of Part 1 (but not Section 27) of the Sale of Land Act 1962 applied and as if a reference in that Division to land was reference to the business.
(c)         Payment must be by a bank cheque or by cash.
…
7. Running The Business
(a)The Vendor must maintain the goodwill of the business and carry on the business in a proper and businesslike manner until the settlement date.
(b)The Vendor must do whatever is reasonably necessary to introduce the Purchaser to customers and suppliers connected with the business and give the Purchaser reasonable assistance and advice about running the business during the assistance period.
(c)The business is at the risk of the Vendor until the settlement date.
8. Valuing Stock
(a)The Purchaser must pay the Vendor the value of the stock …
(b)The value is:-
(i)the value agreed by the parties; …
…
18.          Interpretation
The general conditions must be read subject to any special conditions set out below.
19.          Entire Agreement
This is the entire Contract between the parties. No other document, agreement or understanding is applicable to this transaction.
PARTICULARS OF SALE AND SCHEDULE A
The Particulars of Sale refer to the business name being ‘Newtown Radiator Repairs’ (Registered Business Number 058995Z) and ‘Greater City Car Care Geelong’ (Registered Business Number B1871630L).
The price is stated to be $100,000. A deposit of $1 is stated with a residue of $99,000 being payable ‘in accordance with Special Condition 3’.
Settlement date is stated to be:
On 1 November, 2006 or earlier by mutual agreement is the day that the Purchaser pays the price and the Vendor gives possession of the business
Stock is stated to be ‘maximum stock value’ of $12,000.
Schedule A includes a list of assets, which includes plant equipment and good will.
SPECIAL CONDITIONS
The Special Conditions include:
3. Vendor Finance
(a)The Vendor and Purchaser agree that the total monies due to the Vendor under this Contract is $112,000.00, such amount representing the aggregate of the Price and the Stock values (‘the Purchase Price”).
(b)         The Vendor agrees to loan the Purchase Price to the Purchaser.
(c)         The Purchase Price is to be paid as follows:
(i)The Stock component is to be paid in 6 equal instalments of $2,000.00 each, payable monthly in arrears commencing 1 December, 2006.
(ii)       The final instalment for the Stock is due on 1 May, 2007.
(iii)The Price component is to be paid in 120 equal instalments of $833.33 each, payable monthly in arrears commencing 1 December, 2006.
(iv)The final instalment payment for the Price is due on 1 December, 2016 (“Repayment Date”).
(d)If payments are not made as specified in Special Condition 3(b) the Purchaser will be in default and interest at the rate of 2% above the rate prescribed by the Penalty Interest Rate Act 1983 (Vic) (as amended from time to time) at the time of the occurrence of the default will accrue on all unpaid monies under this Contract. The purchaser must also pay penalty interest on unpaid monies from the date it should have been paid until it is paid. Penalty interest is added daily.
(e)Possession of the business, including the plant & equipment referred to in Annexure A to this Contract, will pass to the Purchaser at the Settlement Date.
(f)The Purchaser will be permitted to sell the Business prior to the Repayment Date and prior to the repayment of the Purchase Price provided that at the settlement of the sale of the Business, the Vendor is paid the balance of the Purchase Price (as defined in this Special Condition 3) together with any costs or interest as the case should be.
(g)Should the Purchaser elect to sell the Business prior to the Repayment Date and prior to the repayment of the Purchase Price, the Vendor will have the option to purchase the Business from the Purchaser for the price calculated in accordance with Special Condition 3(h). If the Vendor does not accept this offer from the Purchaser within seven days, the Purchaser may sell the Business to a third party.
(h)The price of the Business for the purposes of Special Condition 3(g) will be determined by agreement between the parties and failing such agreement, by an independent valuer nominated by the parties mutually or failing that nomination, nominated by the President of the Real Estate Institute of Victoria Ltd upon application by either party.
…
4. Early Repayment of the Loan
The Purchaser may on any date for repayment of the loan and payment of interest repay additional amounts of the loan provided that any additional amount paid must not be less than $1,000.00 or must be a multiple of $1,000.00. Interest shall abate on any additional amount of the loan repaid from the date of repayment.
5. Default
(a)         Time is of the essence in this Contract.
(b)If the Purchaser defaults in the payment of money under this Contract, the Vendor may either:
(i)sue for the unpaid money immediately, together with reasonable expenses incurred as a result of the default, without giving notice and without affecting any other right; or
(ii)       repossess the Business.
(c)The Vendor’s election to either sue for unpaid monies or repossession under Special Condition 5(b) is at its sole discretion.
(d)Should the Vendor elect to repossess the Business under Special Condition 5(b) the Purchaser shall immediately relinquish its possession of the Business to the Vendor and will do all such things and sign all such documents to transfer the Business back to the Vendor, including a transfer of the Lease for the Premises to the Vendor.
(e)         If either party defaults, the other party may serve a notice which:-
(i)specifies the default, the expenses attributable to the default and the rate of any interest payable, and
(ii)allows not less than 7 days for the remedy of the default and payment, and
(iii)states the rights under GC 5(e) and 5(f) which the party serving the notice intends to exercise if the default is not remedied.
(f)If the Purchaser has defaulted the Vendor may in the notice state that, unless the default is remedied, all money owing under this Contract which is not yet due for payment is now due. If the notice is not complied with then that money becomes due and the Vendor is permitted to exercise its discretion under Special Condition 5(b).
(g)The party giving the notice may state in it that unless the notice is complied with this Contract is ended. If the notice is not complied with this Contract is ended and no further notice is necessary.
6. Entire Agreement
The Purchaser hereby acknowledges that neither the Vendor nor its Agents have made representations, nor given any warranties, other than those contained in this Contract of Sale. The Purchaser has satisfied itself as to the business and the goodwill thereof and shall make no claims whatsoever against the Vendor in respect of same and it is agreed that the Contract of Sale contains the entire understanding between the Vendor and the Purchaser in relation to the sale of the business.

WAS THE BUSINESS HELD ON TRUST?

Roadrunner says (at paragraph 13(2) of the statement of claim) that the business:
…comprised the business names, goodwill, the assets listed in Schedule A of the Contract (including a computer containing the client list and financial accounts for the business), the business telephone number, stock and a lease of the business premises.
Roadrunner says that until all the instalments due under the contract are paid, the business is held by Lotrub in trust for it. In particular it relies on the following clauses of the contract:
· General Condition 2(b)(iii): Ownership of the business passes when the whole of the price is paid.
· Special Condition 3(c): The purchase price is to be paid by instalments with the final instalment due on 1 December 2016.
· Special Condition 3(g): Roadrunner has the first option to buy back the business if the purchasers decide to sell before paying all instalments.
· Special Condition 5(b)(ii): Roadrunner has a right of repossession in the event that the purchasers default on payments.
Special condition 3(b) clearly states that the vendor agrees to loan the purchase price to the purchasers. However, Roadrunner says that evidence of surrounding circumstances should be taken into account in interpreting the contract because the contract contains terms that are ambiguous or susceptible to more than one meaning: Codelfa Construction Pty Ltd v State Rail Authority NSW (1982) 149 CLR 337 at 352. It says that those surrounding circumstances establish that a loan was not intended to be made by the parties. It says that the parties intended that the agreement was a sale by instalments, not a sale financed by a loan.
I am not satisfied that the contract was ambiguous or susceptible to more than one meaning. Whatever the intention of the parties was, or what they understood the contract to mean, this cannot be taken into account in circumstances where the meaning of the contract is clear.
The contract is poorly drafted in part. It would be clearer if Special Condition 3(c) stated that ‘the loan referred to in Special Condition 3(b)’ is to be repaid in the manner that follows, rather than referring to the Purchase Price being paid in that way. However, that is clearly what is intended by the contract. The contract as a whole makes clear that the arrangement was a loan by the vendor at settlement, to be repaid by instalments, rather than instalments of the purchase price being paid by the purchaser.

Given my finding that the contract was clear, the evidence given by Mr Bancroft and Mr Connell about what they each intended to be the financial arrangement between them is irrelevant. (Mrs Connell, also a signatory, did not give evidence). However, had I needed to consider it, given the time that has transpired since the sale contract was entered into in 2006, I would have preferred the contemporary documentary evidence to the recollection of either Mr Bancroft or Mr Connell. That documentary evidence was clear: in its financial records of the time, Lotrub recorded the money due by it to Roadrunner under the contract as a loan from Roadrunner to it.
General Condition 2 provides that the vendor transfer the business and the stock to the purchasers at the settlement date free from all encumbrances. The entirety of General Condition 2 is premised on a transfer of ownership at settlement.
Special Condition 3(b) sets out that the vendor agrees to loan the purchaser the Purchase Price, which is defined in Special Condition 3(a) as $112,000.
Special Condition 3(c) has the effect that the repayment of the loan (there described as ‘the Purchase Price’) is to be paid by:
· In the case of the amount of $12,000 for stock – by six equal instalments of $2,000 payable in arrears commencing on 1 December 2006;
· In the case of the amount of $100,000 for the business – by 120 equal instalments of $833.33 commencing on 1 December 2006;
Special Condition 4 is headed, in bold formatting, ‘Early Repayment of the Loan’ and repeatedly refers to ‘the loan’ three times in two sentences.
General Condition 7 sets out that the business is at the risk of the vendor until settlement.
Nothing in the contract provides that after settlement the business is at the risk of the vendor in any way, or that the purchasers are to hold the business on trust for the vendor until the loan had been entirely repaid.
Roadrunner submits that it does not make commercial sense to interpret the contract as a loan rather than payment by instalments. It points to the fact that there was no interest charged (save for in default), and that ‘it was an unsecured interest’. On this basis, it says that it makes ‘commercial sense’ that Roadrunner retained an interest in the business until it received full payment.
However, these factors are not relevant to construing a contract which is clear on the face of it. Interest was charged in default. Parties are entitled to enter unsecured loans, and this contract, prepared by Roadrunner’s lawyers, provided for such a loan. Whilst the contract provided for Roadrunner having the right to repossess the business in certain circumstances, it did not provide for Roadrunner retaining a beneficial interest in the business after settlement. The business was not held in trust for Roadrunner after settlement.
The contract provided for the purchasers to buy the business with the assistance of vendor financing. The payment of the purchase price was to be made by a loan made by Roadrunner to Mr and Mrs Connell (and later, by novation, to Lotrub). The loan was provided at settlement on 1 November 2006. It was for the whole of the purchase price. That loan was then to be repaid by instalments. The legal and beneficial interest in the business was transferred on the day of settlement.
In closing submissions, Counsel for Roadrunner introduced a new argument in favour of the property being held on trust – that Mr and Mrs Connell did not provide Roadrunner with consideration in exchange for the business. This issue was not raised in Roadrunner’s pleadings, and it therefore must be disregarded. In any event, it could not succeed given my finding that on the true construction of the contract, the purchase price was paid at settlement.
The business was not held in trust for Roadrunner. That means its case against Mr Loughnan cannot succeed.
Even if the construction of the contract argued for on behalf of Roadrunner was correct, and Lotrub did in some way hold the business on trust for Roadrunner, it could not succeed in its claims in this case.
Roadrunner argues that Mr Loughnan received parts of the business, being the GCCC business name, GCCC telephone number and the hard drive (collectively called ‘the trust property’) and knew that the trust property was being misapplied or transferred in breach of a fiduciary duty or trust.
However, the GCCC business name was no longer registered by Lotrub (or at all) when Mr Loughnan took it over. It was not ‘property’ held by Lotrub at that time. It could not have been taken by Mr Loughnan.
The contract provided for Roadrunner to sign documents to transfer services, including the GCCC telephone number, at settlement. The GCCC telephone number was then registered in the name of Mr and Mrs Connell, and Lotrub. However, use of the GCCC telephone number was not ‘property’ held by Lotrub, available to be ‘taken’ by Mr Loughnan.
Baden v Société Général pour Favoriser le Développement du Commerce et de l'Industrie en France SA [1993] WLR 509 (‘Baden’) sets out the types of knowledge required for a claim of knowing receipt of trust property (as later refined by Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89):
i.Actual knowledge;
ii.Wilfully shutting one’s eyes to the obvious;
iii.Wilfully and recklessly failing to make such enquiries as an honest and reasonable person would make; and
iv.Knowledge of circumstances which would indicate the facts to an honest and reasonable person.
Roadrunner’s claim is that Mr Loughnan’s knowledge fell within the third and fourth Baden categories of knowledge: that he wilfully and recklessly failed to make such enquiries as an honest and reasonable person would make, or had knowledge of circumstances which would indicate that the trust property was held in trust to an honest and reasonable person.
The circumstances in which Mr Loughnan obtained use of the GCCC business name, GCCC telephone number and the hard drive were not such that I would have found, if so required, that a hypothetical honest and reasonable person in those circumstances would have made enquiries directed to finding out if those items belonged beneficially in some way to Roadrunner. It follows that I would not have found that Mr Loughnan wilfully and recklessly failed to make such enquiries as an honest and reasonable person would make.
The threshold for the meaning of ‘knowing’ is higher than ‘believing’, ‘suspecting’ or even ‘strongly suspecting’: Permanent Trustee Australia Ltd v FAI General Insurance Company Ltd (2003) 214 CLR 514 at 531. Based on the evidence as to the information that Mr Loughnan was exposed to, his level of knowledge could not have been any higher than that of ‘strongly suspecting’ that the property he received was trust property that had been misapplied or transferred to him by Lotrub in breach of a trust or fiduciary duty. An honest and reasonable person in Mr Loughnan’s position would not have known, on the applicable test, based on the information available to Mr Loughnan, that they were receiving trust property.

Finally, even if Roadrunner had satisfied me of the other elements of its case, its damages claim could not have succeeded.
Effectively, Roadrunner wants to be put in the same position as it would have been had the contract been carried out by Lotrub and all instalments due paid.
However, so far as Mr Loughnan is concerned, whatever he is said to have held on trust would only have the value it had when it came into his possession. Roadrunner did not lead any evidence of that value.
The measure of damages for knowing receipt of trust property is not what Lotrub would have repaid pursuant to the contract.
Roadrunner’s claim for the balance of the purchase price as an accurate measure of the loss caused by the knowing receipt of each item of trust property is misconceived. Other property was sold under the contract. No evidence has been led to separate out the value of each of the hard drive, the GCCC telephone number and the GCCC business name (on the basis it was the trust property said to be knowingly received) from the balance of the property sold.

CONCLUSION

I will give judgment for the fourth defendant.
I direct the parties to consider any consequential orders that should be made as a result of this judgment and provide to me proposed consent orders, or if the parties cannot agree, separate proposed orders, by 4pm on 21 February 2018. If any party requires a hearing as to those orders, it will be listed.

Certificate

I certify that these 16 pages are a true copy of the reasons for decision of her Honour Judge Marks, delivered on 14 February 2018.
Dated: 14 February 2018
Liz Main
Associate to Her Honour Judge Marks