SWM Financial Services Pty Ltd v Lloyd
[2011] NSWSC 1108
•31 October 2011
Supreme Court
New South Wales
Medium Neutral Citation: SWM Financial Services Pty Ltd v Lloyd [2011] NSWSC 1108 Hearing dates: 29 August 2011 to 2 September 2011 and 22 September 2011 Decision date: 31 October 2011 Jurisdiction: Equity Division Before: Ball J Decision: See paragraph 118 of this judgment.
Catchwords: CONTRACT - construction - vendor warranty to 'do all things necessary' to retain staff post sale of business - whether should be interpreted as 'best endeavours' clause CONTRACT - acceptance - whether term of draft consultancy agreement incorporated by reference into another agreement. CONTRACT - construction - meaning of "entice". CONTRACT - termination -whether change in composition of partnership or dissolution of partnership terminate employment by operation of law -whether change in employee's role resulted in termination of contract. EQUITY - fiduciary duties - employer/employee relationship AND CONTRACT - implied terms - obligation to act with good faith - employee entitled to establish competing business post employment - preparatory acts to establish while still employed must not be inconsistent with duties as employee - no breach - confidential information - extent to which employee can use knowledge gained in course of employment. VICARIOUS LIABILITY - whether vicarious liability exists for breach of implied contractual or fiduciary duty to third party - whether conduct in course of employment. CONTRACT - implied terms - whether term should be implied in contract for sale of business providing for deferred consideration that purchasers would conduct business in a proper, business like and professional manner. TRADE PRACTICES - misleading and deceptive conduct - representations concerning how would conduct business - not misleading or deceptive - no loss or damage suffered Legislation Cited: Fair Trading Act 1987 (NSW)
Partnership Act 1892 (NSW)
Restraints of Trade Act 1976 (NSW)Cases Cited: Allen & Son v Coventry [1980] 1 ICR 9
Brace v Calder [1895] 2 QB 253
Brackenridge v Toyota Motor Corporation Australia Ltd (1996) 142 ALR 99
BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266
Bromhead v Graham [2007] NSWCA 257
Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347
Commercial & Accounting Services (Camden) Pty Ltd v Cummins [2011] NSWSC 843
Coulthard v State of South Australia (1995) 63 SASR 531
Deeson Heavy Haulage Pty Ltd v Cox [2009] QSC 277; 82 IPR 521
Del Casale v Artedomus (Aust) Pty Ltd [2007] NSWCA 172
Deutz Australia Pty Ltd v Skilled Engineering Ltd [2001] VSC 194
Ecco Personnel Pty Ltd v Barrett [1996] NSWSC 475
Forkserve Pty Ltd v Pacchiarotta [2000] NSWSC 979
Kooee Communications v Primus Telecommunications Pty Ltd [2008] NSWCA 5
Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; 210 CLR 181
Mainland Holdings Ltd v Szady [2002] NSWSC 699
Manildra Laboratories v Campbell [2009] NSWSC 987
Marks v GIO Australia Holdings [1998] HCA 69, 196 CLR 494
Menkens v Wintour [2011] QSC 7
Mid-City Skin Cancer & Laser Centre Pty Ltd v Zahedi-Anarak [2006] NSWSC 844; 67 NSWLR 569
New South Wales v Lepore [2003] HCA 4; 212 CLR 511
Orica Investments Pty Ltd v McCartney [2007] NSWSC 645
Quinn v Jack Chia (Australia) Ltd [1992] 1 VR 567
Ridgeway International Ltd v McCullum [1998] NSWSC 151
Riteway Express Pty Ltd v Clayton (1987) 10 NSWLR 238 at 240
Rose v Dodd [2005] ICR 1776
Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596
Sheffield District Railway Co, v Great Central Railway Co [1911] 27 TLR 451
Southern Real Estate Pty Ltd v Dellow [2003] SASC 318; (2003) 87 SASR 1
St Hilliers (Developments) Pty Ltd v Radmanovich [2002] NSWSC 524; 11 BPR 20, 191
Weldon & Co Services Pty Ltd v Harbinson [2000] NSWSC 272
Whittaker v Unisys Australia Pty Ltd [2010] VSC 9; 26 VR 668
Woolworths Ltd v Olson [2004] NSWCA 372Texts Cited: K Lewison, The Interpretation of Contracts, 3rd Ed, (2004), Sweet & Maxwell
The Restraint of Trade Doctrine 2nd Ed (Butterworths, Sydney, 1999)Category: Principal judgment Parties: SWM Financial Services Pty Ltd (First Plaintiff)
Michael William Murphy (Second Plaintiff)
Kendall McMaster (Third Plaintiff)
Mark Frederick (Fourth Plaintiff)
Stuart G Lloyd (First Defendant)
Belinda Wu (Second Defendant)
James Finlay (Third Defendant)
Judy Wai Ching Wu (Fourth Defendant)
TTT Australia Pty Ltd (Fifth Defendant)Representation: Mr M Condon (Plaintiffs)
Mr R Alkadamani (First & Second Defendants)
Mr S R Meehan (Third to Fifth Defendants)
Somerset Ryckmans (Plaintiffs)
Haywards (First & Second Defendants)
Meridian Lawyers (Third to Fifth Defendants)
File Number(s): 2009/287505
Judgment
Introduction
These proceedings concern the sale of an accounting practice carried on in partnership by the first defendant, Mr Lloyd, and the second defendant, Ms Belinda Wu, at Neutral Bay under the name of Astims, to the second plaintiff, Mr Murphy, the third plaintiff, Mr McMaster, and the fourth plaintiff, Mr Fisher, who until 1 November 2010 carried on an accounting practice in partnership at Cowra under the name Steel Walsh & Murphy ( SWM ). That practice is now carried on by Mr Murphy alone. The agreement for sale was entered into on 23 May 2007 and completion occurred on 26 June 2007. Following completion, SWM licensed the first plaintiff (formerly known as Astims SWM Pty Ltd) ( SWMFS ) to carry on the practice at Neutral Bay and SWMFS traded under the name "Astims SWM". Until recently, the directors of SWMFS were Messrs Murphy, McMaster and Fisher and the shareholders were Mr Murphy and three companies associated with respectively Mr Murphy, Mr McMaster and Mr Fisher. In November 2010, however, Mr Murphy became its sole director and he and Elara Pty Ltd (a company apparently associated with him) became its sole shareholders.
Ms Wu and, it is alleged, Mr Lloyd continued as consultants to SWMFS following completion of the sale. In addition, most of the staff remained including the third defendant, Mr Finlay, and the fourth defendant, Ms Judy Wu (Ms B Wu's sister). Things did not go well following completion. Mr Finlay left SWMFS and established his own business through the fifth defendant, TTT. He was joined by Ms J Wu and another senior employee of SWMFS, Ms Wendy Kam. SWMFS's revenue fell far short of the plaintiffs' expectations. The plaintiffs claim that they were induced to buy the business carried on by Astims by misleading or deceptive conduct of Mr Lloyd and Ms B Wu. An alternative claim is pleaded in negligent misrepresentation. The plaintiffs also claim that Mr Lloyd and Ms B Wu breached non-compete obligations contained in the sale agreement and their consultancy agreements and that Mr Finlay and Ms J Wu breached their employment agreements by setting up TTT and inducing clients of SWMFS to leave that firm and become clients of TTT. TTT is said to be vicariously liable for that conduct. The plaintiffs seek injunctions restraining the defendants from using confidential information said to belong to the plaintiffs and restraining them from competing against the plaintiffs or soliciting the plaintiffs' clients. The plaintiffs also seek an account of profits and damages.
Mr Lloyd and Ms B Wu have filed a cross-claim seeking payment of $120,000, which was deferred consideration payable under the sale agreement if SWMFS's revenue in its first year of operation following the sale reached $1.4 million. Mr Lloyd and Ms B Wu assert that, when the amount of revenue is properly calculated for the purpose of the sale agreement, SWMFS's revenue met that threshold. In the alternative, they plead that it was an implied term of the sale agreement that the plaintiffs would, following completion, conduct the business efficiently, in a proper, businesslike and professional manner and to the best of their skill and ability and that the plaintiffs breached that implied term and are liable to pay $120,000 as damages for that breach. Mr Lloyd and Ms B Wu make alternative claims for misleading or deceptive conduct and negligent misrepresentation.
The facts
SWM commenced business in Cowra in 1980. It had been looking to acquire an accountancy practice in Sydney since late 2005. Work levels were diminishing in Cowra and the plan was to utilise staff in Cowra to provide services to an expanding practice in Sydney.
Mr Lloyd responded to an advertisement placed by SWM in the March edition of the Chartered Accountant Journal. On 8 April 2007, Mr Lloyd sent Mr Murphy an email attaching a confidentiality agreement, which Mr Murphy signed, together with material that included the profit and loss accounts for Astims for 2005-2007 financial years, client profiles and staff details. The material also contained a summary of Astims' revenue since 1999. The summary disclosed that Astims' total billings in 2005 were $1,034,879.00, in 2006 were $1,383,115.00 and in the 9 months to 31 March 2007 were $1,055,111.00, with an estimate for the whole year of $1,390,000.00. The material included a list of past and current employees, including their current salaries and a brief description of each. In the case of Mr Finlay, it disclosed that his salary for the 2005 financial year was $65,000, for 2006 was $70,000 and that for 2007 he was on a "Busn Services package" of $75,000. The material also made reference to a company called Iolan Pty Limited. That company, which was formerly known as Astims Bookkeeping Pty Ltd, changed its name to its then current one in 2004. It was described in the profit and loss accounts as a "company run for new clients with issues to resolve or Buy/Sell busn. Once stabilised they become clients of Astims." Iolan contributed billings of $287,593.00 in 2005, $74,478.00 in 2006 and $142,400.00 in the 9 months to March 2007. In fact, Mr Finlay and another employee were employed by Iolan, not Astims, and Mr Finlay's salary for the year 2006-07 was $60,000.
In an email dated 9 April 2007, Mr Murphy raised the question whether Mr Lloyd and Ms Wu would be willing to stay on at the firm after the sale. He also said:
I mentioned briefly on the phone that we plan for me to work in Sydney 3 or 4 days per week. The offices would be linked electronically and would like [sic] to send as much work as possible back to Cowra for processing. We can organise staff from Cowra to attend Sydney if there is a need. We currently look after and audit many superannuation funds and a number of the larger audits in our town. I would appreciate your thoughts as to whether this proposal would work with your practice.
Mr Lloyd replied the following day. In relation to his own plans, he said:
I am happy to provide consulting services ongoing, however I would only have 2-3 days a week available, and diminishing gradually. I would always be available to meet with clients or provide help, or historical information. I would certainly refer all future accounting work to Astims, ...
Mr Lloyd also said that he thought that Ms Wu would be willing to remain on as a consultant. On the question of linking the offices electronically, he said:
Our office is very electronic, both email and internet feature heavily in our communication paths. I am sure our staff would also benefit from more hands on supervision and variety of work, and more audit exposure. At various times I have been able short term to run my office from Hong Kong, London, and US, so I do not expect any difficulty in dealing between Cowra and Sydney.
Mr Lloyd goes on to say that he thought the practice could expand quickly and that its expansion had been held back by his other interests.
On the same day, Mr Murphy sent Mr Lloyd a further email. In that email, he outlined the way in which he thought Mr Lloyd and Ms Wu could be remunerated if they stayed on as consultants. Mr Lloyd replied in an email dated 12 April 2007 that he was happy to provide 10 hours per week at no cost for up to 1 year in return for access to office facilities and that he thought that Ms Wu would be prepared to work 4 days per week for a fee of $100,000 per annum. Mr Lloyd also said that he would be happy to refer as much business to SWM as possible.
In an email dated 13 April 2007, Mr Lloyd responded to a number of other questions asked by Mr Murphy. In that response, Mr Lloyd said:
The acquisition proposition you are indicating would be extremely good for us and our clientele as we could continue in this location with all staff, (if you wanted to) and assist through a settling in period, without any concern that clients would get nervous about continuity. Having an available back up work force in Cowra would cut a lot of staffing issues in Sydney that tend to hold back expansion.
Mr Lloyd and Mr Murphy met at Astims' offices on 24 April 2007. Following that meeting, SWM decided to proceed with due diligence which occurred on Sunday, 29 April 2007. In the meantime, on 27 April 2007, Mr Murphy emailed Mr Lloyd a draft sale agreement and draft consultancy agreements for both him and Ms B Wu.
Mr Murphy and his partners met Mr Lloyd and Ms B Wu on 29 April 2007. At that meeting, Mr Lloyd explained that the practice was divided into two sections. The good clients were serviced by Astims. Those with problems were recorded as clients of Iolan, although all tax returns were lodged through Astims' tax agent system. Clients of Iolan either had bookkeeping or cash flow problems. When their affairs were better organised, they were transferred to Astims. Mr Lloyd asked Mr Murphy whether SWM wanted to acquire the Iolan business as well and Mr Murphy replied that it did.
Mr Lloyd also says that at some time on 29 April 2007 they discussed the draft consultancy agreement and that he said:
Also, the consultancy agreement needs to be redrawn altogether as there are a lot of things I don't agree with and some of the terms are unclear. I have looked at this draft consultancy agreement but there is almost nothing in it that I would agree with. I told you initially I would be available to do consultancy for 2-3 days a week, but you never responded. I've always said I would be available after the sale, for up to 10 hours per week to deal with clients and their historical and goodwill stuff. I don't expect to be paid for that. If you want me to do paid consultancy this document needs lots of changes.
According to Mr Lloyd, Mr Murphy suggested that they talk about it later. Mr Murphy denies that they discussed the consultancy agreement at all.
On 30 April 2007, Mr Murphy sent Mr Lloyd an email in which he said:
We are keen to use a standard office management system such as Sol6 or MYOB Accountants office
He went on to ask a number of questions about that proposal. Mr Lloyd responded on 1 May 2007 by saying:
I think using Sol6 or MYOB Practice management should be fine, we just haven't done it, as I believe there is an up front cost as well as a licence fee per person per year. I will check and come back to you. I don't think tere [sic] should be any issue in using it here.
On 7 May 2007, Mr Murphy sent an email to Ms Wu asking where she was up to in considering the contents of her service agreement. Ms Wu sent a reply on 8 May in which she said that she had "[j]ust a few minor questions". One question was whether she would be engaged as an employee or a consultant. She indicated she wanted the latter. The other question related to the number of days she would have to work. She also indicated that a period of 24 months' service was acceptable to her. Mr Murphy replied to that email suggesting that Ms Wu be paid 40 percent of the time she billed out. Ms Wu did not reply to that email prior to 23 May 2007. Nor did anything further happen in relation to Mr Lloyd's service contract.
The agreement for sale was signed by Messrs Murphy, McMaster and Fisher on 22 May 2007 and by Mr Lloyd and Ms B Wu on 23 May 2007. The agreement was prepared by the parties without assistance from lawyers. Clause 3(a) provides:
(i) The Vendor [defined to be Mr Lloyd and Ms B Wu] agrees to sell and the Purchaser [defined to be the three partners of SWM] agrees to purchase the business goodwill and assets included in this sale for $1,200,000.00 apportioned as to Goodwill $1,150,000 and plant fixtures and fittings $50,000, such goodwill purchase price being based on sustainable billings post acquisition equivalent to $1,400,000 per annum, and Plant Fixtures and Fittings at estimated market value $50,000. Provided that if the losses as defined in sub paragraph (a) (ii) of this clause for the year ended 30 th June 2008 then the price for the goodwill and assets shall be reduced by seventy six cents for each fee dollar lost but limited to a fee loss equivalent to the total retention amount ($120,000) specified in paragraph 3 (d).
(ii) Fee losses referred to in sub paragraph 3 (a) (i) shall be calculated as an amount of $1,400,000 less billings achieved by Astims during the year ended 30 th June 2008.
Clause 3(d) provides:
The Purchaser will provide to the Vendor on or before 27 th June 2008, a calculation of Fee Loss as anticipated in Clause 3(a)(i), so as to agree on a fee loss amount, if any. Following agreement in respect of this calculation and by 27 th June 2008, the Retention Sum (10%) amounting to $120,000 shall be paid by the Purchaser to the Vendor and no interest will be payable in respect of this retention amount. In the event that the Retention Sum is not paid, the Vendor shall be entitled to a lien over debtors of the business carried on by the Purchaser, formerly Astims, until such time as the retention sum is paid, and interest at 10% pa shall be payable from 27 th June 2008. In the event that agreement is not reached in respect of this matter, then arbitration procedures as specified in Clause 15 will be followed promptly.
The agreement contains an entire agreement clause (cl 4(a)). In addition, cl 4(b) states that the parties are not bound "by any warranty, representation, collateral agreement or implied term" except to the extent that they cannot be excluded by agreement and cl 4(c) contains an acknowledgement by the purchasers that they do not rely on any statements, inducements or representations other than those specifically listed in the agreement.
Clause 7 relevantly provides:
The Vendor warrants that:
A. Relating to the vendor's capacity and title
.....
D. Relating to employees of the Vendor being re-employed
The employees listed on Schedule A are to be employed by Licencee [sic] after 27 th June 2007 under the same terms and conditions under which the were employed by Vendor for a period of 12 months from 27nd [sic] June 2007 or such longer period as may be agreed. Vendor will do all things necessary to ensure the staff remain as employees of Purchaser or licencee for a period of at least 12 months after 27 th June 2007.
Clause 10(a) provides:
The Vendor agrees to abide by the restraints of trade set out in clause 8 of the Consultancy Agreement collateral to this Agreement.
Clause 10(b) contains an acknowledgment that those restraints are reasonable.
Clause 11(2) provides:
The Licencee [meaning SWMFS, which was not a party to the contract] agrees to offer to re-employ the Vendor's employees on terms and conditions not less favourable than those current at the date of this agreement.
No Consultancy Agreement was attached to the sale agreement. Clause 8 of the consultancy agreement that had been the subject of negotiation between Mr Murphy and Ms B Wu was in the following terms:
(1) Agreement for restraints.
BWHW agrees to abide by each of the restraints contained in this clause.
(2)Reasonableness of restraints.
BWHW acknowledges and agrees that each of the restraints is reasonable as regards the nature of the conduct restrained and the duration and scope of the restraint and that the restraints are reasonably necessary for the future protection of SWM when acquiring the business and its goodwill.
(3)Benefit of restraints.
The benefit of each of the restraints contained in this clause endures in favour of SWM and SWM's successors and assigns being the successive legal owners of the business and the benefit of those restraints may be assigned to those persons or companies together with the goodwill of the business.
(4)Trade restraint.
...
(5)Confidential information.
...
(6) Solicitation of clients.
...
(7) Solicitation of employees .
BWHW agrees that during the period ending 30 th June 2009 she will not entice or attempt to entice any employee of the business from continuing to be employed in the business,
(8)Persons who may be restrained.
(1) BWHW agrees to procure the execution of restraints by such of the former employees of BWHW and the Accountancy Practice Astims as SWM requires.
Clause 7 of the proposed consultancy agreement with Mr Lloyd was in similar terms.
On 22 May 2007, Mr Richard Wu, who was the office manager of Astims (and Ms B Wu's nephew), resigned.
On 30 May 2007, Astims' staff were informed of the sale. On the same day, Mr Murphy sent an email to Mr Lloyd in the following terms:
At this stage the thought is to have the server located in Cowra with dumb terminals in Neutral Bay. That way all of the programmes are maintained in Cowra and there will be a second server in our other office in Cowra to back up everything as it happens.
...
Our inclination at the moment is to stay with Accountants Office for accounting, tax and office costing and Level 31 for filing. MYOB can transfer you [sic] SOL6 tax into Accountants office data base that will give names addresses and Tax file numbers and AO can transfer those details to L31. MYOB assure me this is a simple process and can be done relatively quickly and at much less cost and disruption to converting to Viztopia.
If we go that way with your consent we should be able to have the system up and running in your office in the week commencing 11th June
Mr Lloyd replied to that email on 30 May 2007. He said the staff had taken the announcement well and said that "We will be happy to go with Accountants Office, and installation can be next week or later." He went on to record complaints about MYOB and, in particular, the fact that it appeared that the representative of MYOB with whom SWM dealt had already been told about the merger.
Completion occurred on 26 June 2007. The following day, Ms B Wu provided further comments on her consultancy agreement. Her principal comment was that the period of her consultancy and the restraint in cl 8 should be reduced to 12 months.
On 2 July 2007, Mr Murphy wrote to both Mr Finlay and Ms J Wu in relation to the terms of their employment. In each case, the letter said:
As you know ASTIMS and SWM Financial Services Pty Ltd merged on 27 th June 2007. As part of the merger agreement all of the clients and staff of ASTIMS were transferred to the new firm.
...
All employment conditions of staff as at 26 th June 2007 will continue and your pay will be transferred electronically into your nominated bank account as usual.
We attach a schedule of your salary arrangements from 1/7/07 which we understand you have discussed with Belinda Wu and if you agree that the schedule is correct please sign a copy of the schedule and return it to me. ...
In each case also, the letter had an attachment headed "EMPLOYMENT CONDITIONS FROM 1 ST JULY 2007" which contained details of the employee's annual salary and which provided that there would be "Annual Reviews unless employee considers an Earlier review is required". The attachment contained a statement "I confirm that the above conditions are acceptable to me". Both Mr Finlay and Ms J Wu signed their respective statements.
Previously, Ms J Wu had signed an employment agreement dated 1 October 1999 with Astims and Mr Finlay had signed one dated 1 July 2005. Clause 10 of each agreement relevantly provided:
In particular you acknowledge through signing this agreement that you will strictly observe the following:
(a) You will recognise the confidential nature of the business dealings of Astims with its clients, and you will at all times respect such confidentiality and comply with all legal requirements in respect of privacy.
(b) You must not either during or after employment with Astims communicate or divulge or discuss with any person other than a current Astims principal or employee anything relating to the confidential affairs of Astims or its clients or business interests.
(c) ...
(d) You will not without prior consent of the Principal Partner of Astims either directly or indirectly, for a period of 12 months after your employment with Astims terminates, knowingly seek to represent or seek to be appointed to represent any company on whose account you have worked while at Astims during any part of the 12 months preceding the termination of your employment, in the same city as that of your previous employment with Astims. This condition may be waived by Astims, given reasonable expectation that no conflict will exist as a result of such appointment.
At the time that Ms Wu signed her employment contract, Astims was a partnership between Mr Lloyd and Mr Morris Rozario. Her responsibilities at that time consisted largely of administration and accounts work including the preparation of some tax returns. She had no responsibility for supervising staff. The partnership between Mr Lloyd and Mr Rozario was dissolved by an agreement dated 31 January 2000 between them. From that time until 30 June 2000, Mr Lloyd continued the accountancy practice under the name "Astims" as a sole practitioner. On 20 June 2000, Ms B Wu entered into an agreement with Mr Lloyd by which she became an equal partner effective from 1 July 2000 and, on 29 June 2001, Mr Guy Hammond entered into an agreement with the existing partners to become a partner with an equal share effective from 1 July 2001. However, that partnership was dissolved by an agreement dated 12 February 2002, which was expressed to take effect from 31 December 2001. From that time, Mr Lloyd and Ms Wu continued in partnership together. No new agreements were signed with Ms J Wu at the times when the composition of the partnership changed. Although it is not clear from the evidence, it appears that each time that the ownership of the practice changed, the new partnership took responsibility for any accrued rights that Ms J Wu had.
Mr Finlay had, prior to signing his employment agreement with Astims, been employed by Iolan. He was also a director of, and a 50 percent shareholder in, that company. For reasons which are not relevant to the current dispute, Mr Lloyd and Mr Finlay agreed in December 2005 that it would be more sensible if his employment was transferred back to Iolan. The evidence is that that happened on or about 1 January 2006. Mr Finlay did not sign an employment agreement with Iolan. However, from that time, he was paid by that company and that company made superannuation contributions on his behalf.
Following completion, Mr Murphy began to introduce a number of changes at the Neutral Bay office. Two areas of change - both foreshadowed in Mr Murphy's email dated 30 May 2007 - were to the computing and accounting and practice management systems. The principal change to the computing system was to arrange for all processing to be done in the Cowra office, with staff in the Neutral Bay office accessing that office through a leased-line connection using what would essentially become dumb terminals. Another significant change was that employees of the Neutral Bay office no longer had access to webmail, which created difficulties when they were working out of the office. The changes to the practice management systems involved replacing Astims' proprietary system and a software package known as MYOB AE Tax with a software package known as MYOB Accountants Office. Neither change went smoothly. There were delays in arranging the line between Cowra and Telstra. When it was installed, the terminals in the Neutral Bay office became slow, and the line would periodically drop out. The Neutral Bay office became wholly dependant on the Cowra office to rectify any problems. There were also delays in installing the new MYOB software and, when it was installed, the computers in the Neutral Bay office froze frequently. In order to overcome this problem, staff attempted to use the old systems to process their work and then copy the results back to the new software, only to find that the processed files were over-written. Eventually, it seems that the difficulties with the connection between the Cowra and Neutral Bay offices were resolved and the technical difficulties with the new software were overcome when SWMFS bought new computers. However, there were also complaints by the staff that they had received inadequate training on the new system with the result that they struggled with its implementation. These problems undoubtedly had a significant effect on staff morale and no doubt involved the staff in working longer hours. The likelihood is that they had some effect on the firm's revenue. There is, however, no evidence which attempts to analyse that effect and, in the absence of evidence of that type, I am not prepared to infer that the effect was substantial.
Another area of change was to the way in which work in the office was allocated. Prior to the sale, work was allocated by the managers to any staff member who was available to do it, and the work was supervised by the two partners. Following the merger, in late August 2007, Mr Murphy established three "teams" in the office: one headed by Ms B Wu, a second headed by Ms J Wu and a third headed by Mr Finlay. Mr Murphy did not discuss the new structure with staff before introducing it. However, he did discuss it with Mr Lloyd on 15 August 2007. Mr Lloyd's file note of the meeting does not suggest that he raised any objection to it. Under the new structure, work was only to be allocated within a team by the team leader. Ms B Wu gave evidence that the structure was "unbalanced" and that Mr Finlay was given "a weak team and inadequate support" because he had no senior accountant or anyone with a good understanding of tax in his team.
Other complaints were catalogued in the evidence filed on behalf of the defendants concerning the new management. So, for example, there was evidence that there was limited partner involvement with the staff and with clients. In particular, Ms B Wu gave evidence that Mr Murphy only spent 2 to 3 days a week in the Neutral Bay office, that when he was there he tended to keep to himself, that he showed limited interest in meeting with clients, that he spent less than 30 weeks of the first year following the acquisition in the office and that when he was on holidays the other partners took it in turns to come to the office. Mr Lloyd gave evidence of several occasions on which he introduced Mr Murphy or Mr Fisher to clients and the meetings had not gone well because of a lack of interest on their part. Complaints were also made that the fortnightly meetings held by staff were cancelled and that a significant amount of the more interesting work, including audit and superannuation work, was moved to the Cowra office. Finally, Ms B Wu and Mr Finlay gave evidence of changes in SWMFS's terms of trade which required staff to obtain approval from Mr Murphy to do work for clients who had accounts that were outstanding for more than 15 days and both gave evidence of increases in charge-out rates that caused client dissatisfaction.
The various issues raised by the defendants were denied or explained by Mr Murphy. Much of the hearing was taken up in investigating those matters.
There is no doubt that many of the staff at the Neutral Bay office became dissatisfied with the changes that were made and with the way in which the firm was run. Their dissatisfaction was increased by the substantial difficulties in changing the computing and practice management systems of the firm. Prior to the sale, it appears that the firm was run very much as a family business. Mr Lloyd's former wife was a sister of Ms B Wu and Ms J Wu, and, as I have mentioned, the office manager was their nephew; and, even if Mr Lloyd was estranged from his wife, it seems clear that he remains on good terms with her family. Mr Lloyd was the driving force behind the firm. His management style was quite different from Mr Murphy's, as exemplified by their evidence in the witness box. Mr Lloyd comes across as a thoughtful and polite person. Indeed, in the early days, he had impressed Mr Murphy as a "gentleman". Mr Murphy, on the other hand, comes across as down to earth, direct, if not blunt, and a harder-nosed business man. With the benefit of hindsight, it is perhaps not surprising that the "merger" of the two firms did not go well.
So far as Mr Lloyd is concerned, things reached a head on 19 September 2007 when he sent a letter addressed to the partners of SWM in which he described many of the complaints I have referred to. He maintained that the firm was understaffed and complained about the fact that, despite repeated requests by him, Mr Murphy had not replaced a senior accountant who had left in June and about the fact that the level of outstanding work was "quite staggering". He indicated in the letter that he could not continue providing services to the firm and asked the partners to circulate a letter to clients saying, in effect, that he would no longer be involved in the business. He also sought payment of the $120,000 immediately. Following that letter, Mr Lloyd and Mr Murphy met on 25 September 2007. Nothing came of that meeting and, on 28 September 2007, Mr Lloyd wrote to SWM again saying that, although it was anticipated that he would make himself available for at least 10 hours per week for no charge in return for an office, no consultancy agreement was signed, and that, in those circumstances, he no longer required an office but that he would "continue to make myself available to clients and staff who seek my assistance". Mr Murphy reported on the meeting to his partners in an email, only the last page of which was in evidence. In that email, Mr Murphy concluded "I think the outcome of all this is best for him and us as there is less tension in the office when he is not here". Mr Murphy replied to Mr Lloyd's letter on 2 October 2007. He agreed that there was a backlog in work but explained that that was due to a change in systems and said that it was planned to make a "big effort" to meet clients once the operational issues had been sorted out. He went on to say that he thought that it was important to remain in contact so that they could access Mr Lloyd's "vast client and industry knowledge". There was some further correspondence between the parties and Mr Murphy says that he and Mr Lloyd had a further meeting (which Mr Lloyd denies). The result, though, was that Mr Lloyd ceased to have any further involvement with SWMFS. However, on 13 December 2007, Mr Murphy sent Mr Lloyd an email rejecting his claim that the retention amount be paid immediately, although Mr Murphy went on to say that SWM still believed that they would be paying the retention amount. He pointed out that they were not aware of any large clients having left the firm, that the firm had obtained some new clients, that billings in the first 5 months were $533,610 and that they still expected to earn fees of $1.6 million for the full year.
Ms B Wu finally signed her consultancy agreement on 20 December 2007. Clause 8 was amended in a number of respects. The radius of the restraint was reduced to 20 kilometres. Clause 4(b) was amended to permit Ms Wu to become an employee of a public accounting practice from 1 July 2008 provided she did not solicit clients of SWM within 12 months of terminating the agreement. The restraints themselves were imposed for a period ending 12 months from the date she ceased to be a consultant or 30 June 2009 (whichever was later) and the obligation in cl 8(8) was removed.
Sometime in January 2008, Mr Finlay spoke to Mr Lloyd and told him that he intended to resign and to set up his own bookkeeping and consulting business. Mr Lloyd told Mr Finlay that he had a company, TTT, that Mr Finlay could use for that purpose.
Mr Finlay also told Mr J Wu in late January 2008 that he was planning to leave SWMFS and go into business on his own. The likelihood is that Mr Finlay asked Ms Wu whether she would be interested in joining him. They spoke again in early February by which time Ms Wu says that she had formed the intention of joining Mr Finlay but that she had not made a decision to do so. From that time, she began to assist Mr Finlay in establishing his new business. Ms Wu spoke to Mr R Wu and asked him for help in setting up the business - including advice on appropriate computer software and hardware and help in dealing with suppliers, which Mr Wu agreed to provide. He invoiced TTT $3,200 for his services.
In January and February 2008, two other employees - Elsa Chu and Diem Nguyen - resigned.
On 18 February 2008, Mr Finlay became the sole director of TTT and JBMF Pty Limited, the trustee of Mr Finlay's family trust, became its sole shareholder. At about the same time, Mr Finlay asked Mr Lloyd for financial assistance in setting up the new business. In his affidavit evidence, Mr Finlay said that "the reality was that I did not have sufficient funds to meet the start up costs of the business". However, in cross-examination (by Mr Alkadamani on behalf of Mr Lloyd and Ms B Wu) he said that he was leaving "regardless" of the loan. In any event, Mr Lloyd agreed to lend TTT approximately $30,000. That loan was provided to TTT by Mailun Pty Limited, a company controlled by Mr Lloyd and his two daughters. On 24 February 2008, Mr Finlay obtained a new email address of [email protected]. He gave one month's notice of his resignation from SWM Astims on 29 February 2008 and TTT commenced operations on 1 April 2008. Mr Murphy gave evidence that Mr Finlay told him at the time that he (Mr Finlay) intended to work in his wife's business, although Mr Finlay denies that he said that. The postal address TTT used when it commenced operations was a post office box belonging to Mr Lloyd. Mr Finlay said in cross-examination that he used that address without Mr Lloyd's consent. However, I find that evidence implausible and do not accept it.
There is a question of when Ms J Wu decided to leave SWMFS and join TTT. In cross-examination, Ms Wu was careful to draw a distinction between her intention to leave SWMFS and her decision to do so. She conceded (reluctantly) that she had formed the intention to join TTT in February 2008. But she says that she did not make the decision to leave SWMFS until about 22 April 2008, following a meeting with Mr Murphy on 8 April 2008. Mr Murphy, concerned about Mr Finlay's departure, arranged to meet with Ms Wu on that day. At that meeting, at which a solicitor retained by SWMFS was also present, Mr Murphy offered Ms Wu a new employment contract that was to run for a period of two years and contained a number of post contractual restraints. Ms Wu rejected that offer in a letter dated 22 April 2008 and she conceded that by then she had made the decision to join TTT. Mr Finlay was also adamant that Ms Wu had made no commitment to join TTT before she gave notice of her intention to leave SWMFS.
I do not accept Ms Wu's or Mr Finlay's evidence on this point. In my opinion, Mr Wu agreed in February 2008 to join Mr Finlay and it was agreed at that time that they would establish an accountancy practice. It is difficult to understand why Ms Wu agreed to help Mr Finlay at that time in the absence of such an agreement. In February 2008, Ms Wu was corresponding with her nephew about computer software that was appropriate for an accountancy practice. In particular, on 21 February 2008 Mr Wu sent Ms Wu and Mr Finlay a copy of an email from MYOB concerning a single licence for "AE Tax" software. On 22 February 2008, Mr Wu sent Ms Wu and Mr Finlay an email asking them to fill in "asap" a "BGL Software Subscription Agreement" for software used by accountants to provide secretarial services to clients. Ms Wu completed that agreement in the name of TTT and signed it on 25 February 2008. Ms Wu gave her email address on that form as "[email protected]". On 1 March 2008, TTT agreed to buy three laptops. The natural inference from that fact is that Mr Finlay expected TTT to have three employees - himself, Ms Wu and Ms Kam. Ms Wu was involved in selecting office furniture for TTT in March 2008. On 1 April 2008, Mr Finlay wrote to Ms Wu saying that he needed to issue an invoice to David Zwart (who was a client of Astims SWM) and seeking her approval to a form of letterhead. On 4 April 2008, Ms Wu was copied in on an email from Mr Finlay to an insurance broker concerning insurance for TTT. In that email, Mr Finlay queried why TTT needed product liability insurance of $10 million in these terms: "Why product liability of $10M - we are accountants". In May 2008, Mr Finlay corresponded with a proposed lessor in relation to premises that TTT was planning to lease. In an email dated 20 May 2008, he says that he has discussed the lease with "the others". Mr Finlay said in cross-examination that he had no idea who "the others" were. Ms Wu suggested that the reference to "the others" was a reference to her husband. In my opinion, the reference to "the others" was a reference to Ms Wu and Ms Kam. It is inconceivable that Mr Finlay could not remember who 'the others' were; and it is difficult to understand why Ms Wu's husband, rather than Ms Wu herself, would be involved in signing the lease.
There is also a question when Ms J Wu told Ms B Wu that she intended to leave Astims. Both gave evidence that it was not until after 8 April 2008, following Ms J Wu's meeting with Mr Murphy. Ms B Wu's evidence was that it was on 20 April 2008, at which time her sister told her that she planned to join Mr Finlay. Ms B Wu told Mr Finlay about what her sister proposed the following day. There is no documentary evidence to suggest that Ms J Wu spoke to her sister earlier than 20 April. Ms B Wu says that she did not encourage her sister to leave and that she had some concerns about her proposal to do so because she was the main bread-winner in her family. I accept this evidence. It strikes me as plausible and there is no reason to disbelieve it.
Mr Finlay left SWMFS on 29 March 2008. Before he left, Mr Murphy asked him to prepare a list of clients for whom he was working and to contact those clients and tell them he was leaving and to deal with Mr Murphy in the future. Mr Finlay worked from home for a period of time. A number of clients of SWMFS gave notice that they intended to leave the firm. One was Quest Metals, who gave notice on 27 March 2008. Another was Mr Zwart, who gave notice on 3 April 2008. A substantial number of other clients left over the following months. Some went to TTT. Others went elsewhere.
On 18 April 2008, Ms Kam gave one month's notice of her resignation from SWMFS and, on 30 May 2008, both Ms B Wu and Ms J Wu gave one month's notice of their resignations. Two other employees - Aiden Chan and Vivien Lu - also resigned in May. Ms Kam commenced employment with TTT on 1 June 2008.
Following notice of her resignation, and in accordance with instructions given to her by Mr Murphy, Ms J Wu prepared a list of clients for whom she was working. Mr Murphy also asked Ms Wu to tell clients that she would be leaving. The list prepared by Ms Wu lists the name of each client (grouped together where the clients were related, such as related companies), the name of the principal contacts at each client and some remarks about the clients and who at SWMFS had contact with them. Ms Wu kept a copy of that list together with a number of client files on a personal computer which she took with her when she left the firm. She gave evidence that she had not used that material while working for TTT, although, when pressed in cross-examination, she said that she may have referred to a couple of client files in connection with the work she was doing for those clients while at TTT. Ms Wu says she kept those files on her computer so that she had access to them after hours after web access to Astims' computer system was terminated.
On 26 June 2008, Mr Murphy wrote to Mr Lloyd and Ms B Wu stating that the fees raised by SWMFS in the year ended 30 June 2008 were $1,173,612 and that, in those circumstances, no part of the deferred consideration of $120,000 was payable. Neither Mr Lloyd nor Ms Wu responded to that letter.
Both Mr Lloyd and Ms B Wu have used the services of TTT. Mr Lloyd lodged tax returns on behalf of a number of persons through TTT. However, he gave evidence that, in each case, he did it as a personal favour for the persons involved and did not charge a fee. He had no difficulty in identifying the relevant clients and gave plausible explanations in each case for why he chose to lodge the returns without charging a fee. Ms Wu gave affidavit evidence that, in order to retain her registration as a migration agent, she was listed as a consultant of TTT so as to obtain the benefit of TTT's professional indemnity insurance. However, she gave evidence that she has done no work for TTT. There is no reason to doubt the evidence given by Mr Lloyd and Ms Wu in this regard, and I accept it.
Pre-contractual representations
The plaintiffs plead in paragraph 46 of their further amended statement of claim ( FASC ) that Mr Lloyd and/or Ms B Wu made a number of representations to the partners of SWM. Those representations are to the following effect:
(a) That Mr Lloyd would be happy to provide ongoing consulting services and to refer as much business to SWM Astims as he could;
(b) That they would abide by the restraints in their consultancy agreements:
(c) That they would do all things necessary to ensure that Astims' staff remained employed by the firm and would procure the staff to execute restraints in favour of SWMFS;
(d) That the persons listed in Schedule A of the Sale Agreement were in fact employed by Astims;
(e) That they would "adopt and work to SWM's working policies and working procedures";
(f) That Astims had future maintainable billings of about $1.4 million.
Those representations are said to give rise to a claim for damages under s 68 of the Fair Trading Act 1987 (NSW) ( FTA ) (as it then was) for engaging in misleading or deceptive conduct in contravention of s 43 of that Act or for negligent misrepresentation.
It is not easy to understand how the case based on these representations adds anything to the allegations based on the terms of the sale agreement. Mr Condon, who appeared for the plaintiffs, conceded that they were no more than "a string to the bow". The representation referred to in (a) is best characterised as a statement about Mr Lloyd's intentions. There is no reason to believe that it did not accurately reflect his intentions at the time the representation was made. Remedies aside, the representation referred to in (b) adds nothing to the allegation that cl 10 of the sale agreement incorporated cl 8 of the proposed consultancy agreement with Ms Wu. I deal with that allegation below. The representation referred to in (c) is the subject of the warranty in cl 7D of the sale agreement, although the pleaded representation is broader than the warranty insofar as it refers to a representation that Mr Lloyd and Ms Wu would procure staff to execute restraints. An obligation in the latter terms was, however, contained in cl 8(8) of Ms B Wu's draft consultancy agreement (and cl 7(8) of Mr Lloyd's). Again, I deal with these warranties below.
The representation referred to in (d) was false insofar as Mr Finlay is concerned. However, there is no evidence that the representation induced SWM to do anything. After completion of the sale, Mr Finlay was treated in the same way as all the employees of Astims. In support of the representation referred to in (e), the plaintiffs rely on a number of emails and on cl 6(ii) of the original draft of Ms Wu's consultancy agreement and the equivalent provision in Mr Lloyd's agreement. However, the emails relied on (dated 1, 2 and 30 May 2007) do not support the pleaded representation and the consultancy agreements were only drafts prepared by SWM. Moreover, at the time the representations are alleged to have been made, there is no evidence that Mr Lloyd and Ms Wu did not intend to comply with SWM's working policies and procedures. The representation referred to in (f) is a representation concerning the future. Section 41 of the FTA (as it then was) provides that a representation concerning the future is misleading if the person making the representation did not have reasonable grounds for making it, and it places the onus of proving reasonable grounds on the maker. But in this case, there were reasonable grounds for making the representation. Astims was forecast to earn and did earn in excess of $1.4 million in the year ending 30 June 2007. Until the resignations in 2008, Mr Murphy thought that SWMFS was on track to earn $1.4 million in the following financial year. At the time the representation is alleged to have been made (in June 2007) there was no reason to think that things would change as they did. In addition, the parties contemplated the possibility that revenues would be below $1.4 million and provided for that possibility by agreeing to defer part of the consideration. If SWM relied on the representation, it did so by insisting on that term. In para 53 of the FASC, the plaintiffs plead that SWM would not have acquired Astims if the representations had not been made. However, Mr Condon accepted that the evidence did not go so far as to establish that and, apart from the matters I have referred to, it is not suggested that SWM, or for that matter SWMFS, relied on the representations in some other way. For those reasons, the claims based on the FTA and negligent misrepresentation must fail.
Claims against Mr Lloyd and Ms B Wu for breach of contract
The plaintiffs claim damages against Mr Lloyd and Ms B Wu for breaches of cl 7D of the sale agreement and against Mr Lloyd for breaches of cl 10(a) of the sale agreement and cl 7 of his consultancy agreement. SWMFS was not a party to that agreement and it was not pleaded or asserted that it was a third party beneficiary under that agreement which was entitled to enforce the terms of the agreement itself. In those circumstances, any claim for a breach of the sale agreement is a claim that only the partners of SWM can bring.
Clause 7D of the sale agreement
There is a dispute concerning the construction of cl 7D and the scope of the pleaded breach. Mr Condon submitted that the second sentence of cl 7D imposed an independent obligation on Mr Lloyd and Ms Wu to do all things necessary to ensure the staff remained employees of SWMFS for a period of at least 12 months after 27 June 2007. He submitted that that clause was breached in respect of each employee who left before that date. On the other hand, Mr Alkadamani submitted that the second sentence of the clause did not impose an independent obligation on Mr Lloyd and Ms Wu. Rather, the obligation was conditional on SWMFS complying with the first sentence of the clause - that is, it was conditional on SWMFS employing the employees for a period of 12 months on the same terms and conditions as those on which they had been employed by Astims. In addition, Mr Alkadamani submitted that the plaintiffs' claim was restricted by the FASC to a claim against Mr Lloyd in respect of Mr Finlay and Ms Wu and against Ms B Wu in respect of her sister. The relevant pleadings are contained in paras 41(A) and 41 of the FASC. Paragraph 41(A) relevantly pleads:
The conduct of [Mr Lloyd] breached
(i) ...
(ii) Clause 7D of the Sale Agreement in that by:
(a) failing to dissuade [Mr Finlay] and [Ms Wu] ... from leaving Astims-SWM;
(b) causing Mailun to fund [Mr Finlay's] and [Ms Wu's] efforts to set up a rival accounting business;
(c) facilitating the downloading of the confidential information pleaded in paragraph 37 hereof [that is, the client lists];
[Mr Lloyd] failed to do all thing [sic] necessary to ensure [Mr Finlay] and [Ms Wu] remained as employees of Astims-SWM for a period of a least 12 months after 27 June 2007.
Paragraph 42 relevantly pleads:
... Further, to the extent that Belinda believed that her sister Judy was resigning because she did not want to sign a new contract with Astims-SWM because it contained a restraint of trade provision, and Belinda did nothing to dissuade Judy from leaving, Belinda breached her obligation under clause 7D of the Sale Agreement ...
In response to the pleading point, Mr Condon pointed to the particulars to para 45 of the FASC. Paragraph 45 pleads that by reason of the "aforesaid breaches", each of the plaintiffs suffered loss and damage. The particulars to that pleading relevantly provide:
Furthermore, the value of Astims-SWM was impaired by reason of the newly merged business not having an opportunity to service and hold on to the existing clients because of breaches by [Mr Lloyd] and [Ms B Wu] in not doing all things necessary to ensure that the employees of Astims listed in Schedule A of the Sales Agreement, including [Mr Lloyd] and [Ms Wu], would remain as employees of Astims-SWM for a period of at least 12 months on the same terms and conditions under which they were employed by Astims.
The drafting of cl 7D is far from satisfactory. The clause is expressed to be a warranty by the vendors (that is, by Mr Lloyd and Ms Wu). However, taken literally, what they are said to warrant in the first sentence is that SWMFS will do something completely outside their control - that is, employ the employees on certain terms and conditions for at least 12 months. I do not think that that is what the parties could have intended. Nor, however, do I think that they intended by the clause to impose an obligation on SWMFS to employ the employees on the terms stated or to make that a condition precedent to the obligations imposed on the vendors by the second sentence of the clause. Both constructions are inconsistent with the fact that the clause is expressed as an obligation imposed on the vendors. SWMFS's obligation to reemploy the employees is contained in cl 11(2), although that obligation is not enforceable against SWMFS, since it is not a party to the contract. If the parties intended the first sentence of cl 7D to operate as a condition precedent to the obligation imposed by the second, it seems to me that they would have used words that more clearly had that meaning. In my opinion, a better interpretation of the clause is simply to read the first sentence as an acknowledgement by the vendors of what was intended to happen at the time of completion. The second sentence then imposes an obligation on the vendors to give effect to that intention.
The obligation is expressed as an obligation to "do all things necessary to ensure ...". In St Hilliers (Developments) Pty Ltd v Radmanovich [2002] NSWSC 524; 11 BPR 20, 191 at [53], Palmer J equated an obligation to " do all things necessary to have" a plan of subdivision registered as an obligation to use "best endeavours, in good faith, to procure" the subdivision. An obligation to use best endeavours is an obligation to do all that can reasonably be done within the bounds of reason to bring about the stated object: Sheffield District Railway Co v Great Central Railway Co [1911] 27 TLR 451 at 452. Although it may amount to much the same thing, I would prefer to interpret the obligation imposed by cl 7D as an obligation to do all things necessary on the part of the vendors to be done to bring about the stated object, since that formulation more closely follows the actual words used, while recognising that those words were not intended to impose an obligation on the vendors to do more than was within their power to do to bring about the stated object.
There is a question whether the second sentence imposes a continuing obligation on the vendors after settlement or only an obligation up to the date of settlement. In my opinion, it should be read as only imposing an obligation up until the date of settlement. The words "do all things necessary to ensure the staff remain as employees of Purchaser or licencee for a period of at least 12 months after 27 th June 2007" may seem more apt to describe a continuing obligation. But how was it envisaged that the vendors would comply with the obligation once they ceased to be the employers? Moreover, what was intended to happen if SWMFS decided to terminate a particular employee after 27 June 2007? The parties could not have intended cl 7D to operate in those circumstances. However, it is difficult to see how the clause can be read down so that it did not operate in those circumstances if the clause is interpreted as imposing a continuing obligation. Although the word "remain" suggests the continuation of a state of affairs, the relevant state of affairs is the employment of the employees, not the doing of things by the vendors to bring that state of affairs about. On the interpretation I prefer, cl 7D contains an acknowledgement by the vendors that, as at the date of the agreement, SWM intended that the employees would be reemployed for at least a year following settlement and a warranty by them that they would do everything necessary on their part to be done before settlement to ensure that that happened. Interpreted in that way, there is no allegation that Mr Lloyd or Ms Wu breached that obligation.
Even if I am wrong in the interpretation of cl 7D that I have adopted, there are a number of other difficulties with SWM's claim based on that clause.
First, I accept Mr Alkadamani's submission that no breach can be alleged in relation to Ms J Wu, since she did not cease to be an employee of SWMFS until after 27 June 2008. Even if cl 7D is interpreted as imposing a continuing obligation, the obligation was to do all things necessary on the part of Mr Lloyd and Ms Wu to be done to ensure Ms J Wu remained employed by SWMFS for at least 12 months after 27 June 2007. If Ms J Wu stayed for that period of time, I do not see how it can be said that Mr Lloyd and Ms B Wu breached that obligation.
Second, even if it is open on the pleadings for the plaintiffs to assert that Mr Lloyd and Ms Wu did not comply with their obligations under cl 7D in relation to employees other than Mr Finlay, Ms J Wu and Ms Kam, there was no evidence concerning the circumstances in which those employees left from which it could be concluded that Mr Lloyd or Ms Wu failed to do all things necessary on their part to be done to ensure that they remained employees. Nor is their any evidence that anything that they could have done in relation to those employees would have made any difference. The evidence suggests that none of the employees were happy with the changes in the management of the firm. It can be inferred that that was an important matter that caused them to leave. The plaintiffs bear the burden of proving that Mr Lloyd and Ms Wu breached their obligations under cl 7D and that that breach was a contributing factor in the employees' decision to leave. In my opinion, they have not discharged that burden.
The position is different in the case of Mr Finlay. Mr Lloyd knew that Mr Finlay proposed to leave and he did nothing to discourage him from doing so. Rather, he assisted in his departure. Although Mr Finlay said that he would have left in any event, it needs to be borne in mind that that evidence was only given by him in cross-examination by Mr Alkadamarni and that that evidence was inconsistent with the evidence given by Mr Finlay in chief that he could not afford to set up his own business without Mr Lloyd's assistance. In my opinion, that evidence should be preferred. It was given in chief and it strikes me as unlikely that Mr Finlay would have asked Mr Lloyd for a loan if he did not require it to set up TTT. The loan was given by Mailun Pty Ltd. However, I think that it is fanciful to suggest that the loan would have been given except at the request and with the support of Mr Lloyd. In my opinion, it can also be inferred that Ms Kam was unlikely to have left, at least when she did, if Mr Finlay had not left at that time. She clearly left to join TTT and there is no evidence to suggest that she would have left if TTT had not been established when it was. It follows that Ms Kam's departure was also within Mr Lloyd's control.
However, even accepting the conclusions of the previous paragraph, there is a third problem with the plaintiffs' case based on cl 7D of the sale agreement. Only the partners of SWM can sue for a breach of the clause and then only for the loss they suffered as a result of that breach. The plaintiffs characterise that loss in the FASC as an impairment in the value of "Astims-SWM". More accurately, it is the loss in the value of the partners' shares in SWMFS. In their final submissions, the plaintiffs sought to calculate that loss by reference to the income that the departing employees could have been expected to earn between the time they left and 27 June 2008, less the expenses involved in performing those services. That may be a means of measuring the loss suffered by SWMFS, although it raises the question whether the loss could have been recouped by having the work done by others. However, it is not a measure of the loss suffered by the partners of SWM.
In theory, there is no reason why the partners of SWM could not recover their loss measured by reference to the diminution in the value of their shares to the extent that they were shareholders in SWMFS. At the time the sale agreement was signed, it was contemplated by the parties that the sold business would be operated by SWMFS and the likelihood is that Mr Lloyd and Ms Wu appreciated that the shareholders of SWMFS were the partners of SWM or possibly companies associated with them. However, one difficulty with approaching the loss in that way is that two of the partners (Mr McMaster and Mr Fisher) never owned shares in SWMFS and the companies associated with them who did own shares have sold them. Leaving that point aside, the obligation placed on Mr Lloyd and Ms Wu was to do everything necessary on their part to be done to ensure that the relevant employees remained with SWMFS until 27 June 2008. Assuming that Mr Lloyd and Ms Wu had complied with that obligation and assuming that the result of them doing so was that the employees stayed until that time, there is no reason to think that the employees would have stayed after that time. Consequently, the question is what was the diminution in the value of the shares in SWMFS as a result of Mr Finlay and Ms Kam leaving when they did (that is, on 29 March 2008 and 18 May 2008, respectively) rather than shortly after 27 June 2008. In the absence of evidence, I am not prepared to conclude that there was any diminution in the value of the shares resulting from those circumstances.
Clause 10 of the sale agreement and the restraints in the consultancy agreements
In their final written submissions, the thrust of the plaintiffs' case insofar as it concerned the restraints contained in cl 7 of Mr Lloyd's draft consultancy agreement and cl 8 of Ms Wu's consultancy agreement was that Mr Lloyd became bound by the terms of the consultancy agreement that was sent to him on 27 April 2007, that he breached the terms of that agreement by not working 10 hours per week (for no remuneration) and that the plaintiffs should be entitled to recover damages calculated by reference to the amount that SWMFS could have charged for Mr Lloyd's time at the rate of $200 per hour for 10 hours per week less a small amount representing the deferred consideration that Mr Lloyd and Ms Wu would have earned as a consequence of the increased billings. It was not suggested that a claim was available against Ms Wu for breach of her consultancy agreement. During the course of oral submissions, Mr Condon also embraced the suggestion that cl 10 of the sale agreement picked up the restraint clause contained in the consultancy agreements, although Mr Condon made no specific submissions on what breaches of that clause had occurred or the damages that are said to flow from those breaches.
In my opinion, there is no merit in the first way in which the plaintiffs put their case in relation to Mr Lloyd's consultancy agreement. Mr Condon submitted that objectively Mr Lloyd must be taken to have agreed to the consultancy agreement when he signed the sale agreement because of the references to the former agreement in the latter. I do not accept that submission. The consultancy agreements were sent to Mr Lloyd and Ms Wu as drafts. Although Mr Murphy chased Ms Wu up in relation to her draft before the sale agreement was signed, he did not chase Mr Lloyd up until well after that time. Mr Lloyd gave evidence that he told Mr Murphy that there was "almost nothing" in the agreement he agreed with. Mr Murphy denies that they had a conversation to that effect. I accept Mr Murphy's evidence on that point. If Mr Lloyd had told Mr Murphy that he did not agree with the terms of the consultancy agreement, the likelihood is that Mr Murphy would have sought to redraft it, as he did with Ms Wu's. Mr Murphy did leave a note on Mr Lloyd's desk attaching his (Mr Murphy's) email dated 27 April 2007 and the draft consultancy agreement. The note goes on to say:
I cannot find any further correspondence from you in relation to the agreement whereas I have many emails from Belinda regarding hers.
I have been slack in not following up on this for which I apologize. I now need to finalize the matter and I would appreciate your feedback on the agreement.
The note is dated 27 September 2007, although the likelihood is that that is an error since, by that date, Mr Lloyd had already indicated that he intended to leave the firm. However, what is important is that it is clear from the note that Mr Murphy did not think that the terms of the consultancy agreement had been agreed. That conclusion is reinforced by the fact that, when Mr Lloyd indicated that he no longer intended to come into the office, Mr Murphy did not suggest that that would involve Mr Lloyd breaching his consultancy agreement. Rather, he wrote to his partners suggesting that it was for the best. There is nothing in the sale agreement that undermines this conclusion. Although the sale agreement is drafted on the basis that the parties would also enter into the consultancy agreements, there is nothing in it to suggest that the parties thought that they were already bound by those agreements.
On the other hand, in my opinion, cl 10 of the sale agreement must be interpreted as incorporating the restraint clauses from the draft consultancy agreements as they existed at the time the sale agreement was signed. The reference to cl 8 is obviously intended to include a reference to cl 7 of Mr Lloyd's consultancy agreement. "Vendor" is defined to mean both Mr Lloyd and Ms Wu; and the parties could not have intended the obligation imposed by cl 10(a) to be limited to Ms Wu. The reference to cl 8 should be interpreted as including a reference to cl 7 of the draft consultancy agreement sent to Mr Lloyd: see K Lewison, The Interpretation of Contracts, 3 rd Ed, (2004), Sweet & Maxwell, 279ff. Although no consultancy agreement had been entered into by Mr Lloyd or Ms Wu at the time the sale agreement was signed, draft agreements had been provided to each of them and the terms of the restraint in each of them were the same. Neither Mr Lloyd nor Ms Wu had raised any objection to the terms of those restraints at the time the sale agreement was signed. Clause 10 of the sale agreement was an important clause. The principal asset that SWM was acquiring was goodwill and cl 10 was the means by which that goodwill was protected. It makes no commercial sense that the parties would have agreed to the sale agreement without that protection. Taking these matters into account, the parties must have intended that the reference in cl 10(a) to "clause 8 of the Consultancy Agreement collateral to this Agreement" to be a reference to the restraint clauses in the draft agreements. The only other alternative is to treat cl 10(a) as being void for uncertainty for the reason that the clause to which it refers did not exist. But if that is the case, it is difficult to see how, given the significance of cl 10(a), the parties could have intended that it be severed from the balance of the sale agreement: see Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432 at 442. The result would be that the whole agreement is void for uncertainty. No party contended for that result.
Assuming that the restraints contained in the (draft) consultancy agreements were incorporated into the sale agreement, the next question is whether those restraints were breached by Mr Lloyd and Ms Wu. During final submissions, Mr Condon indicated that the allegations that Ms Wu breached cl 10(a) of the sale agreement and cl 8 of her consultancy agreement were not pressed. That leaves the claim against Mr Lloyd. He is said (in para 41(A)(i) of the FASC) to have breached cl 10(a) and cl 7 of his consultancy agreement by enticing or attempting to entice Mr Finlay and Ms Wu to leave SWMFS by failing to dissuade Mr Finlay from leaving SWMFS, by causing Mailun to fund TTT and by assisting Mr Finlay and Ms Wu to download confidential data of SWMFS (including client contact lists).
There is no evidence to suggest that Mr Lloyd assisted Mr Finlay or Ms Wu to download confidential data of SWMFS. Nor do I think that Mr Lloyd's failure to dissuade Mr Finlay from leaving SWMFS could, on any meaning of the word "entice", amount to enticing Mr Finlay to leave. The position is not so clear in relation to the provision of finance by Mailun. I have concluded that Mailun would not have advanced the $30,000 unless Mr Lloyd had requested it to do so. Even so, I do not think that that is sufficient to amount to enticement. "Entice" in this context means something more than "assist". It involves an attempt either by words or conduct to persuade someone to do something: see Ecco Personnel Pty Ltd v Barrett [1996] NSWSC 475. There is no evidence that Mr Lloyd attempted to persuade Mr Finlay to leave SWMFS. It was Mr Finlay who approached Mr Lloyd and told him that he proposed to leave and it was Mr Finlay who approached Mr Lloyd for assistance. The fact that Mr Lloyd agreed to provide that assistance is not sufficient to amount to enticement. It follows that Mr Lloyd was not in breach of cl 10(a) of the sale agreement.
Claims against Mr Finlay and Ms J Wu
The claim against Mr Finlay and Ms J Wu are put in two ways. First, it is alleged that they each breached the restraints contained in their employment contracts. Second, it is alleged that each of them breached duties of fidelity and good faith they owed as employees of SWMFS.
Claims based on contractual restraints
These claims raise two issues. The first is whether Mr Finlay and Ms Wu were bound by the terms of the employment agreements they signed on 1 July 2005 (in the case of Mr Finlay) and 1 October 1999 (in the case of Ms Wu). The second is, if they were, whether they breached the restraint clauses contained in those contracts.
The resolution of the first issue itself turns on the answer to two questions. One is the terms on which Mr Finlay and Ms Wu were employed immediately before 27 June 2007. The other is whether they agreed to a continuation of those terms following the acquisition of the business of Astims by the partners of SWM.
In relation to Mr Finlay, Mr Meehan, who appeared for Mr Finlay, Ms J Wu and TTT, submitted that Mr Finlay's employment with Astims terminated when he was re-employed by Iolan on 1 January 2006. From that time, he had no written contract of employment and no contract that contained a restraint clause. I accept that submission. It is clear that a change in the identity of an employer brings an end to the old contract of employment and to its terms and creates a new contract with the new employer on terms that are to be determined by that new relationship, not on the terms of the old contract: Ridgeway International Ltd v McCullum [1998] NSWSC 151.
Mr Lloyd represented to SWM in the material that he provided to Mr Murphy on 8 April 2007 that Mr Finlay was employed by Astims. However, it seems clear that that representation was incorrect. Each of Mr Lloyd, Mr Finlay and Ms B Wu gave evidence that Mr Finlay's employment was transferred back to Iolan. That evidence is supported by Mr Finlay's PAYG Payment Summary for the period 1 July 2006 to 30 June 2007 and Iolan's payroll advices for the same period. The information originally supplied by Mr Lloyd to Mr Murphy suggested that Mr Finlay's salary was higher than those documents disclosed. Mr Condon submitted that I should infer from that that Astims also paid Mr Finlay and that he was an employee of both Iolan and Astims. However, there is no other evidence that Astims paid Mr Finlay anything, and the likelihood is that the amount originally disclosed as Mr Finlay's salary was an error or was an indication of what it was expected his salary would be in the near future. It follows that Mr Finlay was not bound by the restraint clause in the contract he signed on 1 July 2005. That contract was terminated when Mr Finlay's employment with Astims was terminated.
Mr Meehan made two submissions in relation to Ms J Wu. The first was that the contract of employment she signed on 1 October 1999 terminated when the partnership between Mr Lloyd and Mr Rozario was dissolved on 31 January 2000. From that time, she was employed under an oral contract with Mr Lloyd. That contract itself was replaced by further contracts each time there was a change in the partnership. None of those contracts contained a restraint. Mr Meehan's second submission was that Ms Wu's employment under the 1 October 1999 contract terminated at some time prior to June 2007 because of the substantial changes that had occurred in her job description before that time. I do not accept either of these submissions.
The first submission was based on the principle stated in Brace v Calder [1895] 2 QB 253 to the effect that a partial change in the identity of the employer was the same as a complete change. In that case, a partnership had four partners. Two retired. Following their retirement, an employee sought to terminate an employment contract that was expressed to be for a term of two years. In reaching the conclusion that the employee was entitled to do so, Rigby LJ said (at 263):
A contract to serve four employers cannot without express language be construed as being a contract to serve two of them.
However, in Bromhead v Graham [2007] NSWCA 257 the Court of Appeal held, following the approach adopted by the English Court of Appeal in Rose v Dodd [2005] ICR 1776, that the dissolution of a partnership does not necessarily terminate the employment of employees of the partnership. Rather, in determining whether dissolution has that effect, it is necessary to consider, among other things, "the circumstances of the dissolution, the terms of the particular employment contract and the acts of the parties": at [77] per Santow JA, with whom Beazley and Giles JJA agreed. One case where the employment contract may not be terminated - which was the case in Bromhead - is where the authority of the partners continues pursuant to s 38 of the Partnership Act 1892 (NSW) for the purpose of winding up the partnership. In that case, of course, there is no change in the identity of the employers, only in the nature of the relationship between them. But that is not the only circumstance in which the contract may continue. In Rose v Dodds , Mummery LJ referred with approval to a number of texts which stated the principle more broadly. In particular, his Lordship said:
[49] Lindley & Banks on Partnership (18th edn, 2002) p 718 (para 25-02) contains a helpful discussion of the general rule in the light of the continuation partnership provisions in s 38:
It has been decided that a general dissolution will terminate the contracts of employment of all the firm's employees, thus inevitably leading to claims for unfair dismissal or redundancy payments. This result is surprising: if the partnership continues for the purposes of the winding up, it is difficult to see why those contracts should not continue until the winding up is complete and the continuation partnership finally comes to an end. On the other hand, a technical dissolution brought about by the death, retirement or expulsion of a partner is unlikely to have the same effect, provided that the partnership continues in existence.
[50] In 16 (1B) Halsbury's Laws (4th edn. reissue) the impact of the dissolution of a partnership on employees is stated in qualified terms:
600. Dissolution of a partnership Whether a change in the composition of the partnership employing the employee affects the contract of employment depends on the express or implied intention of that contract. The death of one of the partners terminates the contract if that contract is sufficiently related to the personal conduct of the deceased partner, but not if the actual composition of the partnership is not of such importance. A change of partners may or may not operate as a wrongful dismissal, depending on the circumstances and the intent of the contract, but a major change entailing the dissolution of the partnership normally so operates. If, however, the employee continues to work for the newly constituted firm, that may constitute a waiver of his common law rights; and, in such a case, the employee's continuity of employment is expressly preserved by statute.
[51] Chitty on Contracts (29th edn, 2004) vol II, p 1050 (para 39-172) states that: 'Dissolution of partnership. A dissolution of partnership of employers may operate as a wrongful dismissal.' (A footnote adds that it may not do so where there is no fundamental disruption to the work of the partnership, such as where one partner among a number retires or dies.)
These paragraphs were quoted with approval by Santow JA in Bromhead [2007] NSWCA 257 at [74] .
The passages from Lindley and Banks on Partnership and Chitty on Contracts both suggest that it is important to the analysis that the partnership itself continue. But why that should be so is not clear. What is important is the identity of the employer and whether the precise identity is material in the circumstances of the particular case or whether a partial identity is sufficient: cf Allen & Son v Coventry [1980] 1 ICR 9. In this case, Mr Lloyd started a professional accounting practice as a sole practitioner in Sydney in 1982. Ms J Wu joined that practice in about June 1994. That practice changed its name to "Astims" on 1 March 1997. Mr Rozario joined the practice as a partner on 1 July 1998 and left two years later. However, the practice continued to operate under the name "Astims" with Mr Lloyd as its sole principal until he was joined by Ms B Wu. It seems clear that Mr Lloyd remained the driving force behind the practice until it was sold to the partners of SWM in 2007. There is no suggestion that Ms J Wu sought to terminate her contract following Mr Rozario's departure. Nor is there any suggestion that she was paid out her entitlements at that time. Ms Wu gave evidence that she entered into an oral contract with Mr Lloyd following Mr Rozario's departure. But the evidence that she gave on this point was simply to the effect that she "agreed to continue working in the Astims business with Stuart Lloyd as my employer" and that she "did not have a written contract of employment during this period". The first proposition is consistent with the terms of her old contract continuing. The second proposition is a conclusion which carries little weight. Having regard to the circumstances in which Ms Wu was employed, I do not accept that it was material to the continuation of the terms of her employment contract that the principals of the firm changed provided that Mr Lloyd remained as a principal who was substantially involved in the day-to-day operations of the firm. It was Mr Lloyd who employed Ms Wu and, in my opinion, it was he who was critical to the employment relationship. That relationship continued.
As to Mr Meehan's second submission, that submission was based on a line of cases holding that a profound change in an employee's terms of employment may amount to repudiation of the contract by the employer or, if a new position is accepted by the employee, to a new contract rather than merely a variation of the old one: see Quinn v Jack Chia (Australia) Ltd [1992] 1 VR 567; Brackenridge v Toyota Motor Corporation Australia Ltd (1996) 142 ALR 99; Whittaker v Unisys Australia Pty Ltd [2010] VSC 9; 26 VR 668. Often, the principle is applied where the employee is demoted. However, it has also been applied where the employee has been promoted and is subsequently terminated in accordance with the terms of the old contract. The question in this latter case is whether the terms of that contract continue to govern the relationship or whether the new position is so different from the old that the terms of the old contract no longer apply.
In my opinion, the principle relied on by Mr Meehan has no application in this case. Ms Wu's employment contract dated 1 October 1999 described her position as "Manager". It did not identify her responsibilities with any greater precision than that. Ms Wu remained a manager of Astims up until the time that it was acquired by the partners of SWM. As Ms Wu's seniority at Astims increased, so did her salary and her responsibilities. However, those changes were incremental and occurred over a period of 8 years. Those changes no doubt led to variations to Ms Wu's employment contract. An obvious example is the express variations relating to Ms Wu's salary. However, Mr Meehan does not point to any change that occurred at a particular time which of itself could be said to be so fundamental as to bring the old contract to an end. Moreover, the contract itself was very much in a standard form. It set out Ms Wu's salary, hours of work, leave entitlements, notice period, confidentiality obligations and the restraint the subject of these proceedings. As I have said, it did not describe Ms Wu's responsibilities other than to say that she was employed as a manager. The terms that it contained (with variations for salary) were equally appropriate for a more junior or more senior employee. In those circumstances, in my opinion, it continued to govern the relationship of the parties up until 26 June 2007.
The next question is whether the terms of Ms Wu's contract continued after 26 June 2007. In my opinion, they did. The letter from Mr Murphy dated 2 July 2007 stated that "[a]ll employment conditions of staff as at 26 th June 2007 will continue". Although Ms Wu was only asked to sign the schedule acknowledging her salary, there can be no doubt that she read the letter which set out the terms on which she would be employed. She did not raise any issue concerning that letter and remained with the firm. By doing so, she must be taken to have accepted what the letter proposed. In my opinion, no significance can be attached to the fact that she was asked to and did sign the schedule attached to the letter. Ms Wu's salary prior to 1 July 2007 was $82,000 per annum. The schedule indicated that it would increase to $90,000 per annum. It was natural that she be asked to sign a document that recorded the only proposed variation to the terms on which she had previously been employed.
Ms Wu's employment contract refers to her employment with "Astims" and contains references to "Astims" and "the Partners of Astims" throughout. It also referred to clients of Astims. Mr Meehan submitted that those expressions could not be given a sensible meaning in circumstances where the business carried on by Astims was acquired by the partners of SWM and they licensed SWMFS the right to provide services to those clients under the name "Astims". However, in my opinion, when SWMFS and Ms Wu agreed that the terms of Ms Wu's prior employment contract would continue to apply they must be taken to have agreed that the references to "Astims" and the "Partners of Astims" would be read as references to "Astims SWM" - that is, to SWMFS - and that references to "clients" would be read as a reference to the clients who would be serviced by SWMFS. That was the entity that continued to carry on the business of Astims and it was in that business that the parties intended that Ms Wu would continue to work.
The FASC alleges that Ms Wu breached the restraints contained in her employment contract in two ways. First, it is alleged (in para 40(b)) that Ms Wu breached the term "that prohibited the use of Astims SWM's confidential information". Whether that is an accurate statement of the effect of cl 10(a) is doubtful. That clause appears to be concerned with information that is confidential to Astims' clients rather than information that is confidential to Astims. That conclusion is reinforced by the reference to "all legal requirements in respect of privacy". Clause 10(b) is concerned with confidential information of Astims but it is restricted to the disclosure of that information rather than its use. Both clauses are expressed in such general and vague terms that I do not think that they can be interpreted as adding anything to Ms Wu's obligations at common law. For that reason, I deal with the question of breach when dealing with the allegation that Ms Wu breached her obligations of fidelity and good faith.
The second way in which Ms Wu is alleged to have breached the restraints contained in her employment contract is by "the solicitation of Astims SWM's clients for a period of 12 months following the completion of [her] employment" (FASC para 40(b)). That allegation is obviously a reference to cl 10(d) of Ms Wu's employment contract which prevented her from "either directly or indirectly, for a period of 12 months after your employment with Astims terminates, knowingly seek to represent or seek to be appointed to represent any company on whose account you have worked while at Astims during any part of the 12 months preceding the termination of your employment". Mr Condon submitted that "company" is this context must be interpreted to include an individual. I do not accept that submission. The ordinary meaning of "company" does not include a person, and there is no reason to give it that construction in this context. It might be said that it makes little commercial sense to draw a distinction between corporate and individual clients. But even accepting that proposition, I do not think that it provides a sufficient reason for departing from the ordinary meaning of the word used. The courts in general take a stricter and less favourable view of covenants in restraint of trade entered into between employer and employee than of similar covenants in commercial agreements: Woolworths Ltd v Olson [2004] NSWCA 372 at [38]. Moreover, in Kooee Communications v Primus Telecommunications Pty Ltd [2008] NSWCA 5 at [38] Basten JA (Giles and Tobias JJA agreeing), referring to the High Court's decision in Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; 210 CLR 181, said:
That approach [that is, the approach taken by the High Court in Maggbury ] is entirely consistent with the principle that the Court is not able to disregard clear words, nor under the guise of interpreting the contract to re-write it.
Although there may be questions about the precise scope of this principle, there is no reason to doubt its application in this case. The word "company" has a clear meaning which excludes individuals. Used in that way, the restraint clause has a clear, albeit limited, operation. It is not for the court to seek to give to the restraint what to some may seem a more commercial operation by giving the word "company" a meaning that it does not have.
There is a question whether a restraint on approaching clients of SWMFS for whom Ms Wu had done work for in a 12 month period is unenforceable as an unreasonable restraint of trade and, if it is, the extent to which it is valid as a result of s 4 of the Restraints of Trade Act 1976 (NSW). However, even if a restraint for 12 months is enforceable, I am not satisfied that Ms Wu breached it. The list that Ms Wu prepared for Mr Murphy shortly before she left Astims SWM identifies a number of companies for whom she had done work. However, there is no evidence that Ms Wu knowingly sought to represent or sought to be appointed to represent those companies. It was put to Ms Wu in cross-examination that she contacted clients of SWM in April and May 2008 and told them of her intention to become an accountant with TTT. She denied that she did. Her denial is implausible. She was asked by Mr Lloyd to contact clients and to tell them that she was leaving. It is hard to believe that she did not do so. And it is hard to believe that when she did so she did not tell those clients that she intended to work for TTT. But that is not enough to establish that she breached cl 10(d) of her employment contract. What the plaintiffs must establish is that Ms Wu sought to represent the companies whom she contacted. There is no evidence that she did. It is unclear which of the companies for whom Ms Wu did work became clients of TTT in the year after she left. Although it appears there was material in evidence from which that information might be obtained, it was not organised in a way that made it possible to obtain the information without undertaking a substantial investigation. Nonetheless, the plaintiffs did not identify any examples of clients who fell into that category. It is to be expected that they would have done so if examples existed. In any event, even assuming that some of them did, that would not establish a breach by Ms Wu. Those clients could have been approached by Mr Finlay or Ms Kam during that time.
Claims based on breach of duties of fidelity and good faith
The FASC does not identify the basis on which it is said Mr Finlay and Ms Wu owed duties of fidelity and good faith. It simply alleges (in para 40(a)) that, in engaging in various pleaded conduct, Mr Finlay and Ms Wu breached those duties. However, Mr Meehan conceded that both Mr Finlay and Ms Wu owed an implied contractual obligation during their employment to act in good faith towards their employer and that that implied obligation carried with it an obligation on the employee not to divulge confidential information or use it in a way that would be detrimental to the employer. There can be no doubt that Mr Finlay and Ms Wu also owed fiduciary duties to serve SWMFS with good faith and fidelity: see Mainland Holdings Ltd v Szady [2002] NSWSC 699 at [66] per Gzell J; Manildra Laboratories v Campbell [2009] NSWSC 987 at [56] per McDougall J.
The plaintiffs allege that Mr Finlay and Ms Wu breached their duties of good faith and fidelity in a number of ways. The alleged breaches fall into 4 categories:
- Establishing TTT as a competitor of SWMFS while they remained employees of that company;
- Soliciting clients of SWMFS to become clients of TTT while they were employees of SWMFS;
- Taking and using confidential information of SWMFS when they left;
- Lying to Mr Lloyd concerning their plans.
An employee does not necessarily breach his or her duty of good faith and fidelity by preparing to compete with the employee's employer before termination of the employment contract. Leaving aside the use of confidential information for the moment, an employee is entitled to compete with his or her employee immediately after the employment contract is terminated and, provided the employee's preparatory acts are not themselves inconsistent with the duties the employee owes to the employer, those acts themselves cannot amount to a breach of duty. For example, in Weldon & Co Services Pty Ltd v Harbinson [2000] NSWSC 272, a case which bears many similarities to the present, the employee worked as a senior accountant for the plaintiff firm. In late 1998, she began making preparations to leave her employment and establish practice as a public accountant on her own. She arranged insurance and office space while still an employee. On a few occasions before leaving her employment, she used a form of letterhead quoting the address and telephone number of her new landlord. She also did some work for her new landlord without charge. In addition, while she was an employee she did some work for private clients. For the most part she did not charge those clients any fees, although, on two occasions, she charged fees of $100 and $400. Most of the work she did for private clients was done out of hours but in some cases it was done during office hours. A husband and wife approached her while she was still an employee of the firm and asked her to act for them when she left. She agreed to do so and wrote to their previous accountant to arrange to obtain their files while still an employee. Bryson J (as he then was) concluded (at [39]) that "the damages in respect of minimal usage of the [employer's] computers, computer programs, paper and time to print work for them can be no more than nominal". However, his Honour was prepared to award the employer $500 in respect of the work done by the employee for which she charged a fee on the basis that that work represented a loss to the employer of a commercial opportunity. See also Manildra Laboratories v Campbell [2009] NSWSC 987 at [77]ff per McDougall J.
In my opinion, none of the steps taken by Mr Finlay or Ms Wu to establish TTT as an accounting firm before they left SWMFS - such as, the acquisition of the shares in TTT, the creation of email accounts and letterhead, the acquisition of computer hardware and software, the location and furnishing of premises and the arranging of insurance - involved a breach by them of the duties they owed to SWMFS. Those steps were merely preparatory to competing with SWMFS. They did not themselves involve competition with SWMFS or the siphoning off to TTT of commercial opportunities to which SWMFS was entitled.
Nor do I think that the evidence establishes that Mr Finlay or Ms Wu persuaded clients to leave SWMFS while they remained employees of that company or did work for those clients before they left which was charged by TTT. Quest Metals gave notice to SWMFS on 27 March 2008 that it no longer wished to use the services of SWMFS and Mr Zwart gave notice to the same effect on 3 April 2008. Mr Finlay wrote to Ms Wu on 1 April 2008 saying that he needed to issue an invoice to Mr Zwart, although it appears that the first invoice for $664.40 was issued on 15 May 2008. Between April 2008 and June 2008, TTT issued invoices to approximately 25 clients, all of whom had previously been clients of SWMFS. None of those 25 appears to have been clients for whom Ms Wu did work. It can be inferred from this evidence that, before he left SWMFS, Mr Finlay, at least, told some clients - including Crest Metals and Mr Zwart - that he proposed to leave SWMFS and to set up his own firm. However, merely telling clients his intentions did not involve a breach by Mr Finlay of his duties; and there is no evidence that he actually sought to persuade those clients to leave SWMFS. It can be inferred that Mr Finlay did some work for Mr Zwart immediately after his resignation took effect. However, I do not think that it can be inferred that he did that work before he left.
Mr Condon submitted that, even in the absence of a restraint clause, fiduciary duties continue after termination to prevent a former employee with specialised knowledge of the company, or special skills utilised with that company, from competing with the company or using that knowledge to benefit himself or herself for a reasonable period. In support of that proposition, he relied on the following passage from the decision of the Full Court of the South Australian Supreme Court in Southern Real Estate Pty Ltd v Dellow [2003] SASC 318; 87 SASR 1 at [36] (per Debelle J, with whom Nyland and Lander JJ agreed):
There is an obvious tension between a reasonable period during which the former director remains subject to his or her fiduciary duties and freedom of competition. Although she [the director] could not make a list of customers or solicit customers whilst a director, after the expiry of that reasonable period Ms Dellow was at liberty to make a list of the clients from memory and actively to solicit their custom ...
However, that decision was concerned with the duties of a director, not those of an employee. Moreover, in that case the court found that Ms Dellow had breached her fiduciary duties while she was a director. In my opinion, it has no application on the facts of this case.
In competing with a former employer, an employee is entitled to use the employee's general "know how" gained from his or her previous employment: Del Casale v Artedomus (Aust) Pty Ltd [2007] NSWCA 172 at [38] - [39] per Hodgson JA. That know how includes knowledge of the former employer's clients and suppliers, provided that the employee has not kept or created a list of them. As Bryson J said in Weldon & Co Services Pty Ltd v Harbinson [2000] NSWSC 272:
[69] ... The entitlement of a former employee to enter into competition, and to use the former employee's knowledge of the identity of clients and their interest in obtaining goods or services of the relevant kind is very clearly established, and in my view there is no room for the implication of any contractual term restricting competition or use of that information, or for the imposition of a similar restriction by employing equitable principles.
[70] ... A former employee's entitlement to use knowledge which the former employee remembers, and the absence of an entitlement to make notes and lists while in the employment and take them and use them, are very long established and are not open to doubt or debate. They were recognised in the judgment of Harvey CJ in Eq in Ormonoid Roofing & Asphalts Ltd v Bitumenoids Ltd & Ors (1930) 31 SR (NSW) 347: see particularly 354-356.
See also Riteway Express Pty Ltd v Clayton (1987) 10 NSWLR 238 at 240 (McLelland J); Mid-City Skin Cancer & Laser Centre Pty Ltd v Zahedi-Anarak [2006] NSWSC 844; 67 NSWLR 569 at [148] (Campbell J); Commercial & Accounting Services (Camden) Pty Ltd v Cummins [2011] NSWSC 843; Menkens v Wintour [2011] QSC 7.
The principle applies not only to lists but also to information from which a list can be created. For example, in Orica Investments Pty Ltd v McCartney [2007] NSWSC 645, the employee forwarded emails containing supplier details to his home computer. White J held that, in principle, there was no difference in doing that and creating a list of suppliers. While the identity of the suppliers themselves was not confidential, the forwarding of the names and contact details of the suppliers, including email addresses and telephone numbers, was a misuse of confidential information: at [254] - [255]. The principle also applies where the employee deliberately commits the list to memory. As J D Heydon said in The Restraint of Trade Doctrine , 2 nd Ed (Butterworths, Sydney, 1999) at 80:
The employee cannot remove, whether by using paper or using memory, a material part of the former employer's business records; but the employee can approach a particular customer or client whom that employee can recall without a list or deliberate memorisation.
That passage was quoted with approval by Young J (as he then was) in Forkserve Pty Ltd v Pacchiarotta [2000] NSWSC 979, at [20].
Both Mr Finlay and Ms Wu, at Mr Murphy's request, prepared lists of the clients for whom they were currently doing work. There is no evidence that Mr Finlay took the list he prepared with him when he left. It was suggested that Mr Finlay took another list when he left SWMFS. That suggestion was based on Skype messages between Mr Finlay and Mr R Wu on 25 March 2008 which were in these terms:
Richard Wu says: hey you still at work?
...
James Finlay says: yes, but I will be leaving soon
Richard Wu says: as in no more astims?
Richard Wu says: starting to do database tomorrow
James Finlay says: No, I am still Astims. Do you need the excel spreadsheet from us with the relevant fields?
Richard Wu says: no I'll send you one and you can alter it
However, it is clear that the database they were referring to was not a database with client information from SWMFS. Rather, they were referring to what might be called the shell of a database that Mr Wu was creating that could be used by TTT. That is made clear from the last message from Mr Wu, where he says that he would prepare the database. He was in no position to prepare a database which included information concerning SWMFS's clients.
Ms Wu, on the other hand, kept a copy of her list that she prepared at Mr Murphy's request on her laptop and also retained a number of client files on her laptop when she left. I accept that Ms Wu kept copies of the documents on her laptop to enable her to work on them or refer to them when she was out of the office and that she did not download them on to her computer for the specific purpose of taking them with her when she left.
Having regard to the authorities I have referred to, in my opinion, the list of clients prepared by Ms Wu was a confidential document belonging to SWMFS and Ms Wu breached her duties by taking a copy of that list with her. However, there is no evidence that Ms Wu used that list to contact clients. The list consisted of the names of clients (in the case of individuals) and the names of contacts at corporate clients together with a list of all companies in the relevant corporate group and persons associated with that corporate group - such as the name of a family company and the members of the family associated with that company. The list only included the names of clients for whom Ms Wu had some responsibility. It did not contain any contact details, such as telephone numbers or addresses. Although it is doubtful that Ms Wu would have remembered the names of each company within a particular group, it is difficult to see how she could make use of that information. Ms Wu denied that she used the list for the purpose of contacting clients. Although in a number of respects her evidence was evasive, her denial is plausible in this context. As I have said, I accept her explanation of how she came to have the list and I think that the likelihood is that she would have remembered many of the names on the list in any event, and, as I have said, the list itself did not provide any contact details. There is no evidence that Ms Wu contacted the clients on the list shortly after she left. It is not easy to determine precisely how many clients on the list became clients of TTT. Certainly some did. But the number does not seem to be large. In those circumstances, I am not satisfied that SWMFS suffered any loss as a consequence of Ms Wu's breach of duty. SWMFS should only be entitled to recover nominal damages in respect of this breach.
As to the client files Ms Wu kept on her computer, I accept Ms Wu's evidence that that material was on her computer so that she could work on it as an employee of SWMFS after remote access ceased to be available. Whether she chose to keep the material or did so due to an oversight is not clear. However, it was not suggested that the material was confidential material belonging to SWMFS. It is not easy from the list of the material in evidence to know precisely what the material consisted of. Some of the documents appear to be documents lodged with the ATO on behalf of the relevant clients, such as BASs and tax returns. Others appear to be accounting records, such as profit and loss statements or management accounts. It appears that the documents were documents that clients would have been entitled to request from SWMFS. There is no suggestion that Ms Wu used the material other than for the purpose of performing work for the relevant clients. In requesting her to do work for them, those clients must at least impliedly have authorised her to use the material she had for that purpose. Consequently, I am not satisfied that Ms Wu breached any duty she owed by using those documents.
Although I have concluded that Ms Wu breached the duties she owed SWMFS by taking with her the list of clients she prepared, there is no basis for granting an injunction restraining her from using that list. I have concluded that Ms Wu did not use the list. Even when it was prepared it was of limited utility to someone seeking to attract clients of SWMFS. It is of no utility for that purpose now, and there is no continuing threat that Ms Wu will use it. Consequently, there is no utility in granting an injunction.
Mr Murphy gave evidence that, at the time Mr Finlay resigned, Mr Finlay told him that he was giving up accounting to work in his wife's business. Mr Finlay denies that he said that. He says that, shortly after he resigned, he had a conversation with Mr Murphy in which he said words to the following effect:
Bill, the reason that I'm resigning is for personal reasons. I'm 41, its time I looked after my future. I've given that a lot of thought and decided its not going to be with Astims. I'll take a break and work out what I'm going to do. I'm an accountant so you can expect that I'll continue in this field of work.
I prefer Mr Murphy's evidence to that of Mr Finlay on this point. In my opinion, Mr Finlay was inclined to give evidence that he thought would assist his case rather than his best recollection of the relevant events. The clearest example of that is Mr Finlay's claim that he had no idea who he was referring to when he said in an email to the lessor that he needed to consult with "the others". In any event, even on Mr Finlay's account of his conversations with Mr Murphy, his statement of his intentions was misleading. It suggested that he would not work for a while after he left Astims, whereas he commenced work immediately.
In her letter dated 22 April 2008 to SWMFS rejecting the two year contract that had been offered to her, Ms J Wu said:
As you may know, I have worked in Astims for more than 14 years. I have been working extremely hard, with at least 8 hours work and 1.5 hours drive every working day. I feel tired of working long hours and I want to spend more time with my family.
Ms Wu's letter of resignation offered no reason for her departure.
Although the statement in Ms Wu's letter dated 22 April 2008 may have been literally true, in my opinion, it gave the misleading impression that Ms Wu was leaving to spend time with her family rather than leaving to compete with SWMFS.
Court's have taken different approaches to the question whether an employee is obliged to tell the employee's employer whether he or she intends to compete with the employer after resigning. In Southern Real Estate Pty Ltd v Dellow [2003] SASC 318 , the Full Court of the South Australian Supreme Court held (at [28] - [31] per Debelle J, Nyland J and Lander J agreeing) that the duty of good faith required an employee to disclose his or her intentions to set up in competition prior to resignation. The Supreme Court of Queensland (McMeekin J) took a somewhat different approach in Deeson Heavy Haulage Pty Ltd v Cox [2009] QSC 277; 82 IPR 521. McMeekin J acknowledged (at [86]) that "...in some circumstances there would come onto a member of senior management an obligation to tell the employer details of any proposed plan to compete against the employer...". However, in that case, his Honour decided that no such duty existed. That was in circumstances where the employer "was well aware the employees were leaving, where the effect of those probable plans were self evident, and where he made no inquiry of them" (at [89]).
In my opinion, Mr Finlay and Ms Wu were not obliged to tell Mr Murphy that they intended to leave to establish their own accounting firm, but they were not entitled to mislead Mr Murphy about their intentions, particularly in circumstances where Mr Murphy had asked each of them to contact clients and explain that they were leaving. Mr Murphy's decision to leave it to Mr Finlay and Ms Wu to tell clients that they were leaving does not seem a sensible one. But it is hard to believe that Mr Murphy would have taken it had he known that Mr Finlay and Ms Wu were proposing to set up their own firm, with the likelihood that they would, at some stage at least, encourage the clients for whom they did work to follow them.
There is, however, no evidence that SWMFS suffered any loss as a consequence of Mr Finlay's and Ms Wu's conduct. Mr Murphy does not say what he would have done if he had known the true position, and there is no evidence that anything he might have done would have made any difference. It appears from the evidence that he and his partners had limited contact with clients of Astims since the time they acquired its business. The clients' loyalty was likely to have been with the persons who did their work, and it is difficult to see what Mr Murphy could have done about that if he had been told by Mr Finlay and Ms Wu shortly before they left that they were setting up their own accounting firm. It follows that SWMFS is only entitled to nominal damages in respect of these breaches.
Claim against TTT
The only breaches of duty I have found that Mr Finlay and Ms Wu committed are misleading Mr Murphy about what they proposed to do when they left the employment of SWMFS and, in the case, of Ms Wu, taking the list of clients she prepared. In order for an employer to be vicariously liable for the conduct of an employee the relevant conduct must amount to a tort committed by the employee in the course of the employee's employment: New South Wales v Lepore [2003] HCA 4; 212 CLR 511. It has been suggested that an employer may also be vicariously liable for an employee's breach of an implied term of a contract that was "concurrent and co-extensive" with a breach of duty of care in tort: see Deutz Australia Pty Ltd v Skilled Engineering Ltd [2001] VSC 194 at [34], and that an employer may be vicariously liable for a breach by an employee of an equitable duty of confidence: Coulthard v State of South Australia (1995) 63 SASR 531. In the latter case, King CJ said (at 535):
No authority has come to my attention which establishes that vicarious liability of an employer can exist under an equitable doctrine of breach of confidence. Nevertheless a breach of the equitable doctrine of confidence is analogous to a common law tort. It is to be expected that equity would follow the law in such circumstances and that the common law doctrine of the vicarious liability in tort of an employer for the acts of an employee in the course of their employment would apply in equity to breaches of confidence. It is to be expected that equity would act upon the conscience of the employer by requiring the employer to accept responsibility for the employee's breach of confidence.
Even accepting these principles are correct and have some application in this case, Mr Finlay and Ms Wu's breach of their duties of fidelity and good faith by misleading Mr Murphy about their intentions and Ms Wu's conduct in taking the list she prepared when she left SWMFS could not possibly be regarded as conduct by them as employees of TTT. For that reason alone, the claim against TTT must fail.
Cross-claim by Mr Lloyd and Ms B Wu against SWM
As I have said, Mr Lloyd and Ms Wu put their claim for the retention amount of $120,000 in three ways. First, they say that on the proper construction of the sale agreement that amount is payable. Second, they say that it was an implied term of the sale agreement that the plaintiffs would, following completion, conduct the business of Astims efficiently, in a proper, businesslike and professional manner and to the best of their skill and ability and would not make substantial changes to its operation that would detrimentally affect billings and that they breached that implied term. Third, Mr Lloyd and Ms Wu plead in para 7 of the amended cross-claim that the purchasers made the following representations:
(a) That they would continue to conduct the business of Astims in the same or substantially the same manner at the same premises.
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(b) That they would make employment offers on the same terms and conditions to all staff to become employers of the new entity, Astims/SWM.
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(c) That Murphy would manage the Sydney practice and be present in the Sydney office for 3-4 days per week.
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(d) That they would expand the business in the Sydney office with a view to sending excess work to Cowra where staff had additional capacity.
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Claim based on terms of the sale agreement
The claim based on breach of express terms in the sale agreement are put in two ways.
First, cl 3(a)(i) of the sale agreement stated that the purchase price was $1,200,000 but was to be reduced by seventy-six cents "for each fee dollar lost but limited to a fee loss equivalent to the total retention amount ($120,000) ...". Clause 3(a)(ii) provided that the fee loss referred to in cl 3(a)(i) "shall be calculated as an amount of $1,400,000 less billings achieved by Astims during the year ended 30 th June 2008". Mr Alkadamani submitted that the expression "billings achieved" should be interpreted as including unbilled WIP recorded in the relevant financial year and time written off during that financial year. Unless "billings achieved" is interpreted to include unbilled WIP, there would not be a fair comparison with the previous financial year, since unbilled WIP from the previous financial year was not carried forward into the new financial year. Unless "billings achieved" is interpreted to include time written off, the figure for billings achieved was open to manipulation, since time could be written off and restored in the following financial year. Finally, Mr Alkadamani submitted that the plaintiffs had failed to include an amount of $18,342.91 in their calculation of actual billings, although that figure alone would make no difference to the payment of the retention amount.
In my opinion, there is no merit in the way in which the cross-claim is put. The expression "billings achieved" has a clear meaning. It means bills actually rendered during the relevant financial year. If the parties intended the retention amount to be calculated in some other way, they would have said so. The principle stated in Kooee Communications v Primus Telecommunications Pty Ltd [2008] NSWCA 5 at [38] (see para [80] above) is equally applicable in this context as it was in relation to the meaning of the word "company" in Ms J Wu' s employment contract. It is not for the court to rewrite the parties' contract because to do so would give it, according to one party at least, a more commercial operation. The contract makes sense when the expression "billings achieved" is given its ordinary meaning. The fact that there may have been a better way to calculate the reduction in the deferred consideration cannot alter what the parties actually agreed.
The second way in which the claim for breach of express terms of the sale agreement are put relies on cls 7D and 11 by which it is alleged the purchasers agreed to offer to employ the staff of Astims on terms and conditions no less favourable than those current as at the date of the agreement.
I have already dealt with cl 7D. In my opinion, it does not impose an obligation in those terms. One problem with cl 11(2) is that it purports to place an obligation on SWMFS, which was not a party to the contract. In any event, in my opinion, SWMFS complied with that obligation. It offered to employ members of staff on the same terms as they had been employed previously other than changes to their salaries (which in some cases, at least, were increased). The fact that 9 months later, when staff began to leave, SWMFS sought to persuade the remaining staff to sign new employment contracts for fixed terms and which contained restraints does not mean that SWMFS breached cl 11(2).
Claim based on implied terms
In order for a term to be implied in a formal written contract, the term must satisfy the requirements identified by the Privy Council in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 282-3 and approved in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 605-6 and Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347. Those requirements are that the term (1) must be reasonable and equitable; (2) must be necessary to give business efficacy to the contract; (3) must be so obvious that it "goes without saying"; (4) must be capable of clear expression; (5) must not contradict any express term of the contract.
In my opinion, the term contended for by Mr Lloyd and Ms Wu does not meet the second, third or fifth requirements identified by the Privy Council. At the time the sale agreement was entered into, the expectation of the parties must have been that the purchasers would run the business of SWMFS with a view to maximising its income. That, after all, was the purpose of the acquisition. Mr Lloyd's and Ms Wu's right under the sale agreement to receive the deferred consideration was protected by the incentive that the plaintiffs had to maximise the profits of the firm for their own benefit. In those circumstances, I do not see how it could be said that the term contended for was either necessary to give business efficacy to the contract or so obvious that it went without saying. In addition, the term contended for is inconsistent with cl 4(b) of the sale agreement which states that the parties are not bound by "any warranty, representation, collateral agreement or implied term" except to the extent that they cannot be excluded by agreement.
Claims based on representations
The representations pleaded in para 7 of the amended cross-claim are said to have been misleading or deceptive because:
(a) The purchasers had an unofficial plan not to meet Astims' Sydney clients for 3 months after completion;
(b) The purchasers intended to make the Sydney computer terminals dumb terminals;
(c) The purchasers intended to send back to the Cowra practice audit and superannuation work even if that work was not expanding in the Sydney office;
(d) The purchasers did not intend to offer Astims' employees employment on terms and conditions no less favourable to the employees;
(e) The purchasers intended to introduce new software and did not intend to train the Sydney staff properly in the use of that software;
(f) The purchasers did not intend to conduct the Astims' accounting practice in the same manner as it had been conducted prior to the sale.
A similar case is pleaded in negligence.
In my opinion, there is no merit in either of these cases.
It is not clear how the unofficial plan not to approach clients makes any of the alleged representations misleading or deceptive. The matters referred to in para 111(b), (c), (e) and (f) above are presumably intended to be particulars of why the representation pleaded in para 7(a) is misleading. The matter referred to in (f), however, is not a particular at all. The representation pleaded in para 7(a) is expressed in such general terms that it is not entirely clear how it should be interpreted. However, it cannot be taken to have been a representation that, for all time, the purchasers would not make any changes to the internal structure and operation of the firm. Mr Murphy in his email dated 9 April 2007 specifically foreshadowed that the two offices would be linked and that as much work as possible would be sent back to Cowra. There is no evidence that the purchasers had given any real consideration to precisely how that would be done at the time the representations were alleged to have been made, but whatever the representation means I do not think it can be interpreted as a representation that the plaintiffs would not take the steps they thought were appropriate to link the two offices and to send work back to Cowra. Nor do I think the representation can be interpreted as a representation that the purchasers would not at some time in the future introduce new software. It would be remarkable if, at some time in the future they did not. There is no evidence to suggest that the purchasers intended at the time the representation is alleged to have been made not to give the staff adequate training on the new software. Consequently, I do not think that the matters referred to in paras 111(b), (c) and (e) make the representation pleaded in para 7(a) of the cross-claim misleading or deceptive.
As to the representation pleaded in para 7(b), all the employees were offered employment on the same or more attractive terms at the time that the purchasers took over the business (apart from Mr Wu, about whom no complaint is made). It appears that what is alleged is that the representation was misleading because, subsequently, employees (such as Ms J Wu) were offered contracts for fixed periods containing restraints once some employees started to leave. But that does not make a representation about what was intended prior to entry into the sale contract misleading or deceptive. No particulars are given of why the representations pleaded in paras 7(c) and (d) were misleading or deceptive.
In any event, Mr Lloyd and Ms J Wu have not established that they suffered any loss as a consequence of the conduct which is said to have been misleading or deceptive or to have involved negligent misstatements. Mr Lloyd and Ms Wu seek damages on the basis that, by reason of the misleading conduct (or negligent misstatements), clients and staff became dissatisfied and left and, as a result, SWMFS did not bill $1.4 million. However, those events were not the result of the misleading or deceptive (or negligent) conduct. In the way Mr Lloyd and Ms Wu put their case, SWMFS's failure to bill $1.4 million was the result of SWMFS not conducting the business as promised. But put like that the damages they claim amount to treating the representations on which they are said to have relied as contractual promises.
The correct method of assessing Mr Lloyd's and Ms Wu's damages is to consider whether they would have entered into the sale agreement on the terms that they did if the representations had not been made: Marks v GIO Australia Holdings [1998] HCA 69, 196 CLR 494 at [48] per McHugh, Hayne and Callinan JJ. There is no suggestion that they would not have. Mr Murphy discussed the changes that he was proposing to make with Mr Lloyd before making them. Mr Lloyd may not have had any say on whether the changes would be introduced or not, but there is no evidence that when they were raised with him he objected to them or suggested that they were contrary to representations that had been made to him. Ultimately, Mr Lloyd did express dissatisfaction with the changes that had been made to the firm. But even then, Mr Lloyd did not assert that he had been misled. He simply asserted that he did not agree with the changes. It follows that the cross-claim should be dismissed.
Orders
SWMFS is entitled to judgment for a nominal amount against Mr Finlay and Ms J Wu. However, there does not appear to be any utility in giving that judgment; and I will only give judgment in those terms if SWMFS requests me to do so.
Consequently, the orders of the court are:
(1) The proceedings against the first, second and fifth defendants be dismissed.
(2) The first plaintiff have liberty to apply for judgment for a nominal amount against each of the third and fourth defendants.
(3) The cross-claim be dismissed.
I will hear the parties in relation to costs.
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Decision last updated: 31 October 2011
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