FRASER vy LESLEY WILLIAM PICKUP & COLONIAL BUSINESS BROKERS PTY LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MASON P, MEAGHER JA and SMART AJA 11 June 1997, 24 June 1997 [1997] NSWCA 116 SALE OF "BUSINESS" — WHETHER GOODWILL EXISTED — RIGHTS OF RE-SALE The vendor of a lucrative sub-contract courier business comprising a truck and goodwill with an allocated run entered into an agreement for its sale. There was no dispute about the truck but there was about goodwill. Under the agreement between the sub-contractor and the principal there were to be separate delivery contracts for each job. In practice, the principal gave the sub-contractor jobs each week day. The driver of the truck had to be approved by the principal. The sub-contractor provided the truck, kept it in good working order and met all outgoings and overheads. The purchaser knew that upon sale, an existing sub-contractor surrendered his sub-contract and his run and the principal re-allocated the sub-contract and the run to the purchaser, the principal having to approve the purchaser and new driver. Any re-sale required the approval or acquiescence of the principal. HELD: 1. There was a business, goodwill existed and there was no breach of contract by the vendor. Goodwill includes whatever adds value to a business: Box v The Commissioner of Taxation 86 CLR 387 at 396-397 applied; 2. There were no false or misleading representations by the vendor or the business broker; 3. Appeal by purchaser dismissed. Mason P I agree with Smart AJA Meagher JA I agree with Smart AJA. Smart AJA Phillip Nelson Fraser appeals against the judgment of the District Court entering a verdict for the defendant respondents in proceedings brought by him to recover damages for breach of contract and for false and misleading misrepresentations made in trade and commerce against Pickup, the vendor of a carrying business, and for false and misleading representations made in trade and commerce against Colonial Business Brokers Pty Ltd (Colonial) (per Mr Street, its Managing Director), the business broker which negotiated the sale of the business on Pickup's behalf to Fraser. Fraser contends that Pickup had neither a business nor goodwill to sell. The judge said that to a large extent the facts were not in dispute. The judge thought that Fraser was an honest witness who did his best to assist the Court and for the most part accepted the credibility of Fraser's evidence. The judge also accepted the credibility of Pickup and Street. He found that Street gave his evidence with meticulous care, being supported to a significant extent by contemporaneous diary notes. The judge did not think that the case turned on the credibility of witnesses except to the limited extent that his acceptance of 2 UNREPORTED JUDGMENTS Pickup's evidence as to a conversation in October 1990 with Mr T Syrjalainen negated fraud on Pickup's part. The judge was content to base his decision on Fraser's evidence. Fraser had obtained legal advice from Mr Hunter, his solicitor. There was a dispute as to what was said, Fraser suggesting that the advice was fleeting and relatively inconsequential and Hunter contending that it was comprehensive. The judge thought that the truth lay somewhere in between the two versions. Pre-Contract History From 1982 Pickup had had his own truck and was in business as a truck driver, on his own account, collecting and delivering parcels. Prior to April 1990 he was working in that capacity for Stanford Couriers which had a contract with Australian Airlines to perform courier work. Mr Terry Syrjalainen was a fellow employee. In the early months of 1990 Australian Airlines decided to establish its own road courier service and engaged Syrjalainen to set up this business which was to be conducted through a subsidiary, Queensland Airlines Pty Ltd (Queensland). Syrjalainen persuaded Pickup and other owner drivers for Stanford Couriers to join the new enterprise. On 20 April Queensland, by Mr R Daniell, the Fleet Manager (and later National Operations Manager) and a superior of Syrjalainen, wrote to Pickup in these terms: "T am pleased to advise that your application to become a sub-contractor with Queensland Airlines has been approved and we are prepared to offer you work commencing 6am on Monday April 30, 1990. Your terms and conditions will be those laid out in the 'Transport Industry - Courier and Taxi Truck Contract Determination' as published in the NSW Industrial Gazette, Vol 246, 17 December 1987... Since the Determination does not include a rate structure for air freight pickups and deliveries, the following rates will apply (all payments are net to you before tax): All overnight movements per item (pickups or $ 1.40 deliveries, maximum payment 40 items per pickup or delivery Fast Forward movements ex Mascot, per SNR (Sender Numerical Reference) 10 km or less 7.10 over 20 km 20.00 Fast forward movements to Mascot, per SNR 10 km or less 10.50 over 20 km 20.00 Additional weight surcharge to apply to total weight per pickup or delivery: 25 kg or less Nil Thence, per kg 0.06 Additional after hours surcharge for pickups after 12.00 6pm or before 6am Other movements will be paid at the rate set out in the determination..............000 UARASER v LESLEY WILLIAM PICKUP & COLONIAL BUSINESS BROKERS PTY LTB (Smart AJA) 'You are required to supply a white vehicle, less than 3 years old (this requirement may be varied at the discretion of the company). The vehicle must be kept clean and in good repair. Please contact the Fleet Supervisor (Teny Syrjalainen) prior to commencement to arrange fitting of decals and radio. You are required to maintain high standards of personal presentation and conduct while dealing with the company's clients. Please contact the Fleet Supervisor prior to commencement to arrange supply of a uniform. It gives me great pleasure to welcome you as a founder member of our new ground fleet. I look forward to sharing some exciting times with you." The Contract Determination mentioned was made pursuant to the powers contained in s91L and s91N of the Industrial Arbitration Act 1940. S91L(3) provides that subject to this Act, a tribunal established for a class of contracts of carriage may, after inquiry, make a contract determination with respect to the reinstatement of a contract of carriage that has terminated. The effect of this provision was not raised and I do not tarry to consider it. It was accepted that the Contract Determination applied to the relationship between Queensland, a principal contractor, and Pickup, a contract carrier. Pickup was required to pay all statutory costs and fees in respect of the vehicle, keep it in good working order and adequately equipped and fully insure the vehicle and the cargo. He was required to indemnify Queensland against claims arising out of the use of the vehicle or loss of or damage to the cargo. Amongst his other obligations Pickup was required: (1)(a) Subject to agreement between a principal contractor and the contract carrier, where it is the normal practice of contract carriers performing work with the principal contractor, to undertake work as directed by the principal contractor and to carry such goods as the principal contractor shall from time to time specify and between such places as the principal contractor may reasonably require; or (b) Otherwise to be available at all reasonable times to perform contracts of carriage on behalf of, or at the request of, the principal contractor, to observe all reasonable and lawful requests by the principal contractor, and to be of neat and clean appearance. (5)(a) Not to engage or use the services of a driver for his vehicle, other than the approved driver, without the approval of the principal contractor. Such approval may be withdrawn by the principal contractor if the driver commits misconduct or fails to comply with a provisions of this determination appropriate to be complied with by a driver of the vehicle of the contract carrier. (b) Not to engage or allow any person to drive his vehicle other than the approved driver when he is working with the principal contractor. PROVIDED THAT, in circumstances where the approved driver is unable to work for a reason other than agreed periods in accordance with para(a) of subcl(1) of cl3 of the Determination, and where the contract carrier elects not to cease work with the principal contractor, it will be the responsibility of the contract carrier to arrange wherever reasonably practical for the services of a substitute driver to operate his vehicle for a period not to exceed 3 months from the date of the approved driver becoming unable to work. Beyond such 3 months' period, the principal contractor may terminate any agreement with the contract carrier for the performance of any contract(s) of carriage. 13 To carry out any reasonable and lawful requests of the principal contractor made in order to observe the requirements of customers as to the order in which contracts of carriage are performed. 4 UNREPORTED JUDGMENTS 14 To inform the principal contractor immediately, or at the earliest possible opportunity, if he is unable to effect pick-up or delivery of goods to be carried pursuant to a contract of carriage agreed to be performed by him. 16 To observe the necessity for civility to customers. The contract determination imposes significant obligations on Queensland. I will not rehearse these, perhaps the most important being the remuneration provisions. C110(1) provides that an engagement between a principal contractor and a contract carrier in relation to the performance of a contract of carriage does not commit either to enter into further contracts of carriage. C110(2) provides that the principal contractor shall in the offering of permanent runs to contract carriers take into account the principles of seniority, vehicle type and capacity and, where relevant, reliability and physical ability, compatibility with existing permanent runs and any agreed local rules, instructions and conditions. C112(3) - Cl12(5) provide: 3. All contracts of carriage performed by a contract carrier with a principal contractor shall (in the absence of an agreement to the contrary), be treated as individual contracts of carriage irrespective of whether they are performed concurrently or consecutively. For the purposes of para(a) of subcl(1) of cl11 hereof, the contract carrier shall be entitled to remuneration for each contract of carriage satisfactorily performed. 4. The relationship between a contract carrier and a principal contractor shall be that of independent contractors and not master and servant. 5. No contract carrier shall be engaged to perform work who does not supply a vehicle approved by the principal contractor or who, personally is not approved by the principal contractor. The Contract Determination envisages that a company may be the contract carrier. In such a case the principal contractor has to approve the driver before he can drive the truck on a regular basis. Because of the type and capacity of his vehicle Pickup was allocated a particular run generally covering the western suburbs of Sydney. There were obvious advantages in having a carrier doing the same run. He would be able to establish a relationship with the customers and become familiar with their needs and problems and so better able to serve them. Pickup's run proved to be profitable, with a gross income of the order of $2800 per week. Queensland contracted in similar terms with other truck drivers but with one exception, the runs allocated to them were not as remunerative as the tun allocated to Pickup. About October 1990 Pickup said to Syrjalainen "I want to move to Brisbane. Can I sell my truck with work" to which Syrjalainen replied "Funny you mention that. Rhys (Daniell) and I have been to DHL and the subject was mentioned. Their Operations Manager replied that legally the sale couldn't be stopped if the person was acceptable." Pickup said "Does that mean I can sell or not?'', to which Syrjalainen responded in the affirmative. Syrjalainen agreed that a conversation had taken place but insisted that he had told Pickup that he could only sell his truck and that he could not sell "it" as a going concern as the work did not belong to him. About a week or so later there was a further conversation in which Pickup had mentioned that someone had valued the truck and the run and a figure which Syrjalainen could not recall. He claimed that he had reiterated to Pickup that he could not sell the truck with work as he owned only the truck. Syrjalianen thought that the work had been valued at about $50,000. UARASER v LESLEY WILLIAM PICKUP & COLONIAL BUSINESS BROKERS PTY LTB (Smart AJA) The judge preferred the evidence of Pickup on the point and found that he was told by Syrjalainen that the run was available for Pickup to sell. Shortly after the conversation in which Pickup was told that he could sell the run, Pickup contacted Colonial and asked Street to sell the business. They met and Pickup supplied details of his business and truck. On 5 November 1990 Pickup and Street signed a document on the letterhead of Colonial headed "Sales Inspection Report and Agency Agreement For Sale of Business." It was stated that the business had been inspected and was estimated to be worth $70,000 to $75,000 SAV and that it was an opinion and not a valuation. Colonial was authorised to sell the business for $75,000. By letter of 9 November 1990 Colonial forwarded to Pickup a copy of the profile of his business and asked him to let him know if he disagreed as it was most important to present the right facts. The profile was in these terms: Nature of Business: Hours: The Market: Vehicle: Financial Analysis: Average weekly earnings Less Operating Expenses Fuel Rego and insurance Repairs & Maint. Average Operating Expenses AVERAGE WEEKLY EARNINGS Note: Total Investment: Delivery Run The vendor operates the business 5 days per week Monday to Friday for approximately 12 and a half hours per day This business consists of metropolitan courier work of light airfreight goods for a domestic airline. The vendor does all local runs which are mainly set calls. Uniforms are supplied and the truck is sign-written by the airline. The purchaser would have to be introduced to, and approved by, the airline. Most of the runs are made up of regular pickups and deliveries. The truck averages about 800 kms per week and no offsider is required. The truck is a well maintained 1978 model 6 ton pantech. $2,800 70 410 $2,390 These costs and sales are best estimates and are presented as an indicative guide only. While the vendor has been doing this run for the last 3 years, it is only since April 1990 that he has been directly contracting with the airline. As a result, the income side is best verified from airline invoices and monthly PPS Tax forms, and the expenditure can be verified directly against previous tax returns. $75,000 6 UNREPORTED JUDGMENTS Disclaimer: This document has been compiled entirely from information supplied by the Vendor and the opinions expressed are those of the Vendor. The information supplied in this report is provided on 5 the basis that the writer does not warrant the accuracy of any of the information supplied, and the writer expressly disclaims any liability to any person, firm or company in respect of anything and of the consequences of anything done by any person, firm or company in reliance on any of the 10 information provided in this report. Neither Colonial Business Brokers, nor it's directors, nor employees shall be held responsible for any statement, opinion, misstatement or error or omission herein. 15 On 10 November 1990 and possibly on other occasions Colonial advertised Pickup's business for sale thus: "DELIVERY RUN NET $2,400 PW 20 Rare opportunity to purchase highly profitable truck and run. Truck included, 5 days only $75,000." In mid November 1990 Fraser spoke to Street about another business and in 25 the course of that conversation Street mentioned that Pickup's business was for sale, that the gross weekly takings were about $2,800, with the net weekly return between $2,300 and $2,400 and that the asking price was $75,000. Fraser met Street in his office towards the end of November 1990. Street gave Fraser a copy of the profile, said that it involved a large airline and described the nature of the 30 run, the hours of work involved etc. Fraser said that he told Street that he was not impressed with the hours but that the weekly return attracted him. Fraser claimed that he then said: "If it's really earning that money, I could do it for a while and sell it" to which Street replied "I would not advise thinking about selling 35 straightaway, but in a couple of years there'd be nothing to stop you from selling it." Fraser and Pickup met with Street in his office the next day. Fraser said that they discussed the details of the operations, the method of calculating the charges, the exigencies of a typical day and that he made a brief inspection of the truck. A date was selected for a trial run. On that day, Fraser spent between Sam 40 and 10am in the truck, during which he said to Pickup "TI could do it for a while to help me get out of financial difficulties," and Pickup replied that Fraser may be able to sell it in a couple of years for a capital gain. Pickup brought Fraser into Queensland's premises and introduced him to Syrjalainen. The three men had a discussion and Syrjalainen, subject to security 45 checks proving satisfactory, had no hesitation in allowing Pickup to sell his truck to Fraser who met all the company's requirements. The drivers had to be intelligent, present themselves well, have a nice personality, talk correctly and be able to solve the client's problems or help them to do so. At Syrjalainen's suggestion Fraser accompanied Pickup on the run again. 50 Pickup asked Fraser whether he was interested as a few people had rung up. Fraser stated that he was but that he was not sure that he liked the hours. He asked UARASER v LESLEY WILLIAM PICKUP & COLONIAL BUSINESS BROKERS PTY LTD (Smart AJA) if he could employ a substitute driver. Pickup replied that Fraser would have to do the driving for a period, and, if Syrjalainen agreed, probably Fraser could. Fraser said "Anyway, I could just do it for a couple of years." Pickup allegedly replied "Well you could sell it off after a couple of years if you wished." Fraser said "Well I am certainly not interested in it unless I could do that." It is a wonder that Fraser never spoke directly to Syrjalainen about that matter. Fraser spoke to Street again and after some negotiations a total price of $73,000 was agreed with a 10% deposit to be paid forthwith and the balance to be paid on completion. Street was to prepare a contract. Fraser said that neither Street nor Pickup told him that he would be unable to sell the business at a later time and that if he had been told this he would not have proceeded. The Contract About 20 December 1990 Pickup and Fraser entered into an agreement in the standard form by which Pickup agreed to sell and Fraser to purchase "The Business" which was described thus: "(a) Type of Business: Carrier (b) Located at: Sydney Domestic Airport... (c) Known as: Les Pickup." The price was stated to be $73,000 to be apportioned as to $53,000 for goodwill and $20,000 for plant, fittings & chattel. This item of $20,000 referred to the truck. By virtue of cl14 and Particular P, Pickup promised not to directly or indirectly and whether solely or jointly with or as director, manager, agent or servant of any person or corporation carry on or be engaged or interested in, any business of the nature of that sold, or any significant component thereof, or permit his names to be used in connection with any such business within the area of 10 kilometres for 2 years. The area specified is open to debate either as too vague to be enforceable or as being within a radius of 10 kilometres from Sydney Domestic Airport. If the condition meant no more than that Pickup could not make deliveries to or from Sydney Domestic Airport for 2 years such a condition would be significant and practically effective. Pickup promised not to derogate from Fraser's right to obtain the full benefit of the goodwill of the business. Condition | provided that the business included the goodwill and all plant fittings and chattels used in connection with it and was sold free from encumbrances charges and liens. Condition 17 provided that at the date of completion all goodwill, plant, fittings, chattels, agreed to be sold were the sole and unencumbered property of the vendor and no other person had any claim adverse to the vendor. Condition 20 provided that the purchaser acknowledged that, in entering into the agreement he had not relied upon any statement, representation, warranty or condition made or given by the vendor or anyone on his behalf in respect of the subject matter of the agreement, other than those expressly contained in the agreement. On 20 November 1990 Queensland (per Syrjalainen) issued a letter confirming that Pickup was employed on a permanent basis as a sub-contractor and that his average weekly gross earning was $2800-$3000. By an undated letter issued subsequently, Queensland confirmed that an application by Fraser for a position as a subcontract driver to Queensland had been approved. Queensland recorded that Fraser was considering purchasing a truck from one of the company's sub-contractors who was currently averaging $2800 with his vehicle's run and that this income was based on the current rates of pay which Queensland envisaged being held firm for some time to come. 8 UNREPORTED JUDGMENTS On 21 January 1991 Westpac issued a letter to Fraser confirming that the bank had approved a term loan of $73,000 to assist with the purchase of a subcontract business. Fraser accepted the loan on 23 January 1991, the day on which completion of the purchase took place. No written agreement was entered into between Fraser and Queensland nor did it issue a formal letter of appointment. Post Completion History Fraser operated the run formerly serviced by Pickup from completion onwards. Apparently, there was some talk amongst the sub-contractors and Syrjalainen became aware of the approximate sum which Fraser had paid for the run. In May 1991 Syrjalainen called Fraser into his office and told him that Rhys (Daniell) was very upset about what Fraser had paid Pickup for the business as they had no idea that he had paid that sort of money. Syrjalainen continued that he had understood that Pickup, being desirous of moving to Queensland, was merely arranging for a friend to continue to drive a truck in his place. Syrjalainien confirmed that Fraser could not sell the business and suggested that Fraser should seek legal advice. Fraser continued to drive the truck and to derive a substantial income. Early in 1993 Fraser arranged for Queensland to accept Phiwen Pty Ltd as the party contracting with Queensland in lieu of Fraser. Fraser and his wife were shareholders in Phiwen. Item 12 of Fraser's income tax return for the year ended 30 June 1991 shows an amount inserted against "net income from business". The statement of income and expenditure included is his 1992 tax return is that of a business and he was able to set off against a substantial income from Queensland a large loss ($59,488) on disposal of a non-current asset. In his 1993 tax return Fraser described his main business activity as courier service. The accounts of Phiwen for 1993 and 1994 each show an item of $92,443 for goodwill. Fraser explained this as a device advised by his accountant. The judge thought that the plaintiff had received a sufficient sum from Phiwen to negate any loss. A study of the accounts reveals that the run was very profitable. Fraser used the substantial income from the carrying business to absorb losses incurred apparently elsewhere and reduce his income and then by the transfer to the company put himself in a position where he could effectively split the income of the carrying business with his wife. Phiwen, through Fraser, continued to perform sub-contract services for Queensland until October 1994. On 1 July 1993 Fraser at the behest of Australian Air Express Pty Ltd (formerly Queensland) entered into an agreement for 2 years to provide sub-contracting services. It forbad the inclusion of goodwill in the sale price upon sale of the vehicle. The judge held that Pickup had rights which could be characterised as goodwill quite distinct from the rights flowing to him under his agreement with Queensland and that those other rights were capable of sale by whatever name they were designated. The judge recognised that the value of the rights which Mr Pickup had to sell depended upon the attitude of Queensland. The plaintiff was aware of this from his conversation with Syrjalainien when he was approved as Pickup's replacement. The Contentions Fraser submitted that Pickup did not have a business. This is incorrect. Generally from Mondays to Fridays Pickup kept himself available and as asked by Queensland, attended at the premises of nominated clients, collected parcels UARASER v LESLEY WILLIAM PICKUP & COLONIAL BUSINESS BROKERS PTY LTB (Smart AJA) and delivered them to the company's Mascot air cargo depot. He attended to the client's needs and problems and, as required, enhanced Queensland's interests by the quality of his service as he was bound to do. He was paid agreed sums for each contract. Pickup provided the truck, maintained it in good working order, met the running expenses and the insurance premiums. His relationship with Queensland was not that of master and servant. Fraser also submitted that Pickup had no goodwill. This submission is incorrect. Pickup was operating a profitable run and had a relationship with Queensland and Queensland's customers on that run. As at October - December 1990 there was no suggestion that Queensland intended to interfere with his run or to re-allocate the runs. Pickup's truck was particularly suited to the run which he was servicing. It was Pickup's desire to withdraw from the run that effectively made that run available and he prevailed upon Queensland to consider Fraser who was accepted. No-one else was considered for that run. In the joint judgment of Dixon CJ, Williams, Fullagar and Kitto JJ in Box v The Commissioner of Taxation 86 CLR 387 at 396-397 reference was made to the remarks of Lord Lindley in IRC v Muller and Co's Margarine Ltd 1901 AC 217 at 235 that "goodwill regarded as property has no meaning except in connection with some trade, business or calling" and that in that connection "it included whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers and agreed absence from competition or any of these things and there may be others..." Their Honours pointed out at 397 that a sum of money had been paid as consideration for the vendor entering into a covenant not to compete with the purchaser in the business which he had previously been carrying on. Their Honours continued at 397: "Tt was paid to protect and enhance the value of that business so that the purchaser would be able to carry it on in the future in the same profitable manner as the vendor had previously carried it on without the risk of the vendor commencing or becoming engaged in a competing business. Goodwill includes whatever adds value to a business, and different businesses derive their value from different considerations." Their Honours said that some goodwills are purely personal. They gave instances of other goodwills. There was goodwill attached to Pickup's business. That goodwill included his relationship to Queensland and its customers which facilitated his introduction of Fraser to Queensland and the latter being able to take over the profitable run serviced by Pickup subject to Queensland's approval and, as it transpired, without difficulty. This enabled Fraser to earn substantial sums of money. There was also the covenant against competition although this may not have been of great value. Fraser contended that it was an implied term and condition that he would be able to sell the business and the goodwill. The implication allegedly arose out of the terms of the agreement providing for the sale of the business including goodwill and all plant, chattels etc and the condition that all goodwill, chattels etc were the sole and unencumbered property of Pickup and that no other person had any claim adverse to Pickup. There is no express term to this effect and an implied term is not needed to give the agreement business efficacy. The agreement dealt with the sale of the business including goodwill from Pickup to Fraser. It did not purport to deal with the rights of resale. Fraser was aware prior to entering into the agreement that any 10 UNREPORTED JUDGMENTS purchaser had to be approved by Queensland and that it had to allocate the run to the purchaser previously held by the vendor. Fraser was also aware that there was not an assignment but a giving up and a re-grant of the run as might be approved by Queensland. It could re-allocate runs subject to the terms of the Contract Determination. Fraser also relied upon express warranties or representations. The judge dealt with the matter in this way: "Tn so far as he relies upon express warranties or representations as to his right to resell the business, in my opinion it is plain upon his own evidence that such statements as were made to him in that connection were qualified expressly or by necessary implication to the effect that any resale would require the acquiescence of Queensland. That being so, the fact that Queensland saw fit to tell him in advance of any proposed re-sale, that in effect no re-sale would be approved, could not cause him any loss. Somewhat curiously in any event, the Plaintiff seems to have accepted the dictum for Mr Syrjalainen without seeking to negotiate an alternative solution and notwithstanding that, Queensland later approved the transfer of the contract to the company, Phiwen Pty Ltd, the shares of which presumably could have been sold at any time without the involvement of Queensland." That was a satisfactory way to deal with the matter given that the plaintiff was aware that any sale (which would include a re-sale) required the acquiescence of Queensland and the giving up of the run and its re-grant by Queensland to an approved purchaser. These reasons also dispose of Fraser's case against Colonial. The appeal should be dismissed with costs. Counsel for the appellant: R J Weber Solicitors for the appellant: Rosenblum & Partners Counsel for the first respondent: D Ronzani Solicitors for the first respondent: Parish Patience Counsel for the second respondent: L G Foster, R Sheldon Solicitors for the second respondent: Murray Stewart & Fogarty