New South Wales Supreme Court CITATION : Town & Country Property Management Services Pty Ltd & Anor v Kaltoum & Ors [2002] NSWSC 166 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 3625/99 HEARING DATE(S) : 29/10/01-2/11/01, 7/11/01, 17/12/01-18/12/01 JUDGMENT DATE : 26 March 2002 Town & Country Property Management Services Pty Ltd (1st plaintiff) PFD Asset & Property Management Pty Ltd (2nd plaintiff) PARTIES : Elie Kaltoum (1st defendant) Sandy-Real Estate Pty Ltd T/as Town & Country Real Estate Merrylands (2nd defendant) MKR Holdings Pty Ltd (3rd defendant) Matthew Karl Francis Robinson (4th defendant) JUDGMENT OF : Campbell J S Reuben (plaintiffs) COUNSEL : R Bartley, solicitor (1st and 2nd defendants) D Allen (3rd and 4th defendants) Lincoln Smith & Company (plaintiffs) SOLICITORS : Sid Hawach (1st and 2nd defendants) Philip Parbury & Associates (3rd and 4th defendants) CATCHWORDS : CONTRACTS - whether restrictive covenant varied - whether restrictive covenant breached - no questions of principle decided - ESTOPPEL - whether estoppel from enforcing restrictive covenant - no question of principle decided - CONTRACT - remedies for beach - whether an account of profits an available remedy - EQUITY - equitable remedies - availability of account of profits as remedy when breach of contract established. - PROCEDURE - pleading - need to plead basis for remedy of account of profits - TRADE PRACTICES AND RELATED MATTERS - consumer protection - whether representations made, or relied on, or caused loss - no question of principle decided - LANDLORD AND TENANT - termination of the tenancy - whether landlord entitled to terminate tenancy - no question of principle decided - CORPORATIONS - constitution and legal capacity - when execution of document on behalf of corporation binds the corporation - no question of principle decided LEGISLATION CITED : Conveyancing Act 1919 Restraints of Trade Act 1976 Watson v Foxman (1995) 49 NSWLR 315 Walden Properties Ltd v Beaver Properties Pty Ltd [1973] 2 NSWLR 815 Deta Nominees Pty Ltd v Viscount Plastic Produces Pty Ltd [1979] VR 167 Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 CASES CITED : Attorney-General v Blake [2000] UKHL 45; [2001] AC 268 ICT Pty Ltd v Sea Containers Ltd (1995) 39 NSWLR 640 Huntsman Chemical Company Australia Ltd v International Pools Australia Ltd (1995) 36 NSWLR 242 AG Spalding Bros v AW Gamage Ltd [1914-15] All ER Rep 147 Colbeam Palmer Ltd v Stock Affilliates Pty Ltd (1968) 122 CLR 25 DECISION : See paragraph 215 - 88 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST CAMPBELL J 26 March 2002 3625/99 TOWN AND COUNTRY PROPERTY MANAGEMENT SERVICES PTY LTD & ANOR v ELIE KALTOUM & ORS JUDGMENT HIS HONOUR: Background To The Dispute 1 Elite Pty Ltd ("Elite") is a company which, prior to August 1997, was controlled by Mr Elie Kaltoum. It once operated a real estate business in Parramatta. One part of that business involved managing, for landlords, leased residential property. 2 In August 1997, Elite agreed to sell an undivided ninety percent share of its business to Town & Country Property Management Services Pty Ltd (T&CPMS). T&CPMS was at that time, a company controlled by Mr Matt Robinson. The agreement for sale of the ninety percent share in the business required Mr Kaltoum to become an employee of T&CPMS. Another term imposed on Mr Kaltoum a restrictive covenant, which (broadly) prohibited him from competing, within ten-kilometres from the place of business of Elite, for a period of two years after the time his employment ended. 3 Mr Kaltoum's employment with Elite ended in September 1998. Soon after, he had some discussions with Mr Robinson about the possibility of opening a real estate office at Merrylands. This was because Mr Robinson also operated a business of franchising real estate offices under the "Town & Country" name, and Mr Kaltoum was interested in becoming a franchisee. Mr Kaltoum prepared and sent to Mr Robinson a document which Mr Robinson signed, affixed the company seal of T&CPMS to, and returned to Mr Kaltoum. Mr Kaltoum relies upon that document, and the conversations he had with Mr Robinson, as releasing him from his obligations under the restrictive covenant. 4 Mr Kaltoum formed a new company, Sandy-Real Estate Pty Ltd, which began trading as Town & Country Real Estate Merrylands before the end of 1998. It is common ground that the Merrylands office of that company was within ten-kilometres of the office which Elite had occupied at the time Mr Kaltoum entered into the restrictive covenant. 5 Mr Edward Lee controls PFD Asset & Property Management Pty Ltd (PFD). Through agreements made in November and December 1998, PFD came to own all the shares in T&CPMS. By that time the only activity which T&CPMS carried on, was the management of the Parramatta rent roll. It carried on that business at 255 Church Street Parramatta. The shares in T&CPMS were owned by MKR Holdings Pty Limited ("MKR"), another company controlled by Mr Robinson. PFD alleges that MKR and Mr Robinson made misrepresentations to it about the number of the properties under management, the quality of the business, and the existence of a valid and enforceable covenant with Mr Kaltoum. PFD seeks relief concerning those alleged misrepresentations. 6 Further, the agreement under which PFD acquired the business imposed a restrictive covenant on MKR. PFD alleges that MKR breached that covenant, causing PFD loss. 7 To enable PFD to carry on the rent roll business, MKR sub-leased to PFD the first floor of the premises at 255 Church Street Parramatta. On 12 August 1999 MKR terminated that sub-lease, alleging that PFD had breached the sub-lease in a way which entitled MKR to terminate it. PFD denies that MKR was entitled to terminate the sub-lease. It seeks damages for the breach of contract it says was constituted by the termination. The damages sought are not only compensatory damages but also exemplary damages. 8 The hearing has been a separate trial of: (a) All questions of liability in the proceedings; and (b) Any question relating to whether exemplary damages ought be paid to PFD, but not including the quantum of such exemplary damages. PART A – CLAIM OF PLAINTIFFS AGAINST MR KALTOUM AND HIS NEW COMPANY The Agreement of 26 August 1997 9 The agreement whereby Elite sold an undivided ninety percent share of its business to T&CPMS was made on 26 August 1997. The items sold by that agreement were the "Business Assets". These were defined In this judgment I shall use footnotes to identify some of the evidentiary basis for factual findings. The footnotes are not intended to be an exhaustive statement of the evidentiary basis for the factual findings. The reasoning process can be followed even if the footnotes are ignored. Clause 1.1 as "an undivided 90/100th share in the real estate and property management carried on by the vendor at shop 5/1 Palmer Street Parramatta, including the rent roll, real estate listings and interest of the vendor in commissions earnt on real estate sales made after the completion.". Thus the business, an interest in which was sold, included both acting as a real estate agent for the sale of property, and acting as a real estate agent for the management of leased property. The agreement made provision Clause 7 for the procedure to be followed to make current contracts for the management of property available to the buyer, and also procedures to make current contracts for acting as an agent for the sale of real estate available to the buyer. 10 Mr Kaltoum, who was referred to as "the Covenantor", was also a party to the agreement. The agreement made provision Clause 13.1.1 for Mr Kaltoum to become an employee of T&CPMS. Mr Kaltoum also agreed as follows: "13.3 Restrictions 13.3.1 the Covenantor upon retiring or having his employment terminated will not 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 the business hereby sold, or any significant component thereof, to [sic] prevent his name to be used in connection with any such business (a) within the area of ten (10) kilometres from the current place of business of the Seller; (b) for a period of two (2) years. 13.3.2 Except to the extent as otherwise agreed the Covenantor shall not after completion of this Agreement during the periods referred to in Clause 13.1.1(b) hereof engage in conduct derogating from the Buyer's right to obtain the full benefit of the Goodwill of the Business hereby sold. 13.3.3 The area and period referred to in Clause 13.1.1 hereof are acknowledged by the Seller and the covenantor to be no greater than reasonably required to protect the Goodwill sold to the Buyer." 11 The agreement also contained a term: "18.5.1 A variation of any term of this Agreement must be in writing and signed by the parties." No Significance, for the Restrictive Covenant, in the Change of Premises 12 After Mr Kaltoum started working for T&CPMS, it continued to operate from premises at 5/1 Palmer Street for about three months. Then the lease of those premises was terminated, and the business operated from 255 Church Street Parramatta T 187-188. The business was still operating from 255 Church Street Parramatta when Mr Lee's interests took it over. In the course of opening the case, counsel for the plaintiff asserted that the fact that the covenant related to Palmer Street premises, but the business was actually carried on at Church Street did not matter, as the premises were sufficiently close to each other for the difference not to matter T 5.45-.55. That statement was never challenged, and the case was conducted on the basis that that statement was correct. Mr Kaltoum's Duties while an Employee 13 During the time that Mr Kaltoum was working as an employee for T&CPMS it was part of his duties to look after the management of properties that were on the rent roll, to contact landlords, and to ensure rent was paid on time by the tenants. T 190 Not all the properties which T&CPMS managed were his responsibility however – he estimates that about 150 of the approximately 400 properties which were under management as at September 1998 were his responsibility T 195. Termination of Mr Kaltoum's Employment – Mr Kaltoum Looks for a Location for Another Business 14 On 28 September 1998 Mr Kaltoum's employment was terminated T 12.35-.45, T 18.14-.16. It is common ground between the parties that, as a matter of construction, the restraint imposed by clause 13.3.1 would operate for a period of two years from the date of cessation of employment T 12.33-.40, T 18.51-T 19.2. 15 Mr Robinson at this time conducted a number of businesses connected with real estate. One of those businesses involved the franchising, under the "Town & Country" name, of real estate offices. Mr Kaltoum, or Elite, had operated as such a franchisee before 26 August 1997 T 203-204. When Mr Kaltoum's employment with T&CPMS came to an end, it was by retrenchment, without any notice T 198. Mr Kaltoum, given the choice between working out a period of notice and leaving immediately, chose to leave immediately T 199. On that day, Mr Kaltoum told Mr Robinson that he would like to open his own real estate office. Mr Robinson said he did not want to lose Mr Kaltoum as a franchisee T 203. Mr Kaltoum promptly set about looking for premises. One of the places he looked was Blacktown, which he says is outside the 10-kilometre radius. T 204-205 16 In early October 1998 Mr Kaltoum had a conversation with Mr Robinson where he enquired about the possibility of opening an office in Blacktown, Pendle Hill, Toongabbie or Bankstown. Mr Robinson suggested to him that he should open in Merrylands. Merrylands is within the 10 kilometre radius referred to in the restrictive covenant, T 3.38-.45, & 5.10-.12 and Mr Kaltoum was aware that the restrictive covenant he had entered would prevent him from operating there T 205. Thus he enquired whether Mr Robinson would let him open in Merrylands, and received an affirmative answer. 17 Mr Kaltoum's account, in his evidence in chief, of his early October 1998 conversation with Mr Robinson ends there Kaltoum affidavit 19 November 1999 para 3. Mr Kaltoum Starts the Merrylands Business 18 After that conversation with Mr Robinson, Mr Kaltoum inspected some premises at 3/254 Pitt Street Merrylands, and on 7 October 1998 paid a deposit in relation to a lease of the premises. In mid October 1998 Mr Troy Cortis, who was the Franchise Manager of Town & Country Real Estate (Franchising) Pty Ltd went with Mr Robinson to inspect those premises. On 20 October 1998 Mr Cortis signed two letters, each on the letterhead of Town & Country Real Estate (Franchising) Pty Ltd, and each addressed to the Fair Trading Department. The body of one letter said: "Town & Country Real Estate (Franchising) Pty Ltd ACN 057 3837 564 [sic] confirms that a franchising agreement has been entered into with: - SANDY REAL ESTATE PTY LTD ACN 084 635 512 OF Shop 3/254 Pitt Street, MERRYLANDS Who will operate in Merrylands as: TOWN & COUNTRY REAL ESTATE MERRYLANDS" 19 The second letter was marked for the attention of "licensing" and said: "Please be advised that Mr Elie and Mrs Mona Kaltoum of 37 Rowley Road GUILDFORD telephone 9632 6315 or mobile 0413764648. Would like to apply for a corporation license for the following: SANDY REAL ESTATE PTY LTD ACN 084 635 512 TRADING AS: TOWN & COUNTRY REAL ESTATE MERRYLANDS 3/254 Pitt Street MERRYLANDS If you require further information please do not hesitate to contact our office." Mr Cortis sent each of those letters to Mr Kaltoum. 20 Mr Kaltoum's evidence in chief continues as follows: "A few days after Mr Cortis and I inspected the shop at Merrylands I had a telephone conversation with Mr Robinson which included words to the following effect: I said: "I found a shop at Merrylands. Troy Cortis came and had a look at it. He approved of the position and exposure. I would like to get a release from the restriction clause." He said: "Prepare what you want and fax it to me and I will look into it." On about 22 October 1998, I prepared a letter dated 22 October, 1998 and sent it to Mr Robinson by facsimile transmission. Shortly afterwards, I went to see him at his office at Level 6, 34 Hunter Street, Sydney and we had a conversation which included words to the following effect: I said: "I met Troy Cortis at the shop at Merrylands and he is happy with the location. I would like to finalise the financial side of the contract. I need money to start a new shop." He said: "I am still in a difficult financial situation. Can you wait? I am expecting some money soon. I am in the process of negotiating a sale of the franchise company. I am going to a meeting with the head of another franchise company in that regard shortly. I need you to sign a franchise agreement for 5 years and I will work out what I owe you. I'll pay you soon. You should take out a business loan to open a new office." Mr Robinson then signed the letter dated 22 October, 1998 I had sent to him by facsimile transmission and handed it to me. Annexed and marked "C" is a true copy of the said letter handed to me by Mr Robinson." Affidavit Kaltoum 19 November 1999; T 177.40-.53 21 The letter which was annexure "C" to Mr Kaltoum's affidavit is as follows: "22 October, 1998 Elite Real Estate Pty Ltd & Elie Kaltoum 37 Rowley Road GUILDFORD NSW 2161 Attention: Elie Kaltoum RE: OPERATING A REAL ESTATE OFFICE We refer to the sale of Business agreement made on the 26 August 1997 between Elite Real Estate Pty Ltd – ACN 069 786 223 (the seller) and Town & Country property management Services Pty Ltd – ACN 054 512 775 of level 6, 34 Hunter Street Sydney in the state of New South Wales (the buyer) and Elie Kaltoum (the Covenantor.) We refer in particular to Clause 13.3 and declare that, I Matt Robinson Director of Town & Country property management services Pty Ltd – ACN 054 512 775 here by release and forever INDEMNIFY Elite Real Estate Pty Ltd and Elie Kaltoum from anything arising out of this subject close [clause]. Therefor I Matt Robinson Director of Town & Country property management services Pty Ltd here by grant Elie Kaltoum Director of Sandy Real Estate Pty Ltd – ACN 084 635 512 the permission to operate a real estate office in Merrylands. Yours faithfully [signature of Mr Robinson] [common seal of T&CPMS] THE COMMON SEAL OF TOWN & COUNTRY PROPERTY MANAGEMENT SERVICES PTY LTD WAS HEREUNTO AFFIXED BY AUTHORITY OF THE BOARD OF DIRECTORS IN THE PRESENCE OF MATT ROBINSON DIRECTOR OF TOWN & COUNTRY PROPERTY MANAGEMENT SERVICES." I will refer to that document as the "Release Document". 22 The executed original of the Release Document was tendered in evidence Exhibit F. It bears at the top a facsimile transmission note that records it as having been sent on Thursday 22 October 1998 at 12:31. 23 On 2 November 1998 Sandy Real Estate Pty Ltd registered the name "Town & Country Real Estate Merrylands" as a business name with the Department of Fair Trading. At some time in November 1998 Sandy-Real Estate Pty Ltd entered into a lease of the premises at 3/254 Pitt Street Merrylands for a term of one year commencing on 16 November 1998, with an option to renew for a further period of three years Exhibit A document 4. The lease both permitted, and required, the premises to be used as a "real estate agent" Lease clause 6.1, Schedule item 16. During the week ended 9 December 1998 an employee worked in the business, from the week ended 24 December 1998 the business had at least one employee working in it on a regular basis. It appears that no formal franchise agreement was ever entered into relating to the use of the "Town & Country" name at the Merrylands business T 234. Town & Country Real Estate (Franchising) Pty Ltd did not charge any franchising fee to the Merrylands operation prior to March 1999. For the month of March 1999, an invoice for $450 was rendered by Town & Country Real Estate (Franchising) Pty Ltd, and for the three months thereafter invoices were rendered at the rate of $600 per month. Mr Lee's Interests Acquire T&CPMS – How the Kaltoum Restrictive Covenant was Treated in that Acquisition 24 On 11 December 1998, interests associated with Mr Lee acquired the shares in T&CPMS. The acquisition took place pursuant to two agreements. The first was a document entitled, "Agreement for Sale of Shares and Business" made on 3 November 1998. That document made provision for the sale by MKR Holdings Pty Ltd, ("the Vendor") to Portfolio Data Pty Ltd, ("the Purchaser") or its nominee Clause 2.2 of the whole of the issued capital of T&CPMS, ("the Company"). The agreement stated that the Company carried on business of the management of a rent roll, which formerly operated from Town & Country Real Estate office at Kings Cross ("the Kings Cross Rent Roll"), and also the management of a rent roll carried on from the Town & Country Real Estate office at 255 Church Street Parramatta ("the Parramatta Rent Roll") Clause 3. It made provision for the Kings Cross Rent Roll being sold to another person Clause 4, for the Parramatta rent roll to remain with the Company, and for there to be a due diligence enquiry by the Purchaser, with provision for adjustment of the purchase price, depending on the results of that due diligence. Clause 14D.2 said: "The Vendor and Robinson shall if called upon by Lee and the Company (and indemnified by them) commence (or join in) any proceedings to stop any person (including but not limited to Elie Kaltoum and Elite Pty Ltd) causing solicitors or requesting landlords to remove their properties from the Parramatta Rent Roll. This obligation shall not merge upon completion." 25 Before the Agreement of 3 November 1998 was entered into, Mr Robinson had told Mr Lee that Mr Kaltoum had entered into a restrictive covenant with T&CPMS T 257.5-.13. However the precise terms of the restriction were not made known to Mr Lee, or any of his advisors, until nearly a fortnight after the transaction settled. On 12 November 1998, while the due diligence was in progress, Comasters (the solicitors who acted for Mr Lee and Portfolio Data Pty Ltd concerning the purchase) wrote to Mr Morrissey (the solicitor acting for the vendor and Mr Robinson's interests) making various enquiries about the business, including: "We understand that Elie Khatoum [sic] has entered into a restriction of competition agreement with Town & Country Australia. May we please have a copy of the relevant clause(s)." Exhibit A document 28 26 Mr Morrissey replied on 16 November 1998 saying, in relation to that item, "We will provide you with a copy of the relevant clauses of the Agreement within 24 hours." However, he did not do so. 27 On 16 November 1998 Mr Morrissey drew up a document he called an "Activity Report". It was a solicitor's checklist of tasks which needed to be performed to enable the transaction to settle. It took the form of a table which listed tasks, and made provision for stating, in relation to each task, who was to take what action, and by when. This "Activity Report" was made available both to Mr Morrissey's clients, and to Mr Lee and those acting for him. It was updated periodically as settlement of the transaction approached, and each updated version was made available to Mr Lee and his advisors. Throughout all versions of it, the Activity Report included an item "Agreement with Elite and Kaltoum", but at no time was any specific action recorded alongside that item as needing to be done. 28 On 26 November 1998 Mr Morrissey wrote to Mr Robinson saying: "The areas of the transaction you need to attend to are as follows: 1. With reference to Elie Kaltoum – we need to sort this out. We need to make sure that he confirms he is still bound by his restrictive covenants. You should assign the benefits of those covenants to Eddy Lee. You may have to call a meeting with Ellie on Friday and I would like to have some documents there for him to sign. Could you telephone me in this regard." Exhibit A document 41 29 There is nothing in the evidence to suggest that any such meeting with Mr Kaltoum was ever called, or any such documents were put to him for signature. However, Mr Morrissey's advice to assign the benefit of the covenants was not necessarily appropriate in circumstances where Mr Lee's interests were acquiring the shares in T&CPMS, which already had the benefit of the covenant. 30 Mr Morrissey was not aware that the Release Document dated 22 October 1998 (see paragraph 21 above) had been signed. Indeed, he had not seen a copy of the Release Document, and did not know of its contents, until the day he gave evidence in this case T 328-329. 31 The second agreement under which interests associated with Mr Lee came to acquire the shares in T&CPMS was a deed called the "Completion Deed and Deed of Assumption" made on 11 December 1998. That Deed was executed on the day that settlement of the transaction occurred. Mr Lee took over operating the rental management business on 12 December 1998. The Deed of 11 December 1998 proceeded on the basis that PFD, (called "Newco" in that Deed), had been nominated by Portfolio Data Pty Ltd under the Agreement for Sale of Shares and Business dated 3 November 1998. It made provision for PFD to acquire the shares in T&CPMS. It contained a provision in clause 13: "The Vendor shall provide to the Company Newco and Lee a copy of all correspondence, documents and agreements between the Company, Elie Kaltoum and Elite Pty Ltd within three (3) working days from the date of this Deed. The Vendor shall comply with its obligations under clause 14D.2 of the Sale of Shares Deed." 32 By the start of 24 December 1998 Mr Lee's interests had still not been provided with the terms of the restrictive covenant which Mr Kaltoum had entered. On 24 December 1998 Comasters wrote to Mr Morrissey asking that he provide: "Copy of agreement (and other relevant documents) between the Vendor and Elie Kaltoum and Elite Pty Ltd. It appears that there is evidence that Elie Kaltoum has been 'stealing' clients from TCP (clause 13)." Exhibit A document E . 33 On 24 December 1998, Mr Morrissey sent Comasters the agreement between Elite, T&CPMS, and Mr Kaltoum, Exhibit A document F which contained the restrictive covenant. Assertions by Mr Lee's Interests that Mr Kaltoum was Breaching the Restriction 34 On 8 January 1999 Comasters wrote a letter addressed to: "Mr Elie Kaltoum Town & Country Merrylands Real Estate Agents Shop 3 254 Pitt Street MERRYLANDS NSW 2160" The body of the letter said: "We act for PFD Asset & Property Management Pty Ltd and Town & Country Property Management Services Pty Ltd, located at level 1, 255 Church Street Parramatta. It has come to our clients' attention that you have contacted clients of Town & Country Property Management Services Pty Ltd whereas in your agreement dated 26 August 1997 you were not to compete with the company. Clause 13.3.1 of that Agreements states: [The clause was set out] We request that you cease acting in breach of the above clause. Our client reserves the right to claim from you any loss incurred by your present actions." 35 Mr Lee gave evidence of the sending of this letter in an affidavit in these proceedings which he swore on 16 August 1999. Mr Lee said, in that affidavit, "I received no response to that letter nor, so far as I am aware, did my Solicitors." Paragraph 12. Mr Kaltoum gave oral evidence T 232 that he responded to the letter by going to see Mr Lee about it. Mr Kaltoum had made no mention of any such visit to Mr Lee in his own affidavit in the proceedings, sworn 19 November 1999. I am not prepared to accept Mr Kaltoum's evidence in this respect. 36 On 12 February 1999 Mr Robinson wrote to Mr Lee in response to a letter which is not itself in evidence, but which I infer, from the terms of Mr Robinson's response, made various complaints about how Mr Lee had found the business to be operating. Part of Mr Robinson's letter said: "Elie Kaltoum has been put on notice to desist. Any damages to your business as a result of this should be pursued by you. I will co-operate and be of assistance if I am required." Exhibit A document J 37 Mr Robinson gave evidence that he had spoken to Mr Kaltoum about his activities after the date of settlement, but before writing that letter of 12 February. "Q. What did you say to him? A. I said, "Should you be approaching landlords of the business that you sold to me, or should you be approaching landlords at Town & Country Property Management Services, you should desist", and Elie gave me his assurances that he was not." T 279 38 Mr Robinson gave evidence that after receiving the letter of 26 November 1998 (see paragraph 28 above) from Mr Morrissey, he spoke to Mr Kaltoum about the restrictive covenants. "Q. What did he do on or after 26 November to confirm that he was still bound by his restrictive covenants? A. Well, when I pointed out what his obligations were he gave me a reassurance that he wouldn't break those obligations and contact or solicit any business from the Parramatta rent roll. Q. So you say that it was as a result of this letter that you had a conversation with Mr Kaltoum, do you? A. Yes. T 264 39 No such conversations were referred to by Mr Robinson in any of his affidavits. (This is so notwithstanding that Mr Robinson was not prepared to agree in cross-examination that he had not referred to any such conversation in his affidavits T 264.) Given that, · Mr Robinson and his company were being sued by the plaintiffs for having made a misrepresentation about the existence of a restrictive covenant which bound Mr Kaltoum, · Mr Kaltoum was asserting in the defence he had filed, that the Release Document on 22 October 1998 amounted to a contractual variation, or alternatively gave rise to an estoppel which entitled Mr Kaltoum to compete with the business of the Parramatta rent roll, and · Mr Robinson's interests themselves were being sued, by cross-claim, by Mr Kaltoum's interests for misrepresentation arising from Mr Robinson having granted permission to so compete, it would be extraordinary for Mr Robinson not to refer to any such conversations in his affidavit if they had occurred. Further, the evidence I have just quoted was given on Friday 2 November 2001. On 30 October 2001 Mr Robinson had sworn an affidavit referring to the letter which Mr Morrissey had written to him on 26 November 1998 and said, concerning it, "I do not recall seeing this letter. I do not recall being asked during November or in the first half of December 1998 to answer any questions about Kaltoum." In light of what Mr Robinson swore on 30 October 2001, and of his failure to refer to any conversation with Mr Kaltoum on or after 26 November confirming he was still bound by his restrictive covenants, I am not prepared to accept the evidence of Mr Robinson given orally on 2 November and which I have set out above in paragraphs 37 and 38 above. 40 On 28 April 1999 Comasters wrote again to Mr Kaltoum, referring to their previous letter of 8 January 1999, saying that: "There appears to be a further and continuing breach by you of clause 13.3.1 of the Agreement". The letter set out clause 13.3.1, and continued: "We demand that you immediately cease acting in breach of the above clause. You are hereby warned to immediately cease (amongst other things) approaching any of our clients' customers. Our clients are considering claiming from you any loss incurred by your breach. Our initial inquiries inform us that we already have substantial evidence to prove your breach." 41 The present proceedings were initiated by summons filed on 19 August 1999. At that stage, T&CPMS was the only plaintiff, and Mr Kaltoum and his new company were the only defendants. The summons sought a declaration that Mr Kaltoum was in breach of his restrictive covenant, and injunctions restraining Mr Kaltoum and his new company from continuing to breach the covenant. Mr Kaltoum's New Company Acquires Management of Properties from the Parramatta Rent Roll 42 Mr Kaltoum and his new company were required, by Notice to Produce under the Court rules (which has the force of a subpoena) to produce: "All files and records listing by address all properties of which the first and second defendants or either of them was or were the manager or managers in the period from 9 October 1998 to 9 October 2000 where such properties are or were located within an area of 10 kilometres from the premises at 5/1 Palmer Street Parramatta." Exhibit A document 8 43 Pursuant to that Notice, Mr Kaltoum and his company produced 29 management agreements Exhibit A document 9. Those management agreements can be summarised as follows: Landlord Commencing date of agency Days notice for termination of agency Number of properties covered Di Bella 2/12/98 90 1 Joe Elaro 24/12/98 90 1 George Elaro 24/12/98 90 1 Raymond Elaro 24/12/98 90 1 Jenkins 5/1/99 90 1 Pavlovski 21/1/99 90 1 Taggart 21/1/99 90 1 Cheiban Elaro 24/1/99 90 1 Auld 27/1/99 90 Unclear Yen 18/2/99 30 1 Fechali (?) 18/2/99 30 2 Manning 25/2/99 7 Unclear Holden 25/2/99 90 1 Mallanoo 8/3/99 90 1 Ransley 10/3/99 90 1 McMahon 17/3/99 90 1 Silvia Fung 18/3/99 90 1 Hay Man Fung 18/3/99 90 1 Lanaway 5/4/99 90 1 Elias 9/4/99 90 1 McBride 12/4/99 90 1 Binney 16/4/99 7 1 Volos 19/4/99 90 1 McNevin 21/4/99 90 1 Kalmar 21/4/99 90 1 Youngman 21/4/99 90 1 Bonte 21/4/99 90 1 Freeman 23/4/99 90 1 Perrott 30/4/99 90 2 Frome 30/4/99 90 4 Vettori 1/5/99 30 4 Walker 5/5/99 90 1 Ruckley 12/5/99 90 1 Smith 11/6/99 90 1 Maroon 30/8/99 90 2 Williams 9/9/99 90 1 Rose 28/10/99 30 2 Raven 25/2/00 90 1 Joshi 1/5/00 30 1 44 From the management agreement it was, on most occasions, clear on the face of the document how many properties the management agreement related to – frequently, the address of the property was stated in the form "1/23 X Street Y", which I would infer relates to a single property. However, on two occasions a street address was given for the property the subject of the management agreement, without any indication as to whether that street address consisted of one dwelling, or several dwellings. Those are the management agreements where I have shown the number of properties covered as "unclear". Thus, there were 39 management agreements, which related to 49 (or possibly a higher number) different properties, which met the description of the Notice to Produce. Is the Release Document of 22 October 1998 an Effective Variation of the Contract? 45 A contract can be varied by the parties to it, only by an agreement for which there is consideration, or by a deed. In its terms, the Release Document does not refer to any consideration. Rather, the benefits which purport to flow under it go all one way – in its terms, there is a release and indemnification granted to Elite and Mr Kaltoum, and a permission granted to Mr Kaltoum to operate a real estate office in Merrylands. No party attempted to put forward a case whereby the Release Document was part only of some wider agreement, and where that wider agreement involved consideration flowing to T&CPMS. Thus, the Release Document cannot operate as a variation made by an agreement for which there is consideration. 46 The parties to this litigation treated the question of whether the Release Document was otherwise binding on T&CPMS as depending upon whether it was executed in a way which bound T&CPMS. 47 As at 22 October 1998, T&CPMS had two directors, namely Mr Robinson, and Mr Bradshaw Exhibit A document 13. Counsel for the plaintiffs submits that, under the Constitution of T&CPMS, the affixing of a seal was required to be done in the presence of two directors, or a director and secretary (plaintiffs' written submissions page 20 paragraph 16). The only version of the Constitution which was tendered in evidence Exhibit A document 13 during the trial, is incomplete. After judgement was reserved, the legal representatives, by consent, supplemented the evidence by a full copy of the Memorandum and Articles of Association of T&CPMS. The Articles of Association included clause 84(2), as follows: "The seal shall be used only by the authority of the directors, or of a committee of the directors authorised by the directors to authorise the use of the seal, and every document to which the seal is affixed shall be signed by a director and be countersigned by another director, a secretary or another person appointed by the directors to countersign that document or a class of documents in which that document is included." 48 In October 1998, the execution of documents by corporations was governed by the Corporations Law. 49 The following provisions of the Corporations Law are relevant: " 125 Constitution may limit powers and set out objects (1) If a company has a constitution, it may contain an express restriction on, or a prohibition of, the company's exercise of any of its powers. The exercise of a power by the company is not invalid merely because it is contrary to an express restriction or prohibition in the company's constitution. … 126 Agent exercising a company's power to make contracts (1) A company's power to make, vary, ratify or discharge a contract may be exercised by an individual acting with the company's express or implied authority and on behalf of the company. The power may be exercised without using a common seal. (2) This section does not affect the operation of a law that requires particular procedure to be complied with in relation to the contract. 127 Execution of documents (including deeds) by the company itself (1) A company may execute a document without using a common seal if the document is signed by: (a) 2 directors of the company; or (b) a director and a company secretary of the company; or (c) for a proprietary company that has a sole director who is also the sole company secretary---that director. Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(5) for dealings in relation to the company. (2) A company with a common seal may execute a document if the seal is fixed to the document and the fixing of the seal is witnessed by: (a) 2 directors of the company; or (b) a director and a company secretary of the company; or (c) for a proprietary company that has a sole director who is also the sole company secretary---that director. Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(6) for dealings in relation to the company. (3) A company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with subsection (1) or (2). (4) This section does not limit the ways in which a company may execute a document (including a deed). 128 Entitlement to make assumptions (1) A person is entitled to make the assumptions in section 129 in relation to dealings with a company. The company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect. … (4) A person is not entitled to make an assumption in section 129 if at the time of the dealings they knew or suspected that the assumption was incorrect. 129 Assumptions that can be made under section 128 (1) A person may assume that the company's constitution (if any), and any provisions of this Act that apply to the company as replaceable rules, have been complied with. … Document duly executed with seal (6) A person may assume that a document has been duly executed by the company if: (a) the company's common seal appears to have been fixed to the document in accordance with subsection 127(2); and (b) the fixing of the common seal appears to have been witnessed in accordance with that subsection. For the purposes of making the assumption, a person may also assume that anyone who witnesses the fixing of the common seal and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices. 50 In the present case, section 126(1) does not apply. Even if Mr Robinson was acting with the express or implied authority of T&CPMS, he has not purported to enter any deed on behalf of the company. Thus, even if the Release Document is validly executed on behalf of the company by virtue of Mr Robinson having signed it, it is inefficacious to effect a variation of the contract because of the lack of consideration. 51 Section 127(2) does not apply. The fixing of the seal was not witnessed by two directors of the company, nor by a director and secretary of the company. Nor is T&CPMS a proprietary company that has a sole director who is also the sole company secretary. The Corporate Affairs search Exhibit A document 13 shows that, as well as having two directors, it had two secretaries. 52 Section 127(3) does not apply because the document is not expressed to be executed as a deed. Nor is the document executed in accordance with section 127(1) or (2). 53 Mr Kaltoum was aware at the time of execution of the release dated 22 October 1998, that Mr Bradshaw was one of the directors of T&CPMS T 189, T217. 54 Mr Kaltoum gave the following evidence in cross-examination: "Q. I suggest to you that, to the best of your knowledge, Mr Bradshaw was a director of Town & Country at that time, wasn't he? A. Yes. Q. You knew, for example, that that seal had not been placed on that document by the use of two directors of Town & Country, didn't you, when you picked it up from Mr Robinson on 22 October 1998? A. I didn't understand. Q. You noticed that on that document that seal did not indicate that it had been put on by the authority of two directors of Town & Country, didn't you? A. If you'd please repeat it again. Q. When you picked up that document from the Town & Country offices in the city, you saw the common seal was put on the document, didn't you? A. I was handed this document. What happened before and after, I don't remember." 55 I should here record that the answer "I didn't understand" seemed to me, when I heard the evidence, to be the witness saying that he did not understand the question that was being put to him. It was not the witness denying the proposition that he knew that the seal had not been placed on the document by two directors. 56 The assumption provided for by section 129(6) does not assist in establishing the validity of execution of the Release Document. For the reasons I have already given, the company's common seal does not appear to have been witnessed in accordance with section 127(2). Thus section 129(6)(b) does not apply. As the requirements of 129(6)(a) and (b) are cumulative, that is sufficient to stop the first sentence of section 129(6) from applying. As no one has stated on the Release Document next to a signature that they are a sole director and sole company secretary of the company, the condition of application of the second sentence in section 129(6) does not arise, so the second sentence in section 129(6) does not apply either. 57 Of the assumptions in section 129, it is only the assumption in section 129(6) which could be relied upon to have the execution of the Release Document treated as a valid corporate act, capable of varying the restrictive covenant which Mr Kaltoum gave. 58 I mention that the plaintiffs did not seek to argue that the Release Document was ineffective to vary the restrictive covenant because it failed to comply with clause 18.5.1 of the Sale of Business Agreement (see paragraph 11). (The Release Document was clearly not signed by either Mr Kaltoum, or by Elite.) Clause 18.5.1 requires a variation to be signed by the parties (plural) - hence the possibility for an argument that the Release Document did not comply with clause 18.5.1. 59 For these reasons, I conclude that the Release Document was not effective to vary the restrictive covenant. Does the Release Document give rise to an Estoppel? 60 In the alternative, Mr Kaltoum and his new company asserted that the Release Document gave rise to an estoppel. 61 It is clear enough that the Release Document, taken at its face value, accords to Mr Kaltoum a permission to open a real estate office in Merrylands. If that were all that had passed between Mr Kaltoum and Mr Robinson concerning what Mr Kaltoum could do in Merrylands (as Mr Kaltoum's case in chief would have had it) that may well have provided a basis for estoppel. However, the Release Document did not constitute the only communication between those two men on that topic. 62 Mr Robinson, in an affidavit sworn 30 October 2001, said that both before and after he signed the Release Document: "…Kaltoum said to me words to the effect, 'I won't be approaching any of the clients from your rent roll, you bought it from me and it's your property'. This was said to me in about August of 1998 when his employment was terminated and later when he asked whether he could open up in Merrylands. On each occasion I said to him, 'You can open up but you can't pinch our rent roll or approach any of our clients'". 63 Subject to correcting the date of this conversation to September 1998 T179, Mr Kaltoum agreed that he had said to Mr Robinson "I won't be approaching any of the clients from your rent roll, you bought it from me and its your property." T178.25-.30 64 Mr Kaltoum also gave evidence that, in the conversation in early October with Mr Robinson, when Mr Robinson said that he would allow Mr Kaltoum to open in Merrylands. "Q. Did he say something to you along the lines of, "You can't pinch any of the rent roll or approach any of our clients"? A. Yes. Q. He said that? Where did this conversation take place? A. Over the phone. Q. When he said to you those words about, "You can't pinch our rent roll or approach any of our clients", did you say anything in response? A. I don't recall what I said, I'm sorry. Q. Did you say anything along the lines that you wouldn't be approaching any of the clients from the rent roll? A. Yes. Q. And, of course, when you were speaking of the rent roll, you were talking about the rent roll of Town & Country Parramatta, weren't you? A. Yes." T206.3-.22 65 Later in his cross-examination Mr Kaltoum confirmed this evidence. "Q. Similarly, at the time of the initial conversation that you had with Mr Robinson – that is, in October 1998 before you prepared the Release Document – Mr Robinson said words to the effect, "You can't poach any of our clients or approach any of our clients and pinch our rent roll." Do you recall that? A. Yes. Q. You agreed with that at that time? A. Yes." T229.47-.57 66 Nor was this the only time that restrictions on Mr Kaltoum's activities in Merrylands were discussed. Again on 22 October, when the Release Document was executed, there was a discussion. "Q. When you had discussions with Mr Robinson concerning those matters, and in particular the document which you have in front of you, did Mr Robinson say to you, "You can open up at Merrylands but you can't pinch the Town & Country rent roll or approach any of our clients"? A. Yes. Q. And he said that to you again, having said it to you previously at the meeting that you had when you picked up that document referred to as "Operating a real estate office"? A. Yes. Q. Did you agree that you would not be approaching any of the clients of the Town & Country rent roll? A. Yes. Q. And by that you agreed to the fact that you would not be approaching any of the clients in respect of the Parramatta rent roll? A. Yes." T219.41-220.3 That evidence was also later confirmed by Mr Kaltoum. "Q. Mr Kaltoum, do you recall giving evidence here today that when you obtained the document a copy of which is behind guide tab 3-- A. Yes. Q. --which I will call for present purposes the release document, you said you had a conversation with Mr Robinson at the office in Hunter Street? A. Yes. Q. In the course of the conversation, it was said to you by Mr Robinson that "you can open up in Merrylands, but you can't pinch our rent roll or approach any of our clients", or words to that effect. Do you recall giving that evidence? A. Yes. Q. You said that you agreed with that? A. Yes." T229.28-.46 67 Mr Robinson gave evidence as follows: "Mr Kaltoum approached me I said to him: "You can use the name but you can't approach any clients. If you steal clients I will sue you." He replied: "I won't, I have sold you the business their your managements. You have paid for them. I won't steal them. Even if clients approach me I won't steal them. I know a lot of these people." Affidavit Robinson 24 April 2001 68 Mr Robinson was not cross-examined to challenge the correctness of this evidence. 69 Mr Kaltoum was reminded, in cross-examination, about the oral agreement he said he had reached with Mr Robinson. He was also reminded that every single one of the properties whose management agreements had been produced to the Court under the Notice to Produce, were properties formerly under the control of Town & Country Parramatta T226.55, 228.20, 240.17. Mr Kaltoum asserted that, even so, he had not breached his agreement with Mr Robinson. "Q. Why do you say no, you didn't breach agreement? A. Because these people approached me to manage their property. Q. So you are saying, then, that the critical element as to whether your agreement was breached relates to who made the approach – is that what you're saying? A . Yes. Q. You didn't discuss that with Mr Robinson, did you? A. I don't remember." T230.12-.22 70 Strict compliance with the restrictive covenant would have meant that Mr Kaltoum could not open a real estate office in Merrylands at all. The effect of what Mr Robinson told Mr Kaltoum was that the restriction would be relaxed to some extent. Mr Kaltoum was to be free to carry on, at Merrylands, a business of real estate sales however he wished. Further, Mr Kaltoum was not to be absolutely prohibited from carrying a business relating to property management of leased properties. However, the permission to operate a property management business in Merrylands was circumscribed, in that he could not deal with clients of the Parramatta rent roll. 71 In Watson v Foxman (1995) 49 NSWLR 315 at 318-9 Mr McLelland CJ in Eq said: "Where, in civil proceedings, a party alleges that the conduct of another was misleading or deceptive, or likely to mislead or deceive (which I will compendiously describe as "misleading") within the meaning of s 52 of the Trade Practices Act 1974 (Cth) (or s 42 of the Fair Trading Act), it is ordinarily necessary for that party to prove to the reasonable satisfaction of the court: (1) what the alleged conduct was; and (2) circumstances which rendered the conduct misleading. Where the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases (but not all) the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience. Each element of the cause of action must be proved to the reasonable satisfaction of the court, which means that the court "must feel an actual persuasion of its occurrence or existence". Such satisfaction is "not …attained or established independently of the nature and consequence of the fact or facts to be proved" including the "seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding": Helton v Allen (1940) 63 CLR 691 at 712. Considerations of the above kinds can pose serious difficulties of proof for a party relying upon spoken words as the foundation of a causes of action based on s 52 of the Trade Practices Act 1974 (Cth) (or s 42 of the Fair Trading Act), in the absence of some reliable contemporaneous record or other satisfactory corroboration. … What I have said above as to the cause of action based on s 52 of the Trade Practices Act 1974 (Cth) (or s 42 of the Fair Trading Act) is equally applicable, mutatis mutandis, to the causes of action based on contract and on equitable estoppel (with the added requirements, in the case of contract that any consensus reached was capable of forming a binding contract and was intended by the parties to be legally binding, and in the case of equitable estoppel that any representation alleged was clear and unequivocal and was relied on to the substantial detriment of the representee)." 72 The onus is on Mr Kaltoum and his new company to establish that the limitations which were imposed, in relation to how clients of the Parramatta rent roll were to be dealt with, were such as to justify Mr Kaltoum's subsequent action concerning those clients. I am not satisfied that there was a clear representation which left Mr Kaltoum free to deal with such clients of the Parramatta rent roll as approached him. In at least some versions of the evidence the restriction on Mr Kaltoum was that he could not, "pinch our rent roll", or "approach any of our clients". I am not satisfied that there was a representation to Mr Kaltoum which permitted him, in what would otherwise be breach of the restrictive covenant, to deal with any former client of the Parramatta rent roll at all, during the two year period that the restriction applied. 73 By its letter of 8 January 1999, Comasters in effect withdrew the permission which Mr Robinson had granted for Mr Kaltoum to conduct a real estate office at Merrylands, provided that he did not deal with clients of the Parramatta rent roll. The letter of 8 January 1999 seeks nothing less than complete compliance with clause 13.3.1 of the Agreement. Insofar as the letter of 8 January 1999 required Mr Kaltoum to cease carrying on a property management business at all (rather than carrying on such a business on the basis that it did not deal with clients of the Parramatta rent roll) Mr Kaltoum would be entitled to a reasonable time to cease carrying on that business. In other words, it seems to me that Mr Kaltoum has established an estoppel of a limited type. He has established that, to the extent to which he acquired clients for the Merrylands business prior to 8 January 1999, who were not clients who had been on the Parramatta rent roll, he is entitled to a reasonable time to disengage himself from those clients. 74 The evidence provides very little assistance in assessing what such a reasonable time would be. Relevant matters would include what relative proportions of turn-over, and profit were involved in that part of the property management business that did not involve dealing with clients of the Parramatta rent roll, and that part of the business which involved real estate sales. (It is apparent that sales are at least some part of the business which Mr Kaltoum's company has been conducting in Merrylands. The evidence includes a photograph of a house with a "For Sale" sign outside it, the sign directing the reader to Town & Country Real Estate Merrylands Exhibit D). (I leave out of consideration the turn-over, and profitability, of the property management business insofar as it involved dealing with clients of the Parramatta rent roll, because Mr Kaltoum was never entitled to conduct that part of the business.) Also relevant is the amount of rent which Mr Kaltoum's company had committed itself to pay, and the term for which it had committed itself to pay that rent, in the belief that it would be entitled to conduct a property management business not involving clients of the Parramatta rent roll. Also relevant would be the length of notice that was provided for in management agency agreements entered, prior to 8 January 1999, with landlords who were not clients of the Parramatta rent roll. While the evidence is deficient in these respects, it seems to me that these are matters which should more properly be taken into account in an assessment of damages, rather than in determining the questions of liability with which the present hearing is involved. 75 It may also be that having established this limited estoppel, it will not be of much practical use to Mr Kaltoum. The estoppel will have room to operate only to the extent that the appropriate plaintiff can establish that it has suffered loss by reason of Mr Kaltoum running a property management business at Merrylands, which dealt with clients who were not clients of the Parramatta rent roll. It is a matter for the enquiry as to damages, however, whether the plaintiff is able to prove it has suffered damage of that kind. The Pleaded Breaches of the Restrictive Covenant 76 In the Statement of Claim the plaintiffs plead three separate breaches of the restrictive covenant, namely that: "Kaltoum and/or alternatively Kaltoum through and by SRE, has and have and continue to: (a) carried on or been engaged or interested in a business of property management by establishing and operating such business at Shop 3, 254 Pitt Street Merrylands, being an address which is within 10 kilometres of the Palmer Street premises under the name of "Town and Country Real Estate Merrylands"; (b) carried on such business within 10 kilometres of the Palmer Street premises by approaching owners of properties within that area and with whom T & C has or had management contracts with a view to having those owners confer the management of such properties on SRE and/or Kaltoum; (c) engaged in conduct derogating from T & C's right to obtain the full benefit of the goodwill of the business, being the conduct referred to in sub-paragraph (b)." 77 It follows from what I have said so far, that the first of these breaches is made out. While the management agreements which were produced pursuant to the Notice to Produce (see paragraph 42 above) establish that the first of the breaches is made out, those management agreements do not necessarily mark the full extent of the breach. It will be recalled that the Notice to Produce required the production of management agreements relating to properties located within 10 kilometres of the Palmer Street Parramatta premises. It is the existence of the business at the shop in Merrylands, being within 10 kilometres of the Palmer Street premises, which constitutes the breach, not the location of the properties which are managed being within 10 kilometres of the Palmer Street premises. However the management agreements produced, pursuant to the Notice to Produce, amply establish that the plaintiff has made out enough of a case of breach to justify an enquiry as to damages. Is Account of Profits an Available Remedy for the First Pleaded Breach? 78 The remedy which the plaintiffs seek in relation to this breach, is damages or an account of profits. The cause of action on which the plaintiffs sue is breach of contract. The only remedy which the common law provides for breach of contract, is damages. 79 Equity will sometimes, in its auxiliary jurisdiction, grant an injunction against the repetition or continuance of a breach of contract, but no such injunction was, by the time of the hearing, sought. 80 There are some judicial statements which suggest that an account of profits is not available as a remedy for a breach of contract, but rather that, in circumstances where a breach of contract is established, it must be shown that there is also a breach of an equitable obligation (such as breach of a fiduciary duty, or breach of an obligation concerning the use of confidential information) before an account of profits will flow (Walden Properties Ltd v Beaver Properties Pty Ltd [1973] 2 NSWLR 815 at 835 E-F per Hope JA, Deta Nominees Pty Ltd v Viscount Plastic Produces Pty Ltd [1979] VR 167 at 180 per Fullagar J). 81 However, there are also some cases where an account of profits has been awarded for breach of a legal obligation. Thus an account of profits is one of the remedies available for the tort of passing off (AG Spalding Bros v AW Gamage Ltd [1914-15] All ER Rep 147; Colbeam Palmer Ltd v Stock Affilliates Pty Ltd (1968) 122 CLR 25 at 32 per Windeyer J). Even in relation to the availability of a remedy of an account of profits for the tort of passing off, however, it appears that it was not the mere commission of the tort which gave rise to the equitable remedy – rather, the Equity Courts looked to see whether, as well, there were factors present (whether it be the protection of property, or the existence of fraud) which justified the intervention of the Equity Court (Colbeam Palmer Ltd v Stock Affilliates Pty Ltd, supra, at 33.8-34.3). 82 In Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41, at 124-125 Deane J expressed the view that the activities of the defendant in that case (which amounted, his Honour held, to a breach of contract which did not involve a breach of fiduciary duty) was nonetheless liable to account for its profits, on the basis that a constructive trust was imposed, which "…should properly be seen as imposed as equitable relief appropriate to the particular circumstances of the case rather than as arising from a breach of some fiduciary duty flowing from an identified fiduciary relationship." (At 124), and "…a constructive trust may be imposed as the appropriate form of equitable relief in circumstances where a person could not in good conscience retain for himself a benefit, or the proceeds of a benefit, which he has appropriated to himself in breach of his contractual or other legal or equitable obligations to another." 83 This view of Deane J was a dissenting view. What one can draw from it, though, is that even if an account of profits is sometimes available in circumstances where there has been a breach of contract, something more than a mere breach of contract is needed to demonstrate the appropriateness of awarding the equitable remedy. The same conclusion follows from Attorney-General v Blake [2000] UKHL 45; [2001] AC 268. 84 Referring to the remedy as "account of profits" is shorthand. There are two distinct components to the remedy – first, that an account should be taken of the profits which the defendant has earned, and on the second, that the amount of profits so found to have been earned should be paid by the defendant to the plaintiff. As is the case with any remedy which equity grants in its auxiliary jurisdiction, an Equity Court needs to be given a reason, which is sufficient in accordance with equity principles, why it should grant an equitable remedy in addition to, or in lieu of, the ordinary common law remedy. 85 In the present case, the plaintiffs have not alleged, in their Statement of Claim, anything beyond the existence of the restrictive covenant, its breach, and consequent damage. If an equitable remedy is to be granted, it is necessary for the material facts, which justify the award of the equitable remedy, to be pleaded. In this case, no such facts were pleaded. In argument, while counsel for the plaintiffs stated that an account of profits was claimed, no reasons were given as to why it was appropriate. In these circumstances, I am not prepared to grant an account of profits. Which Plaintiff or Plaintiffs has a Remedy for the First Pleaded Breach? 86 It was only the first plaintiff which was party to the contract on which the plaintiffs sue. Hence, it is only the first plaintiff who is entitled to recover damages for the breach which has been established. Against which Defendant does a Remedy Lie for the First Pleaded Breach? 87 It is only Mr Kaltoum, not his new company, who was party to the restrictive covenant. It is his new company which has been carrying on the business at Merrylands. Mr Kaltoum is a director of that company, and has at all times been actively involved in the conduct of its business. That suffices to put Mr Kaltoum in breach of clause 13.3.1 of the Agreement of 26 August 1997. If the covenant had not expired by effluxion of time, it might, possibly, have been appropriate to grant an injunction to restrain the company from carrying on its property management business. However, notwithstanding the possible availability of such an injunction, against it, Mr Kaltoum's new company is not liable for damages for breach of contract (ICT Pty Ltd v Sea Containers Ltd (1995) 39 NSWLR 640 at 654F-657E). 88 The prohibition on Mr Kaltoum, under the restrictive covenant, was on being engaged in "any business of the nature of the business hereby sold, or any significant component thereof". The "business hereby sold" was a business involving both real estate sales, and property management. Thus, Mr Kaltoum is in breach of the covenant, even in continuing to operate, through his company, a business of real estate sales. However, the plaintiffs have not sought to make out a case on breach of contract based on the ongoing operation of a real estate sales business. In circumstances where the plaintiffs' present business does not involve them in selling any real estate, it is difficult to see how they could have established any loss arising from Mr Kaltoum and his new company operating a real estate sales business, even if they wished to. The Second and Third Pleaded Breaches of the Restrictive Covenant 89 The second breach of covenant of which the plaintiffs complain, alleges that the defendants were carrying on the business of property management, "within 10 kilometres of the Palmer Street premises by approaching owners of properties within that area and with whom T & C has or had management contracts with a view to having those owners confer the management of such properties on SRE and/or Kaltoum". 90 Mr Kaltoum has specifically denied that he approached tenants who were formerly of Town & Country Parramatta and asked for those persons to pay rent to Town & Country Merrylands T231. I have reservations about the accuracy of some aspects of Mr Kaltoum's evidence, and am not confident in the accuracy of his memory, so I am not prepared to treat the question of whether there has been a breach, of the second type alleged, as being decided simply by Mr Kaltoum's answer. 91 However, neither am I satisfied that the plaintiff has discharged its onus of proof in relation to this second alleged breach. No landlords who transferred business from the plaintiffs to the Merrylands business were called to give evidence about who instigated the change, or whether any contact where change was discussed occurred within the ten-kilometre radius. 92 Some business records of the plaintiff were tendered, consisting of notes made by an employee of the Parramatta office concerning 10 different properties, the management of which was transferred to Town & Country Merrylands. Most of them refer to the fact that the property has been lost, without casting light on who initiated the transfer. One note in relation to a landlord called Bonte reads: "Lost management in May 1999. Elie of T&C Merrylands contacted LL and asked LL to transfer management to him. Spoke to LL Mr Bonte on 27/5/99 about this matter and he said he decided to transfer the management to Elie but LL will consider whether to transfer back the management to us in six months later." ("LL" is shorthand for "landlord".) 93 The note does not attribute a source to the statement, "Elie of T&C Merrylands contacted LL and asked LL to transfer management to him." I am not prepared to regard it as satisfying me that in fact it was Mr Kaltoum who made the first approach. 94 I should also record that one of these notes, in relation to a landlord called Ruckley, says: "Spoke to Mr Ruckley today regarding the transfer of management to Elite of T&C Country Merrylands. He confirmed that it is truth. The management was taken by Elie more than a month ago. Tenants confirmed that they have stopped paying there rent to us since 25/5/99. Mr Ruckley said that he was not very happy with our service that's why he transferred the management to Elie." 95 The only other evidence is from Yew Foo Woon, the operations management of the plaintiff, who gives evidence of a telephone conversation with Mr Kaltoum on 11 June 1999 when Mr Kaltoum asked for the keys for a particular unit. Mr Woon asked, "Why? Have you taken the management from us?" to which Mr Kaltoum replied, "Yes". That does not establish who was the first to approach whom. 96 Thus I do not find that the second breach alleged by the plaintiffs has been established. 97 The third breach is pleaded in terms which make it dependant upon the plaintiffs establishing the second breach. Hence it has not been established either. PART B PLAINTIFFS' CLAIMS AGAINST MKR AND MR ROBINSON The Misrepresentation Claims 98 I have earlier set out how PFD came to purchase the shares in T&CPMS by there being an agreement on 3 November 1998 ("the November Agreement") whereby Portfolio Data Pty Ltd agreed that it, or its nominee, would purchase the shares in T&CPMS, and by an agreement on 11 December 1998 ("the December Agreement") whereby PFD agreed to purchase those shares. 99 Paragraph 17 of the Statement of Claim makes the following allegation: "At the time of entering into the November Agreement MKR, by itself and by Robinson, represented to Portfolio: (a) that the Parramatta Rent Roll comprised 407 properties which were then under management by T & C; (b) that such properties were the subject of Management Agreements made between T & C and its landlord customers which were valid, current and enforceable; (c) that neither MKR nor Robinson was or were aware of any fact matter or circumstance which would disentitle T & C from continuing to receive in the future the full benefit of the income to be generated from T & C's continued management of such properties; and (d) that T & C had entered into a valid and enforceable covenant with Kaltoum which prevented him or any party associated with him from canvassing T & C's customers with a view to having the management of their properties taken away from T & C. PARTICULARS The representations were made orally by Robinson and by other officers of MKR and/or T & C to Lee and to Mr Jeffrey Lee (Solicitor) and Mr Lim (Accountant) during the course of the due diligence in November and December 1998. Those representations were supported by purported listings of management contracts produced to those persons during the course of the due diligence." 100 Paragraph 21 of the Statement of Claim makes the following allegation: "At the time of entering into the December Agreement, MKR by itself and by its Director, Robinson, represented to PFD: (a) that the Parramatta Rent Roll comprised 407 properties which were then under management by T & C; (b) that such properties were the subject of Management Agreements made between T & C and its landlord customers which were valid, current and enforceable; (c) that neither MKR nor Robinson was or were aware of any fact matter or circumstance which would disentitled T & C from continuing to receive in the future the full benefit of the income to be generated from T & C's continued management of such properties; and (d) that T & C had entered into a valid and enforceable covenant with Kaltoum which prevented him or any party associated with him from canvassing T & C's customers with a view to having the management of their properties taken away from T & C. PARTICULARS The representations were made orally by Robinson and by other officers of MKR and/or T & C to Lee and to Mr Jeffrey Lee (Solicitor) and Mr Lim (Accountant) during the course of the due diligence in November and December 1998. Those representations were supported by purported listings of management contracts produced to those persons during the course of the due diligence." 101 While the words of the representations in paragraphs 17 and 21 of the statement of claim are pleaded identically, they speak as at different times, and so are different in substance. The "Number of Properties" Representation 102 Under this heading I will deal with representations (a) and (b) (see paragraph 100 above), as at each of the dates of the November Agreement, and the December Agreement. 103 In May 1998, Mr Lee had started working for Town & Country Australia Pty Ltd as a sales consultant in its head office at 33 Hunter Street Sydney. He did this work pursuant to an agreement between Town & Country Australia Pty Ltd and Portfolio Data Pty Ltd, whereby Portfolio Data Pty Ltd was entitled to a commission if it introduced a purchaser who completed a purchase. Mr Lee heard from someone he knew in the office that the rent roll which Town & Country conducted, was for sale. In about October 1998 he told Mr Robinson he was interested in buying it. Mr Lee's evidence in chief is that Mr Robinson then said to him, "We have about 450 properties under management at the Parramatta office and its growing at a rate of about 10 additional properties per week". When asked about the price, Mr Robinson said he wanted, "about $650,000-$700,000". Mr Lee said, in his evidence in chief Affidavit 12 April 2000 paragraph 6 that in the course of that same discussion with Mr Robinson, David Horder, the financial controller of Town & Country Australia, was also present. Mr Lee said that at that meeting Mr Horder produced a listing of the properties concerned. He annexes to his affidavit what he says is a copy of the listing which was produced to him. 104 That listing is a computer generated table which identifies each property managed, the weekly rental charged for each property, the rates (expressed as a percentage) of commission charged, and the annual amount of commission earned. The first column in the table numbers each line of the table on which there is an entry. The last line of the table on which there is an entry has "409" in this column. Thus it is readily apparent to any reader of the table that it lists 409 properties. At the foot of the table appears: "Annual management fee $256,488.97 Monthly $21,374.08" 105 I have some doubt as to whether this listing document, which Mr Lee annexed to his affidavit, was in fact supplied to him in the precise circumstances to which he deposes. The document annexed, has on each page a fax transmission header showing it as having been sent on 10 November 1998. Its first page has written on it the words, "Current as at 28/10/98", in the handwriting of Mr Morrissey, the solicitor who acted for Mr Robinson and MKR in connection with the transaction T317. There is no reason to believe that Mr Morrissey was involved in the transaction at this early stage. Mr Robinson gives evidence that he did not provide the document to Mr Lee personally in October 1998 T 247. However, counsel for MKR and Mr Robinson did not challenge this aspect of Mr Lee's evidence. 106 Mr Lee says that, after this initial meeting, there were a number of other meetings with Mr Robinson before agreement in principle on the purchase was arrived at, and the November Agreement was entered into. 107 The November Agreement made provision for Portfolio Data Pty Ltd to acquire the 1,000 fully paid shares in T&CPMS for $1,000, and, on or before 28 November 1998 (time being of the essence) to accept the allotment of a further 599,000 shares in the company for a further $599,000. Clause 7 The proceeds of the allotment were to be used to pay out a loan which the company had from St George Bank Clause 5 and, to the extent to which any of the allotment monies remained after payment of the St George loan, it was to be expended in payment of loans which MKR had made to the company. To the extent to which those loans that MKR had made could not be repaid from the allotment monies, they were to be released Clause 8. There was also provision for Portfolio Data Pty Ltd to make immediate payment of $30,000 Clause 11 which was to be deducted from the amount of MKR's loans. 108 The November Agreement contained the following provisions: "… 6.1 The Vendor covenants to the Purchaser and Lee & the licensee that for the month of October, 1998 the fees paid to the Company for the management of the Parramatta Rent Roll calculated on an annual basis (using the month of October as a basis for such calculation) would amount to $256,488.90 ("the annualised Parramatta income) 6.2 The Vendor and the Purchaser and Lee and the licensee agree that a fair and proper price to acquire the Parramatta Rent Roll is Six hundred thousand dollars ($600,000.00) should the Vendor wish to sell the Parramatta Rent Roll as distinct from the sale of the shares and/or allotment of shares in the Company. … 9.1 The Purchaser shall commence a due diligence enquiry into:- a. The status of the Parramatta Rent Roll; and b. The assets and liabilities of the Company within two (2) working days from the date of execution of this Agreement, time of which shall be the essence. 9.2 The Purchaser agrees that it shall complete its due diligence on or before 17 November, 1998 ("due diligence completion date"), time of which shall be the essence. 9.3 The Vendor covenants to the Purchaser that it has caused to calculate the annualised income to the Company for the Parramatta Rent Roll (determined on the income for the month of October, 1998) to be $256,488.90. 9.4 9.4.1 Should the income from the Rent Roll, calculated in accordance with Clause 9.3 hereof, be less than $256,488.90 for the month of October, 1998 the Company hereby agrees that it shall reduce the amount payable by the Purchaser for the allotment of the shares in the Company (in accordance with Clause 7.2 hereof) by an amount of $2.3392 for each dollar the income from the Rent Roll is less than $256,488.90. 9.4.2 The Purchaser shall carry out its due diligence enquiries and in particular shall ascertain the status of the Management Agreement which comprise part of the rent roll. Should on the due diligence completion date, a number of Management Agreements have been terminated, the Vendor and Purchaser shall meet on or before 21st November 1998 to - i. Ascertain the number of terminated Management Agreements ii. The amount of the reduction in value of the Rent Roll and in this regard the value of the Rent Roll (after the exclusion of the terminated Management Agreements) shall be calculated in accordance with Clause 9.4.1. 9.4.3 The Vendor and the Purchaser agree that should the value of the Rent Roll be less than $450,000.00 calculated in accordance with Clause 9.4.2 iii, and the provisions of Clause 9.4.4 shall apply. 9.4.4 Should the value of the Rent Roll be less than $450,000.00 (as calculated in accordance with Clause 9.4.3 ii, the Vendor and the Purchaser may rescind this Agreement and the deposit of $30,000.00 will be refunded to the Purchaser. 9.5 Should the income from the Rent Roll, calculated on an annual basis (based on the month of October, 1998 in accordance with Clause 6.1) be greater than $256,488.90 the Company hereby agrees that the Vendor shall be entitled to nominate such property in the Rent Roll that will not form part of the Parramatta Rent Roll and the Purchaser acknowledges that the Company may transfer to the Vendor or its nominee the management of those properties so nominated by the Vendor, provided the Vendor and the Purchaser gives to the Purchaser the first right to purchase such Management for a price calculated in accordance with Clause 9.6. 9.6 The Vendor hereby covenants to the Purchaser that should during the ordinary course of its business it be given the opportunity to manage properties, the Vendor shall grant to the Company a first right of refusal (which shall be accepted or rejected within seven (7) days of offer) to manage those properties, provided that the Company pays to the Vendor upon the assignment of the management of that property, an amount representing Two Dollars $2.00 for every dollar of income earned as a result of the management of that property (or as negotiated between the Vendor and the Purchaser). Such first right of refusal would apply for a period of 24 months from the date of completion. 9.7 In the event that the Purchaser has not completed this Agreement by 28th November, 1998 the Vendor may terminate this Agreement and there shall be no further obligations on behalf of the Vendor and the Company to the Purchaser, Lee or the Licensee and the deposit shall be the Vendor's property. 9.8 The Vendor and the Purchaser agrees that the Purchaser's due diligence shall include:- a. An inspection of the income earned by the Company in respect of the conduct of the Parramatta Rent Roll for the month of October, 1998 and other months; and b. Inspection of the Management Agreements between the Company and the various landlords; and c. An identification of any assets, liabilities, claims, actions, demands (whether actual or contingent) that may be made against the Company. 10. Payment of the Purchase of the Shares 10.1 The Vendor and the Purchaser acknowledge the Company causes to carry out a statement run for the Parramatta Rent Roll on or about 28th November, 1998 ("the Statement Run"). 10.2 In order for the Purchaser to acquire all the shares in the Company and have the benefit of part of the income of the Statement Run (as provided in Clause 10.3), the Purchaser shall complete the purchase of the allotment of the shares in accordance with Clauses 87.1 and 7.2 on or before no later than 30th November 1998, time of which shall be of the essence. … 15. Completion Process 15.1 Upon execution of this Agreement, the Purchaser shall pay to MKR the consideration of $30,000 as specified in Clause 11.3 which shall be released immediately to MKR and become the sole and absolute property of MKR. 15.2 The Purchaser shall, in two (2) days from the date of this Agreement, commence its due diligence enquiries. 15.3 On or before 17th November, 1998 the Purchaser shall complete its due diligence enquiries and advise the Vendor as to the outcome of those enquiries. 15.4 Should there be any adjustment in the purchase price of the shares, then such adjustment is to be made in accordance with Clause 9.4. The Vendor and the Purchaser agree that they shall, on or before 24th November, 1998 meet for the purposes of calculating the adjustment as specified in Clause 9.4 hereof and they shall agree to the amount of the adjustment (if required) on 21st November, 1998. 15.5 On 24th November, 1998 the Vendor and the Purchaser and their representatives shall meet to complete the terms of this Agreement. Such completion shall include the following:- a. The Purchaser tending to the Vendor the sum of $1,000.00 to acquire the Vendor's shares in the Company. b. i. The Purchaser tending to the Company, the adjusted amount (as determined on 21st November, 1998) in accordance with Clause 7.3 hereof, less the sum of $30,000.00 ii. Should the value of the Rent Roll exceed $600,000.00 the Vendor and the Purchaser may at the meeting on the 24th November, 1998 elect to purchase such additional properties on the basis specified in Clause 9.4.1 and such payment shall be made at the completion date of this acquisition of shares." (A further 10 matters required to be performed at settlement, but not presently relevant, were listed.) 109 Mr Lee instructed Comasters to act for him in connection with the due diligence, and also FH Lim & Co Chartered Accountants. 110 A meeting was held at the Parramatta office of T&CPMS on 10 November 1998, attended by Mr Jeffrey Lee (the solicitor who conducted the practice of Comasters), Mr Lim, Mr Horder, Mr Morrissey, and Mr Ryan (external accountant and auditor for T&CPMS). Mr Morrissey's notes of the discussion at that meeting are in evidence. They include the entry, "413 properties". They also include the entry, "attrition rate for management – turnover in a year 10-15% of rent roll" Morrissey statement attachment E. Thus, the fact that landlords removed properties from the rent roll was disclosed early in the due diligence process. 111 On 12 November 1998 Mr Morrissey wrote to Comasters and FH Lim & Co saying, amongst other things: "I note the due diligence completion date is 17th November 1998. I have asked Mr Ryan and Mr Horder to have the 1998 Town & Country Property Management accounts up to date and have calculated the MKR loans by that date. I hope they will be able to give me a response today in respect of this request. Can you advise if this is a satisfactory course. For the sake of complete accuracy this is the appropriate course I believe we should take. I note you are presently carrying out due diligence. If you have any queries in relation to those, could you provide them to us in writing, so they can respond promptly. I would be happy to accept a handwritten list of queries." 112 On 12 November Mr Morrissey also prepared, and circulated, a list of tasks which had been identified in the meeting on 10 November 1998. That list did not include anything about checking the number of properties under management. (Nor did it including anything about the restrictive covenant which Mr Kaltoum had entered.) 113 On 12 November 1998 Mr Morrissey had a conference with Mr Michael Fern, who he identifies as someone who was employed by T&CPMS to manage its rent roll in November/December 1998. Mr Morrissey gave evidence that at that conference "we spoke about shrinkage in respect to the rent roll." Morrissey statement paragraph 13. He annexes a copy of his notes of that meeting, and under the heading "shrinkage" he lists various addresses. The second address listed (which appears to be 21/100 Cleveland Street Chippendale) does not appear on the list of 409 properties which Mr Lee says he was given at the end of October. However, the others all appear on that list. (They are numbers 309, 147, 352, 201, 173, 63-69 inclusive, 1-6 inclusive, 162, 372, and 190.) In relation to the property known as K/56 Victoria Street (number 372 on the list) Mr Morrissey's note reads, "90 day notice - won't depart until February - can be saved vision [illegible] may reconsider." Mr Morrissey's note, after listing these properties, records "21 units gone". (That would be correct if K/56 Victoria Street was treated as a "gone".) 114 Mr Morrissey's note continues: "New units to put on. 3 new managem in last week 6 from Kings Cross 4-5 [illegible]" (There then follow several other lines which I cannot decipher.) 115 Comasters prepared a document called "Due Diligence Report (limited basis)" dated 16 November 1998. The executive summary of that report said: "On the basis of a limited review of the Company's legal position and enquiries from key personnel of Town & Country Property Management Services Pty Ltd, namely David Horder, John Morrissey and Kevin Ryan, we comment as follows: 1. The business of the Company appears a going concern; 2. The Company has a system of operation in place which appears to follow legal requirements of the industry; … 6. Subject to some operational or administrative difficulties as noted in the audit report by FH Lim & Co, the Company's management agreements and tenancy agreements – in general – appear to be in order; … 8. Based on the audit report (limited scope) by FH Lim & Co, the total amount of management fees appears to be over $450,000 per year, consequently the "exit clause" will not be activated; 9. As at 16 November 1998 (9.00am) there are a number of outstanding issues but some verbal representations had been made by key personnel of the vendor which would seem acceptable to the purchaser; and 10. A written advice should be prepared and forwarded to the vendors' lawyer by 5.00pm Tuesday 17 November 1998 stating the purchasers position, after considering the due diligence issues – the written advice may set out outstanding issues which need satisfactory answers prior to settlement on 30 November 1998." 116 Under the heading "Audit Report by FH Lim & Co and accounting issues" the due diligence report said: "We have perused the auditors report prepared by FH Lim & Co set out on annexure 13. We note that 20 out of 413 management agreements with landlords were randomly inspected by FH Lim. Information on "letting fees" were not included in the calculation of the rent roll." 117 Under the heading "Management Agreements and Tenants Agreements" the due diligence report said: "We inspected some six files containing management agreements and tenants agreements. We saw a number of correspondence with Elie Kaltoum signing the letters to landlords. The agreements seem to be made within the legal requirements of the industry. Trust receipts are not actually provided to tenants but kept on file. Post office and other DEFT institutions give its own receipts." 118 (The significance of Mr Kaltoum signing letters to landlords is, I assume, that he was not the licensee at the time.) 119 The report of FH Lim & Co is dated 16 November 1998. It is addressed to Messrs Edward Lee and Keith Sweeney. (Keith Sweeney was a party to the November Agreement, and had intended to play a role in the operation of the property management business, but he pulled out before the time of the December Agreement.) It said: "We are pleased to report to you our findings based upon the agreed procedures (modified during the audit to suit the circumstance and in consultation with Mr Edward Lee), which were outlined in our letter to you dated 6th November 1998 and described below with respect to the rent rolls of Town & Country Property Management Services Pty Ltd (TCP) as of 28th October 1998, set forth in the attached schedules ( appendix A) ; Auditors Report to the Department of Fair Trading, as required by Section 38D(2) of the Property, Stock and Business Agent Act 1941 for the three years 1996-1998 (not the five years as stipulated in our 6 November 1998 letter), being the period of trading of "TCP (Appendix B) ; Our summary of the rental actually collected and management fees received therefrom (based upon available information) (please see Appendix C) . Our engagement was undertaken in accordance with Australian Auditing Standards applicable to agreed-upon procedures engagements . The responsibility for determining the adequacy or otherwise of the procedures agreed to be performed is that of Messrs Edward Lee and Keith Sweeney. The procedures were performed solely to assist you in evaluating the validity of the rent rolls; comment upon the Auditors Reports and the Taxation position of TCP." 120 I pause here to note that the letter from FH Lim & Co dated 6 November 1998 was not tendered in evidence, so one cannot know what procedures were initially agreed upon, nor how those procedures were changed in the course of the due diligence. The version of the due diligence report which was tendered in evidence did not include an appendix "A". However, the document which Mr Lim annexes to his affidavit as being a copy of the listing which Mr Horder gave him in about October 1998 contains a handwritten heading "Appendix "A"". That heading, together with the fact that the listing is one which Mr Morrissey wrote on as being "current as at 28/10/98", together with certain oral evidence which I will refer to later, combined to lead to the conclusion that that listing was appendix A to the report of FH Lim & Co. More importantly, it is a listing which was represented, in the course of the due diligence, as being the Parramatta rent roll, in the form which was current as at 28/10/98. 121 FH Lim & Co reported: "We selected at random, 20 samples from the rent roll marked Appendix A and conducted the following tests: 16 samples for October 98 were selected; 1 for June 98; and 1 for "September and 2 were aborted due to properties with no rent traceable For the months selected we reviewed landlords and properties files for - agency agreements - tenancy agreements Compared rental payable by tenants to tenancy agreements Compared agency commission to landlords ledgers Checked calculations of agency commissions Where possible summarise monthly rentals collected and management fees received Findings The samples selected were, as stated above, mainly from October 1998. Of the samples selected, we found the following: Agency agreements not located · S & DG Holding's property at 2/30 Albert Street North Parramatta. Mr Horder will try to locate it · Tchilingirion at 1/13-15 Cairds Avenue Bankstown. The only agency agreement appeared to be that with Mr Nabil Aboud, a previous landlord? · Sonenco Pty Ltd at 10/57 Prospect Street Harris Park. It was noted that during the month of October 1998, Rent was received in October 1998 but was deposited in November 1998 · G Gibson at 14/26 Wellwood Avenue Moorebank A property was sold in October 1998 and should have been excluded from the rent roll. The property is at 14/84 Brancourt Avenue, Bankstown No management fee was charged against Mr & Mrs A Dunford in October 1998 at 14/26 Wellwood Avenue Bankstown due to management problem by TCP One property was no longer under management at 7/179 Targo Road, Pendle Hill Rent paid by Shaun Wilson & Amanda Gay at 10/57 Prospect Street Harris Park were mis-posted to another tenant's account. Mr Horder has rectified the matter at the time of our visit Management fees overstated on rent roll · Mr & Mrs Brockway at 1/31 Meehan Street Granville showed 7% management fee but was actually charged at 5% · Mr & Mrs Surandra Lal at 1/66 Pitt Street Merrylands showed 7.5% but was actually 7% Tenancy Agreements which have expired Of the samples selected 9 have expired" 122 This can be summarised by saying that, of the 20 entries in the rent roll which were chosen at random, · Two (equals 10%) could not be checked on at all "due to properties with no rent traceable" · Two (a further 10%) were incorrectly included on the rent roll · Three (a further 15%) showed a larger amount of management fee than had actually been collected · Four (equals 20%) could not be shown to have an agency agreement · Nine (equals 45%) had agency agreements which had expired 123 FH Lim & Co also reported: "A review of the Auditors Report for the 1996 to 1998 years indicated extensive breaches of the Property, Stock and Business Agents Act 1941 (The Act). Please refer Appendices B. The most significant breaches were: · In 1996 trust records were incomplete, and therefore, the bank reconciliation could not be relied upon · In 1997, though a new licensee was appointed, the trust accounts still were not operated to comply with the Act · In 1998 the situations were similar and the trust accounts were not able to be reconciled Mr Horder informed us that $10,000 was deposited into the bank account to cover any shortfall in trust funds." 124 The Auditors Report for the 1998 year, which was part of appendix B to FH Lim & Co's Report, is in evidence (though not as an annexure to that Report) Exhibit A document 22a. It includes, as schedule 4, a type written page which summarises breaches of the Act and/or regulations. The auditor reports: "Whilst I do not believe, nor is there any evidence to suggest any impropriety by the licensee, due to the number of breaches recorded in schedule 4 and the standard of record keeping by the employees of the corporation I am required to issue a qualified report for the Town & Country Property Management Services Pty Ltd trust account as at 30 June 1998. We have attended the corporation's premises for each quarter ended 30 September 1997-30 December 1997 and 31 March 1998 in addition to our 30 June 1998 review and unfortunately, even though the licensee has appointed new employees in an attempt to resolve the situation, we have not noticed any significant improvement." These matters are ones which would suggest to a purchaser that T&CPMS had not been an organisation which was meticulously careful in maintaining its records. 125 Appendix C to FH Lim & Co's report sets out a table covering the months February 1998 to October 1998, which shows the monthly rental collected, the monthly management fees collected, and a percentage rate. (The only exception is that the figures for April 1998 were stated to be, "not available".) It is said to be, "based upon information by Mr David Horder from month end report". The figure shown as monthly management fees collected in October 1998 was $27,224.00. Clause 6.1 and clause 9.3 of the November Agreement (see paragraph 108 above) contain covenants that the fees paid to the company for management of the Parramatta rent roll calculated on an annual basis, using the month of October as a basis for such calculation, would amount to $256,488.90. If one multiplies the figure which appendix C of the report attributes to October 1998 by 12 (which is, presumably, the calculation which clause 6.1 and 9.3 requires to be done) one arrives at a figure of $326,688. Thus, the figure of $256,488.90, which clause 6.1 and clause 9.3 required, was well exceeded by the management fees which FH Lim & Co's report on the due diligence showed were payable. 126 The figure of $256,488.90 would (if all months were of equal lengths) equal a monthly income of $21,374.00. Appendix C shows that that figure was exceeded in every month in the table except February 1998 (where $21,269.00 was received). 127 On 16 November 1998 Mr Lim telephoned Mr Morrissey, and expressed concern that T&CPMS might have taxation or other liabilities. Thereupon the legal advisors to both sides of the transaction started considering whether it would be possible to assign the existing management agreements to a new company, or possibly to form a new company which entered into fresh management agreements with landlords as each existing management agreement of T&CPMS expired. It was recognised, soon after the proposal was raised, that it would involve problems in that any lender to Mr Lee's interests would need to be satisfied that the entity to which it was lending had, and would continue to have, the benefit of the managements agreements. This proposal for restructuring of the transaction was one of the reasons why it did not achieve completion at the time originally envisaged. 128 On 16 November 1998 Mr Morrissey drew up the first Activity Report – the table of tasks to be performed which I have earlier mentioned at paragraph 27. He sent it to Mr Horder, and asked Mr Horder to give a copy of it to Mr Lee and Mr Sweeney. Item 11 of that table was headed "Purchaser's Due Diligence". It read: Morrissey Statement document H Activity Resolution 11.1 Due Diligence completion date 17.11.98 11.1 Lee and Lim to confirm that due diligence will be completed by 17.11.9 11.2 Income for the Parramatta Rent Roll 11.2 JFM, David Horder and Michael Fern by pm 17.11.98 to give status reports of the number of properties in the Parramatta Rent Roll – also income as at 17.11.98 from the management of the Parramatta Rent Roll 11.3 D.H. to provide an assessment of the income of the Parramatta Rent Roll 11.3 Lee and Lim to advise by pm 17.11.98 11.4 Inspection of the Management Agreements 11.4 Lee and Lim to complete by pm 17.11.98 11.5 Nomination of Properties which exceed the $256,488.90 (Clause 9.5) 11.5 Lee and Lim by 19.11.98 11.6.1 Lee and Lim to complete the due diligence by 17.11.98 11.6 Completion of Due Diligence 11.6.2 Lee and Lim to raise no further queries on due diligence after pm 17.11.98 11.6.3 David Horder, Kevin Ryan, Michael Fern and JFM to respond to due diligence by pm 19.11.98 (The Activity Report also contained a column headed "Completion" , but it was blank.) 129 On 20 November 1998 Mr Morrissey sent to FH Lim & Co an updated Activity Report, and requested Mr Lim to: Morrissey Statement annexure N "Please ring on Monday to advise: 1. Can task identified be completed on dates specified. 2. Status of settlement arrangement" 130 That Activity Report said, concerning purchasers due diligence: ACTIVITY RESOLUTION COMPLETION 1 11.1 NOT YET TO J.F.M 111.1 Due Diligence completion date 17.11.98 11.2 Income for the Parramatta Rent Roll 11.2.1 J.F. Morrissey, David Horder and Michael Fern by pm 17-11-98 to give status reports of the – number of properties in the Parramatta rent roll – also income as at 17-11-98 from the management of the Parramatta Rent Roll. M.F. BY 20-11-98 11.3 D.H. to provide an assessment of the income of the Parramatta Rent Roll 11.3 Lee and Lim to advise by pm 17-11-98. NOT YET SUPPLIED 11.4 Inspection of the Management Agreements 11.4 Lee and Lim to complete by pm 17-11-98 and raise queries by pm 18-11-98. NO QUERIES RAISED 11.5 Nomination of Properties which exceed the $256,488.90 ceiling (clause 9.5) 11.5 Lee and Lim by 19-11-98. NOT SUPPLIED COMPLETED, NO QUERIES RAISED 1.6.1 Lee and Lim to complete due diligence by pm 17-11-98 11.6 Completion of Due Diligence 11.6.2 Lee and Lim to raise no further queries on due diligence after pm 17-11-98 NIL RAISED 11.6.3 David Horder, Kevin Ryan, Michael Fern and JF Morrissey to respond to due diligences queries by pm 19-11-98 NIL QUERIES RAISED 131 A copy of an identical Activity Report, accompanied by an identical request, was also sent by Mr Morrissey to Comasters on 20 November 1998. Morrissey Statement document P 132 On 24 November 1998 Comasters sent to Mr Morrissey a document which it described as, "a marked-up (by Edward Lee) copy of the Activities Report" Morrissey Statement annexure S. It was the version of the Activity Report which Mr Morrissey had sent on 20 November 1998, in which Mr Lee had placed some handwritten comments. Against item 11.1 he wrote, "not yet due to structural changes to main agreement". Alongside item 11.2 he wrote, "not yet". Alongside items 11.3, 11.4 and 11.5 a bracket was placed, and Mr Lee wrote, "due to limited audit [illegible], and [high?] percentage of inaccuracies, we have proposed to MKR on 19/11/98 of an escrow amount [$50K]". (The final dollar figure might be $30K.) 133 On 26 November 1998 Mr Morrissey wrote to Comasters, saying: "I note on 24th November 1998 you have forwarded a copy of the Action Sheet that I had prepared on 20th November 1998 with Edward Lee's comments on it. I understand the following matters have been attended to:- … 11.1 Due diligence – I note Mr Edward Lee has indicated that he has not yet finalised you to structure the main agreement. My understanding is that the main Agreement has not been changed. As yet, I have not received a notification of the name of the company which will be assuming the obligations of Portfolio Data. Our client is anxious to be able to complete this transaction by the settlement date as required in the document. 11.2.1 The final statement of the properties in the Parramatta Rent Roll will be provided by Statutory Declaration of Mr Michael Fern on 28th November, 1998. 11.3 Mr Michael Fern will provide a Statement of the income of the Parramatta Rent Roll by 28th November, 1998. 11.4) The comments from your client are not understood by the writer. 11.5) In any event, your due diligence time has expired. Any queries in relation to due diligence to date have been answered. 11.6.1) 11.6.2) No questions raised. 11.6.3) …" 134 The letter concluded by saying: "We are instructed to advise our client wishes to settle this matter on the due date, which is 30th November, 1998 – time of which is the essence. It is logical for the parties to effect settlement at that time. The Statement Run is to take place on 28th November, 1998. Could you telephone the writer to advise your client's position in relation to settlement." 135 Also on 26 November 1998, Mr Morrissey sent to Comasters a copy of a valuation from Robert Bevan & Associates of the rent roll of T&CPMS at Parramatta. That valuation was stated to be as at 23 November 1998. It includes statements that: "The rent roll comprises approximately 413 established tenancies which are managed on behalf of approximately 285 landlords." and "The business receives in property management commission approximately $259,104.00 pa from permanent rental management landlords." 136 It stated as well: "This report and valuation has been prepared based upon the information provided by the proprietors of the business. The valuation is based on information provided by the business's proprietors including the level of income received by the business. This valuation assumes that the information provided is true and correct." 137 Mr Bevan applied a multiplier of 2.5 to the annual income to arrive at a value of $648,000. However, that valuation was on the basis that any sale effected at that price: "…would firstly be based upon an amount of 20% of the rent roll goodwill being retained for a period of six months from settlement such amount to be utilised to offset any losses of properties managed during that six months period and secondly it being a condition of the contract that the vendor agree not to operate or trade as a real estate agent, sales consultant or property manager for a period of thirty six months from the date of sale within a radius of eight kilometres of the business." 138 On 27 November 1998 Mr Morrissey made a file note as follows: "Spoke to Michael Fern on morning of 27th and he was going to do a statutory declaration which included the following:- 1. A print out of the current rent roll with the deletions on it. A note setting out what the new properties are going on – particularly the Eddy Lee ones that he has poached, setting out a valuation of the rent roll based on $2.3329 cents in the dollar calculated on a yearly basis. Michael should have that done for me mid-morning and I would speak to him then." 139 On 29 November, Mr Lee himself wrote to Mr Morrissey, responding to the letter which Mr Morrissey sent to Comasters on 26 November. He said: "Reference to JFM's letter dated 26th-Nov-98. I do have comments and concerns as follows, 1. All items listed/noted as "NOT YET DELIVERED / COMPLETED" have to be completed and cleared up before any settlement could take place irrespective of the time issue." 140 Mr Lee went on to say that his greatest concern related to the structure of the transaction. "…e) In short, I must see a say $600,000 purchase is registered and seen by the ATO as legitimately my entry price/cost, beyond all doubt. How this is to be done has to come about from the Vendor to the Purchaser without further time erosion nor "eating into my budget due to uncalled for professional time". f) That is, as soon as item (2e) is fixed for my consideration or confirmation, I could direct Comasters Law Firm and FH Lim for Further Work ; 1 Further Work means to add the following (a) and (b) items as part of the Main Agreement for finalization duly executed a) Minor Agreement – 1, To include "Retention Period" to replace suggested "Escrow Sum of $30,000" appropriately recommended by Robert Bevan & Associates dated 23rd-Nov-98, and this has been allowed for by the Vendor to the Purchaser of the "King Cross Rent-Roll Package",…" 141 In other words, Mr Lee is here suggesting that, rather than the escrow sum which his handwritten comments on the Activity Sheet had proposed, the sort of structure on which Robert Bevan & Associates had based their valuation (retention of 20% of the price for six months) should be adopted. 142 On 29 November Mr Morrissey met with Mr Horder and Mr Fern "to discuss the various shrinkage and growth managements and identifying matters to be actioned". His notes of that meeting includes the entries: "Shrinkage 18 MF full list & [lett?] to JFM 20/11/98 with [illegible] Growth – 3 [illegible] E Lee DH give a list to MF MF to give list of new managements" 143 On 2 December 1998 Comasters wrote to Mr Morrissey saying: "We understand the outstanding points in relation to this matter are as follows: …2. Edward Lee advised that at 12.30pm today (Wednesday December 1998), Matt Robinson and Edward Lee spoke on the matter of $50,000 deferment. Matt Robinson suggested and Edward Lee agreed that Matt Robinson would provide a personal loan to Edward Lee of $30,000 with a period of up to 15 February 1999 to refund Matt Robinson in full. We understand that in return, the additional rent roll will be provided to our clients at no further cost to our clients. … 6. We note that you were to provide a statutory declaration. We are not sure whether this is still forthcoming. … 9. Our clients request a proper listing of managements for the month of November 1998, ie fees for management agreements and new letting fees. 10. Other items not dealt with so far in the Activities Reports of 20 November 1998 and 26 November 1998 must be completed." 144 On 2 December 1998 Mr Morrissey wrote to Mr Horder saying: "As you are aware, Matt indicated to Edward Lee on Monday that the receipts for the rent roll for the month of November is approximately $28,000. I indicated you would be able to prepare a print out of the calculations showing exactly what revenue was received from the November rent roll. Could you attend to that as soon as possible, I have to get it out to Edward Lee and his advisors this morning. Edward also had made general complaints about the material that he requested and had not yet been supplied." 145 On 3 December 1998 Comasters wrote to Mr Morrissey saying that they had received advice from a tax expert that the structure of the transaction created serious risks for Mr Lee's interests, from a tax point of view. An alternative structure was proposed, whereby a new company would be formed by the purchaser to purchase the 1,000 shares in T&CPMS, and that the new company would also lend $599,000 to T&CPMS. 146 On 4 December 1998 Mr Morrissey wrote to Mr Robinson. By that time, Mr Morrissey had spoken to Mr Julian, of the St George Bank. Mr Julian was prepared to have St George finance Mr Lee, against the security of the rent roll, but St George would advance only 40% of the value of the rent roll. Mr Morrissey's letter concluded: "5. In respect of the value of the rent roll, Michael Fern shows the annual management fees are now $256,480. This gives a valuation of $641,200. St George will take security of 40% being $256,480 – say $260,000. 6. We may have to add into the rent roll some additional managements. To get the full value we need to add approximately $50,000 per year in commissions." 147 The evidence shows that on 8 December 1998 Mr Morrissey sent to Robert Bevan & Associates a list 15 properties which had been formerly managed from the Town & Country Kings Cross office and said, "our client is intending to include those in the Parramatta rent roll, and asked that Mr Bevan prepare a valuation of the properties contained in the list". On 9 December Mr Morrissey wrote to Mr Bevan again, enclosing a copy of a property schedule. It was identical to the property schedule sent the previous day, save that it did not record that one of the units was vacant. The letter informed Mr Bevan of the total commissions earned on the properties in the schedule, and said, "could you please provide us with a letter increasing your valuation of the Town & Country Parramatta rent roll based on the annual commissions on the properties identified in the schedule." 148 Mr Bevan wrote to Mr Morrissey that day, saying that the additional 15 properties would add approximately $35,500 to the value of the rent roll. Mr Lee does not depose to any of this proposal to add properties to the rent roll being brought to his attention, however. Nor does the evidence disclose whether that intention was actually carried out. The next event, according to the evidence, is the entry of the December Agreement on 11 December 1998. 149 On 22 December 1998 Mr Lee wrote to Mr Robinson and Mr Horder saying, "There are several current, outstanding and overdue issues needing your serious attention." There followed a list of complaints. One of the items on the list was, "I am still waiting from you a final list of rent-roll due to my company under my purchase agreement, and it is well overdue". 150 On 24 December 1998 Comasters wrote to Mr Morrissey asking that he arrange to provide, amongst other things, "End of month Nov 98 statement of rent roll. This is part of the necessary document to reconcile the accounts." 151 Mr Morrissey replied the same day, dealing with some of the requests which Comasters had made, but saying nothing about the request to provide the end of month Nov 98 statement of rent roll. 152 Mr Horder was shown, in evidence, the listing of properties which Mr Lee said had been handed to him in October 1998. Mr Horder denied that he had handed it to Mr Lee in any meeting. However, he confirmed that he had produced the list from his computer, given it to Mr Robinson, and that Mr Robinson had handed that list to Mr Lee. T341-342 153 It will be recalled that the allegations in paragraph 17 of the Statement of Claim related to representations made at the time of entering into of the November Agreement to Portfolio Data Pty Ltd. Portfolio Data Pty Ltd is not a plaintiff. There is no difficulty of principle in A suing for misleading and deceptive conduct in relation to a misrepresentation which has been made to B – provided that A can prove that, in consequence of the misrepresentation being made to B, A has suffered loss and damage. (This happens in that category of misleading and deceptive conduct cases where a trader complains that his trade rival is making misleading and deceptive statements to consumers, in consequence of which the trader is losing custom.) However, before the making of any of the representations pleaded in paragraph 17 of the Statement of Claim could give PFD a cause of action, it would be necessary for them to continue to be operative in the mind of PFD at the time PFD entered the December Agreement. PFD came to play a role in this transaction only after Comasters' letter of 3 December 1998, which proposed the incorporation of the new company. While I would be prepared to assume that any representations which were current at the time that PFD came onto the scene were passed onto PFD, in my view by early December it could not be said that there was any representation that the Parramatta rent roll comprised 407 properties which were then under management by T&CPMS. 154 Nor is there satisfactory evidence of the falsity of any such representation, beyond what the due diligence report had made known to Mr Lee. No attempt was made by the plaintiff to show the number of properties that were actually under management at either of the relevant dates. As Mr Lee took over the business, complete with its records, he would have had the factual material to enable such demonstration. Further, Mr Lee swore an affidavit in these proceedings on 16 August 1999 (at a time before MKR and Mr Robinson were joined as defendants) in which he referred to the purchase, and said: "At the time of that purchase the plaintiff owned and managed a rent roll … which consisted of 409 residential properties, most of which were located in the Western Suburbs of Sydney and mainly in the Parramatta area. Exhibited to me now and marked "EL1" is a true copy of the Parramatta rent roll as it was at 28 October 1998." 155 As well, Mr Lee gave evidence: "Q. You would agree that at the time of the purchase of the shares in Town & Country Property Management Services Pty Limited the rent roll consisted of about 409 residential properties? A. That's correct." Transcript 105 156 There is also some evidence from Mr Kaltoum that he remembered the number of properties under management as at September 1998, when his employment ceased, as being "around 400". Transcript 195 At the end of November 1998 there was a "statement run" performed. This process produces statements of income and expenditure which are posted to individual landlords. As well, Mr Horder gave evidence: "Q. What accounting record is generated by the month end run that remains in your hands? A. The copy of all the statements, a full cashbook, receipts and payments, landlord ledgers, tenants ledgers and an audit trail, all of which were performed and supplied and left in the office." 157 It could not be said that Mr Lee was, at that time, relying on any such representation. Mr Lee did not expressly state that he had relied on any such representation about the number of properties. In an appropriate case, a court can infer reliance, even if there is no express evidence of it (Huntsman Chemical Company Australia Ltd v International Pools Australia Ltd (1995) 36 NSWLR 242). However, in the present case, I would not be prepared to make such an inference. By early December 1998 Mr Lee had the results of the due diligence, which showed clearly that the list of properties was unreliable. Mr Lee had proposed two alternative methods of dealing with that unreliability, namely the escrow amount and the retention period. Each of those proposals had fallen on deaf ears. He had been promised more up to date information, but had not received it. He went ahead with the settlement regardless. 158 Nor was there any representation that the properties were the subject of management agreements made between T&CPMS and its landlord customers which were valid, current and enforceable. No such representation was made in those words or any similar words. The structure of the due diligence, provided for by the November Agreement, was that the purchaser had to satisfy itself about that matter. 159 Again, there was no express evidence from Mr Lee of reliance on any such representation. Again, I would not be prepared to infer that Mr Lee had, in fact, relied on any such representation. The due diligence showed that there was a very serious deficiency, even in the very limited sample which was examined, in T&CPMS having management agreements for all its properties. The "Not Aware of any Disentitling Circumstances" Representation 160 The plaintiffs do not contend that a representation of this type was made expressly. Rather, it is said to have been made impliedly, or by silence. I do not find that any such representation was made. The structure of the sale agreement was that the purchaser was to be entitled to perform a due diligence. No limit was placed upon the depth of investigation that might be involved in that due diligence, save that the due diligence was required to be completed on or before 17 November 1998. It was specifically agreed that the purchaser would "ascertain the status of the management agreements which comprise part of the rent roll" (clause 9.4.2) and it was specifically contemplated that by 17 November 1998 a number of the management agreements might have been terminated, in which case an appropriate adjustment would be made to the purchase price, or the entire Agreement rescinded. Mr Lee must have been aware of the possibility that landlords might leave after the purchase was completed – he noted that Mr Bevan had valued the business on the basis of setting aside twenty percent of the price for six months and using the fund so created to, "offset any losses of properties managed during that six month period", had tried to persuade the vendor to include such a provision in the contract, and had failed in that attempt. First Alleged Breach of 'No Disentitling Circumstances' Representation – Telephone Lines 161 Three different breaches were alleged concerning this representation. The first, related to the circumstances in which the telephone and facsimile services of the premises came to be interrupted. Those services were cut off for more than five days in the period between 12 December 1998 and Christmas 1998 Lee affidavit 12 April 2000 paragraph 12. 162 The premises at 255 Church Street Parramatta consisted of a ground floor and a first floor. During the time that a company controlled by Mr Robinson carried on business there, the sales and property management functions of the business were spread over both floors. The Agreement For Sale Of Shares And Business dated 3 November 1998 made provisions for how the space would be utilised when Mr Lee's company had purchased the shares in T&CPMS. "12.3 The Vendor and its related corporation shall while they occupy part of the First Floor, 255 Church Street, Parramatta:- 1. Allow the Company to have the use at no charge – one quarter of the window space of Shop 1, 255 Church Street, Parramatta. ii. Share the costs (as to half to the Company and half to the Vendor and its related corporations) of a receptionist. The Company shall pay all its telephone costs and expenses of its half use of a receptionist. The Vendor and its related corporation shall provide a desk and office equipment for the receptionist. iii. Allow the Company and its employees access to all staff amenities and electricity, water and light. The Company shall pay part of the electricity and water usage relating to the part of the premises it occupies. iv. Provide air conditioning to the premises." 163 The Agreement said nothing about there being a transfer of existing telephone services, or that there was to be any sharing of existing telephone lines. The provision in clause 12.3(ii) that, "the Company shall pay all its telephone costs" could conceivably be made to operate in a situation where the property management business shared telephone lines with the ongoing sales business, but it would be highly impractical – it would require keeping an account of which entity had made every single telephone call on the shared line. The preferable view is that the Agreement contemplated that Mr Lee's company would make arrangements for its own telephone service. 164 On taking over the business, Mr Lee made no arrangements to obtain independent telephone lines for it. He continued to use the existing telephone lines, which were services concerning which an entity associated with Mr Robinson had a contract with the telephone company. The telephone lines were cut off because one of Mr Robinson's companies had failed to pay the October 1998 telephone account Transcript 352. Mr Horder said that there was a dispute (the precise nature of which was not explained, save that the bills in question, were bills of MKR, not of T&CPMS Transcript 353) with the telephone company. 165 In my view, there was no misrepresentation involved in Mr Robinson, or anyone on behalf of MKR, failing to tell Mr Lee about that dispute with the telephone company, or about the failure to pay the October 1998 telephone bill. Nothing in the evidence discloses that anyone in Mr Robinson's camp should have realised that anyone in Mr Lee's camp would have an ongoing interest, after settlement, in whether Mr Robinson's companies had paid their telephone bill. Mr Horder gave evidence: "The phones were supposed to have been separated between the two businesses. We weren't providing phone services for Mr Lee, they were to the downstairs office which we were continuing to operate." 166 For these reasons I find that, even if there had been representation of the type alleged, it was not breached by the circumstances in which the telephone lines came to be disconnected. Second Alleged Breach of 'No Disentitling Circumstances' Representation – Termination of Management Agreements 167 The second alleged breach of this representation concerned the existence of notice of termination of management agreements in relation to some properties. 168 On 30 November 1998 Sonenco No79 Pty Ltd wrote to Mr Robinson complaining about the way T&CPMS had managed two rented home units. The letter gave 30 days notice of termination of management agreements in relation to all the properties of that lessor. 169 That lessor had a large number of properties managed by T&CPMS. Mr Robinson agreed that that lessor was, "one of your major landlords" Transcript 270. Mr Robinson did not tell Mr Lee about the notice of termination. Instead, he went to see Mr Fayad (the man behind the lessor), and paid some compensation for the matters that the letter of 30 November had complained about, with the result that the notice of termination was withdrawn. Even if there had been a representation of the kind sued on, it would not be breached by these circumstances. 170 In April 1999 Mr Lee prepared, and gave to Mr Robinson, a document which sets out management agreements which had been lost up to that time Document O, transcript 277-278. That document identifies the number of days notice given in relation to each such management. According to that document, prior to the settlement on 11 December 1998, management agreements relating to 39 properties had actually terminated. Further, landlords of an additional eight properties had given notice to terminate, which was exercised after 12 December 1998. (Mr Lee's document includes nine properties in this latter category, but one of them involves a termination on 16 December 1998 where the owner gave "nil" days notice, so it must be excluded.) Thus, there were a total of 47 properties in relation to which notice had been given prior to 12 December 1998. However, not all of those 47 properties are ones which appeared amongst the 409 properties listed on the rent roll. It appears that 17 of them were not listed on the rent roll (14 properties at 27 Inkerman Street Parramatta, 56 James Ruse Drive, 1/74 Stapleton Street Wentworthville and 1/29 Manchester Street Merrylands. There are an additional three (those shown in Mr Lee's document as 2/29 Manchester Street Merrylands, 3/164 Station Street Wentworthville and 17/164 Station Street Wentworthville where there is not a complete correspondence to an address on the rent roll, but a somewhat similar address appears on the rent roll, so that these three entries might involve properties on the rent roll in relation to which there has been a typographical error of some sort.) 171 In relation to these notices of termination, Mr Robinson gave evidence that all the files were made available for due diligence Transcript 278. That is in accordance with the regime which the Purchase Agreement provided for due diligence. 172 Further, the plaintiff has not attempted to show to what extent, if any, there were new managements added to the rent roll during the period of the due diligence. Thus, I cannot be confident that the net number of properties lost during that period was equal to the gross number lost. 173 In the circumstances where it was the purchaser's obligation to investigate the status of the management agreements, I am not of the view that the failure to disclose expressly that notice of termination had been received in relation to these properties, amounted to misleading and deceptive conduct. 174 The third way in which this particular breach is alleged to have occurred, is by not disclosing the release from the restrictive covenant which had been given to Mr Kaltoum. This should be considered with the fourth representation. Representations Re the Kaltoum Covenant 175 I have already recounted (paragraph 25 above) how, before the Agreement of 3 November 1998 was entered into, Mr Robinson had told Mr Lee that Mr Kaltoum had entered into a restrictive covenant with T&CPMS. However, the terms of that covenant were not disclosed. I have already held that the covenant was effective, though Mr Robinson had given Mr Kaltoum permission to operate a property management business at Merrylands provided he did not deal with clients who were on the Parramatta rent roll. In these circumstances it was true that there was a restrictive covenant in force with Mr Kaltoum. The precise circumstance which existed, namely that there was a restrictive covenant created by a document, which had been partly relaxed, so as to permit Mr Kaltoum to open a real estate office at Merrylands provided he did not deal with any clients from the Parramatta rent roll, was well within the scope of the extremely vague representation which Mr Robinson made to Mr Lee. 176 Mr Robinson gave oral evidence that he told Mr Lee that Mr Kaltoum would be operating at Merrylands Transcript 257. This is evidence which was not given by Mr Robinson in affidavit form. Mr Robinson's counsel did not put it to Mr Lee in cross-examination. My impression of Mr Robinson is that I would be wary of accepting his evidence when it was not corroborated. I am not prepared to find that Mr Robinson had this conversation which he alleges with Mr Lee. 177 Neither am I prepared to find that Mr Lee has suffered any detriment in consequence of what Mr Robinson told him about the Kaltoum covenant. During a period between the entering of the contract on 3 November 1998 and its completion on 12 December 1998, it seems to have been at, or close to, the bottom of the list of priorities of Mr Lee and his solicitor, to find out what the terms of the restrictive covenant were. The sale was completed without Mr Lee finding out the terms of the restrictive covenant (though with the benefit of a promise to disclose it later – see paragraph 31 above). While that promise required the restrictive covenant to be disclosed within three days of completion, it was not until 12 days after completion that Mr Lee's solicitor made a request for it. While it was the belief of Mr Lee, at the time settlement occurred, that Mr Kaltoum had entered into a restrictive covenant, he had no idea what its terms were. Further, Mr Lee cannot recollect receiving any advice from his solicitor, in the period between 3 November 1998 and 12 December 1998 about any restriction of competition with Mr Kaltoum Transcript 83. In these circumstances I am not prepared to hold that the belief that Mr Lee had about the existence of the restrictive covenant was a cause of Mr Lee causing his companies either to enter the Agreement of 3 November 1998 or the Agreement of 11 December 1998. 178 In the result, each of the claims of misleading and deceptive conduct fails. Was there a Breach of the Lease? 179 As part of the settlement effected on 11 December 1998, MKR leased to PFD, for a period of two years commencing on 11 December 1998, the first floor of 255 Church Street Parramatta. For the first two years, the rental was $2,333.30 per month, payable in advance. Document C; schedule item 12; clause 5.2 The lease also contained the following provision: "17.1 On the commencement date the Lessee must either pay to the Lessor an amount equivalent to three (3) months rent payable under this Lease ("security sum"). 17.2 The Lessor can call on the security sum and the interest earned in whole or part satisfaction or any moneys payable to the Lessor under Clause 5.1. 17.3 If the Lessor calls on the security sum, the Lessor will promptly deposit additional funds to the Lessor so that the Lessor's security is maintained at an amount equal to three (3) month's rent. …" 180 The amounts of rent which PFD actually paid were; December 1998 $2,333.33 12 March 1999 $4,666.66 19 April 1999 $4,666.66 The payment made on 19 April 1999 paid the rent up to 11 May 1999. 181 The lessee never provided cash to make up the "security sum" required by clause 17. However, on 8 April 1999, the Bank of New Zealand issued a bank guarantee, at the request of Mr Lee, in favour of MKR, in the sum of $7,000. That bank guarantee was payable if the Bank received an unconditional written demand from MKR. Mr Lee sent the bank guarantee to MKR about 22 April 1999 Transcript 283. 182 While clause 17.6 of the sublease did not require the security sum to be paid until painting, air conditioning and other works had been carried out, Mr Lee accepted that he did not provide the bank guarantee until those works had been carried out Transcript 126. 183 Around 17 May 1999 MKR made demand on the Bank of New Zealand, and received $7,000. 184 Mr Lee met Mr Horder on 20 May 1999. Mr Lee gives an account of the conversation as follows: "You should not have called up our Bank Guarantee as I was not behind in my rent. My Solicitor has told me that you have no right to terminate my lease unless the rent is at least 14 days in arrears. What can we do about this?" 185 Mr Horder denies that any such conversation occurred. He agrees he had a conversation with Mr Lee in which the question of the bank guarantee of the arrears of rent were discussed, but says he said to Mr Lee, "I can't make those decisions, you'll have to talk to Matt Robinson". 186 I accept Mr Horder's account. Mr Lee's evidence on this topic was seriously unsatisfactory. In his affidavit of 12 April 2000, he annexed what he said was a; …"true copy of a Bank Guarantee from Bank of New Zealand Limited in favour of the third defendant and which I provided to the fourth defendant on or about 12th December 1998, in performance of the 2nd plaintiff's obligation under the sub lease of the Parramatta premises." 187 The document annexed was the first page of the bank guarantee. The complete bank guarantee bears its date, 8 April 1999 on the third page. Had he annexed the whole of the bank guarantee, the fact that he had not provided it on 12 December 1998 would have been immediately apparent. When cross-examined about this error in his affidavit Transcript 110-112 he was extremely evasive. 188 It is true that, on 9 June 1999 Mr Lee wrote to Mr Robinson and Mr Horder saying that on 19 April 1999; "…I handed out a cheque to you for the rental payment of two months, that is one month current and one month in advance as follows: · 12th April to 11th May 1999 · 12th May to 11th June 1999" 189 I pause here to note that this method of allocating the payments of rent is wrong. The payment of rent made on 19 April 1999 had the effect of paying the rent up to 11 May 1999. 190 That letter also said: "At your premises on 20th May 1999 our meeting with David Horder, we discussed this BG [bank guarantee] matter. He advised that the $7,000 cashed by MKR Holdings Pty Ltd should be treated as rent payment of 3 months in advance, that is from · 12th June 1999 to 11th July 1999 · 12th July 1999 to 11th August 1999 · 12th August 1999 to 11th September 1999 If this is what you wish, please confirm, and on 12th Sept 1999 and each month thereafter, I will issue a cheque for a monthly payment." 191 This letter was not replied to by Mr Horder, to contest Mr Lee's account of what happened. Transcript 349 While the failure to respond to the letter counts as an admission of the allegation made in it, in my view it is an admission of little weight. The fact that Mr Lee had misallocated the rental payments in an earlier part of the letter, demonstrated that Mr Lee was proceeding on a false basis. As well, the allegation that Mr Horder had made an agreement of the kind alleged is one which is so far fetched that a reader would be entitled to not take it seriously. By this time, there were serious disputes between Mr Lee and Mr Robinson's interests; Mr Lee had demonstrated significant unreliability about the payment of rent, and the effect of the agreement which Mr Lee alleged, would be to leave the lessor without any security for its rent. These circumstances show that it is improbable that there was any agreement of the kind Mr Lee alleges. 192 Rather, Mr Lee put a proposal to Mr Horder that the encashment of the bank guarantee should be applied as being three months rent, but the proposal was not accepted Transcript 351. This account is consistent with the phrase in Mr Lee's letter of 9 June 1999, "If this is what you wish, please confirm". 193 MKR faxed a monthly invoice to Mr Lee for rental of the premises, in the sum of $2,333.33, on 5 January, 5 February, 5 March, 6 April, 5 May, 7 June and 5 July 1999. Exhibit 2 194 On 9 August 1999 MKR sent PFD a letter saying: "We advise that your monthly rent of $2,333.33 is due by end of business 10 August 1999 and your security deposit of $7,000 must be brought up to date also by end of business 10 August 1999 as stated in clause 17.3 of your lease. You are already in serious breach of your lease. We demand from you full payment of the above amounts by 5.00pm 10 August 1999 by way of cash or bank cheque. We reserve all of our rights under the lease." 195 On 12 August 1999 Mr Lee arrived at the premises to discover the locks had been changed, and that a security guard was preventing access. That day, PFD received a letter from MKR saying: "You are in breach of your lease of the premises of 255 Church Street Parramatta in that you have failed to substitute a security as required under the lease. You are hereby notified that we are terminating the lease and taking possession of the property. You are not to re-enter these premises unless you do so with our authority and in the presence of our representative. You should remove your goods under our supervision." 196 On 18 August 1999 PFD's solicitors wrote to MKR disputing that MKR were entitled to take the action they had taken, and disputing that PFD was in default of the sub-lease but saying that MKR's action in effecting re-entry and taking possession amounted to a repudiation of the obligations of MKR, which was accepted as terminating the sub-lease. Mr Lee ran the business from his home, as best he could, for the next few weeks. PFD obtained a sub-lease of other premises in Parramatta, for a term which began on 3 September 1999. 197 The invoices which MKR sent to PFD for the rental were in a common form for the months January to May 1999 inclusive. Each of those letters concluded with the words "Please send cheque to level 6/34 Hunter Street Sydney or post to GPO box 4316 Sydney." However, those for June and July 1999 did not finish in this way. Rather, they took the form: "TO: Rental of the above property due 10.6.99 $2,333.33 Please note this office is moving to new premises. Our address for future correspondence is GPO Box 4316 Sydney 2001 or level 8/23 Hunter Street Sydney." 198 That is to say, after the bank guarantee was cashed, the letters did not contain any request that a cheque be sent for the amount of rental. 199 On 3 March 1999 MKR wrote to PFD saying: "Please find enclosed invoices for January, February, would you kindly forward a bank cheque for the amount of $4666.66. Please forward a bank cheque also for the security sum of $6,999.99 as per clause 17 of the lease. March rent is also due on 11 March 1999. Should you fail to pay the rent and security sum the sub-lessor is at liberty to take possession of the premises. That right will be exercised without further notice to you. Possession of the goods on the premises will not be granted until all monies have been paid. The sub-lessor may take action against the guarantor under the lease irrespective of any action against the sub-lessee." 200 No case was put that there was a variation of the lease (other than by Mr Lee's evidence, which I have rejected, concerning his conversation on 20 May 1999 with Mr Horder.) Nor was there any allegation of any estoppel concerning a bank guarantee being regarded as a suitable substitute for the cash which clause 17 of the lease required. 201 Clause 12.2 of the lease entitled the landlord to re-enter if rent was 14 days overdue for payment, or if the tenant had failed to comply with a landlord's notice under section 129 of the Conveyancing Act 1919. Section 129 provides: "129(1) A right of re-entry or forfeiture under any proviso or stipulation in a lease, for a breach of any covenant, condition, or agreement (express or implied) in the lease, shall not be enforceable by action or otherwise unless and until the lessor serves on the lessee a notice: (a) specifying the particular breach complained of, and (b) if the breach is capable of remedy, requiring the lessee to remedy the breach, and (c) in case the lessor claims compensation in money for the breach, requiring the lessee to pay the same, and the lessee fails within a reasonable time thereafter to remedy the breach, if it is capable of remedy, and where compensation in money is required to pay reasonable compensation to the satisfaction of the lessor for the breach." 202 The letter of 3 March 1999 amounts, it seems to me, to adequate notice under section 129 in relation to the failure to provide the security sum. However the events which occurred afterwards, concerning the provision, and cashing, of the bank guarantee are regarded, it seems to me that the lessor was entitled to terminate the lease when it did. If the provision, and cashing of the bank guarantee is treated as the provision of a Security Sum, then the rent was considerably more than 14 days in arrears at the time the landlord re-entered possession of the premises. If the provision, and cashing, of the bank guarantee is treated as being the payment of three months rent, then the notice of 3 March 1999 requiring provision of the security sum has not been complied with. More than a reasonable time has passed, since 3 March 1999, at the time that the landlord re-entered possession. 203 For these reasons the claim that MKR breached the lease fails. MKR's Restrictive Covenant 204 The Agreement for Sale of Shares and Business made 3 November 1998 contained the following covenant: "14E.1 The Vendor will not directly or indirectly 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 the business hereby sold, or any significant component thereof, or permit their names or the names of any of them to be used in connection with such new business:- i. Within the Sydney Metropolitan area. ii. For a period of 24 months. 14E.2 Except to the extent otherwise agreed the Vendor shall not, after completion of this Agreement, during the period referred to in sub-clause 14E.1 ii. engage in conduct derogating from the Purchaser's right to obtain the full benefit of the goodwill of the business. 14E.3 The area and period are acknowledged by the Vendors to be no greater than reasonably required to protect the goodwill sold to the Purchasers." 205 The solicitors for the third and fourth defendant were served with a Notice to Produce: "All files and records recording or referring to any business in the nature of property management carried on by the defendants, or either of them, either solely or jointly with or as a director, manager, agent or servant of any other person or corporation where such business has been carried on by them within the Sydney Metropolitan area in the period from 3 November 1998 to 3 November 2000." 206 Pursuant to that notice, the third and fourth defendants produced a document dated 30 October 2001 headed, "Property Contact Report". It is a document which lists properties by address, and states in relation to each property who is the owner, and who is the tenant. The list runs to five pages (if some blank headings are excluded). The properties are widely scattered in the Sydney Metropolitan area. Mr Robinson gave evidence that the managements referred to in that list were, "Conducted by one of my corporations in Sydney, or they were, but it wasn't Town & Country Sydney". It is not clear which corporation he was referring to as 'Town and Country Sydney' in this evidence. 207 The tender of the Property Contact Report does not establish a breach of clause 14E. Before 14E could be breached, it would be necessary for MKR Holdings Pty Ltd to be conducting a business of the kind referred to in clause 14E. The Notice to Produce is framed in terms which can catch a business conducted by any corporation whatsoever, other than MKR, of which Mr Robinson is a director. Thus no breach of clause 14E has been established. 208 In these circumstances, it is not necessary to consider the arguments which were presented about whether clause 14E infringes the common law of restraint of trade, and whether (if it does) it is capable of being read down under the Restraints of Trade Act 1976. PART C – MR KALTOUM'S CROSS-CLAIM AGAINST T&CPMS AND ROBINSON 209 Mr Kaltoum alleges that in about October 1998 T&CPMS, acting through Mr Robinson, and Mr Robinson personally, represented to Mr Kaltoum and his new company that; "(a) that Kaltoum and Elite Pty Ltd were thereafter released from the operation of clause 13.3 of the 1997 Agreement (b) that T&C and Robinson would thereafter indemnify Kaltoum and Elite Pty Ltd from any claims against them arising out of or under the said clause 13.3 (c) that T&C and Robinson granted permission for Kaltoum and SRE to operate a real estate office in Merrylands in the said state (d) that SRE could operate a real estate office under the name Town & Country Merrylands." 210 Both the text of the Release Document, and the conversations between Mr Robinson and Mr Kaltoum concerning it, need to be taken into account in deciding whether these representations were, or were not made. I have made findings about these matters at paragraphs 45 to 72 above. On the basis of that discussion, I will state my conclusions directly. 211 The representation pleaded in paragraph (a) (see paragraph 209 above) was not made in the absolute terms in which it has been pleaded. Rather, the representation was that Kaltoum and Elite were released from the operation of clause 13.3 to some extent, but not so as to permit them to deal with the management, for leasing purposes, of properties which were on the Parramatta rent roll. 212 The representation pleaded in paragraph (b) (see paragraph 209 above) was not made in the absolute terms which have been pleaded. Likewise, that representation was qualified such that, any indemnity would not attach to Mr Kaltoum and Elite in relation to any claims against them arising out of their acting as managing agent for leased property, of properties which were on the Parramatta rent roll. 213 Representations (c) and (d) were made, but subject to the condition that Mr Kaltoum and SRE would not act as managing agents for any property which was on the Parramatta rent roll. 214 When these are the representations which are made, there is no reason to conclude that any of them were false, misleading or deceptive. In consequence, the cross-claim should be dismissed. 215 I have not heard counsel concerning orders, or costs. The orders which, uninstructed by argument, I would propose are: ORDERS 1. Declare that the first defendant has breached his contractual obligations to the first plaintiff contained in clause 13.3 of the Agreement dated 26 August 1997 between the first defendant, Elite Pty Ltd and the first plaintiff. 2. Declare that the first plaintiff is estopped from claiming damages for that breach to the extent that those damages are sustained (a) by reason of the second defendant having as a client of its property management business any lessor of property who was not a client of the Parramatta rent roll, and (b) within a period after 8 January 1999 which is reasonable for the second defendant to cease acting as property manager for that lessor 3. Order that it be referred to the Master to enquire, and to certify, what is the amount of damages which the first plaintiff has suffered by reason of that breach. 4. Order the first defendant pay to the first plaintiff the amount of damages so certified. 5. Otherwise, statement of claim dismissed. 6. Cross claim dismissed. 216 The matter may be re-listed by arrangement with my associate for the making of final orders, and any argument about costs. ********** Last Modified: 03/27/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.