New South Wales Supreme Court CITATION : Elias Bastas v John Edward Hodes (No 2) [2009] NSWSC 1092 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 14-17 September 2009 JUDGMENT DATE : 26 October 2009 JUDGMENT OF : Gzell J DECISION : Further amended statement of claim dismissed with costs. CATCHWORDS : CONTRACTS - General Contractual Principles - Implied terms - sale of an accounting business to partnership by defendant who became an employee of purchaser - assuming heads of agreement contained implied terms as to good faith - whether defendant failed to transfer goodwill of his practice to partnership - whether he made representations that he would retire - whether misleading or deceptive conduct under the Fair Trading Act 1987, s 42 LEGISLATION CITED : Fair Trading Act 1987 CATEGORY : Principal judgment CASES CITED : Commissioner of Taxation of the Commonwealth of Australia v Murry [1998] HCA 42; (1997-1998) 193 CLR 605 Watson v Foxman (1995) 49 NSWLR 315 Elias Bastas (First Plaintiff) PARTIES : David Millard Lawson (Second Plaintiff) David Rooney (Third Plaintiff) John Edward Hodes (Defendant) FILE NUMBER(S) : SC 3346/07 COUNSEL : P O'Loughlin (Plaintiffs) A McInerney (Defendant) SOLICITORS : JGP Lawyers (Plaintiffs) HWL Ebsworth Lawyers (Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION GZELL J MONDAY 26 OCTOBER 2009 3346/07 ELIAS BASTAS & ORS v JOHN EDWARD HODES (No 2) JUDGMENT Introduction 1 John Edward Hodes, the defendant, was the sole practitioner of an accounting practice JE Hodes & Co. David Millard Lawson, the second plaintiff, Peter Hersh and Morris Kaplan were the partners of another accounting practice, GPL Solutions. 2 Mr Lawson claimed that Mr Hodes made representations to him in negotiations for the sale of Hodes & Co to GPL that he was winding down to retirement. Mr Lawson drew up a heads of agreement for the acquisition of the business. The four parties executed it in November 2000. 3 The heads of agreement provided that Mr Hodes would be employed by GPL as a consultant at an hourly rate. His expected hours of work for the year ended 31 December 2001 were to be 1,800 and 1,500 in the year ended 31 December 2002. Mr Hodes agreed to sell his practice including goodwill, work in progress and fixed assets. 4 Mr Kaplan became ill in 2004 and retired from the partnership in March 2005. In July 2005 Elias Bastas, the first plaintiff and David Rooney, the third plaintiff became partners in GPL and Mr Bastas became managing partner. In June 2006, Mr Hersh left the partnership and, with others, established an accounting firm called Logicca. 5 The current partners of GPL sought damages for breach of contract against Mr Hodes on the basis that he had neglected to transfer the goodwill of his business to GPL. They also sought relief under the Fair Trading Act 1987 for an alleged breach of s 42 by Mr Hodes, claiming that his representations that he would retire and would transfer the goodwill of Hodes & Co to GPL were misleading or deceptive conduct. 6 A further claim under the Fair Trading Act that after leaving GPL and taking up employment with Logicca, Mr Hodes represented to GPL's current partners that he would not approach the former clients of Hodes & Co who had become clients of GPL and take them with him and that constituted misleading or deceptive conduct, was abandoned in final address as was a claim for breach of fiduciary duty. Contract claim 7 Nothing much was done by the partners of GPL for almost five years to integrate the clients of Hodes & Co into GPL. Mr Hodes was left to deal with those clients in much the way he had as a sole practitioner. 8 Mr Hodes commenced employment with GPL on 11 December 2000. Shortly thereafter he took steps to integrate his former clients into GPL. He advised all clients that GPL had acquired his practice. He recorded all clients in accordance with GPL systems. He installed all clients on GPL software and learned and used that software. He advised the Australian Taxation Office of the change of tax agent for all clients and he advised the Australian Securities and Investments Commission of the change of agent and registered offices of company clients. 9 Mr Lawson said it was difficult to integrate Mr Hodes' practice immediately because GPL was in the process of moving premises and this was the time immediately following the introduction of GST and accounting practices generally with very busy dealing with those changes. 10 Mr Hodes said the change of premises did not occur until February 2003. He was not challenged on this evidence. I have no reason to doubt it. He had a very much clearer recollection of events than did Mr Lawson. 11 Nor do I doubt Mr Hodes' evidence that he spoke with Mr Lawson and possibly with Mr Hersh and Mr Kaplan suggesting to them that they should start familiarising themselves with the clients' affairs, notwithstanding Mr Lawson's denial that he was the person to whom Mr Hodes spoke. 12 Mr Kaplan was thereafter assigned as Mr Hodes' supervising partner and it was agreed that Mr Hodes would brief Mr Kaplan as each individual job was completed prior to Mr Kaplan signing off on the completed work. This left Mr Hodes and Richard Burling, who with Wendy Garcia had came with Mr Hodes to GPL, to service the former clients of Hodes & Co with minimum involvement of the GPL partners. 13 It was up to the partners of GPL to put in place procedures to integrate the former clients of Hodes & Co. They did not do so. In particular, they took no steps to become acquainted with the clients or the work being done for them. 14 Mr Hodes said that prior to September 2005 Mr Bastas did not request to meet, or otherwise show an inclination to meet, any of the former clients of Hodes & Co. He asked only minimal questions in relation to work done for the clients before signing off on it. 15 Although not formally appointed as an additional client account manager of Mr Bastas until July or August 2006, Mr Hodes carried out that function as well as Mr Forsyth. 16 In September 2005, Mr Bastas wrongly put the conversation in February 2006, Mr Bastas said he did not need two managers and gave Mr Hodes twelve months notice. 17 Mr Bastas commissioned an external consultant to prepare a management plan for the integration of the former clients of Hodes & Co. Mr Hodes received a copy of the plan in September 2005. As counsel for the current partners of GPL said in final address, the plan was honoured in the breach rather than in the observance. 18 The management plan called for Mr Hodes to make appointments with "A" class clients for face-to-face meetings with Mr Bastas and Mr Hodes at the rate of two per week. In the telephone conversation the purpose of the appointment was to be outlined in accordance with a prescribed script. It said nothing about Mr Hodes' retirement or the sale of Hodes & Co to GPL. It was in the following terms: "You may be aware that I'm going to be taking a more strategic role in the practice over coming months. As part of this change, our senior partner Elias Bastas will be taking over the day to day management of your affairs. Of course, I'll still be available to support you and provide advice as required. To ensure that the handover process runs smoothly, I'd like to organise a time in the next couple of weeks for us to get together to discuss your priorities and to introduce Elias. When would you be available? Where would be the best place to meet? We can come over to your offices or alternatively we can meet here at gpl." 19 Mr Hodes thought this impracticable as it would only serve to upset former clients and in the period from October to March each year a lot of work was completed and there were a lot of client meetings to sign off on the work. Mr Hodes suggested to Mr Bastas that the meetings take place when clients were coming to the office to receive their completed work. Mr Bastas agreed to this variation. 20 Appointments were to be made with reference to the diary of Mr Bastas and progress was to be monitored in a spreadsheet of client status maintained by Mr Bastas with weekly feedback from Mr Hodes. Prior to each appointment Mr Hodes was to brief Mr Bastas on key issues to be covered. At each appointment Mr Bastas was to be introduced as the partner responsible for the work. The new client management structure was to be explained to the client and followed up by a letter in fixed terms. It included the statement that during a transitional period Mr Hodes would be available to provide assistance. 21 Mr Bastas said there were four or five such joint client meetings but he did not dispute that he met nine clients identified by Mr Hodes from the diary of Mr Bastas between October 2005 and February 2006. Mr Hodes said there were other client meetings the details of which he could not recall. Mr Bastas did not disagree with this. Mr Hodes said that Mr Bastas missed quite a few meetings. 22 Mr Bastas accepted that at each meeting he was introduced by Mr Hodes as the managing partner and the partner responsible for the client's work. Mr Bastas said he had told Mr Hodes a number of times that he required Mr Hodes to tell clients that he was retiring, that he had sold his practice and then he should introduce Mr Bastas as the partner looking after the work. Mr Bastas said he gave up interviewing clients with Mr Hodes because Mr Hodes would not do as he was told. 23 The management plan called for Andrew Forsyth, the client account manager of Mr Bastas, to be the first point of contact with former clients of Hodes & Co. Mr Bastas accepted that this never happened. 24 Mr Bastas did not monitor the spreadsheet. It recorded only two meetings with Mr Hodes. Mr Bastas said it did not get off the ground because Mr Hodes refused to have meetings in accordance with the plan and go through the purpose of the meetings. 25 Mr Bastas did not complain nor did he insist upon Mr Hodes making arrangements for further meetings. 26 A client review process was set out in the management plan for a new partner or client account manager taking over a client's affairs to obtain appropriate information from the partner or client account manager then responsible for that client. It was not followed. 27 The follow-up letters were not sent and the management plan's flow chart was not followed. 28 Mr Bastas agreed in cross-examination that he did not speak with Mr Hodes about the failure to comply with the management plan. His complaint was that Mr Hodes failed to comply with his requirements that clients should be informed that he proposed to retire, that he had sold Hodes & Co to GPL and that Mr Bastas was the partner looking after the client's work. 29 Mr Hodes said that Mr Bastas showed little interest when he sat in on client meetings and following some meetings clients asked him who Mr Bastas was or said they did not particularly like Mr Bastas. If Mr Hodes was not available, clients tended to ask to speak to Mr Hersh or Mr Lawson rather than speak to Mr Bastas. Mr Hodes said that apart from arranging the meetings, nothing else in the management plan was implemented. Mr Bastas never followed him up in relation to its implementation and neither did anyone else. 30 Mr Bastas had it in his power to implement the management plan. He did not do so. He did not complain to Mr Hodes that he was not complying with it. 31 Mr Rooney said that from his observations Mr Hodes was very resistant to change. On one occasion Mr Hodes had said he did not want to move offices because he did not want to leave his desk, which he had had for the last 30 years. He said Mr Hodes was reluctant to share information in relation to his former clients. During weekly production meetings he said when asked to give an update of his work he was very guarded about sharing any information about the status of his files. When Mr Rooney was responsible for following up debts owed by clients he said Mr Hodes told him: "why are you chasing these debtors, they're my clients." Mr Rooney agreed in cross-examination that Mr Hodes decided when and how the clients were billed and when he queried Mr Rooney's actions he was drawing attention to the fact that he knew the clients well and they might take offence to Mr Rooney's approach. 32 Mr Forsyth left with Mr Hersh in June 2006 and Daryl Ong became the client account manager of Mr Bastas until his employment was terminated in late July or early August when Mr Bastas appointed Mr Hodes to that position. 33 In November 2006, Mr Bastas told Mr Hodes that his work was to be reduced to three days per week. 34 In mid December 2006 Mr Hodes gave one month's notice of termination. He left GPL on 25 January 2007 and became an employee of Logicca. 35 Assuming in favour of the current partners of GPL that there are to be implied in the heads of agreement a term and condition that Mr Hodes would do all things and attend to all matters and execute all documents necessary to give effect to the agreement and include the vesting of the goodwill of Hodes & Co with Mr Lawson, Mr Hersh and Mr Kaplan; that it was a further implied term and condition that Mr Hodes would do all things necessary to ensure that Mr Lawson, Mr Hersh and Mr Kaplan received the benefit of the agreement; that it was a further implied term and condition of the agreement that each party would act in good faith towards the other; that it was a further implied term and condition of the agreement that Mr Hersh would act in good faith towards Mr Lawson, Mr Hersh and Mr Kaplan: they have not made out a breach of contract by Mr Hodes. 36 For almost five years nothing was done to integrate the clients of Hodes & Co into GPL. They were served by Mr Hodes without demur notwithstanding his suggestion that some action be taken. In this regard I prefer the evidence of Mr Hodes to that of Mr Lawson. During all this time gross fees were earned by GPL from the work of Mr Hodes and GPL had the advantage, annually, of the income streams that work produced. 37 Goodwill is the right to conduct a business in substantially the same way in which it has attracted custom to it. In Commissioner of Taxation of the Commonwealth of Australia v Murry [1998] HCA 42; (1997-1998) 193 CLR 605 at 615 [23] the High Court said: "From the viewpoint of the proprietors of a business and subsequent purchasers, goodwill is an asset of the business because it is the valuable right or privilege to use the other assets of the business as a business to produce income. It is the right or privilege to make use of all that constitutes "the attractive force which brings in custom". Goodwill is correctly identified as property, therefore, because it is the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it. It is a right or privilege that is inseparable from the conduct of the business." 38 That is precisely what GPL enjoyed between 11 December 2000 and 25 January 2007. There was no failure on Mr Hodes' part to "transfer" the goodwill to GPL, whatever that may mean. The business was conducted on GPL's behalf by Mr Hodes. Goodwill was inseparable from the conduct of that business. 39 Nor did Mr Hodes neglect to do all things necessary to ensure that GPL received the benefit of the heads of agreement. Nor did he neglect to act in good faith towards the partners of GPL. Mr Lawson regarded Mr Hodes as an honest, hardworking employee of the firm and at no time during his employment did he have any cause for complaint in respect of Mr Hodes' conduct as an employee. 40 I reject Mr Rooney's suspicions. Nothing turns upon Mr Hodes' desire to retain a desk he had used for 30 years. 41 Mr Hodes commenced to attend weekly production meetings in August 2006 when he became the client account manager of Mr Bastas. He was then responsible for the files of Mr Bastas as well as the files of former Hodes & Co clients. He denied he was guarded about sharing information about files and he denied that he gave as brief a response as possible. I accept that evidence in preference to Mr Rooney's impression. Since he was responsible for the clients of Mr Bastas as well the former clients of Hodes & Co, any failure on his part to give appropriate information would have been noticed and commented upon. It was not. Mr Bastas had sufficient faith in Mr Hodes to appoint him his client account manager. He would not have done so if Mr Hodes was acting against the interests of GPL. 42 It was not a lack of good faith towards GPL on Mr Hodes' part that lead to the management plan not being followed. Mr Bastas was in charge of it and chose not to follow it. He chose not to attend further client meetings. 43 In his first affidavit Mr Bastas did not say that he required Mr Hodes to inform the former clients of Hodes & Co that he had sold its business to GPL. He said he told Mr Hodes to tell clients that he was winding down to retirement and then to introduce Mr Bastas as the partner looking after the work. It was in cross-examination that Mr Bastas, for the first time, included the third requirement. 44 It is unlikely that Mr Bastas required Mr Hodes to say the business of Hodes & Co had been sold to GPL. The business of Hodes & Co had been sold to GPL some six years previously to the knowledge of any of the clients who visited the offices of GPL, including those with whom Mr Bastas met. 45 It is more likely, in my view, that Mr Bastas abandoned the management plan and came forward with the alleged failure of Mr Hodes as an excuse for his own decision. 46 The current partners of GPL have failed to establish that Mr Hodes was in breach of contract. It is unnecessary for me to consider the expert evidence on the quantification of damages. Fair Trading Act claim 47 The current partners claim that in breach of the Fair Trading Act, s 42 Mr Hodes made representations that were misleading and deceptive. The alleged representations were that he was tired of working as a sole practitioner; that he was concerned about the future of his practice; that he was looking for an exit strategy; that he was looking for a way to secure his retirement; that he intended to retire; and if Mr Lawson, Mr Kaplan and Mr Hersh entered into the heads of agreement he would transfer the goodwill of Hodes & Co. 48 It is alleged that relying on the truth of the representations and induced thereby, Mr Lawson, Mr Kaplan and Mr Hersh entered into the heads of agreement but that, contrary to the representations, Mr Hodes did not transfer the goodwill of Hodes & Co to Mr Lawson, Mr Hersh and Mr Kaplan and did not retire. 49 The claim fails because, for the reasons expressed above, Mr Hodes did not fail to "transfer" the goodwill of Hodes & Co. 50 Nor did he represent that he would retire at a lunch with Mr Lawson at Tattersalls Club where the representations were said to have been made. In this regard I prefer the evidence of Mr Hodes to that of Mr Lawson. 51 Mr Lawson said that at the lunch Mr Hodes said: "I've had enough working on my own. There's a bit of friction working with Lawrence in the same premises. I don't want to continue working at this level, I'm working every Saturday. I want to wind down. I am looking for an out and a way to retirement." 52 Mr Hodes had been in practice in partnership with Lawrence Lau. They terminated their partnership and practised separately but from the same premises. 53 Mr Lawson said that some time in November 2000 the partnership announced the acquisition of Hodes & Co to all its employees. He said that he, Mr Kaplan and Mr Hersh all said words to the effect: "GPL has acquired the practice of JE Hodes & Co. John is coming on board with GPL as a consultant, with a view to winding down to retirement." 54 Mr Lawson said that Mr Hodes was present when these comments were made and did not indicate that the comments were incorrect. 55 Mr Hodes said that at a lunch at City Tattersalls Club Mr Lawson said that GPL was looking to expand its practice. Mr Hodes said it became apparent to him during the course of the lunch that Mr Lawson was interested in potentially buying his practice but at that stage his family trust was still a joint owner with Mr Lau's family trust of the premises from which they practiced. 56 In October 2000, he having confirmed a purchase of his trust's interest in the premises by Mr Lau, Mr Hodes said he telephoned Mr Lawson and arranged another lunch at which he told Mr Lawson he might be interested in selling his practice and if he could not sell he would need to relocate. He said to Mr Lawson that maybe Mr Lawson should consider buying his practice. Nothing definite was proposed or agreed upon at that meeting according to Mr Hodes. 57 Following the second lunch, Mr Hodes said that he and Mr Lawson discussed the possibility further. He said that Mr Lawson proposed that he should sell Hodes & Co to GPL; that GPL would employ him as a consultant; and that he should bring two senior staff with him, Mr Burling and Ms Garcia. 58 Mr Hodes said that he then met Mr Lawson, Mr Kaplan and Mr Hersh in early November. Negotiations then progressed between him and Mr Lawson culminating in the heads of agreement. 59 Mr Hodes denied making the representations said to have been relied upon by Mr Lawson. He said he had no recollection of ever having said to Mr Lawson that he was concerned about the future of his practice. He may have said at some stage he was concerned about continuing to practise as a sole practitioner because of his perception that it was becoming increasingly difficult for an accounting practitioner to keep up with the changes to the taxation legislation following the introduction of GST. He said that at one stage during his negotiations with Mr Lawson he was asked did he want to retire to which he said: "not now or in the near future although I obviously will eventually." 60 Mr Hodes could not specifically recall when the issue of his retiring was first discussed. It might have been during the first lunch but he only said words to the effect that he obviously would at some stage. He said he had no definite date in mind to retire and he denied saying to any of the partners of GPL that he would retire by a specific date. 61 In cross-examination, Mr Lawson did not recall what other matters were discussed over lunch. He said that it was his understanding that Mr Hodes was to retire when he left the practice. Then he said Mr Hodes was to retire within a short period of time from the time GPL took over his practice. Yet he made no complaint that Mr Hodes had not retired within a short period of time. Mr Lawson then said he would have complained if he had been given the impression that Mr Hodes was not to retire when he left the GPL practice. Mr Lawson then changed his evidence again to say that Mr Hodes was to retire at the time of handing over the practice to GPL. He said that was an important matter to him yet it was not included in the heads of agreement. At no time did Mr Lawson say to Mr Hodes that he should retire. 62 As to the announcement of the takeover of Hodes & Co, Mr Lawson agreed under cross-examination that he was not sure whether he spoke or not. He did not recall who else spoke. He did not recall what was actually said. It was put to him that he did not recall words being said that Mr Hodes was coming on board as a consultant with a view to winding down to retire. He said: "that would have been words I would have used". He said he may not have mentioned that Mr Hodes was to retire in a short period of time. Mr Lawson agreed that the words he said were used by Mr Hodes as to retirement did not have a time frame. 63 Later in cross-examination Mr Lawson said that Mr Hodes indicated that it was his full intention to retire in the short term. He was asked what he meant by the short term and said three to five years. He then conceded that that time frame was not short. Mr Lawson said he did not recall whether the three to five year period was based on anything said by Mr Hodes. He did not, once Mr Hodes had worked for GPL for three years, take any steps to have him retire, nor did he take steps after the employment reached four years, nor after the employment reached five years. 64 In contrast, Mr Hodes was an impressive witness who was not shaken in cross-examination. He denied that he wanted to retire in the short term. He was 63. The growing complexities of practice attracted him to selling his practice and becoming an employee. The conversation alleged by Mr Lawson was put to Mr Hodes and he denied making those statements. He was asked whether he recalled a meeting at which most of the staff were invited. He did not recall. It was put to him that it was more likely than not that there was some formal introduction of him to the staff. He said he could recall being taken around by Mr Lawson and introduced to everybody and some of the people he already knew. The announcement Mr Lawson said was made was put to Mr Hodes. He said he had no recollection of it. He could not confirm or deny that in November 2000 a statement was made. He did not go to GPL until 11 December 2000. 65 The variations in the evidence of Mr Lawson deny any degree of precision sufficient to enable the court to be reasonably satisfied that the alleged conversation was misleading in the circumstances (Watson v Foxman (1995) 49 NSWLR 315 at 318). Those variations also lead me to prefer the evidence of Mr Hodes that no representations as to when he would retire were made. 66 It was submitted that the reduction in Mr Hodes' working hours from 1,800 for the year ended 31 December 2001 to 1,500 in the year ended 31 December 2002 in the heads of agreement supported the allegation that Mr Hodes had represented that he was winding down to retirement. 67 Mr Hodes worked in excess of those hours both in the two years mentioned in the heads of agreement and thereafter. That fact cannot create the required precision to justify a successful claim under the Fair Trading Act. 68 The heads of agreement were not varied when Mr Kaplan retired, when Mr Bastas and Mr Rooney joined the firm or when Mr Hersh left it. There was a provision in the heads of agreement as follows: "In the event that the practice of GPL is acquired by or merged with another practice the terms and conditions referred to in this agreement will be honoured and form part of any sale or merger agreement." 69 It was submitted that this was sufficient to bind Mr Bastas and Mr Rooney to the heads of agreement and to bind Mr Hodes to it during the changing partnerships. 70 I fail to see how Mr Bastas and Mr Rooney would be entitled to relief under the Fair Trading Act with respect to any representations made by Mr Hodes to Mr Lawson if those representations had been established and had constituted misleading conduct. 71 The current partners of GPL have failed to establish an entitlement to relief under the Fair Trading Act. Orders 72 The amended statement of claim is dismissed with costs. ********** 28/10/2009 - To insert judgment number as more than one judgments in this matter - Paragraph(s) In the title inserted (No 2) on coversheet and title on first page of jdugment 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.