Findlay & Ors v ADIT Engineering Pty Ltd & Ors [2005] QSC 65

SUPREME COURT OF QUEENSLAND CITATION: Findlay & Ors v ADIT Engineering Pty Ltd & Ors [2005] QSC 065 PARTIES: BRETT FINDLAY, DONNA FINDLAY, STEVEN FORRESTER and KATICA FORRESTER (applicants) v ADIT ENGINEERING PTY LTD ACN 051 136 764 (first respondent) and ARTHUR DEREK THOMPSON, NANCY ELIZABETH THOMPSON AND STEPHEN HUGH THOMPSON (second respondents) FILE NO: 11065/03 DIVISION: Trial PROCEEDING: Application ORIGINATING COURT: Supreme Court, Brisbane DELIVERED ON: 5 April 2005 DELIVERED AT: Brisbane HEARING DATE: 12 November 2004 JUDGE: Douglas J ORDER: ORDER THAT THE SECOND RESPONDENTS PAY $453,952 TO THE APPLICANTS IN EXCHANGE FOR ALL DOCUMENTS NECESSARY TO TRANSFER THE APPLICANTS’ SHARES IN THE FIRST RESPONDENT TO THE SECOND RESPONDENTS CATCHWORDS: CONTRACT – GENERAL CONTRACTUAL PRINCIPLES – DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH – REPUDIATION AND NON-PERFORMANCE – REPUDIATION – GENERAL PRINCIPLES – where valuation of the applicants’ share in the second respondent was dependent upon the existence of a restraint of trade clause – whether repudiatory conduct prevents the clause applying if it were enforceable Prudential Assurance Co Ltd v Newman Industries Ltd [1982] Ch 204, cited Thomas v D’Arcy & Ors [2005] QCA 068, cited Promenade Investments Pty Ltd v New South Wales (1992) -- 1 of 4 -- 2 26 NSWLR 203, applied Natoli v Walker (Supreme Court of New South Wales, Court of Appeal, Kirby P, Mahoney, Meagher JJA; CA 40351 of 1993, 26 May 1994); BC9402554), applied COUNSEL: Mr M R Bland for the applicants Mr D D Bates for the respondents SOLICITORS: McCullough Robertson for the applicants Deacons for the respondents [1] DOUGLAS J: On 20 January 2004 Helman J made a consent order in this matter that the second respondents (“the Thompsons”) purchase the applicants’ shares in the first respondent, ADIT Engineering Pty Ltd (“ADIT Engineering”). The applicants, Mr and Mrs Findlay and Mr and Mrs Forrester were, together with the Thompsons, shareholders in ADIT Engineering, a mechanical engineering and repair business. The purchase price for the applicants’ shares was to be determined by a valuation on a going concern basis of those shares as at 11 November 2003 by Calabro Partners. The parties agreed to be bound by the valuation “subject to manifest error”. The purchase price was to be paid by the Thompsons to the applicants as to 50 per cent of the purchase price on or before 30 March 2004 and the remainder by 28 May 2004. [2] The valuation was prepared on the assumption that the applicants would be subject to a restraint of trade set out in cl. 10 of a shareholders’ agreement entered into between the applicants and the second respondents as the shareholders in ADIT Engineering on 1 October 2001. The valuer went on to say: “If Messrs Forrester and Findlay are not subject to a restraint of trade and could trade in direct competition with the company I would not consider the methodology adopted by me appropriate due to the unknown impact this could have on the future maintainable earnings of the company.” [3] The restraint clause reads as follows: “10. RESTRAINT OF TRADE The parties hereto acknowledge that in the event of either Brent Findlay as a Shareholder in Group C or Steven Forrester as a Shareholder in Group D exiting the Company other than as a result of the sickness accident or death of either or both of them, then both Brent Findlay and Donna Findlay and Steven Forrester and Katica Forrester jointly and severally covenant and acknowledge that they will be restricted from operating another business providing similar services to that offered by the Company in the geographical areas of the States of Australia within which the Company operates for a period of two years from the date of this event and in any event shall for the period of two years not be permitted to trade, participate or operate a similar business either as servant agent, director employee in respect of such geographical area or in respect of any client from -- 2 of 4 -- 3 time to time which has been a client of the Company in the previous three years for a period of two years from the date of the event.” [4] The Thompsons paid $273,294.25 to the applicants on 7 April 2004 but resist paying anything further on the basis that the Calabro Partners’ valuation contains a manifest error, namely, the assumption that Mr Forrester and Mr Findlay are subject to a restraint of trade as set out in cl. 10 of the shareholders’ agreement. [5] The applicants brought this application seeking an order that the Thompsons pay $453,952 to them pursuant to the consent order of 20 January 2004 and based on the Calabro Partners’ valuation. Because of their contention that the valuation is subject to manifest error, the Thompsons propose that the consent order, instead, be varied so that another valuation is prepared on the assumption that Messrs Forrester and Findlay will not be subject to a restraint of trade. [6] The reasons the Thompsons advanced for this course of action are that the applicants’ solicitors denied that cl. 10 of the shareholders’ agreement was enforceable against their clients in a facsimile of 30 March 2004, that both Mr Findlay and Mr Forrester are or have been employed by clients of ADIT Engineering within the period described in cl. 10 and because Mr McDonald of Calabro Partners has said in a conversation with the Thompsons’ solicitor that, if the restraint of trade clause did not apply, he would reduce the goodwill figure referred to in his valuation to zero. [7] Mr Bland submits for the applicants that what was said by his solicitors in the facsimile does not reflect the legal effect of cl. 10 which, he contends, is valid. What they said in another facsimile on 31 March 2004 was that the restraint could not be used to prevent their clients from being employed as diesel mechanics. That is true as the restraint is more confined than that in preventing them from participating, for example, as employees in businesses similar to ADIT Engineering’s mechanical engineering and repair business in certain areas for a certain period. It was admitted that Mr Findlay and Mr Forrester had been employed by former clients of ADIT Engineering but Mr Bland did not concede that there had been any breach of cl. 10 on the basis that they did not “trade, participate or operate a similar business either as servant agent, director employee ... in respect of” those clients. [8] In any event he submits that, if there has been a breach of the clause, then damages are recoverable by ADIT Engineering. Mr Bland also submits that events occurring after the date of the valuation, 11 November 2003, cannot affect the value of the shares on that date so that any breach by the applicants of the restraint is irrelevant. In submitting that any breach can be compensated by damages recoverable by the company he points to the inability of the shareholders to recover damages in circumstances where the loss is one suffered by the company, which is in as good a position as any shareholder to bring proceedings for the loss; Prudential Assurance Co Ltd v Newman Industries Ltd [1982] Ch 204 at 222-223 and see also Thomas v D’Arcy & Ors [2005] QCA 068. [9] Prima facie the parties are bound by cl. 10 and it is not a manifest error for the valuation to have proceeded on that basis. A manifest error in a similar context has been described as one that is evident or obvious rather than arguable1 or where there 1 Promenade Investments Pty Ltd v New South Wales (1992) 26 NSWLR 203, 225. -- 3 of 4 -- 4 is a “swift and easy persuasion and rapid recognition of the suggested error”2 . The asserted denial of cl. 10’s enforceability by the applicants’ solicitors does not determine whether it binds the parties. Even if that were repudiatory conduct it would not prevent the provision from applying if it were enforceable. Nor does it prevent the company from suing for breach of the clause in the absence of some election, waiver or estoppel preventing it from taking such a course. There is no evidence that it has taken such a course. [10] Nor does it appear on its face to be an agreement that is necessarily unreasonable as between the parties. That issue was not litigated on this application which was limited to argument about the effect of the order in the circumstances that had occurred. Nor was there any argument as to whether the restraint operated in the public interest. The term of the restraint is limited to two years from the time either man leaves the company and the restraint only operates to prevent them operating a business providing similar services to that offered by ADIT Engineering in the geographical areas of the states of Australia within which it operates and from trading, participating or operating “a similar business either as servant agent, director employee in respect of such geographical area or in respect of any client from time to time which has been a client of” ADIT Engineering in the previous three years. There may be some problems of construction of the clause but it may well be no more than adequate protection of the interests of the parties to the agreement when they entered into it and, thus, enforceable.3 [11] Accordingly, it seems to me that the applicants are entitled to the relief they seek. I shall make an order that the second respondents pay $453,952 to the applicants in exchange for all documents necessary to transfer the applicants’ shares in the first respondent to the second respondents. I shall hear further submissions as to the time within which that payment should be made and as to costs. 2 Natoli v Walker (Supreme Court of NSW, Court of Appeal, Kirby P, Mahoney, Meagher JJA; CA 40351 of 1993, 26 May 1994; BC9402554) at 25 per Kirby P. 3 Generally see Halsbury's Laws of Australia at [110-7205], [110-7225], [110-7230], [110-7235]. -- 4 of 4 --