Cassis & Anor v Kalfus

Background 16 The uncontested evidence is that the plaintiff worked in France between 1970 and 1981 as an engineer for the firm Chaffoteaux et Mauri (CMF) at that time the world's largest manufacturer of instant gas hot water heaters. 17 The first-named plaintiff migrated to Australia with his wife, the second-plaintiff, in 1981. In 1982 he began working for CMF through its subsidiary in this country Chaffoteaux et Mauri Pty Ltd (Australia) (CMA). The plaintiff was the managing director of CMA. The defendant acted as a solicitor for CMA and was an alternate director of it. A friendship developed between the first-named plaintiff and the defendant and the defendant undertook legal work on behalf of the first-named plaintiff in the acquisition of a residential property at Coogee in 1984. 18 In his statement of defence the defendant does not deny that from time to time he acted as a solicitor for the first-named plaintiff in respect of real estate transactions and that he acted for CMA between 1982 and 1989 but denied that he had any general retainer to act for the first-named plaintiff and that he failed to perform his duties. 19 CMA expanded its business between 1982 and 1988 due to the successful management of it by the first-named plaintiff. In 1983 its turnover was $425,824. In 1988 it was $1,986,985. By 1998 the first-named plaintiff was on a salary which was stated to be equivalent of $100,000 per annum, that being made up of a salary of approximately $85,800 per year, together with the provision of a car, and payment of superannuation. 20 In 1988 the first-named plaintiff and the defendant discussed the possibility of entering into a joint venture directed to them taking over the business conducted by CMA in Australia. The first-named plaintiff, when he was in Paris in 1988, raised the matter with M Eskander from CMF. There is a dispute as to who first suggested the joint venture. The first-named plaintiff says it was the defendant and the defendant says it was the first-named plaintiff. It does not seem to me to matter greatly who raised the matter first. Both were enthusiastic for the venture to proceed. 21 The plaintiff and the defendant agreed that if CMF allowed them to take over the business of CMA they would form a company, International Gas Corporation Pty Ltd (IGC), to buy out CMA and take over CMA's distribution franchise in Australia. It was agreed between the two of them that they would both become directors and shareholders of IGC. 22 Although it is common ground that the first-named plaintiff and the defendant formed a company in which they had equal rights, there is a dispute concerning the conversations that preceded both the incorporation of IGC and the agreements IGC subsequently entered into to buy out CMA and to distribute CMF's products throughout Australia. 23 According to the plaintiff in the first half of 1988 the defendant suggested to him that they enter into a joint venture to buy out and subsequently operate the business of CMA. (As I have said the defendant says it was the first-named plaintiff who first raised the matter.) In the course of that conversation as recounted by the first-named plaintiff, the first-named plaintiff said he proposed that his contribution to the joint venture would be 50 per cent of the profits of IGC over and above expenses (which included payment to him of $100,000 per annum). He alleges that the defendant, for his part, promised to contribute 50 per cent of the net profits of his law firm over and above $100,000 which he, the defendant, was entitled to keep because he was wholly responsible for the conduct of the law practise. 24 The first-named plaintiff has alleged that the defendant represented to him that his firm made a net profit of approximately $200,000 per year. The defendant has denied it. 25 In January the following year the defendant, at the request of the first-named plaintiff, provided the first-named plaintiff with what was described as a "letter of comfort" in which the joint venture agreement was set out. 26 The defendant executed a document on the letterhead of his legal practice as follows - "Re: Legal Practice of MARCEL, KALFUS & CO This letter is by way of confirmation of the agreement reached between ourselves concerning International Gas Corporation Pty Ltd and the above practice. I hereby confirm and acknowledge that you shall as from 1 February 1989 be entitled to an one half share of the net profits of the above legal practice. In determining the net profits there shall be deducted from the gross fees received in any tax year or trading period, all operating expenses including wages, rent, equipment leasing charges and bank interest and other charges and income tax. I hereby further confirm that the net profit from the legal practice and from International Gas Corporation Pty Ltd (IGC) and all other jointly related companies or businesses operated by us jointly are, to be pooled or aggregated and then shared by us on an equal basis. I also confirm that you shall be entitled during an annual period of operation of IGC and related entities to draw the sum of $100,000 as an annual salary as managing director of the company. Similarly I shall be entitled to draw the sum of $100,000 as from the gross fees received by Marcel, Kalfus & Co on account of my share of such profits. Our respective advance drawings against profits may exceed the sum of $100,000 but in the absence of express agreement between ourselves the same shall not in any year exceed the total of the permissible advance on drawings by more than twenty-five per cent, ie in the first year such advance drawings must not exceed $125,000. We may by agreement, at any time vary the amount of advance drawings in any year. All amounts paid by way of advance drawings shall be debited to the account of share of profits of yourself and myself respectively. If the amount of advance drawings of either of us in any accounting period exceeds a half share of the net profit of IGC (and its related entities) and the legal practice, then shall excess will be debited against such person's account for share of profits in the ensuing year. I trust this letter provides you with the comfort you desire concerning our new and exciting venture." 27 There is no mention in this letter of any representation by the defendant that his legal practice netted $200,000 per year and I am not persuaded that this was a representation made by the defendant to the first-named plaintiff. However, it is fairly clear from the terms of the above letter that the defendant was representing, or at least implying, that his legal practice was netting, or could be netting, an amount in excess of $100,000 per year, sufficient to make a contribution to the 'pool' that was said to be established by the joint venture. 28 In fact the defendant said in evidence that his earnings at that time never rose above $70,000 per year before tax. 29 The defendant, while admitting that he had acted for the first-named plaintiff on real estate transactions in the past, denied there existed between him and the first-named plaintiff a relevant "solicitor and client" relationship. The defendant told CMF towards the end of 1988 that he would not be acting for CMA in the transactions designed to advance the interests of the joint venturers, because he had a vested interest in the outcome and that he was acting "on behalf of Sami [the first-named plaintiff] and myself as co-venturers". 30 It was put to the first-named plaintiff that from at least mid-1988 onwards he was proposing himself to take over the operations of CMA and that the defendant's participation in IGC was no more than that of a shareholder and director. The first-named plaintiff agreed that he was proposing to take over the operation of CMA but denied that the participation of the defendant was to be as a shareholder and director of IGC only. He has said that if he had known he was, as it were, on his own, he would never have entered into the transaction. As I have said I think it more probable than not that representations were made concerning the ability of the defendant to contribute to the pool referred to in the letter set out above. I would infer, in the light of all the circumstances that, the reference to the "pool" was intended to be a reference to be moneys that might be needed as capital for the continued operation of the company. The joint venture agreement contemplated, in my opinion, that the defendant had to be more than just a director and a 50 per cent shareholder contributing nothing other than day to day legal work and to be entitled by reason of his shareholding to 50 per cent of the profits after expenses. In my opinion I am entitled to infer that the defendant agreed to contribute not just to the day to day legal work, but also the capital, if needed, and which he represented would be available out of the profits of his law firm. 31 As events turned out, the defendant never contributed any money to the joint "pool" and neither did the first-named plaintiff. In fact for the first three years IGC was successful under the first-named plaintiff's management. It re-paid the debt it owed in respect of its "buy out" of CMA (an amount in excess of $1,000,000) in slightly under two years. The debt was paid out in October 1991. During the three year period the plaintiff had a gross salary of $68,723 in 1990, $56,000 in 1991 and $56,000 in 1992. From that package was deducted moneys for superannuation and the provision of a car, maintained by IGC. The first-named plaintiff also had his wife and one of his sons on the company's payroll. 32 In January 1989 the defendant wrote to M. Eskander in Paris concerning the terms and conditions of the buy out by IGC of CMA's business. The negotiations were directed largely to the price CMF was asking and to the period of the sole agency agreement CMF was prepared to grant to IGC. 33 In the course of these negotiations two matters were raised of relevance to this litigation. The first, was in a letter sent by M. Eskander to the defendant and the first-named plaintiff. He referred to a statement in the draft heads of agreement that had been forwarded to him, in which it was said that the term of the sole agency agreement had been agreed in 1988 as being an initial term of three years with a right to the local distributor to renew for a further three years. M. Eskander did not deny that the matter had been discussed as alleged, but claimed that - " … the renewal period, however, is a different story and we cannot accept nor did we ever accept renewals for more than one year. As for your proposal of leaving the renewal to the decision of just the purchaser is totally unacceptable. The right of cancellation must be reciprocal." 34 Eventually it was agreed that the period of the sole agreement should commence on 1 February 1989, and remain in force until 31 December 1991, and thereafter to continue in force unless and until cancelled by six months notice in writing given by either party to the other, and expiring at the end of such period or any time thereafter. (In fact the period was extended to December 1992 and thereafter, by reason of notice given in January 1992, the sole agency agreement was terminated.) 35 The second matter to which attention should be directed was the insistence by CMF that - "This whole Agreement is conditioned on Mr SAMI CASSIS being the Managing Director of the Distributor. Any modification of Mr SAMI CASSIS'S role will automatically allow Principal to immediately terminate this Agreement, if he so wishes, without the Distributor being entitled to any indemnity". 36 Prior to finalising the "buy out" and sole agency agreements the first-named plaintiff and the defendant had discussions concerning the period of the sole agency. The defendant was concerned that, bearing in mind that the purchase price (as I have said, in excess of $1,000,000) had to be repaid within two years (commencing in October 1989), the sole agency period was not long enough. However, the first-named plaintiff was confident that by reason of his relationship with relevant people in CMF in Paris, the term of the agency insisted upon by CMF would not be a problem. It is to be remembered that the first-named plaintiff had run the distributorship on behalf of CMF for at least five years before the joint venture and at CMF's insistence he was to continue being the Managing Director of IGC. 37 An important aspect of the first-named plaintiff's claim is that he was not adequately advised concerning the "sole" agreement entered into by IGC with CMF. This was because, he alleges, originally be believed the sole agreement would last for three years with an enforceable option by IGC for a further three years at least. (In fact the first-named plaintiff has stated in evidence his understanding was that IGC was to be given sole distributing rights for three years with two further periods of three years at the option of IGC, although there does not appear to be any written evidence to support his claim). 38 If I understand the first-named plaintiff's submission correctly it is that by failing to be advised of the consequences of entering into the buy out agreement (which was said to be "inter-dependent" on the sole agency agreement) the first-named plaintiff was put in a position that he had no option but to accept whatever CMF offered as a term of the sole agency agreement. I do not accept that this submission accurately reflects the effect of the evidence. As I have mentioned, the first-named plaintiff was a successful businessman. He was confident that his relationship with CMF was such that the joint venturers need have no concern about the period of the directorship. I do not accept the submission, on his behalf, that he did not understand what the word "inter-dependent" meant in the buy out agreement. In my opinion it was plain to the first-named plaintiff that the buy out agreement was subject to a sole agency agreement then being negotiated, and that the plaintiff with full knowledge of all relevant circumstances was prepared to accept CMF's terms. 39 As I find the plaintiff knew perfectly well that the agreement lasted for only three years, whatever else might have been said previously. He did not need the defendant to tell him that if CMF refused to renew the sole agency agreement IGC could do nothing about it. As I have said, at the time of entering into the agreement, he was confident that such an eventuality would not happen in the foreseeable future because of the importance he believed the French company attached to his ability to sell its product in Australia - where he had been so successful between 1982 and 1988. 40 As I have said IGC traded profitably for almost three years. It paid off the purchase price it had agreed to pay within a period of two years without, it appears, any difficulty. 41 The real cause of the collapse of IGC (and hence losses suffered by the first-named plaintiff) was (as he admitted to the liquidator and, in fact, alleged in his statement of claim) that IGC lost the French distributorship. That occurred in December 1992. This finding is of importance because it has been submitted that I should find the business failed because of the failure by the defendant to provide capital funds as promised. On the material before me I am unable to agree with this submission. The business failed because the distributorship was lost. 42 Later I will refer to the allegations of the first-named plaintiff concerning the alleged breaches of duty of the defendant arising out of the transactions referred to above. However, for the present time it is necessary for me to refer to other matters in respect of which, it is alleged, the defendant was also in breach of his duty to the first-named plaintiff. 43 IGC commenced trading in or about March 1989. It raised working capital by having an overdraft facility of $200,000 with Bank Nationale de Paris (BNP). The first-named plaintiff and the defendant were guarantors of the overdraft facility and their obligations were secured by mortgages over their properties - the first-named plaintiff mortgaged his residential property at Leeton Ave Coogee and the defendant, his residential property at Double Bay. 44 In February 1991 the first-named plaintiff and the defendant entered into a shareholders' deed conferring mutual rights of first refusal in relation to the shares each had in IGC. It is to be recalled that at this time IGC was functioning efficiently and making profits sufficient to pay off its debt to CMA and to pay the first-named plaintiff his salary. It is also to be noted that on this occasion the defendant insisted that the first-named plaintiff be independently advised concerning the proposed transaction. 45 In September 1991 BNP was paid out and National Australia Bank (NAB) took over the facility previously granted by BNP. It also advanced $70,000 to pay out a loan previously advanced by the Advance Bank and secured over the Leeton Avenue property. It advanced a further $100,000 to pay out BNP. It granted an overdraft facility of $150,000 and it took a first mortgage over the Leeton Avenue property as security and a third mortgage over the defendant's house at Double Bay. The defendant acted as solicitor for IGC and the first-named plaintiff, as well as on his own behalf with respect to these transactions. 46 It appears the first-named plaintiff was concerned that he was exposed to a greater potential loss than the defendant because of the greater equity he had in the Leeton Avenue property, when compared with the equity the defendant had in his Double Bay property. In October 1991, and at the request of the plaintiff, the defendant signed a letter promising to indemnify the plaintiff (not IGC) for 50 per cent of any personal loss to him in respect of the liability incurred to NAB. 47 On 12 December 1993 (that is, twelve months after the period of the distributorship's expiry) the defendant signed another letter addressed to the first-named plaintiff promising to indemnify him as to 50 per cent of any personal liability the first-named plaintiff might have to third party creditors. 48 On 23 December 1993 NAB was paid out from advances by two new lenders which have been referred to as the "White" and "Vesaro" transactions. The "White" transaction concerned an advance of $280,000 arranged through Mr White, a solicitor, and which was secured by a mortgage given by the first-named plaintiff over the Leeton Avenue property. The second was an advance arranged from a mortgage broker, Mr Vesaro, for $40,000, which was also secured by a second mortgage over the Leeton Avenue property. With respect to these transactions the first-named plaintiff alone was the borrower - not IGC or the defendant. However, although the defendant did not provide security over real estate owned by him, he gave a personal guarantee. He acted for the first-named plaintiff and charged a fee with respect to these transactions. 49 Although IGC made certain repayments under the mortgages, it was unable to continue to do so. By about mid-1994 the first-named plaintiff came to an arrangement with a Mr Roden, and a new company called International Gas Appliance Pty Ltd (IGA) was formed. Mr Roden had 50 per cent of the shares of IGA, the first-named plaintiff had 42.5 per cent of the shares, and another shareholder had 7.5 per cent of the shares. IGA acquired the assets of IGC for $45,000. 50 An advance by Mr Roden of $220,000 was secured by a charge over the assets of IGA and 50 per cent of the loan facility was guaranteed by the first-named plaintiff. These transactions were completed in July 1994. The plaintiff received legal advice concerning them from the defendant. The defendant said that it was a "bad deal" and advised the plaintiff not to enter into it. The defendant did not, as is alleged in the statement of claim, tell the plaintiff he had no option but to go ahead. Nonetheless the plaintiff himself felt he had no option and proceeded with the transactions notwithstanding the advice received. 51 The business of IGA continued to decline, and in April 1995 Mr Roden gave notice requiring the plaintiff to pay an amount of $106,250 being the amount secured by the guarantee. It was not paid, for the reason, I surmise, that the first-named plaintiff had no funds. On 17 November 1995 Mr Roden, after a contested hearing, obtained judgment in the Supreme Court for this amount plus interest. (I should also mention that the Vesaro mortgage was discharged from the $45,000 paid to IGC by IGA). 52 Later the Leeton Avenue property was sold to a son of the plaintiff for $450,000 of which $288,000 was paid to discharge the White mortgage. The defendant acted as a solicitor on the transaction and was paid legal fees. The first-named plaintiff assigned his interest to the second-named plaintiff being the sum of $162,000 balance of purchase money. After the sale the first and second-named plaintiffs continued to live in the property although they were living apart. 53 Arising out of these transactions, and in particular, the joint venture agreement, the first-named plaintiff makes a number of allegations of tortious breach of duty at law and breaches of fiduciary duty in equity. 54 So far as the negligence claim is concerned it is alleged that the defendant -