Collins Hill Group Pty Ltd v Trollope Silverwood & Beck Pty Ltd [2002] VSCA 205

Collins Hill Group Pty Ltd v Trollope Silverwood & Beck Pty Ltd [2002] VSCA 205 - VSCA 2002 case summary — Zoe

[6]

"Further to our letter of July 4 and subsequent discussions, I am writing to confirm our agreement in relation to professional fees, which is as follows: (i) We will work with you on a flexible basis until June 1998, with the goals of substantially lifting current profitability, laying the foundation for sustained revenue growth, and putting in place an appropriate funding structure for the business. The work program will include regular meetings (initially weekly), and work on specific initiatives to achieve agreed goals. The work will be performed by Nigel Hannam and myself, and I will guide the whole process in conjunction with you. In June 1998, we will agree on the basis for our further involvement in 1998/99. (ii) We will invoice you progressively, on a monthly basis, for amounts equivalent to 33% of the costs that we incur based on time involved at our standard chargeout rates (Christopher Tipler $500 per hour, Nigel Hannam $400 per hour, Analyst $150 per hour). The first invoice will be issued today, covering time expended in June and July. TS&B will pay these accounts within 30 days of receipt of invoice. (iii) In September 1998, Collins Hill will invoice you for an amount equivalent to 5% of the increase in TS&B's pre-tax profit for the year ended June 1998, in comparison with the year ended June 1997. Profit will be determined in accordance with your normal accounting standards and will be an audited result. The time-based fees invoiced during 1997/98 will be fully rebated in the event that the profit-based fee is more than six times the total time-based fees (eg, if total time-based fees for the year are, say, $60,000, then the profit-based fee would need to be a minimum of $360,000 before the $60,000 would be rebated). The net invoice (profit-based fee less any rebate) will also be paid within 30 days of receipt. (iv) In September 1999, Collins Hill would invoice you for an amount equivalent to 5% of the increase in pre-tax profitability in the 1998/1999 year relative to the previous year. A rebate arrangement similar to that outlined above would also apply. Again, this invoice will be paid within 30 days of receipt. I would appreciate it if you would sign and return the attached duplicate of this letter in confirmation of our agreement."

[16]

"With respect to our fees, our conversations in May centred on a basis which included some very small payments to cover part of our costs, and a success fee geared to profit improvement. I spoke in terms of Collins Hill receiving 10% of the increase in TSB's profitability over a two year period from July 1 (based on the final accounts for 1996-97). I still think that some sort of structure of this sort is appropriate, given that we will have to expend a lot of relatively high cost time and effort on your behalf, and given your inability to pay normal consulting fees. Realistically, however, I think it can be argued that you have already laid the foundation for some improvement in profitability, to which I think we will add significantly. In this light, I propose the following arrangement: (i) We will commit to work with you on a flexible basis until June 1998, with the goals of substantially lifting current profitability, laying the foundation for sustained revenue growth, and putting in place an appropriate funding structure for the business. (ii) We will invoice you progressively, on a monthly basis for amounts equivalent to 33% of the cost that we incur based on time involved at our standard chargeout rates. TSB will pay these accounts within 30 days of receipt of invoice. (iii) In August 1998, Collins Hill will invoice you for an amount equivalent to 5% of the increase in TSB's pre-tax profit for the year ended June 1998, in comparison with the year ended June 1997. I understand that there will need to be some give and take in the determination of final results, but presumably the accounting standards that you have applied in recent years would continue to apply, and the accounts would be audited. This invoice would also be paid within 30 days of receipt. (iv) In August 1999 Collins Hill will invoice you for an amount equivalent to 5% of the increase in pre-tax profitability for the 1998-1999 year relative to the previous year. Again this invoice would be paid within 30 days of receipt. Barry, for our part this arrangement will provide us with some incentive to assist you on a continuing basis to realise the potential of the business. In June 1998 we can agree on the extent to which our further involvement is necessary. I look forward to your response to the above proposal."

[21]

After a trial in the County Court the learned judge delivered a careful and well ordered judgment dealing with the arguments put before him by the parties. The first issue for his decision was whether the expression "pre-tax profit", for the purpose of the comparison to be made under clause (iii) of the agreement, should be taken to mean the relevant profit in the strict sense or whether the parties intended a comparison to be made between the "bottom line" figures of the company in the two financial years. On this issue his Honour held that the expression meant what it said and that "profit" could not include loss. It was therefore inappropriate to make a calculation which used the previous loss as a means of calculating the difference between the profits in the respective years. As a result he held that the appellant was not entitled to the full sum it claimed for the first year but was entitled to 5% of the difference between nil and $350,867, being the figure ultimately agreed as being the correct pre-tax profit for that year, 5% of which amounted to $17,543.33. The second issue which the judge said he had to determine was whether there was any right in the plaintiff at all to make a claim in respect of the second year, the respondent contending that there was no concluded agreement in respect of the second year because of the use in clause (i) of the agreement of the expression "we will agree on the basis for our further involvement in 1998/99". The respondent argued that, as there had not been any subsequent agreement for the appellant's "further involvement" for the latter year, clause (iv) of the agreement had nothing on which to operate as there had yet to be a concluded agreement in respect of that year. His Honour, however, held, after considering in particular the letter of 4 July 1997, that clause (iv) was intended to operate in all circumstances, and, so it would seem, whether or not any further agreement for the performance of work in the later year had been reached pursuant to clause (i).

[35]

In consequence, on its face clause (iv) could have some independent operation regardless of agreement as to the appellant's "further involvement" in the later year. Moreover it made business sense to provide for some additional element of profit from the second year of operation once the "appropriate funding structure for the business" had been "[put]" in place, as clause (i) recited. What was being sought was advice leading to a programme or plan intended to lift profitability and provide a "foundation for sustained revenue growth" by the respondent in the future. Clause (i) contemplated that work would be performed through to June 1998, though obviously enough how much work would be concentrated in the first few months after 31 July 1997 and how much would be needed towards the end of the financial year was not yet known and so was not prescribed by the terms of the letter. One has only to try to predict realistically how the performance of the appellant's obligations might operate on the business itself to see that the chances of a large turnaround in the first few months, even in the latter months of the year, would not obviously be great, so that the "success fee" would have a relatively limited chance of application, limited to the extent that the respondent's business could produce increased profits within eleven months from the making of the agreement. After all a comparison had to be made with the "profit" (or "profitability") of the respondent for the whole of the financial year to 30 June 1998. Much of that time, even on a simple reading of the terms of the letter, might well be expected to have been spent unprofitably or at least without any significant increase in profit. On the other hand, the figures for the succeeding year, 1998-1999, would be far more likely to reflect the success or otherwise of the appellant's advice and reforms. There would therefore seem to have been strong grounds for thinking that, as part of the business proposal, the respondent was agreeing to a second year being used also as a measure of the "success fee". If one ignores the use of the word "would" and treats it as the equivalent of "will", the clause can operate sensibly and without difficulty. The rebate might not apply (though that would reduce the fee), but the application of that provision would not become relevant if all necessary work had been completed within the first year.

At a glance

Court

Decision date

Before

Source

Judgment (84 paragraphs)

Parties