Connections Total Fitness for the Family Pty Limited v Selkirk Pastoral Co Pty Limited

Witness Credibility 17Mr David Wright and Mr Peter Sheehy were both generally credible witnesses, although I do not entirely accept their evidence. Mr Martin thoroughly cross-examined them both using an array of documents which showed their growing personal differences, as the economic fortunes of Connections worsened in 2013. But they ultimately gave consistent explanations for their May 2013 conduct; explanations I accept. 18Mr Sheehy and Mr Wright were quite different people. There was clear tension between them in the first two weeks of May 2013, which had developed as the Connections gym and health club had failed to do any more than just meet its overheads. By mid-2013 they were both locked into a business relationship of necessity, not of choice: attempting to save Connections and themselves from their creditors. Mr Wright was a man of a few words, both in his email correspondence and in his oral evidence. In contrast, Mr Sheehy was far more communicative. Mr Sheehy was trying to hammer out a solution to the financial problems of the gym with Mr Wright but was becoming frustrated with Mr Wright's propensity to act alone and his failure to communicate what he was doing back to Mr Sheehy. 19That is exactly what happened on the late afternoon of 15 May 2013: Mr Wright acted alone in creating the 15 May memorandum with Mr Ovenden. Mr Wright thought that he was helping the situation by creating the document. He mostly was. But Mr Wright was a little out of his depth. He said a number of times in evidence how difficult the situation was for him. He was under immense personal pressure. He had money from his own family members invested in the business that was likely to be lost if the business failed. Mr Sheehy was about to sever their relationship. He too wanted to avoid being left an unpaid creditor of Connections. 20In contrast Mr Ovenden was a man of streetwise commercial instincts. Gunnedah farmer he was, but he was also a property developer, who had built the Smeaton Grange commercial centre in which the Connections gym was located. He was used to dealing with bankers and builders and was unafraid to take a tough commercial position and assess and accept commercial risk, when required. 21Mr Ovenden is not a witness whose evidence I would always readily accept. He had a capacity to stubbornly adhere to improbable versions of events when it must have been obvious to him that he was not speaking the whole truth. An example of this was his account of the 1 May 2013 conversation between himself, Mr Wright and Mr Sheehy. 22On that occasion Mr Wright and Mr Sheehy have Mr Ovenden saying that he has name one "willing to pay all the debts of the business in return for taking over the business", (Mr Wright), or that he, Mr Ovenden "can take over the business and I'll pay all your debts for you" (Mr Sheehy). I prefer Mr Sheehy's version. 23Mr Ovenden claimed in oral evidence that he would "never have said anything about paying anything at that point of time [1 May 2013]". He persisted in this strange evidence: that he did not convey to Mr Wright or Mr Sheehy on 1 May 2013 the idea that he (or Selkirk) was taking over the debts of the business, nor indeed did he do so at any time up until he signed the 15 May Memorandum. 24This evidence cannot be right. By the time the 15 May memorandum came to be signed Mr Ovenden was openly committing to some kind of indemnity in respect of at least some description of the debts of Connections. But when pressed whether before he signed the 15 May memorandum he had said anything to Mr Sheehy or Mr Wright about "taking over any description of the debts of the business" either on 1 May, 9 May or the morning of 15 May 2013 all he could say was "not that I recall in specific manner" and "I will have to re-read, might have done". 25There is ample documentary evidence in Mr Sheehy and Mr Wright's recollections and email correspondence from 1 May 2013 to show that they were both well aware of an offer from Mr Ovenden to take over the business and indemnify them in respect of its debts, which could only have come from Mr Ovenden himself. This episode shows another feature of Mr Ovenden's evidence that when pressed he was quite prepared to resort to studied vagueness to prevent himself from being tied down to answers that might be inconvenient to him. He was a witness whose first preference was not always one for the truth. 26Mr Ovenden also gave evidence about what, if any, promise was made for Selkirk to take on the debts of Connections TF. Although the transcript cannot reflect Mr Ovenden's physical responses, his evidence on this subject was characterised by long pauses during which he looked quite confused. He was asked whether he had made this offer. In answer he stared rather blankly, as though it was the first time someone had asked him such a question; it almost appeared that he did not expect the question. Yet that question is central to the proceedings. Mr Ovenden had been a party to this litigation for months. His apparent confusion is puzzling and barely credible. 27Mr Ovenden was at pains to distance himself from the running of the business. But at times his claim to be 'hands off' was implausible. The issue of a manager, Mr Ridden's role was raised in Mr Ovenden's cross-examination. It emerged that although working in the gym on the Smeaton Grange premises full time since 17 May 2013 Mr Ridden had, according to Mr Ovenden, apparently not been paid by anyone for that work. 28Counsel asked Mr Ovenden about the terms of Mr Ridden's employment: "Q. Is Mr Ridden still at the gym? A. Yes. Q. Has he ever been paid? A. No. Q. He has been working at the gym all that time without any income? A. I believe that's so, yeah. Q. Does that strike you as unusual? A. It does." This evidence rather gave the impression Mr Rider was a volunteer at the gym. 29Mr Ridden gave evidence only minutes later. He clarified that he conducts private sessions at the gym as a personal trainer. Payments for these sessions went directly to Mr Ridden, providing him with his personal income. And he continues to perform managerial duties on the basis that if the gym makes a profit in future, he will share in some portion of that profit. This arrangement makes sense. Mr Ovenden's apparent lack of knowledge of these arrangements with Mr Ridden seems strangely incurious. I do not accept Mr Ovenden's evidence that he did not think Mr Ridden had never been paid. Mr Ovenden was sufficiently "hands on" to know all the terms of Mr Ridden's employment. But he did not want to own up to such knowledge to the Court.

A Gym Business Flounders and Is Sold - February 2010 to May 2013 30The next section of these reasons contains a narrative of the Court's findings on the contested and uncontested evidence in the proceedings. The narrative sometimes, but not always, refers to evidence inconsistent with the findings the Court has made. Even where inconsistent evidence is not mentioned the Court has considered and rejected the inconsistent evidence. After this narrative of factual findings the Court considers the legal issues.

The Connections Total Fitness for the Family Gym - February 2010 to April 2013 31A mutual interest in personal fitness and health and careers in the Australian Regular Army brought Mr Wright and Mr Sheehy together. Mr Wright had been a corporal in the Royal Australian Electrical and Mechanical Engineers in the Australian Army between 1979 and 1991. After that he owned and operated a disabled taxi and then from 2004 to 2009 owned and carried on a squash court and gym business in Camden, known as "Camden Squash". 32Mr Sheehy's primary skill is that of a pilates instructor. He carried this business on as a sole trader from 2002 to 2009 under the business name of "Body Fit Australia" and "Australian Pilates Academy". Like Mr Wright, between 1980 and 2003 Mr Sheehy was a member of the Australian Regular Army, retiring as a warrant officer, second class, and later serving in the Army Reserve? 33In early 2007 it was clear that Camden Squash's lease was not going to be renewed. Mr Wright already knew Mr Ovenden as a squash player at Camden Squash and as a property developer. So he approached Mr Ovenden about the possibility of building new gym premises. At the same time Mr Wright approached his friend Mr Sheehy about taking some space for a pilates studio in the proposed gym. 34No doubt as a pre-leasing arrangement to assist Selkirk to fund the development of the Smeaton Grange premises, in 2007 Mr Wright executed a deed of agreement to lease the premises once completed. But by 2008 he realised that he would need more capital to start up the gym business. So Mr Wright approached Mr Sheehy and they agreed to be joint investors in a company which would run a gym business on the site. The 2007 deed of agreement required the payment of $21,000 by way of a security deposit, which Mr Sheehy funded, and was paid to Mr Ovenden. 35The building was completed and the gym business started in February 2010, although the lease was not signed until 1 March 2010. Aspects of the terms of the lease found issues between the parties. These terms are dealt with later in these reasons. 36Most of the income of the gym business came from membership fees, collected through EzyPay. In addition there were about $4,000 to $6,000 per week in casual up front payments from school groups and other casual users of the gym. 37Selkirk commenced building for the gym premises, and other shops, in about June 2009. They anticipated opening the business in the new premises in early 2010. By July 2009 Mr Sheehy and Mr Wright started marketing gym memberships to the public in the Narrellan town centre and to members of Camden Squash, as well as attending local businesses to sell memberships. Up until January 2010 they had signed up about 700 to 750 members. From mid-2009 Connections had employed three full time employees to sell memberships, and then to work in the gym once it opened. 38The broad division of functions between Mr Sheehy and Mr Wright suited their personalities. Mr Wright looked after the books and finances. Mr Sheehy ran the "front of house" business. Their relative authority within the business was a point of some friction between them. But Mr Sheehy tolerated Mr Wright retaining and using the title "CEO" as something of an indulgence. But Mr Sheehy seemed content with Mr Wright dealing on behalf of Connections with the authority of a senior executive. Although the issue was initially fielded in the proceedings, there was no issue in the end about each of Mr Sheehy and Mr Wright's authority to speak on behalf of Connections in their various discussions with Mr Ovenden. 39In January 2013 another gym opened up in the Smeaton Grange area. Connections immediately lost more than 100 members. This reduction income meant that Connections started having difficulty paying the rent. Mr Sheehy and Mr Wright obtained management advice and decided to lower their membership prices, waive joining fees and the requirement for members to sign contracts. 40Mr Ovenden had a sensitive nose for impending financial trouble. He instructed his solicitors, Caldwell Martin Cox ("CMC") to require Connections to pay a security deposit and provide a bank guarantee under the lease. The disputes about the quantum of these items are referred to later in these reasons. Nevertheless Connections did continue to pay the rent and cover the arrears as best it could to keep the gym operating, as the tenant ledger shows. 41Although Mr Ovenden had initially encouraged Mr Wright to speak with the letting agent, rather than Mr Ovenden himself, by late April 2013 the need for direct conversations among the principals had become paramount.

From 1 May 2013 to 14 May 2013 42Mr Ovenden was a regular visitor to the gym. On one of these visits on 1 May 2013 he and Mr Sheehy and Mr Wright met on the gym balcony to discuss Connections' rent arrears. Mr Wright gives the following account of this conversation, which I mostly accept. I prefer Mr Sheehy on one aspect of this meeting. Mr Wright opened the encounter by confessing the obvious, "we are still a little behind in our rent I think, I want to show you how we can trade out of our problems and our rent". Mr Wright had with him some materials which he offered to show to Mr Ovenden to inform him about the gym's new pricing structure and the income stream for which they were then budgeting. 43But Mr Ovenden cut him off, "I am not interested in looking at that. All I want is my money by 31 May 2013". As Mr Ovenden just wanted the rent consistently, he did not need to involve himself in the gym's budgeting. 44Mr Wright was more confident of being able to pay the arrears of rent than he was in being able to meet Mr Ovenden's new demand for the security deposit and the bank guarantee. He asked Mr Ovenden "Can we just pay the arrears and not any other amount or come to some other arrangement?" But Mr Ovenden re-iterated his demand, "no I want all my money". 45Mr Ovenden then first floated the idea that was eventually to mature into the 15 May Memorandum. Offering Mr Wright another solution, Mr Wright says that he said "you should consider selling the business. I have someone who is willing to pay all the debts of the business in return for taking over the business". Mr Sheehy says, in a version that I prefer, that Mr Ovenden himself offered to take over the business. 46Mr Ovenden had thought about this solution before this meeting. By 1 May Mr Ovenden was already thinking about taking over the business himself. The following day, 2 May 2013, he registered the business name "Phoenix Health Club", the name which he ultimately used from 15 May for Selkirk to conducted the business from the Smeaton Grange premises. 47But Mr Wright responded, accepting what Mr Ovenden had outlined. "Well at least we know where we stand". He confirmed his options back to Mr Ovenden "we either come up with the money or we sell the business. I guess we will just see if we can raise the money". 48Mr Sheehy adds some other recollections to this meeting, recollections that are consistent with those of Mr Wright except as to who was going to "take over" the business. I accept Mr Sheehy's additional account of this meeting and where it differs from that of Mr Wright. Mr Sheehy recalls that when Mr Wright offered to show how Connections could trade out of their current problems, Mr Ovenden said words to the effect "I am not interested, you have said this before. Nothing has changed. I have a better solution to the problem. I can take over the business and I will pay all your debts for you". It was at that point that Mr Wright said "well at least we know where we stand". 49The meeting ended with Mr Ovenden and Mr Sheehy walking away together. Mr Sheehy explained in his affidavit evidence that the reason he stayed behind to talk to Mr Ovenden on 1 May was that he wanted to try and make an arrangement about the pilates studio within the gym, should Mr Ovenden go through with the agreement that he had foreshadowed. I accept Mr Sheehy's evidence that he said to Mr Ovenden in this private conversation "if you take over the gym, I could continue with the pilates studio" to which Mr Ovenden responded "that sounds good". This conversation between Mr Ovenden and Mr Sheehy makes it probable that Mr Ovenden had been talking that day about taking over the gym himself. 50Both in the three-way conversation on 1 May and the subsequent two-way conversation Mr Ovenden had firmly conveyed the idea of "taking over the gym". Although not fully spelled out, that nevertheless clearly communicated in my view that Mr Ovenden was proposing that Selkirk acquire Connections' gym undertaking and assets and take responsibility for all its ongoing liabilities. Mr Sheehy's private discussion with Mr Ovenden about the pilates studio convinced Mr Sheehy, that Mr Ovenden had in mind taking over the gym business himself. 51Mr Ovenden says he had a conversation with Mr Wright on 9 May 2013 whilst he was on his farm at Gunnedah. I accept that on or about 9 or 10 May Mr Wright and Mr Ovenden arranged by telephone that the three of them would meet at the gym at 10am on Wednesday, 15 May 2013. I accept Mr Wright's evidence that about the 8 or 9 May he telephoned Mr Ovenden and said to him that a meeting was necessary because they could not come up with the funds he was then demanding by 31 May and therefore "we need to work out the details of you taking over the business". Mr Ovenden said he was "interested" but, as he was away in Gunnedah that week, he would not be able to meet until the following week. Thus the meeting was arranged for Wednesday, 15 May. Both Mr Wright and Mr Sheehy wanted the 15 May meeting because their own relationship was deteriorating rapidly, as their private email exchanges show. 529 May 2013 was also a day of intense email correspondence between Mr Wright and Mr Sheehy. The pattern of email correspondence on this day illustrate the relationship between these two men. Mr Sheehy writes lengthy emails asking for information about the business and about what is going on. Mr Wright emails tiny packages of information that treat Mr Sheehy on a "need to know" basis. For example at 9.45am Mr Wright indicates to Mr Sheehy "when I have a meeting with Mark I will let you know". At 10.12am Mr Sheehy says "Is this [meeting with Mark] organised? If so why don't I know? You have not discussed a proposed date with me to meet him! What is the reason for the meeting? Have you spoken with a solicitor about your meeting? Regardless of what you want to do, I have made my mind up. I do not want to continue". But in reply Mr Wright says "When I know what I'm doing I will let you know. When I know the time and date of the meeting with Mark I will tell you." Mr Sheehy writes another lengthy email in reply which he foreshadows that he will "be contacting Mark [Ovenden] today to let him know my position". The intensity of this suggests that it coincided with some communication with Mr Ovenden the same day. 53Mr Wright and Mr Sheehy's eagerness to re-engage with Mr Ovenden on 15 May is an important basis for choosing between their and Mr Ovenden's version of the 15 May meeting. Mr Wright and Mr Sheehy both knew from the tone of their mutual email correspondence that their business relationship could not last much longer. They needed rapidly to sell the business to Mr Ovenden and end their responsibility for its operations and its liabilities, which were causing them so much discord. 54Mr Ovenden's case is that the 15 May Agreement was one for Selkirk to receive the EzyPay income stream and for Messrs Wright and Sheehy to receive indemnities in respect of Connections' debts, but without any sale of the business. But in my view, given the state of their mutual relationship it was inconceivable to each of Mr Sheehy and Mr Wright that they would keep any ownership or responsibility for the business after their deal with Mr Ovenden. They both "wanted out". And that is how they went into the discussions on the 15 May. Mr Ovenden well understood that was their attitude. And this attitude was mutually confirmed in the parties discussions on 15 May. 55Mr Sheehy rang Mr Ovenden independently on 14 May to seek assurance from Mr Ovenden that the meeting was going ahead the next day. He was anxious to ensure the meeting took place. I accept Mr Sheehy's evidence that in the course of this conversation he asked Mr Ovenden "are you going to put the same offer on the table to take over and pay all the debts? Because if you are, I will say 'yes' to it and I will convince David that he should do the same". To which Mr Ovenden responded "Yes, that offer stands". This laid the foundation for the meeting that Mr Sheehy wanted. Such unusual candour between Mr Sheehy and his counter-party in the negotiations, Mr Ovenden is explained by Mr Sheehy's increasingly dysfunctional relationship with Mr Wright. 56Mr Sheehy says that Mr Ovenden apparently was not already aware of the 15 May meeting when they spoke by telephone on this occasion. But in my view Mr Sheehy is mistaken about this. Mr Wright rang Mr Ovenden about the meeting on approximately 9 May. They were very keen for it to take place. What they did not then fully appreciate is that Mr Ovenden was equally keen: a collapse of Connections business, the lead tenant in Selkirk's Smeaton Grange development, would have placed great financial strain on Selkirk, through which his farming and domestic assets were held..

The Meetings of Wednesday 15 May 2013 57There were two meetings on 15 May 2013. The first was the one arranged between the three of them at 10am on 15 May. This meeting took place on the balcony of the gym. 58The second meeting, which was foreshadowed towards the end of the first meeting, took place at 5.00pm between Mr Wright and Mr Ovenden in the gym office. Mrs Ovenden was present in the second meeting, but not the first. 59The 10.00am Meeting. I generally prefer Mr Sheehy and Mr Wright's account of the 10am meeting. It is common ground that Mr Wright, with the consent of all parties concerned, recorded the audio of the meeting on his mobile telephone. But the recording was not available at the hearing. His mobile phone was subpoenaed. But the recording was not able to be accessed in time for the hearing. The Court was therefore left to a contest of oral evidence about the meeting. Mr Wright's account of this conversation is slightly more complete in relation to the important details than Mr Sheehy's and I accept it as accurate. Mr Wright set the scene, asking Mr Ovenden whether he was still prepared to proceed with the agreement which had been discussed on the 1 May: "We can't come up with the money by the 31st. What is the go with you taking the business and paying out debts? What can we work out? When do you want this to happen?" 60Mr Ovenden's response was quick. It showed that he had thought out his plan of action. "It will happen today. We will have a meeting at 5pm when you can sign over to me the authority to receive the EzyPay direct debits". 61Mr Ovenden was talking about what he was to get under the arrangement. But Mr Wright was more interested in what he and Mr Sheehy were to get. So he asked "OK, how are the debts going to get paid?" Mr Wright cannot recall a response to this question. That is because Mr Ovenden brushed it off. This was the first tell-tale sign of a persistent feature of Mr Ovenden's conduct in this transaction: he had less than full interest in the detail of how his side of the bargain - paying the debts - was going to be performed. 62The subject of wages came up. That it was even discussed is significant in showing that both Messrs Wright and Sheehy on the one side, and Mr Ovenden on the other appreciated that Connections was ceding and Selkirk was assuming responsibility for the employees of the business in the transaction. I accept Mr Wright's evidence that he said to Mr Ovenden "What about the EzyPay monies that were due to be received by Connections today?" Mr Ovenden responded "You can keep that as long as you pay the wages, which are due to be paid tomorrow". 63The parties also discussed the possibility of engaging lawyers. Mr Sheehy remembers this part of the conversation well, because it was his idea. I accept that after Mr Ovenden said that the transaction "Can happen right now" and "I can take over from today" and that Mr Sheehy was more hesitant than the other two. Mr Sheehy said "Hang on guys. I think this is going a bit too far. Surely we have to see solicitors for this to happen". Mr Ovenden said "No, don't worry about that. I will take over the business today and pay all your debts". As with Mrs Ovenden's question seven hours later, if Mr Ovenden and Mr Wright had paused for just a moment and listened to Mr Sheehy at that point, it is also likely that this litigation would never have occurred. 64Finally, the parties fixed a hand-over time. I accept Mr Sheehy's evidence that Mr Ovenden said, mainly to Mr Wright, "you have until 4pm the next day to remove all your things from your office". Mr Ovenden wanted full control of the premises and the existing Connections' business. Mr Sheehy recalls, and I accept, that Mr Wright asked Mr Ovenden "Can I continue running the squash court?" To which Mr Ovenden said "No". Mr Ovenden wanted physical control of all Connections' business operations the next day and Mr Wright and Mr Sheehy understood and accepted that. 65Wright-Sheehy Emails Between Meetings. Shortly after the 10am meeting finished Mr Sheehy sent Mr Wright an email (at 12.29pm) which became a matter of some controversy in the proceedings. The first half of the email was as follows: "David, I am not sure if you want to speak to me and understand if you feel you can not. I can assure you that mark and I have no deal. In regards to our business relationship, we need to take steps to ensure that our business relationship is dissolved correctly. As of this moment I am resigning as a director of 'Connections Total Fitness of the family' I am CC'ing Phillip Dahler of this as well some he is aware of the situation and that any appropriate advice he has to ensure the proper transition of Connections to its new owner is done in the appropriate manner.[sic]" 66Counsel suggested to Mr Sheehy that his words "I can assure you that Mark and I have no deal" was again an indication that Mr Sheehy had no intention of being bound by the 15 May Agreement. But Mr Sheehy quite adequately explained that he was only seeking to assure Mr Wright that he had not negotiated some side deal with Mr Ovenden separate from the 15 May Agreement. The email is consistent with that; and in my view that is all Mr Sheehy meant. 67The 12.29pm email also refers to Mr Sheehy's resignation as a director of Connections. But Mr Sheehy understood that this: was not able to be effected immediately, despite the flavour of the email; was to facilitate the performance of the 15 May Agreement; and, was not a matter Mr Sheehy or Mr Wright communicated to Mr Ovenden at that time. Nor does it seem to have been carried out. 68The 12.29pm email then finished with Mr Sheehy's prescient request "we have to move on to the next chapter. I would hope you can come up with a detailed list of creditors. When this has been done I would like to see the list to ensure mnothing (sic) is left out". Mr Sheehy's suggestion was common sense. Mrs Ovenden brought up the same subject soon afterwards in the 5pm meeting. 69Between the end of the 10am meeting and the start of the 5pm meeting Mr Wright and Mr Sheehy exchanged a series of mutually recriminatory emails. Mr Sheehy was cross-examined on the strength of these emails to suggest that he had no intention of proceeding with the 15 May Agreement. But as will be seen, Mr Sheehy did not repeat the statements he made in these emails to Mr Ovenden. Seen in context they are really just expressions of Mr Sheehy's frustration with Mr Wright. But the emails are still useful in confirming parts of the 10am conversation. 70There seems to have been a conversation early in the afternoon of 15 May between Mr Wright and Mr Ovenden "as to what would happen with the last input of money from EzyPay and any other monies left in Connections' bank account". At 3.44pm Mr Wright suggested that from the money left in the bank account, wages should be paid and Mr Wright and Mr Sheehy should share the balance of the money for their benefit; so Mr Sheehy claimed half of what was left over. At 5.50pm Mr Wright replied saying "I will be taking a WAGE". At 3.58pm Mr Sheehy says "You can take a wage but only for one fortnight" for $1,000. At 4.03pm Mr Wright complains "so, I have worked non stop for three years and all you think I should get is $1,000". He then complains about Mr Wright's conduct of the pilates studio. At 4.48 Mr Sheehy responds "David I am not prepared to fight about this. I have made a decision and expect you to stand by it. If you want to argue about money I have put around $250,000 into this business. Without me there would be no business". He then complains that Mr Wright's family debt has been repaid by Connections over many months but his debt owed by Connections has not been recovered. He then says, "I expect to see a payment into my account as discussed. Please remember that you are not the only one who has lost money here". The evidence in these proceedings suggests that Mr Sheehy was not wholly right when he claimed that Mr Wright's "family debts have been paid back by Connections over months". Some of that debt is still outstanding, although in an amount considerably less than Mr Sheehy's personal debt. Mr Wright did not reply to this email as by 5.00pm he was attending the second meeting with Mr and Mrs Ovenden. 71The 5.00pm Meeting. As had been foreshadowed, Mr Wright and Mr Ovenden met at 5pm to sign over the EzyPay debts. But by then Mr Wright had absorbed a little of Mr Sheehy's caution. I infer that the bitterness of some of his recent exchanges with Mr Sheehy made him realise that any financial mistake he made now, on his own, may well compound his dispute with Mr Sheehy, who wanted solicitors involved. 72So at 5pm Mr Wright baulked at signing over the EzyPay direct debits. He said to Mr Ovenden "Here is the form to sign over the EzyPay direct debits. Before I sign the document though I need to know how the company's debts are going to be paid?" In response Mr Ovenden condescended, "What do I need to give you to make you happy?" Conscious of what Mr Sheehy had wanted, Mr Wright sought to add a little legal rigour to what they were doing and said "We should sign an agreement". I accept that Mr Ovenden then went to Mr Wright's computer and started typing, saying to Mr Wright, "What do you need in the document?" Together they discussed and drafted the words that appear in the 15 May Memorandum. When the document was substantially prepared Mrs Ovenden, who was present throughout the meeting, said to her husband the words which open this judgment. 73Mr Ovenden finished typing. He printed the document. Then both Mr Ovenden and Mr Wright signed it together. As soon as it was signed Mr Ovenden said to Mr Wright "You have until 4pm tomorrow to remove your things from the office". Mr Wright accepted this, asking Mr Ovenden whether he could keep the computer, to which Mr Ovenden said "Yes, whatever you need". 74This exchange and that of the morning meeting represented a consensus as to several matters. First the existing lease between Selkirk and Connections would come to an end at 4pm the following day by Connections surrendering possession, but not vacant possession, to Selkirk. Mr Ovenden did not complain about Selkrik not getting vacant possession. He reasonably assumed from what had passed in conversation that Selkirk was acquiring possession of all this equipment. Secondly, Mr Wright and Mr Sheehy had completely failed to raise the subject of what would happen to the customers of the business and what would happen to the equipment of the business, other than the minor matters of the computer and some office equipment. Nor did Mr Ovenden ask any questions about these two matters. The reason Messrs Wright and Sheehy did not raise these subjects was that they quite reasonably assumed from the exchanges that had occurred that the Connections business was being sold to Selkirk, which was about to take possession of the whole business undertaking, equipment and customers. That explains why Mr Wright was asking for permission from Mr Ovenden to carve out from that arrangement some small items of personal value to him, such as the computer. Mr Ovenden understood this well and it suited him. He did not raise this subject either because he reasonably understood the deal the same way from their communications. These exchanges have important implications for analysis of the written and oral agreement the parties made, which is dealt with later in these reasons. 75The parties vigorously disputed in argument whether the extent of the indemnity for Connections' debts was discussed in this second meeting. It was uncontested that it was not discussed in the first meeting. Mr and Mrs Ovenden said that it was discussed in the second meeting. Mr Wright ultimately made a concession that this issue was raised. I accept Mr Wright's evidence that he asked Mr Ovenden at the 15 May morning meeting "What about the personal dents the company owes to us?", to which Mr Ovenden replied "we have all lost money on this". Mr Wright then said "OK", which communicated, in my view, that Mr Wright accepted such personal debts would not be paid. Whatever doubts I have about Mr Ovenden's evidence, combination of Mr Wright's and Mrs Ovenden's evidence which I accept is enough to corroborate Mr Ovenden's version as correct. 76Mr Ovenden's principal affidavit of 5 June 2013 did not deal with this subject at all. But by the time Mr Sheehy's evidence was filed and Mr Ovenden was replying in September 2013, he denied he ever said his indemnity "was to include all debts, as I did not know the extent of what they were". Mrs Ovenden's first affidavit went into this subject in more detail. She said that at the second meeting, while the document was being typed, Mr Wright asked Mr Ovenden "What about the debts owed to the family?" And Mr Ovenden replied, "They are not part of the deal and I am not taking them on. I am only taking on existing debts of the business so that it can continue to trade", to which Mr Wright responded, "OK, fair enough". 77Although Mrs Ovenden initially denied the statement Mr Wright attributed to Mr Ovenden, recorded in the first paragraph of this judgment "No it's OK, I am taking over all the debts", in oral evidence she conceded that it was said but in a context in which it was almost immediately qualified by Mr Ovenden's words that family debts were "not part of the deal". Mrs Ovenden then re-affirmed in cross-examination that indemnity for the debts of family members had been discussed and rejected. Her memory of this seemed to be quite firm and I accept it. Moreover, it is inherently probable. Mr Ovenden was a sufficiently hardheaded businessman that he was not going to compensate Mr Wright and Mr Sheehy for their lost investment in the business. Were that his intention, it is far more probable that he would have asked to see the debts concerned, because they were far less obvious than the regular business outgoings, which after three years of operation of the gym business he felt he was in a reasonable position to assess. I accept that Mr Ovenden did not ask for a list of creditors because he felt sufficiently confident he could estimate them. But had he done so the distinctions between external and related-party debt and guaranteed and other debt would immediately have come to the surface and been resolved. 78I reject this part of the plaintiffs' case. It was quite clear between Mr Wright and Mr Sheehy by the end of the 5pm meeting that Connections' debts owed to family members of Mr Sheehy and Mr Wright and to them personally (the related-party debts) were not included in the agreed indemnity. 79The parties all agree that Selkirk took control of the premises the next day. But despite the de facto change of control the poor documentation of the agreement became immediately evident.

Thursday 16 May - 18 May 2013 80Mr Sheehy and Mr Ridden let many people know between Wednesday, 16 and Friday, 17 May 2014 that the gym had been sold. Mr Sheehy told his pilates classes on 15 May "the gym has been sold" and posted a message on the Facebook page of Australian Pilates Academy to the same effect on 18 May 2013. Mr Ridden posted a notice on the Connections web page notifying of the sale. I accept that neither Mr Sheehy nor Mr Wright gave instructions for this posting. I infer therefore that Mr Ridden did not post this notice of his own initiative but did so on Mr Ovenden's instructions. Mr Ovenden believed he had taken control of the business. 81Between 15 and 18 May Mr Ridden put up an "under new management" sign within the gym. I accept that Mr Sheehy and Mr Wright had nothing to do with this. I infer that Mr Ovenden instructed them to erect the sign, in the belief that Selkirk was by then managing the business. All of Mr Ovenden's post 15 May instructions are consistent with a belief on his part that Connections' had sold its gym and health club business to Selkirk. 82Mr Sheehy encountered Mr Ovenden at the gym on Saturday, 18 May. Mr Sheehy was conducting pilates training. During a training break Mr Sheehy sought out Mr Ovenden and said to him, "when do you want to sit down and organise payment of the debts?" To this Mr Ovenden replied, "well, I'm sure they'll ring me to get paid". Mr Sheehy did not share Mr Ovenden's confidence. He replied, "They won't ring you Mark. They'll ring me". Mr Ovenden responded, "Well, just send them my way". 83This struck Mr Sheehy as a cavalier approach to Selkirk's contractual obligations. Angered he fired back at Mr Ovenden, "I'm not really happy with that Mark. I think we need to discuss how and when you are going to pay all the debts". The conversation terminated there; Mr Sheehy had to go back to his pilates class. 84This chance encounter with Mr Ovenden troubled Mr Sheehy. He had never been involved in a sale of a business before and began to doubt that Selkirk really would pay Connections' present and future debts. He says, and I accept, that he realised by now that his earlier caution about engaging lawyers had been right and that "the deal between Mark and myself needed to be finalised with some certainty as to time frame, and to do this I needed to involve a solicitor". Mr Sheehy's conduct in the following week is largely explained by this change of heart. He ruminated about the issue over the following weekend. From his perspective Mr Ovenden had taken over the whole business undertaking but was not committed to paying its past debts. Mr Sheehy felt he needed a lawyer to give him more assurance of the certainty and security of his position.

Monday 20 May - Friday 24 May 2013 85In the week of Monday 20 to Friday 24 May, the uncertainties of the agreement struck the week before led the parties into open hostilities. 86Mr Sheehy is an early starter. On 20 May at 5.58am he sent an email to an executive of EzyPay, Mr Daniel Moy, confessing some of his fears about what was wrong with the deal of the previous week, and his concerns about what Mr Wright may have done without his knowledge. The email was as follows: "Hi Daniel, You may be aware that recently there has been an attempt by someone to take over the ownership of Connections. This is a long story that I would be happy to share with you but for now I need to know that my interests are being maintained and that I am not recipient of a terrible scam. I am not too sure what David has done so far but I need you to check some things for me. 1. I need to know if David has recently given Authority for the Direct Deposits to be placed into any other account other that Connections total fitness for the family account. If he has it must be stopped immediately and be restored back to the original account. The reason for this is that all of the equipment finance is still in my name along with many other assets of Connections. If the DD's are allowed to go to the account of who is attempting to take over the ownership, this will give him cash that he is not legally entitled to as he does not own the equipment, the memberships or the money that you are collecting. If it is allowed for this person to take any moneys it may amount to fraud and Ezypay may become liable as I have informed you f the issue. Please contact me ASAP on [mobile number not published] today. If I do not answer, please leave a message or a text and I will get back to you. This is a matter of urgency as I may have a backer to save the club for me and prevent it from going into someone else's hands. Legally, I have until 31 May 2013. David has given up prematurely, this is why I fee he may have given authority without thinking of the consequences. If this guy is to take over then I need to be covered legally by him for all of Connections debt which I have not been so far. If he gets the cash as well he can just dump me with the debt and that will send me bankrupt. Please assist me here. Peter Sheehy" 87Selkirk and Mr Ovenden relied upon this email to suggest that Mr Sheehy never intended to go through with the 15 May Agreement. But the email was never communicated to Mr Ovenden. Seen in context it was merely an attempt by the person, who at that point in time knew the least about what was going on, and who did not have lawyers, to get some basic intelligence to protect himself. Whatever he may have thought at this time he never went so far as to tell Mr Ovenden that he did not regard the 15 May Agreement as binding or that he did not want to go through with it. He wisely left all such communications with Selkirk to solicitors. There were some accidental meetings between himself, Mr Ovenden and Mrs Ovenden in the following week, but their exchanges all related to only one aspect of the 15 May Agreement: the timing of the signing over of the EzyPay income. 88Mr Sheehy asked by text message at 6.40am on 20 May for Mr Ovenden's email address, because "I have a few concern[s] that need addressing ASAP". The "concerns" were those that had troubled him late the previous week. Mr Ovenden replied by text (at 7.54am) saying he was away but that his wife Sarah was at the gym that day. Mr Sheehy saw Mrs Ovenden on the stairs of the gym about 9.00am. He had not seen her since March. So he decided to raise with her the subject that was worrying him: "we need to talk, you have taken over the gym but nothing is happening about the debts". He went on: "I feel uncomfortable signing over the authority for Mark to receive the direct debits until I know how he is going to pay the debts". Mr Sheehy felt he could confide in Mrs Ovenden. He then articulated his abiding concern to her, "I think we need to speak to a solicitor to ensure this happens properly". 89Mrs Ovenden explained that his signature was required, so that they could "pay wages" and "pay bills". It was quite clear from this that she thought she and her husband had taken operational responsibility for the business through Selkirk by then. And she pointed out "We already have David's signature for the direct debits and we need you to sign it as well". But Mr Sheehy reiterated to her "I am perfectly happy to sign but I don't want to do it until I have spoken to the solicitors; I need to know the debts will get paid". 90Mrs Ovenden followed up. Later that night, after Mr Sheehy's pilates class about 8.30pm, she came back with an EzyPay direct debit authority for him to sign. Mr Sheehy knew Mrs Ovenden sufficiently well to use an affectionate nickname for her. "Sare Bear", he said, "I told you I need to speak to solicitors first". She reiterated the need to sign as soon as possible, "We have to get the wages paid". 91His response indicated perhaps what was by then obvious, that he saw Mrs Ovenden as a good channel of communication between the parties. He said to her "I'll do it and don't have a problem doing it, but I need to see a solicitor. I need to know how you are paying the debts, Mark won't discuss it". I infer Mrs Ovenden conveyed all of these conversations to her husband. 92Mr Sheehy perceived that his communications via Mr Wright and Mr Ovenden had not been very productive. He was right. At that stage he did not even know about the 15 May Memorandum. Mr Wright had not yet shared the news of its execution with him. In their personal styles both Mr Wright and Mr Ovenden were less communicative than were Mr Sheehy and Mrs Ovenden. The Mr Sheehy-Mrs Ovenden line of communication was an important way for Selkirk now to know of Connections' attitude to performing the 15 May Memorandum. Through Mrs Ovenden Selkirk could have little doubt that Connections and Mr Sheehy wanted to go through with the deal. And Mr Sheehy maintained that this was his attitude throughout his evidence. I accept that it was always his attitude. Moreover Mrs Ovenden was sufficiently intuitive to understand that. Although she must have been a little puzzled by Mr Sheehy's distrustful approach at 8.30pm on 20 May. After all that day she knew, and he did not, that the 15 May Memorandum had been signed. But she did not know he was unaware of this. 93Because of their personal difficulties Mr Wright had not told Mr Sheehy about the execution of the 15 May Memorandum for five days. He finally revealed it that night, on the telephone, saying to Mr Sheehy "I have signed a written agreement with Mark Ovenden for the sale of the gym". This conversation is not admissible as evidence of an agreement for sale between Connections and Selkirk. It is only a conversation between the directors of Connections. However, I accept Mr Sheehy's account of this conversation which assists in confirming Mr Wright's recollection that he and Mr Sheehy were negotiating a business sale agreement with Mr Ovenden. Mr Sheehy says that is the first time he had heard about the document. I accept that it was. Mr Wright sent Mr Sheehy an unsigned copy of the document almost straight away. 94The following day, Tuesday 21 May, solicitors became involved on both sides. Selkirk engaged Caldwell Martin Cox solicitors ("CMC"). Connections engaged Meehans solicitors ("Meehans"). On 21 May 2013 CMC wrote in the following terms to the directors of Connections: "Our instructions are as follows: 1. You are in significant arrears (both rent and security deposit) in the sum of approximately $90,000.00; 2. Our client, without prejudice to its rights under the lease, agreed to allow you until 31 May 2013 to repay the arrears in full without exercising its right to immediate termination of the Lease; 3. You approached our client directly to surrender all of your right, title and interest in the Lease to our client effective from 4pm, Wednesday 15 May 2013 as you were unable to comply with the agreement reached with our client to repay the arrears by 31 May 2013; 4. Our client accepted your repudiation and surrender of the Lease on Wednesday, 15 May 2013 and re-entered possession of the Premises. This act by our client is without prejudice to its rights to further claim against you, Mr David Wright and Mr Peter Sheehy as personal guarantees under the Lease. 5. By virtue of the above circumstances, our client confirms that the Lease was terminated on Wednesday, 15 May 2013 in accordance with clause 12.1.2 of the Lease. Our client also relies on the non payment of rental arrears for the lawful termination of the Lease in accordance with clause 12.2.2 of the Lease " 95Whilst Mr Sheehy was arranging to meet, Ms Karen Watson, at Meehans solicitors he kept in touch with Mr Ovenden. Just before 3pm on 21 May, he sent him a text message: "Hi Mark. I still need your email address. Can you also send me a copy with the current lease as my solicitor needs to see it. All things are travelling according to plan at the moment. Peter." 96About 2 minutes later Mr Ovenden responded asking Mr Sheehy to send him "Your solicitor details". Within another minute Mr Sheehy responded foreshadowing the meeting with Ms Watson at Meehans "I am meeting tomorrow morning. Have not met them yet. They said to bring it [the lease] with me". Within the following minute, Mr Ovenden replied, "OK" and Mr Sheehy responded further, "Thanks mate. Hopefully we are all sorted by tomorrow". Despite the tone of the CMC letter of the same day the text messages show Mr Sheehy and Mr Ovenden communicating quite calmly about moving ahead with the lawyers to resolve the issues concerning performance of the agreement. 97Mr Sheehy opened the communications with Mr Ovenden early on Wednesday, 22 May at 6.50am. He foreshadowed by text message to Mr Ovenden that he would be seeing the solicitor "this morning" and stating that he needed a copy of the lease. He was seeking access to the office of the old leased premises, so he could collect the copy of the lease. He then reported on some recent conversations with Mr Wright: "I finally gotten David to talk to me and will get the funds released to me from EzyPay today so we can pay wages. This is so frustrating. Peter" 98Before Mr Sheehy saw Meehans, Mr Ovenden reminded him at about 7am by text "Sarah has copied the lease for you...Sorry I can't be there". 99The evidence suggests that Mr Wright and Mr Sheehy met Meehans on Thursday, 23 May, rather than on Wednesday, 22 May. But Mr Sheehy kept up the communications with Mr Ovenden on Wednesday, 22 May, reporting to him that progress had been made with Mr Wright about releasing the EzyPay funds. His text message to Mr Ovenden at about 11.20am read: "David has agreed to release the funds. He will inform EzyPay and have this done ASAP. I will let you know the timeline when it will be done as soon as I know. Peter " 100At about lunchtime on 23 May Mr Ovenden tried to contact Mr Sheehy who apologised and said he was in the "S Meeting" which I infer to mean the meeting with Meehans. Shortly afterwards he asked for Mr Ovenden's bank account details which were supplied. 101After Mr Sheehy conferred with Meehans at 2.46pm he emailed Mr Adam Waters, an EzyPay executive authorising him "Please distribute funds to the Connections bank account as per discussion today". He explained that "issues have been resolved and payment should go ahead as normal". He asked to be informed when that had been done so that "I may collect those funds". EzyPay operated by sweeping money out of the third party accounts and into Connections' account on a Thursday evening. This explains the timing of this conversation. Mr Sheehy was concerned to keep control of the EzyPay funds sweep that night. Shortly afterwards Mr Waters confirmed that the funds had been released but "next week's distribution would not occur until we have the change of ownership signed off". 102Then Mr Sheehy replied at 3.58pm to Mr Waters "Hi Adam, please do not inform anyone yet that funds have been released, Regards Peter". Counsel for Selkirk suggested that this evidenced an intention on Mr Sheehy's part not to go through with the 15 May Agreement. But analysed in context it does not bear this construction. All Mr Sheehy was doing here was trying to prevent Mr Ovenden from overreacting if and when he found out that the funds had been released. Mr Sheehy wanted to keep events under the control of their solicitors. 103On Friday, 24 May 2013 Mr Sheehy met Mr Ovenden at the gym. A frustrated Mr Ovenden immediately raised the subject "When are you going to sign the money over for the direct debits?" Mr Sheehy said in response, "I am off to see the solicitors right now and I will try to get it sorted out as soon as I can". 104Mr Ovenden decided that raising the temperature was the best way of dealing with Mr Sheehy. He replied, "Well, it might be too late now. My solicitors told me to send you bankrupt and that you were no good". They said we should just close you down and start again". In response Mr Sheehy protested, "I am doing my best". But he pointed out, "I need to speak to the solicitors" and that he was going directly to the solicitors' office. 105Mr Ovenden concluded the conversation with words that were later relied upon as giving notice of termination of the 15 May Agreement. Mr Ovenden said, "If you don't have this sorted by Monday, the deal is off". In his affidavit evidence Mr Ovenden places this conversation on the 29th of May and its substance slightly different from Mr Sheehy's account. But I prefer Mr Sheehy as a witness over Mr Ovenden and the parties ultimately did not contest the conversation must have taken place on 24 May. 106Mr Sheehy did see Meehans later that day. His visit to them resulted in Meehans sending a letter of the same date [24 May 2013] to CMC in the following terms: "On 1 May 2013 our respective clients entered into a written agreement that your client would indemnify our client and the directors of all debts accrued to date and thereafter, all current Accounts, all company debts, outstanding lease payments, tax liabilities, super payments, insurance payments and any other company debts in exchange for the eze pay direct debits. We enclose a copy of that signed agreement. We are instructed that on 15 May 2013, as part performance of the enclosed agreement, your client entered the premises and took possession of the business (Connections Health Club), and has continued to operate the business since that date. We advise that our client has transferred the monies received from the eze direct debits to our Trust Account with authority to assign those monies and all future eze pay direct debits to your client in exchange for payment of all the company debts to date and indemnify of all future company debts as promised in the attached agreement. Our client is preparing an itemised list of all company debts which we will provide to you early next week so that settlement and finalisation of the attached agreement can occur. We have been instructed that the employee/contractors wages are due to be paid for the period ending this week. We have authority to transfer payment for wages to you so that those wage payments can be effected. Please provide us with a list of wages due and owing." 107All this letter was seeking to do was to build on the idea Mrs Ovenden had raised at 5.00pm on 15 May: create a list of debts to be paid, then, see when and how they were to be paid in exchange for the signing over of the EzyPay payments. The 15 May Memorandum refers to an "exchange" of an indemnity for the EzyPay direct debits. This letter was consistent with arranging such an exchange: all presently ascertainable debts would be paid and all future debts would be covered by the written indemnity.

Monday 27 May - Friday 31 May 2013 108The following week started badly. CMC replied to Meehans' 24 May letter in terms that show declining levels of mutual trust and an increasing lack of commitment to whatever had been agreed on 15 May. The CMC letter of 28 May was starting to describe a rather different looking agreement to that recorded in the 15 May Memorandum, an agreement now involving the sale of shares in Connections. And it is the first indication that Selkirk would contend that it was not a buyer of the business, only a landlord retaking possession. This is what CMC wrote: "We acknowledge recept of your letter dated 24 May 2013. 1. The indemnity provided in favour of your client is conditional upon your client's full and candid disclosure with regards to the financial position of the Company and our client being satisfied in respect of same, at our client's sole discretion. In this regard our client requests copies of the accounts for the last three (3) proceeding financial years, copies of all agreements entered into by the Company in which it has a liability (both actual and contingent) and any other document that may have a material effect on the Company's financial position. 2. Our client did not re-enter possession of the Premises in part performance of the agreement reached between our respective clients' as suggested. As you client will be aware, our client was naturally entitled to terminate the Lease and seek possession of the Premises on the basis that the rent was unpaid for more than 14 days in accordance with clause 5 of the Lease. Any suggestion that our client has acted in performance of any agreement is rejected. 3. Only your client can provide a list of wages due and owing in addition to the above documentation in due course. 4. Please provide us with the proposed documentation to give effect to the transfer of shares in the Company for our client's consideration. Our client reserves its right and will not be bound by any agreement until such time as your client has made full and frank disclosure to our client and the parties have entered into the appropriate Share Sale Agreement. Until such time as that occurs, our client is at liberty to operate from the Premises in its own right as the Landlord." 109Meehans passed CMC's 28 May letter on to Mr Sheehy the same day. Mr Sheehy consulted with Meehans to prepare a reply. On 30 May 2013 Meehans replied in a manner consistent with the plaintiffs' case in the proceedings. Using the CMC paragraph numbers the substance of Meehans' response to the CMC letter of 28 May was:

1. Connections was finalising its financial accounts but relied upon the 15 May Agreement;
2. Selkirk did not have any right as landlord "to take possession of the business and to operate the business" as distinct from the premises and asserted "our client has allowed your client to take possession of the business on that day [15 May] in accordance with the agreement" and further stated "our client has further performed the agreement by making payment of the wages of the week ending 24 May 2013 out of the EzyPay monies held by us on trust until completion of the agreement being the payment of all the company debts and a replacement of the guarantors to any debts of the company";
3. Selkirk is operating the business in "part performance of the agreement" and explained that Connections were unable to release payments for wages for the week ending 31 May 2013 "until your client provides us with details of employee hours due"; and
4. That the 15 May Agreement did not contemplate share transfers because it was "a transfer of business to your client, in exchange for payment and indemnity of all the debts of our clients". 110The letter concluded by putting CMC on notice that there should be no material change to the operation or income of the business until the debts of the business are fully paid in accordance with the 15 May Agreement and warned that an application may be made to the Supreme Court in the absence of Selkirk providing an undertaking to that effect.

The Drift to Litigation - Late May to Early June 2013 111CMC did not provide the undertaking that Meehans had requested. CMC replied on Thursday, 30 May pointing out that "the indemnity provided by our client was conditional upon the immediate transfer payment of the EzyPay direct debits from your client to our client" and as "this did not occur" then continuing "we fail to see how your client can seek to obtain an order for specific performance of the conditional agreement where your client has failed to satisfy the condition precedent". The letter then continued as follows: "Nevertheless, our client's position is as follows from our instructions: 1. The Lease was terminated by your client's repudiation of the Lease on 15 May 2013 as set out in our letter dated 21 May 2013. 2. Our client exercises a lien over all assets, fixtures and fittings left in the Premises at 15 May 2013 both under the common law and/or in the alternative, treats such items as abandoned in accordance with clause 12.3 of the Lease. 3. Our client, as Landlord and owner of the Premises, is entitled to do anything from the Premises that it desires. That extends to operating a gym in its own right. As such, our client will not be varying the payment arrangements of existing members. If existing members wish to sign up as a member to our client's gym as a new business from the Premises, that are at liberty to do so and we highly doubt that a Court will grant the orders you propose to seek. 4. Our client has no knowledge as to the provenance of the email attached to your letter dated 30 May 2013 and no instruction from our client was provided to anyone to send such correspondence. 5. The document signed by our client and dated 15 May 2013 makes no reference to the re-entry to the Premises by our client in any way forming part of the agreement surrounding the indemnity your client now claims is in place. As such, we reject any assertion that our client has acted in part performance of any agreement. Our client was naturally entitled to terminate the Lease as set out in our letter dated 21 May 2013. The reclaiming of possession of the Premises by our client and the alleged indemnity are two (2) separate and distinct matters. 6. Our client reserves its rights to commence proceedings against your client and its guarantors for the outstanding rent and loss it has suffered due to the termination of the Lease." 112Connections approached the duty judge on Friday, 31 May 2013 and obtained injunctive relief restraining Selkirk and Mr Ovenden from approaching clients of Connections' business, from soliciting payment from those clients, or from soliciting the transfer of Connections' members to a new health club. The Summons was made returnable before the duty judge on Monday, 3 June 2013. The same day Meehans were conducting correspondence with lessors of equipment for the business, seeking to persuade them to withdraw termination notices and allow Connections to assign the equipment to Selkirk, as the equipment remained on the premises. 113The proceedings were soon case managed into their present form. On 3 June 2013 the injunction was extended to 6 June 2013. On 6 June Lindsay J discharged the injunction by consent and without admissions. The solicitors for the plaintiffs, Meehans, arranged for the correct form of EzyPay change of ownership form to be obtained on 11 June. But once the litigation was underway neither side seemed very interested in signing, handing over or in receiving this form. Nothing was done with it, pending the outcome of the litigation. 114After a number of directions hearings in June and July 2013, orders were made for affidavit evidence to be filed and for the matter to proceed by way of pleadings. In September 2013 the proceedings were listed for final hearing between 3 and 5 March 2014. They were completed within the three days allotted.

Financial Issues and Rent Dispute 115The parties were in substantial consensus that after January 2013, once Connections faced nearby competition, its profitability at the site was much reduced. It was just meeting expenses. Mr Wright and Mr Sheehy were barely able to take their wages out of the business and were certainly unable to achieve the return of all their capital. 116CMC's correspondence in late May claimed that Connections owed $90,000 on the lease for arrears and rent, a security bond and a bank guarantee. The truth was rather different. Although this issue in the proceedings does not need to be decided. 117This completes the narrative of findings. The legal analysis arising from the parties' submissions follows.

Analysis of the Parties' Contentions 118As earlier indicated the parties had five main issues: (1) the terms of, form of and parties to any agreement; (2) whether the gym business was to be sold; (3) the extent of Selkirk's indemnity; (4) was any such agreement terminated by reason of the plaintiffs' repudiation? and (5) what remedies, if any, are now appropriate? The first of these five issues also included debate about the construction of the 15 May Memorandum. The Court now deals with these issues in this order.

(1) Contractual Analysis - form of, terms of and parties to any agreement 119But the starting point for analysis is whether or not there was an agreement. Both Messrs Wright and Sheehy on the one side, and Mr Ovenden on the other, thought they had reached an agreement by the end of 15 May 2013. Indeed both sides acted the following morning on what they thought had been agreed. But identification of the precise terms of the contract is difficult because of the number of things that the parties had left unsaid. The situation here brings to mind Napier J's statement in Subdivisions Limited v Payne [1934] SASR 214 at 220, "I think it takes some ingenuity at times to reconcile the practice of the common law with the theory of offer and acceptance as elements of contract"; and see Brambles Holdings Limited v Bathurst City Council (2001) 53 NSWLR 153, per Heydon JA. But as will be seen, what the parties agreed can be defined with reasonable certainty. And here, as is commonly the case, it is the Court's duty to uphold the reasonable expectations of parties who believed they had a contract, and to avoid "the reproach of being the destroyer of bargains": Hillas & Co Ltd v Archos Ltd (1932) 147 Lt 503 at 512, per Lord Tomlin. This was a commercial arrangement. Courts generally try to find ways to uphold commercial arrangements: Prints for Pleasure Ltd v Oswald-Sealy (Overseas) Ltd [1968] 3 NSWR 761 at 765-6, per Macfarlan J. 120The parties' conduct on 15 May points to their making an agreement; and I infer that they did. Mr Ovenden accepted that what was described as "option 2" (taking over the business and taking on the liabilities) was agreed at the 10am meeting and that the 5pm meeting was "to formalise things". 121The parties' conduct after 15 May points to the same conclusion. Subsequent conduct cannot be used to interpret a contract: James Miller & Partners Ltd v Witworth Street Estates (Manchester) Ltd [1970] AC 583. But subsequent conduct may be used to establish the existence of concluded contract, Port Sudan Cotton Co v Govindaswany Chettian & Sons (1977) 2 Lloyd's Rep. 5 at 11. Here the various attempts at performance and complaints of repudiation after 15 May are a basis to infer that the parties did contract on that day. 122But what the parties agreed and in what form they reached their agreement requires closer analysis. The present analysis of terms assumes the outcome of the two disputed questions discussed below: whether or not there was a sale of the gym business (there was) and the extent of the indemnity (it only covered non related-party debts). 123What were the full terms of the agreement? I find that there were at least nine terms: (1) Connections would sell its gym business at the Smeaton Grange premises to Selkirk; (2) Connections would assign to Selkirk the benefit of the EzyPay direct debit payments; (3) Selkirk would pay the debts of Connections (defined as its non related-party debts only) and indemnify the directors of Connections and Connections in respect of their present and future liability for those debts; (4) Connections management would hand over control of all operations to Selkirk by 4pm the following day, 16 May, which operations Selkirk would then assume; (5) Connections could have the benefit of any EzyPay direct debit payments received by midnight on Thursday, 16 May but Selkirk would have the benefit of payments thereafter; (6) on Friday, 17 May, Connections would finalise employment arrangements with existing gym staff and Selkirk would re-engage those staff; (7) Connections would surrender to Selkirk the March 2010 lease, which would accept that surrender; (8) the surrender of the March 2010 lease would not give vacant possession back to Selkirk, but Selkirk would accept that surrender, subject to the existing office and gym equipment remaining on the leased premises, to which equipment Selkirk would take possession as against Messrs Wright and Sheehy, who could remove specified items by 4pm on 16 May; and (9) Connections would assist Selkirk to take over the leasing obligations of any leased equipment left on the premises. 124Some of these terms were express. Some of them were implied. Only a few of them were set out in the 15 May Memorandum. For example, the 15 May Memorandum covers the subject matter of terms (2) and (3) which were interdependent promises made in "exchange" for one another. Terms (1) and (4) follow from the Court's findings below that there was a sale of a business, a subject only indirectly referred to in the 15 May Memorandum. Terms (5) and (6) were expressly agreed but do not appear in the 15 May Memorandum. Terms (7), (8) and (9) are implied. They were not discussed but should be implied into the contract to give it business efficacy, in accordance with the principles stated in BHP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266. 125This analysis of the terms of the 15 May Agreement immediately shows that this is not a case where the 15 May Memorandum embodies the whole of the terms agreed. This was an agreement, partly oral and partly in writing. The parties did not attempt to embody the whole of their agreement in writing, merely the parts of it that they thought were the most important. For the reasons which follow, the Court is able to look at both the written and the oral part of the agreement. The parol evidence rule does not apply in this case. 126The relevant legal principles may be shortly stated. As the learned authors of Contract Law in Australia, 5th edition, Carter, Peden and Tolhurst (2012) explain at [12-08]: a contractual document may be executed with the intention of superceding entirely all prior negotiations in relation to the subject matter dealt with by the document, and the effect of such a document will be to integrate the bargain in a written form (Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 336) and such a contract discharges any prior oral agreement, evidence of which becomes inadmissible, because of the parol evidence rule; but a second form of integration occurs, where a document embodies the parties' agreement without discharging a prior oral agreement and the document is conclusive evidence only of the part of the contract recorded in writing: Bank of Australasia v Palmer [1897] AC 540 at 545 and Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133, at 144. 127Here the parties did not attempt to place the whole of their bargain in writing. First, they did not declare in the written document that that was what they were doing. Secondly, many of the express oral terms of the agreement, are not in the 15 May Memorandum. Thirdly, the agreement they actually made was not workable based only on the 15 May Memorandum because of what had failed to include, including the implied terms. 128Selkirk first disputed that Connections was a party to the 15 May Agreement. Looking at the 15 May Memorandum alone, it is quite understandable that Selkirk would put such a submission. The document appears only to be for the benefit of the directors of Connections: Mr Ovenden says in it "I indemnify the directors of Connections". The 15 May Memorandum was directed to the position of Mr Sheehy and Mr Wright, because that is what Mr Wright was most worried about at the 5pm meeting and that is what Mr Ovenden wanted to reassure him about at that moment. But Connections must have been a party to the 15 May Agreement, both the oral part as well as in the 15 May Memorandum itself. Selkirk could not acquire the business from Connections without Connections being a party. And Messrs Wright and Sheehy had ostensible authority to contract on behalf of Connections. I find that is what they did. 129A remarkable result of Connections not being a party to the 15 May Agreement is that Connections would now be in a position to sue Selkirk for trespass to its goods and for conversion of its business operations, as Selkirk has apparently taken them over outside the authority of any contractual arrangements for their acquisition. Mr Martin correctly agreed this conclusion was the logical consequence of his argument. But such inconvenience is avoided because Connections was a party to the 15 May Agreement.

(2) Sale of the Business? 130Connections sold the business to Selkirk. Although the parties did not expressly use the language "sell the business" either orally or in the 15 May Memorandum, the language they did use meant just that. On several occasions, as the findings above make clear, on 1 May, 9 May and on 15 May Mr Ovenden agreed with the proposition that he would "take over" the business. This was an express oral part of their agreement. 131But what of the last sentence of the 15 May Memorandum? This part of the 15 May Memorandum most closely approaches the concept of selling the business. Selkirk submitted that the words "with the intention of the sale of Connections Health Club to Selkirk" meant that the sale of the business was to be in the future, provided the rest of the 15 May Memorandum was performed. 132But that is not the correct construction. The words "with the intention of the sale of" should be properly construed as meaning "to the intent that". In that sense they make out a connection between the 15 May Memorandum and the oral part of the 15 May Agreement. The acts of signing over the EzyPay direct debits and the giving of the indemnity were acts to be done with the objective of effecting the sale of the business. 133In one of its primary senses the word "intention" means "the end or object intended": Macquarie Dictionary. The end or object intended here, of selling the business, was not going to be at some indefinite future time to be agreed and settled upon later. That object was objectively intended and had been the subject of oral discussions, and would be progressively effected by performance of all the nine terms set out in these reasons.

(3) The Extent of the Indemnity 134The Court concludes in this section that Selkirk only agreed to indemnify Connections, Mr Wright and Mr Sheehy for all non related-party debts. 135The question of the extent of the indemnity Selkirk was providing under the 15 May Agreement contains a number of sub-questions: (1) was Selkirk indemnifying Connections against its present and future gym business liabilities; (2) was the indemnity to cover Connections' liabilities to Mr Sheehy, Mr Wright and members of their families (the related-party obligations); and (3) did the indemnity only cover circumstances in which the directors of Connections, Mr Sheehy and Mr Wright might have direct legal liability to the creditors of Connections. These questions are answered in this order. 136Connections had the benefit of Selkirk's promise to pay its past and future debts. That promise was not contained in the 15 May Memorandum but it was nevertheless in the partly written and partly oral 15 May Agreement. In the oral part Mr Wright and Mr Sheehy received on behalf of Connections the benefit of a promise that Connections' past and future debts would be paid. Mr Ovenden agreed to take over these liabilities of Connections. But the 15 May Memorandum is expressed in the form of an indemnity, so that it would be clear that the two directors were also benefited by the promise and that any secondary liability they had in respect of Connections' debts would also be covered. The word "indemnity" was an apt use of language by Mr Ovenden. It referred to the major kinds of liability that Mr Wright and Mr Sheehy might have in respect of Connections' debts: as guarantors of financial leases for equipment used in the business, for their statutory obligations to the Australian Taxation Office in respect of the tax debts of Connections, and for their obligations under company law to creditors for allowing Connections to trade whilst perhaps insolvent. 137When the written and oral parts of the 15 May Agreement are put together the position makes full sense: Selkirk was promising (orally) to pay Connections' debts, past and future and would also indemnify Messrs Wright and Sheehy (via the 15 May Memorandum) in respect of any liability they had in respect of those debts. 138The third sub-question is now answered. The indemnity in the 15 May Agreement is designed to cover the directors' secondary liabilities for Connections' debts. But Selkirk is also taking responsibility directly for the payment of all Connections' non related-party debts, whether or not they result in any secondary liability to the directors. Selkirk made this promise directly to Connections. 139That leaves the second sub-question: whether related-party liabilities are covered? The Court's findings about the 10am and 5pm meetings on 15 May decide this sub-question. The parties agreed to exclude related-party debt obligations, being the debt obligations Connections owed either to Messrs Wright and Mr Sheehy or to members of their families. This qualification was agreed to orally at the 10am meeting. But it was also agreed contemporaneously when drafting the 15 May Memorandum, Mr Ovenden referred to debt obligations that could only readily apply to non related-party debts "all current accounts, all company [debts], outstanding lease payments, tax liabilities, super payments, insurance payments and any other company [debts]". These words were only apt to describe Connections' ordinary trading obligations, not debt obligations to family members. 140Finally, Selkirk submitted that if the word "indemnity" in the 15 May Agreement was ambiguous it should be construed and applied strictissimi juris for the benefit of Selkirk the indemnifying party: Andara Transport Pty Ltd v Brambles [2004] HCA 28; (2004) 217 CLR 424 ("Andara"). But it is not necessary to decide this point because there was express agreement excluding related party debt obligations from the scope of the indemnity. 141Selkirk also submitted on the basis of Andara that the indemnity could not arise until there had been an "exchange" (of indemnity with the EzyPay assignment) and that as the plaintiffs had refused an exchange that Selkirk should now be discharged from further performance. 142But there are several answers to this argument. First, the correct analysis of the position Meehans had taken in their letter of 24 May was that the plaintiffs were prepared to exchange a signed EzyPay transfer for evidence that Connections' current debts had been paid. There was no refusal to perform the agreement the Court has found was made. Secondly, as will be seen below, Selkirk has affirmed the 15 May Agreement and not elected to accept its discharge and an exchange can still now take place, even though the EzyPay assignment will be of little future value to Selkirk.

(4) Repudiation and Termination 143The 15 May Agreement was neither repudiated nor terminated. Connections was not in breach of the term of the 15 May Agreement that Connections would assign to Selkirk the benefit of the EzyPay direct debit payments. But the requirement for performance of this term was interdependent with Selkirk's obligation to pay Connections' debts. For the reasons which will be explained in this section both these terms were conditions of the contract. But they have not been breached. Neither side has yet offered to perform in precise accordance with the contract. Nor has there been a repudiation of the contract, nor an election to terminate the contract; and, any right to terminate cannot be relied upon by reason of Selkirk's affirmation of the contract. This section of these reasons will now deal with each of these matters in turn. 144Connections' promise to assign the EzyPay payments was an important promise to Mr Ovenden. In my view, Mr Ovenden, on behalf of Selkirk would not have entered into the 15 May Agreement unless he had been assured of a strict or substantial performance of this promise and this was apparent to Mr Wright and Mr Sheehy on behalf of Connections. The breach of such an obligation will constitute the breach of a condition of a contract: Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 ("Luna Park") at 641-2 and Associated Newspapers Ltd v Bancks (1951) 83 CLR 322. The promise to assign the EzyPay payments was in my view a condition of the contract, the refusal or failure to perform which may have entitled Selkirk to terminate the contract for breach, or because the conduct of failing or refusing to perform such a term amounted to a repudiation of the contract. 145But in my view Selkirk's obligation to pay Connections' debts and indemnify its directors was also a condition of the 15 May Agreement. Persons in the position of Mr Sheehy and Mr Wright would not have entered into this contract without such a promise. But these two promises were wholly interdependent, as evidenced by the language of "exchange" in the 15 May Memorandum, and the phrases used orally so closely together on several occasions, "take over the business" and "pay its debts". 146The Court cannot look to the prior negotiations of the parties to establish the plaintiffs' and the defendant's motivation for entering into the contract and to establish the importance in Mr Ovenden's mind of this clause because the relevant test is an objective one: Luna Park at 641. Here though the income stream from EzyPay payments was the principal source from which any business operator would meet the outgoings of Connections gym business. No reasonable operator would have acquired the business without the assurance of this future revenue stream. And no reasonable seller of the gym business would have committed to this transaction without a promise Connections' debts would be paid. This was centrepiece of Selkirk's promises to Connections. 147Selkirk alleges Connections' decision not to assign the EzyPay payments at 5.00pm on 15 May and thereafter was a breach of that condition entitling it to terminate the contract. But the EzyPay payments for 16 May were agreed to be released to Connections to pay wages for that week. And the payments for the following week commencing 20 May were paid into Meehan's trust account. Connections submits that it was anticipating "an exchange" by which any assignment of the EzyPay payments was to be given over simultaneously upon the receipt of a promise to indemnify. This in my view was in conformity with the contract. 148But for complicated reasons this exchange failed to occur because of conduct on both sides, so that neither side performed the exchange. Selkirk failed to provide a form of indemnity which corresponded exactly with its promise under the 15 May Agreement to pay the past debts of Connections, that Connections was entitled to expect under the Agreement. The defect in what Connections received was that Selkirk did not clearly make a written promise to Connections itself, rather than just to Mr Sheehy and Mr Wright in the 15 May Memorandum to pay its non related-party debts (or to actually pay them by then) and so what Selkirk offered did not correspond with what had actually been agreed to occur "in exchange" for the EzyPay assignment. On the other side Connections did not have an EzyPay payment form ready to sign over on 15 May, and did not have one ready until 11 June. 149But that is where matters remained. The Meehans letter of 24 May indicated a willingness to exchange the EzyPay payments and the monies in trust for payment of Connections' existing debts and a suitable indemnity. But in subsequent correspondence Selkirk never offered to perform in this way. 150In the result, Selkirk decided to open its own account with EzyPay. But as neither side has offered to perform this contract precisely in accordance with its interdependent terms as the price of asking for performance, neither side is in breach. 151But even if Connections' were in breach its conduct does not amount to a repudiation of the 15 May Agreement. A party may be found to have repudiated a contract if the party has expressed an unwillingness no longer to be bound by it: Associated Newspapers Ltd v Bancks (1951) 83 CLR 322. Here though Connections, far from indicating an intention to no longer be bound by the 15 May Agreement, quarantined the funds to perform the agreement if and when Connections had the assurance from Selkirk that the Agreement could be performed in accordance with its terms. The only proper way to look at Meehans preserving the funds in their trust account is to signal that Connections regarded the future performance of this part of its contract as sufficiently important that it would set aside the funds to demonstrate to Selkirk that it would be able to perform when required. This was not a repudiation of the contract. 152And Selkirk did not terminate the 15 May Agreement. If the contract were repudiated or if a breach of a condition were established, Selkirk had a right to elect to accept the repudiation. But ordinarily an election should be communicated in some clear way so that acceptance of the other party's repudiation can be understood by both parties to the contract: Heyman v Darwins Ltd [1942] AC 356, 361. But here the closest that Selkirk's case came to a communication of such an election is when about 24 May Mr Ovenden warned that there would be negative consequences if the EzyPay assignment did not occur by 27 May. But neither at that time nor on 27 May, when the EzyPay assignment had not occurred did Selkirk communicate to Connections that as a result of the repudiation Selkirk was treating the contract as repudiated and the repudiation was accepted and that the contract was therefore at an end. This essential act is simply absent in this case. 153The absence of clear election is no accident in this case. Mr Ovenden was faced with a fundamental dilemma: it must have been clear to him that if an election of termination of the contract were communicated to Connections that Selkirk would have to give up any benefits it had received under the contract and return them immediately to Connections. These benefits included the continuing use of Connections' equipment and business assets, including its databases. I infer that Mr Ovenden well knew that he would have to do this if the contract were formally terminated. He did not want to take this action because he did not want to give up the benefits that he had received. He somehow managed to convince himself that all he was doing was no more than taking a surrender of Connections' lease and that Connections had failed to pick up its own property after the surrender. But if that were the true explanation of Selkirk's conduct, consistently it would have given some notice to Connections to come and collect its own goods and assets which were inconsistent with giving vacant possession on surrender of the lease. In the meantime none of these assets would have been actually used by Selkirk. 154Selkirk's continued use of Connections' tangible and intangible assets has another consequence. Whatever Selkirk attempted to do, it had in fact lost its right to terminate this contract because of its continued affirmation of it. A right to terminate for breach of condition or a right to accept a repudiation may be lost by the innocent party's affirmation of a contract: Sargent v ASL Developments Ltd (1974) 131 CLR 634. Selkirk continues to affirm the 15 May Agreement.

(5) The Scope of Any Relief 155Damages and declaratory relief are appropriate remedies for the plaintiffs. 156The plaintiffs have been successful in establishing that the 15 May Agreement was made in the terms which they contend: that Selkirk purchased Connections' gym business, and that Selkirk promised to pay Connection's [non related-party] debts to indemnify its directors in respect of those debts. The appropriate way to give effect to this result is to make declarations of a right to enable Connections, Mr Sheehy and Mr Wright to obtain indemnity for their respective obligations, should it be required in the future. Connections also claim damages against Selkirk for the whole of Connections' debt obligations. 157But those debt obligations have not been fully ascertained. The Court will direct that there be an inquiry as to damages, which will ascertain the quantum of Connections' debt obligations for the purposes of these proceedings. This inquiry is a separate exercise from that of Connections' liquidator. The liquidator may make his own determinations as to the extent of its debts. That may differ from what the Court now reaches on the present evidence. 158It is in the interests of the parties to ensure that there is maximum correspondence between the quantum of the debts approved by the liquidator and the quantum recoverable in these proceedings. No doubt they will bear this in mind in preparation for the inquiry as to damages. 159But if the liquidator were to admit to debt a proof which was not recoverable in these proceedings by way of damages for Connections, and if that additional obligation of Connections were also to result in a director's liability on the part of Messrs Sheehy and Wright, that may yet result in Selkirk having to indemnify the directors for that difference under the indemnity declarations made as a result of this judgment. 160A previously unseen costs question may arise as a result of the Court's findings. The Court has upheld an indemnity, at least for Connections' directors. The question may arise as to whether or not an indemnity cost order should also be made against the defendant in favour of the directors and possibly in Connections' favour.

Conclusions and Orders 161In the result therefore for the reasons set out above the Court finds for the plaintiffs and makes the following orders and directions. Whether costs issues should be decided now, or after the damages inquiry that is to be ordered, can be the subject of the parties' submissions. (1)A declaration that the defendant purchased the first plaintiff's business in May 2013. (2)A declaration that the defendant is liable to indemnify the plaintiffs in respect of the debt obligations owed by the first plaintiff, other than the first plaintiff's debt obligations owed to the second and third plaintiffs. (3)Order that there be an inquiry as to damages and that the parties bring in further short minutes of order to provide for that inquiry, including as to its precise scope. (4)List the proceedings for further directions on Monday, 17 March at 9.30am.

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. Decision last updated: 14 March 2014