Plaintiffs v Defendants

Plaintiffs v Defendants - [2005] VSC 229 - VSC 2005 case summary — Zoe

[98]

81 It is clear that if the contract was still in existence in the year 1991, Mr Tropeano breached the term. He gave evidence that in about April 1990 he started to make approaches to former clients after Mr Riboni had failed to pay the balance of the purchase price of $134,000 on 9 January 1990. He admitted that at some point he was involved in a firm called Madison & Co, and he admitted that he was not revealed as a partner until some time in 1991. On the other hand, Mr Riboni gave evidence that no attempts were made to take any of his clients until February 1991. Mrs Tropeano seemed to be of the same view. She remained at the old firm until about November/December 1990 shortly prior to when the Instruments Act writ was issued and she decided it was politic to leave the firm. Her memory was that no attempts were made by her husband until the year 1991 to take Mr Riboni's clients. Mr Riboni submitted that the evidence revealed that the first attempts to take his clients occurred on 26 February 1991 when a firm E.R. Lanzon and Associates wrote a letter to him advising him that they were acting on behalf of some of his former clients. There were three letters of the same date involving about 11 clients. On 20 May 1991, Madison & Co commenced to forward letters to Mr Riboni stating that they were acting for a number of former clients and requiring Mr Riboni to hand over their accounts and documents. The heading on the letter revealed that the principal was a Mr Ercole Lanzon. Mr Tropeano accepts that as at that date he was a member of that firm although not revealed in any public document. Mr Riboni submits that the evidence would lead to the conclusion that when Mr Lanzon wrote on 26 February 1991 he was then acting for and on behalf of Mr Tropeano. I would not be prepared to draw that conclusion. Mr Riboni gave evidence based upon his records in the form of a summary of the clients that were lost to the practice. His category A dealt with Mr Lanzon who wrote some six letters from 26 February to 4 April 1991 stating that he was then acting for a number of former clients. Mr Riboni gave evidence in his category B of the letters that were forwarded by Madison & Co which apparently commenced about 20 May 1991 and continued right through to October 1991. All told there were 34 clients, although it is apparent that some of the personal clients were involved in companies. Mr Riboni stated that those clients were lost to the firm, and he gave evidence that to 30 June 1990 his firm derived a total of $81,551.75 income from those clients. Mr Tropeano in cross-examination stated that it was his belief that Madison & Co recovered about 40% of Mr Riboni's clients, and he opined that the value of the work taken was in the order of about $50,000. No attack was made upon Mr Riboni's summary which was supported by the letters written and I accept his evidence as to the number of clients who apparently moved across to Madison & Co as a result of Mr Tropeano's activities, and that the value of the services provided by his firm to those clients to 30 June 1990 was $81,551.75.

[115]

90 The sale agreement restrained the plaintiffs as vendors from acting for any person or entity who had been a client of the firm in the preceding three years. The agreement did not restrain either plaintiff from pursuing his vocation as an accountant, provided each did so at least five kilometres from the Northcote premises. What the restraining clause did was to stop either from acting for former clients for an indefinite period. Liberty to contract on such terms as the parties agree underlies the law of contract. That is not to say that contracting parties have an absolute right to make any agreement. They do not. There are well recognised categories of contracts which are forbidden and also contracts which are unenforceable. But within limits each party negotiates to achieve the best bargain for himself. The negotiation process leads to an agreement in law. A vendor of a business sets out to achieve the best price he can. He wants the best return for his industry in establishing and building up his business. He wants a proper return on the sale of his goodwill which recompenses him for his efforts. On the other hand the purchaser wants to pay as small a sum as possible. But it is vital to his interests that in paying for goodwill he protects himself from the risk of clients going elsewhere and in particular back to the vendor. In purchasing the goodwill of the business the purchaser wants protection against the fruits of the sale being whisked away by the former owner. Mr Riboni purchased the business as a going concern, and by doing that he sought to obtain an advantage in respect of the location, the premises, the goodwill and the customers. He desired to take over the business and provide accountancy services to the same clients. He paid to get the goodwill and expected that the clients would remain with the business. The business continued under the same name at the same premises, using the same equipment and with the same staff. The contract provided that Mr Tempone should remain as a "full time consultant and Managing Accountant from the date of settlement to 30 April 1989". The parties agreed not to tell the clients of the takeover, to inform them that Mr Riboni was principal of the firm, that Mr Tropeano was on holidays and that Mr Tempone was continuing in the business. It was then agreed that at the end of April, when Mr Tempone was proposing to take a holiday, that the clients would be told that he was going on a holiday, leaving it up to the clients to ultimately ascertain that there had been a change in ownership. It is clear that these steps were all designed to ensure that the clients did not leave. It is clear that the parties recognised the risk of this happening and took steps to minimise the risk. The risk was that on the sale of the goodwill of an accountancy practice where clients had been with the business over a lengthy period of time, a change of ownership may cause them to leave and engage the former owners. This was the ever present risk. Mr Tropeano had built up the practice since 1978. His background is Italian and the bulk of his clients were Australians of Italian background. Mr Tempone is also of Italian background. The personal aspect of the goodwill was obvious. The element of personal loyalty posed an ever present risk that the clients would seek to return to the old owners. The price was agreed and was subject to the terms of the agreement. It is clear Mr Riboni provided substantial consideration for the restrictive covenant.

[174]

129 A general practical approach to the measure of damages is to consider what would have happened if the breach had not occurred and compare that with what in fact did happen.[40] That is, the hypothetical situation compared with the actual. If these clients had not been taken from Mr Riboni's firm, the prospects were that they would have remained with him, although there was always a risk that some may have left. The value of his goodwill would be expected to remain at about the level at which it was when he purchased the business, but subject to variation according to the number of clients he had. He would have performed services for those clients, for which he would have been remunerated. Hence by losing a substantial number of clients Mr Riboni lost part of the value of his goodwill and also the net income which would have flowed from performing work for them. The question immediately arises as to how the Court determines the loss of income and for what period? The lost income would be the net profit from performing the services, because there would be an expense involved in performing the services. If there were less clients, there was every prospect that staff would have been dismissed and the wages bill would have been reduced accordingly. On the other hand, the fixed expenses would have remained. Approaching the task in this case, it is complicated by the fact that Mr Riboni's firm effectively ceased on 15 October 1991 when the agents of the mortgagees moved in and took possession of his practice. The evidence revealed that Mr Tropeano made approaches to the agents and acquired some of the clients himself, and Mr Riboni later reached agreement with the agents, recovered back some of his clients and recommenced his practice. Hence any loss of income arising from the loss of clients ceased in October 1991. In my view the Court should award damages to Mr Riboni for his loss of clients affecting his asset, namely, the goodwill, which on a dollar for dollar basis represents a loss of $81,551.75. It is not possible for the Court to calculate any loss of net income arising from the loss of these clients because there is no evidence which demonstrates the loss. The evidence of the value of the clients was based upon services rendered to the preceding financial year, namely, 30 June 1990. The wrongful acts occurred in or about May through to October 1991. It is unknown whether Mr Riboni performed services for the clients in the financial year to 30 June 1991 and whether he had been paid. There is a fair inference that he did and was paid. But for the period 1 July to 15 October 1991 there is no evidence to establish that if he still had the clients he would have performed services and been paid. The exercise could have been performed, the matter could have been investigated and proper evidence could have been placed before the Court which would have shown if there was a loss of income and how it was calculated. The Court in these circumstances expects the best evidence. The best evidence was an investigation of the circumstances and, if there was a loss, demonstrating it.

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Judgment (178 paragraphs)

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Legislation Cited (1)

Cases Cited (12)