Russo v Resource Developments International Pty Ltd [2003] NSWSC 838 | Case summary

D. A claim for indemnification against guarantees given by the plaintiff in connection with the subject business pursuant to clause 20 and 22 of that agreement. 4 I will deal with each of these heads of damage in turn. 5 A. The answer of the defendants to this claim is contained in the defence of the first and fourth defendants to the further amended statement of claim filed 18 June 2003 (paras 13-15). Para 13 pleads that prior to February 2003, various companies therein called trading companies, all ceased to trade and two of them had been wound up by the court, as a consequence of which the share sale agreement is a frustrated contract and all promises due to be performed but not performed were discharged pursuant to s 7 of the Frustrated Contracts Act 1978. 6 Para 14 of the defence claims in the alternative that Resource Developments International "hereby rescinds and terminates" the share sale agreement. Para 15 pleads that the plaintiff cannot complete the share sale agreement as required by clause 15 and in the premises, Resource Developments is entitled to, and hereby does, rescind and terminate the agreement. 7 It may be remembered that before the events recorded in my first judgment, the plaintiff and his son Marcello, were, commercially speaking, the proprietors of a concrete recycling business being carried on at Kurnell. Negotiations were carried out with the defendants and as a result, as from 12 February 2001, the plaintiff ceased all involvement in the management and administration of the companies conducting the concrete recycling plant and treated the third defendant Hy-Tec Industries Pty Ltd as the proprietor. Although this had happened in February, the documentation of the transaction was not complete and by April 2001, the plaintiff was becoming very frustrated. On 5 April, he took direct action and started turning trucks away from the Kurnell site. This led to the promise of action from the fifth defendant, Mr Costa, who was the solicitor involved, and on 10 April 2001, the share sale agreement was signed. 8 By August 2001, relations between the parties soured. 9 The share sale agreement had not come into effect because it had not been signed by the son. The son signed it in December 2001, at which time everyone else on the defendants' side had intimated that the agreement was not binding on them. It was submitted that by November 2001, everyone (except the plaintiff) had walked away from the contract and it had been terminated or abandoned in November 2001. I held that the agreement was still in force in December 2001. Indeed, the whole of my first judgment assumes that it was still in force as at 2 April 2003 when I gave the judgment. 10 It is necessary to turn to the provisions of the share sale agreement in a little more detail. As I indicated in my earlier judgment, there are various bizarre aspects to it, but I will not repeat all of what I said before. 11 The vendors are the plaintiff, Maccotta Pty Ltd and Merkado Pty Ltd. Clause 3 provides that the vendor agrees to sell and the purchaser, that is, the first defendant, Resource Developments International Pty Ltd, agrees to purchase the vendor's shares in the company for $400,000. The question is what "the company" means in clause 3. The recitals say that Merkado Pty Ltd is the trustee of the Stafford Trust and the Caracalla Trust who had the beneficial ownership of the vendor company Maccotta Pty Ltd which owned shares in the six trading companies and is the legal and beneficial owner of all the issued shares in the trading companies. The plaintiff is either by himself or his trustee selling 50% share in Maccotta Pty Ltd and the trading companies to the purchaser. This seems to suggest that "the company" in clause 3 means Maccotta Pty Ltd, the shares in Maccotta carrying control of the trading companies. 12 The status of Maccotta is that it has not been wound up and is still available for its shares to be transferred. 13 There has been a submission that the share sale agreement refers to the trading companies. Reading the document as a whole I cannot see how this could be so. It was an important aspect of the transaction that the whole business be transferred, and this would involve the holding company as well as the trading companies. 14 Accordingly, one cannot just treat this case as if it were a contract for the sale of shares in a company which is now in liquidation. It is a contract for the sale of shares in a holding company and before completion a significant portion of the assets of that company have been depleted in that some of the trading companies have been wound up or are otherwise in their dying days, and the business generally has ceased to be. What is the effect of that event on the contract for the sale of shares? It must be remembered that in this contract all the warranties were deleted. 15 The usual rule where there has been partial destruction of the subject matter of a contract is that the contract is not frustrated, though it may provide a basis for termination; see Treitel on Contract 10th ed (Sweet and Maxwell, 1999, p 809). Partial destruction will only work a frustration if that destruction causes the main purpose of the contract to be defeated. 16 I cannot see that there is any frustration in the instant case. The parties had effectively passed control of the business in February 2001, they had agreed to sell the plaintiff's whole interest in the business by way of a transfer of the shares in Maccotta, contracts for the sale of shares are always considered to be wasting contracts where there is a real possibility that the value will alter if the contract is not performed in a timely fashion; see the notes on sales of business contracts in the 3rd ed of Australian Encyclopaedia of Forms and Precedents Vol 11 p 11064. That is why contracts for the sale of shares involving the business of a private company are usually presumed to be contracts in which time is of the essence; see the cases referred to in Lindsay v Mahoney (1979) 1 BPR 9584, 9587-8. 17 Because I have not found frustration, I do not need to examine the technical arguments that were put to me over Mr Lever's proposition that were there frustration the frustration was caused by the acts of the first and fourth defendants. I do not need to decide whether the acts of the defendants relied on by Mr Lever were wrongful in the sense of being a breach of contract or otherwise, or all the other rather complicated matters which are considered by Jane Swanton in her article "The Concept of Self-Induced Frustration" (1990) 2 JCL 206. 18 There is no frustration, and in view of my earlier decision there was no rescission or termination as at the day I gave my first judgment. 19 However, when I gave that judgment I was only considering the first $100,000 instalment and I believe it is fair to consider whether the second $100,000 instalment is due and payable in the light of the pleadings which have been amended since I gave my main judgment. The payments due on 1 February 2003 was not a matter I considered when I was giving my earlier reasons because there was no claim for it at that stage. 20 I should note that if the analysis is correct that the plaintiff can sue for the instalments of purchase money due, and the defendants may be able to sue for non-delivery of the shares, then I do not need to worry about the second aspect because there has never been any claim or cross claim in respect of those matters. 21 Accordingly, in my view, the plaintiff is entitled to the $100,000 under the first head. 22 B. Mr Rayment says that there must come a time when a contract which is in suspension is in suspension so long that the court must infer that it has come to an end. If it has not come to an end, then either party may bring it to an end and this the relevant defendants have done by filing their defence on 18 June 2003. This last mentioned matter, would not, of course, be a defence to the $100,000 due in February 2003 as the alleged termination was not until after the contract was rescinded or terminated. 23 As I held in my first judgment, by November 2001, it was quite clear that the defendants and their allies had walked away from the contract. However, as the argument before me which took place at the end of 2002 showed, the basal position taken by the defendants at that stage was that the contract had never come into existence, or alternatively, was subject to various warranties in earlier heads of agreement. They did not then put forward the present defence. 24 The rules governing contractual regimes have become more and more fixed as the centuries have gone by. As I understand the principles of the law of contract today, once parties have entered into a contractual regime that regime continues until there has been discharge. Discharge may be by performance, by frustration, by agreement or by a party taking advantage of an option to put an end to the contract either because of a contractual term permitting it to do so, or because of repudiation by the other side. The law also knows the concept of abandonment of contract, but the prevailing view is that abandonment occurs where the court infers from the conduct of the parties that one party must have made an offer that the contract be abandoned and the other has accepted it. 25 In DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423, 434, the High Court said that where there is a situation reached between parties to a contract that neither party intends the contract should be further performed, the parties must be regarded as having so conducted themselves as to abandon or abrogate the contract. The Justices relied on Summers v The Commonwealth (1918) 25 CLR 144. In Summers' case Issacs J had at 152 followed the decision of the Privy Council in De Soysa v De Pless Pol [1912] AC 194, 202, where Lord Atkinson, giving the judgment of the Board had said: "One party to a contract is not bound to give to the other unlimited time after a day named to do that which the other has contracted to do. There must be some point of time at which delay or neglect amounts to refusal … ." 26 However, in the present case, whilst the defendants had walked away from the contract in November 2001, there is no material to show that the plaintiff had. He was still trying to enforce the contract in the action before me up until May 2003 and still continues to do so. 27 I cannot see how there was any abandonment, at least before May 2003. 28 Accordingly, the second payment of $100,000 is payable. 29 There will come a point of time, indeed, it may already have passed, where the non-fulfilment of the contract in all the circumstances may enable a court to say that it has come to an end by abandonment. It may also be that the termination of the contract made on 18 June 2003 is effective. However, it is not necessary for me to decide this and there are good reasons for not deciding it. The principal reasons are that there has not been an argument as to whether time is of the essence of the contract, or whether a notice to complete needed to have been given by the defendants before their purported termination of the contract. 30 C. There is no dispute, as I understand it, that the stamp duty of $2,814.01 is payable as damages. Whether someone is entitled to a refund if there is rescission rather than termination, does not concern me. 31 D. Accordingly, I pass to the claim for damages for breach of the contract of indemnity. 32 The plaintiff's claim is for damages in respect of eight different guarantees. The defendants' basal answer is that the guarantees were in respect of equipment which was surrendered by the Russo interests and that the indemnity does not apply to them. However, it is necessary to look at the guarantees one by one. 33 In the argument before me, the guarantees fell into five categories, but three of them had sub-categories so there were eight in all. The items are as follows:

I said at [116]: "Once an asset is disposed of so it can no longer pass to the purchaser on completion there is no longer any requirement to refinance it … . I say refinance because it seems to me that the whole commercial purpose of clause 22 is that everyone knew that the plant and equipment to be taken over would be subject to financing involving personal guarantees and that there would be refinancing by the purchaser with a consequential release in the guarantee." 37 It is clear that item 1(b) cannot be within clause 22. I had already set out in para 114 of the earlier judgment just how money was raised by manoeuvring with the Cedarapids 45 roller cone crusher and it is quite outside the agreement. As to the other equipment, Mr Rayment's submissions come within what I said in my earlier judgment. Mr Lever's answer is that the plaintiff left the business in February 2001, he left the business with the equipment in the hands of the defendants and their allies, and because there was no attempt to meet the lease payments, the property was repossessed in January/February 2002. 38 So far as (1)(a) is concerned, it would seem from the notice of termination that three months' rental was owing as at January 2002 when the lease was terminated. This would indicate that the non-performance occurred somewhere in the second half of 2001. 39 So far as (2) is concerned, the default was 7 September 2001 according to the statement of claim. The Esanda documents would also tend to show that the default happened in 2001 but the matter is not as clear. The same comment could be made about the remainder. 40 Accordingly, it seems to me that as at the date of the share sale agreement in April 2001, the probabilities were that all of these pieces of equipment save (1)(b) were equipment which was being used in the business which had been taken over by the defendants and their allies in February 2001, the lease payments had been put into default after that date and they were within clause 22. 41 I was concerned in my earlier judgment that it may be that Mr Russo's liability under the guarantees might not be as much as the full amount claimed by the finance companies because there might be other set-offs or monies might have been recovered from other parties. However, the evidence now before me tends to show that this is not the case. 42 Accordingly, in my view, one deducts from the $713,425.79 item (1)(b) which is $258,058.94 and I find that the defendants are liable to the plaintiff for the balance, namely $455,366.85. 43 Accordingly, the plaintiff is entitled to $100,000 under head A; $100,000 under head B; $2,814.01 under head C; $455,366.85 under head D. There must therefore be a verdict for the plaintiff for $658,180.86. The first and fourth defendants must pay the costs of these damages proceedings. ******************

Russo v Resource Developments International Pty Ltd

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Judgment (16 paragraphs)

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Cases Cited (4)