Sims v SPM Business Consultants Pty Limited

The contentions of the parties 30 The applicants' case is a simple one. It is now limited to the Ormond practice. The case is that the sale of the goodwill of the Kampf practice to South East Melbourne carried with it the transfer of property in the client files. The client files are chattels. South East Melbourne and/or its receiver is entitled to proceed in detinue against the respondents for the recovery of possession of those files. The "office listing report" lists the files which were transferred to South East Melbourne. It was those files which were taken over by the respondents on 1 May 2002. The files have a particular value to South East Melbourne as Kampf is prepared to repurchase the Ormond practice if the files can be obtained to enable a seamless transfer. The respondents have not established (and the onus is on them), that South East Melbourne either sold the Ormond practice or the files to SPM, or abandoned that practice or the files. Client files which were created after 14 December 2000 but prior to 1 May 2001 are also the property of South East Melbourne even if the files were created by SE Melbourne or Facilities as each of them was acting as agent for South East Melbourne in that respect. 31 The respondents submit that all that South East Melbourne purchased from Kampf was the goodwill of an accounting practice, which was dissipated and deprived of all value from the moment Mr Sharpe caused South East Melbourne to become divorced from the assets and undertaking of the Ormond practice. Thus SE Melbourne became the lessee of the premises from which the business was conducted and the proprietor of the "Kampf Partners Consulting" business name. Facilities became the employer of all of the staff employed at the Ormond practice which was conducted from its inception by SE Melbourne. At no time did the receiver own any of the assets of the business, or otherwise operate or control any of the sources of goodwill of the Ormond practice. SPM is the successor in title to the business operated by SE Melbourne and assets of Facilities. None of the applicants has any claim to that "property". In the respondents' submission there is no evidence that South East Melbourne purchased any files relating to clients such that property in any such files vested in South East Melbourne as chattels. If that submission is not accepted, the submission was that any relief should be confined to the files in the form in which they existed at 14 December 2000, being the date of settlement of the Kampf agreement. 32 Alternatively the respondents contend that there was a concluded agreement under which SPM acquired the Ormond practice on and from 1 May 2002. 33 Alternatively the respondents contend that by their actions in early 2002 (in April 2002 in particular) in failing to cause Facilities to pay employees of the Ormond practice or the rent or other liabilities of the practice, Mr Sharpe and the other directors of Facilities abandoned any goodwill of the Ormond practice built up by SE Melbourne and/or Facilities in the period after December 2000, which was thereafter maintained through the actions of Mr Harris and Mr Diggerson, and later of SPM acting to ensure the continuity of the business of the Ormond practice.

Whether South East Melbourne had property in the client files 34 On 1 November 2002 Emmett J ordered the respondents: "(to) permit the first applicant, by himself his servant or agents, to have access from time to time during business hours, and upon reasonable written notice, to the business premises of the respondents and to inspect the Client Files …" The "Client Files" were defined by the terms of the order as the files in respect of the clients listed on pages 147 to 235 of Exhibit "AMS1", together with all electronic data associated with each of those files. 35 There is no evidence as to whether the applicants undertook any such inspection, or, if they did, as to the results of such inspection. Apart from the terms of the sale agreement itself, and the fact of the "Office Listing Report" itself, there is almost no evidence in relation to the client files, considered as chattels. Such evidence as there is consists of evidence given by Mr Harris in cross-examination of a process undertaken whilst he was the practice manager of the Ormond practice of "deletions" whereby client files were periodically pruned and the deletions put into another stack. Mr Harris gave evidence that the filing cabinets were cleared out "so that they didn't include people that weren't current clients". The deletions were of people who were perceived as having ceased to do business with "Kampfs". 36 Mr Harris said that there were about 2000 clients in number. Up to 50 new clients were obtained between December 2000 and May 2001. Only about a dozen new clients were obtained after 1 May 2002. Mr Harris said that the respondents can identify the persons who became new clients of the practice after December 2000. 37 Mr Harris had not seen pages 147-235 of Exhibit "AMS1" prior to the institution of these proceedings. Neither Mr Diggerson, Mr Sharpe nor Mr Kampf gave any evidence about the "Office Listing Report". It is common ground that the document is a business record of Kampf. There is no direct evidence as to any physical delivery of files from Kampf to anyone on behalf of South East Melbourne at about the time of settlement of the sale of the Ormond practice. There is no evidence as to whether there is any electronic data associated with the files backed up onto disks or tapes. Nor is there any evidence as to the circumstances in which any such disks or tapes were brought into existence, or by whom. 38 The subject matter of the sale agreement made on 12 October 2000 was the goodwill of the practice. "The goodwill" was defined so as to mean: "the Goodwill attaching to the Practice of the Vendor and shall include and entitle the Purchaser to use, subject to the approval of the appropriate authorities, the name 'Kampf Partners Consulting' any computer database and records and all client information in relation to the Practice." "Practice" was defined so as to mean: "the accounting and tax agent and consulting business carried on by the Vendor at the Premises at 596 North Road, Ormond." 39 The equipment which formed the subject matter of the sale to Facilities was set out in schedule 2 to the sale agreement. That schedule included a number of items styled "solution computer system", but having regard to the definition of "goodwill" which formed the subject matter of the sale to South East Melbourne, it is reasonable to infer that any computer systems the subject of the sale to Facilities were confined to items of computer hardware. 40 I infer from the evidence of Mr Harris earlier referred to that on completion of the sale agreement, client files which had been created by Kampf were handed over to Mr Harris. Under the terms of the sale agreement, property in those files as chattels vested in South East Melbourne. The information contained in the client files may be protected under laws relating to intellectual property or trade secrets. But that does not deny the proposition that property exists in the physical materials themselves. That property remains in South East Melbourne unless and until there is a sale of the property or an abandonment of it: cf Breen v Williams (1995-1996) 186 CLR 71, 80-81 (Brennan CJ), 101 (Gaudron and McHugh JJ), 126-129 (Gummow J). 41 I have no evidence as to the content of the client files. They may or may not contain documents which are the property of the client rather than of the accountant: cf Wentworth v De Montfort (1988) 15 NSWLR 348. No attention was paid to this aspect of the matter during the hearing. It was mentioned for the first time in written submissions on the part of the respondents lodged after the hearing, without any explanation as to why, if I was otherwise of the view that an order for the return of the files should be made, the possibility that there may be within the files documents belonging to clients should lead to some different result. Whilst the evidence is scant, I infer that Kampf, and thereafter South East Melbourne was the bailee of any documents within the client files in which property subsisted in the client, and is thus entitled to immediate possession thereof. 42 In these proceedings South East Melbourne seeks to vindicate its ownership of the client files as chattels, or its entitlement to possession of those files as chattels. Whether goodwill continues to subsist in South East Melbourne in the business in which those chattels were employed having regard to the matters relied upon by the respondents as amounting to a dissipation of that goodwill, or as depriving it of any value, are simply irrelevant to the claim which is made. The discussion of the nature of goodwill in Commissioner of Taxation v Murry (1998) 193 CLR 605 has no bearing on the outcome of the present proceedings. 43 Client files brought into existence between 14 December 2000 and 30 April 2002 were physically created by Mr Harris or other persons employed by Facilities in connection with the Ormond practice which was conducted by SE Melbourne. Both Mr Sharpe and Mr Harris asserted that it was SE Melbourne which conducted that practice between 14 December 2000 and 30 April 2002, and I see no reason not to accept their evidence in this respect, particularly as there is support for it in contemporaneous documents. On that basis, SE Melbourne would prima facie be the owner of the client files created in that period unless SE Melbourne was conducting the practice on behalf of South East Melbourne. 44 It is possible that SE Melbourne was conducting the practice as agent for South East Melbourne, and it is equally possible that it was not. I simply do not know what the position is, as there is no evidentiary foundation for a conclusion either way. It follows that the applicants have not established ownership, or entitlement to possession, of files created whilst SE Melbourne was conducting the Ormond practice post 14 December 2000.

A sale to SPM? 45 The "letter" of 24 April 2002 was marked "Without Prejudice" as well as "Private and Confidential" and was addressed to: "Mr G Sharpe Sharpe Partners Hanna's Arcade Beardy Street Armidale NSW 2350" Mr Sharpe's office was located at that address. Mr Smith (a director of Sharpe Partners (New England) Pty Ltd and another person involved in the sale negotiations) also had his office there. A letter addressed to Mr Sharpe at those premises would ordinarily have come to Mr Sharpe's attention, but his evidence is that he first saw it "the other day". Mr Smith was not called to give evidence, but it was agreed that Mr Smith would say that he never received the letter of 24 April 2002. 46 The evidence as to an oral agreement for a sale of the Ormond and North Melbourne practices is unsatisfactory and unconvincing. Mr Harris' affidavit of 31 October 2002 contained material, which was inadmissible in form, directed towards establishing verbal agreement that SPM would take over the conduct of the Ormond practice. I rejected that material, but gave leave to the respondents to adduce evidence on that topic orally if they wished, but in proper form. Counsel for the respondents did not take up that leave. He did not ask Mr Harris any questions on that topic. In the result, Mr Harris gave no admissible evidence on the topic of a sale of the Ormond practice to SPM, nor did he corroborate the evidence of Mr Diggerson. 47 Mr Diggerson gave oral evidence that a verbal agreement was reached between himself and Mr Sharpe on 20 or 21 April 2002 by telephone for the sale of the practice which was confirmed by the letter of 24 April 2002. But when asked in chief about the telephone conversation with Mr Sharpe on about 21, 22 April he could not specifically recall what was said. Mr Diggerson did not give any coherent account of a conversation between himself and Mr Sharpe at which an agreement for the transfer of the Ormond practice was reached orally. The letter of 24 April 2002 does not purport to confirm an antecedent oral agreement. Mr Sharpe did not respond to the letter nor did Mr Diggerson ever raise the letter in conversation with Mr Sharpe. No attempt was made by Mr Diggerson to put in place the "settlement" which was said to occur on 1 May 2002. As earlier noted, the letter sent by SPM's solicitor on 20 September 2002 asserts that Sharpe Partners abandoned the Ormond practice, without referring to the agreement for which Mr Diggerson contends. 48 In Mr Sharpe's affidavit of 27 November 2002 he denied that any agreement was reached in terms of the letter of 24 April as well as denying receipt of the letter itself. Counsel for the respondents did not cross examine Mr Sharpe on this denial, or put the respondents' case as to the conclusion of an oral agreement on 20 or 21 April 2002 to Mr Sharpe so that he could deal with it. 20 and 21 April fell on a Saturday and Sunday respectively. 49 I accept that the letter of 24 April 2002, if it was ever sent, was not received by Mr Sharpe or Mr Smith. I accept Mr Sharpe's evidence in this respect. 50 I am not satisfied that an oral agreement for the sale of the Ormond practice was reached between Mr Diggerson and Mr Sharpe. Mr Sharpe denies that there was any agreement. Mr Diggerson does not give a coherent or convincing account as to the making of such an agreement. Contrary to his evidence, the "letter" of 24 April 2002 does not purport to confirm such an agreement. No steps were taken by Mr Diggerson to effect a settlement of the supposed agreement, nor was it referred to by SPM's solicitors when SPM's entitlement to conduct the Ormond practice was challenged by the receiver's solicitors. The failure to put the respondents' case as to the making of a concluded oral agreement to Mr Sharpe for him to deal with adds emphasis to the unsatisfactory nature of the evidence in support of that case. Further, the following observations of Higgins J in Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647 at 650 need to be borne in mind: "Moreover - through it ought to be superfluous to say it - it is one thing for two parties to settle what are to be the terms of an agreement, if it should be made; and quite another thing to make the agreement. I have found, in my experience, that the two processes are frequently confounded; …" 51 Nor am I satisfied that the "letter" of 24 April 2002 was sent by Mr Diggerson to Mr Sharpe. Ordinarily, written communications of this type were sent by email. Whilst Mr Diggerson advanced the explanation that a hard copy was used because his email server was down, this explanation was given for the first time in cross-examination and was not the subject of corroboration. Mr Diggerson accepts that Mr Sharpe did not respond to the letter, nor did he refer to it thereafter. If Mr Diggerson had sent the letter, and regarded the letter as a record of a concluded contract (as he says he did), the probabilities are that in the absence of any response by Mr Sharpe he would have raised the matter of the letter with Mr Sharpe, if only in relation to the proposed settlement, or to confirm that Mr Sharpe had received the letter, and agreed with its terms. He did not do so. In those circumstances I do not accept the uncorroborated evidence of Mr Diggerson that he sent the letter to Mr Sharpe as a record of a prior verbal agreement.

Abandonment of property in the files? 52 Again, the respondents' submissions raise an immaterial issue - whether there was an abandonment of any goodwill of the Ormond practice. If there is an issue, it is whether South East Melbourne abandoned property in the client files. Moorhouse v Angus & Robertson (No 1) Pty Ltd (1981) 1 NSWLR 700 at 702, 706, 712 decides that even if property in chattels can be lost or extinguished by abandonment, the evidence necessary to prove abandonment must establish facts from which an intention to abandon property can be inferred or established. See also Cook v Saroukos (1989) 97 FLR 33, 40-41. 53 There is no evidence from which an inference of an intention to abandon property in the files can be drawn. The evidence is the other way. At the time of the alleged abandonment, the parties were in negotiation as to the terms and conditions on which Messrs Harris and Diggerson should acquire the Ormond practice. That is inconsistent with any intention on the part of South East Melbourne to abandon its property in the client files.

Data backed up onto disk or tape 54 Property can exist in a computer disk or tape considered as a chattel. In order to succeed in a cause of action in detinue, South East Melbourne would need to establish that it is entitled to possession of the disk or tape in question, and that the disk or tape was in the possession of a respondent at some time: "detinue does not lie against him who never had possession of the chattel": Jones v Dowde (1841) 9 M & W 19, 20 quoted in Trindade & Cane The Law of Torts in Australia (3rd Edn) 1999 at 162. 55 Whilst the goodwill the subject of the sale agreement to south East Melbourne includes "any computer database and records", there is no evidence that any of the respondents has, or ever had, in its possession any computer disk or tape the property of South East Melbourne, or to the possession of which South East Melbourne was otherwise entitled. 56 The claim in detinue in relation to the disk and tapes therefore fails for want of an evidentiary foundation.

Remedy 57 At the conclusion of addresses, I gave leave to the applicants to lodge supplementary written submissions with my associate on the issue of ownership of additions made to the files after 14 December 2000. Those submissions are contained in a document styled "Submissions of the Applicants" dated 5 December 2002, which is with the papers. The submissions go beyond the leave reserved, but the respondent has responded to them, albeit under protest. 58 In that document, the applicants state that despite a possible entitlement to do so, they make no claims in respect of the 50 additional clients of the Ormond practice acquired between 14 December 2000 and 1 May 2002, or the 12 clients acquired by the respondents after 1 May 2002 (see [36] above). 59 In any event, the files relating to those clients were not included in the schedule to the Further Amended Originating Process, although the applicants' oral submissions originally extended to those files. By that document, the applicants seek leave to amend the schedule to the Amended Originating Process (see [28] above) so that it reads as follows: "The client files in respect of the clients listed on pages 147-235 inclusive of both pages to Exhibit 'AMS1' to the affidavit of Anthony Milton Sims sworn 10 October 2002 current to the date of the order of the Court or, alternatively, to 14 December 2000 or, in the further alternative, to 1 May 2002 together with all electronic data associated with each of those files backed up onto disk or tape." These files are hereinafter referred to as "the relevant files". 60 The amendment acknowledges the possibility that documents may have been added to the relevant client files either in the period between 14 December 2000 and 1 May 2002, when SE Melbourne conducted the Ormond practice, or in the period after 1 May 2002 by SPM. The amendment is intended to raise for decision whether any files ordered to be delivered up should include any such additions. The respondent opposes leave to amend, but in my view there is no prejudice to the respondent arising from the proposed amendment, even though made after the hearing, and in accordance with settled principle the amendment should be allowed. 61 I should say at the outset that whilst it is probable that some documents may have been added to the relevant files in one or both of these periods, there is no direct evidence as to whether documents were in fact added to the files, or as to the nature or form of any additions. 62 As to the period between 14 December 2000 and 1 May 2002, the applicants contend that they "continue to rely on the agency of SE Melbourne". For the reasons I have already given, I am not satisfied that any such agency has been established. 63 However, if SE Melbourne inserted documents into files which were the property of its related entity, South East Melbourne, whilst conducting the Ormond practice, the natural inference is that it did so with the intention that the documents should form a permanent accretion to the file. The respondents cannot have any claims to additions made to the relevant files whilst the Ormond practice was under the control of SE Melbourne. Accordingly, any order for delivery up of the relevant files should at least extend to the files in the form which they were as at 1 May 2002, being the date on which the respondents assert that they "took over" the Ormond practice, and thus also the relevant files. 64 In written submissions lodged after the hearing, the applicants claimed to be entitled to documents added to the files by the respondents after 1 May 2002 upon the basis of the doctrine of accession. The applicants submit that the respondents were being, at the very least, opportunistic in relation to any dealings with the files after 1 May 2002. In the circumstances, the applicants rely on the doctrine of accession so that later added documents to the files form part of the property of the applicants by virtue of the knowledge and constructive intention on the part of the respondents: Thomas v Robinson [1977] 1 NZLR 385 at 390.35 per Speight J. 65 There are at least two problems with this submission. First, there is no evidence from Mr Harris, either in chief or in cross-examination, as to whether or why or in what way documents were added to the client files after 1 May 2002. It was not put to him in cross-examination that he was being "opportunistic" in his dealings with the files after that date, hence he was denied the opportunity of answering the charge now made against him. In those circumstances it would not be appropriate for me to find that the charge has been made out, or that the respondents' actions after 1 May 2002 in relation to the files were otherwise lacking in probity. 66 Secondly, the doctrine of accession only applies where personal property is increased, improved upon or added to such that separation of it is impracticable: Halsbury's Laws of Australia, Personal Property [315-350]. 67 Thus in Rendell v Associated Finance Pty Ltd [1957] VR 604, 607 the Full Court of the Supreme Court of Victoria said that where one chattel is incorporated into another, if the chattels can be severed without damage to either, then each owner may take his chattel, and there is no need to invoke any doctrine of accession of title by reason of the annexation of the goods of one to that of another. See also McKeown v Cavalier Yachts Pty Ltd (1988) 13 NSWLR 303 at 311 where Young J referred to the test of injurious removal whereby a chattel only accedes to another chattel if it cannot be separated without the destruction of or serious injury to the whole so formed as being the test for accession which has found the most favour. And in The National Bus Co Ltd v Federal Commissioner of Taxation (1998) 98 ATC 4170 at 4174 Sundberg J accepted that the doctrine of accession operates only when it must be applied as a matter of practical necessity. There is a general discussion of the cases on the point in Alston "Chattels Attached to Chattels" (1996) 4 Australian Property Law Journal 120. 68 Accordingly, the respondents are entitled to remove from the files any documents which they added to the files after 1 May 2002 provided that removal will not damage the file, considered as a chattel. The applicants' submissions in reply (par 7) appear to accept that there is no particular difficulty associated with the removal from the files of documents added to the files after 1 May 2002. 69 That leaves for decision whether this Court can or should make an order for the delivery up or return of the relevant files. At common law, a judgment in detinue was in the alternative: for the return of the property, or payment of its assessed value. There was no right to specific restitution at common law: Fleming The Law of Torts (9th Edn) 1998 at pp 81-82. The common law courts were empowered, originally by the Common Law Procedure Act 1854 (UK), to order the return of the chattel detained, without giving the defendant an option to pay its value. This remedy is discretionary. It would not be granted, for example, if the chattel is an ordinary article of commerce, and of no special value to the applicant. If the respondent has added value to the chattel, so that it would be unfair to make an unconditional order for redelivery, then an order for the return of the goods may be refused, or moulded to suit the circumstances. 70 In New South Wales, s 93 of the Supreme Court Act 1970 (NSW) ("the Supreme Court Act") provides: "Detention of goods (1) In proceedings for the detention of goods judgment may be given for delivery of the goods, without giving the defendant the option of retaining the goods upon paying the value assessed, if any. (2) In proceedings for the detention of goods, where judgment has been given for delivery of goods or payment of the value assessed, the Court may make an order for delivery of the goods, without giving the defendant the option of retaining the goods upon paying the value assessed. (3) Subsections (1) and (2) apply whether or not the value of the goods has been assessed." Provision is made in Part 42 rule 5 of the Supreme Court Rules 1970 (NSW) for the methods of enforcement of such orders for the delivery of goods. These methods include, relevantly, a writ of specific- delivery in the case of a judgment which does not give the defendant the option of paying the assessed value of the goods; or a writ of delivery to recover the goods or their assessed value where such an option is given to the defendant by the judgment. 71 The Federal Court of Australia Act 1976 (Cth) ("the FCA") does not contain a provision in or to the effect of s 93 of the Supreme Court Act. However, s 23 of the FCA and Order 35 r 1 of the Federal Court Rules empowers the Federal Court to make such judgment or order as the nature of the case requires. In addition, s 53 of FCA is as follows: "53 Enforcement of judgment (1) Subject to the Rules of Court, a person in whose favour a judgment of the Court is given is entitled to the same remedies for enforcement of the judgment in a State or Territory, by execution or otherwise, as are allowed in like cases by the laws of that State or Territory to persons in whose favour a judgment of the Supreme Court of that State or Territory is given. (2) This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for the execution and enforcement of judgments of the Court." Order 37 rule 7 provides, relevantly, as follows: "Enforcement as in State and Territory Supreme Courts (1) Subject to the Rules, and without limiting any other means of enforcement which may be available, the Court may, in order to enforce a judgment or order of the Court, make any order, issue any writ or take any other step that could be made, issued or taken, by the Supreme Court of the State or Territory in which the judgment or order is to be enforced if the judgment or order had been made by that Supreme Court. (2) The modes of procedure and forms of process of the Supreme Court of the State or Territory in which the judgment or order is sought to be enforced shall be available and followed in the Court so far as is practicable mutatis mutandis for the enforcement of orders of the Court." 72 It is clear from these provisions that the Federal Court has power to make an order for specific return of goods without giving the respondent the option of paying its assessed value, even though the FCA does not contain a provision to the effect of s 93 of the Supreme Court Act. Counsel for the respondent did not submit to the contrary. 73 In the present case, the relevant files are not ordinary articles of commerce. They have a special value to South East Melbourne because there is a potential purchaser of the Ormond practice if the relevant files can be secured. Absent other considerations, an order for the specific return of the files would be an appropriate order to make against a person guilty of detaining them. The respondents did not advance any discretionary considerations against the making of an order for specific return of the files. 74 Prima facie, any order for the delivery up of the relevant files should encompass the files in the form in which they exist at the date of the order. That is the chattel which is being detained. However, for the reasons already given, the respondents are entitled to remove from the files any documents which the respondents added to the files after 1 May 2002 provided removal can be effected without damage to the files. 75 The applicants seek an order for the return of the relevant files, being the files relating to the clients listed in the document styled an "Office Listing Report". The applicants have not established that all of those files came into the possession of any of the respondents. The applicants have not proven that Kampf delivered all of those files to Mr Harris. Mr Harris' evidence as to "deletions" make it impossible to infer that all of those files were in the Ormond premises when they were taken over by the respondents on 1 May 2002. 76 In those circumstances, the applicants are not entitled to an order for delivery up of client files in the terms sought, because an order in those terms might encompass files which never came into the possession of the respondents. 77 The first and second applicants would, however, be entitled to an order that the respondents deliver up such of the client files current to the date of this order in respect of the clients listed on pages 147-235 inclusive in Exhibit "AMS1" to the affidavit of Anthony Milton Sims sworn on 10 October 2002 as came into the possession, custody or power of any of the respondents, subject to the qualification earlier referred to in relation to documents added to the files after 1 May 2002. 78 The applicants should have the opportunity of reformulating the relief which they seek in the light of these reasons. I direct the applicants to bring in short minutes of order, and that the matter be listed for directions on a convenient date. I certify that the preceding seventy-eight (78) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hely.

Associate: Dated: 18 December 2002 Counsel for the Applicants: Mr D Pritchard

Solicitor for the Applicants: Garland Hawthorn Brahe