Bluella Pty Ltd v Consolidated Building Industries Pty Ltd and Anor [2005] ACTSC 119 (25 November 2005)

Last Updated: 30 November 2005

BLUELLA PTY LTD v CONSOLIDATED BUILDING INDUSTRIES

PTY LIMITED and CONSOLIDATED BUILDERS LIMITED

[2005] ACTSC 119 (25 November 2005)

CONTRACT LAW - interpretation of terms - whether state of mind of the parties to the agreement relevant - plain, ordinary or natural meaning of the words used will prevail unless the context warrants otherwise.

LABOUR LAW - whether an employment relationship can continue after the expiration of a written employment contract - a person may remain an employee even though no longer employed under that contract.

Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337

L Schuler AG v Wickman Marine Tool Sales Ltd [1974] AC 235

Brackenridge v Toyota Motor Corporation Australia Ltd (1996) 142 ALR 99

Taylor v Johnson (1983) 151 CLR 422

The Laws of Australia, O 7, Contract; General Principles, [71]

No SC 581 of 2002

Judge: Connolly J

Supreme Court of the ACT

Date: 25 November 2005

IN THE SUPREME COURT OF THE )

) No SC 581 of 2002

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: BLUELLA PTY LTD

ACN 061 306 410

Plaintiff

AND: CONSOLIDATED BUILDING INDUSTRIES PTY LIMITED

ACN 077 948 460

First Defendant

AND: CONSOLIDATED BUILDERS LIMITED

ACN 008 654 411

Second Defendant

ORDER

Judge: Connolly J

Date: 25 November 2005

Place: Canberra

THE COURT ORDERS THAT:

1. There be judgment for the plaintiff in the sum of $200,000.

2. The defendants pay the plaintiff's costs.

1. This is a claim for damages for breach of contract. The plaintiff company pursuant to a written agreement of 2 May 1997 sold to the first defendant a parcel of shares in a company, Delta Windows Pty Ltd (Delta Windows). The Share Sale Agreement, which was before me, shows that the first defendant purchased from the plaintiff 80 per cent of its shares for the purchase price of $100,000. This was an aluminium window business established by the principal of the plaintiff, Mr Mathew Kalogris, who is and was a very experienced manager in the aluminium window industry. The first defendant is a company involved in the construction of houses and units in the Canberra district. The second defendant is the principal company behind the first defendant and was a party to the agreement whereby it guaranteed all of the obligations of the first defendant under the Share Sale Agreement. The Share Sale Agreement involved the first defendant acquiring a controlling interest by way of 80 per cent of shares of the company, with the plaintiff company, controlled by Mr Kalogris, retaining 20 per cent of the shares.

2. At the time of the Share Sale Agreement, Mr Kalogris entered into an agreement with Delta Windows to be the manager of the enterprise for a period of five years, from 2 May 1997 to 2 May 2002. This agreement was referred to throughout as the Window Manager Agreement. The nature of these transactions was essentially that Mr Kalogris had created a new venture manufacturing and selling aluminium windows. A controlling interest in this venture was purchased by a building company, and Mr Kalogris entered into an agreement to continue to operate and manage the window venture. The window enterprise, Delta Windows, sold windows both to the new controlling entity, and to other builders.

3. The present dispute concerns the effect of clause 11 of the Share Sale Agreement, which provides as follows:

11. TERMINATION OF WINDER MANAGERS EMPLOYMENT

11.1 Within 60 days of Mathew Kalogris ceasing to be employed under the Window Manager Agreement referred to in Annexure "B", Mathew Kalogris or the Vendor may request in writing that the Purchaser purchase all of the Vendor's remaining shares in the Company and the Purchaser must do so with the date of that purchase being deemed to be the date upon which that request is served upon the Purchaser and with the price to be determined according to this clause.

11.2 If within 14 days of the date the request in clause 11.1 is served on the Purchaser the parties are unable to agree on a price for the sale of those shares then the price for the sale of those shares shall be determined by the President of the Institute of Chartered Accountants in Australia (ACT Division) (or such person who holds the equivalent position)(`the President') who shall act as an expert and not as an arbitrator and whose decision shall be final and whose costs must be paid in equal shares by the Vendor and the Purchaser.

11.3 Either party may request the determination under clause 11.2 by written request to the President and service of copy of that request on the other party.

4. It seems that the enterprise operated to all parties' satisfaction for most of the first five years. Financial records of Delta Windows show that sales growth was experienced over this period and the venture was clearly profitable. The evidence before me suggests that about a third of the sales were to interests associated with the second defendant. There was evidence before me that the aluminium window industry is very competitive with manufacturers competing for sales both on price and on reliability and reputation. Central to success, it seems, is the ability to deliver a window of a satisfactory standard on a stated day. Builders schedule their construction activities around the delivery of the windows, and so a delay by the manufacturer will have significant flow-on consequences. The sales figures in evidence in these proceedings would indicate that Delta Windows performed well on this account, and evidence was given that Mr Kalogris was regarded highly in the industry as a reliable window manager who would deliver the right product at the right price at the right time. The second defendant, in obtaining windows through Delta Windows, presumably obtained a satisfactory product at a satisfactory price and, by owning the substantial part of the enterprise, were profiting from the supply of a product that they would have needed to acquire for building purposes.

5. Mr Kalogris gave evidence that, as the five-year term approached its end, he was hopeful that the venture would continue to grow. Due to labour shortage issues in Canberra, he was in negotiations with interests in Nowra about establishing a second window construction plant at Nowra. I am satisfied from the documentary evidence that this was being considered by the second defendant's interests that controlled Delta Windows, but that they had concerns about operating across two jurisdictions under one corporate structure, and were considering a separate legal entity to operate any plant in New South Wales.

6. In April 2002, Mr Kalogris wrote to the Board of Directors of both Delta Windows and the second defendant offering to enter into negotiations to renew a window manager agreement for a period of a further two years, subject to an increase in salary and superannuation. It is clear from the evidence that the proposed salary increase was not a problem. He also proposed that the second defendant acquire a further 10 per cent of the shares in Delta Windows. His letter stated:

Due to personal loan commitments I must sell 10% of my shares in Delta Windows as currently 75% of my weekly income is committed to interest payments, thus leaving me with very little to meet my other family obligations.

7. He also proposed that the new window manager agreement contain a provision relating to the buy out of his remaining shares. He said:

If at any time during the next contract period I cease to be employed as the Manager of Delta Windows, the balance of my shares must, if I elect, be bought by CBL in accordance with Clause 11 of the sale of shares contract of 2 May 1997. This is to say, I require your confirmation that if we extend my engagement as Manager, then clause 11 of the Sale of Shares Contract must also be extended.

8. Mr Kalogris says, and I accept, that the board of the first defendant was prepared to pay the additional salary and to renew an agreement, but did not wish to acquire further shares. Indeed, when the employment contract came to an end on 2 May 2002, he continued to work for the company and the agreed new rate of salary was paid.

9. He received a draft Window Manager Employment Agreement on about 29 May 2002 prepared by solicitors for Delta Windows, which provided for the agreed rate of salary and superannuation, but contained no provision equivalent to clause 11 relating to purchase of shares. On 11 June, Mr Kalogris' solicitors wrote to the solicitors for Delta Windows. While there were a number of minor issues of drafting, the principal concern in this letter was the absence of the share buy out provision, and the proposed term of five years rather than two. Mr Kalogris' solicitors in that letter sought agreement that under the new agreement the first defendant would buy out the remaining shares if Mr Kalogris ceased to be employed under the new agreement, and said:

Unless you confirm this in unambiguous terms, for all parties other than our client, by 14 June 2002, our client will have no alternative but to serve a notice under clause 11 of the Sale of Shares Agreement (copy enclosed).

10. In a response of 14 June 2002 the solicitors for Delta Windows stated:

... I need to point out that my client refutes and denies that any representation was made to your client with respect to entering into a new employment agreement. In fact the opposite was the case, with our client stated repeatedly that it would not agree to acquire any further interest in Delta Windows in any circumstances.

I also note your comments with respect to clause 11 of the Sale of Shares Agreement. It is our view that the clause is no longer in operation as the employment agreement term of 5 years has now expired.

11. This letter also indicated that:

Our client has repeatedly informed your client that it has no interest in running a window business in circumstances where your client is not the manager.

and concluded that:

Your client will need to make a decision as to whether they prefer to sell the business now or enter into a new employment agreement.

12. In a letter of 19 June 2002, Mr Kalogris' solicitors indicated that a share buy out provision would be an essential part of any new employment agreement, and that failing such an agreement he would not wish to continue with the firm. This letter also served on both defendants (who were identified as Consolidated Building Industries Pty Ltd ("CBI") and Consolidated Builders Limited ("CBL")) a document giving notice that the plaintiff required the first defendant to purchase the remaining shares in Delta Windows. I am satisfied and find that this notice was served and came to the attention of the defendants. The notice said:

(a) Under an Agreement dated 2 May 1997 (the "Agreement") between Bluella Pty Ltd ACN 061 306 410 ("Bluella") and Mathew Kalogris and Catherine Katina Kalogris and CBI and CBL, Bluella sold 80% of its shares in Delta Windows Pty Ltd ("Delta Windows") to CBI. CBL guaranteed all of the obligations of CBI under the Agreement.

(b) Clause 11.1 of the Agreement states:

11.1 Within 60 days of Mathew Kalogris ceasing to be employed under the Window Manger Agreement referred to in Annexure B, Mathew Kalogris or the Vendor may request in writing that the Purchaser purchase all of the Vendors's remaining shares in the Company and the Purchaser must do so with the date of that purchase being deemed to be the date upon which that request is served upon the Purchaser and with the price to be determined in accordance with this clause.

(c) On 1 May 2002 (or thereabouts) the employment of Mathew Kalogris under that Window Manager Agreement ceased.

NOW TAKE NOTICE

Bluellla requests CBI to purchase all of its remaining shares in Delta Windows.

13. There was a meeting between the solicitors on 26 June 2002, and Mr Kalogris' solicitors wrote to the solicitors for Delta Windows on 28 June asserting that they believed that they were able to enforce the share buy out provision, but indicating that they would be happy to enter into a new employment contract provided such a clause was retained for the future. On that day the plaintiff also reserved copies of the notice directly on the two defendant companies. On 3 July the solicitors for Delta Windows replied that it was their view that the share sale agreement clause was not operable because "Delta Windows believes that your client is still employed pursuant to the terms of that agreement (as varied from time to time)".

14. The parties were unable to resolve this impasse, and so the matter has proceeded to this present dispute. The plaintiff has maintained that it was able to enforce the share sale agreement, and the defendants have maintained either that the share sale agreement ended when the five year first term of employment ended or, in the alternative, that at the time the notices were served on June 2002, Mr Kalogris continued to be employed.

15. The directors of Delta Windows agreed to wind up the company, and this occurred on 22 October 2002. The plaintiff received an interim dividend from the liquidator of $100,000 on 26 August 2003, a further interim dividend of $24,000 on 10 June 2004 and a final dividend of $2,362.14 on 9 February 2005. Thus the plaintiff has received the sum of $126,362 for its 20 per cent of the shares in Delta, and it follows that the first defendant, having paid $100,000 for its 80 per cent stake in the company, has received $505,448 for its share. Mr Kalogris continues to be engaged in the aluminium window industry, now as a manager for a major supplier.

16. The issues for determination at this hearing are whether the plaintiff was in June 2002 able to enforce clause 11 of the Share Sale Agreement, and, if so, what would the value of the shares be, recognising of course that any award of damages would be reduced by the value the plaintiff has received following the winding up of the company.

The effect of Clause 11

17. The real question going to liability in this matter is whether clause 11 of the Share Sale Agreement can be relied on by the plaintiff as giving rise to a right to demand that the first defendant purchase the remaining shares in Delta Windows. There was much material tendered in affidavits as to the state of mind of parties to the agreement and those persons who were advising them at the time, but it seems to me that it is unnecessary to go to much of this material in any detail.

18. It is a well established principle of law that "The plain, ordinary or natural meaning of the words used by the parties to express a term will prevail unless the context warrants otherwise" (The Laws of Australia, O7, Contract; General Principles, [71]). In Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, Mason J at 348 cited with approval the remarks of Lord Wilberforce in L Schuler AG v Wickman Marine Tool Sales Ltd [1974] AC 235 where his Lordship said (at 261):

"The general rule is that extrinsic evidence is not admissible for the construction of a written contract; the parties' intentions must be ascertained, on legal principles of construction, from the words they have used. It is one and the same principle which excludes evidence of statements, or actions, during negotiations, at the time of the contract, or subsequent to the contract, any of which to the lay mind might at first sight seem to be proper to receive".

19. Mason J went on to say (at 352) that:

The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aide to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.

20. The material here seems only to suggest that the inclusion of clause 11 occurred at a relatively late stage in negotiations, and what was in contemplation was providing some form of security for the plaintiff as a minority shareholder in a venture controlled by the purchaser of the shares. It seems to me that it is really not necessary to go beyond this, as the words of clause 11, at least in so far as they go to when a right to demand a share purchase is created, are not ambiguous or susceptible of more than one meaning.

21. It seems to me that on its face clause 11 is clear. It gives a right to the present plaintiff to require the first defendant (guaranteed by the second defendant) to purchase the remaining shares in the Company (Delta Windows), with a mechanism for determining the price. The right, on the terms of the clause, may be exercised "Within 60 days of Mathew Kalogris ceasing to be employed under the Window Manager Agreement".

22. The Window Manager Service Agreement appears as an annexure to the Share Sale Agreement, and both were in evidence before me. It is clear on its terms that the Window Manager Service Agreement is to have a term of five years from 2 May 1997, unless earlier terminated pursuant to termination provisions within the employment contract. I am satisfied, and find, that there was no earlier termination, and it follows from the terms of the employment contract that Mr Kalogris' employment under this agreement ceased on 2 May 2002.

23. It seems to me to follow that, as at June 2002, the present plaintiff had the right to exercise clause 11 of the agreement. Although I accept that Mr Kalogris continued to be employed by Delta Windows after 2 May 2002, that employment, it seems to me, was not pursuant to the agreement. It is well established law that an employment relationship can continue after the formal term of a written employment contract comes to an end. If authority is needed for this proposition, it can be found in the remarks of Wilcox CJ, von Doussa and Marshall JJ in Brackenridge v Toyota Motor Corporation Australia Ltd (1996) 142 ALR 99 where their Honours remark (at 101) that, following a demotion of an employee to a lower level position "the employment relationship continued albeit under a new contract of employment". A person may remain an employee of an employer even though no longer employed under a specific employment contract. It seems to me that this is what happened here, and that, after 2 May 2002, Mr Kalogris had a new employment contract (and, it appears from the evidence, a new rate of salary being based on the increase he proposed under the new agreement that was never executed), which subsequently came to an end. This is not, however, employment under the original contract, which had run its term.

24. It was further argued by Mr Van Aalst, for the defendants, that the notice was fundamentally defective because it did not nominate a price at which the plaintiff required the defendants to purchase the shares pursuant to clause 11. I am not satisfied that this was in fact required. The clause sets out a mechanism for resolving a dispute about price, but the fact is that in this matter there was never any discussion about price, because the defendants maintained that clause 11 was never operative, and denied that there was any obligation on them to purchase. It does not seem to me that clause 11 should be construed so as to read in an obligation to nominate a specific price for the share buy out.

25. It was further submitted that, if I was against the defendants on the construction of clause 11, it was open for me to order that the contract be set aside as having been entered into under a serious mistake about a fundamental term pursuant to the principle established in Taylor v Johnson (1983) 151 CLR 422. In that case a vendor executed a contract to sell a substantial parcel of land at a price of $15,000, believing that the contract provided for a sale price of $15,000 per acre. The Court (Mason ACJ, Murphy and Deane JJ) accepted that (432):

... a party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in equity to an order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering the contract under some serious mistake or misapprehension about either the content or subject matter of that term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or misapprehension.

26. This principle, it seems to me, is quite inapplicable in the present case. This was a commercial arrangement to purchase the controlling interest in a manufacturing venture, and to secure the services of the key person who had set up the venture, and to retain him as manager under the new majority owner. The agreement provided for a significant restraint on his ability to compete with the venture during the life of the contract, and so a buy out clause would, it seems to me, be a sensible provision to protect his interest as a minority shareholder. Both parties to the Share Sale Agreement were companies advised by reputable commercial lawyers. There is nothing unconscionable about the plain meaning (as I have found it) of the share buy back provision, and nothing in the conduct of the plaintiff or Mr Kalogris to suggest that the defendants can call in aid the principle of Taylor v Johnson to rescind that clause.

27. The buy back arrangement meant that the majority owners acquired control of the company, but the seller with a 20 per cent interest had a strong incentive to ensure the success of the venture. Mr Kalogris, as the principle behind the plaintiff, was on the board of Delta Windows, and clearly on the evidence worked hard to build the value of the company. Some level of protection to ensure that he could receive value from his shares if he ceased employment, or indeed within a defined period of so ceasing, does not, it seems to me, indicate any mistake by either party about the effect of a term inserted in a commercial agreement.

The share price

28. Clause 11 of the agreement provided a mechanism whereby, if there was disagreement about the price to be paid, reference would be made to the President of the Institute of Chartered Accountants. It seems to me, however, that the point for this clause to become operative had never been met, because the defendants have throughout maintained that clause 11 was not operative. That is, they have never accepted that there is an obligation to purchase shares and a dispute about price. I find that the solicitors for the plaintiff on 30 July 2002 requested the President of the Institute of Chartered Accountants to determine a price for the shares, and that the solicitors for the defendants on 12 August 2002 advised that they did not consent to the process. Given that there was no agreement, no further action was taken by the third party.

29. There was extensive evidence before me going to the appropriate approach to valuation of the bundle of shares. Reports were in evidence from Mr Mark O'Shaughnessy, a chartered accountant and a partner in the firm of Duesburys for the plaintiff, and from Mr Eric Adriaanse, principal in the firm of RSM Bird Cameron, Chartered Accountants, and current President of the Certified Practicing Accountants Association (ACT Division), for the defendant.

30. Both experts, it seemed to me, prepared their reports and gave evidence in the professional manner that one would expect, and indeed there was a substantial level of agreement in the approach to be adopted to valuing a business. In fact, Mr O'Shaughnessy adjusted his report after reading Mr Adriaanse's report because he agreed that Mr Adriaanse had properly identified an adjustment that needed to be made going to the proper basis of valuation of stock on hand. This ready acceptance of each other's methodologies and willingness to work with corrected figures, marks both experts as fully complying with the code of practice that this Court now requires expert witnesses to observe.

31. The real difference between them went to the outcome of a mutually agreed relevant process of valuing the goodwill in the business. The financial records of Delta Windows were in evidence and were available to both experts. Save for some disagreement about the proper approach to valuation of stock on hand (which I will address later in these reasons), they were in agreement about the previous healthy financial state of affairs of the company, and were in broad agreement about past profit.

32. The business was established in the 1997 financial year, and it was common ground that its reported net profit over the years was as follows:

1997 $18,292

1998 $100,646

1999 $205,290

2000 $552,043

2001 $378,830

2002 $202,648

33. A difference in approach between the expert witnesses went to the period of time one should look to determine an average profit figure. With any business, one would expect a period of low profitability during a start up time, and so a different result will flow depending on whether one averages out profit over all of the known data or looks only to more recent trading years.

34. Both experts, quite properly in my view, disregarded the 1997 start up period. Mr O'Shaughnessy looked at the average maintainable earnings for the years 1999 to 2002 by looking at the reported net profit, and adjusting for income tax at 30 per cent for a figure of $242,011. Mr Adriaanse looked at the reported profits after tax for the period 1998 to 2002 to determine an average maintainable earnings of $191,047.

35. It seems to me that the 1998 year can properly be seen as the growth year from the beginning of this venture, and that for the purposes of looking to future maintainable earnings, Mr O'Shaughnessy's approach looking back over the four years is preferable.

36. I am satisfied from all of the evidence that the aluminium window industry is one in which there are a large number of competitors who are all competing to provide a broadly similar product. Indeed, the evidence was that, save for the very large companies, most of the industry obtained their raw materials, being aluminium formed channel and beams, and the machinery needed to fabricate these into windows, from one supplier. Delta Windows was such a company. As various companies would be in competition with a broadly similar product, the key factors for success were, it seems, price and reliability of supply. This latter factor would be largely under the control of the manager of the enterprise.

37. There was evidence that Mr Kalogris was very highly regarded in the aluminium window industry as a manager whose word could be trusted in relation to supply dates. At the point when the plaintiff company served the defendants with the notice to acquire the shares, I am satisfied that negotiations between Mr Kalogris and Delta Windows had broken down, in that Mr Kalogris was determined that he would only re-enter into a contract as a window manager for Delta Windows if there was a further buy out clause in the new contract, and Delta Windows was making it clear that it did not want to purchase any further shares, and would not include such a clause in any new agreement. I am satisfied that at this point it was clear that Mr Kalogris, whose employment contract with Delta Windows had come to an end, would not enter into any new contract, and that he would be leaving the company.

38. I am satisfied from evidence before me from Mr Frame, Executive Director of the Australian Window Association, that there are about 1,500 window manufacturers in Australia, with about 30 operating in the Canberra-Queanbeyan region. Mr Frame said that the manager was crucial to the viability of a window supply company, but that in 2002 there would have been a significant pool of experienced window managers who could have been recruited to replace Mr Kalogris. He also said that his association frequently assisted to make contact between potential employers and managers, and that the principal supplier of raw material and machinery would from time to time provide an interim manager to enable a manufacturer to continue to operate while a replacement manager was found. I also find that Mr Kalogris had made an offer to continue with Delta Windows for an interim period while a replacement could be found, although it is clear that the majority owners did not wish to pursue this option.

39. Both valuers were in broad agreement that the position of the manager would be significant in determining the goodwill of the business. On the one hand, with Mr Kalogris as the established manager with a high reputation and an intention to continue as the permanent manager, the goodwill would be high. On the other hand, at the point in time when the owners of Delta Windows decided to cease to continue to trade and to not appoint a new manager, the goodwill would be minimal. It seems to me that, under the terms of clause 11, the value of the shares is to be determined at the point in time when the notice was given, which was in June 2002. At that point the business was still viable, but it was clear that Mr Kalogris would not renew a long term contract with the company. I am not satisfied that he was "irreplaceable", and it seems to me that another experienced manager, though perhaps not with such a high reputation as Mr Kalogris, could have been retained had the owners wished to maintain value in the company. I do not accept the approach of Mr Adriaanse who effectively says that there should be no good will attached to the business because Mr Kalogris had left the company. On the other hand, Mr O'Shaughnessy seems to me to have paid insufficient regard to the fact that Mr Kalogris would leave, and that a new manager would need to be recruited, who could not be assumed to have been as effective as Mr Kalogris. Mr Kalogris would be free to do as he has done, and obtain employment in the aluminium window industry in Canberra, and so Delta Windows would find itself in competition with another firm enjoying the high reputation that both parties agreed Mr Kalogris enjoyed when with Delta Windows.

40. Mr Adriaanse, who took the view that there was no goodwill attributable to the business, and who took the average maintainable earnings over the longer five year average, said that a fair value for the business would be between $1,000,000 and $1,100,000 as at mid June 2002. This would attribute a value of between $200,000 and $220,000 for the 20 per cent of the business then held by the plaintiff. It will be recalled that the plaintiff received payments from the liquidator of $126,362.14 between the liquidation and February of 2005, leaving a net loss to the plaintiff of between $73,638 and $93,638. Mr Van Aalst did not concede that this would be an appropriate basis for an award of damages, because he made the submission that, as the business was to be closed down, the real value of the business was the value revealed on the liquidation. I do not accept this submission, and it seems to me that the range of values derived by Mr Adriaanse would be the minimum award of damages for the plaintiff.

41. Mr O'Shaughnessy, who took the view that there was a value of goodwill of between $394,198 and $587,809, and who took the average maintainable earnings over the four year average discounting the first full year of operations, attributed a value of the business at the relevant time of between $1,479,147 and $1,672,758. This would amount to a value of between $295,830 and $334,552 for the plaintiff's 20 per cent of the business. This would amount to a loss to the plaintiff, given the amount received from the liquidator, of between $169,468 and $208,190. Mr O'Shaughnessy, however, seems to me to have been somewhat optimistic in his calculation of goodwill, and to have made insufficient allowance for the fact that, at the time of the valuation, being mid June 2002, it was apparent that Mr Kalogris would not be remaining with the business, and so the appropriate basis for valuing the goodwill was for the goodwill of the business with another manager, rather than Mr Kalogris, and in an environment where Mr Kalogris would be able to be operating in competition with the business. Mr O'Shaughnessy in his report says that he was influenced (quite properly it seems to me) by a discussion he had had with the principal of the major aluminium raw material and machinery supplier, who had a view of Delta Windows as being a "highly profitable business" and was "one of the most profitable businesses (in percentage terms) he had seen in that industry". He indicated that Delta Windows was performing extremely well in a market less strong than the current market.

42. This is however something of a double edged sword for the plaintiff, because it indicates that, while Delta Windows was performing "extremely well" and was "one of the most profitable businesses", that was under the stewardship of Mr Kalogris, and at the time this valuation must be preformed, Mr Kalogris was no longer going to continue with the company. The value a hypothetical willing but not eager buyer would have paid for the business with Mr Kalogris is clearly going to be higher than the value a willing but not eager buyer would pay for the business with a replacement manager, and it is the latter that, it seems to me, must be assessed.

43. Mr O'Shaughnessy was criticised in cross-examination for making no enquires of the other directors of Delta Windows associated with the defendants. He said that he was assessing the value of the company based on the audited figures, and on the assumption that the 80 per cent shareholder would act rationally in protecting its value. It seems to me that this is a fair assumption, and I do not criticise Mr O'Shaughnessy for not making enquires of the directors of Delta Windows associated with the defendants as to their subjective reasons for wanting to get out of the window construction business. It seems to me that the basis of the valuation in mid June 2002 should be on the basis that Delta Windows was then a business that had been trading strongly and profitably for a long time, had or was about to have a change of manager, and could be expected either to be sold as a going concern, or retained as a viable enterprise.

44. Mr O'Shaughnessy's range of figures was, he said, based on some uncertainty as to the ongoing viability of the building industry. It was common ground that the impact of the introduction of the GST on the building industry had lead to projects and purchases being brought forward (so as to avoid the tax), and that there was still some adjustment being felt in the 2002 trading year.

45. It seems to me, on all of the evidence, that the appropriate valuation of the company at the relevant time, being mid June 2002, falls between the estimates of Mr Adriaanse and Mr O'Shaughnessy. It seems to me that the more cautious starting point of Mr O'Shaughnessy is the appropriate starting point, reflecting the greater uncertainty for the venture given that Mr Kalogris was then clearly leaving and free to compete, and that a greater adjustment down is necessary in respect of goodwill, given again that the goodwill of the business was heavily dependent on the reputation of the manager who was leaving. It seems to me that, with the range of valuations for the whole business as at 19 June 2002 ranging from $1million to $1.1 million (Adriaanse) to between $1.479 million to $1.6722 million (O'Shaughnessy) an appropriate figure reflecting all of the factors set out above would be to adjust Mr O'Shaughnessy's lower sum down to $1.3 million. This would amount to a value for the parcel of shares owned by the plaintiff of $260,000. The plaintiff has of course received some payment from the liquidator for these shares of $126,362 so the net loss is $133,638.

46. It seems to me that I should award this sum. This would generate interest on the Supreme Court scale of $47,441 for a total award of $181,079. But of course this would be on the assumption that the plaintiff was held out of the sum of $133,638 from the date of the breach, but in reality the plaintiff was held out of the total value of the shares until the first instalment payment of $100,000 in August 2003, with the balance of $24,000 paid in June 2004 and the final balance in February 2005. It seems to me that a greater discretionary interest should be allowed. To award the total sum of $200,000 would adequately allow for the plaintiff's loss pursuant to the breach of the agreement, and I award this sum.

I certify that the preceding forty-six (46) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Connolly.

Associate:

Date: 25 November 2005

Counsel for the plaintiff: Mr R Arthur

Solicitor for the plaintiff: Macphillamy's Lawyers

Counsel for the first and second defendants: Mr J Van Aalst

Solicitor for the first and second defendants: Meyer Vandenberg

Dates of hearing: 11, 12, 13, and 14 October 2005

Date of judgment: 25 November 2005