Tropeano v Riboni [2005] VSC 229
In the Common Law Division of the Supreme Court of Victoria, Gillard J held that a covenant on the sale of an accountancy practice that the vendors would not at any time act for clients of the preceding three years was valid although it had no time limit, and that the vendors, having affirmed the agreement after the purchaser's breach of an essential term, remained bound by it [79], [99], [101], [124].
What the court decided
Mr Tropeano and Mr Tempone sold their Northcote accountancy practice to Mr Riboni [2]. The agreement was executed on 17 January 1989 and fixed a price of $514,000, with a balance of $134,000 payable on or before 9 January 1990 [39]. The vendors sued for the balance, and Mr Riboni counterclaimed, including for breach of a restraint [12].
His Honour rejected the misrepresentation, fraud and negligence claims [77], [78]. The alleged breaches of the sale agreement were held not proved [64]. His Honour found technical breaches in the disclosure of contingent liabilities, for which he allowed nominal damages of $1 [50]. He also held that the vendors' push to invoice work before the sale, reducing the work in progress Mr Riboni bought, did not breach clause 19(h) [61].
Clause 7(a) provided that the vendors would not at any time in the future practise as accountants for clients, other than one named company, for whom either had worked in the three years before settlement [79]. His Honour found that Mr Tropeano breached clause 7(a) by acting for former clients of the practice [84].
His Honour said that the onus of proving a restraint reasonable in the interests of the parties lies on the covenantee, and that restraints on the sale of goodwill are viewed much less strictly than those in employment contracts [89]. If the restraint is reasonable between the parties, the covenantor bears the onus of proving that it is injurious to the public [89]. Referring to the Full Court in TW Cronin Shoe Pty Ltd v Cronin, his Honour said that the court places great weight on the fact that the parties agreed to the terms [91].
The restraint was reasonable in the parties' interests because the goodwill rested on personal loyalty, the substantial price was agreed on the basis of the restraint and the vendors remained free to practise at a distance from the firm [93], [94]. The lack of a definite duration did not make it unreasonable, given its purpose, Mr Tropeano's legal advice and the substantial price [99]. Mr Tropeano failed to prove that the restraint was injurious to the public interest [100].
His Honour did not accept Mr Tropeano's evidence that he had terminated the agreement soon after the balance fell due [105], [106]. On the facts, the contract had not been rescinded when Mr Tropeano began soliciting clients in May 1991 [109]. Mr Riboni's failure to pay arose from difficulty raising funds and was not a repudiation [113], [114]. Because clause 15 made time of the essence, however, the failure to pay on 9 January 1990 was a breach of an essential condition entitling the vendors to terminate [119].
His Honour held that about ten months without a demand, followed by a solicitors' letter asserting rights under the contract, amounted to affirmation [122], [123]. If that was wrong, the later statement of claim, which sued on the contract with an alternative claim on the promissory note, put affirmation beyond doubt [123]. Having affirmed, the vendors lost the right to terminate for that breach and remained bound by the agreement [124].
His Honour held Mr Riboni entitled to damages of $81,551.75 for the loss of clients affecting his goodwill [129], [131]. The vendors were entitled to $134,000 with interest at 18% from 9 January 1990 [132]. His Honour proposed that the judgments be set off, noting a complication because Mr Riboni's claim lay only against Mr Tropeano [132].
Why it matters
This single judge's decision on its facts shows that a covenant against acting for former clients with no time limit may be upheld on the sale of a professional practice, where the price was negotiated on the basis of the covenant and the vendors remain free to practise elsewhere. Vendors who make no demand for an overdue instalment and then sue under the contract may be held to have affirmed it and to remain bound by their own covenants.
Those points were not among the issues on Mr Riboni's appeal in Riboni v Tropeano (2007) VSCA 99, where Buchanan and Nettle JJA (Ashley JA agreeing) allowed the appeal and set aside the judgments and orders below. Reversing the trial finding on clause 19(h), they held that faster billing was not of itself a breach, but that the clause, read with clause 19(i), was breached because the business was not carried on so as to leave work in progress at settlement not materially below the accounts figure; damages were $30,715. They left the restraint award in place, rejected a wider claim for clients lost to other accountants and held both vendors jointly and severally liable under clause 7(a), so the damages were set off, leaving the vendors a net judgment.
Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.