August 16, 2015

Contract Disputes – When a Single Piece of Paper Counts

It has often been said ‘the pen is mightier than the sword’ well here is an example.

In a recent assignment, we were able to find a single page within a mountain of material written in Mandarin, that greatly contributed to a positive outcome for our client.

The Situation

Our client was employed during the mid 1990’s as the second in charge of a Company which manufactures and sold its products through its Australian retail stores.  His employment contract entitled him to his base wage, 10% of the profits of the business and if he was to leave the company, an additional 10% of the increase in value of the business, with the business being valued at his leaving date less the value of the business at his commencement date.

When our client started his employment with the Company, all the goods were manufactured within Australia.  During his employment, our client was instrumental in establishing a manufacturing plant in China, and shortly after his employment,  all manufacturing was moved to the Chinese manufacturing plant.

The business in the mid 1990’s was making a profit of approximately $1 million per year. Some 12 or 13 years later, with much lower costs of production and an increase in sales, the business was making approximately $20 million per year.

Under his original employment contract  our client was now earning a very healthy sum and the directors of the Company altered his employment contract. Our client resigned and sued the Company.

The other side were arguing that when valuing the business at the start of our client’s employment, the future maintainable earnings of the business should incorporate the Chinese manufacturing plant, as this had been initiated by the directors of the Company prior to our clients employment. This obviously would have resulted in a higher business valuation at the start of our client’s employment and thus our client being entitled to a lesser pay out.

The Outcome

Among some 90 lever arch files of subpoenaed material, we found a piece of paper written in Mandarin giving the Company permission to build the factory and operate a business in China, some 6 months after the commencement of our client’s employment.  Once translated, this piece of paper was instrumental in gaining our client a larger payout.

Yes, the pen was mightier than the sword.

The SV Partners forensic team are experts in dealing with complex business issues, including contract disputes. If you would like assistance with any forensic accounting issues, please contact a member of our team on 1800 246 801.

Article written by Ross Mottershead, Director – Forensics, New South Wales

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