THE COURT OF APPEAL [1994] QCA 506 SUPREME COURT OF ...

THE COURT OF APPEAL [1994] QCA 506SUPREME COURT OF QUEENSLAND

Appeal No. 273 of 1992

Brisbane

Before Macrossan C.J.Pincus J.A.Dowsett J.

[Exelby and Ors v. Tuite]

BETWEEN:

RUSSELL PETER EXELBY(First Defendant)

First Appellant-and-

WENDY CHEREE EXELBY(Second Defendant)

Second Appellant-and-

CRADEX PTY LTD(Third Defendant)

Third Appellant

AND:

PATRICK THOMAS TUITE and MARIE JANECE TUITE(First Plaintiffs)

First Respondent-and-

WENMAR STOCKFEEDS PTY LTD(Second Plaintiff)

Second Respondent

REASONS FOR JUDGMENT - THE CHIEF JUSTICE

Judgment delivered 28/11/94

I have read the reasons prepared by Dowsett J. in this

matter. On very many of the issues with which he deals I am

able to express my agreement with his conclusions. On most

of those issues it will not be necessary to make any further

comment although I shall add some limited observations. On

two important aspects I have, with respect, reached

different conclusions and I deal with these below.

The learned trial judge found that there should be

judgment against the second appellant, Wendy Exelby, and I

consider that his conclusion is justified. It is true that

the form of the respondents' pleading against the second

appellant could more precisely have stated the case intended

to be made against her. However, the way in which the case

was conducted below has a certain significance. The

pleading provided what were described as particulars of

alleged conduct on her part said to amount to breaches of

obligation owed by her. This conduct seems more to possess

the character of evidence of a circumstantial kind relied on

to establish participation on her part equally with her

husband in relevant breaches.

The burden on the respondents of establishing a full

involvement by Wendy Exelby with her husband and accordingly

an equal liability with him was, in the circumstances, not

confronted with the level of difficulty that would have

applied if they were endeavouring to make a similar case

against individuals who occupied an independent, arms length

position. An allegation of full authorisation by one

individual of another might in those circumstances be

difficult to prove.

The difference here is that Russell and Wendy Exelby

were not only husband and wife but had been involved

together as business associates with Mr and Mrs Tuite in the

affairs of Wenmar. They were, in effect, as between

themselves business partners, that partnership extending to

embrace Mr and Mrs Tuite as well. No doubt as between

Russell and Wendy Exelby the former played the more dominant

role in the affairs of Wenmar, but Wendy Exelby appears as

acquiescing in his actions and supportive of him while

occupying a position where she took benefits from his more

active involvement. This is a most relevant part of the

background to remember when considering the actions of

Russell Exelby when he branched out and became involved in

the affairs of Cradex. This involvement of Russell Exelby

is not now disputed. The particular actions which the

statement of claim alleges against Wendy Exelby in respect

of Cradex seem not to have been relied on as actions causing

loss to Wenmar, but as part of the picture advanced to prove

that she was pursuing a co-operative joint activity with her

husband in the affairs of Cradex. Although they were far

from being able to prove all details of the total picture

directly, the respondents' case attempted to establish that

everything significant which Russell Exelby did in respect

of Cradex could be taken as something in which she, on the

probabilities, was equally involved. The trial judge has

given attention to specific instances illustrative of her

involvement and he seems to have regarded them as being

simply part of a larger picture. His findings come down to

an acceptance that Wendy Exelby's husband had her full

general authority to act as he saw fit in the matter of

Cradex on behalf of both of them. I think that this finding

should not be regarded as unjustified. The unfavourable

impression which Wendy Exelby appears to have made on the

judge should be given some weight as well as the absence in

her evidence of any clear repudiation by her of her

husband's actions. These matters where the judge had some

advantage could quite properly be taken with the rest of the

evidence against her, as sufficiently establishing, by

circumstantial means, a picture justifying the relevant

finding. The appeal on Wendy Exelby's behalf should be

dismissed.

So far as the appeal on behalf of the first appellant

is concerned, since the judgment entered against him on the

basis that he was "interested" or "concerned" in the affairs

of the competing company, Cradex, is no longer disputed, it

is not necessary to specify what the limits are of the

meanings which can be attributed to these two words in

context. It is sufficient to say that the finding against

him of "interest" or "concern" was justified as well as

being presently unchallenged. This conclusion, of course,

leaves for consideration the question of damages so far as

the first appellant is concerned.

The trial judge found that the third appellant, Cradex,

wrongly procured a breach of contract and breach of duty on

the part of the first and second. If, however, as the

judge has found, Cradex really functioned as the alter ego

of the husband and wife appellants his further finding would

be inconsistent with this view. The two propositions cannot

really stand together and the finding of wrongful

procurement accordingly should be set aside.

The judge has also found that the second respondent,

Wenmar, is entitled to claim damages against the third

appellant, Cradex, for breach by the first and second

appellants of their directors' duties. So far as this

finding was based upon the possible existence of a fiduciary

duty owed by Cradex to Wenmar a challenge to it was

abandoned by Counsel for the appellants on the hearing of

the appeal. However, it remained a contention that there

was no evidence to support a breach of duty.

In any assessment made against Cradex under this head,

it would be necessary as a first step to identify the damage

flowing from any improper use by Cradex of information which

to its knowledge was obtained in breach of duty. If Cradex

after it became established to trade in the relevant

business made use of information obtained by prior improper

approaches made by the first appellant or Dalton to Wenmar

customers, it could conceivably involve itself in liability

for breach of the obligation owed by those two persons and

so liable for loss attributable to that use of information.

The difficulty in the present case for Wenmar in its claim

against Cradex is immediately confronted when an attempt is

made to quantify the amount of any loss under this heading.

It is not possible to find that any approach which Russell

Exelby or Dalton on his behalf made while the former was

still a director of Wenmar owing relevant duties, actually

caused that company any loss. It is of course a different

question whether those approaches could be relied on as part

of the proof against Russell Exelby of his involvement in

the affairs of Cradex.

I agree with Dowsett J. that aspects which he has

identified render it desirable to undertake a fresh

assessment of damages in this case and I accept the

calculations which he has accordingly made including his

selection of 3.3% in lieu of 1% as an appropriate allowance

for the extra costs which would have applied to increased

sales which might have been obtained if Cradex had not

opened up in competition to Wenmar. Further, in considering

the period prior to September 1989, I agree with his

observation that preparing for trade should not be regarded

as the same as trading, but that later trading during the

contractual period of restraint probably resulted in some

carry-on effect damaging Wenmar after the restraint period

terminated. In the end, I agree with the assessment of

$422,768 which Dowsett J. has made of the pre-tax loss of

profits by Wenmar. As already stated, it is not possible to

attribute any part of Wenmar's loss claimable in the action

to any breach by Russell Exelby of his fiduciary duties

prior to 19 June 1989 at which time he ceased to be a

director of Wenmar.

It is a difficult matter for decision whether, in the

assessment of damages, any discount should be applied to the

sum last mentioned to allow for liability to income tax. I

have now had the advantage of considering the reasons which

both Pincus J.A. and Dowsett J. have prepared on this

question.

It was accepted by the parties that the question of

discounting damages for tax could be decided on the basis

that any award to the first respondents would be taxable in

their hands. On the reasoning in the Air Express case

(1979) 146 C.L.R. 249 at 302 this fact should be accorded

certain significance as should the fact that our fundamental

aim is to determine a sum which will fairly compensate the

first respondents for what they have lost.

Firm information on the levels at which profits and

dividends might have been taxed in the hands of Wenmar and

the first respondents seems to be lacking. It is a relevant

matter that if the estimated lost profits of Wenmar are

reduced at the company rate as notionally passing through

its hands to the two first respondents, then the latter, who

are also to be regarded as liable to tax on what they

receive, may end up significantly disadvantaged compared

with what their position would have been if tax under an

imputation system had actually been levied on profits in

Wenmar's hands and on the dividends in their hands.

The lack of clarity in the picture established at the

hearing and the concern about the injustice of applying a

broad discount to the assessed lost profits of Wenmar, while

they persuade me that perfect justice is not achievable in

the assessment, also convince me largely for the reasons

expressed in greater detail by Pincus J.A. that we should

not apply any discount on account of tax to the assessed

figure.

I consider that the amount of the judgment which should

be given in favour of the first respondents is $422,768 with

interest at 10% for fifteen months. It is my view that

judgment should be given against both the first and the

second appellants.

Appropriate orders for costs will be determined by the

conclusions at which the majority have arrived. The orders

and some brief explanation concerning them are set out

below.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 273 of 1992.

Brisbane

[Exelby v. Tuite]

BETWEEN:RUSSELL PETER EXELBY

(First Defendant) First Appellant

- and -

WENDY CHEREE EXELBY(Second Defendant) Second Appellant

- and -

CRADEX PTY LTD(Third Defendant) Third Appellant

AND:PATRICK THOMAS TUITE andMARIE JANECE TUITE

(First Plaintiffs) First Respondents

- and -

WENMAR STOCKFEEDS PTY LTD(Second Plaintiff) Second Respondent

_________________________________________________________________

Macrossan C.J.Pincus J.A.Dowsett J.

_________________________________________________________________


Separate reasons for judgment of each member of the Court.Judgment of the Court as to orders to be made. _________________________________________________________________

1. APPEAL ALLOWED.2. SET ASIDE THE ORDERS OF THE LEARNED PRIMARY JUDGE.3. JUDGMENT FOR THE FIRST RESPONDENTS PATRICK THOMAS TUITE

AND MARIE JANECE TUITE, AGAINST THE FIRST APPELLANTRUSSELL PETER EXELBY IN THE SUM OF $422,768 TOGETHERWITH INTEREST OF $145,710.

4. THE CLAIMS OF THE FIRST RESPONDENTS AGAINST THE SECONDAPPELLANT WENDY CHEREE EXELBY, THAT OF THE FIRST

RESPONDENTS AGAINST THE THIRD APPELLANT CRADEX PTY LTD,AND THAT OF THE SECOND RESPONDENT WENMAR STOCKFEEDS PTYLTD AGAINST THE APPELLANTS, ARE DISMISSED.

5. AS TO THE COSTS OF AND INCIDENTAL TO PROCEEDINGS BELOW:(A) THE FIRST APPELLANT IS ORDERED TO PAY THE

COSTS RELATING TO THE FIRST RESPONDENTS'CLAIM AGAINST HIM, OTHER THAN THE COSTSOCCASIONED BY THE ADJOURNMENT OF THE TRIAL ON29 MAY 1992, WHICH SHALL BE PAID BY THE FIRSTRESPONDENTS TO THE FIRST APPELLANT;

(B) THE FIRST RESPONDENTS ARE ORDERED TO PAY THECOSTS RELATING TO THEIR CLAIM AGAINST THESECOND AND THIRD APPELLANTS;

(C) THE SECOND RESPONDENT IS ORDERED TO PAY THECOSTS RELATING TO ITS CLAIM AGAINST THEAPPELLANTS.

6. THE RESPONDENTS ARE ORDERED TO PAY THE APPELLANTS'COSTS OF AND INCIDENTAL TO THE APPEAL.

_________________________________________________________________

CATCHWORDS: CONTRACT - RESTRAINT OF TRADE - DAMAGESFLOWING FROM BREACH - Appellant caused rivalfeed mill to be set up in breach of restraintof trade covenant - whether Second Appellantparticipated in the breach by acquiescence inand approval of husband's conduct.

EQUITY - FIDUCIARY DUTIES - former companydirector canvassed customers for rival feedmill - whether damage caused by such breach -whether Second Appellant in breach - whetherThird Appellant company assumedresponsibility for First Appellant's breach,where First Appellant not director orshareholder of company.

DAMAGES - APPEAL - MEASURE OF - breach ofcontract - whether damage caused outsiderestraint period can be assessed - 3 monthrun-up period.

DAMAGES - APPEAL - MEASURE OF - whetheradjustment of award of damages should be madeto take into account assessment of incometax.

British Transport Commission v. Gourley[1956] A.C. 185.Cullen v. Trappell (1980) 146 C.L.R. 1.

PRACTICE - JUDGMENTS AND ORDERS - COURT OFAPPEAL - differently constituted majoritieson various aspects - method of determiningorder of court.

Woolworths Ltd v. Kelly (1990) 22 N.S.W.L.R.189New South Wales Medical Defence Union Ltd v.Crawford [No. 3] (N.S.W. Court of Appeal, 23September 1994)

Counsel: Mr H G Fryberg Q.C. with him Mr P Hack forthe appellants.Mr R Chesterman Q.C. with him Mr R C Mortonfor the respondents.

Solicitors: Mr K Wood, Town Agent for Roy Gordon & Gordonfor the appellants.MacGillivrays for the respondents.

Hearing date: 4-6 May 1993.

IN THE COURT OF APPEAL


Appeal No. 273 of 1992.

Brisbane

Before Macrossan C.J.Pincus J.A.Dowsett J.

[Exelby v. Tuite]

BETWEEN:RUSSELL PETER EXELBY

(First Defendant) First Appellant

- and -

WENDY CHEREE EXELBY(Second Defendant) Second Appellant

- and -

CRADEX PTY LTD(Third Defendant) Third Appellant

AND:PATRICK THOMAS TUITE andMARIE JANECE TUITE

(First Plaintiffs) First Respondents

- and -

WENMAR STOCKFEEDS PTY LTD(Second Plaintiff) Second Respondent

REASONS FOR JUDGMENT - PINCUS J.A.


I have had the advantage of reading the reasons of

Dowsett J and those of the Chief Justice; other than in the

respects specifically identified below I am in agreement

with the orders Dowsett J proposes, and with his Honour's

reasoning. In what follows, I have tried to avoid repeating

information and lines of reasoning which are to be found in

the reasons of Dowsett J. I respectfully differ from

2

Dowsett J on some matters and from the Chief Justice as to

the liability of Wendy Exelby.

The appeal has turned out to be a complex piece of

litigation. One special reason for its complexity is that

one must consider overlapping claims by the first

respondents, the Tuites, shareholders in the second

respondent Wenmar Stockfeeds Pty Ltd (Wenmar), against the

first and second appellants, the Exelbys, and against a

company in which according to the primary judge's findings

the Exelbys were interested, the third appellant Cradex Pty

Ltd (Cradex). Questions arise, which were not explored to

any extent in argument, as to the way in which the Court

should treat these overlapping claims, in particular to

avoid double recovery. A second reason for the appeal being

complex is that it was not very clear what points were

raised as being pressed on behalf of the appellants; some

of the grounds stated in the notice of appeal were hardly

discussed in oral argument, and after that argument had

finished, the appellants sent in a substantial written

submission which contained additional arguments, on aspects

of the case not previously raised, in the written outline or

in oral argument.

Wendy Exelby

The second appellant Wendy Exelby was held liable for

losses the nature of which is discussed in detail in the

reasons of Dowsett J; Wendy was held liable, in substance,

3

because the primary judge thought that the first appellant

Russell Exelby had committed the wrong-doings of which he

was found guilty for the two of them - i.e. on behalf of

Wendy as well as on his own behalf.

In outline, the facts of the matter were that the

Tuites and the Exelbys had been shareholders in a company,

Wenmar, which carried on a business of producing and selling

stock feed. On 19 June 1989 the Exelbys agreed to sell

their shares in the company to the Tuites and the agreement

contained a covenant in restraint of trade, two years in

duration. The share sale agreement was completed. In

September 1989, less than three months after the shares were

sold, the Tuites, as owners of Wenmar, found that they were

in close competition with a new company Cradex, ostensibly

owned by Russell's parents. This new company had been set

up and was conducted with the assistance of Russell Exelby;

indeed, the primary judge held that Cradex was merely a

sham, and that it was not in truth owned by Russell Exelby's

parents, but by Russell and Wendy Exelby, a conclusion which

was challenged by the appellants. Russell breached his duty

to Wenmar, prior to the agreement for sale of the shares

being made on 19 June 1989, by taking steps with a view to

the setting up of a competing business, and after that date

he breached the covenant in restraint of trade by taking

further steps with the same purpose and by participating in

the new business. There was evidence to support the judge's

findings against Russell and his liability was not disputed

4

before us, although the quantum of that liability was the

subject of argument.

The judge found that Wendy acquiesced in and approved

of Russell's wrongful conduct. It does not appear that

there is any sufficient basis on which this Court could set

aside those basic findings. The evidence in support of them

was largely indirect; for example, one finds this question

and answer in Wendy's evidence:

"Would it be fair to say that throughout your timeas a director of Wenmar, that the decisions inrelation to the company so far as you and yourhusband were concerned were made by your husband?-- Some decisions were discussed. Not all of them. On the whole, anything to do with the business,yes."

This gives some support to the view that in the new venture,

Cradex, in which Russell interested himself, what he did was

likely to have been discussed with Wendy. Wendy also

admitted that she and her husband "probably" had discussions

about what Russell "proposed to do after he got out of

Wenmar" and said that she recalled conversations about the

possibility of them being involved in another feed mill.

It is important to note that the judge did not find

that there was any express agreement between Russell and

Wendy that his activities with respect to the new feed mill

- the Cradex venture - were engaged in on behalf of both of

them; his Honour's findings are limited to approval of and

acquiescence in those activities. Acquiescence needs no

further consideration, for approval is a stronger finding,

5

implying as it does a positive state of mind and no doubt

expression of that state of mind, rather than mere

passivity.

In general a finding that A has approved of something

wrongful done by B does not make A liable for the wrong-

doing. For example, A may approve of B's breach of contract

and express the approval without incurring liability;

liability depends on establishing that what A did was a

cause of B's wrongful act - that it induced the breach of

contract: Woolley v. Dunford (1971) 3 S.A.S.R. 243. In

some circumstances no doubt proof that A approved of what B

proposed to do or of what B had done would be enough to make

A liable; that would be likely to be so, for example, where

B's actions purported to be done on behalf of A: see

Fridman, Law of Agency, 6th ed. pp. 92, 93.

Here, there is nothing to suggest that Russell

purported to act on Wendy's behalf in relation to Cradex, as

he might have been thought to do, at least implicitly, if it

had been intended that Russell and Wendy become shareholders

in Cradex. To achieve the result which Russell, on the

primary judge's view of the case, wanted, namely to bring

about the setting up of a new business competing with

Wenmar, Russell did not need Wendy's authority.

I am of the view that, in the circumstances of this

case, a finding that Wendy knew and approved of what Russell

6

proposed to do and did, in relation to Cradex, could not

support the conclusion that Russell was acting for both of

them in the matter. It should be noted that, as Dowsett J

points out, it was not put to Wendy that she was a party to

the steps Russell took towards establishment of Cradex.

Two other aspects of Wendy's liability should be

mentioned.

Apart from the concept that, since she approved of

Russell's actions with respect to Cradex, she was liable for

them, the respondents relied on certain steps which Wendy

took or might be thought to have taken on her own behalf.

Of these the most important, at first sight, appears to have

been the guarantee given by Mr & Mrs Oliver (Wendy's

parents) to support the application by Peter and Doris

Exelby (Russell's parents) for finance in relation to the

Cradex venture. The judge held that it was most unlikely

that the Olivers would have given the guarantee if their

daughter were not financially involved. There was no

finding, however, that Wendy induced her parents to give the

guarantee, and there were other possible explanations for

it; the Olivers were friends of Peter and Doris Exelby and

had been so since before Russell and Wendy's marriage. But

the primary judge did not, as it seems to me, so much rely

upon actions performed by Wendy as upon her connection with

Russell's activities, in finding her to be liable with him.

7

The second remaining aspect of Wendy's liability is the

finding that she and Russell were the true beneficial owners

of Cradex and that Cradex was, as the primary judge held,

operating as a facade for Russell and Wendy.

It appears to me, with respect, that the allegations in

the statement of claim were wide enough to give notice of

such a case. Paragraph 10A makes an allegation that Russell

and Wendy had either by themselves or by Cradex supplied

Wenmar customers, and at p. 16 of the pleading the Cradex

business was described as one "purportedly carried on by"

Cradex. Further, it seems likely that, at least in some

respects, the case was conducted in such a way as to point

towards the conclusion which his Honour reached.

But I agree with Dowsett J that the case of sham was

not made out. There was evidence from which it could be and

was concluded that Russell helped to set Cradex up and

assisted in its operations; indeed, the primary judge took

the view that Cradex was "really under Russell's control".

There was also evidence of a practical connection between

Cradex and the parties registered as its directors and

shareholders; as was pointed out by counsel for the

appellants, it was Peter and Doris Exelby who obtained the

finance for Cradex and who mortgaged their property to

obtain it. Peter Exelby was also, on the evidence, involved

in getting plant and equipment for Cradex. The day to day

running of the business seems to have been in the hands of

8

the manager, Dalton, and there is no evidence that it was

necessary for either the directors of Cradex or Russell to

supervise or interfere with Dalton's managerial functions

continually, or to any substantial extent. But even if one

assumes that Russell gave Dalton persistent assistance or

direction, that would be easily explicable on bases other

than that the purported ownership of the company in Peter

and Doris Exelby was a sham: as the primary judge points

out, Russell lived close to the feed mill and his parents a

considerable distance away from it; so that it, in my view

was likely to be convenient for Russell rather than his

parents to look at what Dalton was doing, when necessary.

If it were established that Peter and Doris had ceded

managerial authority to Russell, that would be by no means

the same thing as abandoning ownership of the company.

A company is an artificial person and, particularly

with respect to small family companies, it seems common

enough for persons associated with them not consistently to

respect the company's independent existence, except at tax

return time. In my view it conduces to uncertainty in legal

relations, if courts readily act on pleas, advanced in one

interest or another, to ignore the existence of such

companies as not representing the true or practical

position.

One may fully, and respectfully, accept the view that

Russell encouraged and promoted the establishment of the new

9

feed mill business, without regarding that as going any

distance towards a conclusion that Russell or Russell and

Wendy in truth owned it. In the context of commercial

transactions the word "sham":

"...has come to be applied where persons haveentered into an ostensible transaction as adisguise to conceal their real transaction", perToohey J in Re Public Services Federation; Exparte A-G (W.A.) (1993) 67 A.L.J.R. 577 at 593.

If the position was one in which Russell and Wendy really

owned Cradex or owned its business (Cradex being treated as

having no real existence) then one would have expected some

evidence that, for example, the dividends or directors' fees

ostensibly paid to Peter and Doris Exelby in truth went to

Russell and Wendy. There was no evidence sufficient to

prove that. The judge was encouraged towards his finding of

sham by the circumstance that Russell paid Peter and Doris

$10,000 on the same day that they paid a similar sum to

Cradex in connection with an application for finance. In

discussing this matter, his Honour pointed out that moneys

due from Russell and Wendy to Peter and Doris in respect to

the purchase price of a farm had not been paid. The idea

which was accepted was apparently that the $10,000 was paid

to Cradex by Russell through his parents, as a disguise.

Exhibit 62, a record of the payments made to Peter and

Doris by Russell and Wendy, shows that substantial payments

of interest were made until August 1988, but at rather

irregular intervals; annual payments of capital were also

made in various sums. The last big payment of capital,

10

being the $10,000 just mentioned was, as his Honour noted,

not the last capital payment; two smaller payments were

made in 1991. Peter Exelby said in effect that the payments

made under the mortgage had been rather erratic, but he was

not concerned because he realised the problems:

"Farmers are just not doing very well up in thatparticular area".

It was suggested to Peter Exelby that directors' fees

were to come out of Cradex in lieu of interest payments, and

he denied that; apparently the denial was disbelieved. But

the suggestion,with respect, made not a great deal of

practical sense. The senior Exelbys were to get, under the

mortgage, not only interest payments, but capital repayments

of $10,000 a year. The directors' fees taken would have

amounted only to about half the total of mortgage payments

due. The judge also accepted a submission that Russell and

Wendy's trading with Cradex gave them a benefit; but that

must surely be explicable on the basis of the family

connection with the owners of Cradex without assuming any

sinister motive.

To some extent at least, his Honour's conclusion that

Russell and Wendy were the true owners of the shares in

Cradex and the associated conclusion that the establishment

of Cradex was a mere sham were factual inferences based on a

view of credibility of the witnesses. But making full

allowance for his Honour's advantage, in my respectful

opinion it was not open to his Honour to draw those

11

conclusions. The result is that I agree with Dowsett J that

the finding of liability in Wendy cannot stand.

Treating Cradex as a mere sham might have lead to the

view that it could not be liable for damages, independently

of Russell and Wendy, or the view that it should be

identified with Russell and Wendy for the purposes of

liability for damages. In my opinion, Cradex must be

treated as an independent entity for all purposes of this

action, and this leads to some difficulties, further

mentioned below.

Wenmar's Cause of Action

The primary judge awarded Wenmar damages in the sum of

$1,649,261, together with interest, against Cradex as well

as against Russell and Wendy. Wenmar was not a party to the

covenant in restraint of trade and no action was brought by

it for breach of that covenant. The complaint made on

behalf of Wenmar in para. 19 of the statement of claim was

that, in breach of their duty to Wenmar, Russell and Wendy

failed to have regard to Wenmar's interests and failed to

act in good faith. It was also alleged, in para. 20 of the

statement of claim, that Cradex committed certain wrongs

against Wenmar. Wenmar claimed damages against Russell and

Wendy for breach of their duty as directors and for breach

of fiduciary duty and claimed damages against Cradex for

breach of fiduciary duty.

12

Three grounds of the notice of appeal, namely nos. 10,

11 and 15 relate to Wenmar's claim and seem to require

consideration of the validity of that claim. Dowsett J has

considered it and reached the conclusion that the Wenmar

claim must fail.

In my respectful opinion the primary judge was right to

hold that Wenmar had a good claim, although, as is conceded,

the damages it was awarded were excessive. The Wenmar claim

as pleaded relied upon breaches of duty by Russell and Wendy

as directors, and upon breach of fiduciary duty. The

primary judge held, in summary, that Russell breached his

duties to Wenmar by canvassing Wenmar customers with a view

to having them take their business elsewhere, and by

promoting the formation of a business competing with Wenmar

in other ways, the details of which need not be recounted.

The judge held that Cradex was liable to Wenmar for breach

of fiduciary duty because it assumed Russell Exelby's

fiduciary obligation and because it knowingly received the

financial benefit flowing from Russell's breaches of duty.

It is not contested that Russell was guilty of breaches

of his duty as a director of Wenmar; I have expressed above

my conclusion, agreeing with Dowsett J, that Wendy has no

legal responsibility for what Russell did.

It does not appear to me possible to reject the primary

judge's conclusion that Russell's breaches of duty owed to

13

Wenmar were causative of loss to it; the reason is that

what Russell did in promoting the formation of the new

business to compete with Wenmar while he was still a

director was a substantial cause of the formation of that

business. The result flowed from those breaches of duty.

It is true that not all the losses which Wenmar suffered as

a result of customers it might otherwise have obtained going

to Cradex can be attributed to the breaches by Russell of

his duty to Wenmar, all of which occurred before 19 June

1989; breaches of covenant by Russell, after that date,

were an independent cause of these losses. The point at

which I respectfully differ from Dowsett J was that his

Honour attributes Wenmar's loss solely to the establishment

of the competing mill and its subsequent trading activities,

not to Russell's conduct in breach of his fiduciary duties

prior to his resignation as a director. I am unable to

accept that Wenmar's entitlement to damages for the breaches

of fiduciary duty vanishes because other later events

contributed to Wenmar's losses. To generalise the problem,

I do not accept that, if a director in breach of his duty

makes approaches to customers of a company of which he is a

director, and takes, while a director, other steps towards

establishment of a business to compete with that company, he

is not liable to the company if the formation of the

competing business and other circumstances augmenting the

company's loss occur after the director's resignation. I

agree, however, that it is impossible for us to identify any

part of the loss suffered by Wenmar as attributable to

14

Russell's conduct prior to his resignation as director; if

Wenmar is to have damages fixed in its favour, that can only

be done by remitting the matter for further hearing, a

course one would be loath to take. I have, with some

hesitation, concluded that it is unnecessary to make such an

order.

The shareholders in Wenmar, the Tuites, are as Dowsett

J has held entitled to recover damages in respect of the

loss of profits attributable to Russell's breaches of

covenant. Those damages relate to the whole of the relevant

lost business, whereas in my opinion Wenmar could only

recover such part of the loss as is reasonably attributable

to Russell's unlawful activities before 19 June 1989 - a

substantially lesser sum. Leaving aside the complication

that an allowance for tax, it is contended, must be deducted

from the Tuites' damages, those damages overlap and include

the amount which Wenmar would be entitled to receive. If an

award were made in favour of Wenmar as well as in favour of

the Tuites, there would be a duplication; whatever orders

are made, we cannot award the same damages twice.

A similar problem was discussed in the English Court of

Appeal in Prudential Assurance Co. Ltd v. Newman Industries

Ltd [No. 2] (1982) 1 Ch. 204, where shareholders sued in a

representative capacity on behalf of other shareholders and

also personally. It was held that the personal claims,

which are those which are relevant for present purposes,

15

could not succeed because the shareholders could show a loss

only through the company. In discussing this point the

court took as an example (p. 223) a case in which a fraud is

practised on a plaintiff shareholder to obtain the key to

the company's cash box, which is then robbed. The court

said:

"There are two wrongs, the deceit practised on theplaintiff and the robbery of the company. Thedeceit on the plaintiff causes the plaintiff noloss which is separate and distinct from the lossto the company. The deceit was merely a step inthe robbery. The plaintiff obviously cannotrecover personally some 100,000 pounds damages inaddition to the 100,000 pounds damages recoverableby the company".

That case was considered by the High Court in Gould v.

Vaggelas (1985) 157 C.L.R. 215. There, shareholders were

induced by misrepresentations to buy property, but the loss

which they sought to recover was, to put it broadly, a loss

through a company which they acquired to buy the property in

question. It was held that the shareholders could recover

their own loss. Dawson J dissented, on the basis that the

shareholders' loss was caused by the failure of the company,

and it was the company which had the cause of action (269).

But, as it appears to me, in affirming that the

shareholders could sue, the majority did not deny that the

company also had a cause of action. Consistently with that

view, where the company and the shareholders each sue and

the damages claimed are the same or (as here) overlap, each

has a good cause of action.

The question is how to avoid double recovery. On that

16

aspect of the matter, I have been unable to find any

authority which is determinative; a related problem, that

which arises where the same sum is sought against a number

of defendants, has been considered in a number of

authorities, including B O Morris Ltd v. Perrott and Boulton

[1945] 1 All E.R. 567; Fox v. Everingham (1983) 50 A.L.R.

337 at 349-350; and Hudson and Nielsen v. Wiseman (1986)

W.A.R. 156 at 161-2. In the last mentioned case, it was

held in effect that one group of defendants should be

treated as primarily liable to indemnify the plaintiffs for

so much of the judgment debt as they were not able to

recover from the first group of defendants; in that way,

the problem of double recovery was avoided.

In the present case no analogous solution is available;

but it is impermissible to give Wenmar judgment for a sum

which is in substance included in a larger sum awarded to

the Tuites. In my opinion, the only course is to treat

these respondents, who are represented by the same

solicitors and counsel, as electing to have that judgment

which would produce the larger sum; that would clearly

enough be the judgment in favour of the Tuites. On that

basis, I would set aside Wenmar's judgment.

Judgment Against Cradex

The judgment against Cradex raises a similar

difficulty. The learned primary judge took the view that

Cradex should be held liable in the same sum as his Honour

17

awarded against Russell. Dowsett J has concluded that, for

reasons his Honour states, the judgment against Cradex must

be set aside; I agree. It may be, and there is reason to

suspect that it is the case, that it makes no practical

difference to the shareholders in Cradex whether or not a

judgment is also given against Cradex.

I should have thought there might have been an arguable

case against Cradex on the basis that it was a party to, in

the sense of taking advantage of, Russell's breaches of his

duty as a director, insofar as Russell made approaches to

customers of Wenmar before 19 June 1989; Cradex sold to

some of those people. But that case was not pleaded: see

para. 20(a) of the statement of claim, which relies merely

on the use of information with respect to the identity and

intention of customers. It does not appear to me possible

to find that any loss flowed from that. As Dowsett J points

out, it was not held that the information was confidential;

all users of stock feed in the area were potential

customers. Further, the action against Cradex for procuring

a breach of contract on the part of Russell is impossible to

sustain; the thrust of the primary judge's reasons was not

that Russell was induced to act unlawfully, but that he was

the prime mover. I also agree that, for the reasons given

by Dowsett J, the action against Cradex based upon Dalton's

activities should have failed.

Insofar as the primary judge held Cradex liable on the

basis that it was a mere facade, that view for reasons I

18

have mentioned cannot be upheld.

Taxation

During the relevant period, undistributed profits tax

had but for a transitional scheme been abolished and the

imputation system in respect of company dividends had been

instituted. The effect the imputation system would have had

upon the shareholders in Wenmar, the Tuites, is impossible

to determine unless one postulates a particular level of

dividend declarations and also has detailed information

about the tax position of those shareholders.

It has been submitted on behalf of the appellants that

the respondents carry the burden of proof on this question,

and that is so. One cannot, on the evidence in the record,

make any other than a guess at the impact of the taxation

system upon the money which but for Russell's wrongful

actions would have been earned by Wenmar.

It was submitted on behalf of the respondents that the

award of damages to the Tuites would be assessable as income

in their hands, and that seems not to be disputed by the

appellants who, however, "reserve the right to contend in

any further appeal" to the contrary. I am content to

proceed on the basis on which the parties have agreed as I

think that the award of damages would indeed be subject to

income tax.

19

The complication is that tax on the lost profits would

have been exigible at two levels, potentially at least: on

the profits in the company's hands, and then on the dividend

distributions. The former level of tax is known; it is

39%, but the latter is affected by uncertainties, as I have

mentioned.

The question is whether in these circumstances the

successful parties, the Tuites, are entitled to the whole of

the profits or some lesser sum - the latter arrived at by

taking into account the tax effect.

British Transport Commission v. Gourley [1956] A.C. 185

was decided on the basis that the damages there in question

were not taxable (205), and the rule laid down in that case

is therefore not directly applicable; it was held, in a

personal injuries case, that the tax the plaintiff would

have had to pay if he had received the income which he lost

as a result of his injury had to be taken into account in

assessing damages. Although the consequences of this

decision have been extensively worked out in English

authorities the point has been the subject of substantially

less litigation in this country. The principal authority

here is Cullen v. Trappell (1980) 146 C.L.R. 1, which was

like Gourley's case, a claim for damages for personal

injuries. There, a majority of the court held that

Gourley's case should be applied to actions for damages for

personal injuries, in accordance with the dissenting

20

judgments of Gibbs and Stephen JJ in Atlas Tiles Limited v.

Briers (1978) 144 C.L.R. 202. The conditions which have

been held to be applicable, as a general proposition, if a

Gourley assessment is to be made, are two:

"...the first being that the amounts for the lossof which damages are awarded would, if they hadbeen received by the plaintiff, have been subjectto tax. The second is that the damages awarded tothe plaintiff would not be subject to tax": AirExpress Ltd v. Ansett Transport Industries(Operations) Pty Ltd (1979) 146 C.L.R. 249 at 302.

The question is whether on the basis on which the

parties invited us to proceed, namely that the damages are

taxable in the hands of the Tuites, allowance should be made

for the notional tax payable, at a point anterior to any

receipt by them - i.e. in the hands of Wenmar. We were

referred to no authority in favour of the view that the

principle should be refined in this way, and it appears to

me undesirable to take that step.

First, the principle of Gourley's case has been

accepted in this country only with some reluctance. There

are reasons for that, of which two should be mentioned. One

is that if damages are awarded "gross" - i.e. without regard

to tax impact - then that, conveniently, leaves it to the

legislature to determine what tax should in fact be exacted.

Secondly, the Gourley rule can, as that case itself

illustrates, provide what looks like a windfall for the

wrongdoer: he rather than the government, gets the benefit

of the tax that would have been payable.

21

Looking at the matter more broadly, the problems

inherent in attempting to account for the impact of tax, in

assessing damages, are illustrated by the history of this

litigation. The primary judge decided that an allowance

should be made in favour of the respondents by reason of the

impact of the Income Tax Assessment Act 1936; the allowance

was over $0.5M. Although the respondents' outline of

argument supported that view, ultimately it was abandoned

and the difference between the parties appears to be the

extent to which an allowance for tax should be made against

the Tuites.

The argument in favour of extending the Gourley

principle so as to cover this situation is of course that if

Wenmar had earned the additional profits postulated, it

would have had to pay tax on them before any possibility

arose of transmitting some of the profits, by way of

dividend distribution, to the shareholders. But as the

argument on behalf of the Tuites points out, if the damages

are taxable in the hands of the Tuites, their position is

worsened compared with that which they would have occupied

had the money come to them as dividends; the tax on the

damages is not reduced on account of the notional tax

applied to the income earned by Wenmar. It should be added

that, assuming the damages to be taxable, the tax would be

exigible in a single year and this would be likely to make

it payable at a higher marginal rate.

22

The rule which we are invited to enunciate, and then

apply in favour of the appellants, is that even where the

damages are taxable the notional tax which would have been

payable on the lost profits should be taken into account by

way of reduction of the damages, in one fashion or another.

I prefer the simple principle stated in the Air Express

case, and on that basis I would, respectfully differing from

Dowsett J on this point, make no deduction, in respect of

profits lost, on account of the income tax which would have

been payable at either level - i.e. by the company or by the

shareholders.

Costs

On the view I take of the case judgment should be given

for the Tuites in the sum of $422,768 plus interest at 10%

per annum against Russell Peter Exelby, the first appellant,

in replacement of the judgments given below. That is, the

claim by Wenmar fails, as does the Tuites' claim against

Wendy Exelby and that against Cradex.

I have adopted the view that Wenmar had a good cause of

action, but because of the difficulty about overlapping

claims, effect should not be given to it in these

proceedings; there should therefore be judgment against

Wenmar, but without costs. With respect to Wendy Exelby and

Cradex, I take the view that an order should be made having

the effect that their costs of successfully defending the

23

proceedings be paid directly by Russell Exelby.

In these respects, my views on the appropriate costs

orders differ from those of Dowsett J. I agree with his

Honour, however, that despite the mixed result of the appeal

the appellants should have all their costs of the appeal.

24

THE COURT OF APPEAL


Appeal No. 273 of 1992

Brisbane

Before The Chief Justice Pincus JA Dowsett J

[Re: Exelby & Ors]

BETWEEN:

RUSSELL PETER EXELBY(First Defendant)

First Appellant-and-

WENDY CHEREE EXELBY(Second Defendant)

Second Appellant-and-

CRADEX PTY LTD(Third Defendant)

Third AppellantAND:

PATRICK THOMAS TUITE and MARIE JANECE TUITE(First Plaintiffs)

First Respondents-and-

WENMAR STOCKFEEDS PTY LTD(Second Plaintiff)

Second Respondent

REASONS FOR JUDGMENT - DOWSETT J.


In this action, the respondents recovered damages and

interest in the amounts of $1,649,261 and $141,508.75

respectively against the appellants for breach of a

restraint-of-trade clause and other associated causes of

action. The award included an amount of $808,940 described

25

as, "damages for the reduction in the capital value of (the

first respondents') shares in the (second respondent's)

business" and $517,191 as an allowance against the

possibility that the award might be assessable to income

tax. At the hearing of the appeal, counsel for the

respondents conceded that those amounts could not be

justified. The amount of the judgment must therefore be

reduced by $1,326,131 to $323,130. It will be necessary to

re-calculate interest. This reduced judgment is also

subject to appeal on other grounds.

Prior to 11 May, 1989 the first respondents and the

first and second appellants were shareholders in and

directors of the second respondent, which company had

carried on the business of stock feed milling and sales at

Wondai since late 1985 or early 1986. At some time prior to

11 May, 1989 the first and second appellants offered in

writing (ex.1) to sell to the first respondents their shares

in the second respondent. The offer provided that upon

acceptance, the parties were to enter into an agreement

containing the following clause (inter alia):-

"The Vendors shall not engage or be employed inany stock food production business in the SouthBurnett area for a period of two years from thedate of settlement. It is acknowledged that thiscovenant does not affect the Vendor's right totrade in wholegrains or the lot feeding of cattleduring the said period of 2 years."

Settlement was to take place within 30 days of the

exercise of "the said option", meaning the acceptance by the

first respondents of the offer. It is common ground that

the offer was accepted on 11 May, 1989 and a subsequent

26

agreement (ex.2) was executed,providing as follows:-

"(a) The Vendors shall not exercise, carry on orbe in any manner whatsoever either directlyor indirectly concerned or interested eitherby themselves or person, company orcorporation in the trade or business of stockfood production within an area defined by aline drawn on the map from Hervey Bay andthence to Gympie and thence to Moore andthence to Dalby and thence to Eidsvold andthence to Hervey Bay, hereinafter called 'thedefined area' during a period of two yearsfrom the date hereof or permit their personalname to be used in carrying on or inconnection with any such business or supplyor solicit any of the existing customers ofthe Company. The Vendors acknowledge theCompany has existing customers or contactsthroughout the said defined area andspecifically acknowledges that valuableconsideration has passed from the Purchasersto the Vendors in respect of this covenant.

(b) The Purchasers acknowledge the withinCovenant does not affect the Vendors rightwithin the said period of two years to carryon the following businesses within thedefined area:-

(i) to trade in whole grains

(ii) to mix and supply stock feed for lot feedingof cattle upon the Vendor's own property."

The agreement was dated 19 June, 1989, and so the

period of restraint continued until 19 June, 1991. There

was no challenge to the enforceability of this covenant.

The third appellant was incorporated as a solicitor's

shelf company on 17 April, 1989, and the first appellant's

parents, Peter and Doris Exelby, became the only directors

and shareholders on 3 May, 1989. The third appellant has

established a feed mill on land in Transmitter Road,

Tingoora, very near to the first and second appellants' farm

which they had purchased from Peter and Doris Exelby prior

to all presently relevant events. Part of the purchase

27

price remained owing as at June, 1989. The learned trial

judge found that the third appellant commenced operating the

mill in early September, 1989 and continued to operate it up

to the date of trial. His Honour also found that from late

March or early April, 1989 the first appellant had been

speaking to customers of the second respondent with a view

to inducing them to deal with him if he set up a new feed

mill business.

The learned trial judge found that the day-to-day

business of the third appellant was conducted by one John

Dalton, previously employed as a grain-mixer by the second

respondent. The appellants asserted that Dalton was

supervised in that employment by Peter Exelby. His Honour

inferred that as Russell Exelby was living in the vicinity

and was experienced in the business, it was more likely that

he was supervising Dalton. His Honour also found that the

third appellant had purchased grain from the first and

second appellants at a very favourable price (to them) and

inferred from this that the third appellant was providing

benefits to them. Other involvement by the first appellant

in the third appellant's operation included assistance in

applying for finance and participating in loading and

unloading activities at the mill. The first appellant also

paid $10,000 to his parents from the joint account operated

by himself and the second appellant, which amount was then

paid to the third appellant. The payment was in reduction

of the farm purchase price, but his Honour inferred that it

was motivated by a desire to fund the third appellant. The

28

second appellant's parents, the Olivers, gave a limited

guarantee in connection with the establishment of the third

appellant's business.

His Honour inferred that directors' fees paid to Peter

and Doris Exelby were probably in lieu of capital and

interest payments in connection with the sale of the farm

and that the shares in the third appellant were held by

Peter and Doris Exelby for the first and second appellants.

They were therefore in breach of the restraint clause,

being engaged, concerned or interested in the third

appellant's business. Although the appellants do not

challenge this ultimate finding of "involvement" as against

the first appellant, they challenge it as against the second

appellant. They also challenge the finding that the first

and second appellants were the beneficial owners of the

shares in the third appellant. Findings of breach of

directors' and other fiduciary duties were also made against

the first and second appellants. The relevant distinction

between these two categories of fiduciary duty is not clear

to me. I will hereafter refer to both causes of action as

involving breaches of directors' duties. Judgment was

obtained against the third appellant for procuring breach of

contract and breach of directors' duties. All these matters

are subject to appeal, although in some cases, only because

it is alleged that no loss flowed from the alleged

misconduct.

PLEADINGS

In para.10 of the statement of claim, the respondents

29

alleged various actions by the first appellant said to

evidence his being engaged, concerned or interested in the

third appellant's business. Two specific allegations were

also made against the second appellant, namely that :-

(a) She permitted her name to be used in connection with

certain finance applications; and

(b) That she procured her parents, the Olivers, to give

guarantees of the indebtedness of the third appellant

to the National Australia Bank in order to obtain

finance.

In para.10A, it was alleged that the first and second

defendants, by themselves or by the third defendant,

supplied customers of the second plaintiff in breach of the

restraint clause.

It was alleged in paras. 18, 18A and 19 that the first

and second defendants acted in breach of their duties as

directors of the second respondent. Particulars of

misconduct against the first appellant were given, but the

only particulars against the second appellant were that she

procured her parents to give the guarantee and permitted her

name and the financial records of the second respondent to

be used in a lease application. It was also alleged that

the first and second defendants divulged confidential

information, acted to damage or depreciate the value of the

second respondent's business and made improper use of

information gained as directors. Again, there were

substantial particulars of the misconduct alleged against

the first appellant. It was then alleged that:-

30

"The above acts on the part of the first defendantwere done on his own behalf and on behalf of thesecond defendant who acquiesced in suchbehaviour."

It was alleged that the third appellant induced the

first and second appellants to commit the misconduct alleged

against them. This probably referred to the breach of the

restraint clause. The respondents also alleged that the

third appellant received and used information which, as it

knew, was provided by the first appellant in breach of his

obligations to the second respondent, induced, encouraged

and procured the first appellant to breach his obligations

to the second respondent by supplying the information

previously mentioned and induced, encouraged and procured

John Dalton to breach his obligations to the second

respondent. Dalton was an employee of the second respondent

until 16 May, 1989 and subsequently worked for the third

appellant. He was alleged to have given advice to Peter

Exelby as to the equipment and machinery necessary to set up

a feed mill and to have canvassed customers of the second

respondent.

FINDINGS

The learned trial judge concluded that the third

appellant was, "a facade for Russell and Wendy (Exelby) as

real owners ...", and that the shares in the third appellant

were the beneficial property of the first and second

appellants. His Honour inferred that the first and second

appellants were therefore engaged, concerned or interested

in the third appellant's business. The learned trial judge

made certain specific findings as to the activities of the

31

first appellant, most of which I have recorded in the

introductory paragraphs above, and concluded that:-

"... Wendy Exelby approved of Russell's foregoingconduct. ... I am satisfied that whateverdecision Russell made in respect of a new feedmill and financing of it she left to Russell andwas prepared to abide by and be part of thatdecision and its consequences ...

... whatever arrangements Russell made in relationto the new feed mill were acquiesced in by her anddone with her approval. I also find that it ismost unlikely that Mr and Mrs Oliver would risk aguarantee liability up to $70,000 in a field inwhich the apparent owners, Peter and Doris Exelbyhad had no prior experience unless the guaranteewas in reality given because their daughter wasinvolved in that venture.

I have concluded that the second defendant isliable for Russell Exelby's breaches of therestraint of trade covenant which I have earlierset out, she having approved of Russell's conductwhich constituted those breaches."

His Honour also found that the first and second

appellants had supplied feed to customers in breach of the

restraint clause by virtue of the third appellant's supply

of grain to those customers. This finding, his Honour said,

resulted from, "my earlier finding that Cradex Pty Ltd was

at all times a facade for the first and second defendants

and my construing the restraint of trade clause in ex.2 to

read:-

"The vendors shall not ... either by themselves... or (by a) corporation in the trade or businessof stock food production within (the area) duringa period of two years from the date hereof ...supply ... any of the existing customers of(Wenmar)."

Based upon the finding of "facade" and the other

findings, his Honour was satisfied that the first and second

appellants had breached the restraint clause and their

32

duties as directors. The third appellant was held liable

for procuring breach of contract and as a party to those

breaches of directors' duties.

The finding that the third appellant was, in effect, a

facade for the first and second appellants is fundamental to

a number of aspects of the judgment. That description of

the relationship between the first and second appellants and

the third appellant is, however, merely an inference drawn

from the evidence. That the third appellant may be so

described does not in any way strengthen the respondents'

case. It is the evidence said to justify that description

which is relevant to the issue in hand, namely determining

whether there was a breach of contract or other actionable

misconduct.

THE SECOND APPELLANT

For the sake of completeness, I list the specific

allegations made against the second appellant:-

(a) That she breached the restraint clause by being

concerned or interested in the third appellant's

business by permitting her name to be used in finance

applications;

(b) That she was similarly concerned or interested in that

she procured her parents to guarantee the indebtedness

of the third appellant to the National Australia Bank;

(c) That she supplied grain to customers of the second

respondent, contrary to the restraint clause;

(d) That she permitted her name and the financial records

of the second respondent to be used in a lease

33

application, and was thereby in breach of her duty as a

director;

(e) That she authorised and acquiesced in the first

appellant's conduct alleged in para.19(aa), sub-paras.

A, B, C and D of the statement of claim, and was

thereby similarly in breach of duty.

As to allegation (a) above, there was no express

finding that the second appellant had so approved the use of

her name, although his Honour's finding that she acquiesced

in and approved of all that was done by the first appellant

may have been a basis for such an inference if it were shown

that he used her name. There are, however, other

difficulties for the respondents in this allegation.

There were a number of applications for finance. It is

not clear to which of these applications the plea related.

Firstly, there were the applications referred to in

para.10(c) of the statement of claim, to Esanda Limited for

leasing finance over equipment. There were two such

applications, one concerned with equipment for a feed mill

in the name of Peter and Doris Exelby and one in relation to

a feed lot in the name of the first and second appellants.

The documentation suggests that the two applications were,

in some respects, inter-dependent and so it might be said

that the second appellant's name was used in connection with

an application for finance of a feed mill. Involvement in a

feed lot business was not restrained by the agreement.

These applications were made prior to 19 June, 1989, before

the second appellant became bound by the restraint clause.

34

They cannot have been in breach of its terms. In any event,

the feed mill application was unsuccessful. I am not sure

about the fate of the other application. The respondents

could not have suffered damage as a result of the use of the

appellant's name in a failed application. A further

application was made to Esanda in August, which was

successful, but there was no suggestion that the second

appellant's name was used in it.

Secondly, an application for finance was alleged in

para.10(c)(ii), but there is no reference to any such

application in the evidence, and Mr O'Brien was not asked

about it. As his firm was allegedly involved in the

application, it seems safe to infer that there was no such

application.

Thirdly, Peter and Doris Exelby applied twice to the

National Bank for finance for the feed mill. Paragraph

10(c)(ii) relates to one of those applications. The first

application was unsuccessful. There was no allegation that

the first appellant's name was used in connection with

either application. It was alleged only that he assisted in

the application. It is therefore unlikely that the

allegation of use of the second appellant's name related to

these applications. The relevant documentation (ex.37)

contains references to the first and second appellants, but

these references seem to have emanated from bank officers.

Thus the only possible act proven against the second

appellant was allowing her name to be used in the lease

application. This occurred before she was contractually

35

bound and in any event, could not have caused loss to the

respondents as it was unsuccessful.

As to allegation (b) above, there was no finding that

the second appellant procured her parents to guarantee the

indebtedness of the third appellant. There was a finding

that they probably expected her to be involved in the

business, but that is not the same thing. There was

certainly no evidence to support the assertion that she

procured the guarantee, nor was there any evidence that the

first appellant did so. The only evidence was that it was

sought by Peter and Doris Exelby, the Olivers having known

them for many years. Even if his Honour rejected this

evidence, it was not open to him to infer that the second

appellant procured the guarantee, nor did his Honour do so.

As to allegation (c) above, para. 10A of the statement

of claim alleged that the first and second appellants, by

themselves or by the third appellant, supplied customers of

the second respondent. The restraint clause expressly

prohibited such supply. His Honour found that this

allegation was made out and constituted a breach of

contract. This conclusion depended upon the finding of

"facade" and a particular construction of the restraint

clause, which construction appears at p.D54 of the record

and is set out above. I will deal with the question of

"facade" later.

As to the construction point, his Honour held that the

words, "either by themselves or person, company or

corporation", extended the prohibition on sale by the first

36

and second appellants to include sale by a company in which

they had an interest. I am unable to accept this

interpretation of the clause. In my view, the clause

operated to bar a number of discrete activities including:-

(i) exercising or carrying on the business of stock

food production;

(ii) being directly or indirectly concerned or

interested, either by themselves or persons,

company or corporation in the trade or business of

stock food production;

(iii) Permitting use of their name in carrying on or in

connection with etc.;

(iv) Supplying or soliciting existing customers.

While it may be arguable that the words of extension

(underlined above) apply to (i) as well as (ii), it is not

arguable that they apply to (iii) or (iv). The verbs and

verbal phrases "exercise", "carry on" and "be ... concerned

or interested in", all have as their objects, "the trade or

business of stock food production". The verbs, "permit",

"supply" and "solicit", share the auxiliary verb and

negative, "shall not", with the earlier verbs, but not their

predicates. This interpretation was adopted by the

respondents in paragraph 8 of the statement of claim, and I

consider it to be correct. It follows that the second

appellant did not supply existing customers simply because

the third appellant did so. The clause prohibited direct

supply by the first and second appellants. It did not

extend to prohibit supply by a company in which they were

37

interested or to deem such supply to be supply by them.

Such a situation would involve a breach of the first part of

the clause in that the first and second appellants would be

concerned or interested in a prohibited trade or business.

As to allegation (d) above, paras 18, 18A and 19 of the

statement of claim alleged breach of duty by the second

appellant as a director of the second respondent. The

relevant conduct was said to be procuring her parents to act

as guarantors of the indebtedness of the third appellant and

permitting her name and the financial records of the second

respondent to be used in connection with the lease

application to Esanda. The first allegation was not

established on the evidence. As to the use of her name in

the application to Esanda, even if this were a breach of her

duty as a director, for reasons which I have already

discussed, no loss flowed from it. As to use of the

financial records, there was information in the application

which was probably derived from the records of the second

respondent. This information was clearly supplied by the

first appellant. Although his Honour found that the second

appellant had a general knowledge of what he was doing and

that she tacitly or otherwise approved of it, I cannot

accept that this means that she knew of each step in advance

and was a party to it. No such suggestion was made to her

in cross-examination. In any event, as the application was

unsuccessful, no loss flowed from the mis-use of the

information. As I have said, there was a later application

to Esanda, but there was no evidence that this information

38

was used therein.

As to allegation (e) above, it was alleged that the

second appellant acquiesced in the first appellant's conduct

particularised in para.19(aa) of the statement of claim.

Although his Honour drew many inferences against the second

appellant, there was no evidence to justify an inference

that she breached her own duty as a director or had other

than a general appreciation of what he was doing. It was

not put to her that she was aware in advance of any of his

breaches of duty, and it seems unlikely that she was. She

certainly did not authorize or acquiesce in them. The

allegation was not made out.

As to the question of "facade", the respondents did not

plead that the first and second appellants were beneficially

entitled to the shares in the third appellant, nor that it

was a mere "facade" for their activities. They rather

pleaded specific conduct said to constitute concern or

interest in the business of that company. His Honour

inferred that evidence of such involvement established

beneficial ownership. In argument before us, considerable

time was spent in justifying the description of the third

appellant as a "sham". I do not understand why this matter

loomed so large in the case. If the first and second

appellants were shown to be concerned or interested in the

business conducted by that company, then they were in breach

of the restraint clause. If they tried to conceal their

activities behind the corporate face of the third appellant,

then the latter might be accurately described as a "sham",

39

but to so describe it did not add anything to the case. The

description would be a consequence of the respondents'

having proved their case against the first and second

appellants, not a step in that process.

The findings of beneficial ownership and "facade" as

against the second appellant depended very much upon the

evidence of conduct and statements by the first appellant.

Although his Honour was unimpressed by the second appellant

as a witness, his rejection of her evidence was not itself

sufficient to justify a finding that she was a party to her

husband's misconduct. She admitted discussions about

involvement in a second feed mill early in 1989 and

discussions about a feed lot. She said that she left such

matters to her husband. It was not suggested to her in

cross-examination that she was party to an agreement with

her husband to breach the restraint clause or to damage the

second respondent's business. There was no evidence from

him or any other witness to suggest as much.

I have mentioned the sum of $10,000 paid to Peter and

Doris Exelby by the first appellant from the account of the

first and second appellants and subsequently paid by Peter

and Doris Exelby to the third appellant. There was no

evidence that the second appellant was aware of this

payment. Whatever the first appellant's motive in making

the payment, the first and second appellants were indebted

to Peter and Doris Exelby in respect of the purchase of the

farm. This incident does not lead to any different

conclusion as to the involvement of the second appellant in

40

these transactions.

If the second appellant were beneficially interested in

the third appellant, that, by itself, would have been

sufficient evidence of concern or interest to constitute a

breach of the restraint clause by her, at least if she knew

of the interest. It is arguable that the clause

contemplates a conscious "concern" or "interest", in which

case an interest vested in the second appellant without her

knowledge would not have been sufficient. His Honour's

finding as to beneficial interest obviously depended very

much upon inferences drawn from the conduct of the first

appellant and statements by him. In the absence of any

evidence of agency, evidence of those matters was not

admissible against the second appellant. The general

knowledge inferred by his Honour was not sufficient for this

purpose. The finding of beneficial ownership cannot stand

as against her for purely evidentiary reasons.

Even if it were established that the second appellant

had become the beneficial owner of shares in the third

appellant, it could not be said that such breach, of itself,

caused any loss to the respondents. Her beneficial

ownership would have been as a result of the first

appellant's conduct. That conduct may well have caused loss

to the respondents by fostering the establishment of a

business in competition with that of the second respondent.

However the second appellant's interest in the third

appellant's business would also be a consequence of that

conduct rather than a further cause of loss to the

41

respondents. Even in that case, there would be a judgment

against the second appellant for nominal damages only. The

judgment against the second appellant must be set aside.

THE FIRST APPELLANT

His Honour obviously concluded that the third appellant

was very much the creature of the first appellant, that its

incorporation and commencement of business were instigated

by him, and that Peter and Doris Exelby would not have

acquired the company or established the business had he not

caused them to do so. There is also a clear finding that he

applied his expertise in the conduct of the business and

that he solicited customers for its benefit. He obtained

the services of Dalton. It was open to his Honour to infer

that the first appellant was the moving spirit behind the

establishment and operation of the third appellant and its

business. Had he not intervened, the business would

probably not have been established and therefore, the third

appellant would not have competed with the second

respondent. It is this fact which is at the root of his

Honour's approach to the case. For the respondents'

purposes, it did not matter who owned the third appellant,

although ownership would have been one way of proving

concern or interest. The question was whether the first

appellant had breached the restraint clause and if so, what

loss was suffered as a result.

There was, in my view, no sufficient basis for finding

that he was the beneficial owner of the shares in the

company. The respondents did not seek to prove that, and it

42

is difficult to see how they could have done so. Although

$10,000 found its way from the first and second appellants

to Peter and Doris Exelby and then to the third appellant,

the money was paid to Peter and Doris Exelby in partial

discharge of a valid debt. There was no suggestion that the

first appellant invested other funds in the company,

although he was apparently willing to do so had it been

necessary. It was not open to the learned trial judge to

infer that the shares in the company were beneficially owned

by either the first or second appellant.

There was, however, ample justification for the finding

that the first appellant was concerned or interested in the

third appellant's business. He formulated the idea for the

new mill, encouraged his father to adopt it, canvassed

customers, exploited his relationship with Dalton, assisted

in the obtaining of finance, supervised Dalton and was, on

occasions, physically involved in its business. These

specific findings were not challenged. His Honour was

satisfied that had it not been for the first appellant's

acts, the third appellant would not have been established

and would not have commenced trading in competition with the

second respondent. He was clearly in breach of the

restraint clause.

AN ALTERNATIVE BASIS OF CLAIM - PARA 11(a)

In the statement of claim and, indirectly, before us,

some attempt was made to establish a "breach" of the

restraint clause in the original offer as opposed to that in

the ultimate agreement. This would have avoided the

43

difficulty inherent in the fact that many of the alleged

acts of misconduct by the first appellant occurred prior to

the date of the agreement, 19 June, 1989. One problem with

this argument is that the offer did not purport to restrain

the first and second appellants. It merely provided that

any agreement to be executed would contain a restraint

clause. Thus there was no restraint upon the appellants'

conduct, even after acceptance of the offer on 11 May, 1989.

The period of restraint referred to in the offer was not to

commence until settlement of the anticipated agreement,

although in the event, that agreement provided that the

restraint take effect from the date of the agreement, not

its completion. This argument is without substance.

THE THIRD APPELLANT

The learned trial judge gave judgment for the first

respondents against the third appellant for damages for

wrongful procuration of breach of contract and for the

second respondent against the third appellant for damages

for breach of directors' duties. Although there was no

specific ground of appeal against the finding of procuration

of breach of contract, that finding depended upon the

"facade" argument, and this was challenged in ground 1.

Ground 9 concerned the finding that the third appellant owed

a fiduciary duty to the second respondent. This ground was

abandoned. Ground 10 alleged that there was not sufficient

evidence to involve the third appellant in any breach of

fiduciary duty by the first or second appellant. Ground 11

alleged that there was not sufficient evidence of any damage

44

resulting from such a breach. Thus the whole of the

judgment against the third appellant was subject to appeal,

notwithstanding the abandonment of ground 9 and the absence

of any express attack on the finding of procuration of

breach of contract.

Concerning the allegation of inducement, his Honour

found, at p.D65 of the record that:-

"Cradex by its directors and by Dalton haveoperated its business as a facade for the firstand second defendants and thus procured the firstand second defendants to breach the restraintscontinuously up to and including 19 June, 1991. Those breaches by the first and second defendantsare in most cases directly attributable to Cradex'acts. Without the corporate entity to shieldtheir carrying on the stock feed mill the firstand second defendants could not have breached therestraints as substantially as they did. Damagehas been caused to the first plaintiffs by Cradex'conduct."

With all respect to his Honour, it does not follow from

the fact that the third appellant was a "facade" for the

first and second appellants, that the third appellant

procured them to breach the terms of the restraint clause.

The finding of "facade" was dependent upon the conduct of

the first appellant and the conclusion that the third

appellant was his creature. That conclusion could not stand

with a finding that he was acting at its direction. The use

of the expression, "facade for the first and second

defendants", concealed the true relationships amongst the

appellants. The description did not help to prove the case,

particularly in the absence of the finding as to beneficial

ownership.

The respondents' case was not dependent upon an

45

assertion of "facade". It was rather that the third

appellant had induced and procured the first and second

appellants to engage in the conduct particularised in

para.10 of the statement of claim. I have already

demonstrated that such misconduct was not established in the

case of the second appellant. As to the first appellant,

his Honour made certain findings as to that conduct which

were not challenged, but there was no evidence of inducement

by the third appellant. In any event, many of the breaches

occurred prior to the first appellant's becoming bound by

the restraint clause. This cause of action against the

third appellant was not established.

The judgment for the second respondent against the

third appellant was based on the following allegations:-

(a) That the third appellant had received and used

information supplied by the first appellant in breach

of his fiduciary duty to the second respondent. This

was information about the identity of customers and

their willingness to cease trading with the second

respondent.

(b) That the third appellant induced, encouraged and

procured the first appellant so to breach his

obligations to the second respondent.

(c) That the third appellant induced, encouraged and

procured John Dalton to breach his obligations to the

second respondent by advising Peter Exelby of the

equipment and machinery required to set up a business

in competition with the second respondent and by

46

canvassing customers of the second respondent to leave

the second respondent in favour of the third appellant.

His Honour approached this claim primarily upon the

basis that, as the third appellant was a facade for the

first and second appellants, it was also liable for their

breaches of fiduciary duty. If this meant that a party

deriving a benefit from a person acting in breach of a

fiduciary duty, with knowledge of that breach, is liable to

account for any benefit so derived, little can be said in

criticism of the proposition. However it seems that his

Honour was saying rather more than this. Such an

explanation was offered as the alternative basis for the

judgment. See pp.D77 and D78 of the record. The primary

ground was the "facade" argument. See p.D76. Once the

finding of beneficial ownership is set aside, as it must be,

there can be no basis for using the description "facade" as

a basis for liability in the third appellant for the actions

of the first appellant.

As to the alternative basis for this claim, the

allegation concerning information about customers depended

upon the allegation that Peter Exelby received and acted

upon that information as agent for the third appellant. He

became a director on 3 May, 1989. There was no basis in the

evidence for assuming any relationship between him and the

third appellant before that date. The third appellant was

not responsible for the receipt of any confidential

information by Peter Exelby prior to 3 May, although it may

arguably have been liable for the use of such information

47

thereafter.

As to allegation (a) above, at p.D77, his Honour refers

to communication of the outcome of the first appellant's

canvassing and the communication of trading figures to

O'Brien for the Esanda application. The latter matter was

not raised in this context by the pleading. It occurred

prior to Peter Exelby becoming a director, and the

application for finance was also made before that date. See

pp.B163 and D77 of the record. Again, in any event, the

application was unsuccessful. Even if pleaded, the third

appellant could not be held liable for receipt or use of

this information by Peter Exelby.

Assuming for present purposes that it would be a breach

of the first appellant's duty as a director to communicate

information about his canvassing of customers, it may follow

that, if the third appellant received that information

knowing that the first appellant was acting in breach of his

duty, the third appellant would become a party to that

breach, and the injured party could recover from the third

appellant any benefit derived from that breach. A court of

equity might, in some cases, exercise its statutory

jurisdiction to award damages or compensation in lieu of

other equitable relief. However it would be necessary to

identify damage flowing from the impugned conduct.

It was impossible to infer, as his Honour did, that the

alleged loss suffered by the second respondent was so

attributable. A person was a potential customer of the

third appellant because he was involved in the pastoral

48

industry, not because he was a customer of the second

respondent. The customers in question were apparently well-

known to the first appellant. Had he, on behalf of the

third appellant, canvassed customers of the second

respondent after he ceased to be a director, there could

have been no complaint that he had breached his fiduciary

duty to the second respondent, as opposed to his contractual

duty to the first respondents. It could not have been said

that the identity of customers was confidential information,

given the public nature of the business. While there may

have been a breach of duty by the first appellant in seeking

to compete with the second respondent while still a

director, no identifiable loss flowed from that breach. It

was the subsequent establishment of the competing business

which caused any loss. It would be a pretence to suggest

that the earlier canvassing or disclosure of the outcome

thereof caused such loss. As to allegation (b) above, there

was simply no evidence of inducement of the first appellant

by the third appellant. As I have said, such an allegation

is inconsistent with the view that the latter acted as the

former's creature.

As to allegation (c) above, it was said that Dalton's

duty was not to inflict harm on the second respondent's

business and not to further the interests of a possible

competitor. The advice about machinery and equipment was

given on 25 April, 1989 before Exelby became a director of

the third appellant. The third appellant was not

responsible for Peter Exelby's conduct at that time. As for

49

canvassing customers, Dalton left the second respondent's

employ on 16 May, 1989. Only canvassing between 3 and

16 May could be attributable to the third appellant. Before

that date, the third appellant had no connection with the

Exelbys and after that date, Dalton was no longer an

employee of the second respondent. It is therefore

necessary to consider when such canvassing occurred.

Dalton accompanied the first appellant when he saw the

customer, Shelton. Shelton said that meeting occurred on a

Sunday in the winter of 1989, which would have been after

16 May. Counsel for the respondents sought to establish

that it occurred earlier, but he also suggested that Dalton

was not present at that conversation. See p.B216 of the

record. His Honour found (at p.D26) that the first

conversation between Shelton and the first appellant

occurred in March or April, 1989. Even if Dalton were

present, the conversation was prior to 3 May.

Dalton also saw the customer, William Gregory Bell.

Bell was unable to fix the date of the meeting, but he

considered that it occurred not more than a month before the

date of the local golf championships, which he was also

unable to fix. His Honour found that the meeting probably

occurred in May, but that did not establish that it occurred

while Dalton was employed by the second respondent. There

was, in any event, no evidence that Peter Exelby or the

third appellant procured Dalton to canvass customers before

he left the second respondent's employ. There was no

evidence inculpating the third appellant in any actionable

50

breach of fiduciary duty. It follows that the judgment

against the third appellant must be set aside.

QUANTUM

I deal firstly with the claim in contract. At the time

of entering into the contract, the reasonably foreseeable

loss likely to flow from breach of the restraint clause was

reduction in the business flowing to the second respondent,

and therefore a diminution in either the value of the first

respondents' shares or their entitlement to dividends and/or

other financial benefits derivable from the second

respondent, were it trading as it would have done in the

absence of such breach. As the restraint was for a period

of two years, identification of the net loss suffered by the

second respondent during those two years was obviously a

good starting point for calculating damages.

His Honour accepted the approach adopted by the

witness, Pastellas, an accountant. His report is ex.15.

Certain amendments were made in the course of the trial.

These appear in ex.47. One criticism of the quantum of the

award was that his Honour used an uncorrected figure from

ex.15, $161,788, corrected to $161,169 in ex.47. This

appears to be so. At the trial, the respondents claimed

lost profit during the period of the restraint plus an

amount for the lost capital value of the business, both in

the hands of the second respondent and in the hands of the

first respondents as shareholders. This claim was

successful at trial but was abandoned at the commencement of

the appeal. The need to establish the value of lost

51

business led Mr Pastellas to try to quantify the future

annual loss attributable to the breach. The figure

mentioned above represented that loss. It was also used to

calculate the loss incurred during the restraint period.

As the trial occurred in mid-1992, the restraint period had

already expired, and actual trading figures were available

for both businesses.

These actual figures would probably not have given the

whole story. Had the first appellant honoured the restraint

clause, the second respondent would have enjoyed the benefit

of a "run-off" period after the expiry of the restraint

period, during which the third appellant was establishing

its business. His Honour inferred as much. In this aspect

of the award, the actual figures for 1989-91 would also have

given a better guide than Mr Pastellas' notional prospective

annual figure. His Honour took the latter figure and

extended it for 21 months, adding thereto a further sum of

$40,000. The choice of 21 months rather than the 24 months

of the restraint period reflected the fact that the third

appellant had not traded during the first three months of

that period. The sum of $40,000 represented the estimated

loss for a three month "run-off" period. It is roughly one

quarter of Mr Pastellas' projected annual figure. The

appellants submitted that his Honour ought to have used the

actual figures in these calculations. There is substance in

this submission.

The appellants were content to base their submissions

upon Mr Pastellas' Appendix 9 which appears in its amended

52

form at p.C429 of the record. This shows the third

appellant's gross billings to former customers and one

potential customer of the second respondent for the periods

from 10 September, 1989 to 30 June, 1990 and 1 July, 1990 to

30 June, 1991. The appellants criticised the inclusion of

the sum of $234,063 for the potential customer, saying that

the second respondent had only a chance of securing that

order, even in the absence of competition from the third

appellant. There was also a wider submission that the

estimated lost profit should be generally discounted to

reflect the possibility that other customers who left the

second respondent for the third appellant might have left in

any event and gone to other suppliers in the area. There

was evidence of such other suppliers.

The particular order in question was from Bellgrove

Piggeries. The witness, Wall said that he made the decision

that Bellgrove Piggeries seek a new supplier, and that the

order in question was his order. He was dissatisfied with

his existing supplier and so approached both the third

appellant and the second respondent. He received a better

offer from the third appellant and so placed the order

there. It was a reasonable inference that in the absence of

the third appellant, the business would have gone to the

second respondent. That inference could have been drawn

with sufficient certainty to justify his Honour in making no

discounting.

As to the broader issue, whilst there might, in the

absence of the third appellant, have been some coming and

53

going of customers, there was no reason to believe that the

second respondent's business would have suffered a net

reduction during the restraint period, given the relatively

short time involved. I would not be minded to interfere in

his Honour's treatment of the Bellgrove transaction nor

otherwise to discount the calculation of lost income.

Mr Pastellas used historical evidence as to

profitability, derived from the records of both the second

respondent and the third appellant, to calculate the gross

profit margin (i.e. gross sales less cost of raw materials).

He chose 19.23 per cent. This approach was not challenged

by the appellants. Mr Pastellas then deducted a further one

per cent of gross sales to represent the extra cost incurred

to produce and distribute the additional product, including

overheads. That figure was said to include allowances for

bad debts, electricity, motor vehicle expenses, truck

expenses, stationery, wages, rates and other items of this

kind. At p.357, Mr Pastellas said that .3 per cent was for

bad debts and .2 per cent was for truck expenses related to

delivery of goods. He had assumed, and his assumption was

supported by his Honour's findings, that the second

respondent's operation contained sufficient excess capacity

to permit increase in sales without necessarily incurring a

proportionate increase in outgoings. Thus, outgoings would

not necessarily increase proportionately with increases in

sales.

The major challenge to this assumed figure of one per

cent was that historical figures indicated that freight and

54

packaging charges represented about 2.5 per cent of gross

sales. Because the second respondent delivered the product

to properties, it is probable that the cost of freight would

bear a fairly direct relationship to the volume of sales.

Similar inferences might be drawn about the cost of

packaging. This criticism was accepted by the respondents

in the course of argument. The appellants submitted that we

should adopt a figure of 4 per cent instead of Mr Pastellas'

1 per cent. This figure was derived by assuming that

whatever Mr Pastellas allowed for in his one per cent, it

did not include anything for freight and packaging. The

appellants submitted that we should add 1 per cent to 2.5

per cent, yielding 3.5 per cent then add another .5 per cent

for other unspecified outgoings. The respondents, on the

other hand, submitted that we should take the 2.5 per cent,

add .3 per cent for bad debts referred to by Mr Pastellas

and round off to 3 per cent. Giving as much weight as I can

to his Honour's acceptance of Mr Pastellas' approach, I am

inclined to assume that Mr Pastellas wrongly included .2 per

cent for transport. I would add .3 per cent for bad debts

to the actual transport figure of 2.5 per cent, giving 2.8

per cent. Mr Pastellas considered that an additional .5 per

cent should be added for other unspecified items. I would

therefore choose a figure of 3.3 per cent.

The appellants also attacked his Honour's allowance of

$40,000 for the so-called "run-off" period, submitting that

on the proper construction of the restraint clause, the

first appellant was not restrained from participating in the

55

establishment of a business during the restraint period,

provided there was no actually trading. I infer that his

Honour approached this problem upon the contrary basis that

the first appellant was so restrained. I base this

inference upon the passage at the foot of p.D58:-

"The evidence shows that Cradex mill was built andbegan operating within 3-4 months. "

In the context, this suggests that his Honour proceeded

upon the basis that no step should have been taken to

establish the mill until after the expiry of the restraint

period. The respondents also submitted that in any event,

the second respondent's loss continued after the expiry of

the restraint period because, as a result of the breach, the

third appellant was in a much better trading position at

that time and thereafter than would have been the case had

it only then commenced to trade.

The first appellant was restrained from exercising,

carrying on or being concerned or interested in the

specified trade or business. The third appellant had no

trade or business until it commenced to trade. Preparing to

trade or carry on business is not, in my view, the same as

trading or carrying on business. I consider, therefore,

that the first appellant was entitled, during the restraint

period, to prepare to trade or to be concerned in trading

after its expiry. Nonetheless, the third appellant would

have had less impact upon the trade of the second respondent

in the period immediately after the expiry of the restraint

period, had it not commenced trading during that period.

For this reason, it was appropriate to allow some amount to

56

represent this lost protection.

One might reasonably infer that it would have taken six

months to establish the business, probably longer. The

business would have been accelerating over that period. One

might allow half of the notional lost profit for that

period. In other words, I find merit in the actual approach

taken by his Honour, despite my disagreement with his

justification for it. Of course, the actual figure may be

somewhat different from that chosen by his Honour in view of

the other challenges to the award.

Given the validity of many of the criticisms of the

quantum calculations, this court should address the question

of damages afresh. In so doing, I will use the historical

trading figures of the third appellant rather than the

projections by Mr Pastellas. There is no evidence that the

second respondent suffered any loss as a result of the first

appellant's conduct other than by loss of custom to the

third appellant. An examination of custom attracted by the

third appellant should therefore give a reasonable

reflection of the quantum of the loss. This approach should

avoid including in the calculation amounts properly

attributable to factors unrelated to the first appellant's

breach, such as errors in judgment by officers of the second

respondent, seasonal variations and the ordinary comings and

goings of clients.

Lost profit may be calculated as follows:-

10.9.89-30.6.90 1.7.90-30.6.91

Cradex billings $943,220

57

$1,212,974Bellgrove billings $234,063

$1,177,283

Estimated gross profit at 19.23% $226,391 $233,255

Less overheads at 3.3 per cent $38,850 $40,028

$187,541 $193,227

Use of the figure for 1990-1991 is not strictly correct

because the restraint clause expired on 19 June, 1991. That

is a matter to be considered in calculating the "run-off"

amount. I have chosen a three month period for that

exercise, that is one quarter of the loss for 1990-91, or

about $48,000, which should be reduced for the reason given

above. A figure of $42,000 is indicated.

The second respondent's pre-tax loss of profit was

therefore:-

1989-90 $187,541

1990-91 $193,227

run-off period $42,000

$422,768

This represents the profits lost by the second

respondent as a result of competition from the third

appellant. I am, however, concerned with claims against the

first appellant by the first respondents, as shareholders in

the second respondent, for damages for breach of contract

and by the second respondent for damages for breach of his

duty as a director.

For reasons already given, it is impossible to

attribute any loss to the latter breach. Assuming that

whilst he remained a director, the first appellant ought not

have sought to compete with the second respondent, nor to

foster any competing business, nor to alienate its staff,

nonetheless once the contract of sale was signed, the

relationship between the first appellant and the second

respondent was near its end. When he ceased to be a

director on 19 June, 1989 he was no longer restrained from

doing such things. It is impossible to identify any part of

59

the loss suffered by the second respondent as being

attributable to the first appellant's conduct in breach of

his fiduciary duties prior to his resignation as a director.

The establishment of the competing mill and its subsequent

trading activities caused the loss. The first appellant's

conduct may have led him and other people to conclude that

there was a market and encouraged them in establishing the

mill, but his conduct whilst a director cannot be seen as

itself causing loss. Given the absence of damage, the

finding of breach of directors' duties has no consequence.

It should be set aside.

I return to the first respondents' claim against the

first appellant. After 19 June, 1989 the first respondents

were the sole shareholders in the second respondent. I

infer that the demonstrated loss of profits by the second

respondent resulted in a loss to the first respondents,

either by way of a diminution in the value of their shares

or a lost opportunity for a dividend. Of course, had such

profits been derived by the second respondent, they would

have been taxable, at least to the extent that the second

respondent demonstrated a profit for the tax years in

question. In fact, a small loss was shown in 1989-90, but

it was not suggested that this was relevant for present

purposes. The first respondents submitted that any award in

this case will be taxable in their hands, whilst any

dividend would not have been taxable. The appellants did

not dispute that the award of damages would be taxable in

the hands of the first respondents but claimed to reserve a

right to do so at some later stage. However, they

60

challenged the assertion that the first respondents should

recover compensation for any increased tax liability.

Similar questions have arisen on numerous occasions

since the matter was considered by the House of Lords in

British Transport Commission v Gourley [1956] AC 185, where

it was held that in calculating damages for lost income as a

result of personal injuries, regard should be had to the tax

which the plaintiff would have paid on that lost income. In

Cullen v. Trappell (1980) 146 CLR 1, the High Court endorsed

the principle in Gourley, holding that in assessing such

damages, the Court should also take into account income tax

to be assessed on income to be generated from the damages.

It has been said that in order that the proposition in

Gourley apply, two conditions must be satisfied:-

"The first being that the amounts for the loss ofwhich damages are awarded would, if they had beenreceived by the plaintiff, have been subject totax. The second is that the damages awarded tothe plaintiff would not be subject to tax."

See Air Express Ltd v. Ansett Transport Industries

(Operations) Pty Ltd. (1979) 146 CLR 249 at 302 per Aickin J

at first instance, apparently approved on appeal.

This is certainly the factual context in which the

question arose in Gourley (supra), although common sense

suggests that it is not the only circumstance in which the

question of income tax will be relevant in assessing

damages. There, the immediate question was whether pre- or

post-tax income gave the appropriate level of damages, but

the real question was as to the amount necessary to place

the plaintiff in the position he would have been in had he

not been negligently injured. Cullen v. Trappell (supra)

61

and the earlier case, Atlas Tiles v Briers (1978) 144 CLR

202, involved the same general question. Air Express

(supra) concerned the assessment of damages flowing from an

interlocutory injunction where the plaintiff failed in the

action. The issue was the need to show a causal connection

between the injunction and the alleged loss. In the

present case, the figure of $422,768 as calculated above, is

the net lost income of the second respondent before tax. I

can see no reason to doubt that such sum, in the hands of

the second respondent and in the absence of other allowable

deductions, would be liable to income tax. Prima facie, one

would think that, therefore, the after-tax profit in the

hands of the second respondent would be the maximum amount

recoverable by the first respondents. They could hardly

have received more than that sum. The first respondents,

however, submit that their loss is greater because, in their

hands as dividends, the amount would not have been taxable

whereas the award will attract taxation. The entitlement or

otherwise to any allowance for that fact should be

determined by reference to the appropriate measure of

damages.

In the present case, we are concerned with a claim in

contract. The appropriate measure of damages is that

prescribed in Hadley v. Baxendale (1854) 9 Ex. 341, as

explained in Victoria Laundry (Windsor) Ltd. v. Newman

Industries Ltd (1949) 2 KB 528 at p.539. In the latter

case, the Court of Appeal summarized the rule as follows:-

"What propositions applicable to the present caseemerge from the authorities as a whole, including

62

those analysed above? We think they include thefollowing:-

(1) It is well settled that the governing purpose ofdamages is to put the party whose rights have beenviolated in the same position, so far as money cando so, as if his rights had been observed ... Thispurpose, if relentlessly pursued, would providehim with a complete indemnity for all loss defacto resulting from a particular breach, howeverimprobable, however unpredictable. This, incontract at least, is recognized as too harsh arule. Hence,

(2) In cases of breach of contract the aggrieved partyis only entitled to recover such part of the lossactually resulting as was at the time of thecontract reasonably foreseeable as liable toresult from the breach.

(3) What was at that time reasonably so foreseeabledepends on the knowledge then possessed by theparties or, at all events, by the party who latercommits the breach.

(4) For this purpose, knowledge _possessed' is of twokinds; one imputed, the other actual. Everyone,as a reasonable person, is taken to know the_ordinary course of things' and consequently whatloss is liable to result from a breach of contractin that ordinary course. This is the subjectmatter of the _first rule' in Hadley v. Baxendale. But to this knowledge, which a contract-breakeris assumed to possess whether he actuallypossesses it or not, there may have to be added ina particular case knowledge which he actuallypossesses, of special circumstances outside the_ordinary course of things,' of such a kind that abreach in those special circumstances would beliable to cause more loss. Such a case attractsthe operation of the _second rule' so as to makeadditional loss also recoverable.

(5) In order to make the contract-breaker liable undereither rule it is not necessary that he shouldactually have asked himself what loss is liable toresult from a breach. ... It suffices that, if hehad considered the question, he would as areasonable man have concluded that the loss inquestion was liable to result ...

(6) Nor, finally, to make a particular lossrecoverable, need it be proved that upon a givenstate of knowledge the defendant could, as areasonable man, foresee that a breach mustnecessarily result in that loss. It is enoughthat he could see that it was likely so to result.

63

It is indeed enough ... if the loss ... is a_serious possibility' or a _real danger'. Forshort, we have used the word _liable' to result. Possibly the colloquialism _on the cards'indicates the shade of meaning with some approachto accuracy."

Recently, the High Court has made it clear that the

distinction between the two rules in Hadley v. Baxendale

should not be too vigorously applied. See Hungerfords v.

Walker (1988) 171 CLR 125, especially at p.142. The

majority in that case adopted foreseeability as the true

limitation of damages for breach of contract. Hadley v.

Baxendale should therefore be seen as exemplifying the way

in which that general test will often apply in assessing

damages for such a breach. The two rules should be seen as

distinguishing between the proof of foreseeability by

reference to common knowledge on the one hand, and in the

light of special knowledge on the other. Whether one

applies either of the rules in Hadley v. Baxendale or the

broader approach adopted in Hungerfords (supra), the result

is the same. In order that damages be recoverable for

breach of contract, those damages must be reasonably

foreseeable.

This case has proceeded upon the basis that it was

reasonably foreseeable that the first respondents would, as

a result of the first appellant's breach, lose the benefit

of the receipt by the second respondent of the proceeds of

sales wrongfully redirected to the third appellant. There

is no difficulty in concluding that such loss was reasonably

foreseeable by a person in the position of the first

appellant. Whether the loss represented diminished value of

64

the assets of the second respondent, and therefore of the

first respondents' shares in that company, or reduced

dividends has not, to date, been important. Loss incurred

in either way was reasonably foreseeable. However, it does

not follow that further loss as a result of the incidence of

income tax was also foreseeable and, therefore, recoverable.

The first respondents had to demonstrate both that they had

suffered such additional loss and that such loss was

reasonably foreseeable.

The learned trial judge awarded damages to the first

respondents under two headings, one representing the lost

capital value of their shares and the other, lost income.

With respect to the former, his Honour also allowed over

$500,000 to represent the probable incidence of taxation

upon the award which was itself in excess of $800,000. As I

have already said, this head of damages (including the

allowance for taxation) was abandoned at the outset of the

appeal.

After considering the relevant legislation, his Honour

concluded at p.D64 of the record as follows:-

"It seems to me therefore that given that thefirst plaintiffs are entitled to have therestraint on trade covenant properly performed itwas in my view reasonably foreseeable by the firstand second defendants that their breaches of therestraint on trade covenant would expose the firstplaintiffs to tax under Part IIIA on an award ofdamages for any loss in value of the plaintiffs'shares in Wenmar caused by such breaches."

This inference appears to have been based upon the

terms of the income tax legislation rather than upon an

assessment of what was reasonably foreseeable as a result of

the application of that legislation to the affairs of the

65

first and second respondents. Obviously, when one speaks of

reasonable foreseeability in this context, one is speaking

of the consequence of the application of the taxation

legislation, not of the probable interpretation of it. In

any event, as I have said, that aspect of the claim has been

abandoned. I mention the matter only to demonstrate that

this finding should not be taken to be a finding of fact as

to the general foreseeability of loss as a result of the

incidence of income tax in all circumstances.

As to the award for lost income, his Honour was of the

view that the amount would be taxable in the hands of the

second respondents, but did not make any further allowance

to compensate for that fact, apparently relying upon the

decision of the Court of Appeal in London and Thames Haven

Oil Wharves Ltd. v. Attwoll [1967] Ch 722 at p.815, although

that case appears to be authority only for the proposition

that compensation for failure to receive a sum, which would

have been taxable in the hands of the claimant, is to be

treated for income tax purposes in the same way as would the

lost sum. This is a different question from the present

problem which assumes a somewhat different proposition.

I am unable to infer that the tax implications for the

first respondents would have been the same whether the net

lost profits came to them as dividends or were retained by

the second respondent. I am also unable to infer which of

those courses was more likely in the circumstances of this

case. There was no cross-appeal against his Honour's

refusal to allow any sum to compensate for this allegedly

increased tax liability.

66

None of the written submissions on behalf of the

respondents, provided to us before or during the argument of

the appeal, raised this question. Indeed, written

calculations submitted by the respondents in the course of

argument indicated that the first respondents accepted that

their damages should be calculated having regard to the

notional after-tax profit of the second respondent. This

was in contrast to the treatment of the second respondent's

claim which, it was submitted, should have been based on the

pre-tax figure because the second respondent would be taxed

on the award. The first occasion on which the respondents

suggested that the first respondents' damages should be

calculated to include an amount for increased tax liability

appears at p.95 et seq of the transcript of argument, when

the issue was raised by a member of the court. The

respondents also submitted a written submission to that

effect after the hearing of the appeal.

The learned trial judge was not asked to make factual

findings to support such a claim. Findings as to how the

profit would have been dealt with by the second respondent

(determined by reference to the way in which the affairs of

the second respondent had been conducted in the past and the

tax advantages of the various courses open to the

respondents) were necessary to a consideration of any such

claim. Sections 160AQT and 160AQU of the Income Tax

Assessment Act, to which we were referred by the

respondents, govern the circumstances in which shareholders

will avoid tax on dividends. Both sections also involve the

establishment of factual matters which seem not to have been

67

ventilated at the trial. Most importantly, the issue of

foreseeability was also not addressed. No such claim can be

entertained at this late stage in the absence of appropriate

findings of fact.

The total pre-tax loss of profit was $422,768, which I

reduce by 39 per cent (the relevant tax rate for the second

respondent) to $257,888. Had the second respondent been

successful in its claim against the first appellant, the

loss to the first respondents may have been reduced, but

that claim was worthless. I fix damages at $257,888.

The learned trial judge allowed interest at 10 per cent

per annum from 19 June, 1991 for 15 months. There was no

challenge to that exercise of the discretion. This shows

the amount of $32,234 for interest. The judgment for the

first respondents in favour of the first appellant should

therefore be varied accordingly. The judgments against the

second and third appellants should be set aside. The

respondents' claims against them should be dismissed.

Apart from the special order made at the trial relating

to the adjournment, the orders as to costs should be set

aside and the following orders made in lieu thereof:-

(a) That the first appellant pay the first respondents'

costs of the action, other than the costs occasioned by

the adjournment of the trial on 29 May, 1992 and the

costs of and incidental to the claim for lost value of

the second respondent's business;

(b) That the respondents pay the first appellant's costs of

the latter issue;

(c) That the respondents pay the second and third

68

appellant's costs of and incidental to the action.

As to the appeal, a number of grounds were advanced and

abandoned, but on the other hand, substantial concessions

were made by the respondents. In the circumstances, it is

appropriate that costs of the appeal follow the event. The

first and second respondents are to pay the appellants'

costs of the appeal.

There is another matter about which I should comment.

The appellants originally advanced as a ground of appeal,

quite serious criticism of the conduct of the learned trial

judge. This ground was abandoned. Such serious allegations

ought not be made without careful consideration. To reflect

adversely upon the judge's conduct of the trial in a notice

of appeal and then abandon the ground in question suggests

less than appropriate care over a very serious matter. Such

allegations should not be used by counsel to relieve

frustration at an unfavourable result.

THE COURT OF APPEAL [1994] QCA 506 SUPREME COURT OF ...

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