Court of Appeal (Qld)|1994-11-28|Before: Pincus J, Dowsett J

Exelby, Exelby & Cradex Pty Ltd v Tuite, Tuite & Wenmar Stockfeeds Pty Ltd [1994] QCA 506 (28 November 1994)

THE COURT OF APPEAL [1994] QCA 506

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 [1981] HCA 75; (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.

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

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APPEAL ALLOWED.
SET ASIDE THE ORDERS OF THE LEARNED PRIMARY JUDGE.
JUDGMENT FOR THE FIRST RESPONDENTS PATRICK THOMAS TUITE AND MARIE JANECE TUITE, AGAINST THE FIRST APPELLANT RUSSELL PETER EXELBY IN THE SUM OF $422,768 TOGETHER WITH INTEREST OF $145,710.
THE CLAIMS OF THE FIRST RESPONDENTS AGAINST THE SECOND APPELLANT WENDY CHEREE EXELBY, THAT OF THE FIRST RESPONDENTS AGAINST THE THIRD APPELLANT CRADEX PTY LTD, AND THAT OF THE SECOND RESPONDENT WENMAR STOCKFEEDS PTY LTD AGAINST THE APPELLANTS, ARE DISMISSED.

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 COSTS OCCASIONED BY THE ADJOURNMENT OF THE TRIAL ON 29 MAY 1992, WHICH SHALL BE PAID BY THE FIRST RESPONDENTS TO THE FIRST APPELLANT;

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

(C) THE SECOND RESPONDENT IS ORDERED TO PAY THE COSTS RELATING TO ITS CLAIM AGAINST THE APPELLANTS.

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

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CATCHWORDS: CONTRACT - RESTRAINT OF TRADE - DAMAGES FLOWING FROM BREACH - Appellant caused rival feed mill to be set up in breach of restraint of trade covenant - whether Second Appellant participated in the breach by acquiescence in and approval of husband's conduct.

EQUITY - FIDUCIARY DUTIES - former company director canvassed customers for rival feed mill - whether damage caused by such breach - whether Second Appellant in breach - whether Third Appellant company assumed responsibility for First Appellant's breach, where First Appellant not director or shareholder of company.

DAMAGES - APPEAL - MEASURE OF - breach of contract - whether damage caused outside restraint period can be assessed - 3 month run-up period.

DAMAGES - APPEAL - MEASURE OF - whether adjustment of award of damages should be made to take into account assessment of income tax.

British Transport Commission v. Gourley [1955] UKHL 4; [1956] A.C. 185.

Cullen v. Trappell [1980] HCA 10; (1980) 146 C.L.R. 1.

PRACTICE - JUDGMENTS AND ORDERS - COURT OF APPEAL - differently constituted majorities on various aspects - method of determining order of court.

Woolworths Ltd v. Kelly (1990) 22 N.S.W.L.R. 189

New South Wales Medical Defence Union Ltd v. Crawford [No. 3] (N.S.W. Court of Appeal, 23 September 1994)

Counsel: Mr H G Fryberg Q.C. with him Mr P Hack for the appellants.

Mr R Chesterman Q.C. with him Mr R C Morton for the respondents.

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

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 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.

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, 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 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 time as a director of Wenmar, that the decisions in relation to the company so far as you and your husband 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, 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 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.

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 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 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 have entered into an ostensible transaction as a disguise to conceal their real transaction", per Toohey J in Re Public Services Federation; Ex parte A-G (W.A.) [1993] HCA 30; (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, 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 that particular 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 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.

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.

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 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 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, 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 the plaintiff and the robbery of the company. The deceit on the plaintiff causes the plaintiff no loss which is separate and distinct from the loss to the company. The deceit was merely a step in the robbery. The plaintiff obviously cannot recover personally some 100,000 pounds damages in addition to the 100,000 pounds damages recoverable by 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 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 [1944] ArgusLawRp 11; (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.

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 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 have mentioned cannot be upheld.

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.

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 [1955] UKHL 4; [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] HCA 10; (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 judgments of Gibbs and Stephen JJ in Atlas Tiles Limited v. Briers [1978] HCA 37; (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 loss of which damages are awarded would, if they had been received by the plaintiff, have been subject to tax. The second is that the damages awarded to the plaintiff would not be subject to tax": Air Express Ltd v. Ansett Transport Industries (Operations) Pty Ltd [1981] HCA 75; (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.

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.

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.

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 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.

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 restraintoftrade clause and other associated causes of action. The award included an amount of $808,940 described 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 in any stock food production business in the South Burnett area for a period of two years from the date of settlement. It is acknowledged that this covenant does not affect the Vendor's right to trade in wholegrains or the lot feeding of cattle during 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 agreement (ex.2) was executed,providing as follows:-

"(a) The Vendors shall not exercise, carry on or be in any manner whatsoever either directly or indirectly concerned or interested either by themselves or person, company or corporation in the trade or business of stock food production within an area defined by a line drawn on the map from Hervey Bay and thence to Gympie and thence to Moore and thence to Dalby and thence to Eidsvold and thence to Hervey Bay, hereinafter called 'the defined area' during a period of two years from the date hereof or permit their personal name to be used in carrying on or in connection with any such business or supply or solicit any of the existing customers of the Company. The Vendors acknowledge the Company has existing customers or contacts throughout the said defined area and specifically acknowledges that valuable consideration has passed from the Purchasers to the Vendors in respect of this covenant.

(b) The Purchasers acknowledge the within Covenant does not affect the Vendors right within the said period of two years to carry on the following businesses within the defined area:-

(ii) to mix and supply stock feed for lot feeding of 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 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 grainmixer 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 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.

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

"The above acts on the part of the first defendant were done on his own behalf and on behalf of the second defendant who acquiesced in such behaviour."

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.

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 first appellant, most of which I have recorded in the introductory paragraphs above, and concluded that:-

"... Wendy Exelby approved of Russell's foregoing conduct. ... I am satisfied that whatever decision Russell made in respect of a new feed mill and financing of it she left to Russell and was prepared to abide by and be part of that decision and its consequences ...

... whatever arrangements Russell made in relation to the new feed mill were acquiesced in by her and done with her approval. I also find that it is most unlikely that Mr and Mrs Oliver would risk a guarantee liability up to $70,000 in a field in which the apparent owners, Peter and Doris Exelby had had no prior experience unless the guarantee was in reality given because their daughter was involved in that venture.

I have concluded that the second defendant is liable for Russell Exelby's breaches of the restraint of trade covenant which I have earlier set out, she having approved of Russell's conduct which 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 business of stock food production within (the area) during a 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 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.

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;

(d) That she permitted her name and the financial records of the second respondent to be used in a lease 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. 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 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 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.;

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 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 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", 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 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 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.

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 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.

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 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 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 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 have operated its business as a facade for the first and second defendants and thus procured the first and second defendants to breach the restraints continuously up to and including 19 June, 1991. Those breaches by the first and second defendants are in most cases directly attributable to Cradex' acts. Without the corporate entity to shield their carrying on the stock feed mill the first and second defendants could not have breached the restraints as substantially as they did. Damage has 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 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 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 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 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 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 breach of fiduciary duty. It follows that the judgment against the third appellant must be set aside.

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 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 "runoff" 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 "runoff" 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 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 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 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 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 and began 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 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.

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:-

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 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 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 [1955] UKHL 4; [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] HCA 10; (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 of which damages are awarded would, if they had been received by the plaintiff, have been subject to tax. The second is that the damages awarded to the plaintiff would not be subject to tax."

See Air Express Ltd v. Ansett Transport Industries (Operations) Pty Ltd. [1981] HCA 75; (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 posttax 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) and the earlier case, Atlas Tiles v Briers [1978] HCA 37; (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] EngR 296; (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 case emerge from the authorities as a whole, including those analysed above? We think they include the following:-

(1) It is well settled that the governing purpose of damages is to put the party whose rights have been violated in the same position, so far as money can do so, as if his rights had been observed ... This purpose, if relentlessly pursued, would provide him with a complete indemnity for all loss de facto resulting from a particular breach, however improbable, however unpredictable. This, in contract at least, is recognized as too harsh a rule. Hence,

(2) In cases of breach of contract the aggrieved party is only entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach.

(3) What was at that time reasonably so foreseeable depends on the knowledge then possessed by the parties or, at all events, by the party who later commits the breach.

(4) For this purpose, knowledge _possessed' is of two kinds; one imputed, the other actual. Everyone, as a reasonable person, is taken to know the _ordinary course of things' and consequently what loss is liable to result from a breach of contract in that ordinary course. This is the subject matter of the _first rule' in Hadley v. Baxendale. But to this knowledge, which a contract-breaker is assumed to possess whether he actually possesses it or not, there may have to be added in a particular case knowledge which he actually possesses, of special circumstances outside the _ordinary course of things,' of such a kind that a breach in those special circumstances would be liable to cause more loss. Such a case attracts the operation of the _second rule' so as to make additional loss also recoverable.

(5) In order to make the contract-breaker liable under either rule it is not necessary that he should actually have asked himself what loss is liable to result from a breach. ... It suffices that, if he had considered the question, he would as a reasonable man have concluded that the loss in question was liable to result ...

(6) Nor, finally, to make a particular loss recoverable, need it be proved that upon a given state of knowledge the defendant could, as a reasonable man, foresee that a breach must necessarily result in that loss. It is enough that he could see that it was likely so to result. It is indeed enough ... if the loss ... is a _serious possibility' or a _real danger'. For short, we have used the word _liable' to result. Possibly the colloquialism _on the cards' indicates the shade of meaning with some approach to 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 [1989] HCA 8; (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 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.

Exelby, Exelby & Cradex Pty Ltd v Tuite, Tuite & Wenmar Stockfeeds Pty Ltd [1994] QCA 506

At a glance

Court

Decision date

Before

Source

Judgment (216 paragraphs)

Exelby, Exelby & Cradex Pty Ltd v Tuite, Tuite & Wenmar Stockfeeds Pty Ltd [1994] QCA 506 (28 November 1994)

Parties

Cases Cited (4)