Fensford Pty Ltd & Ors v Nour Pty Ltd; Vella v Nour Pty Ltd [2006] VSCA 118

Court of Appeal (Vic)|2006-06-01|Before: CHERNOV, NETTLE and ASHLEY, JJ.A.

EMPLOYER AND EMPLOYEE - Contract of service - Contract of service later varied to provide for provision of services of employee to employer through employee's family company - Construction of contract - Express term of contract providing for salary to be paid at the rate of $25 per hour - Whether upon correct construction of contract salary was limited to $25 per hour - Whether judge erred in assessment of hours actually worked - Whether employees entitled to remuneration other than as expressly provided for by contract.

2 This is an appeal from a judgment for $237,596.09 and interest of $72,728.80 which was given in favour of Nour Pty Ltd ("Nour") in Commercial and Equity Division proceeding No 8031 of 2001. There is also before the court an appeal from a judgment given in favour of Nour in Commercial and Equity Division proceeding No. 4304 of 2002 which was heard at the same time and before the same judge. But we were told in the course of argument that the appellants are no longer interested in prosecuting the latter appeal. So, it will be dismissed.

Background facts

3 In or about 1984, a Californian dentist, Benson Donald McGann ("Mr McGann"), established in the United States of America a business of conducting orthodontic training seminars under the name or style of "Progressive Orthodontic Seminars" and of supplying orthodontic equipment under the name or style of "Progressive Orthodontic Supplies".

4 From about 1984 the business was conducted in the United States by an American corporation, Progressive America Inc ("PAI"), of which Mr McGann was sole shareholder and director.

5 Progressively over time, the business spread to some 12 countries throughout the world and in 1989 Nour was established as the corporate vehicle through which to conduct the business in Australia. At all relevant times Mr McGann was a director of Nour and held six of the twelve issued shares in the company while the remaining six issued shares were held by others on trust for him.

6 At all relevant times, Julie Vella ("Mrs Vella") was a trained dental nurse and dental technician andduring 1990 Mr McGann offered Mrs Vella and she accepted the position of manager of Nour at a salary of $25.00 per hour.

7 On 8 November 1990 Mr McGann procured Mrs Vella's appointment as a director of Nour. Thereafter she continued in the capacity of manager and director of the company until her death from cancer on 19 September 1999.

8 To begin with, Nour paid Mrs Vella's salary directly to Mrs Vella but, from about 1995, Mrs Vella organised for Nour to pay her remuneration to Fensford ("Fensford"), a Vella family company of which Mrs Vella and her husband Ric Vella ("Mr Vella") were directors.

9 Following Mrs Vella's death, Mr Vella for some time acted as a manager of Nour and as a de facto director of the company, and Nour continued to pay remuneration to Fensford: initially at the rate it had paid while Mrs Vella was alive and later at a reduced rate. Then Mr Vellas' services were terminated and he was removed as a director in or about May 2000.

10 Nour's claim below was for the recovery of amounts overpaid by Nour to Fensford for the services of Mrs Vella; amounts paid by Nour to Fensford for the services of Mr Vella following the death of Mrs Vella; and amounts overpaid by Nour to Fensford for rent paid to Fensford in respect of premises occupied by Nour at different times. Nour alleged that Mrs Vella as a director and Mr Vella as a de facto director procured the overpayments and payments in breach of their fiduciary duties under s.232 of the Corporations Law; that Mr Vella and Mrs Vella's estate were accountable and liable to make equitable compensation for the amounts of the overpayments and payments; and that, because of the commonality of directors as between Nour and Fensford, Fensford was liable to account as a constructive trustee as for knowing receipt of trust property.

11 As the case was conducted below, the principal issues were whether Fensford was entitled to charge Nour any more for Mrs Vella's services than salary calculated at the rate of $25.00 per hour for each hour actually worked; and whether Mrs Vella had in fact worked all of the hours for which Fensford had charged Nour.

The "administration services" fee

12 It was common ground that Mrs Vella was employed at the outset of her engagement on terms that she be paid at the rate of $25 per hour and that, as from July 1995, her remuneration had been paid to Fensford. But the parties differed as to the basis on which Fensford was payable:

• Nour's case was that it was not bound to pay anything apart from salary calculated at the rate of $25 per hour for each hour worked. Nour also claimed that Mrs Vella had not worked any more on average than 50 hours per week. Nour contended, therefore, that, of the $450,137.76 which Nour had paid to Fensford[1] by way of fees for "administration services" in the years of income ended 30 June 1995 to 30 June 2000, $200,971.09 was money to which neither Mrs Vella nor Fensford was entitled.

• Fensford's case was that Fensford was entitled to charge Nour for Mrs Vella's services at the rate of $25.00 per hour for each hour worked and also for reimbursement of superannuation, WorkCover, printing and stationery expenses, motor vehicle costs, telephone expenses and depreciation on assets owned by Mrs Vella and used in the business. According to Fensford, Mrs Vella had worked on average at least 70 hours per week. As Fensford contended, therefore, the administrative service fees charged by Fensford to Nour had been correctly calculated as representing salary computed on the basis of an average of 70 hours work per week at the rate of $25.00 per hour plus reimbursement for compulsory superannuation contributions, WorkCover levy, printing and stationery expenses, motor vehicle costs, telephone expenses and depreciation on assets made available by Fensford for use in the business.

13 The judge held that she was not satisfied that Mrs Vella or Fensford was entitled to charge anything more than for salary at the rate of $25.00 per hour for each hour actually worked by Mrs Vella, and that she was not satisfied that Mrs Vella had worked any more on average than 50 hours per week. Thus, as the judge put it, she was not satisfied that the administration services fee "included amounts attributable to any items other than Mrs Vella's salary".

14 The appellants contend that the judge was in error in a number of respects.

Hours worked

15 To begin with, the appellants say that the judge erred by basing her finding on evidence given by Ms Race as to the number of hours which Ms Race had worked as manager, in preference to evidence given by Mr Vella, Ms Piggott and nine friends and relatives of Mrs Vella as to the hours which they say that they observed Mrs Vella worked in the position. In the appellants' submission, Ms Race was an evidently biased and prejudiced witness whose evidence was to be doubted, and thus that the evidence of Mr Vella, Ms Piggott and the nine friends and relatives of Mrs Vella should have been preferred.

16 In my view that submission is not persuasive. The assessment of Ms Race's credibility was a matter for the judge and there is nothing I see or which has been suggested which precluded the judge accepting Ms Race as a witness of truth. It may be that there was a degree of animosity between Ms Race and Mr Vella, and it appears that complaints made by Ms Race to officers of PAI concerning Mr Vella led to Ms Race being appointed to the position of manager of Nour in place of Mr Vella. But Ms Race was no longer with Nour at the time of trial - indeed she had been retrenched only a short time before the trial - and so, apart from any residual animosity, she did not have an axe to grind. Nor was it put to Ms Race that she was not telling the truth.

17 With respect, it appears to me that the judge was also correct in characterising the evidence given by Mr Vella, Ms Piggot and the other witnesses as being of limited utility. Mr Vella gave evidence that Mrs Vella was always in her office; that she "could have worked sixteen hours a day on five to seven days a week"; that she regularly worked on Saturdays and holidays; and that he was the primary carer of their children. But, as the judge observed, while that sort of evidence established that Mrs Vella was a hard worker, it did not put a number on the hours that she worked.

18 Ms Piggott gave evidence that work was all that Mrs Vella ever seemed to do; that she would be working when Ms Piggott arrived in the morning and when she left to go home at night; that next morning there would be papers organised, which indicated that Mrs Vella had been working during the night, at least for a while after Ms Piggott had left; and that she estimated that Mrs Vella worked at least 65 to 70 hours per week and on average 85 to 90 hours per week when seminars were being conducted. But the judge took the view, in my opinion with justification, that Ms Piggott's estimate was inflated. It was inherently improbable that Mrs Vella worked on average as much as 70 hours per week for 52 weeks of the year and there was evidence which confirmed that impression. Friends of Mrs Vella testified that the Vella family were in the habit of attending motocross events in country Victoria at weekends. Mrs Vella also had a personal American Express card on which she was the only signatory and on which she incurred charges in country Victoria and New South Wales on nine occasions between July 1995 and September 1999. Mrs Vella had used the card as well on holidays in Rosebud, Thailand, Bali and the United States (where Mrs Vella took her two elder children) for a total of something over 40 days, and it was not suggested that the time in the United States (or elsewhere out of Australia) was associated with Mrs Vella's position at Nour. As the judge said, those charges were enough in themselves to indicate that the evidence of Ms Piggott as to the number of hours worked by Mrs Vella was exaggerated.

19 The other witnesses, who were friends of Mrs Vella, gave evidence that whenever they went to Mrs Vella's house she appeared to be working. But, as the judge said, although that too confirmed the impression that Mrs Vella was a hard worker, it equally did not put a number on the hours that she worked. Plainly, there was no necessary inconsistency between the friends' evidence and the improbability that Mrs Vella worked any more on average than 50 hours per week for 52 weeks of the year.

20 The appellants contend in the alternative that, even if it were open to the judge to prefer Ms Race's testimony as to the number of hours worked, the judge erred by leaving out of account important passages of Ms. Race's evidence.

21 The judge summarised the effect of Ms Race's evidence as follows:

" Elaine Race was employed by Nour from May 1999, when Mrs Vella was already ill, until March 2003. She said that when she commenced working for Nour Mrs Vella was very ill and sometimes unable to attend the office, and when there would work for an hour or so at a time. When she took over Mrs Vella's duties she worked 40 hours per week on average and 70 hours per week when there were seminars. There were 24 seminars per year, which she said would probably account for about twenty weeks.

...

...

...The evidence of Mrs Race, who performed similar duties at Nour, is of most assistance. That evidence indicates that Mrs Vella would have worked on average 40 hours per week for 32 weeks of the year and 70 hours per week for 20 weeks of the year, giving an average of 51 hours per week for every week of the year. That calculation makes no allowance for holidays or illness. If an allowance of one hour per week is made to cover those two factors, the average figure is 50 hours per week, as the plaintiff contends.

22 In the appellants' submission her Honour's summary overlooked that Ms Race also said:

• In evidence in chief, that she was paid at the rate of $20 per hour[2] and, in cross examination, that in the first two full fiscal years in which she worked for Nour she was paid in the order of $60,000 per year.[3]

• In cross-examination, that after she took over the role of manager of Nour in May 1999 she was working 60 to 70 hours per week and, on one view of her evidence, 80 hours per week.[4]

23 The appellants say that those further aspects of Ms Race's testimony imply that she worked on average at least 58 hours per week for 52 weeks of the year, even before she assumed the role of manager, and that she worked on average in the order of 70 hours per week for 52 weeks of the year, after she took over as manager. In turn they say that that implies that Mrs Vella is likely to have worked considerably more than 50 hours per week for 52 weeks a year when she was in the role of manager. Further, inasmuch as the judge's reasons say nothing of those further aspects of Ms Race's testimony, one is left in the dark as to how the judge resolved the inconsistency. Hence, in the appellants' submission, the judge's reasons are inadequate.

24 With respect, I think that there is substance in that complaint. Where a judge rejects or discounts relevant and cogent evidence, the judge should assign reasons for its rejection or discount.[5] Similarly, where a judge accepts part of the evidence in preference to other significantly inconsistent parts of the evidence, the judge should refer to the inconsistency and resolve the apparent disparity. If a judge fails to adopt that course, he or she is at risk of error[6] which vitiates the judge's reasoning.[7] Evidently, there was an inconsistency between so much of Ms Race's evidence as the judge summarised, and therefore presumably relied upon, and the further aspects of Ms Race's evidence to which the judge did not refer, and therefore presumably rejected. Accordingly, I accept the appellants' submission that the judge should have referred to the inconsistency and dealt with it, specifically, by explaining why it did not affect her Honour's conclusion. As the reasons for judgment stand, it is not apparent whether her Honour turned her mind to the effect of the inconsistency or, if she did, by what process of reasoning she concluded that it was insignificant. In my view that is an error which vitiates the reasoning process.

25 It is true, as the respondent contended, that Ms Race qualified her evidence about working 60 to 70 hours per week in the role of manager. She added that approximately half of that time was spent running seminars, and that the balance was devoted to what she described as "mopping up", and she explained that further by saying that:

"With the moves [of premises following the retrenchment of Mr Vella] and with the legal ramifications of being a director, I haven't - probably double the work. That doubled the workload if you like."[8]

But then she went on to say that, in the last four months before she was retrenched, which was several years after the change of premises and one might have thought after she had ceased to have much to do with the conduct of the proceedings, she worked on average about 60 hours per week for about four months.[9]

26 The net effect of Ms Race's evidence appears, therefore, to be that she was likely to have worked in the role of manager on average around 60 hours per week, and that was apart from any additional work which may have been associated with the change of premises and the institution of proceedings. Thus assuming, as the judge did, that Ms Race and Mrs Vella worked about the same number of hours each week in the position of manager, it follows that Mrs Vella is likely to have worked around 60 hours per week in that position.

27 That is not necessarily to deny that it was open to the judge to find that the figure was only 50 hours per week. It may be that, if her Honour had satisfactorily resolved the inconsistencies in Ms Race's evidence and still come to the conclusion that 50 hours was the correct figure, her assessment would have been unassailable. But, as I say, I regard the judge's failure to resolve the inconsistencies as an error of law which vitiates her reasoning on the point, and in those circumstances it falls to this court to make its own assessment on the basis of the evidence before it.[10]

28 It is then necessary to make an allowance for holidays and other down time and, with respect, I think that the judge was right to allow at least one hour per week as she did. But in reality it seems that Mrs Vella's holidays and other downtime would have been a good deal more than that. An allowance of only one hour per week amounts to less than one week per year and, when one bears in mind the weekends at motocross and the sorts of trips and holidays evidenced by Mrs Vella's credit card statements, an estimate in the order of four weeks per year would surely be closer to the mark.

29 An allowance of four weeks holiday and down time each year would reduce the weekly average hours worked from 60 to 55 hours per week for each of the 52 weeks of the year. That is the amount which I would allow.

Conflation of issues

30 The appellants next refer to the passage in the judge's reasons for judgment in which her Honour said:

"On the evidence before me, I cannot find that the 'administration services' fee paid to Fensford included amounts attributable to any items other than Mrs Vella's salary."

The appellants submit that it shows that the judge erred by conflating two separate issues of whether Fensford was entitled to charge Nour for anything other than Mrs Vella's salary and whether in fact the administrative services fees which it charged included anything other than Mrs Vella's salary.

31 I do not accept that submission. It is apparent from reading the judge's reasons as a whole that her Honour did find that Fensford was not entitled to charge for anything other than Mrs Vella's salary at the rate of $25.00 per hour worked. As her Honour put it:

"Mr McGann stated that his best recollection was that Mrs Vella was hired at $25 per hour, but it could have been $16 per hour, and that there was no written contract of employment. Samantha Piggott ("Ms Piggott"), who was employed by Nour from August 1997, said that Mrs Vella had told her that she was paid $25 per hour. This is the only evidence of the terms on which Mrs Vella was employed, save that Mr McGann said that he was later made aware of the compulsory payment of superannuation contributions under Australian law, and contributions were paid in respect of Mrs Vella. I find, on the balance of probabilities, that Mrs Vella was paid by Nour at the rate of $25 per hour. There is no evidence that she was entitled to receive any other benefits from Nour save the compulsory superannuation contribution, and no such entitlement is pleaded by the defendants. There is no evidence relating to the superannuation fund, save that contributions totalling $26,879.48 were paid by Fensford to FIA Insurance Group on Mrs Vella's behalf between May 1994 and August 1999."

...

Mr Anderson in a letter to Mr McGann dated 9 February 2000 said that the administration fee paid to Fensford 'was not only for Julie's wages but covered other costs that she incurred in managing the business for you.' He lists a number of line items as expenses paid by Fensford, including superannuation, Workcover, printing and stationery, motor vehicle costs, telephone and depreciation on assets owned by Mrs Vella and used in the business. However, he says at the outset of that letter that for the last 18 months to two years he had had very little involvement with Nour, to the extent that he had been unaware of Mrs Vella's illness until just before her death. There is no evidence of any agreement that those items were to be paid by Fensford and reimbursed by Nour, and Mr Anderson does not say who instructed him that this was to be the case. Mr McGann's letter of 6 March in reply to Mr Anderson's letter does not seem to me to accept what Mr Anderson is saying. The evidence of Mr McGann was that he disagreed with everything in Mr Anderson's letter."[11]

Entitlement to more than salary

32 The appellants' third contention goes to whether the judge erred in holding that Mrs Vella was not entitled to authorise payment to Fensford of amounts for the reimbursement of superannuation, WorkCover, printing and stationery expenses, motor vehicle costs, telephone expenses and depreciation on assets owned by Mrs Vella and used in the business.[12]

33 The appellants submit that it was inherent in Mrs Vella's role as manager that she had discretion to determine the contracts into which Nour should enter and thus to authorise payment to Fensford of amounts (in addition to salary) for the reimbursement of superannuation, WorkCover, printing and stationery expenses, motor vehicle costs, telephone expenses and depreciation on assets owned by Mrs Vella and used in the business.

34 I do not accept that submission either. Such an authority could not be implied as going without saying, or as necessary to give business efficacy to Mrs Vella's contract of engagement as manager, or as imported as a matter of custom or usage.[13] Nor was it within the scope of her authority as a director. It was not suggested that she was a managing director and, of itself, her office as a director would not have given her authority to vary the terms on which she had been engaged.[14] There was also the oral evidence given by Mr McGann that the idea of Mrs Vella setting her own remuneration was altogether inconsistent with the way in which his organisation operated and that he expected Mrs Vella to consult with him on anything of substance.

35 With respect, however, I disagree with the judge that the only evidence as to the terms of Mrs Vella's engagement was what Mr McGann said in evidence were its terms. It appears to me that there was more in the form of the letter sent by Nour's Australian external accountant, Mr Anderson, to Mr McGann on 9 February 2000 (after the death of Mrs Vella) and admissions against interest contained in Mr McGann's letter of response of 6 March 2000.

36 In his letter of 9 February 2000, Mr Anderson wrote:

"...

In relation to the administration fee paid to Julie's company this was made up of a monthly payment of A$5,400 paid from Supplies and also from Seminars making a total of $10,800 per month...

This payment was not only for Julie's wages but covered other costs that she incurred in managing the business for you. If Julie had been employed by you then Nour Pty Ltd would have had to pay these costs as part of their operating overheads.

As I explained, I was unaware of the financial arrangement between yourself and Julie, however, after discussions with Ric Vella he believed the wage content to be $A25/hour although he is not 100% sure. Julie worked an average of 60-70 hours per week.

Nour Pty Ltd expenses paid by Julie's company for the year ended 30/06/99 were as follows:-

$ $

Compulsory Superannuation 14606

Compulsory WorkCover 2370

Printing & Stationery 819

Motor Vehicle costs - Depreciation, Fuel,

Repairs, Registration & Insurance 40711

(Car use extensively in business)

Less Private Use Paid by Julie 5399 35312

Depreciation on Computers & other

Assets owned by Julie used in the Business 727

Telephone 2372

56566"

37 In the response of 6 March 2000, Mr McGann said:

"Thankyou for your reply regarding the salaries of Julie and now Ric plus the explanation of the other employees of the company and their duties. I was surprised to see the numbers of salary earned, especially in light of the disappointing earnings with classes full of students. We are accustomed to receiving substantial profit from locations with so many students, and the expectations were the same for Australia. The explanation does not really answer the overall question posed about salaries.

General Manager: (Ric) The agreement with Julie was in fact A$25 per hour and I do appreciate she worked long hours, especially during certain times of the year when new classes were starting (marketing and dental supplies). The hours, even if 60, only add up to $6000 per month at that rate. ($72K per year).

I understand that a separate company was established, and normal additional costs incurred by the Nour company were paid by the Vella company, justifying a higher salary base. According to the expenses, only about $20K is listed as expenses that would ordinarily be paid by the company, since a car is not usual. This brings up the total "reasonable " to $92K. I am uncertain how the additional $28K was justified in the total $120K per year salary received."

38 That exchange of correspondence confirms that Mr McGann had previously agreed that Nour was to pay salary at the rate of $25 per hour for each hour worked, and that Mr McGann was not averse to the idea that Nour should reimburse Fensford for expenses in effect incurred by Fensford on behalf of Nour.

39 With respect, I also disagree with the judge that Fensford was precluded from claiming credit for compulsory superannuation charges and WorkCover levy. There may have been no agreement as to payments other than salary at the rate of $25.00 per hour, but Nour's claim as pleaded and conducted below was that Mrs Vella was engaged as an employee at the rate of $25.00 per hour worked and the judge accepted that as an appropriate characterisation of the arrangement between Nour and Mrs Vella. Assuming it were so - and Nour does not challenge it - it would follow that Nour was under a legal obligation to pay the compulsory superannuation contribution and the WorkCover levy in respect of Mrs Vella's services as an employee. Conversely, if the correct characterisation of the arrangement were one of contract by Fensford to provide the services of Mrs Vella at a fee, as I think that it was,[15] it was conceded that the amount of the fee should have included amounts which Nour would have been bound to pay by way of superannuation contributions and WorkCover levy if Mrs Vella had remained an employee of Nour.

40 As has been seen, the judge in effect dismissed Fensford's entitlement to charge for superannuation contributions on the basis that Fensford had not pleaded the entitlement and because there was no evidence as to the amount of the entitlement. But neither of those things was a sufficient basis to deny the entitlement. Nour's claim was to recover moneys by way of equitable compensation as for money had and received by Fensford to the use of Nour. Ex hypothesi, part of the moneys which Nour sought to recover were moneys which Nour had been bound to pay Fensford to recoup Fensford for payments which Fensford had made to discharge Nour's legal obligation to pay the superannuation contribution and the WorkCover levy. To that extent there was not a total failure of consideration for the overpayments or, to put it another way, there was a right in Fensford to counter-restitution. So, to that extent, it was not unjust or unconscionable that Fensford should retain the overpayments.[16]

41 Furthermore, inasmuch as Nour's claim was for equitable compensation, it was incumbent on Nour to demonstrate that the payments which Nour had made to Fensford were excessive. As it happened, Nour went only part of the way towards that - by showing that Fensford was not entitled to charge for more than the labour, superannuation and WorkCover amounts. It remained for Nour to establish the amounts properly payable for superannuation and WorkCover and, until that was done, one could not put a figure on how much of the fees paid to Fensford were overpaid. At all events, one could not do so, without further evidence, as long as Nour continued to deny, as it did at trial, that the amounts which Nour had paid to Fensford had been calculated in accordance with the formulae set out in Mr Anderson's letter of 9 February 2000.

42 That did not mean that Nour was bound to fail. Nour's claim was for the taking of accounts and for equitable compensation in the amount found to be due. Absent sufficient evidence to make an immediate calculation, the proper course was for the judge to refer the matter to a Master to take the necessary accounts. But the point for present purposes remains that there was no reason to deny Fensford's entitlement to retain any amounts properly due for superannuation and WorkCover in addition to labour charges calculated at the rate of $25.00 per hour.

43 It was submitted for Nour that there were documents in evidence which implied that Nour had already paid amounts towards superannuation on behalf of Mrs Vella, and that they too should be brought to account. That may be so. The matter was not explored in any depth at trial and the judge did not make any findings about it. Therefore, as matters stand, I am unable to say whether any of the amounts to which reference was made were compulsory superannuation charges paid on behalf of Mrs Vella. But I accept that if Nour has paid such amounts they should be brought to account. Absent agreement as to quantum, that should be dealt with in the taking of accounts.

44 Finally, on this aspect of the matter, I note that Mr McGann signed the annual returns of Nour each year and thus approved the company's accounts each year. For that reason, it is a little surprising that he did not notice the level of administration fees paid by Nour or question what it entailed. Possibly, he did not pay close attention to the accounts. Yet that seems unlikely. As may be seen in some of the correspondence in evidence and in Mr McGann's cross-examination, he took a personal interest in the repatriation of the bulk of Nour's profits to the United States by way of management fees calculated to reduce the amount of tax payable in Australia. That suggests that he would have looked very closely at the accounts. Another possible explanation is that Fensford was not mentioned by name in the Nour annual accounts, and it is not suggested that Mr McGann saw any of the Nour management accounts in which it was mentioned. But that is not particularly convincing either. So far as can be told from the evidence, Mr McGann was not infrequently in Australia during the relevant period and in close contact with Mr Anderson. Despite those reservations, however, estoppel was not alleged.

Fees paid to Fensford after Mrs Vella's death

45 The appellants' fourth contention concerns the judge's conclusion that Fensford was bound to repay all amounts paid by Nour to Fensford in respect of the period after Mrs Vella's death.

46 The evidence established that Mr Vella was employed by Nour from about 1994 and was paid wages for the work which he did as a sort of office factotum. Following his wife's death, he took over for a time as manager of the company and acted as a director. During that period, he continued to be paid wages by Nour as an employee but he also arranged for Nour to continue to pay the same administrative services fee to Fensford that it had paid while Mrs Vella was alive.

47 The judge held that Mr Vella was entitled to retain the wages he was paid but that there was no ground for payment by Nour to Fensford of the fees for "administration services". As her Honour put it:

"Nour claims that Mr Vella arranged for amounts totalling $83,700 to be paid for 'administration services' by Nour to Fensford from October 1999 to March 2000 following the death of Mrs Vella, when Fensford no longer had any entitlement to receive moneys other than rent from Nour. I have found that the payments for 'administration services' were attributable only to payments for Mrs Vella's salary. It is admitted in response to this claim that Mr Vella received payments totalling $83,700 between October 1999 and March 2000. That admission constitutes a concession that payments to Fensford at that period were in effect payments to Mr Vella, who was at that time a de facto director of Nour and a director of Fensford. He agreed that after his wife's death he became familiar with the books of both companies and that he provided to Ms Piggott invoices from Fensford to Nour.

...

It is clear that after the death of Mrs Vella there was no ground for the payment by Nour to Fensford of the fees for 'administration services' and that Mr Vella was aware of this. He cannot have imagined that the making of those payments was in the interests of Nour. The evidence establishes that his conduct in making the payments was deliberate. I find, on the basis of ... Marchesi v Barnes,[17] that in arranging the payment of those amounts he was in breach of his duty under section 232(2) of the Law to act honestly in the exercise of his powers and the discharge of the duties of his office as a de facto director of Nour. Further, in making those payments to a company which he now controlled (and I note the concession set out in [32] above that he personally received the amount of the payments) he was also in breach of his duty under section 232(6) of the Law as well as his fiduciary duty to act honestly and faithfully in the best interests of Nour."

48 The appellants submit that the judge's finding was against evidence that Mr McGann knew and approved of Mr Vella taking over as manager of Nour upon Mrs Vella's death. They rely in particular on a number of documents which they say evidence that responsible officers of PAI were well aware that Mr Vella had taken over as manager and accepted that position. I do not think that is so.

49 The first of the documents is a group of Nour company papers, comprising minutes of meeting, annual returns and accounts signed by Mr McGann and by Mr Vella "on behalf of Julie Vella" between 22 November 1999 and 5 March 2000. Some of them were put to Mr McGann in cross-examination and he was asked what he had made of them at the time that he signed them. He was also asked whether he accepted that they showed that he was not concerned at the time that Mr Vella was acting as a director. In effect, he answered that, in retrospect, he found the fact of Mr Vella signing on behalf of Mrs Vella to be strange but that he did not accept he was aware at relevant times that Mr Vella was acting as a director.[18]

50 The second document is an email dated 30 May 1999 from Mr McGann to one of the employees of PAI concerning the repatriation of profits (or "profit drains" as they are described in the email) from Nour to the United States, by way of what are described in the email as "'substantial' management fees". For present purposes, I regard the document as irrelevant. [19]

51 The third document is an authority dated 28 September 1999, signed by Mr McGann, authorizing Mr Vella to sign cheques on two Nour bank accounts. That document was put to Mr McGann in cross examination and he agreed that he signed it. He said that he had been asked to sign it as a matter of emergency to ensure that everyone continued to be paid after Mrs Vella's death. I see no reason to doubt that.

52 The fourth document is a fax dated 1 December 1999 from an employee of PAI to Mr Vella concerning the repatriation of Nour profits by way of "management fees". In effect it is a set of instructions to Mr Vella as to how the invoices for the "management fees" were to be constructed and that he should cause Nour to pay on the invoices when sent. When cross-examined on the document, Mr McGann said that he had never seen it before.[20] It demonstrates, however, that by 1 December 1999 officers of PAI were aware that Mr Vella was to some degree involved in the management of Nour.

53 The fifth document is a fax dated 21 December 1999 from an officer of PAI, Cheryl Ann Sullivan, to Mr Anderson in which it is said that Mr McGann had requested a list of all employees currently working at Nour with their titles and salaries. That does not appear to take the matter much further than the fax of 1 December 1999.

54 The sixth document is a handwritten fax dated 6 March 2000 from Cheryl Ann Sullivan to Mr Vella, as follows:

We need to know how much we are paying you (personally) per month to run PDS. I know the rent and your 3 employees' salary [sic] but what is your income (salary, or director or whatever).

55 That document was not put to Mr McGann in cross examination. But he did say in cross-examination that Cheryl Ann Sullivan was the officer of PAI responsible for finding out what was happening at Nour.[21] It is also to be observed that, by 6 March 2000, Mr McGann had already received Mr Anderson's letter of 9 February 2000 (which is the sixth document on which the appellants rely), and replied to it by letter dated 5 March 2000 (which is the seventh document on which the appellants rely), and that Mr McGann wrote in the letter of 5 March 2000, in addition to what I have already set out above, the following:

"...Ric is now receiving $8100 per month ($97K per year) and I assume using the same Vella company with similar expenses incurred. But, does Ric do the same job as Julie? Does he work the same number of hours? I was under the impression that he had another job which would make this impossible. I am concerned that the company is [not] receiving the value for apparently 'self set' salaries, which influence the overall profit picture of this location. I mean no offense by this inquiry, but the company is a business not in the habit of supporting people for anything except for the work they deliver for the benefit of the company. I do appreciate Ric's efforts to cut costs to improve the profit picture."

56 The appellants next refer to a fax dated 4 May 2000 from Mr Anderson to Mr McGann which responded to the letter of 6 March 2000. In that letter Mr Anderson stated that Mr Vella did the work that had previously been done by Mrs Vella and that he had been working in the business for three to four years "helping with orders, deliveries and other business matters".

57 The eighth document is an email dated 4 May 2000 from Mr McGann to Mr Vella and Mr Anderson and others, concerning the contents of Mr Anderson's fax of 4 May 2000. In that email Mr McGann wrote, among other things:

"...With regards to the employees in Australia, please do NOT TAKE ANY ACTIONS at changing the current positions until you hear from me. I have scheduled a meeting of the POS/PDS Management staff for next Wednesday to discuss the situation, and get advisory input before making any decisions. I will comment at this time, however, that I was unaware of the change in Julie's compensation to a 'salaried' position, and especially of the magnitude that it was. It was my 'observation' that Julie was preparing Elaine and Samantha to continue the pace of the business. At no time do I remember any discussions about Ric becoming a POS/PDS employee, and I never gave approval to such a hiring, much less the salary."

58 The ninth and tenth documents are two emails dated 10 May 2000 from Ms Race to PAI in which Ms Race set out a number of grievances as to the way in which she had been treated by Mr Vella in his capacity as manager. They do not appear to me to add significantly to the documents which have already been mentioned.

59 The eleventh document is an email dated 10 May 2000 from Mr McGann to Mr Anderson and others stating, among other things:

"...Please confirm that Nour Pty Ltd is a corporation owned by myself, Benson Donald McGann with one [A]ustralian director with a small share. Currently this was changed to Rick Vella after the death of Julie. I wish to substitute Iveta Komora as the required Australian Director, and Rick Vella removed. Please have these papers prepared."

As I see it that does not take the matter any further either.

60 Last, the appellants refer to a number of documents which came into existence after Mr Vella was dismissed. Since they follow the termination of the relationship between Nour and Mr Vella, they do not seem to me to bear on the question of what was known or accepted before Mr Vella was dismissed. It is not suggested that they contain any admissions as to what was known or accepted during that period.

61 Taken then as a whole, the documents on which the appellants rely appear to establish that PAI was aware from December 1999 that Mr Vella was to some extent involved in the management of Nour and that from on or about 9 February 2000 Mr McGann was on notice that Mr Vella had assumed the position of manager in place of Mrs Vella and that Nour was being charged for his services at the rate of $8,100 per month. But in my view that does not mean that Fensford was entitled to charge fees after Mrs Vella's death.

62 Perhaps it is arguable that Mr McGann's failure to object to the arrangement gave rise to an implied agreement that Mr Vella should continue to act on that basis. The nature of such an implication was explored by Kirby, P. (as his Honour then was) in Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd.[22] But as Kirby, P. said in Empirnall, the existence of such an agreement will only be inferred where:

"...there have been previous dealings between the parties or where

something in the history of the transaction between the parties gives rise to 'an inevitable inference from the conduct' of the disputing party, and from its 'doing and saying nothing' for a considerable time, that it 'accepted the [contract] as valid'. This was the way in which the English Court of Appeal expressed its conclusion in Rust v Abbey Life Assurance Co Ltd [1979] 2 Lloyd's Rep 334 at 340: see also discussion in Chitty on Contracts, 25th ed, (1983) (pars 79ff at 48) and D W Greig and J L R Davis, The Law of Contract (1987) at 303f."[23]

63 All things considered, I am not persuaded that Mr McGann so acted as to yield the inevitable inference that he accepted as valid an arrangement under which Mr Vella would be remunerated at the rate of $8,100 per month for his services as manager. To the contrary, Mr McGann's first response to the letter of 9 February 2000 was to express disbelief and dismay that Mr Vella should be paid so much as was claimed. The fact that Cheryl Ann Sullivan followed up so quickly with the interrogatory of 6 March 2000 tends to confirm that he was dismayed and disbelieving. Objectively assessed, there is also every likelihood that Mr Vella would have been very uncertain as to whether Mr McGann was going to agree. And as can be seen from the chain of subsequent correspondence, matters remained in a state of flux until the termination of relations in May 2000. There are strong indications in the evidence that he did not work as many hours as Mrs Vella had worked in the role of manager.

64 Perhaps it also arguable that Mr Vella was entitled to sue to recover reasonable remuneration for the work that he did as manager.[24] But the fact is that he did not do so and, even if he had, there was really no evidence that reasonable remuneration for the work done by Mr Vella was any more than the wages which he was paid as an employee.

65 With respect, therefore, I consider that the judge was correct to hold that Fensford had not established an entitlement to the payment of fees in respect of the period after Mrs Vellas' death.

Rent payable

66 The appellants' fifth contention concerns the judge's finding that the only evidence as to rent properly payable by Nour to Fensford for the use of premises provided by Fensford was expert valuation evidence given on behalf of the respondent by Paul Wheeler. On that basis, her Honour determined that the rent which had been payable was an amount calculated in accordance with Mr Wheeler's valuation. The appellants contend that in so holding the judge erred by in effect finding that Mrs Vella and later Mr Vella were not entitled to charge rent calculated by reference to their own estimate of the value of the premises supplied or alternatively, if they were not, that Mr Wheeler's methodology was deficient.

67 In my view those contentions are hopeless. As persons who owed fiduciary duties to Nour, Mrs Vella and Mr Vella were bound to take care to ensure that Fensford did not charge more than market rates for the premises which Fensford supplied and, in the absence of other expert valuation evidence or anything in the nature of effective cross examination of Mr Wheeler, the judge was plainly entitled if not bound to accept Mr Wheeler's evidence and to act accordingly.[25]

Dishonesty

68 Finally, the appellants contend that the judge erred in holding or finding that Mrs Vella and later Mr Vella knew that it was in breach of duty to allow Nour to make payments in excess of salary entitlements to Fensford. The thrust of the argument is that the judge expressly rejected a submission that, because a question of dishonesty was at stake, it was necessary for her Honour to be satisfied of dishonesty on the Briginshaw standard.

69 I do not think that point to be of any consequence. Whether or not Mr and Mrs Vella acted in knowing breach of their duties as managers and directors, on the findings made by the judge it is plain that they acted in breach of their duties by using their positions as managers and directors to benefit themselves and Fensford at the expense of Nour. Just as clearly, as the judge found, they should have known that they were acting in breach of duty. In the absence of informed consent, that was sufficient to render them liable for equitable compensation.

70 In the same way in the case of Fensford, it is enough that Mr and Mrs Vella acted in breach of duty and that they should have realised that they were so acting. Constructive knowledge is enough to make Fensford liable for knowing receipt of moneys paid in breach of duty[26] and, because Mr and Mrs Vella had constructive knowledge of their breaches of duty, Fensford had the same knowledge. Under the equitable doctrine of notice, actual or constructive notice of a matter which is possessed by an agent of a person dealing with a company will be imputed to the principal where the agent was under a duty to communicate the knowledge to the principal.[27] Accordingly, knowledge acquired by a director in his or her capacity as a director of one company will be imputed to another company of which he or she is a director if he or she has a duty to communicate it to the latter company.[28] In the particular circumstances of this case, Mr Vella and Mrs Vella were the agents of Fensford for the purposes of its dealings with Nour and so they were under a duty to communicate to Fensford their knowledge of the amounts which were properly payable by Nour to Fensford by way of remuneration. Furthermore, for the purposes of the transaction Mrs Vella and later Mr Vella were the controlling mind of both companies and therefore their knowledge - actual and constructive - was the knowledge of both companies.[29]

Conclusion and orders

71 For the reasons I have given, I consider that the appellants have succeeded in their appeal to the extent of establishing that the judge erred in holding that the number of hours actually worked by Mrs Vella was on average only 50 hours per week. On my assessment, it was not less than 55 hours per week and the amount which was properly due from Nour to Fensford in respect of the years of income ended 30 June 1995 to 30 June 2000 should be recalculated on that basis. I am also of the view that the judge was in error in holding that Fensford was not entitled to receive from Nour an additional amount equal to the compulsory superannuation charge and WorkCover levy which would have been payable by Nour on Mrs Vella's salary had she remained as an employee during the relevant period. The recalculation of the amount properly payable by Nour to Fensford for the 1995 to 2000 years of income should also include those sums.

72 As matters stand, we are not in a position to recalculate the amount due in respect of labour or the sums due in respect of compulsory superannuation and WorkCover charges. Therefore, failing agreement, it will be necessary to refer the matter to the Master for the taking of accounts. But it may be that, if the parties are given some time before orders are pronounced, it will be possible for them to reach agreement on the correct sum and thus avoid the need for further litigation.

73 Subject to that detail, I would order that the appeal in proceeding No 8031 of 2001 be allowed and that the judgment the subject of appeal be varied by re-computation of the amount due to Nour in accordance with the adjustments I have proposed. As already noticed, the appeal in proceeding 4304 of 2002 should be dismissed.

74 Subject further to hearing the submissions of counsel, I would order that the respondent pay the costs of the appeal in proceeding 8031 of 2001 but, since Nour was substantially successful in that proceeding below, and remains so, I would not alter the orders for costs that were made in the proceeding below. The appellants should of course pay the costs of the appeal in proceeding No 4304 of 2002.

75 The respondent should have a certificate under s.4 of the Appeal Costs Act 1998.

76 I agree, for the reasons given by Nettle J.A., that the appeal in No 8031 of 2001 should be allowed, and that orders should be made disposing of the matter as his Honour proposes. The appeal in No 4304 of 2002 should be dismissed.

[1] In the years of income ended 30 June 1995 to 30 June 2000.

[2] T 227.13.

[3] T256. 14.

[4] T. 255.23 - T. 256.2.

[5] See, for example, Soulemezis v Dudley (Holdings) Pty Ltd (1987) 10 N.S.W.L.R. 247 at 279-280 and 282, per McHugh, J.A.; Transport Accident Commission (Vic) v Bausch [1998] 4 V.R. 249 at 260-261, per Tadgell, J.A.

[6] Fletcher Construction Australia Ltd v Lines MacFarlane & Marshall Pty Ltd [2001] VSCA 167; (2001) 4 V.R. 28 at 35[18], per Chernov, J.A.

[7] Ainger v Coffs Harbour City Council [2005] NSWCA 424 at [47].

[8] T. 255.26 - T. 256. 2.

[9] T. 256 at 20.

[10] Warren v Coombes [1979] HCA 9; (1979) 142 C.L.R. 531 at 551; Fox v Percy [2003] HCA 22; (2003) 214 C.L.R. 118 at 126 [24]- [29].

[11] Emphasis added.

[12] See [30].

[13] Cf. Byrne v Australian Airlines Ltd [1995] HCA 24; (1995) 185 C.L.R. 410 at 440-453, per McHugh and Gummow, JJ.

[14] Re Haycraft Gold Reduction and Mining Co [1900] 2 Ch. 230 at 236; National Australia Bank v Perkins [1999] SASC 280; (1999) 74 S.A.S.R. 68 at 72[23].

[15] Cf. Tupicoff v Federal Commissioner of Taxation (1984) 4 F.C.R. 505.

[16] Roxborough v Rothmans of Pall Mall (2001) 208 C.L.R. 516 at 555 [101]-[103]; Ovidio Carrideo Nominees Pty Ltd v The Dog Depot Pty Ltd [2006] VSCA 6 at [20], per Chernov, J.A.

[17] [1970] VicRp 56; [1970] V.R. 434 at 438.

[18] T. 127, 136, 144, 145-147, and 152 -156.

[19] It may be, however, that the document would be of considerable interest to the Commissioner of Taxation for the purposes of Division 13 of Part III and Part IVA of the Income Tax Assessment Act 1936 (Com), along with so much of Mr McGann's cross examination as was directed to the document.

[20] T.158.23.

[21] T. 158. 29.

[22] (1988) 14 N.S.W.L.R. 523 at 527-528; see also Hyder Consulting (Australia) Pty Ltd v Wilhelmsen Agency Pty Ltd (2002) 18 BCL 122; [2001] NSWCA 313; cf. Paull v Williams [2005] NSWCA 421.

[23] (1988) 14 N.S.W.L.R. at 528.

[24] Pavey v Matthew & Paul [1987] HCA 5; (1987) 162 C.L.R. 221 at 262_; David Securities Pty Ltd v Commonwealth Bank of Australia_ [1992] HCA 48; (1992) 175 C.L.R. 353 at 382-3.

[25] Swinburne v David Syme & Co [1909] VicLawRp 92; [1909] V.L.R. 550 at 565; aff'd [1909] HCA 92; (1909) 10 C.L.R. 43; Hardy v Gillette [1976] VicRp 36; [1976] V.R. 392 at 397; R v Maxwell (NSWCCA) 23/12/98, BC9807450, at 79; R v AWF [2000] VSCA 172; (2000) 2 V.R. 1 at 10[31], per Chernov JA.

[26] DPC Estates Pty Ltd v Grey & Consul Developments Pty Ltd [1974] 1 N.S.W.L.R. 443 at 459; United States Surgical Corp v Hospital Products [1983] 2 N.S.W.L.R. 157 at 187; Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 V.R. 133 at 156.

[27] Sargant v ASL Developments Ltd [1974] HCA 40; (1974) 131 C.L.R. 634 at 658-9.

[28] In re Hampshire Land Co (1896) 2 Ch. 743; Belmont Finance Corporation v Williams Ltd (No. 2) [1980] 1 All E.R. 393 at 404; cf Darvall v North Sydney Brick & Tile Co Ltd (1988) 6 A.C.L.C. 154 at 178; ZBB Australia Ltd v Allen (1991) 9 A.C.L.C. 687 at 696; Fords Principles of Corporations Law at [16.220].

[29] Endresz v Whitehouse (1997) 15 A.C.L.C. 936 at 954; Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd (in liq) [1999] FCA 1820; (1999) 96 F.C.R. 217 at 228[42]-[48].

At a glance

Court

Decision date

Before

Source

Judgment (40 paragraphs)