Trade Practices Act 1974 (Cth), s 52, s 75B

1 JOHNSON J: The plaintiff, GlobalTech Pty Ltd ("GlobalTech") seeks a declaration that the defendant, Mahaveer Pareek ("Pareek"), who provided engineering consultancy services to GlobalTech, is not entitled to any further remuneration, either in cash or by way of the issue of shares in the capital of GlobalTech, for the services provided by him to GlobalTech. Pareek denies the claim made by GlobalTech and counterclaims against GlobalTech and its directors, for payment of $102,000 in cash or in shares in GlobalTech or, alternatively, damages at common law, damages under the Trade Practices Act 1974 and damages under the Fair Trading Act 1987.

2 The basis of the counterclaim is Pareek's allegation that in the course of various discussions between him and the defendants to the counterclaim, the second defendant, Khaled Mufid Yousef Hejleh ("Hejleh"), the third defendant, Johan Anwar ("Anwar") and the fourth defendant, Michael Allan Klass ("Klass"), acting as agents for the plaintiff, representations were made to him that:

(i) He would be paid a remuneration package equivalent to around $100,000 per year in return for his services and for his assistance in setting up the business of GlobalTech; and

(ii) There would be further negotiations and agreements reached at a later date concerning Pareek's precise remuneration package.

3 Pareek claims that, in reliance upon the representations, he commenced work for GlobalTech from 1 May 1999 and did not seek any other paid work. Pareek further alleges that in or about July 1999 an agreement was entered into between Hejleh, Anwar and Klass on behalf of themselves and Pareek as trustee of the Pareek Trust, and between GlobalTech and Pareek as trustee of the Pareek Trust, whereby it was agreed that Pareek would, from 1 May 1999 to 31 December 1999, provide to GlobalTech computer consulting and engineering services as an independent contractor for a total cash package equivalent to $96,000 per annum, being $8000 per calendar month. However, Pareek alleges that it was also agreed that he could elect to defer payment of part of his remuneration and receive either cash or an amount of shares in GlobalTech worth double the amount of remuneration deferred. Until otherwise agreed, GlobalTech was to pay Pareek $2000 per calendar month and either cash or shares in GlobalTech to the value of $12,000 per calendar month, or cash to the value of $12,000 per calendar month would accrue. Under the agreement, Pareek continued to provide his services to GlobalTech from 1 July 1999. Pareek stated that in or about October 1999 an agreement was reached between him and Klass to vary the monthly payment to $3000 per month and to increase the share or equivalent cash value to $10,000 and the amount accrued to $10,000. Pareek alleges that GlobalTech failed to pay him the shares, or their equivalent cash value, which was agreed to be paid in addition to the monthly payment.

4 Pareek also alleges that a further representation was made that he would be paid a remuneration package equivalent to around $100,000 per year in return for his services and for his assistance in setting up the business of GlobalTech. However, it is said by Pareek that the express representations made by Hejleh and by GlobalTech were false and misleading in that there was no intention to pay the remuneration package and GlobalTech did not have the resources to pay it. It is further alleged that the making of the false representation by GlobalTech was conduct in trade or commerce which was likely to mislead or deceive in contravention of s 52 of the Trade Practices Act and in contravention of s 10 of the Fair Trading Act. It is also alleged that, pursuant to s 75B of the Trade Practices Act and s 68 of the Fair Trading Act, Hejleh aided, abetted, counselled, procured and was knowingly concerned in that conduct. A further cause of action pleaded by Pareek is that the representations of GlobalTech and Hejleh were made negligently in that they did not take reasonable care to ensure the truth or accuracy of the representations.

5 In relation to the oral agreement alleged to have been made in or about July 1999, Pareek alleges that GlobalTech acted in breach of contract by failing to pay him the share or cash value agreed to be paid in addition to the monthly payment. Pareek further alleges that the terms the subject of the agreement in or about July 1999 were representations made by GlobalTech through Hejleh, Anwar and Klass on which Pareek relied and that those representations were false and misleading in that there was no intention to pay Pareek the shares or the cash equivalent, or the remuneration package, and that GlobalTech did not have the resources to pay the remuneration and had no reasonable grounds for making the representations. The representations are also alleged to be misleading or deceptive, or likely to mislead or deceive, in contravention of s 52 of the Trade Practices Act and s 10 of the Fair Trading Act, and also to be negligent in that GlobalTech did not take reasonable care to ensure the truth or accuracy of the representations. Hejleh, Anwar and Klass are said to have aided, abetted, counselled, procured and knowingly concerned in the misleading and deceptive conduct of the plaintiff, contrary to s 75B of the Trade Practices Act and s 68 of the Fair Trading Act.

6 In the defence to the counterclaim, all defendants to the counterclaim agreed that they and Pareek were involved in discussions concerning the establishment of a business providing computer consulting and engineering services to be carried on by GlobalTech and any other associated companies. However, they allege that the discussions to which Pareek refers were on the express basis that they were not legally binding and in the discussions it was acknowledged by all parties that shares in GlobalTech would only be issued to those personnel who were fully committed to GlobalTech and who worked for GlobalTech for at least two years. Consequently, as Pareek resigned from GlobalTech in January 2000 and commenced employment with one of GlobalTech's principal customers, he was not fully committed to GlobalTech and did not work for GlobalTech for at least two years. Hence GlobalTech, Hejleh, Anwar and Klass each dispute that Pareek is entitled to any more monies than he has already received.

7 It can be seen that the primary action is the counterclaim. On that basis it was agreed between the parties that the defendant, the plaintiff on the counterclaim, should have the carriage of the action. In those circumstances, when referring to the parties to the action, rather than to the individual witnesses, I will refer to Pareek as the plaintiff and to GlobalTech and its directors as the defendants.

8 It is also apparent that, in order to resolve the dispute between the parties, it will be necessary to identify the purpose of the discussions as well as to determine the precise terms of the discussions to which the counterclaim relates, as one clearly influences the other. Resolution of the latter issue requires a detailed analysis of the evidence because of the almost complete conflict between the account given by the plaintiff on the counterclaim and that of the defendants and the witness called on their behalf.

Evidence on behalf of the plaintiff on the counterclaim

9 Pareek gave evidence in support of his claim. He stated that he is an engineer with a Bachelors degree in Electronic Engineering with First Class Honours from an Indian university. He graduated in June 1983 and, at the relevant time, was approximately 38 years old and had approximately 17 years engineering experience. Pareek had always worked as an electronic engineer with various companies both in India and in Australia. In February 1995 Pareek started working for Formulab Technology Pty Ltd ("Formulab"). He worked as an employee of Formulab until 1997 at which time he became a consultant to Formulab until February or March 1999. At the time Pareek ceased working as a consultant to Formulab he was earning equivalent to $85,867.92 per annum.

10 It is common ground that at Formulab Pareek met Hejleh, Anwar and Klass. The three had been directors of Formulab when it first commenced operating but later worked as consultants. Also working at Formulab was Malcolm Beale ("Beale") who was the Engineering Manager and Pareek's immediate superior. Hejleh, Anwar, Klass and Beale were all qualified engineers.

11 Again, it is common ground that in April 1999 Formulab went into voluntary administration. According to Pareek, all the employees and consultants had known for some time that administration was coming and were considering their options. It was said that, despite Formulab's financial problems, the market at the time in the area of electronics, software and computing was very buoyant. Pareek wanted to start his own consulting business and had discussed this with Beale. On Pareek's evidence, during the first or early in the second week in April, he and Beale had a brief discussion with Klass and Anwar who said that they were going to start their own business and would like the services of Pareek and Beale. Pareek concedes that these early discussions were informal. According to Pareek, a few days later Anwar and Klass told him and Beale that they were starting a joint business with Hejleh and they would like Pareek and Beale to think of various ideas about new and innovative products and business ideas and give those ideas to them. Several meetings ensued at which, amongst other matters, they talked about strategies associated with setting up a new business and materials necessary for the promotion of the business.

12 On Pareek's evidence, in mid April 1999 a meeting took place at Formulab at which Hejleh said that he, Klass and Anwar intended to start and manage the new business. Hejleh asked everyone at the meeting to help him establish the business. Hejleh already had a company called GlobalTech Pty Ltd which was to be used as the vehicle for the new business.

13 Pareek stated that Hejleh told the meeting that salaries for all five of them would be fixed at $100,000 per annum which exceeded the current salaries of each of them. However, he also said that initially they would have to defer payment of some of that salary until a later date. According to Pareek, he was taken on as Senior Engineering Consultant and was later provided with business cards which bore that title. It is interesting to note that the basis of Pareek's claim is that from at least May 1999 he was employed by GlobalTech on a full-time basis on an annual salary of $100,000 and yet he is provided with a business card that describes him as a consultant.

14 Pareek conceded that all of the others present at the meeting were putting money into the new venture. However, Pareek had no money to put into the venture and told the others so. On Pareek's evidence he was told that this would not create a problem as he would be able to work on a salary and could, if he so chose, convert some of his salary into shares and "buy equity in that way". Pareek stated that he had two choices. One was to work for a salary and to defer payment of some of that salary until later. The other was to work for a salary and to defer payment of some of the salary which would be converted into shares. On Pareek's evidence, at this meeting he accepted the offer to work for GlobalTech on the terms which they had discussed and, as a result, did not look for another job and did not claim unemployment benefits. Pareek emphasised that throughout the history of his employment he had never been without a job and had never claimed unemployment benefits. Pareek further stated that he was told by Hejleh that, once the business premises were set up, paperwork reflecting the agreement between them would be prepared. Pareek also asked for instructions and was told to look in different industrial areas for a suitable property for sale and meet with various real estate agents.

15 According to Pareek, he raised the issue of intellectual property rights. Hejleh proposed to have an additional company called GlobalTech Corporation Pty Ltd ("GlobalTech Corporation") so that there would be two companies; GlobalTech, would operate the business, hold any monies and pay salaries, and GlobalTech Corporation would hold the intellectual property. Hejleh considered that the cost of GlobalTech Corporation should be borne by all. It cost $2000 to set up a company and everyone contributed $400 and each became a director of GlobalTech Corporation. Pareek was never a director of GlobalTech.

16 Following that meeting, he and Beale started looking for business premises and meeting with real estate agents. Pareek also prepared the items for the business promotion material and proof read the printed drafts. By the end of April, Klass had secured a property in Canning Vale ("the Canning Vale premises"). According to Pareek, everyone was busy setting up the office and the new business. Pareek was also involved in renovating the building and promoting the business, collecting business names in the different parts of Australia and preparing and distributing promotion letters to the various businesses. Pareek alleged that he generated the idea about a new telephone related product and also prepared technical material for it. In about August or September 1999 GlobalTech applied for a Commonwealth grant to develop the product.

17 On Pareek's evidence he planned to sacrifice about 25 per cent of his monthly salary. Apparently the only financial commitment he had at that time was a home loan with BankWest which was almost repaid. Pareek stated that in May 1999 he contacted BankWest with a view to opening a line of credit. The bank required information about his current employment so Pareek spoke to Klass and advised him that he had told the bank that his salary was $100,000 per annum and that the bank needed to verify Pareek's current employment. Pareek's evidence was that a BankWest representative did in fact contact Klass to confirm his employment. However, Pareek concedes that the bank used his salary from the two previous years at Formulab to determine his entitlement. Once the line of credit was opened, Pareek used the monies to pay himself a salary of $5000 per month and arranged for money to be withheld for tax. In June 1999, Pareek paid to the Australian Taxation Office a lump sum to meet his taxation requirements.

18 Cross-examination of Pareek about his loan application highlighted the implausibility of his explanation for obtaining a line of credit. Pareek maintained that he had decided to obtain a bank loan sometime before Formulab went into administration because he wanted to buy a house nearer his daughter's school. However, he applied for a line of credit rather than a housing loan secured by mortgage, despite the fact that he did not actually buy a block of land until May of the following year. He conceded that it would have been cheaper to apply for a mortgage. Pareek was somewhat evasive when asked whether he told the bank why he was borrowing the money. Initially he said he was using the money for personal investment. However, at another point he said that the line of credit was for personal use only. Certain bank documents indicate that the money was for personal use and not for personal investment whilst in another Pareek has ticked the description "for business and investment purposes". Whilst I acknowledge the existence of inconsistencies in Pareek's evidence as to the purpose of the loan I do not believe that are of any real significance. Purchasing a house may well be seen both as a personal use and for investment purposes. However, I found Pareek's explanation for taking out a line of credit to be less than compelling. In my view, taking out a more costly line of credit without at that time having a specific purchase in mind, is more consistent with the proposition put on behalf of GlobalTech: that the reason he applied for a line of credit was because he expected that, for a considerable period of time, he would depend upon his savings whilst establishing GlobalTech as a profitable business capable of paying him a salary.

19 An the end of June or the beginning of July a meeting was held in the boardroom of the Canning Vale premises during which Pareek scribbled down handwritten notes of what was said and typed them up after the meeting. The typed document is headed GlobalTech Pty Ltd Structure (Minutes) ("Minutes"). In his statement tendered in evidence-in-chief, Pareek said that he gave the handwritten notes, as well as the typed version, to Klass. If Pareek's evidence on this point is correct, then insofar as the typed version does not include a matter contained in the handwritten notes, it is Pareek who is responsible for the omission. The handwritten notes were not identified in the discovery process and as far as Pareek is aware, the handwritten notes are no longer available.

20 At the meeting, Hejleh told everyone that he, Anwar and Klass, as the main investors in the business, would be directors of GlobalTech. However, according to Pareek, the primary purpose of the meeting was to decide the sacrifices and salary benefits as salaries had already been decided in April. Pareek raised with the meeting the several ways in which he could be involved in GlobalTech. If that evidence is correct, then it is inconsistent with the proposition that by this stage, Pareek had already joined the company on the $100,000 salary set at the meeting he alleged occurred in April.

21 According to Pareek, he told the meeting that one option was for him to work full-time at GlobalTech and sacrifice salary and receive the salary later with additional benefits taken in cash and/or in shares. The second option was for him to work full-time at GlobalTech and receive a full salary. The third option was to work elsewhere and come to GlobalTech on a "needs" basis and charge contract rates. Pareek's evidence was that it was Hejleh's decision for him to adopt the first option.

22 Hejleh then told the meeting that the proposal for everybody to receive $100,000 was unfair and ultimately Hejleh's salary was fixed at $150,000. Klass and Anwar were to receive $116,000 and Pareek and Beale were to receive $100,000. It was also decided to reduce Pareek's salary from the $100,000 decided upon in April to $96,000. Pareek said that Hejleh told the meeting that the group would work with this arrangement until the end of the year after which each person could renegotiate their salaries. Hejleh told the meeting that the sacrifices made now would help to set up the business and that the families of each member of the group would suffer hardship and consequently the sacrifice amount would be doubled and could be taken in cash or in shares. The monies would be considered a loan to GlobalTech or its directors to help set up the business.

23 Pareek's understanding of the arrangement was that a salary of $96,000 per annum would be equivalent to $8000 per month and that each month he would receive a fixed amount and sacrifice the remainder of his salary in order to receive double that amount in cash or GlobalTech shares at a later time. As it was said at the meeting that the arrangement was to remain in place until the end of the year, Pareek understood that his contract was to run, until 31 December 1999. Based on this understanding, Pareek opted to sacrifice $6000, representing 75 per cent of his monthly salary, and receive only $2000 per month. Pareek said that he sacrificed his salary for May and June 1999. Pareek refuted the proposition, raised by Hejleh in response to Pareek's claim, that there was any mention in the discussions of a condition that he would have to work for two years in order to receive the sacrificed salary. Pareek claimed that it was also agreed at the meeting that Klass would prepare the paperwork to reflect the verbal agreement by 15 August 1999. According to Pareek, in addition to salary, there was talk of a 20 per cent profit or bonus to be distributed to everyone in the group. The bonus was left to the directors to decide, as and when the situation arose.

24 Pareek was cross-examined about his account of the July meeting and the Minutes taken by him. He was taken to par 15 of the Minutes which is in the following terms:

"15. Khaled explains hidden book #2

Weightage of investment type:

-cash (8x: 8 points per dollar)

-equipment(4x: 4 points equivalent dollar value of the equipment)

-Salary(2x: 2 points per dollar)

-Salary (1x: ?)

From July99 to Dec99 any cash injected will be equivalent to ordinary shares.

Class A shares are entitled to dividen [sic].

Cash injection is subject to the budget requirements."

25 Pareek agreed that at the meeting in July there was a discussion about arrangements for sharing profits. He rejected the proposition that the arrangements for sharing profits were on the basis that there was to be hardship incurred by the parties which would be brought to account in the calculation of the profit sharing arrangement. Pareek maintained that the profit sharing arrangement was part of the salary package. Pareek was unclear when asked whether, on his evidence, the hardship was unrelated to the profit sharing arrangement that was discussed. He was taken to the sub-heading under par 15, "Weightage of investment type", and the information under that heading, which concerned investment in the company by way of cash, equipment and salary and did not deal with profit sharing. Pareek agreed that par 15 was all about contribution to GlobalTech. He disputed that the list was a list of matters to be taken into account in calculating the hardship that had been incurred by parties contributing to the company. Pareek maintained that the hardship component related only to salary. He said that an employee could elect to sacrifice part of his salary and to decide how much salary was to be sacrificed, but, because of that sacrifice, hardship might result. Consequently, the amount which was sacrificed would be doubled and could be taken in cash or in shares.

26 Pareek was asked whether, based on the Minutes, where a cash contribution is made, the contributor would be allowed eight times the value of the cash contributed in deciding what profit or shares would be distributed to them. Pareek was somewhat evasive in responding to that question, initially stating that it related to the directors and not to him. However, he still maintained that it did not relate to any profit sharing arrangement. According to Pareek, the profit sharing was introduced later on and providing for 20 per cent profit to be shared amongst the working people and 80 per cent to go to the investors. Therefore on Pareek's evidence there was a profit-sharing scheme as well as a salary sacrifice arrangement.

27 Pareek agreed that the profit sharing scheme was only to be for people who worked for the business for at least two years. However, he insisted that the salary sacrifice was not part of the profit sharing that was discussed. He agreed that he was not contributing cash or equipment to the business. Pareek was asked to provide details of how the profit sharing scheme operated. Again he was a little evasive in providing a response, repeating the proposition that it was a matter for the company and was not his business, notwithstanding that he was at the meeting at which the issue was discussed. Ultimately, Pareek explained the operation of the scheme by reference to cash investment. He said that if a person contributed cash to the business, that person would be treated as having made an investment in the business of eight times that amount. When asked how and when the investment would be allocated he said that the directors were to decide how they wanted to do. However, he maintained that it was not for the directors to decide how others would be allocated their salary sacrifice. That is, there was a different arrangement with respect to the contributions to the company and to the salary sacrifice. However, it is clearly the case that the two are referred to in the Minutes in one list under the same heading. In my view, the explanation that he gave was unsatisfactory, describing the operation of the salary sacrifice arrangements rather than attempting to explain why, if they are different arrangements and are to be treated differently, they were included together in his own handwritten list.

28 Pareek was questioned about the final entry under the heading "Weightage of investment type" which was "Salary (1x: ?)". Pareek's explanation was that if you left before the contract was over then you did not get double benefits. Pareek further explained that, if a person contributed cash and left in December 1999 before the time had expired, then it was for the directors to decide what provision would be made in relation to that contribution. However, the position was different in relation to salary. Only the profit sharing was to be at the discretion of the directors, not the salary. He did not know what would happen about cash and equipment because he was not concerned about cash and equipment. It would seem from that statement that the Minutes are not complete. But if the Minutes are not complete it is because Pareek chose not to include matters which were not of interest to him. Pareek did agree that the hand written notes were not complete, and therefore the typed Minute must be incomplete. However, he attributed responsibility for any omissions in the Minute to Klass because, according to Pareek, he was to prepare full notes of the meeting, presumably from notes which were taken by him, about which there was no evidence, or from memory. Pareek maintained that nothing was talked about at the meeting concerning what would happen to the contribution of cash and equipment if the contributor left. But he still maintained something was said about the salary. What was said, was that, because he was a contractor, he had a different arrangement from the original investors who made contributions of cash or equipment and who were therefore taking the full risk. According to Pareek, as they were taking the full risk they wanted maximum benefits, but as a contractor he would get a full salary. However, if he did not take a full salary then he was actually helping the company and that is why they introduced an arrangement whereby he could double his benefits. If he left earlier than December then he would only get the sacrificed salary. If he stayed longer he would receive double. Pareek did not explain how delaying taking a large component of your salary and then receiving double that amount later provided any help to a fledgling company where the doubled amount would have to be paid a mere six months into the company's operation.

29 Pareek maintained that these things were discussed in the meeting in July but could not explain why salaries were included in a list relating to investments. It was put to Pareek that it was included in the list because they were all to be treated in the same way, as investment into the business. His response was difficult to understand. As a witness, Pareek had a tendency to restate the proposition that he was attempting to get across, rather than actually answering the question posed. He maintained that there was no separate discussion about what would happen if a person made no investment. On Pareek's evidence there was only one discussion about investment types, which is recorded in par 15, but it was a mixed discussion. He maintained that par 15 reflected a discussion on the weightage of investment types only and there was no other discussion about returns for salary sacrificing.

30 It was suggested to Pareek that par 15 is silent about the nature of Pareek's claim because his claim was that he did not make any investment in the business. He said he had the option at the end of December to convert into an investment whatever was due to him or to take it as cash. This was one of many of Pareek's answers which was not a response to the questions asked. He was asked whether there was a reason he did not write that down. He then said that he gave about three or four pages of the handwritten notes to Klass and the typed document is only one page and the handwritten notes had details of everything. However, as it was Pareek who prepared the typed version of the Minutes, that statement does not explain why a matter included in the handwritten notes did not appear in the typed version. Indeed, at no stage in his evidence did Pareek explain why the typed version did not fully reflect the handwritten notes. The absence of this material from handwritten and typed notes taken by Pareek militates against a conclusion that the material was ever the subject of discussion or agreement.

31 Pareek agreed in cross-examination that you did not have to decide whether you were making an investment in respect of a salary sacrifice until December 1999. He explained that you could advise that you wanted to invest in the middle or at the end of December, and the company would give you the money when it had funds. However he then said that you had to work until December 1999 to receive the full benefit. If you were leaving you could then decide whether it was to be an investment or if you were working after that, you could roll it over.

32 Pareek was particularly evasive in relation to anything said at the meeting about investment by way of cash and equipment. He agreed that it would not make sense to have an arrangement whereby one could contribute cash or equipment and six months later receive eight or four times the value of that contribution. The commercial absurdity of such an arrangement could well explain why Pareek was reluctant to answer questions directed to its operation. Overall he was unable to explain why these distinct matters, cash investment and salary sacrifice, were contained in the same list.

33 It is also the case that Pareek initially agreed that the arrangement for doubling salary sacrifice and opting for shares in lieu was available to everyone. He then attempted to retreat from that proposition, once again maintaining that he was only interested in his position and it was up to the directors whether they should or should not take double. He said he could not answer the questions because it depended on the company directors and he was not "at par" with the directors. However, he then agreed that all five had the same rights. That statement supports the evidence of Beale, to which I will later refer, describing the five as "partners". Pareek maintained that these arrangements, including his entitlement to receive double the amount of the salary he sacrificed, were put in place in July 1999 and that he would only have to wait six months to double his salary. It was suggested to Pareek that this would be an absurd arrangement for a new company to take on board. His response was to maintain that it was said and, if it were absurd, the three directors would not have said it. Pareek maintained that it was not for him to say whether it was absurd or not. He was asked whether it occurred to him to seek clarification as to whether he had understood correctly. Pareek's response was that there was nothing to clarify. He maintained that at the end of the meeting Klass said that the final salaries had been agreed and Klass would prepare the documents. According to Pareek, that ruled out any absurdity. Once again, I found Pareek to be evasive in answering questions concerning the merits of the alleged arrangement and whether he sought clarification.

34 Pareek noted that there is no mention of a two year time limit in the typed version of his notes, the Minutes. He said that the time limit only related to profit sharing which would depend on the director's discretion.

35 Pareek was also questioned about the fact that no salary was received by him in May or June, despite the fact that the meeting at which the salaries were alleged to have been set took place in April. He disputed the obvious conclusion that the discussion in July was to apply to the following months and was not intended to be retrospective. He said that the sacrifice was only from July but at the meeting it was said that all the salary sacrificed would be doubled and his salary started in May, although he did concede that when his salary was set in April there was no discussion as to sacrifices. It would appear that, at the July meeting, there was no actual discussion about the salary sacrifice scheme applying from the date when an employee was first entitled to a salary. This was simply a conclusion drawn by Pareek which is inconsistent with the intent of the alleged scheme and the fact that he did not sacrifice his salary in the early months, he just did not receive it.

36 At one point in his evidence, Pareek alleged that, during the early months, his wife did not apply for the Family Allowance Supplement as the amount that he was planning to receive after salary sacrifice would have meant that he would be earning too much to qualify for the supplement. However, at a later point, Pareek stated that, as a result of sacrificing so much of his salary, in July 1999 his wife applied for and was granted a Family Allowance Supplement. The information given to Centrelink was that Pareek's income was $1750. According to Pareek, that was because it was his net income. However, it was put to him that, based on his version of events, he had a right to double his salary at the end of December. Pareek's reply was that he did not advise Centrelink of that because he was not sure that he would get it, because a time limit was never fixed for when the amount of double the sacrificed salary would be paid. According to Pareek, it could have been December or January or July 2000. However, he did not even tell Centrelink about the possibility of receiving the payment and still has not told them. Pareek said that if he had received it he would have told them. The failure to advise Centrelink that his need for government support arose from his election not to receive the salary to which he was entitled which would be paid later and doubled reflects, poorly on Pareek's honesty. Claiming payments is also consistent with the knowledge and belief that the only income which Pareek was entitled to receive was inadequate for the support of Pareek and his family.

37 Sometime in the first half of July 1999, Pareek signed a form headed "Personnel Particulars". The form contains provision for inserting the date on which certain identified events have occurred. Pareek was given this form by Klass without any other document and he was told to sign it, which he did. He inserted the date on which he commenced employment but left the other items blank since, on his evidence, he did not have the other dates available to him at the time. According to Pareek, the dates for the other events have been filled in by someone else. The only date that has not been completed is the one for an employment contract.

38 Pareek described an occasion on which Klass gave him a paper to sign outlining some company procedures and assigning responsibility for certain activities. Pareek was assigned responsibility for all software related inquiries. He was also required to open the premises on one day of the week. According to Pareek, and presumably in response to an inquiry, Klass told Pareek that he was very busy and could not prepare the paperwork reflecting the agreement between Pareek and GlobalTech.

39 On 3 August 1999 Klass called Pareek into his office and mentioned that everybody was required to sign a confidentiality agreement. He gave one to Pareek which he signed and the dates were subsequently entered in the "Personal Particulars" form. Klass also mentioned that he intended to prepare the documents reflecting Pareek's salary agreement by 15 August 1999 although it is difficult to understand why a decision to give him a hardship allowance needed to be reduced to writing.

40 From July onwards Pareek received $2000 per month. He received his first payment on 15 July 1999. He drew a salary for himself from his family trust of $1750 and paid tax. Pareek notes in his evidence that he had to pay his own superannuation and taxation as he was working as a consultant. This description is somewhat inconsistent with his evidence of the agreement reached in the meetings to which I have referred.

41 On Pareek's evidence, the monthly payment of $2,000 was only a partial amount and, as a result, he did not issue monthly invoices. At the time of the final settlement he intended to issue the invoice for the complete amount, which he later did. Pareek alleged that the defendant on the counterclaim knew that they were only paying him 25 per cent of his salary so there was no discussion about an invoice. Again, Pareek's description of the arrangement is more consistent with being a consultant working either for certain hours or on a particular project at an hourly rate claimed by invoice, whilst being responsible for one's own superannuation, taxation and related obligations.

42 Pareek also gave evidence about the work he was doing for GlobalTech. During July and August he was handling the business promotion through Australia Post and mailing material across Australia. He was also preparing technical material for a telephone product. Pareek stated that the first project he worked on for GlobalTech was the FTR encoder card project which commenced some time in August 1999. Pareek was told that this was an important project and it had to be finished on time. Pareek alleges that he worked extremely long hours in order to complete the project on time. He worked on this project from the end of August until mid-October. Pareek stated that after mid-October GlobalTech received some other work but he mainly carried out administrative work. Hejleh had brought a telephone product from abroad to be marketed in Australia called Interphone. Pareek was involved in testing this product and setting up a telephone network for demonstration purposes. Pareek stated that Hejleh did mainly management work and Anwar worked on an in-house project to do with Telecom. Beale was also working on that project. On or about 15 December 1999 GlobalTech received a contract from Eureka Technology for what was described as the Eureka project and Pareek was placed on the project. Pareek's account of his activities was not disputed by any other witness and neither was there any dispute that he was a capable engineer.

43 In around August 1999, Pareek began to realise that running a family of four on a gross payment of $2000 per month was too difficult and he asked Klass whether he could receive $3000 and reduce the amount sacrificed. Klass advised that he would consider the proposal. In October 1999, Klass came back to him and said that the directors had accepted his request and would increase his monthly payment to $3000 from then on.

44 Pareek maintained that in November 1999 he only received the $2000 that he initially agreed to receive. He was told that Hejleh was away and that the remaining $1000 would be paid when he came back. Pareek also alleged that he was told not to deposit the cheque on that day but to wait a few days so there would be money in the account. The inability to meet a cheque for $2000 would indicate to any reasonable person that the company had significant cash flow problems. According to Pareek, he waited for the $1000 to be paid on Hejleh's return but it was not. In December Klass again gave Pareek a cheque for $2000 without any explanation for paying the reduced amount.

45 Pareek was cross-examined on his evidence that he wanted to increase the amount he received each month to $3000 but that his request was refused. It was pointed out to Pareek that, on his evidence, it was up to him to decide how much he sacrificed. His response was rather puzzling. He said that that was why he asked. Pareek explained that Klass had said that he could take $3000 now but refused the increase when Pareek asked him whether he could back date the increased amount to the earlier months. This response is also inconsistent with Pareek's evidence that it was for him to decide the amount of salary sacrificed. If indeed there were a refusal to pay any additional amount, such conduct would be more consistent with a nominal payment made by a company without sufficient income flow or capital to pay salaries. The proposition that the company had the power to decide the amount of the salary sacrifice turns a salary sacrifice into a forced withholding of a portion of an employee's salary.

46 Throughout December 1999 no one at GlobalTech offered to renew Pareek's contract beyond that date. On 20 December 1999 Pareek went to Beale and mentioned to him that their contracts were ending on 31 December 1999 and yet no paperwork had been prepared as had been promised. Pareek told Beale that he was already financially weak and would have to look for another job. He also told Beale that he considered the agreement would be over as at 31 December 1999 unless he received an offer.

47 Later that same day, Beale, Anwar, Klass and Pareek met in the workshop. On Pareek's evidence, he told the others that he could not work at the sacrificed rate and he required a new agreement. Pareek alleges that Klass apologetically said that he was supposed to prepare the documents long ago but had been very busy and could not do them. Klass said that he would prepare them during the Christmas break and they would be ready when Pareek returned. Klass is also alleged to have said that Hejleh would outline new plans when he returned on the first working day in the New Year. Klass mentioned the Eureka project and Pareek told him that work on the project would not be affected.

48 On the first working day of 2000 Pareek went to the directors' office and he told Klass that he would not continue with GlobalTech. He was asked to return the next day when Hejleh would be available. On the following day, Hejleh, Anwar and Klass were present. They asked Pareek to complete the Eureka project. Pareek told them that if Beale did the actual work, he would oversee and assist him at no cost to GlobalTech but at the same time he could look for alternative employment. He said that, if he did the work on the project he would charge consulting rates. According to Pareek, Hejleh said that he wanted him to do the work and asked him his charge rate. Pareek estimated that the work would take three weeks but he was told that the work was to be completed in two weeks. Pareek told him he would charge $5500 to carry out the work on the Eureka project. Hejleh's response was to calculate a figure based on a proportion of an annual salary of $100,000 for an engineer of Pareek's standing and then reduced the figure to $4,000 on the basis that GlobalTech would later provide Pareek with significant consultancy work. Hejleh offered terms of payment of 50 per cent at the time of the project handover and the remaining 50 per cent to be paid one month after payment was received from the customer. According to Pareek, he agreed to Hejleh's terms because he wanted to leave on friendly terms as he had $102,000 at stake. Pareek stated that, as he was leaving, he asked Hejleh about a letter of reference and about his sacrificed salary benefits. Hejleh is alleged to have said: "I have not forgotten it". Pareek said that the letter of reference was very important because all of his industry experience in Australia had been with Hejleh, Anwar and Klass.

49 On Pareek's evidence, he had to work extensive hours to complete the work. He delivered the necessary items to GlobalTech on 13 January 2000. Once Anwar successfully delivered it to Eureka, Pareek went to GlobalTech for the final handover on 19 January 2000. A letter was signed by the directors acknowledging receipt and an invoice was issued to GlobalTech by Pareek. Pareek also signed a letter confirming that all material available to him in any form had been returned to GlobalTech.

50 Pareek stated that on the day of delivery he was expecting to be paid $2000 but was given only $832.10. Pareek alleges that when he made inquiries he was told by Hejleh that "they were the contractors and I was the subcontractor". Pareek asked for details of future payments and Klass told him that he would pay him three pays at $96.55 per week, then $1544.76 then $1333.59. Pareek asked Klass to consolidate the three weekly pays into one payment due on the date of the last weekly payment. Pareek explained that as he had already completed and delivered the work, he had no choice but to accept Klass's schedule. According to Pareek, Hejleh said to him that if Pareek came across a large project which could not be done by one person, he should refer them to GlobalTech. Pareek said that he was convinced that he would get his sacrificed wages with benefits, although it might take some time. Pareek again reminded Hejleh about the letter of commendation that he had agreed to provide but which Pareek had not received. Pareek maintained that he also told Beale that he was expecting the amount that he had sacrificed. According to Pareek, Beale acknowledged that they had to give it to him because he had worked for them.

51 On Pareek's evidence, because he had not received a reference from anyone at GlobalTech, on 11 January 2000 he contacted by email FTR, the company which provided GlobalTech's first project, and asked if he could have a reference. On or about 17 January 2000 Pareek was contacted by an officer of FTR who offered him short term employment. Pareek stated that he accepted the position because he did not have a letter of reference and the delivery schedule of the Eureka project took up so much of his time that he did not have time to look for employment. Pareek signed a contract with FTR on 21 January 2000 and worked with them until 31 March 2000. He was payed $2200 per week.

52 On Pareek's evidence, as soon as he had resigned, he was able to make a decision whether he would invest the amount that he had sacrificed in the company or he would take cash or shares for double. Pareek said that he chose to take cash. He was asked when he made that decision and said that it was when he lodged his claim; that is, after the court proceedings. Prior to then he had only given an invoice for the eight months and said that he would discuss the matter further. It is therefore the case that Pareek only told GlobalTech what he had decided about such an important issue when he commenced legal action. Pareek made it clear that he chose the cash even though his claim is in the alternative. In his letter to Hejleh dated 21 March 2000 Pareek referred to the meeting at which the annual consultancy charges for him were set at $8000 monthly and that he was also told at the meeting to make sacrifice from the full consultancy charges and that the sacrifice amount would be converted into company shares. He also stated that the shares would be issued for double the sacrificed amount. On that basis he claimed $102,000 in shares. Yet again Pareek had difficulty in answering the very straightforward proposition that he had only claimed shares and not cash. At one point he said that he was giving them the option but he conceded that there was no reference in the letter to giving the company an option. Pareek disputed the suggestion that there was only ever a share option rather than cash.

53 Pareek was also referred to his letter addressed to Klass dated the same date, 21 March 2000. The relevant portion of that letter is as follows:

"4. Next thing I receive is an email on 15th March from you, which asks me to sign a letter, which is not related to this payment at all and highly objectionable. I had worked for GlobalTech Pty Ltd from 1st May 1999 to 31st of December 1999 and sacrificed my time and wages in order to help you setup the GlobalTech Pty Ltd company. For May 1999 and June 1999 I did not get any payment and later I received about 25% of my wages. Rest were supposed to be converted into shares and given to me. I had worked with full dedication and sometimes worked day and night to finish the work on time."

54 With respect to that paragraph it was put to Pareek that yet again he had made no reference to cash. His response was far from enlightening or explanatory. At first he said that he was helping the directors and then he said that he wanted to talk to them. Neither is a satisfactory explanation for the fact that at no stage in his request for payment did Pareek mention an entitlement to the cash claimed in the counterclaim and referred to in his evidence.

55 The next explanation that Pareek gave for failing to refer to cash in the second letter either, was equally as unsatisfactory. He said that he was not a lawyer, that he was the most junior person in the group and was just an engineer. He made no attempt to explain why he lacked the capacity at that stage to state his entitlement but had acquired that capacity by the time he initiated proceedings. His final explanation was that it was a friendly letter in which he was actually helping the directors. He wanted to have a discussion because they had already started putting pressure on him to sign a letter that said there was no amount owing to him. The connection between his desire to have a discussion and his failure at the earliest opportunity to mention the entitlement he now claims, is not immediately apparent.

56 When Pareek resigned from all of his roles in GlobalTech on 8 February 2000, he voluntarily gave up his interest in the company. Since he was not working at GlobalTech and would not be a beneficiary of intellectual property, Pareek considered it appropriate to disassociate himself with GlobalTech Corporation. On 18 February he completed an ASIC form to formalise his resignation. He then received a further payment for the Eureka project. On 15 March 2000 Pareek received, by email showing a sent date of 10 March 2000, a letter which he was requested to sign. The letter said that, upon receipt of a payment of $2878.35 from GlobalTech, he had been fully paid for all work done to that date. The letter also stated that there was no outstanding work due from Pareek or payments due to him relating to GlobalTech or GlobalTech Corporation. On 14 March 2000 Pareek sent GlobalTech a letter stating that he had not received the payment due and demanding payment of the balance. On 16 March 2000 Pareek received a further email saying that GlobalTech had that day posted him a cheque for $1544.76 being the third instalment of his part payment and that a further payment of $1333.59 was due to him on 28 March 2000. Pareek was again asked to sign the document for GlobalTech's records. On 20 March 2000 Pareek received an email from Klass disputing that any payments to Pareek were due and expressing disappointment that Pareek had not signed the document sent to him which was described as "simply an administrative tidy up of the paperwork". Pareek's email response explained his reasons for asking for payment. Pareek also sent a letter advising that the company owed him $102,000. On the same day that Pareek received the email from GlobalTech, he also received a phone call from Hejleh asking him to sign the letter.

57 On 31 March 2000 Pareek received two letters. The first, dated 30 March 2000, was from Clayton Utz, GlobalTech's solicitors, refuting Pareek's entitlement to any further monies. The second letter, dated 30 March 2000, was from GlobalTech stating that there never had been a contract for Pareek to be paid $96,000 per annum and that the discussions at the meeting concerning the proposed business of GlobalTech were non-legal and non-binding. The letter further alleged that the only agreement about shares was that they would be issued to personnel who had worked for GlobalTech for at least two years commencing 1 July 1999.

58 Pareek was questioned about the dispute which arose between him and GlobalTech following his resignation. He was taken to a letter which he wrote on behalf of his family trust, addressed to Anwar and dated 14 March 2000. He was asked whether he wrote it prior to being asked to sign a document stating that he was not owed any money by GlobalTech. Once again, it is difficult to discern from his response what his answer to the question was. At one point he seems to suggest that he received the email around the same time but then said that he wrote the letter after talking to Anwar and Klass on the telephone without obtaining any response to his question. He agreed that prior to March he was making lots of inquiries about getting paid the money for the consultancy work with Eureka. He said that they had already started putting pressure on him to sign a letter that they owed him nothing when he wrote the letter of 14 March 2000. However, he rejected the proposition that he became upset when a dispute arose in relation to the consultancy payment G8 and he decided to make in response a claim without foundation.

59 According to Pareek there were a number of attempts to contact Anwar about receiving payment before Klass sent the email dated 10 March 2000 asking him to sign the attached statement. The attached statement is in the following terms:

"Mahaveer Pareek informs and declares that:

This is to confirm that, upon receipt of a payment for $2,878.35 from GlobalTech Pty Ltd, I have been fully paid for all work done to date.

I also confirm that there are no outstanding work due from me or payments due to me relating to both GlobalTech Pty Ltd and GlobalTech Corporation Pty Ltd."

60 Pareek agreed that he did not raise the issue of the salary sacrifice. He said:

"I was waiting for Mr Khaled Hejleh so that we could get together and do it. It was like a gentle- ... "

Pareek then changed direction but was taken back to his answer and, despite being particularly evasive and at one point stating that "it was not a gentlemen's agreement". He ultimately admitted that he was going to say that it was a gentleman's agreement. However, he continued to dispute the proposition that the nature of the arrangements discussed was a gentleman's agreement. He said that he called it that because of the four year association between them which is why he would not have gone and taken strong action. I do not accept Pareek's explanation. It is apparent to me that he made a slip which he considered to be significant enough to explain away with lies.

61 The fact is that Pareek was quite prepared to make a demand for $2878 stating that the payment is overdue for two weeks and that the amount is payable immediately and requesting the payment be paid immediately, but made no mention of the far more substantial sum that he alleges he is owed. His explanation was that one amount was small and the other large and he would not have made a demand for the larger amount. He also said that if he had asked Hejleh about the money and he did not reply then he would call and if he still did not reply then he would have written a similar letter. According to Pareek, it was made clear to him that the money would be given if the company could afford it and he knew in December 1999 that the company did not have many money producing projects and that was the reason he was not pressing for the $102,000. Of course, recognition of the company's parlous financial position is inconsistent with his allegation of a salary sacrifice scheme whereby double the amount sacrificed was to be paid in cash after only six months of operation.

62 In re-examination, Pareek explained that it took him so long to write his letter of demand because he had spoken to Hejleh in January about his salary sacrifice and he said that he had not forgotten it. He also said that it took him until 21 March 2000 to write the letter because the directors started forcing him to sign the letter stating that no monies were owed to him. According to Pareek, that was the first indication that they did not want to pay him the money owed to him from his salary.

63 Pareek was also taken to page 2 of the Memorandum where it says:

"Note, this salary will be paid only if GTPL is in cash flow allowing all key personnel to be paid equally until the lowest salary earner receives his full monthly pay."

64 Pareek's explanation was that he never received this document. Nevertheless, Pareek was at the meeting which the Memorandum records and it was not suggested to Klass that he included in the Memorandum matters which were not discussed at the meeting. In any event, the note to the Memorandum is more consistent with commercial reality than the terms of the agreement alleged by Pareek.

65 Pareek was also taken to Hejleh's letter of 30 March 2000 denying Pareek's entitlement to the monies sought. Pareek's evidence was that the profit sharing arrangement depended on working for GlobalTech for at least two years but a separate arrangement was in place in relation to salary. However, in his letter in reply of 6 April 2000 Pareek writes:

"3. We were told to sacrifice salaries. The sacrificed amount would be considered as equity in the company. This sacrifice could be taken back when company has money or could be converted into shares for double the amount of the sacrifice."

66 Two observations can be made about this paragraph. First, it is inconsistent with a right to double the sacrificed amount in cash after six months. Secondly, Pareek had previously said in his evidence that he had a choice whether or not to salary sacrifice. When referred to the above paragraph, he agreed that he had been told to sacrifice salary. Whether or not Pareek volunteered to sacrifice his salary or was directed to do so has no impact on his entitlement. However, the fact that his evidence on this point is inconsistent, adds to the concerns I have expressed in relation to other aspects of his evidence.

67 Having been taken to this paragraph and having been questioned on his entitlement to cash as opposed to shares, Pareek directed the Court to the third sentence where it says that the sacrifice could be taken back when the company has money or could be converted into shares for double the amount of sacrifice. He then added: "I should mention here that it can be taken as money or shares". However, it remains the fact that there is no mention of this in any other document adduced in evidence. When it was put to Pareek that he did not include in his letter an option of taking double the cash, he said: "It's the same thing". Clearly it is not. Pareek's explanation was that the letter was written very quickly. He disputed that he had changed his story and supported that statement by reference to the Minutes written by Michael Klass which says double the amount of shares. It is difficult to see how this statement, consistent with all others, supports his assertion. As on a number of other occasions, Pareek was very evasive in his response. When it was put to him again that double cash was not talked about, the best response he could make was that he thought it was talked about.

68 Pareek was questioned on the content of the initial defence and counterclaim filed in the action which he agreed was correct in its content. Pareek maintained that in his letter to the directors of GlobalTech he was giving them options because he did not want to deprive the company of cash. He considered he was doing GlobalTech a favour in opting for cash or shares depending upon what the directors were comfortable with. He also said that he did not even press for cash at that time. With respect to his counterclaim, he explained that he did not refer to a claim for cash because he was helping the company because it did not have any cash. I consider this explanation to be highly implausible and entirely without merit.

69 It was specifically put to Pareek that he was working under an arrangement where he knew he was sacrificing his time and wages to help set up the business. He denied this and maintained that he was working for a salary. Pareek also refuted the proposition that he became angry when a dispute arose in relation to the consultancy payment and he then decided to make a claim which had no foundation. He denied this proposition and referred to a discussion with Hejleh when Pareek was leaving GlobalTech in which Hejleh told him that he had not forgotten the sacrifices. In my view, both the explanations put to Pareek are more plausible than anything he raised in his evidence.

70 Pareek also provided this explanation for claiming cash: Despite being financially strapped for cash, the company did not pay him for his work as agreed, so he felt that if he opted for shares he would be taken for a ride again. In my view, there is no substance to this explanation. Failing to pay cash on time or at all was exactly the problem that Pareek had with GlobalTech. It is difficult to see how claiming cash in this action would prevent a repeat of that conduct. In any event, Pareek agreed that in his counterclaim he actually claimed for shares rather than cash. Pareek's explanation was that the document was prepared in a hurry and from memory. However, following discovery when he was privy to documents from the other party, he remembered that he was entitled to cash. Again he was extremely evasive when asked what it was that verified his entitlement to claim cash. First he said that he did not have his handwritten notes when he initiated the claim. But they were not produced in the course of discovery so could not have refreshed his memory. Pareek mentioned that the typed notes were incomplete and that his handwritten notes had more in them. Pareek then identified the Memorandum as a document that prompted his memory. However, he conceded that it did not say he was entitled to double the cash or double the shares but it referred to cash and, as he explained, "that's what put me back into the thinking process of what happened earlier". Pareek was obliged to concede that there was no document which recorded an entitlement to double the sacrificed amount in cash. It is apparent that this explanation for failing to refer to a claim for cash from the outset has no foundation in fact.

71 It was put to Pareek that it was only in the two weeks prior to trial that his case was amended to include a claim for cash. Pareek said that perhaps it was overlooked earlier and then rectified. When asked to explain this response, Pareek said "Because I didn't want the shares. I don't want equity in the company and I didn't want any connection with GlobalTech now ... ". It is apparent from that statement that his claim for cash is simply based on a desire not to be connected with GlobalTech as a shareholder rather than on any agreement reached between the parties.

72 The plaintiff on the counterclaim also tendered into evidence by consent the statement of Lincoln Ross Campbell ("Campbell"). Campbell is a partner and account manager for Talent International Pty Ltd ("Talent") which is said to be one of the leading information technology ("IT") firms in Perth. He has been involved in hiring in the IT industry in Perth for the last 10 years. In 1999 he was employed in the same capacity by another IT services company. As part of his employment he was required to be constantly aware of salaries and conditions applicable to IT personnel, including software engineers. Having studied the curriculum vitae of Pareek, Campbell concluded that in 1999 the employment prospects of someone like Pareek would have been very strong. In 1999 the demand for well qualified engineers such as Pareek was at a peak and Campbell considers that he would have had little trouble obtaining employment for Pareek either as a salaried employee or as a contractor. According to Campbell, at that time a contractor situation was more prevalent earning the engineer a gross hourly rate of $50 - $60 per hour. Campbell concludes that Pareek would have earned a total package of approximately $80,000 - $90,000 per annum if he were in full-time employment.

73 The final evidence to be called on behalf of the plaintiff in the counterclaim was a statement of Ross Patrick Minotti ("Minotti"), an employee of BankWest, which was tendered by consent. In 1999 Minotti was a mobile manager for BankWest based at the Claremont branch. His main role was in sales including new loans. He has no recollection of speaking to or meeting with Pareek in 1999. However, based on BankWest records he appears to have met Pareek in early June 1999. A BankWest form entitled "Enquiry for Consumer Lending" dated 1 June 1999 is signed by Pareek. Minotti identified the other writing on the form as his. Based on this document, Minotti concluded that he discussed with Pareek his application for a loan. Minotti also concluded that he assessed Pareek's income on income tax returns forwarded to him by Pareek. Minotti stated that, to obtain details of Pareek's income, the bank at that stage looked at two years of tax returns averaged, plus add backs such as depreciation, directors' fees and related matters. According to Minotti it was not the bank's practice to approve a loan without proof of income either by tax returns for the previous two years or pay slips or a letter of employment. Minotti stated that it was not his policy at this stage to contact employers and he was fairly confident that he did not ring up Pareek's employer. The bank's records reveal that a loan for $135,000 was approved by way of a line of credit secured by a mortgage over the Pareek's house. Minotti stated that once the loan had been approved he would have had no further involvement in the process which would have been handled by the bank's Head Office.

Evidence of the defendants on the counterclaim

74 Hejleh, Klass and Anwar each gave evidence in defence of the counterclaim and in support of the plaintiff's claim for a declaration. All three are qualified engineers with previous experience in forming and running their own companies and in working in the industry. Hejleh holds a Bachelor of Science (Honours) in Mechanical Engineering. Following graduation he worked as a trainee engineer in Scotland before migrating to Australia in 1983. On arriving in Australia Hejleh commenced work at Formulab in Perth as an engineer. He later took up the position of Sales Engineer with the company. Hejleh continued to work at Formulab for 12 years. By 1992 he was the Chief Executive Officer of Formulab International Limited. Klass graduated in 1977 from the University of Western Australia with a Bachelor of Engineering. He commenced work in 1978 and met Anwar there. Anwar obtained an Electronic Engineer Diploma from Perth "Tech" in 1977. The two had known each other for many years and had gone to school together. In 1979 they started their own business. In 1981 Klass and Anwar commenced work at Formulab as Director of Research and both worked there until March 1999 when Formulab went into voluntary administration. Klass is now the director of Operations of GlobalTech which involves overseeing the administration and financial operations of the company. Anwar's title at GlobalTech is "Director - Technical". He is in charge of all research and development engineering, internal projects as well as external engineering contracts. Klass and Anwar met Hejleh in 1983 when Hejleh joined Formulab. They each met Pareek in about 1994 - 1995 when he commenced working at Formulab. They met Beale in around 1992 when he was employed at Formulab as an engineer.

75 Hejleh left Formulab in 1994 to join Petroserv Limited ("Petroserv") in Doha as Director of Engineering and Business Development. After a year with Petroserv Hejleh became Managing Director. He left Petroserv in 1997 but is still actively involved in business dealings with them. In 1997 Hejleh became CEO of Neuronetics Voicenet Corporation Limited ("Neuronetics") in California, a 50/50 joint venture between Formulab and Goldtron Limited. Hejleh also became an independent (non-executive) director of Formulab Neuronetics. He resigned as a director of Formulab Neuronetics and as CEO of Neuronetics Voicenet in late 1998 and decided to start his own business.

76 The first time Hejleh met Pareek was in December 1996 at a product release. Pareek was there with Beale as engineering support. Beale commenced working at Formulab in 1992 and Hejleh met him at that time. Beale became Formulab's Senior Engineer in 1994, shortly before Hejleh left.

77 On Hejleh's evidence, he returned to Perth from the USA with the aim of starting his own business. Anwar had kept in touch with him after he left Formulab and saw Hejleh when he visited Perth during the period he was employed overseas. In January 1999 he was involved in the incorporation of GlobalTech Engineering, Supplies and Services Pty Ltd ("GlobalTech Engineering"). Global Engineering later became GlobalTech.

78 At about the same time Hejleh was setting up GlobalTech Engineering, he met with Anwar and Klass. The meetings started merely as social gatherings but over a period of three months or so developed into meetings discussing their respective business plans. At that time, Anwar and Klass were still working for Formulab but were uncertain about their future as there was a lot of talk about re-structuring Formulab. Hejleh told them about Global Engineering. Anwar and Klass told him that they, too, were considering starting their own business supplying electronic engineering services and they had established Advanced Technology Group Australia Pty Ltd ("ATG") in 1999 for that purpose.

79 Hejleh stated that he also casually met with Pareek and Beale at Formulab during January and February 1999. Hejleh thought that Klass or Anwar might have been present at some of these encounters. Anwar could not remember who invited Beale and Pareek to these meetings and believed that it was more a matter of courtesy. Apparently, Beale and Pareek also indicated that they were considering starting a business to contract out engineering services. They were waiting to see what happened to Formulab before further developing their plans.

80 After Formulab went into administration, Hejleh began meeting with Klass and Anwar more regularly as they had more time on their hands. Hejleh said that Beale and Pareek came along to most of these meetings. Both Klass and Anwar maintain that salaries were never discussed at these early meetings. It was suggested to Hejleh in cross-examination that there was a meeting at Formulab where salaries were discussed and he told everyone that he was fixing their salaries at $100,000 per annum. Hejleh maintained that there was no discussion of salary in April and he never agreed to pay Pareek, or anyone else, $100,000 per annum. Similarly, Anwar had no recollection of a meeting at Formulab at which salaries were discussed.

81 After a while it became clear that the group required a proper commercial premises to operate from. Hejleh disputed the proposition that, at the time the premises were purchased, they had decided to start with the common business venture. He was firm in his evidence that they decided to obtain premises before they had even agreed on how to proceed with GlobalTech. Hejleh said that the premises were a private business investment made by him, Klass and Anwar and if they decided to start different business, then each would pay a proportion of the rates. The idea was that they would share premises and save costs.

82 On Hejleh's evidence, all five of them commenced looking for premises. However Klass cannot remember anyone asking Pareek to assist in looking for new premises and there was no discussion in relation to Pareek being paid for looking at new premises. Anwar said that it was mainly him and Hejleh and Klass who looked for premises but Pareek may have voluntarily assisted. Ultimately, premises were obtained in late April or May in Canning Vale, which is GlobalTech's current place of business. On Klass's evidence, Pareek did help them move in and he had his own office at the new premises. Anwar stated that he and Klass brought in equipment and furniture and various other items required to run a company.

83 After they all moved in to the premises, they began having discussions in the boardroom of the new premises. Klass, Anwar and Hejleh decided to join forces in a common business venture. Hejleh stated that it was also decided to save costs and run the full operation under one company, GlobalTech, and shelve ATG for later re-structuring. Each of Hejleh, Klass and Anwar were to have an equal share in each company. This meant that each one of them would have to provide an equal amount of cash to form GlobalTech's initial and ongoing working capital. This decision was made without consultation with Beale and Pareek, although they were made aware of it. Klass and Anwar confirm this account of the circumstances behind the formation of GlobalTech.

84 During March, April, May and June 1999 the five of them met several times. From the start Beale and Pareek expressed their wish to be involved in GlobalTech, although neither were actually asked to join GlobalTech. Klass said that Pareek became involved by simply being there when forming the company was discussed. On Anwar's evidence, the discussions they had up until that time did not involve including Beale and Pareek as shareholders or partners, as they did not have the ability to contribute financially. He recalls that Beale mentioned that, as they were not contributing financially, then it should be the case that Hejleh, Klass and Anwar retain ownership of GlobalTech. Pareek made no objection to that statement at the time.

85 According to Hejleh, he made it clear that whilst he personally was determined to make GlobalTech a successful management, engineering and procurement technology company, he did not know and could not guarantee how long this would take or how it would happen. Both Beale and Pareek were told by him, and also by Klass and Anwar that, if they needed an income in the short to middle term, they should find a job elsewhere. Hejleh maintained that this was said a number of times throughout the meetings in clear terms.

86 Hejleh stated that he, Klass and Anwar had millions of dollars worth of shares in Formulab which were lost when it went into administration. The loss meant that, contrary to the mood in the technology industry at the time, he and Klass and Anwar approached the formation of GlobalTech cautiously. According to Hejleh, they knew what could go wrong and their expectations for GlobalTech's success were very modest. The company was financed for its basic operational needs by its shareholders by way of loans to the company. There were no employees and no one was paid a salary. Hejleh stated that he, Klass and Anwar provided equal amount of cash pro-rata to their shareholding. Hejleh also emphasised that, although it had been made clear to Beale and Pareek in the discussions that they would not receive an income whilst GlobalTech remained unprofitable, they decided to commit to the company. Hejleh said that he could not recall exactly when Pareek and Beale committed themselves however, they participated in many of the discussions relating to the formation of the company and always gave the impression that they wanted to be involved. Hejleh maintained that the attitude of Beale and Pareek did not change even when it was made clear to them that they were unlikely to receive any financial reward in the short term. He was certain that Pareek was fully aware of all the risks. Anwar confirmed that, at the meetings, they discussed the fact that the venture was risky with no promise of compensation or rewards. They also discussed the fact that Anwar, Hejleh and Klass would do their best to make it a success but that everyone would have to make certain sacrifices. Beale and Pareek were given a choice to either contribute without guaranteed success or reward or not to be involved at all.

87 During the discussions about the future of GlobalTech and of each of the five members of the group, it was agreed that a new company named GlobalTech Corporation would be formed. Hejleh proposed it and the others agreed to it. Each of the five would be directors of this company and own 20 per cent of the company. At an appropriate time this company would collect royalties for products developed and completed prior to target salaries being achieved. Thus a royalty component of sales revenues generated by such products would be paid to GlobalTech Corporation which would distribute such income equally between its members. Royalties would ultimately be paid to the people involved with GlobalTech during that product's development. On Hejleh's evidence, no specifics were discussed in relation to this royalty scheme because no products had been developed by the company at that stage.

88 It is with respect to the issue of financial reward that the principle point of disagreement arises. It was Hejleh's recollection that, in late May or the middle of June 1999, the group began discussing how to make GlobalTech a viable commercial operation and how each member of the group would be compensated. They also had brainstorming sessions in order to quantify their compensation. Hejleh was firm in his belief that no discussions as to remuneration had taken place before this time. Anwar confirmed that this was the case. Klass maintained that the topic of salaries was only discussed when the group moved into the Canning Vale premises which was in May.

89 Hejleh said that he made it clear at the beginning and end of each discussion as well as during the discussion that there were only discussions and did not represent commitments by him or by the company to anyone. According to Hejleh, he specifically stated that the discussions were "not legally binding". The reason he made those statements was because they did not know what the future held and he did not want the company to have obligations that it may not be able to fulfil. In any event, the company had no income and no cash and therefore could not commit to paying anyone anything. Hejleh maintained that each one of the group acknowledged that the discussions were not be legally binding. Klass confirmed that this was the basis of the discussions. He recalls Hejleh saying that "we are talking as five friends and not in the capacity of directors". Anwar also recalls Hejleh and Klass saying that the discussions would not be legally binding and said that this was highlighted during a number of meetings so that it was clear that all that the discussions were meant to bring out were ideas for survival, progress and improvement of GlobalTech. According to Anwar, the discussions focused on the future. They did discuss salaries but the discussion was about the future when the company could afford to pay them.

90 Klass recalls that at one of these early meetings a proposal was formulated. There were three options for the business:

(a) Pareek and Beale would be sub-contractors to GlobalTech on a job to job basis. They would own their own business;

(b) We would all work for GlobalTech full-time on a scheme involving the sharing of a percentage of GlobalTech's net profits; or

91 According to Klass, these options were briefly discussed at subsequent meetings. Beale and Pareek decided to work for GlobalTech full-time.

92 In cross-examination, Hejleh said that he did remember options being put to the July meeting but could not recall what they were. The options put to him were those referred to by Pareek in his evidence. Hejleh denied that it was ever an option for Pareek to work full-time for GlobalTech, sacrifice a portion of his salary and later be paid the salary with additional benefit taken as cash or shares. Hejleh denied that it was ever an option for Pareek to work full-time at GlobalTech and receive a salary. The company simply could not afford such an option. Neither did he remember Pareek referring to such an option. Hejleh did remember the option for Pareek to work elsewhere and come to GlobalTech on a needs basis and charge contract rates. With respect to the other two options that were put to him, Hejleh said that he remembered there were options but he did not believe they were worded in that way. It must be kept in mind that, according to Klass, there was discussion about the options referred to above. It may well be that Hejleh's recollection was influenced by the discussion of those options. In my view, it cannot be concluded from the fact that Hejleh remembered the discussion of options that they were as Pareek has alleged. Indeed, Hejleh's rejection of the first two options suggested to him in cross-examination on the basis that they were not feasible, cannot be taken as acceptance of the proposition that there was discussion of the options to which Pareek referred.

93 Klass was also cross-examined on the meeting, which Pareek says occurred in early July, where his salary was discussed between all five members of the group. It was put to Klass that Pareek determined the approximate date by the fact that a particular secretary was working for GlobalTech and she did not commence until 1 July 1999. Klass indicated that he had no recollection whether the meeting took place before or after the secretary commenced with GlobalTech but he did recall a meeting where salaries were discussed. When it was suggested to Klass that at this meeting Pareek put forward three options Klass conceded that this could well have occurred. However, he disputed that one of the options was that Pareek would work full-time at GlobalTech and sacrifice salary to be paid later with additional benefits taken as cash or shares. The second option put to Klass was that Pareek work full-time at GlobalTech and receive a full salary. Klass disputed that Pareek would receive a full salary. The third option put to Klass for comment was that Pareek would work elsewhere and come to GlobalTech as a consultant. Klass disputed that Pareek would work for GlobalTech as a consultant. To his recollection, Pareek and Beale were thinking of doing their own engineering business and GlobalTech would sub-contract them from time to time as needed. Klass also refuted the proposition that Hejleh chose the first option on the basis that he did not believe that anybody made any decision affecting another in the group. Klass stated that it was Pareek's choice to work for the company on a full-time basis.

94 According to Hejleh, it was in the context that their discussions were not legally binding that they discussed salaries. There is some conflict in the evidence as to when remuneration of those involved in the business was first discussed. In my view, nothing really turns on the timing of the meetings as opposed to the timing of any payments.

95 Hejleh emphasised that the discussion of salaries was on the basis that the company would not make salary payments to any one of the five until the company started generating a cash flow through sales. He maintained that Pareek and Beale both agreed that the company would not make salary payments until it started generating cash flow, but both said they required a small amount "to keep the wolves away"; what they needed to keep themselves together during that period. They suggested $2000 per month each. Hejleh made it clear, and it was agreed, that this amount would be paid if, and only if, the company was in a position to make such a payment. Klass's evidence was to the same effect. Hejleh emphasised that this money was not a salary and that Pareek never received a salary from GlobalTech. Anwar described it as a token payment. Hejleh stated that the shareholders undertook that they would do their best to provide the company with sufficient funds to allow the payments to be made but it was made clear to Pareek that it was not known how long the payment could be sustained.

96 The only reference to doubling was in relation to points. The difference between the target salary and what money is received would be doubled and added towards the points that will create his share of profit sharing.

97 On Anwar's recollection there was an agreement that when the company could afford it, he and Klass and Hejleh would receive $2000 per month. If the company were successful, that is, in net profit, it would pay them more. Anwar also said that, providing the company could afford it, either from cash injections from shareholders or from sales, Pareek and Beale were to receive $2000 per month from the outset. Everyone agreed to those terms but there was considerable debate about when the outset was.

98 On Hejleh's evidence, target annual salaries were set up for each of the five based on their level of skill and their participation in the inner core of the company. Klass refers to them as virtual annual salaries which were intended to be future salaries each member of the group could expect when the company was successful and making a profit. Anwar agreed that the intention was that the salaries would be commenced if and when the company was profitable. There were some inconsistencies in the terminology used by the defendants on the counterclaim with respect to the salaries to be paid when the company was making a profit and the salary identified for the purpose of the profit sharing scheme. Although at times different terminology is used, it is clear from the context which of the two types of salary is being referred to. In my view, this minor inconsistency does not reflect adversely on the credibility of the witnesses. It is apparent from the evidence, if accepted, that the salary to be paid when the company was in funds is best described as a target salary. The salary identified for the purpose of each party participating on an equal basis in the profits of the company, and not being a salary which was actually to be paid to anyone, clearly meets the description of a virtual salary.

99 There was also some minor conflict in the evidence about the exact amount of each target salary but they ranged from Hejleh's salary of approximately $150,000 down to Pareek's salary of about $90,000. According to Hejleh, the idea was that, once the company started selling and money came in, then the company would start paying salaries. Everything depended on the company receiving sufficient income, at which point the monies were to be spread evenly amongst the members of the group until the target, or virtual, salaries were reached for everyone. Pareek and Beale would be paid $2000 each from the start and then, when the cash flow allowed, Klass, Anwar and Hejleh would be phased in and then all salaries would be increased pro-rata as cash flow allowed until the target salaries were reached. Both Klass and Anwar recalled that Pareek was unhappy with the level at which his virtual salary was assessed and wanted everyone to earn the same amount. According to Hejleh, everyone acknowledged the concept of, and difference between, the actual salaries and target salaries and that the company was not obliged to pay the target salaries now or at anytime in the future. Both Klass and Anwar confirmed this point in his evidence making it clear that, if the company had no money they would not receive payment, and if the company was in funds payments would not be retrospective. Hejleh said that the virtual or target salaries were never entered into the company accounts, as they did not exist.

100 Klass was adamant that Pareek had not commenced work believing that he was receiving a $100,000 salary. He maintained that he made it clear that the $100,000 was simply for the purpose of being fair in calculating the point system. In support of that evidence he referred to the note at the end of the part of the Memorandum dealing with the issue of shares which states: "Salary is based on $100,000 each for the purpose of calculating the issue of shares as in 1c and 1d above. Actual salaries are dealt with as a separate issue."

101 Hejleh denied that Pareek had an option to work for a salary and defer payment until later or that he told Pareek he would have to defer payment of some of his salary until a later date. He maintained that there was no deferral of salary which could later be converted into shares. There was no discussion of deferral of salaries in any form. It was put to Hejleh that he considered that Pareek did not deserve any pay. He said: "No, it's not a case of deserve. We just didn't agree on anyone getting paid at all during that period. We were still finding what we were going to do." At that point they had not decided yet.

102 Hejleh rejected the proposition that Pareek requested that the arrangement be finalised. He maintained that there was no arrangement to finalise. He agreed that, at some point, Pareek was asked to sign a confidentiality agreement but disputed that it would have been logical to document the arrangement with Pareek at the same time. Again, Hejleh made it clear that there was no contract to document.

103 Hejleh's evidence was to the effect that the $2000 payment to Pareek and Beale commenced from 1 July 1999. However, he disputed Pareek's evidence that there was an end point of 31 December 1999 after which they could renegotiate the arrangement. However, Hejleh did say that there was to be a review after six months, although Anwar rejected the proposition that salaries could be renegotiated at the end of the year. Hejleh also rejected the proposition that he told Pareek and Beale that the sacrifice they made now was to set up the business and therefore the sacrifice amount would be doubled or that the amount will be considered as a loan to GlobalTech or its director to help with setting up the business which could be taken back in cash or in shares. Hejleh insisted that the only reference to doubling was in relation to the points referred to in the profit sharing scheme. As part of that scheme, the difference between the target salary and any money received would be doubled and added towards the points that would create Pareek's share of the profits. Anwar had no recollection of anyone mentioning that the amount of any salary sacrificed would be doubled. Hejleh denied saying, in response to Pareek reminding him about his sacrificed salary benefit, that he had not forgotten it. He said there were never any one-to-one discussions with Pareek or Beale.

104 On Hejleh's evidence, a profit sharing scheme that would represent 20 per cent of the company's net profit was also discussed. Anwar describes it as a system where the contributions to start up the company would allow them to benefit through a point system related to financial or time contribution. To Anwar's recollection, Hejleh suggested this points system during one of the meetings as a means of providing equitable benefits to GlobalTech. The point system would be translated into a future profit sharing scheme. Further, in order for anyone of the five to qualify for the profit sharing scheme they would have to remain with the company until the company became profitable. It was also agreed that a minimum stay of two years was required for a person to qualify a person for the scheme. According to Anwar, this was the agreed measure that would confirm an adequate level of commitment and contribution. The 20 per cent profit was to be split between the five in a way that would take into account the contribution of each of the five to the company. This was to be done by a weighted point system. The measurable contribution for each of the five were as follows:

(a) Hardship: Each of the five were to be allocated a virtual annual salary of $100,000 (to ensure that time contribution was equally weighted for all five rather than reflecting target salaries which were different). This amount less the actual salary paid = hardship.

(b) Plant and equipment: Each individual was allowed to contribute equipment and/or furniture by transferring these assets to the company. Such items were required by the company to get going. The rationale behind these contributions was that the company would have to buy these items in any event. Such plant and equipment would be at $ market value.

(c) Cash: Actual cash injected into the company by way of loans or facilities to give the company the necessary funds to operate and grow.

105 These measurable contributions were to be weighted as follows:

(a) Hardship: Actual $ amount x 2, unless amount is eventually reimbursed in cash (at the discretion of the company) in which case actual $ amount x 1.

(b) Plant and equipment: Actual agreed market $ amount x 4.

(c) Cash: $ amount x 8 be it by way of loan, facility or capital injection.

106 This scheme was jointly developed during the discussions by each one of the members randomly standing up and writing and explaining his ideas on the whiteboard or reiterating the ideas of others for clarification. According to Hejleh, the virtual annual salary of $100,000 referred to in par (a) above was set at an equal amount for everyone and was never a target salary.

107 As part of the scheme it was discussed that the five members would be obliged at the very least to give their best for a period of at least two years or until the company was commercially successful without receiving any reward other than actually getting paid from month to month. Consequently, because Pareek left in January, was not entitled to the benefit of the profit sharing arrangement. Hejleh was firm in his evidence that the requirement to remain with GlobalTech for two years was discussed, although he could not now remember exactly when that was.

108 On Hejleh's evidence, the element of risk was highlighted repeatedly as an intrinsic part of building a successful business. Operation of the scheme was conditional upon the company making a profit. Hejleh said that he also made it clear that what was being discussed would have to be formally approved by the shareholders before being adopted and therefore any arrangement was not legally binding. According to Hejleh, the shareholders never met separately and discussed and/or agreed on what had been raised during the discussions. The profit sharing scheme was not something that was formulated by the shareholders separately and then put forward for agreement. The scheme was developed on the spot. Hejleh maintained that, during the discussions, he personally made it very clear that all the talk might come to absolutely nothing and that if anyone could not make ends meet they should forget about GlobalTech and go and get a job. Hejleh even offered to help them obtain employment. As Hejleh noted, everyone was taking a risk of losing time and/or money. Hejleh insisted that Pareek was made fully aware of all the risks. Anwar said in his evidence that he was in no doubt that they would not necessarily be rewarded for the time and effort put into the company. Any future reward was dependent on many unknown factors and it was clear that everybody was risking their time and/or their money.

109 When cross-examined, Hejleh was taken to Pareek's letter to Klass dated 21 March 2000. He was asked why he did not issue Pareek the shares to which he referred if he had worked for six months and had performed his side of the bargain. Hejleh said that Pareek did not qualify for the profit-sharing scheme because he had not worked for two years. According to Hejleh, the two year period was really a benefit. If the worker stayed for two years, even if the company did not realise success, then they would still qualify. Of course Hejleh did not say how the company would pay the money if it were not a success.

110 Both Hejleh and Anwar recalled that the point system was later summarised by Klass in the Memorandum. He described the Memorandum as a piece of paper that reflected the discussions regarding how they were going to proceed together as five people. I note in passing that his description of proceeding together as five people is consistent with Beale's evidence that he was part of a partnership. Although Hejleh's described Klass's summary as incomplete and having some inaccuracies, he considered that it accurately captured the key points in the discussions. He maintained that all five members of the group agreed that the discussion was not legally binding and this was recorded in the Memorandum. According to Hejleh, there was much emphasis during the discussions that the scheme was not a commitment and not legally binding. Anwar's evidence was that everybody, including Pareek, agreed that the discussions were not legally binding. If, and only if, all went well and the company could afford to do so, the company would do the right thing by everyone.

111 In cross-examination Hejleh was referred to par (c) of the Memorandum which states "Pro rata issues of Class A shares based on % of the value of salary owed AND NOT taken at the end of December 99". It was put to Hejleh that this seemed to be a significant date. Hejleh explained the significance was that he had said there would be a review within six months. Hejleh also explained that where the document said "Each dollar will attracted a weighted multiplier of 2" it did not mean that the salary would be doubled, it meant a weighted multiplier towards the profit sharing scheme.

112 It was suggested to Hejleh that there was no mention of target salaries in the Memorandum. Hejleh explained that the reference to "Actual salaries for 1999-2000" and Pareek's salary of $96,000 should have said target salary. Whilst it is technically correct to say that the document does not mention target salaries, written underneath are the words: "The salary will be paid if GTPL [GlobalTech Pty Ltd] is in cash flow allowing all key personnel to be paid equally until the lowest salary earner receives his full monthly pay". To my mind, that is a clear reference to a target salary, as described by Hejleh, Anwar and Klass in their evidence. Notwithstanding the fact that the expression "target salary" is not referred to in the Memorandum, Hejleh maintained that the expression "target salary" was in fact mentioned during the discussions. He also maintained that in discussions they used the word "virtual salary" for the $100,000, although he conceded there was no mention of that term in the Memorandum either. Neither was there any mention of notional salary, another term used by the witnesses to describe the salary sum used for the purposes of the profit sharing scheme. However, the Memorandum states that "Salary is based on $100,000 each for the purpose of calculating the issue of shares ... ".

113 In my view, the absence of any reference in the Memorandum to the terms used by the witnesses to describe the salaries to be paid when the company was in funds, and the salary used as the basis for calculating the issue of shares, does not cast doubt on the evidence of the witnesses. The fact remains that the descriptions given by the defendants on the counterclaim of the terms used by them, matches the descriptions contained in the Memorandum.

114 On Hejleh's evidence, the discussions relating to salary and profit sharing went on for a week or so and were done over a number of sittings. To Hejleh's recollection, Klass was taking notes. At some point towards the end of the discussions, Pareek seemed to Hejleh to be unhappy with the fact that he had the lowest salary. Pareek considered that the group should not necessarily follow the previous salary structure that had been in place at Formulab. Pareek maintained that, as this was a new venture, everyone should be looked at as equal. Hejleh rejected the proposition that Pareek was unhappy because he had worked for two months on the basis that he had been offered $100,000 and then his salary was reduced to $96,000. Hejleh was firm in his evidence that Pareek knew exactly what was happening. Hejleh said that Klass, Anwar, Beale and himself explained to Pareek that they were not following the Formulab salary structure but were deciding salaries based on what they thought was the value of each individual to the company from a technical, commercial and financial point of view. Pareek was clearly not in agreement but ultimately elected to continue his involvement in the business.

115 In terms of the records kept of these discussions, Hejleh seems only to recall the Memorandum prepared by Klass. However, Klass also recalls that Pareek took notes of the meetings but said that in Pareek's version of what was discussed at their meetings, which he typed up and gave to Klass, he left himself out of the virtual salary allocation. Klass expressed the view that at this stage, Pareek appeared to be thinking of not being part of the group's discussions.

116 Klass remembers preparing the Memorandum. He said that it was agreed at one of the meetings that a Memorandum would be drafted for discussion at the next meeting. Klass took it upon himself to draft the document. He completed the document in July 1999. According to Klass, in that Memorandum he summarised the essence of their meetings to date. He entitled the document "Not Legally Binding" in accordance with the comment Hejleh made at almost every meeting they had. Klass maintains that it was also made clear by Hejleh that there was to be no retrospective salary entitlements.

117 It was suggested to Hejleh that it was a little strange to use the term "not legally binding" when the whole idea was to try and work out a legal relationship between the group members. Hejleh explained that they did not know how long it would take for the company to succeed. Therefore, to commit the company to a liability from the outset would seal the fate of the company as a failure.

118 On Hejleh's evidence, commencing on 1 July 1999, both Pareek and Beale were paid $2000 per month in accordance with the discussions. Pareek received a one-off $1000 bonus in about September or October 1999. He requested the money so that he could pay for air-conditioning he had installed in his house. Hejleh, Anwar and Klass agreed to the payment. Hejleh also recalled that Pareek then asked to be paid more for the previous months. That request was declined. In his evidence, Klass confirmed the payment of a $1000 bonus which was made in appreciation for Pareek's work on the FTR contract. They felt he had a young family and would welcome the offer. When cross-examined, Klass suggested that the money was given to Pareek in appreciation for the work that he did on the FTR project. He said that they realised that he was working hard and was under pressure so they decided to give him a bonus for that particular month. He said he was taken aback when Pareek asked if it could be backdated to July but had no recollection of whether Pareek asked for the additional $1000 to be paid from then on. Klass said that he did speak to Hejleh and Anwar about back dating the payment but they said that they could not afford it. Klass also remembered Pareek saying to him that he needed the money because he was installing an air-conditioning system at his home.

119 Anwar recalled that, in October 1999, they decided to pay Pareek an additional $1000 bonus for that month although he thought the money was paid in consideration of his family commitments and the fact that he had a mortgage to pay. Anwar added that this seemed ludicrous now considering that he and Hejleh and Klass were all in the same position with three or more children each to support. However, according to Anwar they thought it would be a nice gesture and a sign of appreciation for Pareek's high-risk involvement, even though they were already over extending the company's overdraft facilities using their private homes as security. However, when Pareek wanted the bonus backdated to July 1999 and he reported this to Anwar and Hejleh, they did not approve his request and stressed that the bonus was a one-off payment. According to Anwar, Pareek wanted the additional payment to be made retrospective because he had just installed air-conditioning in his house for $7000 and needed extra cash to pay for it.

120 Hejleh maintains that he, Klass and Anwar were not paid by GlobalTech and that the company is still not in a position to pay them salaries. However, the company does now pay the full salaries of some 14 employees, consultants and agents. Klass stated that in the first two years of the company's existence, it always made a loss. Pareek and Beale were the only ones receiving a salary. Klass said that it did not concern him that his future entitlements to a salary and profits were not formalised at this time. He was focused on getting the company going and knew that they were working towards a long term goal. He was confident that, once the company was making a good profit, they would together come to an equitable solution in so far as salary and profit sharing was concerned.

121 According to Hejleh, they commenced marketing the company services some time in July/August of 1999. Pareek was involved in promoting the business and Hejleh recalled that he assisted in generating a mailing list and the subsequent mailing promotional material to potential clients. Pareek also assisted in overseeing the renovations undertaken on the Canning Vale premises and helped in developing one of GlobalTech's early products. Hejleh considers that a lot of the tasks Pareek performed were quite menial and certainly would not have commanded a salary of $100,000.

122 Hejleh denied that, in April, he asked Pareek to help him establish the company. He also disputed that Pareek was working full-time in early May, as he alleged, or that from the time they moved into the Canning Vale premises, Pareek was working there full-time. He maintained that Pareek commenced working full-time from 1 July 1999. Hejleh agreed with the proposition that Pareek was not there as a volunteer but described the situation as him trying to find out whether the business venture that was being discussed was going to work for him or not. Klass had a slightly different recollection of events. He said that by May Pareek was spending a lot of time at the Canning Vale premises and from May until the end of December 1999 Pareek was more or less working full-time for the business. Klass did concede that Pareek's business card could have been printed by early May but he disputed that the date on which the card was printed was the time from when Pareek worked for GlobalTech on a full-time basis.

123 In around September 1999 GlobalTech obtained its first customer, FTR, who responded to GlobalTech's fliers. Pareek was selected to do the substantial part of that project. When the project was completed, and the product delivered to FTR, they were very happy and indicated that they would put a lot of work through GlobalTech as GlobalTech had delivered on time and on budget.

124 The next customer, Eureka, retained GlobalTech in around November/December 1999. According to Klass, the contract was quoted based on Pareek's salary of $2000 per month and a delivery schedule for 17 January 2000. As GlobalTech approached the end of the year Pareek hinted that he may want to leave, but because of his commitment to Hejleh and the others he would finish his part of the project on time for delivery to Eureka. Anwar confirmed these events. Klass recalls that the group decided to have a meeting after the Christmas break to discuss projected plans for GlobalTech. However, Pareek left the company before they held the meeting.

125 On returning from the New Year break, Pareek submitted his resignation. He said that he wanted to spend more time at home. According to Hejleh, everyone was understanding and supportive and offered him a reference should he need to apply for a job. When Pareek left GlobalTech in January 2000, he resigned as a director of GlobalTech Corporation and surrendered his shares. There were no products developed at that time that would qualify him for royalties. He did not return for the job reference.

126 On Anwar's evidence, Pareek advised them that he would not be able to complete his assigned software job, the deadline for which was less than two weeks away. Pareek then went on to insist that GlobalTech pay him $5000 in consultancy fees to complete the software. To Anwar's recollection, after some debate, and because of the pressure of needing to complete the project, GlobalTech eventually offered to pay Pareek $4000 to complete the work. That amount was well in excess of the sum on which the project was quoted. Pareek advised that he would complete the work at home, which he did.

127 Hejleh agreed that Pareek did not get paid for the Eureka project until some 18 months later although he maintained that he wrote out the cheque 12 months before then. He said that he reluctantly accepted the $4000 fee because they felt that Pareek was taking advantage of them. He said that he considered Pareek's conduct to be underhand and that was the first sign from his point of view "that there was something foul in the formula". He also said that they were not happy that he obtained employment at FTR. He said that, after that, he was not confident any more what else he was up to.

128 In about January 2001, after Pareek had left GlobalTech to work for FTR, Hejleh telephoned him and asked if he could confirm that he had received everything due to him from GlobalTech. According to Hejleh, it was then that Pareek claimed GlobalTech owed him money and/or shares in accordance with the discussions the group had some six months before.

129 As to GlobalTech's current financial position, Hejleh stated that GlobalTech's balance sheet has remained "in the negative". The 2002 financial year yielded a net profit of $2732 and the 2003 financial year was likely to finish with a loss of $15,000. The company may technically have made a little profit, but the key personnel are not drawing anywhere near their target salaries. As such, the hardship factor is still in effect.

130 Hejleh was cross-examined on the contents of GlobalTech's application for a government research and development grant. The applicant was required to include applicant details which included reference to 24 employees. Hejleh explained that that was the number of employees which would be required if they received the grant. The document also indicated that the person filling certain nominated positions was yet to be appointed while the document also included reference to certain named persons who, at the date of the document, did not actually work for GlobalTech. Some were known to Hejleh and others were not. In relation to one of the people who was named, but unknown to Hejleh he explained that it was someone that they would hire if they received the grant. The application included reference to Pareek and a salary of $66,000 under a heading "current full-time annual salary". Hejleh explained that the government wanted to know how they proposed to spend the money and that was the salary that Pareek would have been paid to perform the position set out in the application. Hejleh indicated that he could not see any other way to present the information of how they intended to spend the grant including who they were going to hire and how much they would be paid. Counsel for Pareek sought to explain the reference to the $66,000 as a statement by GlobalTech of what Pareek was being paid from May 1999 to the present because of the description of "current full time salary". Hejleh maintained that they presented information on the basis of how the grant monies would be spent, notwithstanding the headings in the application. He conceded that perhaps that was not the correct approach but that was what they did. Hejleh also said that there were about four or five people involved in preparing the application hence his lack of knowledge in relation to all the information contained in the application. Anwar, who compiled the information in the grant application, confirmed Hejleh's evidence that the $66,000 was a future salary to be paid if the application was successful. Anwar maintained that the format was in accordance with requirements of the government department overseeing the process. He explained that the forms came as a template for the company to complete and he might have missed the fact that the heading said "current full-time salary" and he probably should have changed it to indicate that it was the salary to be paid when the project began.

131 Hejleh was also questioned about the fact that the document stated that the company commenced business on 1 June 1999 whereas Hejleh maintained that Pareek did not commence work full-time until 1 July 1999. Hejleh acknowledged the conflict. However he remained firm in his evidence that the correct date was 1 July 1999. He explained that the date was not something that they dreamt up later. They said they were opening for business on 1 July 1999 and hired support staff to commence on that day. They simply did not want to start the business until 1 July 1999. Hejleh was also taken to the curricula vitae of Klass and Anwar which both stated that he has been with GlobalTech from May 1999 to the present. Hejleh agreed that there was a significant conflict between that information and Hejleh's evidence. It was put to him that his evidence was that Pareek did not start until July. Hejleh correctly explained that he did not say that Pareek started in July. Pareek did work in May and June but it was not on a full-time basis and at that stage they were still talking about what they were going to do. He maintained that they did not come to any arrangement until 1 July 1999. Hejleh was firm in his evidence that the May 1999 date in the application was a mistake.

132 In Pareek's evidence he maintained that he had asked for a reference which was not provided. Presumably, the suggestion was that there existed some ill will towards him which was reflected in the refusal. Hejleh and Klass were cross-examined on the issue and refuted the suggestion that they had refused to provide a reference. Hejleh's recollection was that he had offered to provide one, although he did give some conflicting evidence with respect to this issue. I consider this to be a very minor issue and can readily accept that a person's recollection of an issue of this type might well fade with time. I am unable to draw any conclusion adverse to the defendants to the counterclaim with respect to it.

133 I propose to deal with the evidence of Beale separately. His evidence is of particular importance in this case because at the relevant time he was in almost exactly the same position as Pareek. Further, at the time of giving evidence, Beale was no longer employed by GlobalTech but had not been paid any money over and above $2000 per month. Consequently, if the position were as Pareek described, Beale's account should support his claim.

134 Beale holds a Bachelor of Science and a Diploma in Electronics and Radio Engineering. He has worked for over 20 years in the engineering field since he emigrated from India to Australia in 1992. At the time of trial, Beale was employed as an engineer by another company.

135 On arriving in Australia in December 1992, Beale joined Formulab as a hardware engineer. At Formulab he met the other members of the group who were already working for Formulab when he arrived. Beale first met Pareek when he interviewed him in early 1995 for a job as a hardware engineer. When Beale was told in early 1999 that Formulab was bankrupt he began looking for alternative employment. According to Beale, he and Pareek considered the possibility of going into business together as engineering consultants. However, before any firm plans were made, Beale became aware that Klass and Anwar were intending to form an engineering company and Beale asked them if they were looking for partners. Following discussions with them, Beale agreed that he would join their business venture. He told Pareek of his decision and asked him if he wanted to join as well. Pareek indicated that he would join. Beale discussed this with Klass and Anwar who were happy for Pareek to be part of the business venture.

136 On Beale's evidence, it was his understanding that Klass and Anwar would be responsible for the finance and project management aspect of the business while he and Pareek would be responsible for the engineering work. That is, Beale considered that the business venture team was a team with separate responsibilities. However, on Beale's evidence, at that stage there were no real discussions of the financial aspects of establishing and carrying on the business. Around the same time, Beale was told by Klass and Anwar that Hejleh was looking to start up an engineering/marketing company for the marketing of electrical and electronic components, using his contacts in this industry. Klass and Anwar told Beale that Hejleh was interested in being part of the business that they and Beale and Pareek were setting up.

137 Beale confirmed that in or about May or early June 1999 there was a meeting between Anwar, Klass, Hejleh, Pareek and himself at which it was agreed that Hejleh would join the business venture and the combined venture would be called GlobalTech. Beale stated that from that time on the group had joint meetings one to three times a month at which various issues relevant to starting up the business were discussed including operational and financial issues, division of profits amongst the business partners, allocation of shares between the parties, record keeping and business plans and proposals. Beale confirms that everyone was involved in obtaining business premises which were ultimately located by Klass, Anwar and Hejleh.

138 On Beale's evidence, at one of the initial meetings around May or June 1999, he and Pareek raised the issue of how they were going to support themselves. The initial proposal was that they were to live off their savings until the company was able to pay them a wage and/or a share in the profits. At a joint meeting held in or about June or July 1999, they discussed how Beale and Pareek were to share in the profitability of the company. Beale remembered discussing the possibility of implementing a profit sharing scheme. According to Beale, profit sharing was an issue because all of the money being invested in GlobalTech was being invested by Klass, Anwar and Hejleh. However, Beale and Pareek were simply unable to make such a commitment. Beale recalls there being some documentation drafted by Klass which reflected these discussions. Beale recalled that at the May/June 1999 meeting, in order to resolve issues regarding profit sharing, each individual partner was asked to write down a figure representing what he thought each other business partner would receive as a salary if they were to offer their services in the market place. They then took the average of these salaries and they formed the annual salary that each business partner should be paid in the event that the company made enough money to do so. On Beale's evidence, these figures were their "virtual salaries".

139 Beale also stated that at one of these meetings they discussed Hejleh's estimation that it would take roughly two years for the business to become profitable. In fact, Beale remembered that they all agreed that it was reasonable to assume that if the business survived two years, then it was bound to make money. According to Beale, they knew that most business go bankrupt within two years if they do not achieve profitability and, on that basis, it was agreed that if you worked for the company for at least two years, and the company was making a profit, then you would be entitled to receive part of the profit. Beale also recalled that each of the meetings were held on the basis of good faith and that none of what was discussed was binding on any of the individuals or the company. It was also made clear at the meetings that, if for personal reasons anyone wanted to leave the business, then they were free to go.

140 In cross-examination Beale disputed the proposition that, at a meeting in mid April 1999 with Beale, Pareek, Anwar, Klass and Hejleh, the salaries for each of them were fixed at $100,000 but payment of some of the salary would have to be deferred to a later date. Beale maintained that it was the profits which would be shared later on when the company became profitable. Beale denied that there was any discussion of salaries at a meeting at Formulab, as Pareek suggested. Beale was questioned about the meeting that was held in late June/early July. Beale had no recollection of Pareek putting to Hejleh three options about his involvement or of the substance of any such options. In response to the question that, from July onwards, he was paid a certain amount by GlobalTech, Beale stated that the allowance of $2000 per month was a hardship allowance, which was the term that was used by everyone. The purpose of the hardship allowance was to alleviate some of the financial difficulties Beale and Pareek were experiencing. Beale also recalled that the arrangement was to continue until the end of the year when it would be reviewed. However, Beale was not particularly clear whether payment of the allowance was decided at the June/July meeting or at a later time.

141 Beale did agree that at the June/July meeting there was talk about how salaries were to be fixed. Beale was taken to the Memorandum and the reference to salary owed but not taken up and asked to explain what that meant. According to Beale, he understood from the document that Pareek and he were contributing the technical input of the company and that when the company reached a point where it could pay salaries, then they would be issued a salary after paying all the overheads of the company. Beale said that, as set out in the Memorandum, they obviously would not receive their full salaries until the company was in a financial position to pay them and the difference between what they actually received and the salaries determined by the group was the salary sacrifice. Notwithstanding describing the difference as a salary sacrifice, it is clear from Beale's evidence, when considered in context, that he does not accept the proposition that there existed an entitlement to be paid the amount of salary sacrificed, at December 1999 or at all.

142 Beale was also taken to the statement in the Memorandum that "Each dollar will attract a weighted multiplier of 2". Although Beale recalled the discussion he said that he did not pay much attention to it at the time. He could not recall the details and was unable to support Pareek's explanation of it.

143 Beale maintained that there was a discussion of a two year qualifying period at the initial stages of starting the company. When asked whether that was something that was agreed to, Beale said that they had a meeting in which they discussed a qualifying period and that each person would give the company at least two years to succeed because that was reasonable when starting a new company. Beale's understanding was that, providing the company made profits, he would have received a percentage of the profits if he had stayed for two years. He maintained that there was no contract and there was no agreement to stay for two years. However, in early 2000, there was to be a review and a discussion about the future viability of the company.

144 Beale had no recollection of the minute. He did recall a meeting on 20 December 1999 when all were present except for Hejleh and at which Pareek said that he was having difficulty managing on the $2000 per month. However, Beale had no recollection of him saying that his contractual arrangements had not been prepared in written form and that he was waiting for the written employment contact from Klass. As Beale observed, "we were partners so it wasn't an issue of an employment contract".

145 In his evidence, Beale said that after a couple of months working for GlobalTech, he needed money to cover his rent and living expenses. Pareek was in the same position, if not worse off, as he had a family and a mortgage. A budgetary meeting was held with the directors where it was resolved that Pareek and Beale would be given $2000 per month to cover their living expenses. According to Beale, it was the general consensus that this payment was not a salary but a payment to help them out whilst the business was being established. Beale stated that, although he was working for nothing prior to this, he was taking a gamble. They all had high hopes that GlobalTech would become profitable within a short period of time and that the hardship they were presently experiencing would be more than compensated for later when the business became a success. At that stage in his life, Beale was keen on being a partner in GlobalTech's business.

146 Beale said that, shortly after it had been agreed that they would receive $2000 per month, there was another meeting to reassess how the company was operating and when it would begin to become profitable. Hejleh explained that he estimated that after a year or so, the company would break even and that, as the company became profitable, they could expect to be paid a part of their virtual salary proportionate to the profit.

147 Beale confirmed the evidence of Pareek and Hejleh that GlobalTech's first contract was with FTR and that Pareek was given the responsibility of working on that project. On completion of the FTR project the client was happy with the work that GlobalTech had done. According to Beale, it was at this stage that Pareek was given a bonus of $1000 in addition to his monthly assistance package. The others in the group felt that Pareek needed encouragement to stay at GlobalTech as they could see that Pareek was unhappy with his current situation. Around this time Hejleh indicated that there would be a meeting in the New Year to review the company's goals and then it would be up to Pareek and Beale to decide whether it would be realistic for them to stay on.

148 Beale recalled that, during mid December 1999, GlobalTech was awarded the contract to work for Eureka. As Beale was tied up with other projects, Pareek was again given the responsibility for completing the Eureka assignment. Despite his obvious dissatisfaction with the company at that time, he reassured the group that he would. However, upon returning after the Christmas break, Pareek surprised everyone by announcing that he was leaving and taking his equipment home. He explained that he wanted to stay at home and work in a consultant's position. It would also give him the chance to look for other jobs. The issue then turned to how much he would get paid to complete the Eureka project. Beale confirmed that there was some haggling about the fee to be paid to Pareek before they settled for an amount of $4000. It was agreed that Pareek would be paid in phases as the project was completed. Beale recalled that the partners felt Pareek was holding the company to ransom as a commitment had been made to Eureka to deliver the product. As such, there was no option but to agree to pay him $4000 to complete the project. Pareek completed the Eureka project as a consultant and, to the best of Beale's knowledge, that was the last of his involvement in GlobalTech's business activities. Following Pareek's departure, Beale's monthly allotment was increased to $3000.

149 In October 2000 Beale left GlobalTech because, from his perspective, GlobalTech's business was not leading in the direction of Beale's interest, being hardware and software engineering but more towards trading in manufactured electronics products. Also, Beale had mostly been living off his savings up until that time and he felt that he should probably get a job since there did not appear to be any prospect that GlobalTech would become profitable in the near future. As Beale described it, "basically, my gamble in becoming involved with the business had not paid off". Beale stated that he was paid the monthly payment up to the date he left. Beale maintained that, in his view, GlobalTech did not owe him any money or shares as, when he left the company, it still had not achieved profitability. To that end, on leaving the company, Beale signed a document to that effect. Beale indicated that he has had no contact with Hejleh since the end of 2000 other than a phone call some three to four months before the hearing regarding Beale's requirement as a witness. Neither has he had any discussion with Hejleh about the evidence that Beale would give. Beale has not spoken to Anwar or Klass since the proceedings were commenced in 2000. Because of my findings to which I will shortly refer dealing with the credibility of the witnesses called on behalf of the defendants to the counterclaim, I accept that there has been no collusion between those witnesses.

150 On a number of occasions in his evidence, Beale made it clear that he considered that he and Pareek and Klass, Anwar and Hejleh were partners in the business. He also described himself as a part owner of the business. Beale also maintained that he was a director of both companies. However, it is clear that he was a director of GlobalTech Corporation but not a director of GlobalTech. However, Beale conceded that he had little experience as a director and, although he had a general idea, he was not particularly familiar with how companies work in terms of directorships and shareholding. It is clear to me that in referring to himself as a partner in the business he was not using that term in the legal sense. He was not indicating that his right equated to those of Hejleh, Anwar and Klass. In my view his use of that term is consistent with the idea of five people coming together to create and develop a viable engineering business with all five having an interest, although not necessarily an equal interest, in that business and all being entitled to have input into, and to be treated fairly in relation to, the operation of the business and the distribution of profits.

151 Support for Beale's understanding of the arrangement can be found in the evidence of Hejleh who disagreed that Pareek's position in the discussions was any different because he was not a shareholder and not a director. Hejleh explained that when the discussions commenced the directors qualified them by saying that they would take their directors' and shareholders' hats off. They considered the situation as being that of five people who have known each other for a number of years discussing how they were going to get on with setting up and running a business. According to Hejleh, they were "one-to-one" in those discussions, although he conceded that, at the end of the day, the directors were the owners and had more to benefit from the company.

152 I found Beale to be very credible witness who gave a consistent and un-contrived account of his dealings with GlobalTech. At no time was he evasive in response to questions put to him. He clearly held no ill will towards Pareek and had no ongoing relationship with Hejleh, Anwar and Klass which might affect his evidence. Indeed, no motive for giving conflicting evidence was suggested to him.

153 The evidence of each of the directors of GlobalTech was consistent on all the significant issues but not so consistent as to raise a concern that there has been some collusion on their part. As one would expect, there are slight discrepancies consistent with the inability to recall details after a significant time lapse. Hejleh gave his evidence in a calm and careful manner. There was no prevarication in his responses and no aspect of his evidence or demeanour which gave rise to concerns about the accuracy of his account. Neither was there anything in Klass's account of events, or in his demeanour, which caused me concern. With respect to the central issues, he gave a consistent and compelling account of events. Based on his demeanour and his careful and consistent account of events, I also found Anwar to be a convincing witness. He had little recollection of minor or peripheral issues, as might be expected but he gave clear evidence on the major issues. The evidence of all three directors remained unchanged under cross-examination and, in my view, the credibility of each of them remained completely unaffected by cross-examination. Further, there was no indication that they disliked or held any ill will towards Pareek, either personally or professionally. However, in a case where there are conflicting accounts of specific events, perhaps the most significant aspects of the evidence of the directors is that, in relation to the central issues, it is plausible and consistent with the available records and commercial realities.

154 In contrast, I found Pareek to be an entirely unsatisfactory witness. He was evasive; he gave inconsistent evidence on central issues; and he had a tendency to embellish his answers. Under cross-examination he was often unable to give credible answers to the propositions being put to him. However, the greatest difficulty I had with Pareek's evidence was that, in many significant respects, his account of events was implausible. I am unable to accept that intelligent people with previous involvement in a commercial enterprise, and any modicum of common sense, would place a new company in the position of having to pay at least two of its employees almost double their considerable salaries after only six months of operation.

155 On behalf of the plaintiff, it was submitted that Pareek was the more reliable of the witnesses and his story was logically consistent. I cannot accept either proposition. In relation to the latter issue, counsel posits the question of why a family man with two children whose wife is not employed and who was able to obtain employment for $80,000 or $90,000 per annum would work in a situation where he had no interest in the business. The obvious and logical answer is that he believed he would obtain an interest in what was hoped to be a very lucrative business. In the absence of capital to invest, working together with the others to build up GlobalTech would provide Pareek with his only opportunity to become a shareholder in the company. No doubt there is a substantial risk in such circumstances. But if Pareek had opted for receiving a salary for working full-time in another company, potentially he might miss out on a very large sum of money if GlobalTech were to perform particularly well.

156 Counsel for the plaintiff raised a number of issues said to support the plaintiff's account of events as well as identifying difficulties with the evidence of the defendant's witnesses which detract from the alternative version of the events. Beale's evidence was discounted on the basis that he incorrectly considered himself an equal partner and an equal owner of the business. However, at no time did Beale suggest that he was an equal owner of the business. He was well aware that others in the group had made capital contributions and that he had not. He was also well aware that he could walk away from the company before the two year period with no rights or duties in relation to the company and without receiving any money from the company or anyone connected with the venture. I do not accept that Beale's evidence should be discounted for the reason raised by counsel.

157 It was also submitted by counsel for the plaintiff that the evidence of the defendants that the end of December was the time when matters were to be reviewed was consistent with Pareek's evidence that he had to stay to that date to receive double his salary or double his shareholding. It was submitted that Pareek's evidence was consistent with par 1(d) of the Memorandum which says: "Pro-rata issue of Class A shares based on % of the value of salary owed AND taken (if the GTPL is able to pay) at the end of Dec 1999." In my view, the only consistency is the inclusion of the date. In the context of the document as a whole, par 1(d) is a reference to a profit sharing scheme and has no connection with the payment of salaries or the amount of salaries to be paid to employees. Not only is that conclusion consistent with the ordinary construction of the document, I accept the evidence of the defendant's witnesses that such is the meaning of the Memorandum.

158 The fact that Pareek payed tax was relied on in support of the conclusion that Pareek believed he would be getting an income and believed that he was on an income of $100,000 per annum and would have a tax liability which needed to be provided for. As I understand the position, the approach taken by Pareek in relation to his association with GlobalTech was to operate through his Family Trust. Consequently, even if it is accepted that Pareek was to be paid a full salary for his work with GlobalTech, the arrangement was not that he would be an employee of GlobalTech being paid a salary from which tax is already deducted. Presumably this was why he referred to himself as a consultant to the company when, on his evidence, he was an employee working for a salary. I accept that Pareek did indeed pay tax. However, there was no evidence to suggest that he had taken advice as to the appropriate approach to taxation when being paid a hardship allowance with the understanding that a full salary would be paid in double when and if the company was sufficiently profitable. In my view, the absence of evidence of the taxation obligations of the Family Trust precludes me from drawing any conclusion about the monies paid to the Australian Taxation Office in the course of Pareek's involvement with GlobalTech.

159 It was submitted that the Centrelink payments do not undermine Pareek's credibility. I find that proposition difficult to accept. On Pareek's account, he had a contractual entitlement to a salary of approximately $100,000. However, in return for a considerable financial benefit, he was entitled to sacrifice an amount of that salary. He could sacrifice a small amount or a large amount. He chose to sacrifice so much of his salary he was unable to maintain his family. Rather than reduce the amount of his sacrifice he applied for government assistance. In my view, an intelligent and educated person must have considered that, where he is entitled to a salary but chooses not to receive it, Centrelink would be unlikely to look favourably on his application for benefits. Of course, failing to tell Centrelink of the entitlement to a full salary would overcome that impediment. I was unimpressed with Pareek's response that, when he received the money owed to him, he would tell Centrelink and repay the benefits received. I consider his conduct in applying for benefits to be more consistent with the belief that he was entitled to benefits because the only payment he was receiving would not be sufficient to support his family and he had no entitlement to receive any greater amount.

160 Counsel for the plaintiff also asserts that Pareek's explanation that he obtained the line of credit to a purchase a house should be accepted. However, I accept the defendants' proposition that, in the normal course of events, one would identify the block of land and then apply to the bank for a loan, if only because you would be able to provide extra security. The approach adopted by Pareek is more consistent with the defendants' evidence that Pareek was involved in the development of a business and would need additional funds on which to draw to support himself whilst waiting for the company to become sufficiently profitable to pay salaries.

161 Emphasis was also placed on the fact that Klass was asked twice to provide Pareek with an employment contract and provided no explanation for why he did not do so. However, Klass's evidence was to the effect that there was no employment agreement and hence no contract to prepare. In any event Klass did not concede that he was asked by Pareek or anybody else to prepare a contract reflecting his employment arrangements. Ultimately, the failure to provide an employment contract is only of significance if it can be taken as evidence of a desire to preclude Pareek from enforcing his employment contract. In any event, I do not accept Pareek's evidence on this issue.

162 The defendant also relies on the dates of commencement in the curricula vitae attached to the grant application in support of Pareek's evidence that the actual commencement date of his employment was 1 May 1999. The evidence, which I accept, was that the curricula vitae were written by the individuals concerned so the inclusion of the date in May is consistent with Pareek's evidence but not corroborative of it. I accept one of the explanations offered that people never like to have a break in continuity of employment and often backdate their commencement date to when the previous employment ended. Another possibility is that Pareek has simply included the date that he became involved with GlobalTech. Whatever the explanation, the date in the curriculum vitae is not necessarily evidence of the date from which the person had an entitlement to be paid a salary. I am not persuaded that the date in the curriculum vitae assist in resolving that specific question.

163 Counsel for the plaintiff placed considerable emphasis on the information contained in the grant application concerning Pareek's salary. It must necessarily be the case that a company may not have sufficient staff to carry out the project to be funded or might not have suitably qualified staff. It will therefore, in many cases, be necessary to hire staff once the funds are received and the project commences. However, in order to obtain the grant it is necessary to provide the applicant's proposal as to staff numbers and their areas of expertise and the total cost of salaries for the staff to be involved in the project. In such circumstances it must necessarily be the case that the expression "current full-time salary" must also cover the situation of proposed salary. I do not believe that the contents of the grant application assists in resolving the issues in this claim. Counsel for Pareek conceded that the salaries were put in the application on the basis that if the company received the grant then the amounts in the application were what they intended to pay those participating in the project.

164 Counsel submitted that support for Pareek's evidence could be found in Klass's evidence of the conversation with Minotti about the loan. It was suggested that Klass said that he could have spoken to Minotti and that it was "quite likely" that he spoke to Minotti. In my view, neither statement is an admission that there was a conversation which would support Pareek's evidence of the existence of an employment agreement. Further, Klass was firm in his evidence that, if he had spoken to anyone at BankWest regarding Pareek's salary package, he would have qualified his comments by saying that the package was based on "profitability and performance". Even Klass's evidence that he would have said to Minotti that Pareek earned $96,000 or $100,000 must be considered in light of his evidence that he would have put the best gloss on the salary arrangement. Clearly, if any such conversation occurred, in light of the other evidence, it could only be explained by Klass's preparedness to assist Pareek in obtaining the loan. As to the existence of the conversation, the evidence of Minotti to the affect that if he had spoken to Klass he would have written it down, must be considered. In my view no support for Pareek's evidence can be found in the evidence surrounding the loan application.

165 Reliance was also placed upon the fact that the Memorandum was never signed and the only person who acted to their detriment as a consequence of it was Pareek. The failure to ensure that the Memorandum was signed could only be of relevance if the Memorandum reflected Pareek's account of an agreement. In my view, it clearly does not. I accept the evidence of the directors that the Memorandum recorded, in summary form, a profit sharing arrangement that was the subject of discussion. Klass was unable to explain why he included provision for signatures, but the presence of those signatures does not persuade me that the document was intended to be binding on anyone. The title of the document clearly indicates to the contrary.

166 Much emphasis was placed by the plaintiff on the way in which the prospects of the fledgling company were being discussed. It is said that Hejleh was painting a very "bullish" picture of the company's financial prospects and made no mention of the risks. Presumably, that conduct is alleged to have influenced Pareek to rely on the representations to his detriment. It is not uncommon for the excitement of launching a new business, and the desire for success, to give rise to an overabundance of confidence about the future financial prospects of the business. However, a person such as Pareek who has worked in the engineering industry for many years, particularly someone who has worked for a company that has failed, would hardly need to be told that there would be risks, in order to know that there would be risks.

167 Counsel also suggested that the conflicts in the evidence could be explained by differences in memory and pointed to one piece of evidence that Beale could not recall. In my view that proposition could not possibly explain how one of two intelligent and educated people could so wholly misunderstand something as fundamental as the terms of his employment. The only possible explanation for the conflict is that one of the accounts of events is wrong.

168 It was suggested by Pareek's counsel that all the witnesses other than Pareek had a vested interest in denying Pareek's account of the agreement reached between them. However, that statement is not true of Beale who has no relationship with GlobalTech and would be unaffected by the payment of monies to Pareek. Additionally, this is not a case where there are separate conversations to which a witness such as Beale may not be privy. In this case all relevant discussions were held in the presence of all five of them. The only explanation that counsel could suggest was that Pareek was a family man whereas Beale was single and perhaps they thought differently. In my view, that explanation has no merit.

169 An alternative proposition put on behalf of the plaintiff is that the evidence of Beale could be distinguished because of his belief that he was a partner, a director of the company. I have at an earlier stage in these reasons, referred to this issue. On my understanding of Beale's evidence, he was saying no more than everyone was being treated equally for the purposes of setting up the company and that, based on the arrangements agreed during the discussions, everyone had the potential to end up with shares in the company that could bring them a large amount of money if the company proved to be successful. At no time did Beale indicate that he believed his interest in the company was the same as that of Klass, Anwar and Hejleh. In my view, Beale was in no different position to Pareek regardless of the fact that he might have held a different view of his involvement in the business. Beale's evidence, which contradicts Pareek's evidence on all essential issues, is fatal to Pareek's claim.

170 Counsel for the defendants identified several aspects of Pareek's evidence which support a conclusion that his version of events should not be believed.

171 Pareek maintained that he could elect to sacrifice any portion of his considerable salary and by the end of September he was entitled to be paid double the amount sacrificed, payable in cash or in shares. The first observation that I would make in this context is that, the defendant's acknowledgment that Pareek "sacrificed" time and wages in order to help set up the company is not an acknowledgement that they agreed to a sacrifice of the type claimed by the plaintiff. Further, I accept counsel's submission that a conferral of a right to double the amount in shares or cash within six months is no sacrifice at all. It is certainly not the word one would use to describe the kind of arrangement which Pareek would have the Court believe existed in this case. It is certainly the case that there is no real financial sacrifice when a person receives double their money at the end of a short period of time. However, I am unable to accept the submission that there is an inconsistency between the term sacrifice and the arrangement which Pareek alleges, when the term can be understood as having to wait to receive payment, albeit that the amount is doubled when it is ultimately received.

172 Emphasis was also placed by the defendants on Pareek's description of the sacrificed amount as an amount that "would be considered as equity in the company". Pareek explained his understanding of equity which was a shareholding in the company. Counsel for the defendants submitted that this is entirely inconsistent with Pareek's claim. However, I consider that his explanation of, "If I choose the shares it becomes equity in the company", is a sufficiently plausible explanation for his description to have no impact on his credibility.

173 However, I accept counsel's submission that Pareek was unable to give a satisfactory explanation when asked to explain why, in par 15 of the Minutes prepared by him, there are references to the cash and equipment in the same context as references to the salary and appear under the heading of "Weightage of Investment type". Counsel observed that the term "Weightage" in the Minutes is consistent with the term "weighted multiplier" referred to in the Memorandum to refer to the profit sharing arrangement for those who stayed with the company. I accept both that proposition and the proposition that the Memorandum has significant weight because it is a contemporaneous record. It is certainly the case that Pareek gave evasive responses. In my view, Pareek's evasiveness resulted from the fact that both documents clearly refer to investment and profit sharing and make no reference to the payment of salaries. Consequently, neither the Minute nor the Memorandum provide support for Pareek's claim. It is significant to note that the Memorandum is substantially consistent with the Minutes, which is Pareek's own record. In particular, there is consistency between par 15 of the Minute and the profit-sharing arrangement set out in the Memorandum. It is also the case that the Memorandum is consistent with Pareek's letters of demand made in March and April.

174 Despite the fact that Pareek now claims an entitlement to cash equal to double the amount of salary sacrificed, it was only shortly prior to the hearing that his case was amplified to include a claim for money in lieu of shares. In the three letters that were sent by Pareek in March and April, the claim made by Pareek was for conversion to shares, which is consistent with the profit sharing arrangement save only for the two year requirement. I accept counsel's submission that Pareek gave an entirely implausible explanation for why he only referred to shares. He maintained that he was helping the defendants, the same defendants with whom he was at that time in conflict. When pressed on this issue, Pareek became evasive. Other explanations given by Pareek on this issue were equally implausible. The second explanation was because the company had stopped his payment, he thought that if he opted for shares he would not be taken for a ride. There is no obvious logical connection between the two events. A further explanation for not claiming the cash to which he alleges he is entitled is that he was waiting for discovery to refresh his memory, presumably about the arrangement reached. However, when asked to identify the documents from which he refreshed his memory he was unable to point to any document which had served that purpose. His final, and equally implausible, explanation was that "maybe it was overlooked".

175 Pareek's conduct in obtaining a line of credit, is also relied upon by the defendants. During the period when Pareek was allegedly sacrificing the majority of his salary, he obtained a line of credit which would have been sufficient to cover an extended period the sacrifice which was being made. His explanation was that he obtained the line of credit in order to purchase a block of land to build a house so that his family would be closer to the daughter's school. Counsel for the plaintiff identifies four reasons for rejecting Pareek's explanation. The first is that Pareek was initially evasive as to the extra cost of the line of credit, referring to the reasons why he preferred the line of credit rather than responding to the question whether he knew a line of credit was more expensive. Further, the explanation that he preferred the line of credit because it was more flexible is an attribute which is of no significance when using the money to buy a block of land. Pareek then went on to question whether a line of credit was more expensive before eventually accepting that the interest rate was higher than applying for a mortgage on a block of land. It is also said by the defendants that the amount of the loan affects the question of what one might have been proposing to use the money for. It indicates the extent of the period for which it was intended. I have, to some extent, addressed this issue in the course of the evidence. There are peripheral aspects relating to obtaining the line of credit that I consider to be inconsequential. However, Pareek's evidence on this issue was evasive and defensive which affects his credibility and, taken together with other concerns I have with respect to his evidence, lead me to conclude that the real reason for obtaining a line of credit would not support Pareek's claim. In my view, Pareek's conduct in relation to the bank loan and the Centrelink support a conclusion that Pareek was taking steps to provide financially for his family because he had no entitlement to a salary and would only be receiving a small hardship payment while the business was being developed.

176 It was also put on behalf of the plaintiff that the Court should find that the arrangements discussed in relation to the issue of shares in return for the hardship of salary sacrifice, were not legally binding. The reasons for such a conclusion are that the Memorandum is so expressed and the evidence of all witnesses except Pareek was to that effect. The Court is also asked to recall the evidence of Pareek that there was a gentleman's agreement and the circumstances in which that description was used. As I have already remarked, initially the question was evaded, denied and then finally admitted as being the phrase in Pareek's mind at the time. I accept that, irrespective of the actual meaning of the term "gentleman's agreement", the significance of Pareek's response is that he appeared to recognise that his use of that description undermined his evidence that a legal obligation existed. I also accept counsel's submission that the defendant's failure to mention his claim for the larger amount of money when he was making demands for a smaller sum, is consistent with the conclusion that the arrangements made were informal and unenforceable arrangements.

177 Counsel for the plaintiff also relies on the commercial absurdity of any arrangement whereby Pareek would be entitled to profit sharing arrangements and also guarantee him double whatever portion of his salary he decided in cash after six months. I consider this to be the most compelling criticism of Pareek's claim. It is certainly difficult to accept that the directors of a new company, particularly a company with a director who is an experienced businessman such as Hejleh, and with limited capital would agree to pay their employees nearly double their salary after the first six months of operating when there was no suggestion that the company would be unable to find engineers to work for a standard salary. The fledgling company would be faced with a significant and wholly unnecessary financial burden shortly after commencing business. In this case, after six months the company was not making a profit and was not in a position to pay the amount alleged to have accrued to the plaintiff. Even counsel for Pareek conceded that it would be cheaper to borrow sufficient funds to pay full salaries than arrange to pay someone double their salary after six months, at which time the company might still need to borrow the money to pay the larger sum. In my view, Pareek's version of events simply is not a commercially sensible arrangement.

178 That view of the situation might be countered by observing that Pareek would not have worked for so little as the amount alleged by the defendants. However, any agreement for work for such a small sum must be viewed in the context of Pareek being an equal participant in a profit sharing scheme pursuant to which he would be issued shares in the plaintiff which all parties believed could be substantial, as well as an equal share in the intellectual property developed. Pareek did not refute the existence of the profit sharing arrangement or his entitlement to participate in it. He did deny the two year qualification period so the profit sharing arrangement was even more ample without that restriction. Indeed, Pareek's acknowledgement of his right to participate in the profit sharing scheme reduces the probability that he was entitled to receive double his salary in cash or shares after six months. On his account, he has all of the opportunity and the benefit, but none of the risk. Counsel maintains that that is what makes the claim implausible and why it should be dismissed.

179 With respect to the plaintiff's claim for shares, counsel for the defendants calls on the Court to find that the arrangements for the issue of shares only applied to those who worked for the plaintiff for at least two years and refers to a number of factors in support of that conclusion. The first point relied upon is that the two year period appears in the Memorandum. Another is that the defendant himself conceded that the profit sharing arrangement only applied if he remained with GlobalTech for two years. Thirdly, the evidence of Beale was to that effect. Further, it seems to me that logically, one would require some period of commitment in order for any new company to justify such an arrangement. That conclusion clearly undermines Pareek's claim that he was entitled to shares to the value of double the amount of his sacrificed salary.

180 Other issues were raised by both counsel but, in view of my findings, it is unnecessary to refer to them.

181 Perhaps not surprisingly, in view of the comments I have already made, counsel for the defendants relies upon the evidence of Beale whom he accurately describes as a witness without any interest in the outcome of the proceedings as he no longer worked for GlobalTech and had no close and ongoing relationship with Hejleh, Klass or Anwar. Beale's evidence contradicts all essential aspects of Pareek's version of his dealings with GlobalTech. The only explanation provided by counsel for Pareek as to the complete contradiction between Pareek's evidence and Beale's is that Beale understood that he was in an equal partnership with Hejleh, Klass and Anwar. However, counsel for the plaintiff submitted that Beale's evidence is perfectly consistent with other evidence where the directors took their hats off and they sat around together as five people and the profit sharing arrangement was to apply to all of them equally, they were all to be given $100,000 as their notional salary so no one received an advantage. I accept that explanation. I do not accept the explanation given for distinguishing the position of Beale to that of Pareek.

182 The misrepresentation component of the claim, both under statute and at common law, is affected by the fact that it was never put to the directors that they had no intention of paring Pareek any of the monies or transferring any shares to which he might become entitled. However, there is a more fundamental issue to be considered. In determining the claim of misrepresentation, the threshold issue is whether the representation was in fact made. If the making of the representation cannot be established then no issue arises as to whether the directors ever intended to perform it.

183 For the reasons to which I have already referred and as a result of my findings on the respective credibility of each of the witnesses, I am not persuaded that there was any agreement on the terms alleged by Pareek in his claim. That conclusion brings an end to the counterclaim because all causes of action pleaded are dependent on finding in favour of Pareek's account of the agreements reach at the April and June meetings.

184 I would therefore dismiss the counterclaim. Counsel for the plaintiff in the primary action submits that, notwithstanding the dismissal of the counterclaim, there remain sound reasons for making the declaration sought, particularly where the party seeking the declaration is a company which may at some point in the future seek capital publicly. I accept that submission. It would be unfortunate if, after the time and resources spent on this action, there should be litigation on any other issue arising from the relationship between GlobalTech and Pareek. I will allow the plaintiff's claim and make the declaration sought in par 1 of the prayer for relief.

185 Finally, I would like to briefly refer to the time taken to deliver these reasons. Unfortunately, due to my lengthy absence from the court, there has been an extensive delay between the hearing of the claim and delivering judgment. The delay and the effect of it on the parties to this action, is sincerely regretted. However, in order to allay, as far as possible, the concerns of the parties, I would note that it is my practice on hearing an action to record, in some detail, my observations of the witnesses and, as far as possible, to draw some preliminary conclusions on the evidence of each witness. This has assisted me to make findings on the credibility of each witness and to draw conclusions on the accuracy of the evidence of each witness.

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : GLOBALTECH PTY LTD -v- PAREEK [2006] WASC 30 (S)

Indemnity costs ­ Calderbank offer to compromise ­ Requirement of offer to compromise ­ When unreasonable to refuse offer

Australian Competition and Consumer Commission v Universal Music Australia Pty Ltd (No 2) [2002] FCA 192

Brymount Pty Ltd t/a Watson Toyota v Cummins [2005] NSWCA 69

Calderbank v Calderbank [1975] 3 All ER 333

Colgate-Palmolive Company & Anor v Cussons Pty Limited [1993] FCA 536; (1993) 46 FCR 225

Dobb v Hacket (1993) 10 WAR 532

Duvall v Godfrey Virtue & Co (a firm) [2001] WASCA 163

Flotilla Nominees Pty Ltd v Western Australian Land Authority & Anor [2003] WASC 122

Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd & Ors [1988] FCA 202; (1988) 81 ALR 397

Fyna Foods Australia Pty Ltd v Cobannah Holdings Pty Ltd (No 2) [2004] FCA 1212

Grbavac v Hart [1996] VSC 37; [1997] 1 VR 154

Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358

Jones & Anor v Millward & Anor [2005] QCA 76

Leichhardt Municipal Council v Green [2004] NSWCA 341

McKerlie v State of New South Wales (No 2) [2000] NSWSC 1159

Messiter v Hutchinson (1987) 10 NSWLR 525

MGICA (1992) Ltd v Kenny & Good Pty Ltd & Anor (No 4) (1996) 140 ALR 707

Townsend & Ors v Collova & Ors (S) [2005] WASC 4

Vasram v AMP Life Ltd [2002] FCA 1286

1 JOHNSON J: The outcome of this action was that I found for the plaintiffs and made the declaration sought by them in the statement of claim. I was not persuaded that the agreement pleaded by the plaintiff on the counterclaim ever existed and, consequently, the counterclaim was dismissed. Having made the orders required by the terms of the judgment, the only remaining issue was that of costs. Counsel for the plaintiffs (the defendants on the counterclaim) sought indemnity costs, an application opposed by counsel for the defendant (the plaintiff on the counterclaim). Both parties sought, and were granted, time to file written submissions on the issue of indemnity costs. The submissions having been filed, I was advised by the solicitors for both parties that they were content for the issue of costs to be determined on the papers. For ease of expression I will refer to the parties in terms of their position in the primary action rather than also referring to their position on the counterclaim.

2 The basis of the application for indemnity costs is an offer to settle the action which was made by the plaintiffs in a letter of 26 March 2001. The letter was headed "without prejudice save as to costs" and was, relevantly, in the following terms:

"(a) indicating that Clayton Utz's instructions were that the allegations made in the Defence and Counterclaim were false and without merit;

(b) offering to settle both the main action and the counterclaim on the following terms:

(i) each party bears its own costs in commencing and defending all claims made in the course of these proceedings;

(ii) judgment be entered for the Plaintiffs in the Plaintiffs' claim against the Defendant;

(iii) the Defendant's counterclaim against each of the defendants to Counterclaim be dismissed; and

(iv) the Plaintiff provide the Defendant/Counterclaimant with a written release from liability."

3 The form of the plaintiffs' offer to settle has been described in the submissions as a "Calderbank" letter or offer: Calderbank v Calderbank [1975] 3 All ER 333. That term is commonly used to refer to any letter containing an offer to compromise as opposed to an offer to compromise made by notice under O 24A.

4 The plaintiffs' solicitors received no reply to this offer and on 10 April 2001 Clayton Utz again wrote to Dwyer Durack on a "without prejudice save as to costs" basis advising that the offer had now lapsed and was withdrawn. The defendant's solicitors were further advised that the plaintiffs would pursue their rights to recover all permissible costs were they to succeed at trial.

5 On 10 April 2001, Dwyer Durack informed Clayton Utz by email that they had not received the offer and requested a fresh copy of such, and then asked for an extension of time for it to be put to the defendant for consideration. Clayton Utz re-faxed a copy of the offer to Dwyer Durack.

6 On 17 April 2001, Dwyer Durack sent an email to Clayton Utz indicating that their client rejected the plaintiffs' "offer to settle on the basis that each party walk away and bear their own costs". The time within which the defendant could have availed himself of the offer was 15 days.

7 With one exception, the issue of costs is provided for in O 66 of the Supreme Court Rules. Order 66 r 1(1) sets down the well established proposition that "the Court will generally order that the successful party to any action or matter recover his costs". However, O 66 r 1(1) also makes it plain that the costs of and incidental to all proceedings shall be in the discretion of the Court. In the usual circumstances, the order made in favour of a successful party with respect to costs is that he will recover party/party costs to be taxed if not agreed by the parties.

8 Offers to compromise an action are dealt with in O 24A of the Rules. An offer made under O 24A must be in writing and bear a statement to the effect that the offer is made under the order: r 1. The offer may be made at any time before the Judge or Master begins to give his decision or reasons for decision: r 3(1). The offer may be expressed to be limited as to the time it is open to be accepted but the time expressed shall not be less than 28 days after it is made: r 3(3). The offer cannot be withdrawn within the time it is open to be accepted: r 3(6). Rule 10(4) identifies the consequences of failing to accept an offer which proves to be more favourable to the offeree than the outcome of the action. It states:

"Where an offer is made by a plaintiff and not accepted by the defendant, and the plaintiff obtains judgment on the claim to which the offer relates no less favourable to him than the terms of the offer, then, unless the Court otherwise orders, the plaintiff shall be entitled to an order against the defendant for his costs in respect of the claim from the date on which the offer was made, taxed on an indemnity basis in addition to his costs incurred before that date, taxed on a party and party basis."

9 There is a reciprocal provision where, either in the primary action, or in a counterclaim as in this case, the defendant makes the offer, although the resulting costs order will differ if the plaintiff is the successful litigant: O 24 r 10(5). Significantly, the effect of r 10(4) is that there is a prima facie entitlement to a costs order on an indemnity basis if the remaining criteria are met. Similarly, under r 10(5) the defendant has a prima facie entitlement to its costs on a party/party basis after the date of the offer and prima facie protection from paying the plaintiff's costs after the date of the letter.

10 Without prejudice offers of compromise which are not made under O 24A may still affect the Court's discretion as to costs: Dobb v Hacket (1993) 10 WAR 532. The rationale behind that proposition is that the Court should preserve in the minds of litigants the conscious consideration that their behaviour may place them at risk as to costs if they refuse reasonable offers of settlement. The Court should be careful not to foster the proposition that obstinacy and unreasonableness will not be punished by orders as to costs: Dobb v Hacket (at 540) per Murray J. As Rogers J observed in Messiter v Hutchinson (1987) 10 NSWLR 525 (at 528): "The purpose of a Calderbank letter is, after all, essentially the promotion of settlement of disputes". In Cutts v Head [1984] Ch 290 (at 306) Oliver LJ observed:

"... As a practical matter, a consciousness of a risk as to costs if reasonable offers are refused can only encourage settlement whilst, on the other hand, it is hard to imagine anything more calculated to encourage obstinacy and unreasonableness than the comfortable knowledge that a litigant can refuse with impunity whatever offer may be offered him even if it is as much as or more than everything to which he is entitled in the action."

11 In Messiter v Hutchinson, Rogers J also drew the following conclusion with respect to the effect of a Calderbank offer (at 529):

"In considering what weight should be given to an offer, the Court will no doubt pay regard to all relevant circumstances, including the reason why no payment in was made, the security of payment available to the plaintiff and the time at which the Calderbank letter was received by the plaintiff."

The reference in that statement to "payment" is a reference to the practice replaced in this jurisdiction by an O 24A offer; the practice of payment into court. Consequently, the reason for not utilising O 24A is a relevant factor in considering the weight to be given to a Calderbank offer.

12 In this case, it is important to remember that the significant action was in fact the counterclaim on which the offerors were the defendants. The main action simply sought a declaration that the employment agreement pleaded by the defendant in his counterclaim did not in fact exist. Order 24A makes no provision for a plaintiff to pay indemnity costs to a defendant in circumstances where a plaintiff has rejected an offer from a defendant that is more favourable to the plaintiff than the outcome of the action. As I have indicated above, the defendant is entitled only to an order that the plaintiff pay the defendant's costs after the date of the offer. That, of course, is only of benefit in circumstances where the plaintiff is less successful than the terms of the offer, but is still successful. In this case, the plaintiff on the counterclaim was wholly unsuccessful. In those circumstances there is a sound reason for utilising a Calderbank offer.

13 In Townsend & Ors v Collova & Ors (S) [2005] WASC 4 the defendants' solicitors wrote two Calderbank letters to the plaintiff's solicitors one of which invited the plaintiffs to discontinue their action on the basis that the parties bear their own costs. The defendant's offers were more favourable to the plaintiff than the outcome of the action. Le Miere J relied on Dobb v Hacket (at 541) and Duvall v Godfrey Virtue & Co (a firm) [2001] WASCA 163 (at [7]) in concluding that without prejudice offers of compromise which are not made under O 24A may still affect the Court's discretion as to costs: (at [36]). With respect to the extent to which a Calderbank offer might affect the Court's discretion Le Miere J stated (at [42]):

"I consider that a Calderbank letter is but one factor relevant to the exercise of the discretion to award costs in favour of a successful defendant. A Calderbank offer is a significant factor in favour of indemnity costs but does not require an order for indemnity costs as a matter of routine."

14 Of course, the benefit of making an offer under O 24A, as opposed to a Calderbank offer, is that the former approach carries with it a prima facie entitlement to indemnity costs: O 24A r 10(4) and r 10(5); MGICA (1992) Ltd v Kenny & Good Pty Ltd & Anor (No 4) (1996) 140 ALR 707 (at 711); Leichhardt Municipal Council v Green [2004] NSWCA 341 (at [19]). In MGICA (1992) Ltd v Kenny & Good Pty Ltd (at 710), Lindgren J, citing a number of authorities, said:

"It is important, however, to appreciate that the mere making of an offer by a 'Calderbank letter' and its non-acceptance followed by a result more favourable to the offeror (less favourable to the offeree) than that represented by the offer will not automatically lead to the making of an order for payment of costs on an indemnity basis."

15 Where the offer, as in this case, is to consent to judgment in favour of the plaintiff/defendant in the counterclaim, in both the primary action and the counterclaim, with parties bearing their own costs, it is necessary to consider whether that is indeed an offer to compromise. In Jones & Anor v Millward & Anor [2005] QCA 76 it was held that a demand which demands nothing less than the final relief sought in the claim plus costs is not a true offer of compromise: ((at [13]) per Holmes J with whom McMurdo P and Jerrard JA agreed). In Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 Giles J observed that compromise "connotes that a party gives something away": (at 368). In Fyna Foods Australia Pty Ltd v Cobannah Holdings Pty Ltd (No 2) [2004] FCA 1212 Kenny J referred to a number of authorities in support of the proposition that an offer to a plaintiff to discontinue with no order as to costs was not an offer to compromise and did not carry with it the consequences of a Calderbank letter: see Vasram v AMP Life Ltd [2002] FCA 1286 per Stone J (at [12]); Australian Competition and Consumer Commission v Universal Music Australia Pty Ltd (No 2) [2002] FCA 192 per Hill J (at [59] - [60]); McKerlie v State of New South Wales (No 2) [2000] NSWSC 1159. Although Kenny did not form a concluded opinion on the issue, he expressed doubt that an offer of that type amounted to a genuine offer of compromise: (at [10]). However, in Leichhardt Municipal Council v Green (at [37], [39]) the NSW Court of Appeal held that an offer will not be a demand for capitulation merely because the offer is made on the basis that judgment be entered against the offeree and that each party bear its own costs. In my view, an offer for judgment to be entered for the offeree and each party bear its own costs can properly be described as an offer to compromise, because the offeror is giving something away, the costs to which it would otherwise be entitled. However, whether it is an offer which would justify an order for indemnity costs is an entirely different matter.

16 In terms of the legal framework to apply in determining this application, the remaining issue is the circumstances in which the refusal of a Calderbank offer will lead to an order for indemnity costs against the party that refuses the offer and is then faced with a less favourable outcome. In MGICA (1992) Ltd v Kenny & Good Pty Ltd, Lindgren J said (at 711):

"Clearly, the circumstances must take a case out of the 'ordinary' or 'usual' category if an order for indemnity costs is to be made, since, as noted earlier, the rules evince an intention that in that category of case, an order for costs signifies an order for costs on a 'party and party' basis. Perhaps the various 'tests' which have been suggested are classifiable as 'abuse of process', 'ulterior or extraneous purpose' and 'unreasonableness' tests."

17 The plaintiffs' written submissions refer to a number of cases which have identified circumstances justifying an award of indemnity costs. One example is where the applicant, properly advised, "should have known that he had no chance of success": Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd & Ors [1988] FCA 202; (1988) 81 ALR 397 (at 410) per Woodward J. Another circumstance was an "imprudent refusal of an offer of compromise": Colgate-Palmolive Company & Anor v Cussons Pty Limited [1993] FCA 536; (1993) 46 FCR 225 per Sheppard J (at 233). In Dobb v Hacket (at 540 - 541) Murray J relied on the fact that the plaintiff "behaved unreasonably" in ordering that the plaintiff pay the defendant's costs even where the plaintiff succeeded at trial, in circumstances where the usual order would have been that costs be paid from the estate. In Quirk v Bawden (1992) 112 ACTR 1 (at 5), the Court considered that where a defendant "unreasonably rejected" an offer made by the plaintiff, it may be appropriate for a court to order that the defendant pay the plaintiff's costs on an indemnity basis. With respect to this issue, the defendant relies on the decision in Flotilla Nominees Pty Ltd v Western Australian Land Authority & Anor [2003] WASC 122 (at [8]) where the Court considered that there must be some special or unusual feature in the element of improper, or at least unreasonable, conduct on the part of the parties or their legal advisor to justify an award of indemnity costs. Pullin J's analysis of the relevant authorities resulted in a conclusion that "some element of improper or at least unreasonable conduct" must be established. However, in that case, the Court was determining an application for costs on an indemnity basis, unrelated to the issue of offers to compromise. Based on these authorities, it would appear that "unreasonableness" in refusing the offer is the salient consideration. Of course, what is reasonable will very much depend on the circumstances of each case.

18 In Grbavac v Hart [1996] VSC 37; [1997] 1 VR 154 the Court of Appeal of Victoria was called upon to review an order that a successful plaintiff pay the defendant's costs after the date of an offer of compromise, an exercise requiring consideration of the adequacy of the offer. Winneke P concluded (at 155) that regard ought not to be paid to an offer of compromise unless the terms of the offer are such as to leave the offeree in no reasonable doubt as to the nature and extent of what is being offered: see also Tadgell JA (at 160 - 161). In Brymount Pty Ltd t/a Watson Toyota v Cummins [2005] NSWCA 69 Beazley JA (with whom Ipp JA and McColl JA agreed) identified a number of factors, distilled from various authorities, which may be significant in exercising the discretion as to costs where a Calderbank offer has been made and rejected:

(a) Whether the rejection of the compromise offer was reasonable in the circumstances: [14];

(b) The time frame which the offeree had to consider the offer. The relevance of this factor is that it provides a party's legal advisers sufficient time to weigh up the prospects of the case: [14];

(c) Whether the letter of compromise explicitly stated that the offer would be made in Calderbank terms, the exact conditions of the offer, and whether indemnity costs would be pursued of the offer was rejected: [14];

(d) Whether the letter of offer provided fair warning of the case that was to be run against the defendant on the counterclaim: [20].

19 It can be seen that the time frame is a relevant factor. In this case, the writ of summons in the originating claim was filed on 8 December 2000. The defence/counterclaim was filed on 13 February 2001. The offer was made by letter dated 26 March 2001 and was open for acceptance for a period of 15 days. At the time of the offer discovery had not been completed.

20 On that basis, counsel for the defendant submits that the fact that the defendant's defence and counterclaim did not have merit could not have been obvious or necessarily correct. It is also said that the element of compromise in the offer was modest and somewhat negligible given the quantum of the defendant's claim. Therefore, it is submitted, it is not imprudent or unreasonable for the defendant to refuse the offer and there was no element of improper or unreasonable conduct on the part of the defendant to justify an award of indemnity costs. It is also submitted on behalf of the defendant that the offer made, in so far as it related to the defendant continuing to defend the plaintiff's claim, was made at an early stage in the proceedings when it would have been quite reasonable for the defendant to continue to defend without the risk of an indemnity costs order being made against him. Counsel for the defendant also identifies a number of deficiencies in the offer itself. They are:

(1) That the offer did not state the plaintiff's intention to seek indemnity costs. It merely informed the defendant that the plaintiff intended to pursue all permissible costs.

(2) The offer failed to give warning of the case to be put against the defendant.

(3) The offer failed to provide a reasonable time frame for acceptance.

21 Finally, it is said that there is nothing special or unusual in this case to warrant a departure from the usual rule of party/party costs.

22 On behalf of the plaintiffs it is said that the matters in issue turn on a relatively straightforward conflict of evidence. The plaintiffs submit that, properly advised by his solicitors, the defendant would have been in a position to have assessed the merits of his case at a very early stage of the proceedings. It is said that the factual issues in both the main action and the counterclaim are relatively straightforward and turn on the existence and content of a verbal employment agreement.

23 The plaintiffs also submit that it would have been evident to the defendant that, in order to succeed in his counterclaim and to successfully oppose the declaration sought by the plaintiff, it would be necessary for him to satisfy the Court that his version of events was true. I agree with that proposition because there was little written material to support the existence and terms of the agreement pleaded in the counterclaim.

24 Reliance is also placed by the plaintiff on the fact that, properly advised, the defendant would have understood that at trial the three director plaintiffs were likely to give evidence that contradicted his evidence and the trial would turn on whose evidence the trial Judge preferred. In this regard, reference is made to the adverse finding made by me with respect to the defendant's credibility. In my view, this is not a relevant factor. Until the judgment was delivered there was no way that either party would know that the defendant would prove to be an entirely unsatisfactory witness nor how the conflict between the plaintiffs and the defendant would be resolved. Even if, during the course of the trial, it appeared that the defendant was not presenting well, by that stage the period of offer had expired. However, I do accept that, in view of my findings, the defendant must have been aware that his claim attracted a greater degree of risk than that of someone who held a sincere belief in the truth of his claim. However, I still consider that this factor is not such as to make the rejection of an offer of that type at such an early stage in the proceedings unreasonable.

25 Neither do I believe that the number of witnesses or plaintiffs who might give evidence in direct conflict to the defendant is a fact that would render unreasonable a refusal of an offer of this type. There are numerous cases where there is an imbalance in witness numbers but judgment is not in favour of the case with the greatest number of witnesses. However, I do accept that the defendant must have known that the witness Beale was a crucial witness because his position in the plaintiff company was the same as the defendant's. The difficulty is that, at the very early stage at which the offer was made, there is no direct evidence, or evidence from which an inference can be drawn, that the defendant had any knowledge of Beale's position on the relevant issues or that Beale was no longer working for the plaintiff company and was no longer connected with the other plaintiffs. Neither was the defendant aware of whether any documentation existed which either directly or inferentially supported his claim because discovery had not taken place.

26 There is no impropriety in preparing and filing a counterclaim based entirely on the instructions of the client when the evidence of the client, if accepted, is capable of establishing the counterclaim. Identifying supporting witnesses is something that can be done, following discovery, prior to filing witness statements. Neither would one expect that the necessary inquiries, response from the witness, advice to the client and instructions from the client could reasonably be obtained within a meagre 15 day time frame. In my view, it would not be unreasonable, even where there is knowledge that a number of witnesses will testify against him, for the defendant to refuse an offer made at the earliest stage of the proceedings merely to forego costs if the defendant abandoned his defence and counterclaim.

27 In making an offer of this type at an early stage of the proceedings, the prospects of successfully seeking an order for indemnity costs would be increased if the offer had set out the strength of the plaintiff's case so that the defendant was informed of the degree of risk involved in proceeding. Indeed, if at this early stage the plaintiffs were aware of the proposed evidence of Beale, including the circumstances pertaining to him, it would have been prudent to include that information in the offer. In my view, if the plaintiff had been made aware of that evidence and the other strengths of the plaintiffs' case then the risks of proceeding would be substantially increased making it more likely that an order for indemnity costs would be made. An allegation that the defendant's case is without merit does not equate to identifying the strengths of the plaintiff's case.

28 There is another factor that causes me some concern. The offer did not precisely state that the plaintiff intended to seek an order for indemnity costs with respect to both actions. The statement that the plaintiffs would "pursue their rights to recover all permissible costs" is not a substitute for a statement that indemnity costs will be sought. Permissible costs are generally the party/party costs to be awarded to any successful litigant. I accept that if the statement was meant to convey that the plaintiffs, if successful, intended to recover their costs of both actions, it would be stating the obvious. However, the discretion conferred on the Court as to costs may well operate other than in the usual course of costs following the event. For example, O 66 r 1(2) provides that if the Court is of the opinion that the conduct of a party has resulted in costs being unnecessarily or unreasonably incurred it may deprive that party of costs wholly or in part, and may further order him to pay the costs of an unsuccessful party either wholly or in part. In those circumstances, I consider it important that a party who makes an offer of compromise with a view to seeking indemnity costs, if appropriate, should explicitly say so. The absence of that statement will not necessarily be fatal to the application if other circumstances are such as to constitute a strong claim to indemnity costs. However, in this case, because of my views with respect to the matters raised by the plaintiffs in support of an application for indemnity costs expressed above, I consider the absence of a clear statement of the intention to apply for indemnity costs to be one of the factors which has led me to conclude that the application should be refused. The other significant factors are the failure to outline the strength of the plaintiffs' case and the marginal benefit to the defendant provided by the terms of the offer. Not being required to pay the other party's costs is a somewhat meagre offer on a claim of significant quantum which, at such an early stage, could not be said to be so hopeless it would fail. That is particularly so in circumstances where the offeree has not provided any information which would suggest to the defendant that his case was either weak or hopeless.

29 I should add that I consider it essential that the Court reinforces, by orders for indemnity costs if necessary, the need for litigants to give conscious consideration to the risks of proceeding with litigation and of failing to consider and accept fair and reasonable offers to compromise claims. If the timing and terms of this offer more closely met with the requirements set out in the authorities to which I have referred, I would have had no hesitation in making the order sought.

30 However, for the reasons to which I have referred, I consider the appropriate order to be that the defendant (plaintiff on the counterclaim) pay the plaintiffs' (defendants on the counterclaim) costs of both actions on a party/party basis to be taxed if not agreed.