Cl 18: If the Company terminates your employment under paragraph (b) by giving you payment in lieu of notice, your employment will terminate as the date that the payment is made.
9 Clauses 19, 20 and 21 contained further provisions relating to payments on termination.
10 Clauses 25 and 26 related to non-competition and restrained Mr Tanaka from competition anywhere in Australia with Tokyo Net's business as Internet Service Provider during the employment and for nine months after termination of employment "(whether by resignation or notice of termination or otherwise)".
11 Both agreements contained provisions choosing the law of New South Wales as the governing law.
12 Tokyo Net had only the nominal sum of $100 as subscribed capital and did not have resources of its own sufficient to provide working capital. It depended on money lent to it by KDDI Australia, its majority shareholder, for working capital. By 2002 its operations had not generated working capital sufficient for its needs. Mr Tanaka said, without support of accounting documents, to the effect that by July 2002 the company's equity was about $29,000. In all practicality Tokyo Net's business was completely under the control of KDDI Australia, which could decide whether to lend working capital to Tokyo Net, could and did appoint two of its three directors and owned the majority of its shares. Mr Matsumoto became a director on 6 April 2001. Mr Arai was a director until 6 September 2001, and became a director again on 24 April 2002. As well as being a director of Tokyo Net Mr Matsumoto is the secretary of KDDI Australia, for which he has worked since February 1999, and earlier he was employed by the Japanese corporation.
13 Mr Tanaka's employment as Chief Executive Officer came to an end in August 2002. He also ceased to be a director of Tokyo Net. The issues in the proceedings include disputes as to when and in what way his employment came to an end. Mr Tanaka exercised or purportedly exercised the Put Option by notice on 16 August 2002. In the Statement of Claim issued on 16 October 2002 his principal claims are a claim against Tokyo Net for damages for breach of his employment contract bringing about the termination of his employment, and a claim against KDDI Australia for specific performance of an agreement for sale of Mr Tanaka's 49 shares in Tokyo Net which he alleges arose when he exercised the Put Option. Mr Tanaka also makes claims for damages, interest and costs. Mr Tanaka's claims depend, in both cases, on his establishing that his employment ended as a result of a resolution of the Board of Directors of Tokyo Net at a meeting on 8 August 2002 to reduce his remuneration from $173,000 per annum to $156,000 per annum. Mr Tanaka claims that this was an anticipatory breach and repudiation of his employment contract, that he accepted the repudiation and terminated his employment contract by a letter to Tokyo Net on 14 August 2002, and that in those circumstances he had an Early Put Option to require KDDI Australia to buy his shares in accordance with cl.10.5, because he had ceased to be employed as Chief Executive Officer for reasons other than reasons set out in cl.11.2(a). That is to say, he claims that he did not resign, his employment was not terminated by a lawful summary dismissal, and his employment was not terminated by three months' notice in the ways referred to in cl.11(a)(i),(iii) and (iv).
14 The defendants claim that Mr Tanaka's employment came to an end in a different way. They dispute that the resolution relating to reduction of salary was an anticipatory breach or a repudiation of the employment contract. The defendants say that on 15 August 2002 Tokyo Net gave Mr Tanaka notice in writing that he was to return to duties as Chief Executive Officer, and then told him that they would rescind the resolution to reduce his salary and that a further board meeting was convened for 20 August 2002. They further say that the resolution was rescinded at a directors' meeting on 20 August 2002, that Tokyo Net on 28 August 2002 required Mr Tanaka to return to duty on or before 7 October 2002, and that when he did not return to duty, Tokyo Net on 11 October 2002 terminated Mr Tanaka's employment pursuant to cl.17(b)(i) by paying him three months' salary in lieu of notice.
15 The factual matters in dispute relate to the terms, meaning and effect of the resolution of 8 August 2002, and to whether that resolution constituted an anticipatory breach and a repudiation of the employment contract when viewed in the circumstances in which it took place; those circumstances include the financial position of Tokyo Net in relation to KDDI Australia's requirement for repayment of its loan, and the terms of the discussion at the Board meeting on 8 August leading up to passing the resolution.
16 Much of the significant correspondence and documents are in the English language, but some significant notes and an email message at the heart of the matter are in the Japanese language, and the minutes are in the Japanese language. I am unable to understand these and I depend on translations which are in evidence. The two translations of the minutes differ slightly.
17 In the Defences filed by each defendant the plaintiff's allegation about the terms of the resolution is, in substance, admitted. The Statement of Claim para.7 alleges:
At a meeting held on 8 August 2002, the board of directors of TokyoNet resolved, over the protest of the plaintiff, to reduce the remuneration TokyoNet agreed to pay to the plaintiff under the employment agreement from $173,000 per annum to $156,000 per annum and communicated that decision to the plaintiff.
18 In KDDI Australia's Defence, KDDI Australia does not plead to paragraph 7 and hence should be taken to admit it. In para.7 of Tokyo Net's Defence Tokyo Net answers para.7 in a way which admits its substance, although it does not admit that the resolution was made over the protest of Mr Tanaka, and it does not admit that the decision was communicated to Mr Tanaka at the meeting. On the evidence these allegations are correct, notwithstanding that they were not admitted.
19 The Defences do not in terms raise an issue to the effect that the resolution was intended only to take effect on a condition, or was hypothetical or was intended to operate only if an assumed outcome actually occurred. The manner in which the proceedings were conducted, and evidence given by Mr Matsumoto and Mr Arai show that the defendants intended to rely on a defence which was not formulated until defendants' Senior Counsel handed me his Written Submissions. These included the following passages:
[10] It was made clear at the meeting that the reduction in salary was proposed on the condition that:
(a) KDDI would provide to Tokyo Net $30,000pa financial support: para 5 and p.101-3 Ex YT2- Mr Tanaka's second affidavit (6.8.03); para 19- Mr Matsumato's affdt. (5.6.03); para 12- Mr Arai's affdt. (6.6.03);
(b) Mr Tanaka would submit to KDDI a re-payment programme for the loan: paras 2, 3 and 5 & p.101-3-Ex. YT 2- Mr Tanaka's second affdt. (6.6.03); para 21- Mr Matsumoto's affdt. (5.6.03); paras 12 and 13- Mr Arai's affdt. (6.6.03)
[15] The 8 August 2002 resolution was conditional upon the matters contained in paras 10(a) and (b) occurring and thus can not be conduct with amounts to an intimation of an intention "to abandon and altogether refuse performance" of the employment agreement.
20 In my view the defendants should have raised in their pleadings any matter on which they rely to the effect that the resolution was conditional, or that it was hypothetical, or that when understood in accordance with the terms of the minute and other events forming part of its factual context, the resolution was not intended to operate unless some foreseen or assumed circumstances actually came about. The effect of Pt.15 r.11 of the Supreme Court Rules is that it is implied that the plaintiff made the (logically necessary) allegation that all conditions for the operation of the resolution were fulfilled, and it is for a defendant to allege any unfulfilled condition, and to allege that it was not fulfilled; in my understanding the burden of proof of fulfilment would be on the plaintiff, notwithstanding that the defendant introduced the condition into the pleadings. The matters raised in the Written Submissions are matters which the defendants ought reasonably to have raised expressly in their Defences to avoid surprise; they are enabled to do raise those matters by Pt.15 r.13. The issue came to be dealt with in the evidence by a side wind and over the objection of the plaintiff's counsel. See transcript pp19-21. I regard it as altogether unsatisfactory that, where there are careful pleadings, an additional issue, in this case the principal issue for decision, can emerge in the course of evidence without being defined in writing. There is a failure of procedural justice in that parties do not clearly understand in advance what will be decided at the hearing and what case they should prepare to conduct, and also in that there is room for an element of surprise. If there is an appeal, departing from the issues as defined by written pleadings opens up the possibility of controversy about what was in issue at the trial, and the possibility of appellate interventions based on the view that the Judge misunderstood what the issues were before him.
21 It appeared to me that the approach expressed in the judgment of Stephen, Mason and Jacobs JJ in Leotta v. Public Transport Commission (NSW) (1976) 50 ALJR 666 at 668 required that I should adjudicate the defences in the Written Submissions although they are not found in the pleadings. See too Water Board v. Moustakas (1988) 180 CLR 491 at 497. Defendants' counsel said, at a late stage, that he wished to amend the Defences, but I told him that as what was relied on appeared in the Written Submissions, I did not require him to make an amendment and that I would record the paragraphs in the Written Submissions in my judgment.
22 As appears from the statement of Gibbs CJ in Shevill v. Builders Licensing Board (1982) 149 CLR 620 at 625-626, repudiation of a contract can take place in several ways, the first of which was referred to by his Honour in these terms: [625-626]
We are of course concerned only with a case in which it is admitted that there was a valid and binding contract. Such a contract may be repudiated if one party renounces his liabilities under it - if he evinces an intention no longer to be bound by the contract ( Freeth v. Burr (1874) LR 9 CP 208, at p 213 ) or shows that he intends to fulfil the contract only in a manner substantially inconsistent with his obligations and not in any other way ( Ross T. Smyth & Co. Ltd. v. T. D. Bailey, Son & Co. (1940) 3 All ER 60, at p 72 ; Carr v. J. A. Berriman Pty. Ltd. (1953) 89 CLR 327 , at p 351 ). In such a case the innocent party is entitled to accept the repudiation, thereby discharging himself from further performance, and sue for damages: Heyman v. Darwins Ltd (1942) AC, at p 399.
23 In Federal Commerce & Navigation Co. Ltd v. Molena Alpha Inc. [1979] AC 757 at 778-779 Lord Wilberforce set out several authoritative formulations and said, at 779C-D, that the common principle is "… to amount to repudiation a breach must go to the root of the contract."
24 It is, in my opinion, elementary that the obligation of an employer to pay salary, and the whole salary, is fundamental to an employment agreement and goes to the root of the contract. It is perhaps not the whole basis of the employee's involvement, but it is very close to being the whole basis of the employee's involvement. In terms of ordinary human motivations and behaviour, no one could suppose that his employee would continue to work for him in the expectation that the employer might withhold part or all of the agreed salary. As is sometimes the case with overwhelmingly clear propositions, it is difficult to find distinct judicial authority for this. In Rigby v. Ferodo Ltd [1988] ICR 29 at 33B, Lord Oliver's speech shows that the House of Lords accepted the following propositions:
It is common ground that the unilateral imposition by an employer of a reduction in the agreed remuneration of an employee constitutes a fundamental and repudiatory breach of the contract of employment which, if accepted by the employee, would terminate the contract forthwith.
25 It is correct, as defendants' senior counsel observed, that this was not a conclusion reached by the House of Lords after the proposition had been tested in argument, and hence it is not a statement of authority, but I regard it as a significant illustration, as it was conceded in a hard-fought case in which there were two appeals and the House of Lords acted on the concession.
26 In Saad v. TWT Ltd (CA NSW 29 May 1998 unreported) Handley JA at p15 treated relevantly similar events as a repudiation:
When the appellant reported for work on 18 June 1990 she did not become involved in what could reasonably be described as a re-negotiation of her contract. She was confronted with its unequivocal repudiation by WIN on a take it or leave it basis, accompanied by an offer of a different and less advantageous contract. The appellant would have been fully justified in walking out immediately and suing for wrongful dismissal.
27 In Advertiser Newspapers Pty Ltd v. Industrial Relations Commission of South Australia (1999) 90 IR 211 Bleby J, with whom other members of the Full Court of the Supreme Court of South Australia agreed, gave, at 217 the following among examples of repudiation of a contract of employment by the employer.
It may also come about by the employer refusing to comply with the fundamental condition, such as refusing to pay the employee at the same rate or to pay the employee at all.
28 The following expression in a judgment of Jordan CJ in Tramways Advertising Pty Ltd v. Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 641-642, was approved in the judgment of the High Court in Associated Newspapers Ltd v. Bancks (1951) 83 CLR 322 at 337:
If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight.
29 In Laurinda Pty Ltd v. Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 Brennan J at 642 said:
A right to rescind depends on the importance of the term repudiated.
30 Defendants' counsel referred me to a number of passages in Laurinda at 634, 641-642, 647-648 and 657-658 including the following statement of Deane & Dawson JJ at 658:
An issue of repudiation turns upon objective acts and omissions and not upon uncommunicated intention. The question is what effect the lessor's conduct "would be reasonably calculated to have upon a reasonable person" (per Lord Herschell L.C., Carswell v. Collard (1893) 20 R (HL) 47, at p 48; Forslind v. Bechely-Crundall (1922) SC (HL) 173, at 190). It suffices that, viewed objectively, the conduct of the relevant party has been such as to convey to a reasonable person, in the situation of the other party, repudiation or disavowal either of the contract as a whole or of a fundamental obligation under it.
31 The reduction of $17,000, almost 10% of Mr Tanaka's agreed salary was far more than slight. The right to salary is in my view of central importance.
32 By Memorandum of Understandings dated 21 July 2000 KDDI Australia agreed to lend Tokyo Net $150,000, repayable in full on 25 July 2001 (Exhibit B, p.20). This carried out the provision for working capital in cl.14 of the Share Sale Agreement.
33 The same parties made a loan agreement on 16 June 2001 regulating a loan of $10,000 repayable on 16 June 2002, and a further loan agreement on 2 July 2001 regulating a loan of $162,968 repayable on 25 July 2002 - Exhibit B, p39. According to Recitals in this Agreement KDDI Australia held a fixed and floating charge granted by Tokyo Net, and the further advance was secured by that charge.
34 By a letter of 1 July 2002 (Exhibit B, p48) Mr Nagase, Managing Director of KDDI Australia, in clear and formal entirely unmistakable language, asked for repayment of the principal of $162,968 and interest of $14,789.01 on 4 July 2002. When Mr Nagase delivered the letter of 1 July 2002 he spoke to Mr Tanaka in terms which showed that KDDI Australia proposed to enforce repayment, by going to Court if necessary, and when Mr Tanaka said that he would respond seriously, Mr Nagase asked him to draw up a repayment schedule and present it as soon as possible. Mr Tanaka remained in close contact with Mr Nagase during the events of July and August 2002.
35 Mr Tanaka replied by a letter of 3 July 2002 (Exhibit B, p49, translation Exhibit B, p52) setting out his thoughts regarding repayment of the loan. Mr Tanaka reviewed at length the history of the relationship between the parties and of the loans, and of the business results which had been experienced. Mr Tanaka contended that KDDI Australia should contribute to repayment of the loan. After reviewing the prospects of increasing the level of business he predicted that total repayments for the first year would amount to around $10,000, and with anticipated repayment support from KDDI Australia of $30,000 there was the possibility for a yearly repayment of $40,000 and for the entire loan to be repaid over a period of four years and several months; or possibly sooner. Mr Tanaka commented on the limited room for reduction of expenditure on human resources and hardware investment. Mr Nagase for KDDI Australia responded on 19 July 2002 calling for payment of the principal and interest, again in clear and formal terms.
36 An Extraordinary Board Meeting of Tokyo Net was held on 26 July 2002. Mr Matsumoto prepared Minutes (Exhibit B, p57, translation at p59) which record consideration of the history of the demands and discussion of responses, and discussion of the prospects of reopening negotiations with KDDI Australia based on a repayment schedule and on reducing outgoings. There was a further board meeting on 31 July (Minute Exhibit B, p61, translation p63), at which the company's business and various prospects for reducing expenditure were considered and a decision was taken to hold a further directors' meeting on 28 August.
37 On 31 July Mr Nagase sent Mr Tanaka a file of documents responding to Mr Tanaka's earlier communication. Among many other things Mr Nagase said, in this file, to the following effects.