Tokyo Network Computing Pty Ltd & Anor v Tanaka [2004] NSWCA 263 | Case summary

2 AUGUST 2004 TOKYO NETWORK COMPUTING PTY LTD & ANOR v YOJI TANAKA Judgment 1 HANDLEY JA: This is an appeal from a decision of Bryson J who awarded damages for wrongful dismissal against the first appellant, Tokyo Network Computing Pty Ltd, and specific performance against the second appellant, KDDI Australia Pty Ltd. Specific performance was ordered of a contract for the sale of the respondent's shares in the first appellant, Tokyo Network, created by Mr Tanaka's exercise of a put option in the share sale agreement of 23 June 2000 under which he sold to KDDI Australia a fifty one per cent majority shareholding in the capital of Tokyo Network. Mr Tanaka remained a forty nine per cent shareholder and these were the shares the subject of the put option which he exercised on 16 August 2002. 2 As part of the overall arrangement recorded in the sale agreement of 23 June 2000, Tokyo Network entered into a contract with Mr Tanaka to employ him as its CEO for a minimum term of three years. The contract was entered into on 3 July 2000 which was the day the share sale agreement was completed. The agreement contemplated that KDDI Australia would have to lend funds to Tokyo Network to provide it with working capital and it agreed to do this for a minimum of twelve months. The loan was renewed on mutually satisfactory terms in July 2001, but in July 2002 KDDI Australia refused a request for further accommodation by way of an extension of the period for repayment of the loan and it demanded repayment of the outstanding loan with interest. Negotiations followed which culminated in Mr Tanaka, the president of Tokyo Network, calling an extraordinary meeting of the company's directors for 8 August 2003. The other directors were Mr Matsumoto and Mr Arai both of whom were nominated by KDDI Australia. 3 The decisions taken at the directors' meeting were recorded in minutes in the Japanese language, which Mr Tanaka typed on his computer or word processor. At the request of Mr Matsumoto they were amended in a relevant respect and then the Japanese text was signed by all three directors. Two translations were in evidence but the trial Judge did not consider the differences were material and Mr Simpkins SC did not suggest otherwise. The relevant part of the minutes reads: "Readjustment of Mr Tanaka's salary. Mr Tanaka: disagree. A dismissal or cut in salary is not acceptable. He contributed to the thirty per cent increase in Tokyo Net sales and bears a heavy responsibility of CEO of Tokyo Net. Mr Matsumoto and Mr Arai: a reduction in Mr Tanaka's salary cut is unavoidable from the viewpoint of Tokyo Net's current circumstances and negotiations for loan repayment between KDDI Australia and Tokyo Net. Accordingly Mr Tanaka's salary will be cut by AUD17,000 per year and this figure allotted to part repayment of the loan. This amount has been calculated on the assumption that KDDI Australia provides Tokyo Net with AUD30,000 per year in support and that Tokyo Net completes loan repayment over the next three years. Due to a majority decision Mr Tanaka's salary shall be reduced to AUD156,000 by subtracting AUD17,000 from AUD173,000."

The remaining entry provided: [Item 7] repayment schedule based on the above decision shall be drawn up and submitted to KDDI Australia. 4 Bryson J held that the reduction in salary effected by the corporate decision recorded in the minutes was an anticipatory breach by the employer of its obligation to pay Mr Tanaka the agreed salary during his employment with Tokyo Net. Mr Tanaka purported to accept this repudiation by a letter to his employer of 14 August and followed up this letter with a further notice on 16 August purporting to exercise his put option and to require KDDI Australia to purchase his minority shareholding in Tokyo Net. 5 Mr Simpkins SC, who appeared for the appellants, challenged the Judge's decision that the corporate resolution was an anticipatory breach, but subject to one qualification did not dispute that if it was it had been accepted by Mr Tanaka and that the put option had been validly exercised so as to create a binding contract for the purchase of his shares. The one qualification which it will be necessary to deal with in due course is the submission of Mr Simpkins that obligations of good faith and to act reasonably in the employment relationship prevented Mr Tanaka from exercising his put option on 16 August 2003. 6 Mr Simpkins did not dispute that as a general rule a unilateral reduction by an employer of the agreed salary payable to an employee is a repudiation of the contract of employment. The Judge quoted authority in support of this proposition including a statement by Lord Oliver, albeit dicta, in Rigby v Ferodo Ltd [1988] ICR 29 HL, at 33. There is other authority which supports the same proposition. This includes Stratton v Illawarra County Council [1978] 2 NSWLR 494, reversed on other grounds not affecting the present proposition, [1979] 2 NSWLR 701, and Marriott v Oxford and District Co-Operative Society Ltd [1970] 1 QB 186 CA, at 191. 7 As I said, Mr Simpkins did not challenge the general proposition but submitted that it had no application in this present case for two reasons. Firstly, he said the majority resolution of the board was not a clear or unequivocal statement by the employer that it would not continue to perform the relevant term of the contract in accordance with its terms. The second submission was that if it was a repudiation, the term repudiated was not an essential term of this particular contract because of its other terms and conditions. This last submission can be disposed of quickly. The contract defines some of the circumstances in which it can be terminated for breach by the employer but does not specify any circumstances in which it can be terminated for breach by the employee. The fact that there is some definition of the circumstances in which it can be terminated by the employer and thus identifies terms which are essential as far as the employer is concerned cannot in my view affect the terms which are essential so far as the employee is concerned. This contract leaves these matters to the general law. Accordingly there is nothing in this particular contract which would exclude the general rule as it affects the obligations of the employer. 8 On the face of the minute the corporate resolution by majority was clear and unambiguous and a repudiation of the company's obligation to pay the agreed salary. The immediately preceding sentence was introduced into the draft by Mr Matsumoto shortly before the minutes were printed and signed. The sentence identifies the circumstances which gave rise to the decision but it is not expressed in terms which would make the decision conditional or would defer or suspend its implementation. 9 Mr Matsumoto gave oral evidence that there was an express agreement among those present that the resolution for the reduction of Mr Tanaka's salary was not to take effect until the repayment schedule contemplated by para 7 of the minutes had been prepared and approved by the board. The Judge did not accept this evidence. He considered that it was inconsistent with the contemporary documents including the minutes themselves and with Mr Tanaka's evidence, and it was not supported by the evidence of Mr Arai. That finding was not glaringly improbable or inconsistent with facts incontrovertibly established and cannot be disturbed. 10 There was no doubt that the board meeting and the discussion of possible cost savings including a reduction in Mr Tanaka's salary took place against the background of the debt owed to KDDI Australia and its demands for repayment. However, as I have said, the resolution itself was unconditional and purported to take effect forthwith. It is not necessary to decide whether it would have affected the payment due in four days time which had almost completely accrued prior to the resolution. Even if it did not it would still affect the rate at which Mr Tanaka would be earning salary from then on. In my view, the sentence preceding the corporate decision does not make that decision conditional or defer its implementation or suspend its operation. However, as the Judge said, even if that view were incorrect, it would not affect the result in this case. The resolution would still mean that the employer regarded itself as entitled to reduce Mr Tanaka's salary when it judged this to be appropriate. 11 In these circumstances the Judge's conclusion that the resolution to reduce Mr Tanaka's salary was an anticipatory breach of the contract of employment should be confirmed. Mr Tanaka promptly accepted that repudiation, as he was entitled to do, prior to the employer's attempt to withdraw it. His acceptance of the repudiation brought the contract to an end because of the anticipatory breach. The employer's subsequent attempts to resile from the position that it took at the meeting of 8 August were ineffective. They amounted at most to an offer to enter into a new contract on the same terms which Mr Tanaka was not bound to accept. Accordingly I would propose that the appeal be dismissed insofar as it relates to the award of damages for the wrongful dismissal of Mr Tanaka. 12 The remaining issue concerns the submission that Mr Tanaka was not entitled to exercise the put option. The matter is pleaded in one way in the statement of defence but this is no longer relied on by Mr Simpkins. If I am wrong in that I would reject any submission that the circumstances in which Mr Tanaka found himself obliged him to warn his employer or the majority shareholder of the steps that he would be entitled to take if the employer repudiated its obligations under the contract of employment. 13 The remaining point put by Mr Simpkins was that given the employer's prompt attempt to withdraw its anticipatory breach and the communication of its changed attitude, Mr Tanaka was not entitled thereafter to exercise the put option. There is no substance in this point. Mr Tanaka had a clear contractual right following his dismissal to exercise the put option and the changed attitude of the employer towards his employment contract came too late to effect that entitlement. In my judgment therefore the appeal against the order for specific performance should also be dismissed. Accordingly I would propose that the appeal be dismissed with costs. 14 MASON P: I agree. The nub of the corporate decision was that a proposal for a repayment schedule would be submitted to KDDI Australia. The employer recognised that it would lie in KDDI's power to accept or reject that proposal, but the employer's decision to offer what was tantamount to an enforced pay cut as part of an overture to KDDI seeking further loan accommodation remained a clear repudiation of its employment contract with the respondent. I agree with the reasons of Handley JA and the orders he proposes. 15 TOBIAS JA: I agree with the orders proposed by Handley JA and with his Honour's reasons. I would merely content myself with the following observations. 16 This is not a case of Tokyo Net saying that it may or may not pay Mr Tanaka the full amount of his salary under his employment contract. It said unequivocally in my opinion, that it would not pay his full salary if, as it hoped, KDDI Australia accepted its debt repayment proposal, an integral part of which was a cut of at least $17,000 to Mr Tanaka's salary. 17 This is therefore a case of Tokyo Net saying that it does not take seriously its obligation to pay Mr Tanaka's salary in full and that it would not in fact pay his full salary unless, in the particular circumstances, it suited it to do so: see Carr v JA Berryman Pty Ltd [1953] 89 CLR 327 at 351 per Fullagar J, cited with approval by Mason CJ in Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] 166 CLR 623 at 633. 18 Accordingly in terms of the question posed by the Chief Justice in Laurinda at 648, namely, would a reasonable person in the shoes of Mr Tanaka clearly infer that Tokyo Net would not be bound by the contract or would fulfil it only in a manner substantially inconsistent with its obligations and in no other way, in my opinion the clear answer is in the affirmative. There was, therefore, an anticipatory breach by Tokyo Net of Mr Tanaka's employment contract which entitled him to treat that anticipatory breach as a repudiation capable of acceptance by his terminating the contract. This he did. I therefore agree with the orders proposed by Handley JA. 19 MASON P: The appeal is dismissed with costs. **********

Tokyo Network Computing Pty Ltd & Anor v Tanaka

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