Chen v Karandonis - [2002] NSWCA 412

No judgment structure available for this case.

CITATION: Chen v Karandonis [2002] NSWCA 412

FILE NUMBER(S): CA 40762/01; 40763/01

HEARING DATE(S): 24 September 2002, 25 September 2002

JUDGMENT DATE:
18 December 2002

PARTIES :

Daniel Chen
Kingsley Chou
Lu Min Yong
John Karandonis

JUDGMENT OF: Beazley JA at 1; Heydon JA at 134; Hodgson JA at 135

LOWER COURT JURISDICTION : District Court

LOWER COURT
FILE NUMBER(S) : 1691/98; 7778/99

LOWER COURT
JUDICIAL OFFICER : Dent DCJ

COUNSEL: N HutleySC/R Marshall (A)
P Neil SC/I Raine (R)

SOLICITORS: Velik Solicitors (A)
Williamsons Solicitors (R)

CATCHWORDS: Tort of conspiracy - Joint venture - Damages - Loan - Reflective damages - Calculation of damages - Exemplary damages - Contumelious disregard - Indemnity costs - Offer of compromise - Calderbank offer - Whether relevant delinquency - Personal loss - Fiduciary duty - Recover of loss - Whether double recovery - Direct liability - Contingent liability

LEGISLATION CITED: District Court Rules 1973 (NSW) Pt 15 r13(2), Pt 19A r 2, Pt 39A r25(4)
Fair Trading Act 1987 (NSW) s 42

CASES CITED:
Gould v Vagellas (1985) 157 CLR 215
Prudential Assurance v Newman Industries (No 2) [1982] 1 Ch 204
Johnson v Gore Wood & Co [2002] 2 AC 1
McWilliam v Penthouse Publications Ltd [2001] NSWCA 237
Milful v Terranora Lakes Country Club (1999) 17 ACLC 1515
Houghton v Immer (No 155) Pty Limited (1997) 44 NSWLR 46
LJP Investments Pty Limited v Howard Chia Investments Pty Limited (1990) 24 NSWLR 499
Armory v Delamirie (1722) 1 Stra 505
Docker v Somes 2 MY & K 656
McDonald v Deputy Federal Commissioner of Land Tax (NSW) (1915) 20 CLR 231
Whitfeld v De Lauret & Co Limited (1920) 29 CLR 71
XL Petroleum (NSW) Pty Limited v Caltex Oil (Australia) Pty Limited (1985) 155 CLR 448
Lamb v Cotogno (1987) 74 ALR 188
Musca v Astle Corporation Pty Limited (1988) 80 ALR 251
Oshlack v Richmond River Council (1998) 193 CLR 72
Packer v Meagher [1984] 2 NSWLR 486
Degman Pty Limited (in liq) v Wright (No 2) [1983] 2 NSWLR 354
Walter Vignoli v Sydney Harbour Casino Pty Limited [1999] NSWSC 1227
Colgate-Palmolive Pty Limited v Cussons (1993) 46 FCR 225
Latoudis v Casey (1990) 170 CLR 534
Ohn v Walton (1995) 36 NSWLR 77
Digital Pulse Pty Limited v Christopher Harris and Ors (No 2) [2002] NSWSC 107
Calderbank v Calderbank [1975] 3 All ER 333

DECISION: 40762/01 Appeal allowed in part; 40763/01 Appeal dismissed

CA 40762/01
CA 40763/01
DC 1691/98
DC 7778/99

BEAZLEY JA
HEYDON JA
HODGSON JA

Wednesday, 18 December 2002

CHEN & ORS v KARANDONIS

FACTS

The Court was concerned with appeals from two sets of proceedings heard together, in which the appellants were found liable to the respondent on the claim in the first proceedings and on the cross claim in the second proceedings.

In the first proceedings the appellants were found to have committed the tort of conspiracy against the respondent with the affect of depriving him of his salary for his work in China, his salary for acting as a Managing Director of Karandonis Shoes Australia Pty Limited (KSA), the benefit of a 20% interest in Total Win Pty Ltd (Total Win) relating to a joint venture in China, a 20% interest in KSA and the value of a loan to KSA.

In the second proceedings the appellants were found to be liable on the cross claim for the value of a loan made by the respondent to the Bank of China.

HELD per Beazley JA (Heydon JA and Hodgson JA agreeing)

As to the first proceedings:

(i) The trial judge erred in failing to distinguish between those losses which were losses of KSA, losses suffered by the respondent for which KSA was liable and those losses which the respondent suffered independently of his relationship with KSA: Prudential Assurance v Newman (No 2) [1982] 1 Ch 204; J ohnson v Gore Wood [2002] 2 AC 1.

(ii) The respondent is entitled to damages for the loss of his salary whilst in China and the loss of the value of a 20% interest in Total Win. These losses were not reflective losses since agreements for the payment of the salary and allocation of the shares were negotiated directly with the appellants.

(iii) The respondent is not entitled to damages for the loss of his salary for acting as Managing Director of KSA, the loss of the value of a loan to KSA or the diminution of the value of a 20% interest in KSA. These losses are reflective of the respondent’s interest in KSA or are monies for which KSA was liable to the respondent and could only be claimed directly from KSA.

(iv) In the absence of reliable evidence as to the value of the respondent’s interest in Total Win a “robust ” approach to the calculation of damages should be applied: Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46: Armory v Delamirie (1722) 1 Stra 505.

(v) There was no error in either the award or the quantum of exemplary damages. The appellants engaged in “conscious wrongdoing in contumelious disregard ” of the respondent’s rights: Whitfeld v De Lauret & Co Ltd (1920) 29 CLR 71.

(vi) The trial judge did not err in awarding indemnity costs to the respondent: Oshlack v Richmond River Council (1998) 193 CLR 72.

As to the second proceedings:

(vii) The trial judge did not err in his decision on the cross claim.

HELD per Hodgson JA

As to the first proceedings:

(i) The respondent was unsuccessful in claiming damages for losses that were reflective of losses to KSA in respect of which KSA had a different cause of action against the appellants for either breaching their fiduciary duties to KSA or knowing participation in such breach: Johnson v Gore Wood.

(ii) The trial judge’s findings as to damages appear to include more than the respondent’s “loss of the interest in the joint venture, that is, to include losses suffered prior to the commencement of the conspiracy and/or losses reflective of KSA’s losses” . Beazley JA’s approach to assessment of damages is correct.

(iii) Weight can be given to the purported offer of compromise as a Calderbank offer, the offer was certain in its terms, and the result, on both the appeal and at trial, was less favourable to the appellants than the offer.

As to the second proceedings:

(iv) The respondent suffered a loss which it was entitled to claim from the appellants. “[T]he substitution of a direct liability as a principle borrower for a contingent liability as a guarantor is a prima facie loss” .

ORDERS

In CA 40762 of 2001:

(i) Appeal allowed in part;

(ii) Set aside order 1 of Dent DCJ made on 30 August 2001 in DC 1691/98;

(a) $120,000 to carry interest at Court rates from 1 April 1996 until 30 August 2001;

(b) $53,333 to carry interest at 4% from 1 May 1997 until 2 March 1998 and thereafter at Court rates until 30 August 2001; and

Thereafter, the total verdict is to carry interest in accordance with s 85 of the District Court Act 1973 (NSW).

(iv) The appellants are to pay 90% of the respondent’s costs of the appeal and each party is to pay the balance of their and his costs of the appeal.

In CA 40763 of 2001:

(i) Appeal dismissed;

********

CA 40762/01
CA 40763/01
DC 1691/98
DC 7778/99

BEAZLEY JA
HEYDON JA
HODGSON JA

Wednesday, 18 December 2002

CHEN & ORS v KARANDONIS

JUDGMENT

1 BEAZLEY JA: The respondent, John Karandonis (Karandonis), either personally or through a corporate structure, had successfully carried on business in Sydney under the name of “Karandonis Shoes” for over 20 years. The business included the manufacturing of shoes in Sydney as well as their wholesaling and retailing throughout Australia. The shoes were generally priced for the luxury market. As at November 1993, the corporate entity which carried on the business was Karandonis Shoes Pty Limited. Karandonis was an equal shareholder in that business with one Rod McHugh (McHugh).

2 Pursuant to a written agreement dated 11 November 1993 (the Acquisition Agreement), the Karandonis Shoes business was transferred to Chendara Pty Limited (Chendara) for a sale price of $AUD 1 million.

3 Upon the sale of the business to Chendara, Karandonis and McHugh each took a 20% shareholding in Chendara. The remaining 60% shareholding was held by the appellants, by persons associated with them or entities in which they had an interest and by the Chinese Government in the following proportions: Mr Yong as to 5%, Lenadi Pty Limited (Lenadi) as to 40%, Eric Chen as to 5% and Ausbao Pty Limited as to 10%. Lenadi was the trustee of the Daniel Chen Grandchildren’s Trust. Ausbao was beneficially owned by the Chinese government.

4 After the transfer, Chendara was renamed Karandonis Shoes Australia Pty Limited (KSA).

5 The purchase price for the shoe business was applied as follows:

$400,000 was retained by KSA representing the value of Karandonis’ and McHugh’s 40% shareholding;

$73,500 was a loan by Karandonis to KSA;

Eric Chen provided an amount of $100,000 to repay some loans;

A substantial part of the remaining $426,500 was used to pay off existing debts of the business;

6 Pursuant to the requirements of the Acquisition Agreement, which provided that KSA would furnish “adequate finance and banking facilities for the proper prosecution of the new business”, banking facilities were put in place with the Bank of China (BOC). Those facilities were secured by personal guarantees from Karandonis, McHugh, Daniel Chen and Eric Chen, a fixed floating charge over KSA’s undertaking and a mortgage over McHugh’s residence as McHugh had no funds to contribute to the purchase.

7 From about February 1994, KSA, through the services of the appellant Kingsley Chou (Chou), carried out investigations about the possibility of setting up a manufacturing process in China. Chou was the managing director of Far Dragon. Far Dragon was a trading company based in Hong Kong whose business included exporting goods from China and Hong Kong to stock supermarkets operated by Burlington Supermarket Pty Limited (Burlington) in Sydney.

8 Karandonis visited China in May/June 1995 with Chou to further investigate joint venture opportunities.

9 In October 1995, Chou introduced KSA to a joint venture project in Shantou with Nanfeng, a Chinese government agency. KSA accepted the proposal and a joint venture company, Shantou Karandonis Shoes Limited (SKS), was established, with Nanfeng holding a 40% interest. The balance 60% of the shareholding was held by a Hong Kong shelf company named Total Win Pty Limited (Total Win). The shareholders in Total Win were Chou and his wife. Chou was the managing director. Karandonis at all times believed he had a 20% shareholding in Total Win, however, that shareholding was never issued.

10 During most of 1995 KSA’s shoe manufacturing business in Australia was unprofitable to the point that KSA faced closure. By the end of 1995, KSA had ceased manufacturing, but continued with its activities as a wholesaler throughout Australia and as a retailer in Sydney. At that stage, its facility with BOC had been exhausted and KSA owed BOC $800,000.

11 The cessation of the manufacturing activities coincided with KSA’s decision to have its shoes manufactured in China by SKS. On 1 December 1995, KSA transferred its plant and equipment to Total Win, which in turn contributed that plant and equipment to SKS to fit out the proposed factory in Shantou. The joint venture arrangement also contemplated that Total Win would contribute the brand name “Karandonis Shoes” as well as working capital. A memo from Low & Co, accountants to the Danchen Group, noted that it was proposed that the value of KSA’s contribution to the venture was to be approximately $AUD750,000 in the form of plant, equipment, goodwill and technology. The invoices KSA issued to Total Win for the plant and equipment (not including goodwill or technology) appear to substantially exceed this amount, totalling approximately $AUD970,000 (although as with most if not all the financial figures in this case, the figure is not easily capable of being verified). However, no funds were paid by Total Win for the plant and equipment. Nor did SKS pay anything to Total Win.

12 Nanfeng contributed the factory buildings as its 40% contribution to the joint venture.

13 It was decided that the working capital for the venture would be funded by commercial borrowing. Total Win thus applied for a loan in the sum of US$600,000 from BOC. The loan was not approved until 1997 when KSA had discharged its borrowings from BOC. In the interim, Chou obtained loan funds from Far Dragon.

14 Karandonis travelled to Shantou in April 1996 at the direction of Daniel Chen to assist in the establishment of the manufacturing plant in Shantou and to manage the operations of the SKS factory. He claimed that in or about August 1996, he had agreed with Daniel Chen that his remuneration would be paid by Far Dragon whilst he was in China. Karandonis also alleged an agreement with Daniel Chen that he, Karandonis, would be issued with 20% of the shares of Total Win.

15 Production commenced by June 1996. However, problems were experienced immediately with both the quality and quantity of shoes manufactured and KSA was forced to sell many of the shoes as ‘seconds’. There were also difficulties as to the price charged by SKS to KSA for the shoes, with no price being agreed throughout the period 1996 to 1998. For his part, Chou merely created a series of prices for Australian Customs purposes which bore no relationship to either the costs of production or the costs charged to KSA. There was also tension caused by SKS wanting to cover its costs of production from shoe sales. Chou overcame this problem by arranging for McHugh to send to Far Dragon or Total Win a regular series of large cheques unrelated to any SKS invoices. Karandonis alleged that this was part of a price transfer scheme whereby goods manufactured by SKS were sold to Total Win and then resold to KSA at an inflated price with Far Dragon acting as agent in the sale, as well as charging KSA the cost of administrative work it performed.

16 Karandonis visited Sydney in early 1997 and was persuaded to borrow approximately $165,775 from BOC. This amount was applied in reduction of KSA’s debt to BOC.

17 In May 1997, the payment of Karandonis’ salary in China was stopped. He remained on in Shantou until October 1997, living off his own resources.

18 On his return to Sydney in October 1997, Karandonis demanded from KSA payment of his remuneration, together with the $73,500 he had lent KSA in November 1993. The demand was not met.

19 Karandonis subsequently fell into arrears in respect of the repayment of his personal loan.

20 In March 1998, SKS closed its factory in Shantou.

21 On 17 March 1998, Karandonis brought proceedings against KSA, Chen, Yong, Chou and McHugh (the Shoes case). The claim, as finally formulated, included a claim based on the tort of conspiracy whereby it was alleged that the natural person defendants had conspired to injure Karandonis by engaging in a transfer price scheme.

22 On 1 July 1999, Danchen paid out Karandonis’ loan with BOC, including all arrears, in return for an assignment by BOC of the benefit of the loan. Danchen then sued Karandonis in separate District Court proceedings filed on 15 October 1999 for the recovery of the loan (the Bank case).

23 The Shoes case and the Bank case were heard together.

24 In 1999, during the course of proceedings, KSA was placed into liquidation. Total Win submitted a proof of debt to the liquidator for an amount in excess of $AUD 2 million, seeking a trustee’s indemnity from KSA as the alleged beneficiary of its activities. The proof of debt included the monies borrowed from BOC and Far Dragon for SKS’s working capital less monies received from KSA by Far Dragon on account of shoes shipped to KSA.

The Conspiracy Claim

25 Karandonis pleaded claim was that from about October 1995, Daniel Chen, Chou, Yong and McHugh unlawfully conspired to injure him by unlawful means: para 15.1 of the Statement of Claim. Alternatively, it was alleged that if the acts of those defendants were lawful, they were carried out unlawfully so as to injure him: para 15.2 of the Statement of Claim. He alleged that by means of the price transfer scheme, KSA was starved of funds, so that (a) KSA was unable to pay Karandonis his remuneration as managing director; (b) KSA was also unable to pay him his remuneration in China as agreed with Daniel Chen; and (c) the value of his shareholding in KSA was reduced to nil.

The Trial Judge’s Findings

26 The trial judge found that Chou extracted the highest possible prices for goods exported to Australia for sale, irrespective of their market value and those goods were accepted by McHugh without any agreement as to their price. At the same time, McHugh instructed KSA’s bankers to transfer money to the Danchen interests in Hong Kong and China without reference to any invoices and in regular lump sums. His Honour found that this was a “naked attempt to raid the coffers of [KSA] and load it up with fanciful product prices bearing no semblance to their cost of wholesale production, plus interest and commissions”. His Honour further found that this was part of an overall plan to reduce KSA to a shell and that, virtually from the commencement of the establishment of the Chinese venture, the intention of the Danchen interests was to “transfer any profits that might be generated on the retail side of KSA to Hong Kong/China”. His Honour further found that these arrangements excluded Karandonis from any role in the financial management of the companies and were intended to cause him injury.

27 His Honour further found that Karandonis was led to believe by the appellants that as part of his package in the Chinese joint venture he would hold a 20% interest in Total Win. That shareholding was never issued because of a decision taken sometime after 9 January 1996 by the Danchen interests, including Daniel Chen, Yong and Chou, that Karandonis would be denied any equity participation in the Chinese venture. His Honour further found that the implementation of that decision involved “the mulcting of [KSA] to a point where it could be put into liquidation at the whim of the Danchen interests”. He observed that that liquidation had been achieved in August 1999, after the commencement of the proceedings.

28 His Honour further found that the withdrawal of Karandonis’ salary in China in May 1997 “was part of the general agreement that it should happen” and was not merely a “capricious decision [by Chou as part] … of a cost cutting exercise”. His Honour next found that Chou’s later direction to stop paying Karandonis his managing director’s salary in Australia was a decision taken in furtherance of the overall agreement to disempower him. He concluded, at 166-167:

“As against the [appellants] Daniel Chen, Lu Yong and Kingsley Chou, I am quite satisfied that they committed the tort of conspiracy against [Karandonis] in an agreed plan consented to by all, to advance their interests in the shoe business in Australia and China, by destroying those of [Karandonis]. They agreed to achieve the implementation of that agreement by adopting tactics contrary to law, involving breaches by Daniel Chen and Lu Yong of their duties as directors of [KSA], to bona fide seek to promote the interests of the company, as opposed to destroying it by the practices engaged in and earlier mentioned. I am conscious of the need to approach grave findings such as these in civil caused by applying the Briginshaw 60 CLR 336, Helton 63 CLR 691 standards to the evidence before me and I have done so.”

29 His Honour held that:

“The agreement to implement the shelling out of [KSA] was achieved by the directors, other than [Karandonis], participating in a scheme whereby the interests of the company were subordinated to the interests of [Far Dragon] and [Total Win]. In so doing … [those directors] were acting contrary to law, in total disregard of their obligation as directors to act bona fides in the Company’s interests.”

30 In so finding, his Honour found a conspiracy to injure Karandonis by unlawful means.

31 His Honour held, however, that McHugh was not engaged in furtherance of the agreement.

32 His Honour further found that the appellants engaged in misleading and deceptive conduct towards Karandonis by pretending that he had an interest in the Chinese joint venture when that was not the case or was not to be the case; they further badgered him into entering into a loan facility with BOC by conduct which was knowingly fraudulent, misleading and deceptive in that the real purpose was to keep Karandonis “at their collective mercy” rather than to promote his interests in the joint venture in China. His Honour further found that they agreed to engage in misleading and deceptive conduct by pretending to Karandonis that there were no funds available to pay his salary in China when their real purpose was to drive him out of China and isolate him from any knowledge as to what was happening in the joint venture. They then forced his resignation as managing director of KSA by determining to stop paying his salary.

33 Having found that the conspiracy had been established, his Honour turned to the assessment of damages. I will deal with his Honour’s specific award of damages in some detail. It is convenient first, however, to deal with the point of principle raised by the appellant which forms an essential challenge to his Honour’s judgment, namely that his Honour failed to distinguish between Karandonis’ losses which flowed from the commission of the tort and the moneys he was owed by KSA and the damages he was entitled to claim from KSA, for example his salary and managing director’s fees, and that which truly reflected a diminution in the value of his investments in KSA: see Gould v Vagellas (1985) 157 CLR 215; Prudential Assurance v Newman Industries (No 2) [1982] 1 Ch 204.

34 In Prudential Assurance v Newman Industries the plaintiffs held 3.2% of the shares in the first defendant. The second defendant, Mr Bartlett, was the chairman and chief executive of the first defendant and Mr Laughton, the third defendant, was a non-executive director and vice-chairman. Bartlett was also non-executive chairman and Laughton vice-chairman/chief executive of the fourth defendant, TPG Ltd. TPG Ltd acquired interests in a number of companies and increased its holding in the first defendant. TPG Ltd found itself in serious financial difficulty and entered into an agreement with the first defendant, which was not disclosed to the board of the first defendant, whereby the first defendant purchased TPG Ltd’s assets. The trial judge found that Bartlett and Laughton had conspired to injure the first defendant and indirectly the shareholders by causing the first defendant to purchase TPG’s assets for an inflated price. He held that the personal, derivative and representative claims should all be joined as one action as all were based on the conspiracy.

35 The Court of Appeal (Cumming-Bruce, Templeman and Brightman LJJ) held at 222-223 that the personal claim was misconceived. They said:

“It is of course correct, as the judge found and Mr Bartlett did not dispute, that he and Mr Laughton, in advising the shareholders to support the resolution approving the agreement, owed the shareholders a duty to give such advice in good faith and not fraudulently. It is also correct that if directors convene a meeting on the basis of a fraudulent circular, a shareholder will have a right of action to recover any loss which he has been personally caused in consequence of the fraudulent circular; this might include the expense of attending the meeting. But what he cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a ‘loss’ is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only ‘loss’ is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent shareholding. The plaintiff’s shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his right of participation, are not directly affected by the wrongdoing. The plaintiff still holds all the shares as his own absolutely unencumbered property. The deceit practiced upon the plaintiff does not affect the shares; it merely enables the defendant to rob the company. A simple illustration will prove the logic of this approach. Suppose that the sole asset of a company is a cash box containing £100,000. The company has an issued share capital of 100 shares, 99 of which are held by the plaintiff. The plaintiff holds the key of the cash box. The defendant by a fraudulent misrepresentation persuades the plaintiff to part with the key. The defendant then robs the company of all of its money. The effect of the fraud and the subsequent robbery, assuming that the defendant successfully flees with his plunder, is (i) to denude the company of all its assets; and (ii) to reduce the sale value of the plaintiff’s shares from a figure approaching £100,000 to nil. There are two wrongs, the deceit practised on the plaintiff and the robbery of the company. But the deceit on the plaintiff causes the plaintiff no loss which is separate and distinct from the loss to the company. The deceit was merely a step in the robbery. The plaintiff obviously cannot recover personally some £100,000 damages in addition to the £100,000 damages recoverable by the company.”

36 Prudential Assurance v Newman was considered recently by the House of Lords in Johnson v Gore Wood & Co [2002] 2 AC 1. The appellant’s company, W Ltd, had sued the respondents, a firm of solicitors, in negligence arising out of their conduct in acting for the company in respect of the exercise of an option to purchase land. Prior to the hearing of the claim, the appellant gave notice that he had a personal claim against the solicitors, arising out of the same matters, which he intended to pursue at a later stage. The company’s action was settled. During the course of the settlement discussions, the settlement of the appellant’s claim was also discussed, but it did not settle. The appellant subsequently commenced proceedings against the respondents.

37 The respondents applied to strike out the appellant’s claim on the basis that the claim was an abuse of process and also sought the determination as a preliminary issue of the questions whether they owed the appellant a duty of care and whether the damages he claimed were irrecoverable as a matter of law for the pleaded breach of duty.

38 An order was made that there be a determination of the preliminary issues. This Court is only concerned with the second of those issues, namely whether the damages claimed were recoverable as a matter of law.

39 Lord Bingham of Cornhill, after referring to Prudential Assurance and other authorities, dealt at 35-36 with the principles which were to be applied to these facts on the assumption that there was a breach of duty:

Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)

Heron International [Ltd v Lord Grade

George Fischer [(Great Britain) Ltd v Multi Construction Ltd

Gerber [Garment Technology Inc v Lectra Systems Ltd

Stein v Blake

Lee v Sheard

George Fischer

Gerber

40 Lord Millett at 62 referred to the first and second of these principles. He then referred to the position where both the company and the shareholder suffered a loss caused by breach of duty owed to each. He said:

“If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company’s creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder.”

41 Lord Millett described the shareholders’ loss referred to in this situation as “a reflective loss”. He said at 66:

Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)

42 His Lordship then dealt, at 67, with the case where a shareholder suffers a separate loss:

“On the other hand, [the shareholder] is entitled (subject to the rules on remoteness of damage) to recover in respect of a loss which he has sustained by reason of his inability to have recourse to the company’s funds and which the company would not have sustained itself.”

43 His Lordship included loss of salary and other employee benefits within the scope of “reflective loss” and was thus not recoverable by the shareholder.

44 Lord Bingham then considered the application of those principles to the particular heads of damage claimed (with Lord Millett and Lord Goff of Chieveley generally agreeing with his Lordship’s analysis). Those claims and their Lordships determination of their availability were:

(i) a claim for sums the appellant invested in certain companies on the respondent’s advice. Lord Bingham considered the first head of damage was “unobjectionable in principle” ;

(ii) the cost of personal borrowings (both loan capital and interest) borrowed by the appellant to fund his personal outgoings and those of his businesses. His Lordship considered the second claim was not “bad on its face” , although he said that at trial, care would have to be taken that it was not a disguised claim for a loss of dividend;

(iii) the diminution in the value of the appellant’s pension and majority shareholding in W Ltd. His Lordship held that to the extent it reflected payments W Ltd would have made into the pension fund, it was merely reflective of the company’s loss and should be struck out. To the extent it represented a claim for the enhancement in value in the fund if the payments had been duly made, it was held to be sustainable. Lord Millett raised, but did not resolve on the application before the court, the question whether such damage was too remote. However, the claim pleaded in the alternative, on the supposition the company would not have made the payments with the result that its assets would thereby be increased and the appellant’s shareholding enhanced, was held to be reflective of the company’s loss and therefore not maintainable;

(iv) loss of his 12.5% shareholding in W Ltd. The appellant claimed that he transferred those shares to a lender as security for a loan and that because of his lack of funds caused by the respondent’s breach of duty, he was unable to buy them back. The fourth head of damage was held not be objectionable in principle; and

(v) additional tax liability. The fifth head was held to be personal to the appellant and not objectionable.

45 The appellants submitted that, on the principles stated in Prudential Assurance v Newman Industries and Johnson v Gore Wood and given the finding of the trial judge that the conspiracy was effected through illegal means, namely by the appellants breaching their duties as directors to KSA, while KSA may have a cause of action against them, the respondent’s claim was not maintainable because all of the individual components of the damages awarded were amounts owed to Karandonis by KSA or reflective of his investments in KSA. It was integral to the appellants’ submission that the company’s cause of action did not have to be the same as that available to Karandonis. Rather, they submitted the question was “can a plaintiff, being a shareholder, claim in respect of a loss which is reflective of a diminution in value of the shareholder’s investment in the company”. They submitted that on the principles in Prudential Assurance v Newman and Johnson v Gore Wood the answer to that question was “no”. See also McWilliam v Penthouse Publications Ltd [2001] NSWCA 237; Milfull v Terranora Lakes Country Club (1999) 17 ACLC 1515.

46 The appellants’ defence based on the principles in Prudential Assurance and Johnson v Gore Creek was not specifically pleaded contrary to the requirements of Pt 15 r 13(2) of the District Court Rules 1973 (NSW). However, the issue was raised at the commencement of proceedings when the appellants moved to strike out para 15.6C of the Statement of Claim (and probably all of para 15 to the extent that those paragraphs pleaded a conspiracy). The issue was thus clearly raised before his Honour. The appellants complain, however, that his Honour completely failed to deal with it. Assuming it to be correct for the moment that his Honour did fail to deal with the issue, that would involve appellable error. In the normal course, an error of that type would involve the matter, at least on the omitted issue, being remitted to the District Court for determination. Neither party was anxious for the Court to adopt that approach and urged it to determine the matter for itself. That raises a particular difficulty, to which I shall return, if the Court comes to the view that Karandonis did suffer a loss which is recoverable within the principles stated in Prudential Assurance v Newman Industries.

47 As is apparent from Prudential Assurance v Newman Industries and Johnson v Gore Wood, it is necessary to identify the precise nature of each claimed loss to determine whether it is merely a “reflective loss” to use the language of Lord Millett or whether it is a separate loss arising from the wrongdoing of the tortfeasor, which is not recoverable by or from the company.

48 His Honour identified the losses suffered by Karandonis as being: (i) the loss of salary in China; (ii) the loss of salary as managing director in Australia; (iii) the loss of the benefit of a promised 20% interest in Total Win, who had a 60% interest in SKS; and (iv) the loss of his 20% interest in KSA and the $73,500 lent to KSA to fund the acquisition of the Karandonis Shoes business. His Honour also observed that “by reason of the [appellants’] actions [Karandonis] has [lost] the right to trademark his goods under his own name”, although, correctly, he does not appear to have included that matter in the catalogue of claimed losses.

49 His Honour then turned to the assessment of damages, which, he observed was “not … easy”. It is apparent that he considered that the damage flowing from each of the losses identified in (i) to (iv) above was recoverable from the appellants. The appellants challenge that this is so. For the reasons which follow, I consider that it is only the first and third of the claimed losses which are recoverable.

50 His Honour allowed the claim in the sum of $53,333 for Karandonis’ loss of salary in China. Counsel for the appellants effectively conceded this amount was recoverable by the respondent. That is clearly so. His Honour had earlier held that Karandonis had reached an agreement with Daniel Chen for the payment of that salary by Far Dragon. His salary was never paid by or agreed to be paid by KSA. Nor did KSA have any legal obligation to pay him for his work in China.

51 However, the loss of Karandonis’ managing director’s salary falls into a different category. Karandonis was employed by KSA as managing director. There was no suggestion that the parties ever entered any other arrangement for the payment of his managing director’s salary. This loss, therefore, is a loss claimable only from KSA and is not recoverable: see Johnson v Gore Wood per Lord Millett at 67.

52 That leaves the third and fourth claims. His Honour found that Karandonis was led by the appellants to believe that as part of his package in the Chinese joint venture he would hold a 20% interest in Total Win. The effect of his Honour’s finding was that there was an agreement to this effect with the appellants. This is not challenged on appeal. Sometime after 9 January 1996, a decision was made not to allocate any such interest to Karandonis. This loss, therefore, falls into the same category as the loss of the salary whilst in China and is recoverable from the appellants.

53 The loss of the 20% interest in KSA, however, is not. It was a loss of Karandonis’ investment in the company. The loss was caused by the depletion of the assets of that company due to the appellants’ breach of their fiduciary duty to the company. The recovery of such a loss is directly denied by the principles stated in Prudential Assurance v Newman. The loan of $73,500, being the second amount referred to in (iv), is also not recoverable. They were monies lent to KSA and are only recoverable from it. On the principles in Prudential Assurance v Newman it is irrelevant that KSA’s inability to repay was caused by the appellants’ conduct. Accordingly, the principles in Gould v Vaggelas, to the extent they might otherwise have applied, are of no assistance: see Actionable Misrepresentation, Bower, Turner and Handley at para 223.

54 Having come to these conclusions, it is necessary to return to the quantification of damages relating to the loss of the interest in the joint venture. His Honour observed in that regard that:

“There is a total absence of acceptable evidence from the [appellants] as to what the real value of the China interests are.”

55 His Honour then referred to the financial position of KSA. His Honour accepted that by the end of 1995, Karandonis’ interest in KSA, if liquidated at that point of time, would have been a negative one. He considered, however, that had KSA been allowed to trade normally it might have been able to trade out of its difficulties. His Honour also held that Karandonis’ interest in both KSA and the joint venture “still exist[ed]”, although he was unable to be precise as to their value. He noted that it was the appellants’ case that they were without value. He said, however:

“I think that any court can fairly infer from the absence of evidence of that nature that neither of those foregone interests are without value, and the conduct of Mr Kingsley Chou and the Danchen interests in pursuing them and continuing them would militate against one forming such a view.”

56 Nor did he accept that KSA’s indebtedness as presented to the liquidator was a true statement of its financial position, as it “was being loaded up with charges that represented advances by [Total Win] to [SKS]”.

57 His Honour’s approach, given his inability to value Karandonis’ interest in SKS and KSA, was simply to award him the loss of his investment in KSA by way of damages for the loss of his interest in both. However, as I have already said, Karandonis’ loss of his investment in KSA was not, as a matter of law, recoverable. Senior counsel for the appellants resisted any such approach to valuing the loss of the interest in the joint venture as amounting to no more than speculation.

58 He further argued that in any event, the basis of the assumption was wrong because as at the date of the conspiracy, that is in January 1996, there was no value in KSA. In particular, the appellants drew specific attention to its indebtedness to BOC in the sum of approximately $AUD 800,000 by mid 1995 and to the fact that by 30 June 1996, KSA had a deficiency of assets over liabilities of approximately $AUD 761,000. This submission, however, runs counter to his Honour’s view that KSA may have traded out of its difficulties and to his finding that there was still some value in that interest. It is also not the subject of a specific ground of appeal. However, it is unnecessary to enter into that area of discourse, at least for the moment, as the loss relating to Karandonis’ investment in KSA is not recoverable.

59 That leads directly to the difficulty to which I have averted. How is Karandonis’ loss of his interest in the Chinese joint venture to be valued? The appellants submit that there is no acceptable evidence of the value of Karandonis’ shareholding in Total Win and therefore, no basis upon which to award any amount for damages. In other words, the appellants submitted that Karandonis had failed to prove his loss. Karandonis responded to this by asserting that “the absence of evidence of value is the responsibility of the appellants as wrongdoers”: see Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46, where Handley JA said at 59:

Armory v Delamirie

LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd

60 In Armory v Delamirie, when the plaintiff was unable to prove the value of a jewel wrongly detained by the defendant, it was held that the court would “presume the strongest against him, and make the value of the best jewels the measure of [the] damages”.

61 In Houghton the difficulty in assessing damages was due to the defendants’ failure to keep proper accounts of the cost of construction of the unlawful improvements they undertook. However, there was evidence of the estimated costs of those improvements which provided a foundation upon which the Court could enter upon the task of assessing damages. There was also some evidence available to the Court in LJP Investments v Howard Chia, the case to which Handley JA referred in Houghton.

62 In this case, there is no evidence of the value of Karandonis’ interest in the Chinese joint venture. Nor is it likely that the value of that interest could ever be satisfactorily assessed, given the manner in which the appellants conducted the affairs of the various corporate entities involved in the Karandonis shoe business. The question is whether the Court can, in such circumstances, embark upon any process whereby damages for the loss of the interest might be awarded. Some guidance to the dilemma the Court faces is provided by Docker v Somes 2 MY & K 656; ER 1095, where Brougham LC said:

“When did a Court of Justice, whether administered according to the rules of equity or law, ever listen to a wrongdoer’s argument to stay the arm of justice, grounded on the steps he himself had successfully taken to prevent his iniquity from being traced? Rather let me ask, when did any wrongdoer ever yet possess the hardihood to plead, in aid of his escape from justice, the extreme difficulties he had contrived to throw in the way of pursuit and detection, saying, you had better not make the attempt, for you will find I have made the search very troublesome? The answer is, ‘the Court will try.’”

63 So emboldened, and given the “robust” approach taken in the authorities referred to above, which authorise an approach of using such evidence as is known or may be determined and which is relevant to an assessment of the loss claimed, I consider that the following matters are known, either from his Honour’s findings or from the evidence, and may provide some basis upon which the Court may assess the loss and thereby the damages to which I have found Karandonis is entitled.

64 A liquidator was appointed to KSA in August 1999 at the instance of Chou. His Honour found that thereafter Chou:

“negotiated with the liquidator for the right to establish another corporation of identical name, with a different corporate number, and also to purchase from the liquidator the very valuable (in the circumstances) trademarks initially acquired by [Karandonis].”

65 His Honour held that he did “not doubt for one moment that in so proceeding, [Chou] was acting as factotum for Daniel Chen’s interests”. He observed that that entity continues to operate a retail outlet “in a prime position in Sydney displaying the [Karandonis] name”.

66 At J 70-71, his Honour referred to Chou’s evidence as to how the shoe business continued after the liquidation:

“Mr Chou explains that the liquidator of [KSA] put in as a bundle with the trademarks the opportunity to continue the name Karandonis Shoes Australia Pty Limited with a different ACN number, a prudent step taken at the suggestion of, ‘the solicitors’.

67 Himway Holdings is a Hong Kong shelf company, in which Mr Chou and his wife are the only shareholders and directors. The company holds an interest in a shoe production factory in Nanhai, a city near Guangzhou, a 2½ hour ferry ride from Hong Kong. Mr Chou gave evidence that in May 2000 the machines of the Shantou factory were moved to that factory, it would seem a part of an arrangement with a Mr Wu, a Chinese businessman who had obtained a lease of premises in Nanhai and government permission to operate a shoe factory.

68 That factory began producing shoes and the Karandonis shoe outlet in Sydney obtained some of its shoes from that source. In his statement dated 21 November 2000, Chou stated that Himway holds its interest in the factory business for Total Win. It was Himway’s interest in the manufacturing business in China making “Karandonis identified shoes” which was the foundation for his Honour’s finding that Karandonis’ interest in the China venture still existed, a finding which is not challenged on the appeal.

69 Chou claimed that he was in the process of arranging for the sale of his shares in Himway to Mr Wu, for $HK1.5 million. He claimed that all the shares in Himway will be sold in order to raise money for Total Win to pay off its indebtedness, which, he said, was in the order of $HK12 million. Of that, $HK7 million was owed to Far Dragon and Yong, and $US600,000 was owed to BOC.

70 As with all of the financial information relating to the appellants’ activities in the Shoe business, it is difficult to know how to assess Chou’s statement that the purpose of the sale of his shares is to raise monies to pay Total Win’s debts. The amount owed to BOC was secured by a mortgage over Nanfeng’s land and Nanfeng was required to contribute to that loan pursuant to its agreement with Total Win. Chou gave evidence that of the total amount of $US600,000 Nanfeng was required to pay $US553,000 and Total Win only $US46,860. The position in relation to the amounts owed to Far Dragon is even more difficult to assess because the major shareholding in that company is held by Chou and Yong. In the circumstances, there must be a question whether Chou’s explanation of these corporate and financial arrangements in relation to Total Win and Himway are merely another demonstration of the manner in which the appellants structured their operations so as to received an ultimate financial benefit from the acquisition of the Karandonis business.

71 Accordingly, to the extent that anything is known about Himway it amounts to this. Chou said he was proposing to sell his shareholding for $HK1.5 million. It is not clear from the context in which he made this statement whether he meant the shareholding in Himway or merely his shareholding. If he meant the latter, then presumably a sale price of all the shares would be in the order of $HK3 million.

72 The appellant submitted that there was no warrant to assume that Chou was only referring to his shareholding of Himway. The fact is, as I have explained, that is simply not clear. The respondent further submitted that an offer to sell or purchase shares is no evidence of value: McDonald v Deputy Federal Commissioner of Land Tax (NSW) (1915) 20 CLR 231 at 239-240. The point made in McDonald is quite different from the use sought to be made of Chou’s evidence as to the proposed sale. McDonald was a land tax case and the question involved was what was the improved value of certain pastoral land for land tax purposes. It is sufficient on this point to refer to the Court’s finding on this point as recorded in the headnote:

“In ascertaining the value of land for the purposes of the Land Tax Assessment Act 1910-1911 the price paid for the particular land, or for similar land, on a concluded contract is admissible as evidence of such value, but the price offered for the particular land, or the price which the owner has offered to accept, not followed by a concluded contract, is not so admissible.”

73 Here the Court does not have available to it any evidence of value as might be derived from a sale of the shares. All that is available is the evidence of the proposed sale. The proposed sale is either for $HK1.5 million or $Hk3 million. On the approach I have considered available, the Court may use that range of figures as some basis upon which to assess the loss.

74 The appellant also submitted that the Court should dismiss Chou’s evidence on this anyway as the trial judge found he was a person whose evidence was unreliable. It was submitted that this Court cannot now be selective and choose to rely on some of his evidence. This submission overlooks the task which the Court is undertaking. If it is said that Chou’s evidence on this is false or unreliable, why should he not be fixed with his own falsehood or unreliability in circumstances where he has been one of the persons responsible for the Court being in the position it finds itself? In this regard, I see no difference in principle to the approach taken by the Court in Armory v Delamirie.

75 It is also known that in 1996 SKS acquired machinery from KSA through Total Win which involved an amount slightly under $AUD1 million. The appellant again submitted that this figure cannot be relied upon the Court. In the first place, it was said that no such submission was made to the trial judge. However, this Court, at the invitation of the parties, is undertaking the task of reassessing the damages. The appellant has had an opportunity to consider this basis as a possible approach to valuing the loss. There is, therefore, no basis in this complaint.

76 Next, it was said that as Total Win never paid for the machinery account would have to taken of the debt. If the appellant’s point on this has any basis it would, in lodging its proof of debt in the KSA liquidation, have included this ‘debt’ as part of its accounting as to the final amount KSA owed to it. The appellant has not provided the Court with any assistance as to whether it did. But, in any event, the effect of the unchallenged finding of the trial judge was that he did not accept the “picture presented to the liquidator of the indebtedness” of KSA, so that the Court is again forced back to the position of seeking some evidence as a basis upon which it can make an assessment of the value of the loss.

77 The appellant then submitted that the figure of approximately $AUD 1 million is wrong and that the invoiced figures “appear to total” approximately $800,000. On one version of the calculations, that may be correct. But as I have said the documentation is not clear, as is apparent from the appellant’s inability to be certain as to the figure. The appellant also submitted that if a figure for the machinery is to be used at all, the Court should only use the book value, which was approximately $AUD 170,000. I do not see why this figure should be adopted. There was a sale of that machinery at a figure somewhere between approximately $AUD800,000 and $AUDI million. Presumably, had KSA’s books of account been properly kept, the sale amount would have been accurately reflected in them. However, whichever of the invoiced amounts is used, it would have to be significantly discounted because of the age of the machinery. If it was discounted, say by 50% (recognising the totally arbitrary selection of that figure) that would give a figure of somewhere between $AUD 400,000 to $AUD500,000.

78 In summary, therefore, in approaching the matter in a “robust” way, there are three known figures which constitute material to which I consider regard can be had to found the assessment of damages. They are the figures of $HK1.5 million, $HK3 million and $AUD500,000 million (or possibly $AUD400,000).

79 The Hong Kong amounts need to be converted to Australian dollars. In the normal case, currency conversion of a loss in foreign currency for a judgment in Australian dollars would occur on the date of judgment, see Luntz, at para 7.5.4. However, as the figure in relation to the value of the Himway shares is a figure given as at the date of Chou’s statement in 23 November 2000, I consider that the amount should be converted as at that date. The parties have provided the Court with exchange rate figures, which at that date were $HK4.0932 for $AUD1. On that basis the figures based on the proposed sale of the shares are:

80 On these figures, therefore, with their significant imperfections, the range of possible value is 20% of somewhere between $AUD366,000 and $AUD733,000. Applying the principle in Armory v Delamirie, it would not, in my view, be unreasonable to adopt a figure towards the higher end of the scale and I would adopt a figure of $AUD 600,000. Karandonis’ loss was in respect of a 20% interest, giving rise to a loss of approximately $AUD 120,000.

Exemplary Damages

81 The appellants also appeal against the award of exemplary damages. They advance their argument on two bases. First, they submit that if their argument is correct and Karandonis was not entitled to compensatory damages, exemplary damages could not be awarded. Alternatively, they argued that this was not an appropriate case for exemplary damages and the factors upon which his Honour relied in determining that exemplary damages were available were not proper matters to which regard should have been had. Secondly, the appellant submitted that the amount awarded is excessive. This latter submission is based upon the premise that even if the respondent is entitled to compensatory damages, those damages would be in a modest amount, not exceeding approximately $70,000 (being the amount of unpaid wages).

82 The trial judge’s award of exemplary damages was based upon the following considerations. His Honour described the conduct of the appellants “until the end of the trial [as being] objectively outrageous”. His Honour referred first to the conspiracy which arose in January 1996, whereby the appellants agreed to structure the venture not only so as to leave Karandonis at the mercy of his partners but also so as to eliminate him from the enterprise as and when the appellants decided it suited their purposes. His Honour described this as “a very cruel hoax”. This was the more so given that Karandonis had so trusted and believed in his “partners” that he continued to work without salary for a period of nearly six months in order to advance the interests of the joint enterprise. Shortly before that, his belief in the arrangement was such that he had entered into a personal loan agreement to support the Chinese venture. In all the circumstances, the appellants’ conduct towards Karandonis was an abuse of the implicit trust that he had placed in them. The appellants’ conduct was the more egregious given that the Chinese venture could not, on his Honour’s finding “have got off the ground” without Karandonis’ talents. His Honour observed that Karandonis “now finds himself an elderly man, a talented shoe-maker, who does not even own his own name and signature under which he can trade”.

83 His Honour further relied upon the manner in which the litigation had been conducted, whereby Karandonis’ proceedings were “trenchantly opposed, even to the point of seeking to bankrupt him, so as to prevent the present litigation from seeing the light of day in a court”. Then, in the course of the proceedings, the appellant Chou had sought to induce Mr Sengupta to give false evidence against Karandonis “to blacken his commercial reputation in these proceedings”. His Honour held, therefore, that:

“what [had] occurred from beginning to end in this case amounts to a conscious wrongdoing in contumelious disregard of [Karandonis’] rights. It involved a monumental betrayal of trust by parties that [Karandonis] believed he was justified and entitled to place trust in.”

84 Exemplary damages are available where a party engages in “conscious wrongdoing in contumelious disregard of another’s rights”: see Whitfeld v De Lauret & Co Ltd (1920) 29 CLR 71 at 77 per Knox CJ. As is pointed out in Luntz’s Assessment of Damages for Personal Injury and Death, 4th Ed, this phrase has become a term of art. Luntz, at para 1.7.4 expands upon this, describing the conduct necessary to ground an award of exemplary damages as being “of such a character that it merits punishment, so that it must have been knowingly wanton, fraudulent, malicious, violent, cruel, insolent, high-handed or an abuse of power”. He points out that:

Uren v John Fairfax & Sons Pty Ltd

Rookes v Barnard

Mayne & McGregor on Damages

Fontin v Katapodis

Australian Consolidated Press Ltd v Uren

85 An award of exemplary damages is of course at large. However, in XL Petroleum (NSW) Pty Ltd v Caltex Oil (Australia) Pty Ltd (1985) 155 CLR 448, Gibbs CJ at 463 warned against the risk:

“that exemplary damages might amount to a punishment greater than would be likely to be imposed if the conduct were criminal”

86 XL Petroleum obtained the right to use land previously occupied by Caltex. XL intended to sell petrol at discounted prices. Caltex had, during its occupancy, installed underground petrol tanks. On the morning XL was to take possession, Caltex employed an industrial plumber to spike the tanks, rendering them unusable for approximately three weeks. XL successfully sued both Caltex and the plumber for trespass.

87 The jury had awarded exemplary damages in an amount of $400,000. The eventual loss to the appellant was in the sum of just over $5,000 and the damage was repaired within about three weeks. There had been no repetition of the trespass by Caltex. The Court of Appeal had considered the amount of $400,000 to be excessive and substituted an award of $150,000. Gibbs CJ stated that the trial judge’s award was “out of all proportion to the circumstances of the case” and the Court of Appeal had been correct in reducing it. His Honour refrained from interfering in the award of the Court of Appeal, stating that whilst it was at the upper end of the range, he was not persuaded that it was excessive. Mason J, at 464, agreed, stating that he did not consider an award of $150,000 “to be at all excessive”.

88 Brennan J, at 471, stated:

There is no necessary proportionality between the assessment of the two categories

Merest v Harvey

‘I wish to know, in a case where a man disregards every principle which actuates the conduct of gentlemen, what is to restrain him except large damages.’

Broome v Casalet Co

“the purpose of restraint loomed large”

89 The element of deterrence is not, however, confined to the parties to the suit. In Lamb v Cotogno (1987) 74 ALR 188, the Court (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ) stated at 192-193, having referred to the punitive function of exemplary damages, continued:

“It is an aspect of exemplary damages that they serve to assuage any urge for revenge felt by victims and to discourage any temptation to engage in self-help likely to endanger the peace … This consideration probably had more force when exemplary damages were in their infancy, but it nevertheless remains as an aspect of them. … When exemplary damages are awarded in order that a defendant shall not profit from his wrongdoing or even where they are described as a windfall to the plaintiff – a description which a plaintiff is unlikely to accept – the element of appeasement, if not compensation, is none the less present.”

90 The appellants however, rely upon the requirement, expressed by French J in Musca v Astle Corporation Pty Ltd (1988) 80 ALR 251, that “where a compensatory award exceeds the benefit gained by the defendant by reason of his tort, the case for or quantum of exemplary damages may be diminished accordingly”.

91 In that case, French J found that so far as the appellants were concerned the compensatory damages which they were required to be paid considerably exceeded the rental benefit which had been derived so that that excess was such that no further punishment by way of exemplary damages was warranted.

92 In my opinion, the same cannot be said here. There is no need to repeat the trial judge’s findings of the conduct involved. On those findings, his description of the conduct was apt and this was an appropriate case for an award of exemplary damages.

93 The appellants submitted that the matters relied upon by his Honour were insufficient for an award of exemplary damages. In particular, they point out that Karandonis has sold his trademarks and the name “Karandonis Shoes” before they were acquired by KSA on 11 November 1993, as they had previously been owned by Karandonis Shoes Pty Ltd. That is correct, however, prior to the introduction of the appellants into Karandonis’ business, Karandonis was associated by name with the marks and I consider his Honour’s reference to have been to the loss of connection as opposed to the legal ownership of the marks. The appellants’ conduct was such as to irretrievably sever Karandonis from any association with those marks. Viewed in that light, it was not an irrelevant consideration.

94 The appellants also argue that the fact that the litigation was hard fought was as much a reflection on Karandonis himself as upon the appellants. They point out that in any event, the claim against McHugh failed, as did Karandonis’ defence of the Danchen bank claim. Both those matters are also correct. However, there was nothing done in these proceedings by Karandonis of an unusual nature and there were actions taken by the appellants, referred to by his Honour in his judgment, which takes this case entirely out of the category of opponents eyeballing each other on opposite sides of the litigation barrier. Those additional factors were that the appellants attempted to take the very means of litigation away from Karandonis by seeking to bankrupt him. They took away recourse against one party, KSA, by putting it into liquidation during the course of proceedings. They then took every step possible to discredit him, unfairly, through Mr Sengupta’s false evidence. Those factors are not the hallmark of legitimately hard fought litigation. They are rightly described as being elements of the appellants contumelious disregard of Karandonis’ rights. Further, there were his Honour’s unchallenged findings to which I have referred in paras 72 and 73, which of themselves would support an award of exemplary damages.

95 The next limb of the appellants’ argument is that, on a proper award of damages, this was a case which involved no more than $70,000 and that an award of $300,000 by way of exemplary damages was excessive by way of comparison. I do not agree. I have already referred to the principles which apply, which are twofold. One is that exemplary damages are intended to be moderate: see Lamb v Cotogno; the second is that there is no necessary link between the amount of compensatory damages and the amount of exemplary damages. The appellants’ argument that the case would have been much shorter had only a case for the loss of wages been run suffers from two flaws. First, on my judgment, the case is more extensive and resulted in a larger award than such a case. Secondly, on the case as I have found it, much of the same evidence would have had to have been called.

Appeal Against Wrongful Admission of Evidence

96 The trial judge admitted into evidence a statement of a Mr I Sengupta dated 24 April 2000, which was in the following terms:

“1. While I was working with Shantou Karandonis Shoes Ltd, Shantou, China, it was on 18th February 1999 Mr Kingsley Chou tried to contact me on a pager of Mr Ma. That day factory was closed for Chinese New Year and factory telephone lines were down. I had to go to the nearby Post Office to ring him up and, Mr Kingsley Chou asked me ‘do you know some persons working in Gaitonde group, Madras, India, well enough who will be willing to write to you a letter alleging that Mr John Karandonis takes commission from Gaitonde for their exports to Shantou Karandonis Shoes Ltd.’

2. When I questioned him ‘why are you asking me for this favour?’ He replied ‘I want to fix John on some charges.’

3. I did not wish to be a party to such a wrongful act and, therefore, I did not oblige him. I did not inform Mr Karandonis of this incident earlier as I was myself winding up from Shantou, China and returning to India.”

97 Karandonis’ counsel had cross-examined Chou on the contents of the document. He denied he had engaged in the conduct alleged, although he admitted Sengupta had rung him (consistent with Sengupta’s statement that he had rung following a pager message from Chou) and that Sengupta “offered to help me do the investigation”.

98 The trial judge noted that the basis of the tender was:

“an attempt to demonstrate that he was profoundly biased against Mr Karandonis and desirous of creating a false case against Mr Karandonis through the witness Sengupta, that Mr Karandonis had been guilty of earning secret commissions during that period when he was otherwise engaged as a designer and production overseer and some sort of manager in a factory where shoes were made in China by a company known as [SKA].

99 His Honour held that:

“That evidence, if true, of Mr Sengupta in my view is clearly admissible to show a malicious bias by Mr [Chou] against Mr Karandonis.”

100 The appellants submit that his Honour erred in doing so because of the unfairness to the appellants which resulted in its use. The appellants’ particular complaint is that his Honour used the statement to impugn Chou’s credit in circumstances where there was no opportunity to cross-examine Sengupta.

101 Although I consider the matter to be borderline, I do not see any error in his Honour’s discretion to admit the document.

The Award of Indemnity Costs

102 The appellants further appeal against his Honour’s order that they pay Karandonis’ costs of the claim and the cross-claim on an indemnity basis. The impetus for the application for an order for indemnity costs was an offer of compromise dated 7 May 1999 said to be made under Pt 19A of the District Court Rules 1973 (NSW). Part 19A r 2 provides, relevantly:

“(1) Subject to this rule, in any proceedings each of the plaintiff and the defendant may make to the other an offer to compromise any claim in the proceedings on the terms specified in the offer.”

103 The offer was in the following terms:

“1) A verdict and judgement in [Karandonis’] favour in the sum of $123,500 inclusive of out of pocket expenses, but exclusive of legal costs. Such judgment to be entered against all [appellants] jointly and severally.

2) [Karandonis] will agree that the [appellants] including the first [appellant] have the trademarks subject of the original sale agreement.

3) The [appellants] procure release of any indebtedness of the plaintiff to the Bank of China.

4) The offer remains open for 28 days from the date hereof in accordance with Part 19A, Rules 3(3).

5) The [appellants] pay [Karandonis’] party/party costs as assessed or taxed.”

104 The offer was not accepted.

105 His Honour considered that the offer was a valid offer under Pt 19A. He said:

“I test the efficacy of the offer in this way: (a) If [the offer was] accepted and (b) having been so accepted, could the Court have made orders for the enforcement of the deal. The apparent uncertainty about the offer springs merely from the fact that it required the [appellants] to procure a release of any indebtedness of [Karandonis] to the Bank of China. The evidence in the principal proceedings before me makes it quite clear that the [appellants] were aware of what that indebtedness was. It was the subject of the second action. I accept for the purposes of deciding this issue that the [appellants] could not by an offer of third party payment force the Bank of China to release Karandonis from his indebtedness. They could however have agreed to do all in their power to secure the release and if they failed then the court could have ordered that, by way of enforcement of the offer, the [appellants] pay [Karandonis] such sum of money as was necessary for him to release himself from his indebtedness to the Bank of China.”

106 The appellants submit that his Honour erred in finding that the offer was certain and could have been accepted according to its terms.

107 In my opinion, the appellants’ submission is correct. Whilst an offer of compromise under Pt 19A is not predicated upon the payment of a sum of money, it has to be productive of an objectively certain, that is achievable, outcome. Such an outcome will normally involve something which is within the immediate power or control of the party to whom it is directed. The payment of a sum of money; the discontinuance of the proceedings; the execution of a specific document; or the return of goods are examples. Here, cl 3 of the letter required the appellants to have a third party provide a release of an indebtedness. That may or may not have been able to have been achieved. BOC may have placed all sorts of conditions upon or before giving such a release other than the payment out of Karandonis’ debt. That simply cannot be known. And, as his Honour recognised, the appellants could not “force” BOC to release him. The fact that his Honour considered that the offer could be complied with by some other means, including having the court ‘enforce’ the offer in a manner different from its express terms, amounts to an acknowledgement that the offer could not be accepted according to its terms.

108 The appellants further contend that the offer did not comply with Pt 19A r 3(3), which provides that the time specified for acceptance “shall not be less than 28 days after it is made”. The terms of this offer were that it was “open for 28 days from the date of hearing”. The appellants’ submission in this regard is also correct.

109 That is not, however, the end of the matter. His Honour also found that this was an appropriate case to award indemnity costs outside the regime provided for by Pt 19A.

110 It should be said, merely to dismiss the possibility of confusion, that although the costs consequences which flow from Pt 19A usually involve orders for costs on a solicitor/client basis: see Pt 39A r 25(4), the court retains its power to award indemnity costs: see District Court Practice Note 42. The circumstances in which an indemnity costs order may be made has been the subject of a deal of judicial exegesis in recent years. So far as is relevant for present purposes, the following principles emerge from the cases:

(i) Costs orders are not in a general sense made to punish an unsuccessful party: Oshlack v Richmond River Council (1998) 193 CLR 72 at 89.

(ii) However, in a case “of some relevant delinquency” or “special circumstances” an order may be made on a solicitor/client basis: Packer v Meagher [1984] 3 NSWLR 486 at 500; or on an indemnity basis: Degman Pty Limited (in liq) v Wright (No 2) [1983] 2 NSWLR 354; Oshlack at 89.

Walter Vignoli v Sydney Harbour Casino Pty Ltd

Cassell & Co Ltd v Broome

Fountain Selected Meats (Sales) Pty Limited v International Produce Merchants Pty Limited & Ors

Whilst the circumstances in which an award of indemnity costs is made is not as confined as her Honour suggests, the distinction she draws between aggravated damages and indemnity costs is correct and care must be taken that there is no cross over between the two.

(a) where “a financially stronger party has patently and deliberately protracted proceedings for the purpose of multiplying costs and wearing down the other side in the hope of forcing an out-of-Court capitulation” ;

(b) where “litigation is instituted or prolonged to an extent which ought to have been unnecessary” ;

(c) where there has been the making of false or irrelevant accusations of fraud;

(d) where proceedings are commenced or prolonged for an ulterior motive; or

Colgate-Palmolive Pty Ltd v Cussons

Latoudis v Casey

Ohn v Walton

Vignoli

Digital Pulse Pty Ltd v Christopher Harris and Ors

(No 2)

111 The matters that his Honour considered relevant to the making of an order for indemnity costs in this case were these. Prior to the commencement of proceedings Karandonis had written to Daniel Chen offering to “treat with Mr Chen and the others concerned towards resolving the difficulties that had arisen between them”. His Honour recorded that “this offer achieved nothing”. There was then the purported Pt 19A offer made on 7 May 1999, prior to the commencement of the Bank proceedings. His Honour was “satisfied that [consistent with his finding in the action] the [appellants] had no intention to arrive at an honourable compromise with [Karandonis]”. He observed that had they accepted the offer “this unfortunate piece of litigation would have been resolved for all time”.

112 His Honour next referred to difficulties the appellants encountered in the litigation. The first was in respect of an order for discovery made on 13 May 1999, which KSA and the appellants had resisted to the extent it required discovery of Far Dragon’s documents. His Honour considered that the basis advanced for not discovering these documents was “a falsehood”. Confronted by this stance, Karandonis’ solicitors attempted to obtain the same material from Burlington by way of a subpoena. Successive failures by Karandonis’ solicitors to comply with the rules relating to subpoenas resulted in the subpoenas being set aside and costs orders being made against Karandonis. It is apparent from his Honour’s judgment on this point that he considered Burlington’s conduct in attacking the subpoena process, though technically valid, to be unnecessary, and that there were less adversarial ways of dealing with the defects. The documents were not produced until during the course of the proceedings.

113 There had been an argument before Dent DCJ that Karandonis should have made a further application to have the order for discovery redefined so as to obviate the necessity for the subpoenas. As to that, his Honour found it would have required:

“Justice Blanch … literally having to decide this action on a motion before he could get to the truth of the matter. In this action it was not until I had considered the entirety of the evidence placed before me that the many pieces of the jigsaw created by the [appellants] could be put into their proper position.” [Red 188]

114 Burlington then commenced bankruptcy proceedings against Karandonis based on the costs orders. Those proceedings came before Emmett J in the Federal Court of Australia. Dent DCJ stated:

“It is quite clear from reading his Honour’s judgement that the pursuit of [Karandonis] by Burlington in the circumstances was mischievous given [Karandonis’] offer to pay out the petition.”

115 Danchen, who had by then obtained an assignment of Karandonis’ indebtedness to BOC and had commenced the Bank case against Karandonis, applied to be substituted as petitioning creditor in the bankruptcy proceedings. His Honour found that was “an equally mischievous piece of conduct, completely consistent with the agreement of the [appellants] to prevent the Karandonis cause ever seeing the light of day”.

116 Against that background, his Honour stated that he “could not imagine a clearer case for the invocation of the Court’s power to make … an order [for indemnity costs]”.

117 In my opinion, these matters were relevant considerations in determining whether this was an appropriate case for an order for indemnity costs. There was, as his Honour found, a persistent course of conduct involving a total refusal to engage in settlement negotiations; the taking of active steps to prevent Karandonis from prosecuting his action; dishonesty; unreasonable tactical positioning in the circumstances; and an almost total obfuscation of the financial and business operations of KSA, SKS, the new operation in China and the other relevant entities such as to make it nearly impossible for Karandonis to effectively conduct his litigation, even given the strictures of the adversarial system of litigation involved in our system of law. In these circumstances, I cannot see any error in the exercise of his Honour’s discretion in awarding indemnity costs. This conclusion makes it unnecessary to consider whether Karandonis’ offer of compromise also amounted to a Calderbank offer: see Calderbank v Calderbank [1975] 3 All ER 333.

Costs of These Proceedings

118 The appellants have been partially successful in these proceedings in establishing that the trial judge erred in failing to deal with the issue raised by Prudential Assurance v Newman or in erroneously applying the principle in that case. That has resulted in the damages being reduced by approximately $175,000. Their success on that issue, however, has only been partial and they have not been successful on any other issue. Further, the appellants put the respondent to a considerable degree of trouble and expense in preparing written submissions to deal with numerous grounds of appeal and extensive arguments which were abandoned shortly before the hearing. In those circumstances, I would propose that the appellants pay 90% Karandonis’ costs of the appeal and that as to the balance each party pay his own costs.

The Bank Case

119 The Bank case arose in the following circumstances.

120 On 22 January 1997, Karandonis entered into a loan agreement with BOC whereby he drew down the amount of $165,774.68. On the same day, he directed BOC to apply those funds “to pay out the loans of KSA”. McHugh borrowed an equal amount and the direction to BOC related to McHugh’s borrowing as well.

121 The background to this borrowing lies in the conspiracy, and on his Honour’s finding, which is unchallenged, was part of it.

122 On 22 May 1996, Karandonis had returned temporarily to Sydney and attended a meeting by Yong with officers of BOC. He returned to China on 26 May 1996. On 5 August 1996, he received a facsimile dated 25 July which was an invitation to apply to BOC for a personal loan. Karandonis telephoned McHugh and told him he would not sign, nor would he permit his son to be a guarantor as was proposed in the facsimile. McHugh told him that the purpose of the borrowing was to pay out the old debt to BOC before the bank would provide a new loan facility. He advised Karandonis that the loan figure of $165,774.68 represented their respective shareholdings in KSA. By 19 December 1996, Karandonis had still not signed the loan facility. There is intervening history including misplaced documents which is not relevant. However, in a conversation with McHugh on about 19 December, Karandonis expressed reluctance to enter into the loan, saying that he would not have the ability to repay it. McHugh replied, “I can’t repay the loan either and the company will have to repay it for us”.

123 Sometime between 17 and 22 January 1997, Karandonis had a meeting with Yong at which Karandonis handed to Yong a letter expressing his reluctance to be personally responsible for the BOC loan. Yong replied “without your signature on the facility agreements there will be no money forthcoming from [BOC] for [SKS]”. His Honour found that Yong’s behaviour towards Karandonis at this stage was aggressive, to put the matter mildly. Yong then said to Karandonis “when the company starts making money it will make the loan repayments for you”. He added “you have to sign so that [BOC] will lend money to continue the business in China”. Karandonis, trusting Yong, agreed to sign the facility. Yong also promised that Karandonis would be paid an extra $10,000 spread over a twelve month period to assist with the loan repayments. Karandonis signed a draw down authority directing BOC to draw down the money and pay off the debts of KSA – this being a different purpose than that specified by Yong in his conversation. KSA met the loan repayments until December 1997.

124 His Honour found, and it is not now challenged, that Daniel Chen and Yong engaged in conduct in trade and commerce which was misleading and deceptive in contravention of s 42 of the Fair Trading Act 1987 (NSW) “in tricking [Karandonis] into believing that [BOC] would not advance the joint venture in China necessary moneys unless he signed the facility agreement”.

125 On 1 July 1999, by a deed of assignment entered into between Daniel Chen, Eric Chen, BOC and Danchen International, Danchen took an assignment of Karandonis’ debt to BOC which at that stage amounted to $182,743.65, being the amount of principal and accrued interest. In October 1999, Danchen International brought proceedings against Karandonis in claiming the amount of $188,407.56, being the amount then owed under the loan agreement. Karandonis cross-claimed against BOC, Daniel Chen, Eric Chen and Yong for the same amount. The cross-claim against BOC was settled. His Honour found for Karandonis on the cross-claim against Daniel Chen and Yong. This finding is challenged. His Honour accepted that assignment of the loan to Danchen was valid and that Karandonis was liable as claimed. He found a verdict in favour of Danchen against Karandonis for $188,407.00 plus interest to be calculated, plus costs. This verdict is not challenged.

126 The appellants submit that his Honour erred in finding them liable on the cross-claim because Karandonis did not suffer any loss as a result of Danchen’s enforcement of the 1997 loan agreement.

127 The appellants’ point on this was simple. As at the date of the 1997 loan Karandonis was already a guarantor of KSA’s indebtedness under the 1993 arrangements. As at January 1997, that indebtedness was in the order of $1 million. Accordingly, Karandonis merely ‘swapped’ one liability for another. On this argument, Karandonis’ liability under the new agreement was in fact less - $166,774.68 as opposed to approximately $212,000.

128 Karandonis’ response to this argument is twofold. First, KSA’s indebtedness to BOC as at 28 January 1997 was $472,837.49. Assuming a 20% share of that liability, Karandonis’ ‘share’ was something less than $95,000. The appellant submitted in reply however that the respondent’s figure is wrong and that a correct understanding of the BOC’s documentation reveals that the indebtedness was $1 million as they had submitted.

129 Secondly, Karandonis submitted that KSA’s inability to meet its indebtedness to BOC by January 1997 was due to the appellants’ “wrongful conduct in raiding KSA’s coffers and loading it up with the debts of the other companies”. This submission is based upon his Honour’s finding that the directors of KSA engaged in:

“conduct which was a naked attempt to raid the coffers of Karandonis Shoes Australia Pty Limited, and load it up with fanciful product prices bearing no semblance to their cost of wholesale production, plus interest and commissions.”

130 There are a number of answers to the appellant’s submission. The first is that proffered by the respondent, to which I have just referred. At this point it is necessary to refer to the appellants’ earlier argument that this is not the case because KSA was in financial difficulty in December 1995 prior to the conspiracy. However, the whole point of the Chinese joint venture was to improve KSA’s profitability and his Honour considered that but for the appellant’s conspiratorial conduct, KSA may well have traded out of its difficulties. Accordingly, if this basis has any validity it cannot be assumed that BOC would ever have called upon Karandonis’ guarantee. Even if there was some basis upon which the former guarantee was to be taken into account it is only as a contingent liability. As KSA continued to trade until August 1999, some 2½ years after the earlier guarantee was discharged it must be assumed that the contingency had a low value. There is the additional consideration that in December 1995 KSA transferred nearly a million dollars worth of equipment to Total Win for which it was never paid. Accordingly, the picture painted of excess liabilities over assets as at June 1996 cannot be taken at face value.

131 Further, McHugh represented to Karandonis that the amount borrowed represented the value of his interest in KSA at that time. Accepting that at face value, the company still had considerable value and should have been able to meet its indebtedness to BOC almost in its entirety if required to do so.

132 In my opinion, the resolution of the issue requires a similar robust approach as that applied to the quantification of Karandonis’ interest in the Chinese joint venture. Because of the appellants’ conduct, including that of Daniel Chen and Yong, it is impossible to know what KSA’s financial position was, let alone what it could or should have been. Accordingly, it cannot be said that Karandonis’ contingent liability under the initial guarantee was in any substantial amount, so that it could be said Karandonis merely swapped one liability for another. Accordingly, I would not disturb his Honour’s order on the cross claim.

133 I would propose the following orders.

In CA 40762 of 2001, the Shoes case:

(i) Appeal allowed in part;

(ii) Set aside order 1 of Dent DCJ made on 30 August 2001 in DC 1691/98;

(a) $120,000 to carry interest at Court rates from 1 April 1996 until 30 August 2001;

(b) $53,333 to carry interest at 4% from 1 May 1997 until 2 March 1998 and thereafter at Court rates until 30 August 2001; and

Thereafter, the total verdict is to carry interest in accordance with s 85 of the District Court Act 1973 (NSW).

(iv) The appellants are to pay 90% of the respondent’s costs of the appeal and each party is to pay the balance of their and his costs of the appeal.

In CA 40763 of 2001, the Bank case:

(i) Appeal dismissed;

134 HEYDON JA: I agree with Beazley JA.

135 HODGSON JA: I agree with the orders proposed by Beazley JA and with her reasons. I would add a few comments of my own.

136 On the question of compensatory damages, I agree that Karandonis cannot be awarded damages in respect of claims against KSA (for wages and loan) or the loss of his 20% interest in KSA. The appellants were found to be liable to pay damages to Karandonis on the basis of a conspiracy to injure him by unlawful means, namely the breaching by two of the appellants of their fiduciary duties to KSA; and these losses claimed by Karandonis were consequential upon the losses caused to KSA by those breaches of fiduciary duty. KSA had a cause of action against the appellants for the losses caused to it, in relation to two of the appellants as directors for breaching their fiduciary duties and in relation to the others for knowing participation in such breaches. Accordingly, although Karandonis had his own separate cause of action in conspiracy which KSA did not have, these losses were reflective of losses to KSA in respect of which KSA had a different cause of action against the same defendants. Thus these losses fall within the first of the three categories identified by Lord Bingham of Cornhill in Johnson v Gore Wood & Co [2002] 2 AC 1 at 35-6, and do not fall within either the second or third of those categories.

137 This problem does not affect Karandonis’ claim in respect of wages not paid to him in China, or in respect of the loss of his interest in the proposed joint venture in China. It was open to the primary judge to find as he did that, but for the conspiracy, Karandonis would have been paid these wages and would have received the benefit of an interest in the joint venture, and that the loss of these benefits was relevantly caused by the conspiracy.

138 As stated by Beazley JA, the difficult question is quantification of the loss of the interest in the proposed joint venture. At pp.115-116 of his judgment, the primary judge said this:

“The assessment of damages in favour of the plaintiff is not an easy one. By the acts done in furtherance of the conspiracy the defendants deprived the plaintiff of his salary entitlements when he worked in China without salary. Thereafter they deprived him of salary as managing director of the first defendant, other than payment on his loan facility with the Bank of China that he was induced to enter into by Mr. Lu Yong, and which is the subject of the second proceedings. These amounts are quantifiable. On the other hand he additionally lost the benefit of a promised 20% interest in the 60% intended interest of the shareholders of the first defendant in the Shantou Karandonis enterprise, and a loss of 20% interest in the first defendant. By reason of the defendants' actions he has lost the right to trademark his goods under his own name. There is a total absence of acceptable evidence from the defendants as to what the real value of the China interests are, and given what has been revealed in this case, I can well understand why. That was an area that the defendants preferred not to go into. Had the first defendant been allowed to trade as a normal corporation paying market prices for goods imported it may well have traded out of its debts and been a viable profit producing merchant. Once again no figures are forthcoming from the defendants to establish the trading position of the substituted corporation at the present time. Given the evidence that emerged in this cause that is hardly a surprise. It goes without saying that I do not accept the picture presented to the liquidator of the indebtedness of the first defendant as a true picture, as the first defendant was being loaded up with charges that represented advances by Total Win Investments Limited to the Shantou Karandonis joint venture. The plaintiff has clearly lost his investment in the first defendant which was $200,000 equity and $73,000 [an error for $73,500] loan. That loss was in my judgement the intended result of the conspiracy and the acts in furtherance of the defendants.”

“Given the state of the evidence in this case, I believe that the proper measure of damages for me to adopt for compensating the plaintiff for the loss of his interests in Australia and China procured by the defendants is the amount of his personal investment in Karandonis Shoes Australia Pty Limited, the sum of $273,500, by way of equity and loan.”

139 At one stage, I thought it might be possible to interpret this as a robust estimate of damages, in accordance with the Armory v Delamirie principle, on the basis that a quantification of the loss of the interest in the joint venture, which was fair and reasonable to both parties, was a figure equal to Karandonis’ original investment, even though that investment as such had been wholly lost prior to the commencement of the conspiracy; and thus as being an estimate which should not be upset on appeal. However, the primary judge’s figure of $273,500.00 is expressed to be compensation for loss of the plaintiff’s interests in Australia as well as China, and thus it appears to include more than the loss of the interest in the joint venture, that is, to include losses suffered prior to the commencement of the conspiracy and/or losses reflective of KSA’s losses.

140 In those circumstances, I concur in Beazley JA’s assessment of this aspect of Karandonis’ claim at $120,000.00. It was somewhat faintly submitted that even this loss was merely reflective of loss suffered by and claimable by KSA, because Karandonis’ contribution to the joint venture was through KSA and his entitlement to any benefit from the joint venture was thus held through KSA. In my opinion, this submission overlooks the circumstance that a very substantial contribution to the joint venture was Karandonis’ own personal experience and expertise, so that the interest in the joint venture which Karandonis lost can properly be considered an interest held in his own right and not merely through KSA.

141 In relation to the bank case, the substitution of a direct liability as a principal borrower for a contingent liability as a guarantor is a prima facie loss, in the sense that it substitutes a certain and definite liability for the mere chance of a liability. The appellants argued that this chance was or turned out to be a certainty, therefore there was no loss; but Karandonis argued that, but for the appellants’ wrongful conduct, KSA could have paid out its debts. In my opinion, this argument, to meet a claim that Karandonis received a benefit from the transaction equal to the burden of it, is not reliance on a loss merely reflective of KSA’s loss. Karandonis’ loss is from his direct liability and he places no reliance on KSA’s subsequent inability to pay its debts: it is the appellants who seek to rely on that, and since that inability was due to their wrongful conduct, they cannot do so.

142 Finally, on the question of indemnity costs, I would for my part have given weight to the purported offer of compromise as a Calderbank offer. The appellants could plainly have procured a release from BOC by paying off the debt, and the result achieved below, and also in this Court, was less favourable to the appellants than the offer, considered in that light.

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Citations

Chen v Karandonis [2002] NSWCA 412

Most Recent Citation

Caruana v Port Macquarie-Hastings Council [2007] NSWLEC 109

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46

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Ekes v Commonwealth Bank of Australia [2014] NSWCA 336

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Cases Cited

16

Statutory Material Cited

2

Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd (No 3) [2012] VSC 99

XL Petroleum (NSW) Pty Ltd v Caltex Oil (Australia) Pty Ltd [1985] HCA 12

Latoudis v Casey [1990] HCA 59

CITATION:	Chen v Karandonis [2002] NSWCA 412
FILE NUMBER(S):	CA 40762/01; 40763/01
HEARING DATE(S):	24 September 2002, 25 September 2002
JUDGMENT DATE:	18 December 2002
PARTIES :	Daniel Chen Kingsley Chou Lu Min Yong John Karandonis
JUDGMENT OF:	Beazley JA at 1; Heydon JA at 134; Hodgson JA at 135

LOWER COURT JURISDICTION :	District Court
LOWER COURT FILE NUMBER(S) :	1691/98; 7778/99
LOWER COURT JUDICIAL OFFICER :	Dent DCJ

COUNSEL:	N HutleySC/R Marshall (A) P Neil SC/I Raine (R)
SOLICITORS:	Velik Solicitors (A) Williamsons Solicitors (R)
CATCHWORDS:	Tort of conspiracy - Joint venture - Damages - Loan - Reflective damages - Calculation of damages - Exemplary damages - Contumelious disregard - Indemnity costs - Offer of compromise - Calderbank offer - Whether relevant delinquency - Personal loss - Fiduciary duty - Recover of loss - Whether double recovery - Direct liability - Contingent liability
LEGISLATION CITED:	District Court Rules 1973 (NSW) Pt 15 r13(2), Pt 19A r 2, Pt 39A r25(4) Fair Trading Act 1987 (NSW) s 42
CASES CITED:	Gould v Vagellas (1985) 157 CLR 215 Prudential Assurance v Newman Industries (No 2) [1982] 1 Ch 204 Johnson v Gore Wood & Co [2002] 2 AC 1 McWilliam v Penthouse Publications Ltd [2001] NSWCA 237 Milful v Terranora Lakes Country Club (1999) 17 ACLC 1515 Houghton v Immer (No 155) Pty Limited (1997) 44 NSWLR 46 LJP Investments Pty Limited v Howard Chia Investments Pty Limited (1990) 24 NSWLR 499 Armory v Delamirie (1722) 1 Stra 505 Docker v Somes 2 MY & K 656 McDonald v Deputy Federal Commissioner of Land Tax (NSW) (1915) 20 CLR 231 Whitfeld v De Lauret & Co Limited (1920) 29 CLR 71 XL Petroleum (NSW) Pty Limited v Caltex Oil (Australia) Pty Limited (1985) 155 CLR 448 Lamb v Cotogno (1987) 74 ALR 188 Musca v Astle Corporation Pty Limited (1988) 80 ALR 251 Oshlack v Richmond River Council (1998) 193 CLR 72 Packer v Meagher [1984] 2 NSWLR 486 Degman Pty Limited (in liq) v Wright (No 2) [1983] 2 NSWLR 354 Walter Vignoli v Sydney Harbour Casino Pty Limited [1999] NSWSC 1227 Colgate-Palmolive Pty Limited v Cussons (1993) 46 FCR 225 Latoudis v Casey (1990) 170 CLR 534 Ohn v Walton (1995) 36 NSWLR 77 Digital Pulse Pty Limited v Christopher Harris and Ors (No 2) [2002] NSWSC 107 Calderbank v Calderbank [1975] 3 All ER 333
DECISION:	40762/01 Appeal allowed in part; 40763/01 Appeal dismissed