Hadoplane Pty Ltd v Edward Rushton Pty Ltd

[1995] QCA 446

IN THE COURT OF APPEAL	[1995] QCA 446
SUPREME COURT OF QUEENSLAND

Appeal No. 54 of 1995.

Brisbane
[Hadoplane P/L v. Edward Rushton P/L]

BETWEEN:

HADOPLANE PTY LTD

(Plaintiff) Appellant

AND:

EDWARD RUSHTON PTY LTD

(Defendant) Respondent

____________________________________________________________

_______

Pincus J.A.
Thomas J.
Williams J.
____________________________________________________________

_______

Judgment delivered 06/10/1995

Separate reasons for judgment by each member of the Court;
Williams J dissenting.
____________________________________________________________
_______

1.   JUDGMENT VARIED BY INCREASING THE AMOUNT TO BE RECOVERED TO $55,744.27.

2.    OTHERWISE, APPEAL DISMISSED WITH COSTS.

____________________________________________________________
_______

CATCHWORDS: DAMAGES - net profit lost by company much less than combined loss to company and its employees - whether damages should be equal to gross income or net income - whether loss to owners as employees by way of salaries and superannuation contribution should be taken into account in assessing damages.

Counsel:	Mr J Muir QC for the appellant. Mr W Sofronoff QC with him Mr M Martin for the respondent.
Solicitors:	Walsh Halligan Douglas for the appellant.

McCullough Robertson for the respondent.

Hearing date: 29 August 1995.
IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 54 of 1995.

Brisbane

Before Pincus J.A.
Thomas J.
Williams J.

[Hadoplane P/L v. Edward Rushton P/L]

BETWEEN:

HADOPLANE PTY LTD

(Plaintiff) Appellant

AND:

EDWARD RUSHTON PTY LTD

(Defendant) Respondent

REASONS FOR JUDGMENT - PINCUS J.A.

Judgment delivered 06/10/1995

This appeal concerns a question of damages recoverable by a small company. The appellant company sued the respondent defendant in the District Court for damages for breach of contract and succeeded. The plaintiff was at material times owned and controlled by Mr & Mrs Gillett, both of whom worked for it. In the financial years leading up to the breach of contract, the plaintiff made only a small profit because its income was not much more than its expenses, the principal item of expense being the remuneration of Mr & Mrs Gillett. Owing to the defendant’s breach of contract the plaintiff’s gross income dropped sharply, but the principal practical effect of the breach so far as the Gilletts were concerned was that they did not receive the remuneration they would have drawn from the plaintiff, had the breach not occurred. The judge however assessed damages on the basis that all that was lost was the relatively small income which, on his Honour’s findings, the plaintiff would have received, after paying expenses.

The result was that the loss Mr & Mrs Gillett suffered
was not recovered; it consisted in their lost remuneration.
Counsel for the appellant suggested that even if the

plaintiff company were not owned and controlled by Mr & Mrs Gillett the damages should have been the gross income which the plaintiff lost, disregarding expenses it would have incurred; but that seems inarguable. If the appellant is to succeed in having the remuneration of the Gilletts disregarded, that must be on the basis that the way in which those in control of the plaintiff derived benefit from its operations - whether for example by salary, dividend or loan - was entirely a matter for their discretion and that the choice of one method rather than another, in the period leading up to the breach, should not avail the defendant.

It is desirable to flesh out this broad statement of the issue with some detail. The plaintiff and the defendant made a contract under which the plaintiff was to provide services to the defendant for a term expiring on 1 January 1992, but the defendant wrongfully repudiated the contract on 27 April 1989. As a result the plaintiff lost $197,150 by way of gross income, that being the amount which would but for the defendant’s breach have been payable to the plaintiff under the contract, from which there must on any view be deducted the sum the plaintiff obtained by working for third parties, after the repudiation. The plaintiff contended before us that its losses were $143,834 being the difference between fees it would have earned but for the breach ($197,150) and the nett sum it derived from consultancy fees paid by third parties ($53,316).

The plaintiff argued here that it is entitled to be placed in the same financial position as if the contract had been performed, but that contention does not appear to me to assist it. Accepting, as the judge did, that if the defendant had not breached the contract the plaintiff would have profited by a much lesser sum than the gross fees of $197,150, it seems plain that that lesser sum is the amount which the defendant must on ordinary principles pay, to place the plaintiff in the same financial position as it would have occupied if the defendant had not breached the contract. If the plaintiff had undertaken to do building work, rather than the consultancy work which was the subject of the contract, "general principles" would put the normal measure at the contract price less the cost to the builder of executing or completing the work: McGregor on Damages, 15th ed. p. 677. And to justify what McGregor treats as the general principle, one need look no further than the authority on which the plaintiff relied before us, Cth. v. Amann Aviation Pty Ltd (1991) 174 C.L.R. 64. There, the claim based on contract which was in issue was to recover wasted expenditure rather than income or profits, but it is clear enough that the High Court accepted that the prima facie measure of damages was nett profit rather than gross income: p. 81 per Mason C.J. and Dawson J., p. 100 per Deane J., pp. 152, 153 per Gaudron J., p. 161 per McHugh J.

In the result the damages in that case were not so assessed, it being held that although the plaintiff could not show that the performance of the contract would have brought it a profit, it could recover expenses reasonably incurred; no such claim is made here.

The plaintiff’s expenses, shown in Exhibit 1 at p. 292, decreased from $65,725 in the year ended 30 June 1988 to $19,149 in the half-year ended 31 December 1991; the breach occurred in 1989. The record does not include a detailed analysis of the nature of these expenses, but plainly the principal reason for the reduction in expenses was that amounts paid to or for the benefit of the Gilletts dropped from $54,712 in the former period to nil in the latter; the 1988 remuneration figure is made up of $46,800 salaries and $7,912 superannuation. There was evidence that the reason for cessation of the salary and superannuation payments was that, although they would have given the plaintiff a loss for income tax purposes, the Gilletts would have had a corresponding income which would have been taxable. But looking at the matter more broadly, it may properly be said that the reason for cessation of expenditure on salaries and superannuation was that the plaintiff’s gross income fell sharply. The case is thus one in which it can be seen that the practical result of the breach was the loss by the plaintiff and the Gilletts, considered as a group, of a much larger sum than was in fact awarded. The plaintiff lost only a small amount of nett income which it would, but for the breach, have received; the Gilletts lost a much larger sum by way of salary and superannuation benefits. It should be noted that the amounts the plaintiff paid to and towards Mr Gillett were much greater than those paid to and towards his wife; but nothing appears to turn on that fact.

Although the principal argument advanced for the plaintiff in this Court was that the gross amounts payable under the contract should have been recoverable, disregarding any expenses necessary to earn those amounts, it seems to me necessary to consider a less extreme proposition which was at least implicit in the contentions put before us: that the defendant should not have the advantage of the circumstance that the Gilletts happened to arrange to receive particular sums from their company, the plaintiff, rather than other sums, and chose to receive them by way of salary and superannuation contributions rather than in some other form. In the present case the mode of assessment adopted by the primary judge, the details of which are set out below, was the same as that which would have been adopted had the Gilletts been merely employees, rather than being employees who happened to control their employer; the judge’s assessment ignored that additional factor.

One answer to the plaintiff’s contention is that in the ordinary case in which, because of a breach of contract, a company suffers lost profits, the amount the party in breach has to pay will not include any losses employees of the plaintiff have sustained. To revert to the example taken from McGregor, if a builder is wrongfully dismissed that may well cause employees who had been working on the job loss of income, but, not being parties to the building contract, they have no cause of action. The question which this appeal raises may be framed in this way: although ordinarily a repudiating party has no obligation to pay damages corresponding to the loss of income of employees of the innocent party who are put out of work by the repudiation, is the position different where the employees control their employer? We were referred to Gould v. Vaggelas (1985) 157 C.L.R. 215, a case in which members of a company successfully sued in respect of fraudulent misrepresentation which induced the company to enter into a transaction; but as pointed out by Wilson J. at pp. 245, 246, there the shareholders did not sue in that capacity, but as persons who were themselves wronged.

A decision which gives some support to the contention that the particular structure chosen by the Gilletts should not enable the defendant to escape paying due compensation can be found: DHN Food Distributors Ltd v. Tower Hamlets London Borough Council [1976] 1 W.L.R. 852. There the plaintiff company which ran a business from a warehouse owned all the shares in another company, which owned the warehouse; the defendant compulsorily acquired the warehouse and it was held liable to pay not only the value of the warehouse but compensation for disturbance of business; that was so although the company whose property was acquired did not own the business in question. The English Court of Appeal treated the companies as part of a group which was entitled to compensation and that was no doubt a commercially realistic view. The decision has been followed or approved in a number of cases in the United Kingdom, but it was criticised by Lord Keith in Woolfson v. Strathclyde Regional Council (1978) 38 P. & C.R. 521 at 526.

In my view, the tendency of Australian authority is against "lifting the veil" in such circumstances. In Hobart

Bridge Company Ltd v. Federal Commissioner of Taxation

(1951) 82 C.L.R. 372 a government acquired shares in company B which were owned by company A which was not a dealer in shares; but B was a dealer in land and the price paid for the shares reflected an increase in the value of land owned by B, the subsidiary. Kitto J. rejected an argument, based on the view that B was "completely subservient" to company A, to the effect that there was a "composite commercial enterprise" which included land speculation. Acceptance of the proposition that the activities of the parent and those of the subsidiary should be lumped together, his Honour thought, would "blur distinctions which are real and significant" (386).

In Walker v. Wimborne (1976) 137 C.L.R. 1 a question arose as to the legal effect of a transaction by companies which were argued to constitute a "group". Mason J., with whom Barwick C.J. agreed, deprecated the notion that the companies in question were members of a group, as well as the emphasis given in the court below to "the circumstance that the group derived a benefit from the transaction" impugned. His Honour held that this emphasis -

" . . . tended to obscure the fundamental principles that each of the companies was a separate and independent legal entity . . . " (6,7)

The same judge, in Industrial Equity Ltd v. Blackburn (1977) 137 C.L.R. 567, considered the question whether the profits available for distribution by a holding company could include or take into account sums earned by subsidiaries. Mason J., holding they could not, remarked:

" There are, I think, a number of reasons which
sustain the accuracy of this assumption.

In the first place, it is a natural consequence of the recognition of the separate personality of each company, a recognition which derives from Salomon v. Salomon & Co. Ltd [1897] A.C. 22 and which has been confirmed by Lee v. Lee’s Air Farming Ltd [1961] A.C. 12. " (577)

It should be noted that Lee’s case was one in which it was held that, in a one-man company, the sole beneficial shareholder may in his personal capacity contract with the company (represented by himself) so as to make a contract of employment; that case is referred to with approval in the passage just mentioned and appears also to have been approved in Hamilton v. Whitehead (1988) 166 C.L.R. 121 at 128. Some of these cases were discussed in the Supreme Court of New South Wales in Pioneer Concrete Services Ltd v. Yelnah Pty Ltd (1986) 5 N.S.W.L.R. 254 (especially at 267B) and in the Supreme Court of Western Australia in State Bank of Victoria v. Parry [1990] 2 A.C.S.R. 15 at 30 et seq. Neither decision gives any support to the notion that the affairs of the owner of all the shares in a company can, except in very limited circumstances, be treated as merged with those of the company owned.

It must be kept in mind that the cases just briefly dealt with have to do principally with ownership by one company of another or others, a situation which does not exist here. But the reasons which have induced Australian courts to be inclined to insist on the legal distinction between the rights and obligations of a company which wholly owns another company, on the one hand, and those of the company owned on the other, apply equally where the question is whether by any means the rights of a wholly owned company can be treated as including those of the natural persons who own it.

Counsel for the plaintiff suggested before us that the plaintiff here could have augmented the damages to which it was entitled by continuing (using borrowed money if necessary) to remunerate its shareholders after the defendant had repudiated, in the same sums as before that event. That course would have produced much more substantial losses than were allowed by the primary judge. If instead of keeping the remuneration about the same level after the repudiation, the plaintiff had then doubled the Gilletts’ salaries, that would on the face of it have brought about an even greater loss. I do not express a view as to whether, however oddly matters are arranged between the plaintiff and its owner/employees, in such a case as this the Court can go behind the arrangements made. In the circumstances last mentioned, the defendant might seek to argue that the increased expenditure could not rationally be said to be due to its breach of contract.

Here, before the repudiation, the plaintiff company appears to have remunerated its owner/employees in a way similar to that in which employees who were not the owners of the company might have been remunerated; at least there is no evidence to suggest that the remuneration differed substantially from normal commercial standards, but after the repudiation that was not so. In the last two periods which are dealt with in the summary in Exhibit 1, the year ended 30 June 1991 and the following six months, no wages were paid, nor was any contribution made to superannuation.

Had the persons employed not been owners of the company, they would surely not have worked for nothing, although in view of the reduced activity of the company they might have been put on a part-time basis. It appears to me that the inclusion in the plaintiff’s claim of an amount calculated as representing its legal obligation to remunerate the Gilletts and particularly Mr Gillett, for the work done after the repudiation, might in some circumstances have been supported; it was argued below, but not in this Court, that such a claim should be allowed. That contention was not accepted by the primary judge, rightly, because there was no evidence on which it could be determined whether or not the plaintiff had an obligation to remunerate the Gilletts for the work they had done after the repudiation, nor any evidence on which the quantum of remuneration could properly be assessed.

Of course, such questions as whether a company owned by two people has come under an obligation to remunerate the two for work they have done for the company without payment have rather an artificial air about them. To avoid problems of that sort, it is tempting to adopt a solution of deconstructing the legal framework in which the Gilletts conducted their business assessing damages as if they and not the company had made the relevant contract and brought the action. I can see no justification in principle for taking this course. It seems to me unfortunate in the present case that the Gilletts, whose loss has been considerably more than their company’s, have no cause of action. But it is a familiar notion that the use of a company structure can bring with it complications and disadvantages, as well as the hoped for advantages. I should add that a recent example of this proposition may be found in the decision of the New South Wales Court of Appeal in Boral Roof Tiles Ltd v. O’Brien (unreported, 2 December 1994). The plaintiff in that case was a truck driver who sued for injuries suffered at work; he carried tiles on his truck for Boral Roof Tiles Ltd. At relevant times Boral made payments for this work to a company, Lasmine Pty Ltd, a family trust which was set up by the plaintiff and his wife on an accountant’s advice, for tax reasons. Lasmine paid the outgoings incurred in running the truck and paid wages to the plaintiff and his wife. The trial judge held that the plaintiff was a party to a contract of service with Boral; the judge described the creation of Lasmine as "clearly a taxation device". In reversing the decision of the trial judge, the Court of Appeal held that the plaintiff was not an employee of Boral, but of Lasmine and it followed that it was Lasmine, the family company, and not Boral which owed the plaintiff an employer’s duty of care; an application for special leave to appeal to the High Court on that point failed: (unreported, 14 August 1995).

In the present case the primary judge awarded damages totalling $34,237.67 and added interest. The largest component was a sum of $25,103 which was found, in effect, to represent the difference between the state of the plaintiff’s profit and loss account in the events which happened and its state on the hypothesis that there had never been a repudiation. The accuracy of his Honour’s calculation was not challenged, but it was said to be wrong in principle, for the reasons explained above. In my view both the contention that in assessing damages the plaintiff should be held entitled to a calculation based on the gross receipts lost, without regard to expenses incurred, and the alternative analysis giving the plaintiff (in one way or another) the value of its shareholders’ lost earnings must be rejected.

The only other point is that the judge allowed a sum of $2,117.37 for holiday pay. It was argued that this involved an error of $300 in favour of the defendant and that is conceded. In its written argument the defendant contended in this Court that there was no justification for a "pro rata period of payment in lieu of holidays" from which it appears that the defendant says that the $2,117.37 should not have been allowed. But there was no notice given under O. 70 r. 13, contending for a variation of the judgment to delete that allowance and it appears to me that the defendant’s written contention about holiday pay cannot be considered. This was, as I understand the matter, accepted at the hearing; therefore the amount of the judgment must be increased by $484, making allowance for interest.

In the circumstances it appears to me that the appellant should pay the costs. The orders will be as follows:

1.   Judgment varied by increasing the amount to be recovered to $55,744.27.

2.    Otherwise, appeal dismissed with costs.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 54 of 1995

Brisbane

Before Pincus JA

Thomas J Williams J

[Hadoplane Pty Ltd v. Edward Rushton Pty Ltd]

BETWEEN:

HADOPLANE PTY LTD

(Plaintiff) Appellant

AND:

EDWARD RUSHTON PTY LTD

(Defendant) Respondent

REASONS FOR JUDGMENT - THOMAS J

Judgment delivered 6 October 1995

This case concerns the principles upon which damages are recoverable by the appellant

company for the respondent's breach of contract. The appellant company was at all relevant times

controlled by Mr and Mrs Gillett who were the sole shareholder directors. The company

contracted with the respondent for the provision of loss assessor services. Although it was not an

express term of the contract it was always contemplated by both parties that the services to be

provided were those of Mr and Mrs Gillett. The contract between the appellant and the respondent

was the appellant's sole business.

The contract was for services to be provided at the rate of $66,000 per annum for five

years expiring on 1 January 1992. The respondent repudiated the contract on 26 April 1989, at

which time the contract still had over two and a half years to run.

If the respondent had contracted directly with Mr and Mrs Gillett for their services, the damages that Mr and Mrs Gillett could have recovered would have been measured by the fees

payable by the respondent over the full term, less the estimated costs to be incurred by the Gilletts in

providing those services, and of course the net amount of any earnings that the Gilletts were capable

of making over the remaining period would have to be brought into account in mitigation of the loss.

Such damages would probably have been very close to the amount that the appellant company

contends on this appeal should be awarded to it (i.e. a little over $140,000). In the event, the

learned Trial Judge assessed the appellant company's loss on the footing that it would probably have

continued at a similar level of profitability as that which it had maintained during the first two years of

the contract. This revealed only a modest net profit ($2000 per annum) and that level is explained

by the fact that most of the company's earnings were paid out to Mr and Mrs Gillett as drawings or

wages. The learned Trial Judge brought into account in favour of the appellant the losses which it

incurred in the remaining years when the contract would have run, and, leaving aside additional

matters such as holiday pay and a separate consultancy fee, assessed the company's basic loss

under the contract at a little over $25,000.

It was probable that the company would have continued to run its business the same way,

and have incurred similar expenses including wages or drawings throughout the five-year period, and

this was accepted by Mr Muir QC for the appellant company. His contention however was that the

amount the appellant chose to pay Mr and Mrs Gillett was irrelevant, and that the consequences of

the breach of contract should be that the company should be put in the position of being paid

moneys that would have been earned under the contract, leaving it to deal with such moneys as it

considers appropriate. The answer to that contention is that if the contract had not been repudiated

the appellant company would have had to perform it, and in order to do so it would probably have

continued to remunerate Mr and Mrs Gillett at the same level. The normal method of assessment of

damages would place the appellant company in the same position as it would have been if the

contract had not been breached. That was what the learned Trial Judge did. Is there any factor

operating in the present case that makes the normal principles of assessment of damages
inapplicable?

The fact is that it was the company which made the contract, not Mr and Mrs Gillett.

Different legal consequences follow according to which party makes the contract. I agree with

Pincus JA that the tendency in Australia is against lifting the corporate veil, especially when the

parties who create it rely upon its legal existence for collateral benefits. There are no doubt cases

where the sole share-owner controller of a company may be treated as the true principal in a

transaction or where the acts of a company can be regarded as the acts of the owner-controller.

The present case is however not such a case, and it cannot be suggested that the company was the

alter ego of Mr and Mrs Gillett. If that had been so, a case could have been brought under which

Mr and Mrs Gillett sued as the genuine contracting party.

The case is therefore one where the plaintiff is the company, and it is the company's loss that

falls to be assessed. Had the company continued to pay the same level of salary to Mr and Mrs

Gillett, notwithstanding that there was no longer sufficient work for them to perform, its losses would

have commensurately increased, and it may have been able to bring such losses into account against

the respondent. I prefer not to express a concluded view on that point, as the answer would

depend upon a finding whether the company had reasonably mitigated its loss in the circumstances.

That is a question of fact (Payzu v. Saunders [1919] 2 K.B. 581, 588, 589) although statements

exist as to the way in which such a question may be approached (Banco de Portugal v. Waterlow

[1932] A.C. 452, 506; cf. McGregor on Damages 15th Ed. paras. 285 et seq., 311 et seq.)

Plainly payments to Mr and Mrs Gillett were discontinued because the company was short of money

and because it would have been thought unwise to generate tax liability on Mr and Mrs Gillett's

behalf by doing so.

Again, if the company at the time of making its contract with the respondent had incurred an

obligation to pay Mr and Mrs Gillett at a specified rate for the whole period of the contract with the

respondent, then that would have created a legal obligation on its part, and the cost of discharging

that obligation would be a part of the loss that it could prove against the respondent by reason for the respondent's breach of the contract. However, no doubt for sound commercial reasons, no such

obligation was created.

In the absence of some obligation of the kinds just discussed, the appellant company in my

view is in much the same situation as any other company. If it mitigates it loss by dismissing staff or

failing to employ persons it would otherwise employ, it simply does not suffer the damage. I may

say that I am in general agreement with the reasons that Pincus JA has written.

While the result is an unfortunate one from the composite view of the appellant company and

of Mr and Mrs Gillett, it is a consequence of the legal structure that was created for reasons which

were thought to be of overall advantage at the time. To introduce exceptions would I think create

uncertainty in the law and also perhaps jeopardise the advantages which currently follow from a

relatively strict adherence to the principle of separate corporate existence.

The appeal must be dismissed.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 54 of 1995

Brisbane

Before Pincus JA

Thomas J

Williams J

[Hadoplane Pty Ltd v. Edward Rushton Pty Ltd]

BETWEEN:

HADOPLANE PTY LTD

(Plaintiff) Appellant

AND:

EDWARD RUSHTON PTY LTD

(Defendant) Respondent

REASONS FOR JUDGMENT - GN WILLIAMS J

Judgment delivered 06/10/1995

The relevant findings of fact made by the learned trial
Judge (none of which was in any way challenged on the
appeal) can be summarised as follows:

1.   Mr and Mrs Gillett are the sole shareholders and directors of the appellant company. They are also employed by it and at material times were its only eomployees. Gillett has been at all material times an experienced loss adjuster.

2.   From about September 1985 the appellant and the respondent agreed that the appellant would provide Gillett's services to the respondent for reward. The terms of that arrangement are not relevant for present purposes.

3.   Late in 1986 and early in 1987 there were discussions between Gillett and Rae, a director of the respondent, concerning that agreement and the terms on which it should continue for the future.

4.   At meetings in January 1987 it was agreed that the appellant should receive $66,000 per annum for the services it provided to be paid monthly.

5.   A draft consultancy agreement between the appellant and the respondent was drawn up and at a meeting on 17 February 1987 Rae said that it "looked okay". At that meeting Gillett stated the appellant wanted a "long term tenure of five years".

6.   There was no contest at the trial that the following was agreed to between the parties:

(i)	That the appellant was to receive $66,000 by way of a salary package;
(ii)	That there would be a 10% bonus to be paid on net profits;
(iii)	That out of pocket expenses would be paid by the respondent; and
(iv)	That the salary amount would be subject to C.P.I. indexation.

7.   In about February 1987 there was an oral agreement reached between the parties, the terms of which were evidenced by the consultancy agreement which was not formally executed.

8.   Long term tenure was at all times envisaged by the respondent and five years was part of the arrangement between the appellant and the respondent.

9.   The conduct of the parties after the draft consultancy agreement was exchanged was such as to evidence an implied agreement to be bound by the terms thereof.

10.  The respondent wrongfully terminated the services of the appellant on or about 26 April 1989, such termination to be effective from 31 May 1989.

11.  The appellant was in terms of the contract entitled to a five year term as from January 1987.

In the action the appellant made a specific claim for monies due to it as at 31 May 1989, and also claimed damages for breach of contract (wrongful dismissal).

With respect to the claim for monies owing, the learned trial Judge awarded $9,134.67, made up of $2,117.37 for holiday pay, $6,286.16 for outstanding consultancy fees, and $731.14 for out of pocket expenses. It was conceded on the hearing of the appeal that the calculation of holiday pay made by the learned trial Judge involved an error of $300 in favour of the respondent. In the circumstances that should be allowed. In consequence the amount for holiday pay should be increased to $2,417.37 and the total of the money claim would therefore become $9,434.67.

At the trial the appellant led evidence supporting a finding that the damages suffered by the appellant in consequence of the wrongful termination of the contract was $143,834; that figure was arrived at after bringing into account in mitigation income actually earned since the wrongful dismissal. But the learned trial Judge, for reasons for which he gave, assessed damages in the sum of $25,103. It is against that assessment of damages that the appellant primarily appeals.

The approach adopted by the learned trial Judge, and his method of calculating damages, can be discerned from the reasons prepared by Pincus JA, which I have had the advantage of reading; in consequence it is not necessary for me to refer to those matters in any detail. The question is whether that approach was correct in law.

The principles relevant to the assessment of damages
for wrongful dismissal are derived from the common law and
have been regarded as settled for some time. The High Court
has but on a few occasions had to refer to them (Lucy v. The
Commonwealth (1923) 33 C.L.R. 229 at 238-9, 249-50 and 253;
Automatic Fire Sprinklers Pty Ltd v. Watson (1946) 72 C.L.R.
435 especially at 476; and Atlas Tiles Ltd v. Briers (1978)
144 C.L.R. 202 at 218-9, 223-4 and 243-4.) What is said in
those passages is, in my view, summarised by the treatment
of the question in McGregor on Damages (14th edition) at
635-6, paras. 933-4:

"The measure of damages for wrongful dismissal is prima facie the amount that the plaintiff would have earned had the employment continued according to contract subject to a deduction in respect of any amount accruing from any other employment which the plaintiff, in minimising damages, either had obtained or should reasonably have obtained.

The rule has crystallised anomalously in this form. It is not the general rule of the contract price less the market value of the plaintiff's services that applies; instead the prima facie measure of damages is the contract price, which is all the plaintiff need show. This is then subject to mitigation by the plaintiff who is obliged to place his services on the market, but the onus here is on the defendant to show that the plaintiff has or should have obtained an alternative employment. ... Basically, the amount that the plaintiff would have earned under the contract is the salary or the wages which the defendant had agreed to pay. In addition there may be benefits in kind, the value of which must also be taken into account, such as rent free residence, board and lodging, luncheon vouchers and the like, and also benefits under pension schemes. [On the other hand, expenses connected with the service that the plaintiff would have had to pay himself, and of which he is, therefore, relieved by the dismissal, must be deducted.]"

Undoubtedly one of the reasons why there are not more authorities dealing with the question of damages for wrongful dismissal is that the law has recognised that, generally speaking, a contract of employment may be terminated upon the giving of reasonable notice. In consequence it has been held that if such a contract has been unlawfully terminated, that is there has been wrongful dismissal, the employee's damages are limited to the period of notice specified in the agreement or the period regarded by the law as reasonable in the circumstances. In most instances that would be a period of a few weeks, and at the outside a few months. It is only senior executives on high salaries or persons contracted for a fixed term of years who are likely to obtain substantial damages for wrongful dismissal.

Most of the reported cases, and the discussion in text books, dealing with wrongful dismissal are predicated on the employee being an individual. But there is no reason in principle why the employee should not be a company (public or private) and there is no reason in principle why the measure of damages should be any different where that is the case. This is but a breach of contract of a particular type and, though as McGregor says one aspect of the principle has "crystallised anomalously", it should make no difference whether the contract of services was to be performed directly by a company or by an individual.

When in terms of the relevant contract the employee is a company, though the services in question will have to be performed by its servants or agents, the legal ramifications of the company being the contracting party cannot be ignored. Even where the servants or agents ultimately providing the services are the sole shareholders, directors, and employees of the private company, the legal realities cannot be ignored; the good must be taken with the bad. An illustration of that is provided by Boral Roof Tiles Ltd v. O'Brien, referred to in the reasons for judgment for Pincus JA.

However, it must also be remembered that there may be many and varied reasons behind a decision that a company should be the contracting party where the services will in fact be provided by the persons who are its sole shareholders, directors and employees. Most frequently in modern times reference is made in that context to the taxation advantages of so structuring a business. But the desirability, for example, of having limited liability may also be a critical factor. There may also be investment and superannuation advantages in structuring a business so that it is carried on by a private company rather than by the shareholders thereof.

It is also important, in my view, to remember that the Gilletts could not directly have sued the respondent on the contract between the appellant and the respondent. This is not a situation where third party rights were created of the type recognised by the reasoning of the High Court in

Trident General Insurance Co Ltd v. McNiece Bros Pty Ltd

(1988) 165 C.L.R. 107. One of the potential disadvantages to the Gilletts of using the appellant as the vehicle by which their services were provided to the respondent is that the only enforceable contractual relationship was that between the appellant and the respondent. Subject to questions of possible unjust enrichment (which need not be considered for present purposes) the Gilletts had no claim against the respondent, and were limited to claims against the appellant, the company under their control.

All of those considerations are of relevance, if not of importance, when considering the issues raised on this appeal.

The evidence does not make clear the basis upon which Mr and Mrs Gillett received money from the appellant. In the Profit and Loss Accounts there is reference to "salaries" and "superannuation" for the years ended 30 June 1988 and 30 June 1989; the total for salaries in each year was $46,800. In the first of those years superannuation amounted to $7,912 and in the second, $14,235. For the year ended 30 June 1990 salaries totalled $10,800 and superannuation $16,800. In relevant subsequent years there was a nil entry for each item. What is not clear is how and when the figure of $46,800, for example, was arrived at. It is not made clear whether that figure was provided for in some contract between the appellant and the Gilletts, or whether it was finally determined upon when the gross profit for the year made by the appellant was known. In the latter event it may well have been that some monies were payable regularly (say monthly) in advance. Though the evidence does not touch upon such matters the only inference that can be drawn from the unchallenged material is that the appellant could only remunerate the Gilletts if, at the end of each financial year, it had generated sufficient income from carrying on its business activities to enable it to do so. During the relevant period its sole business activity was the provision of services pursuant to the agreement referred to above with the respondent, and if income was not generated from that contract then no money could be paid to the Gilletts, whether or not the appellant was under some legal obligation to do so.

The real question to be decided in this case, in my view, is what should be categorised as an "expense" of the appellant in providing the services to the respondent of which it was relieved by the conduct of the respondent in wrongfully terminating the contract. That question can only be answered on the facts of the case; it is difficult to generalise because of the almost infinite variety of factual situations in which such a question may call to be answered.

Perhaps I can best answer that question by initially
distinguishing the facts of this case from other situations.
Assume a contract between two companies, A and B, in the

same terms as that between the parties to this appeal, and further assume that A (the company obliged to provide the services) does not at the time it entered into the agreement have any servants or agents capable of providing the necessary services. In other words, it would be obliged to enter into agreements with others in order to put itself in a position of meeting its contractual obligations; in so doing it would incur obligations (expenses) with respect to the agreement between itself and B. Assume that casual staff were engaged to provide the necessary services, and that they were to be paid on an hourly rate. If B wrongfully terminated the agreement then A would be obliged to terminate immediately its arrangement with the casuals and would be entitled to damages for the wrongful termination calculated in accordance with the principles referred to above. The first step in the calculation of those damages would be the determination of the amount which A would have earned if the contract had run its full term.

Then the question would have to be considered whether or not the wages which would have been paid to the casuals constituted an expense which A would have had to pay if it carried out its side of the bargain and therefore was an expenditure of which it was relieved by the wrongful dismissal; in other words should there be deducted from the amount payable under the contract between A and B the quantum of wages which would have been paid to the casuals if the contract had been completed. That would be a question to be answered on the particular circumstances of the case. On the basic facts outlined the correct conclusion would probably be that the wages payable to the casuals were such an expense. At the end of the financial year, before any question arose as to A's ability to pay any salary, wages, or dividend to its shareholders, such expenditure would have been incurred. That expenditure would, in my view, probably be categorised as an expense of which A was relieved and in consequence it would have to be deducted in the assessment of damages. The amount available for disbursement by A would be that earned in accordance with the contract minus those expenses, and that would also represent the proper quantum of damages.

The result would be the same, in my opinion, if A and B were individuals and not companies. If A, an individual, was employed to do work he was not capable of doing so that he was under an obligation to engage the services of C to carry out the work, on the wrongful determination by B of the contract with A, A's damages would be calculated by bringing into account the necessary outlays in providing the services of which he had been relieved.

Consider another example. Companies A and B enter into a contract in the same terms as that entered into here between the appellant and the respondent. Assume that A, the company in the position of the appellant, has numerous employees capable of providing services of the type required by the contract. Further assume that it has also entered into many contracts of similar type with other entities and that its employees are engaged on a fixed salary. In those circumstances it could not be said that any proportion of the money payable by B pursuant to its contract with A was an expense, being wages of one or more of the employees of A. The need to satisfy those wage demands exists independently of the contract between A and B and is not in any way increased thereby. If the contract between A and B proceeded to completion that would mean that A had in each relevant year a larger income which would probably generate a larger profit which could be disposed of as it saw fit. That greater profit could be applied in replacing capital items, or making investments, or paying higher dividends or bonuses to its directors, shareholders or employees, or could be retained as undistributed profits. Regardless of how A decided to deal with the money in question, if B wrongly terminated the contract it would be entitled, in the circumstances outlined, to recover what it would have earned under the contract between it and B without any deduction because it may have utilised or may have proposed to utilise those funds in one or other of the ways mentioned.

The examples I have considered to date merely highlight the fact that the measure of the loss flowing from the wrongful termination of a contract of employment will be dependent upon the facts of each particular case.

I now return to the facts of the case in question. It is true that the only business of the appellant at the material time was that of providing services pursuant to the contract with the respondent. It is further true that those services were, and were only intended to be, provided by the appellant through the agency of its sole directors, shareholders and employees, the Gilletts, and they were to receive as wages substantially the same amount as the appellant received from the respondent. The question is whether such monies paid by the appellant to those persons should properly be categorised as an expense of which it is relieved by the wrongful conduct of the respondent in terminating the agreement. The question is not without difficulty, but ultimately I have come to the conclusion that no such expense is involved here. The payment of any money to the Gilletts was only possible after it had received money from the respondent pursuant to the agreement, and such a payment involved a decision as to the disposal of money in fact received. That decision was one of the company (as distinct from the Gilletts) as to how money received from the respondent was to be distributed. There is no reason in principle why the appellant could not have made a decision to invest those monies, or to acquire a capital asset in order to improve the efficiency of the company's business, or to make a gift of some or all of it to a charity. The result of a decision by the appellant as to how money received pursuant to the contract should be disposed of cannot, in my view, be categorised as an expense in generating that income.

The differences between this case and the example above involving the engaging of casual employees do not, at first glance, appear all that great; but, in my view, they are significant. In that example the company would never be in a position to determine the disposition of the money (the gross profit) as it did in this case.

Though his views on the question of the taxability of damages did not ultimately prevail, some remarks of Barwick C.J. in Atlas Tiles Ltd v. Briers indicate the correct approach to a problem such as this; he said at 219:

"It is, in my opinion, quite fallacious in relation to damages for wrongful dismissal to ask the question what has the employee really lost, meaning thereby how much of what he would have been paid could he have kept for himself."

In the same case Jacobs J at 244 indicated that a strict approach should be taken to defendants who deliberately break a contract of employment and who must be taken to be aware of the consequences of such a breach. Such a defendant should not have the benefit, for example, of not having to pay proper damages because a particular business structure had been adopted by the innocent party.

In Atlas Tiles Ltd v. Briers at 222 Gibbs J considered that "to ignore tax altogether would be to assess damages on a basis that would be unreal and theoretical". A reading of the judgments in that case (one of wrongful dismissal) suggests that what the court was endeavouring to do was to arrive at what was fair compensation. In my view it would be grossly unfair and illogical to hold in a case such as this that the appellant had only lost its net profit after notionally continuing to pay wages to its sole directors, shareholders and employees.

Having again perused the judgments in Commonwealth v. Amann Aviation Pty Ltd (1991) 174 C.L.R. 64, there is nothing therein which causes me to alter any of the views expressed above. Indeed, the philosophy underlying the reasoning of Mason C.J. and Dawson J. at 81, Brennan J. at 102, and Deane J. at 116 would appear to support the proposition that the appellant should succeed in this case.

The appellant here is a separate entity to the Gilletts; it has rights against the respondent for breach of contract and it may have obligations with respect to the Gilletts. Those considerations must be kept separate. What the appellant has lost because of the wrongful termination of the contract of services is the sum of $143,834 which it could in turn appropriate as it saw fit, but in all probability pay it to the Gilletts by way of salary.

The accountants who were called to give evidence in support of the appellant's case calculated the loss a number of ways, and arrived at figures for the loss which were only a few thousand dollars apart. The amount I have referred is the lowest and that is the sum to which the appellant is entitled.

The plaintiff is therefore entitled to its money claim
of $9,434.67 and damages in the sum of $143,834, a total of

$153,268.67.

The learned trial Judge awarded interest on the amount
of his judgment at 12% per annum for a period of five years.
His judgement was given on 10 March 1995, and that means

that he allowed interest from 10 March 1990. In the circumstances the appellant should have an order that it recover interest from 10 March 1990 to the date of judgment of this Court at 12% per annum.

I would therefore allow the appeal, set aside the judgment of the District Court, and in lieu thereof order that there be judgment for the appellant in the sum of $153,268.67, with interest thereon at the rate of 12% per annum from 10 March 1990. Further order that the respondent pay the appellants taxed costs, including reserved costs, of the trial and of this appeal.