Harry Goudias P/L v Akakios
[2006] SADC 69
•26 June 2006
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
HARRY GOUDIAS P/L v AKAKIOS
[2006] SADC 69
Reasons of His Honour Judge Burley
26 June 2006
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - ILLEGAL AND VOID CONTRACTS - CONTRACTS CONTRARY TO PUBLIC POLICY - GENERAL PRINCIPLES
Agreements for provision of loans entered into - intended to defraud revenue - constituting alleged tax avoidance scheme - deception integral to structure of agreement - illegality not appearing on face of agreements - avoidance of revenue obligations only reasonable explanation of agreement - whether public policy required the court to withhold its assistance in enforcing the illegal contracts.
Fair Trading Act 1987 (SA) ss3(3), 56, 84(2); Trade Practices Act 1974 (Cth) ss52, 75B, 82; Supreme Court Rules 1987 (SA) r53.03, referred to.
Brook v The Flinders University (1987) 47 SASR 119; Nicholls v Stanton (1915) 15 SR NSW 337; Scott v Brown [1892] 2 QB 724; Wardley Australia Ltd v The State of Western Australia (1992) 175 CLR 514; Emanuele v Hedley & Ors unreported, Federal Court of Australia, Wilcox, Miles & Nicholson JJ. 19 June 1998, applied.
Iannotti v Corsara (1983) 36 SASR 127; Weston and Ors v Beaufils and Ors (1994) 122 ALR 240, distinguished.
Gollan v Nugent (1988) 166 CLR 18; Holdcroft & Anor v Market Garden Produce Pty Ltd & Ors [2000] QCA 396; Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd (1988) ATPR 40-853; Mullett v Gabriel (1989) 52 SASR 330; Re Thomas (1842) 2 QB 851; Sykes v Stratton [1972] 1 NSWLR 145; Cheshire and Fifoot's Law of Contract (6th edition); Miller's Annotated Trade Practices Act (26th edition); Donovan & Phillips; Modern Contract of Guarantee (3rd edition), considered.
HARRY GOUDIAS P/L v AKAKIOS
[2006] SADC 69
In this matter the plaintiff pursues a number of causes of action against the defendant:
·Breach of s52 of the Trade Practices Act (Cth) and s56 of the Fair Trading Act (SA):
· Misrepresentation
· Breach of duty of care
· Breach of fiduciary duty
Insofar as the plaintiff relies upon breaches of the Trade Practices Act and the Fair Trading Act, reliance is respectively placed on the secondary offender provisions of those Acts, namely s75B of the Trade Practices Act and s3(3) of the Fair Trading Act.
Finally the plaintiff alleges that a contract of guarantee was entered into between the plaintiff and the defendant.
The Statement of Claim
These causes of action were said to have arisen out of dealings between the parties and a company called Magura Pty Ltd (Magura) in mid to late 1998 when three loans were made by the plaintiff to Magura as follows:
$180,000 on about 27 August 1998
$200,000 on about 29 September 1998
$100,000 on about 16 October 1998
It is common ground that the sum of $50,000 has been repaid to the plaintiff. Whether other repayments were made will depend on what findings I am able to make based on the evidence of Ms Helen Weir, called by the plaintiff (T377-388).
The incorporation of the plaintiff and Magura is admitted. It is also admitted that Magura engaged in trade or commerce for the purposes of the Trade Practices Act and the Fair Trading Act.
At all material times the defendant was the plaintiff’s accountant. That is not disputed. The plaintiff also alleges that the defendant was the plaintiff’s financial adviser. That is in dispute.
In paragraph 4 of the Statement of Claim the plaintiff asserts that the defendant owed the plaintiff a duty of care by virtue of his position as its accountant. That is not disputed by the defendant. It is also asserted that a duty of care was owed by the defendant in his capacity as financial adviser. That is in dispute. The plaintiff pleads that the defendant owed the plaintiff a “duty of care at common law”. That assertion adds nothing to the previous plea relating to a duty of care.
The plaintiff contends that the defendant owed the plaintiff a fiduciary duty. That is disputed by the defendant.
The plaintiff alleges that in about August 1998 the defendant respectively represented and gave advice to the plaintiff that it should lend money to Magura through the defendant, that it would be a secure investment, that the defendant would guarantee repayment and that he had sufficient financial capacity to do so.
From the evidence given at trial by Mr Halambas Paleologoudias, a director of the plaintiff, representations and advice of this sort were said respectively to have been made and given in a conversation between the defendant and him in about August 1998. (Mr Paleologoudias is commonly known as “Harry Paul” and I shall use that name in these reasons.) The defendant, both in his defence and in his evidence, denied that he ever made such statements to Harry Paul.
The plaintiff next asserts in the Statement of Claim that the three loans were made at the times stated. This is not in dispute. I should mention that much of Harry Paul’s evidence consisted of assertions by him that the three loans totalling $480,000 were made to the defendant and not to Magura. This clearly contradicts the effect of the Statement of Claim but, having reviewed Harry Paul’s evidence, the contradiction is more apparent than real. It is clear that he equated the defendant with Magura and, despite having said in earlier evidence that the loans were made to the defendant, he had no difficulty in agreeing that the loans were actually made to Magura. Importantly, it was not contended by the defendant that the plaintiff’s pleaded claim was defective because Harry Paul, in evidence, sometimes asserted that the three loans were made to the defendant rather than Magura.
The Defence
In his defence (paragraph 5), the defendant said that in August 1998, Harry Paul telephoned the defendant and advised him that he wished to invest some money in Magura. The defendant pleaded that he advised Harry Paul that he could not handle the investment but would arrange for Harry Paul to meet with Mr Con Patniotis, a director of Magura. The defendant’s evidence differed from these assertions. He said that Harry Paul merely telephoned him and asked him to introduce him to Mr Patniotis.
The defendant further pleaded (and said in evidence) that all negotiations and discussions regarding the proposed investment took place between Harry Paul and Mr Patniotis and that he was not a party to those negotiations.
The defendant’s primary defence is a factual one: he denies that he made the representations and gave the advice as alleged in the Statement of Claim. His evidence at the trial was to the effect that, in about August 1998, he was contacted by Harry Paul who requested him to arrange an introduction with Mr Patniotis. This he did and when the two met, he withdrew. He said that he took no part in the negotiations between Harry Paul and Mr Patniotis. He specifically stated that he did not at any time guarantee the repayment of any of the three loans the subject of this action.
The defendant relied on other defences. He pleaded that if the relevant representations were made (which he denied) they were made by Odyssey Holdings Pty Ltd trading as Nicholas Akakios & Co. He pleaded that the representations were not made by him in his personal capacity nor in his capacity as a director of Magura.
It is not in dispute that the at the relevant times Mr Akakios carried on his accountancy practice by means of the company Odyssey Holdings Pty Ltd which traded under the name of Nicholas Akakios & Co. It is not clear whether this aspect of the defence was pursued by the defendant because the defendant did no more than call evidence that he traded through Odyssey Holdings Pty Ltd. It would not, in any event, assist him insofar as it might be found that, if he did make some or all of the representations contended for by the plaintiff, he did so either in his personal capacity or as the agent of Magura Pty Ltd.
The defendant also pleaded (paragraph 10.3) that if the representations were made, they were not made in trade or commerce within the meaning of the Trade Practices Act or the Fair Trading Act. There is no substance to this aspect of the defence and it was not pursued at trial.
Various defences to the plaintiff’s claim under the Misrepresentation Act are set out at paragraph 11 of the Defence. Whether any of those defences have been made out will depend upon findings of fact. The same comment applies to the defences raised in paragraphs 12 and 13 of the Defence, in particular to the defence to the causes of action based on s75B of the Trade Practices Act and s3(3) of the Fair Trading Act.
In paragraph 13 of the Defence, the defendant contended, among other things, that any loss suffered by the plaintiff arising from the loans to Magura was caused by reliance upon advice given or representations made by Harry Paul’s brother, Kon Paul and/or Mr Patniotis, and that even if the alleged representations were made, the plaintiff did not rely upon them when deciding to make the loans the subject of these proceedings. Whether or not these defences are made out will depend upon findings of fact.
Claim under guarantee – limitation point
As well as denying the entering into of a contract of guarantee as alleged by the plaintiff, the defendant says that in any event, the bringing of such an action based on the alleged guarantee is out of time. The defendant has asserted, and the plaintiff accepts, that the relevant period of limitation is six years.
It is convenient to deal with this aspect of the defence at this point in my reasons. If it is assumed that a cause of action based on a guarantee accrues when a demand for payment is made under the guarantee, the defendant argued that the earliest time at which a demand might be said to have been made under the guarantee was late November 1998. Although I think that this contention is factually incorrect, it may nevertheless be assumed for the purposes of the argument in relation to the limitation point that a demand was made no earlier than late 1998. The next relevant time is the date of the commencement of the proceedings. The summons was issued on 17 August 2004, ie, within six years from late 1998. The application for leave to amend the Statement of Claim was made at the commencement of trial, namely 10 May 2006. On that day, leave was granted to the plaintiff to add paragraph 15 of the Statement of Claim. This set out the plaintiff’s claim based on an alleged contract of guarantee.
If it is assumed that the amendment which introduced the cause of action relates back to the date of the issue of the proceedings, the claim based on the alleged guarantee has clearly been brought within the relevant six year time limit. Mr Robert Sallis, counsel for the defendant, argued that the amendment did not relate back to the date of the issue of the proceedings. His submission was not clear, but I understood him to have contended that the amendment only became effective from the day that leave was granted. He submitted that because the plaintiff did not specifically rely upon r53.03 when the application for leave to amend was made, the amendment could not be said to relate back to the original date of the issue of the proceedings. In my opinion, the plaintiff did not need specifically to identify r53.03 as the source of power to grant the amendment sought. In any event the relation back of the amendment applies quite independently of r53.03.
The relevant parts of r53.03 are as follows:
53.03 Where an application for leave to amend is made after any relevant period of limitation has expired, the court may, nevertheless, grant leave, on such terms as it thinks fit:
(a) …
(b) …
(c) to add or substitute a new cause of action, if the new cause of action arises out of the same, or substantially the same, facts as the original cause of action.
The plaintiff’s application to amend came within paragraph (c).
In Brook v The Flinders University (1987) 47 SASR 119, von Doussa J, having referred to extensions of time under the Limitations of Actions Act, said (at 122):
On the other hand, r53.03 is primarily intended to provide for a different situation. By its terms, it provides for cases where proceedings have been issued, and in their original form were issued within time, but the period of limitation has since expired. If an amendment sought under r53.03 is granted, the rule contemplates that the amendment will relate back to the date on which the proceedings were first instituted (unless the court otherwise orders as a term imposed on the grant of leave). The newly named party, the new capacity in which a party brings or opposes the proceeding, or the new cause of action, introduced by the amendment will operate as if originally included in the proceedings when first instituted. The defendant is thereby deprived of the limitation defence which would have been open if the plaintiff had been required to issue fresh proceedings. (My underlining)
His Honour later said (at 124 et seq) that, where a cause of action was added which would otherwise be statute-barred, a trade-off between the respective rights of the parties might be achieved by imposing a condition that the amendment operate from a time other (and later) than the date of commencement of the proceedings. However, these remarks were made in relation to the general power to amend (r55.01(c)) as opposed to the power to amend pursuant to r53.03, in respect of which normally no condition would be imposed (at 124). (See also Mullett v Gabriel (1989) 52 SASR 331.)
In any event, prior to the grant of leave to amend to include the cause of action based on an alleged contract of guarantee, no application was made by either party for any term to be imposed as a condition of the amendment which had the effect of setting a date for the operation of the amendment other than the date of issue of the proceedings. In my opinion, in light of the authorities referred to, the defendant cannot now contend that the amendment granted by me operates from any other date but the date of the issue of the proceedings. I therefore hold that the cause of action based on a contract of guarantee, as alleged in paragraph 15 of the amended Statement of Claim, was commenced within the six year limitation period because, when leave to amend was granted, the amendment related back to the date of issue of the proceedings. To that extent, the defence of the defendant based on the contention that the alleged cause of action was commenced out of time must fail.
The defence relating to the limitation period is set out in subparagraph 15.5 of the Defence. The other subparagraphs of paragraph 15 constitute a denial of the entry into a contract of guarantee by the defendant. This aspect of the defence will depend on findings of fact.
Trade Practices Act – Fair Trading Act – limitation period defences
In paragraph 16 of the Defence, the defendant pleaded that the causes of action based on the Trade Practices Act and the Fair Trading Act were commenced out of time because a three year period of limitation applied. This defence was touched upon during the course of the trial but not developed in the final addresses. Two issues arise in relation to this defence: first, what is the relevant period of limitation for each of the two causes of action; and, second, when did the causes of action accrue so that the starting point of the period of limitation might be ascertained.
The period of limitation in relation to the cause of action based on the Fair Trading Act is and always has been a period of three years (s84(2)). That period may be extended by an application under the relevant provisions of the Limitations of Actions Act but no such application has been made in these proceedings.
The period of limitation in relation to proceedings brought pursuant to s82 of the Trade Practices Act was, until 13 July 2004, a period of three years. Thereafter it was a period of six years. The amendment changing the period of limitation from three years to six years had some retrospective effect: cf Schedule 1, item 21 of the Trade Practices Amendment Act (No 1)2001 which is as follows:
(1)The amendment made by item 20 applies in relation to conduct engaged in, on or after the commencement of that item.
(2)The amendment made item 20 also applies in relation to conduct engaged in before the commencement of that item, but only if the period that:
(a) relates to the conduct; and
(b) applied under subsection 82(2) of the Trade Practices Act 1974 before the commencement of that item;
had not ended when that item commenced.
The cause of action relied upon by the plaintiff will only attract a six year limitation period if the three year period of limitation which originally applied had not expired by 13 July 2004 when Schedule 1 commenced its operation. This means that the cause of action relied upon by the plaintiff must have accrued no earlier than 13 July 2001. For reasons which will appear, I do not consider that the causes of action under the Trade Practices Act could be said to have accrued as late as 13 July 2001 and consequently the relevant period of limitation is three years.
I turn now to the question of when the causes of action accrued. Many of the cases which enlighten this sometimes difficult area of the law come from the Law of Tort. It is now well settled that in many respects the statutory causes of action contained in the Trade Practices Act and the Fair Trading Act are similar to, if not the same as, claims in tort. I would add that the cases on the point apply with equal force to the causes of action arising under the Trade Practices Act and to those arising out the Fair Trading Act.
In Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd (1988) ATPR 40-853, Pincus J had occasion to deal with the question of when a cause of action accrued in relation to causes of action under the Trade Practices Act. That case involved misleading conduct which induced the applicants to enter into a lease. Although it was apparent that losses would occur from time to time after the execution of the lease, his Honour held that the cause of action accrued when the lease was entered into. Thus the learned author of Miller’s Annotated Trade Practices Act (26th edition) said (at 841):
Where an applicant claiming relief on the basis of misleading conduct inducing her or him to enter into obligations under a contract points to a series of losses of various kinds flowing from the transaction, there is not a cause of action relating to each kind of loss. The cause of action accrues when the applicant enters into the relevant transaction. …
In my opinion, that principle applies to the present case and consequently the causes of action based on the Trade Practices Act and the Fair Trading Act must be taken to have accrued upon the entry into the three loan agreements between August and October 1998.
Even if such an approach is not applicable, and the loss which arises is said to be contingent, the cause of action accrues when payment is required to be made: cf Wardley Australia Ltd v The State of Western Australia (1992) 175 CLR 514. In this case the last day for payment of the third loan was 18 December 1998 (Clause 3 of Exhibit P3 – p5). Given that these proceedings were not commenced until 17 August 2004 and given, as I have already concluded, that the relevant time limit is three years, the causes of action based on the Trade Practices Act and the Fair Trading Act, whatever their factual bases may otherwise be, are clearly out of time and therefore cannot succeed.
Other causes of action
That leaves for consideration the causes of action based on alleged misrepresentation, breach of duty of care, breach of fiduciary duty and the alleged contract of guarantee. The defences to these causes of action are largely factual in the sense that the defendant denies ever having had the relevant conversations with Harry Paul. As has been seen, there is a fundamental difference in the factual cases presented by the plaintiff and the defendant. If it becomes necessary to attempt to resolve those differences, it will inevitably mean that I will have to give consideration to preferring the evidence of one witness against the evidence of others. It has so far been possible to determine the plaintiff’s claims based on the Trade Practices Act and the Fair Trading Act without having to resolve disputed questions of fact. There is, in addition, a basis upon which the remaining causes of action might be decided without having to resolve disputed questions of fact.
Illegality
Towards the end of the trial, on 26 May 2006, the defendant sought and obtained leave to plead illegality. Paragraph 20 of the Amended Defence, which sets out the plaintiff’s position in relation to illegality, is as follows:
20 The defendant says that:
20.1 The three oral agreements for each of the loans were made for an illegal purpose and/or against public policy in that they were made for the purpose of the plaintiff deriving interest which it would not declare as income to the Australian Taxation Office in breach of s161 of the Income Tax Assessment Act 1936 as amended and the Taxation Administration Act 1953 as amended and constituting tax fraud and evasion;
20.2 The three written agreements for each of the loans were made for an illegal purpose and/or against public policy in that they were made for the purpose of the plaintiff deriving interest which it would not declare as income to the Australian Taxation Office in breach of s161 of the Income Tax Assessment Act 1936 as amended and the Taxation Administration Act 1953 as amended and constituting tax fraud and evasion;
20.3 The three oral agreements and the three written agreements for each of the loans are therefore illegal or tainted with illegality and/or against public policy and unenforceable;
20.4 The guarantee (which is denied) in relation to the three oral agreements and the three written agreements for each of the loans and each of the other causes of action pleaded by the plaintiff against the defendant are therefore illegal or tainted with illegality and/or against public policy and are unenforceable; and
20.5 The court should not aid and abet the illegality or act against public policy and should therefore dismiss the plaintiff’s claim.
In paragraph 20 the defendant has drawn the distinction between an oral agreement for a loan and a written agreement for a loan. According to Mr Patniotis, on each of the three occasions when the plaintiff through Harry Paul agreed to lend money to Magura, there was a discussion between him and Harry Paul the result of which, according to Mr Patniotis, was that Harry Paul, on behalf of the plaintiff, agreed to lend Magura money. Mr Patniotis said that he then prepared a written agreement setting out the terms of what had been agreed apart from the question of interest. It was his evidence that for the first loan of $180,000 Harry Paul required interest payments to be made half in cash and half by cheque. He said that the cash component was “mavra” which all parties agreed is the Greek word for “black money”, namely money that is required to be but is not disclosed as income to the Australian Taxation Office. Mr Patniotis also said that for the second and third loans, Mr Paul demanded that interest be paid entirely in cash or “mavra”.
The evidence of Harry Paul is not quite so clear. Initially in his evidence, I understood him to resist the concept that interest would be paid either partly or totally in cash so as to facilitate the non-disclosure of such moneys to the income tax authorities. I was uncertain about some of his evidence because I could not always be fully confident that he understood the questions that were put to him. However, as his evidence progressed, it became clear that he admitted that interest payments were made in cash and that that cash constituted “mavra” (eg, see T217/32, 218/22, 225/27). He denied that the contracts of loan were negotiated with Mr Patniotis; it was his evidence that such negotiations took place between him and the defendant. Nevertheless, it is clear that whatever version of facts is accepted, part of the plaintiff’s purpose in granting the loans was to obtain interest payments partly or wholly in cash which would not be disclosed to the taxation authorities. The contracts of loan, whether written or oral, included an illegal purpose, namely a conspiracy to defraud the revenue. Such an offence is contemplated by s135.4 of the Commonwealth Criminal Code. It is the same type of conduct (held to be illegal) dealt with by the Queensland Court of Appeal in Holdcroft & Anor v Market Garden Produce Pty Ltd & Ors [2000] QCA 396, an unreported decision delivered on 29 September 2000; see also Gioginis v Kastrati (1988) 49 SASR 371 (FC) at 376.
There was performance of the illegal aspects of the loan requirements. Ms Weir’s unchallenged evidence regarding her records of receipt of interest reveals payments of interest in cash. Exhibit P5 is the best evidence of the interest payments which were actually paid. Pages 2 to 5 of that exhibit constitute the record kept by Ms Weir. Apart from Harry Paul, she was the only employee of the plaintiff who worked in the office at the factory situated at Port Adelaide. She carried out secretarial, bookkeeping and office management duties. Her record discloses that on 27 September 1998 the sum of $2,700 was paid by way of interest in respect of the loan of $180,000. Half of the payment was made in cash and the other half by cheque. The payment represented interest calculated at 1.5% per month or 18% per annum.
On 27 October 1998 a further sum of $2,700, this time entirely in cash, was paid by way of interest in respect of the loan of $180,000.
Only one interest payment was received in respect of the loan in the sum of $200,000. This was a cash payment of $3,000 made on 30 October 1998. It was consistent with an interest rate of 1.5% per month or 18% per annum.
Only one interest payment was made in respect of the loan for $100,000. This consisted of a payment of $1,500 in cash on 16 November 1998. This again represented an interest rate of 1.5% per month or 18% per annum. Those payments are consistent with Mr Patniotis’ evidence that initially interest payments were to be made half in cash and half by cheque and that after the first loan the interest payments were to be made entirely in cash.
Ms Weir also gave evidence that she had a recollection that other payments were made at a later stage in respect of which she either kept no record or, if such a record was kept, that it is now no longer available. Her recollection was uncertain to the extent that I think it would be unsafe to rely upon this aspect of her evidence.
My view as to illegality is strengthened by one aspect of Mr Patniotis’ evidence which I am inclined to accept in preference to Harry Paul’s evidence on the topic. He said that when he prepared the written loan agreements, he included an interest provision which reflected the oral agreement reached relating to the payment of interest. For the first loan of $180,000, he included an interest rate of 0.75% which in the agreement was stated to be “per annum” but which was clearly intended to be per month. He said that he did this because the agreed interest rate was 1.5% per month but, because half of the interest was to be paid in cash, he reduced the interest rate in the written agreement by half to reflect that position. For the second and third agreement, where he said that Harry Paul required all of the interest to be paid in cash, he included the term in the written loan agreement that no interest would be paid. This aspect of his evidence is, in my view, consistent with the documentary evidence (the three loan agreements) and, unlike a lot of the other evidence, inherently credible. I prefer this evidence where it conflicts with the evidence of Harry Paul. I find that the plaintiff, through Harry Paul, agreed with Magura, through Mr Patniotis, that, initially, part of the interest and, later, the whole of the interest, would be paid in “mavra”. I am unable to decide whether such a deal was offered by Mr Patniotis or required by Harry Paul, but it is clear that such an agreement was reached.
In light of the above analysis, it has been possible to make findings as to the existence of illegality without having to resolve the other major conflicts in the evidence adduced by the respective parties. In my opinion, the illegality identified by me was so pervasive that it must taint any contract that was entered into between the parties, including a contract of guarantee, if one was entered into as alleged by the plaintiff.
The effect of illegality
I turn now to the question of what effect the illegality has on the three loan contracts. In the sixth Australian edition of Cheshire and Fifoot’s Law of Contract the learned authors refer to a contract to defraud the revenue: paragraph [1126] at 483. The learned authors state:
There is a clear infringement of the doctrine of public policy if it is apparent, either directly or from the terms of a contract or indirectly from other circumstances, that the design of one or both of the parties is to defraud the revenue, whether national or local. In Miller v Kalinkski [(1945) 62 TLR 85], for instance, the terms of the contract of employment were that the employee should receive a salary of £10 weekly and repayment of his expenses, but that he should be entitled to include in his expenses account the amount of income tax due in respect of his weekly salary.
In an action brought by him to recover ten weeks of arrears of salary and £21.2s.8d for expenses it was divulged that about £17 of this latter sum represented his liability for income tax. It was held that the contract was illegal since it constituted a fraud upon the revenue. No action lay to recover even arrears of salary, for in such a case the illegal stipulation is not severable from the lawful agreement to pay the salary: Napier v National Business Agency Ltd [1951] 2 All ER 264; Warburton v Birkenhead & Co Ltd (1951) 102 LJ 52.
In my opinion, the principle referred to in those cases applies to this case with the result that the plaintiff has never been in a position to enforce the loan agreements against Magura.
What is the position with the alleged contract of guarantee? In the 3rd edition of the Modern Contract of Guarantee, Donovan and Phillips, the learned authors state (at 263):
The general principle applicable to contracts of guarantee is that the guarantor’s liability should be co-extensive with that of the principal. It follows that, if no principal contract is concluded, the guarantor’s liability never arises. As Lord Selbourne said in Lakeman v Mountstephen [(1874) LR 7 HL 17],
until there is a principal debtor there can be no suretyship. Nor can a man guarantee anyone else’s debt unless there is a debt of some of the person to be guaranteed.
It follows from the above reasoning that even if the plaintiff were able to establish a factual basis for its claim under the alleged guarantee, the plaintiff cannot succeed in enforcing such a guarantee.
The remaining causes of action are based on alleged breaches of common law and fiduciary duty and misrepresentation. Again these claims may be decided without the need to resolve the fundamental conflicts in the evidence respectively adduced by the parties. Just as illegality precludes the enforcement of a contract, if the alleged breaches of duty, whether common law or fiduciary, induced the plaintiff to enter into a contract which he knew was for an illegal purpose, he cannot recover damages. The same principle applies where the claim is based on an alleged misrepresentation said to have induced the plaintiff to have entered into a contract: (cf Nicholls v Stanton (1915) 15 SR NSW 337.)
For each of these remaining causes of action, the plaintiff must prove and rely upon the illegal loan contracts in order to make out the cause of action. In Nicholls v Stanton, Pring J referred (at 340) to the judgment of A L Smith J in Scott v Brown [1892] 2 QB where the latter said (at 734):
If a plaintiff cannot maintain a cause of action without showing as part of such cause of action, that he has been guilty of illegality, then the courts will not assist him in his cause of action.
Pring J applied this principle to the case before him which involved fraudulent misrepresentations inducing the plaintiff to enter into an illegal contract. In my opinion, the principle applies to the alleged causes of actions based on misrepresentation and breach of common law and fiduciary duty. In each instance the alleged loan contracts must be proved and relied upon to make out the cause of action.
More modern authority to this effect is to be found in the decision of the Full Court of the Federal Court in Emanuele v Hedley and Ors, (unreported Federal Court of Australia, Wilcox, Miles and Nicholson JJ, 19 June 1998). In that case the plaintiff, Mr Emanuele, sought damages for alleged abuse of process, misfeasance in public office, negligent or fraudulent misrepresentation, breach of duty including statutory duties and for alleged negligent or intentional infliction of harm. The damages were sought in respect of an alleged negligent or fraudulent misrepresentation which in turn was based on an allegation that the defendant falsely represented that he was prepared to accept a bribe. The civil proceedings came after criminal proceedings in which the plaintiff was prosecuted for bribery. He was initially convicted but on appeal the criminal proceedings were permanently stayed, apparently on the basis that the plaintiff had been subjected to entrapment by the prosecuting authorities. It is to be noted that he was not acquitted of the offence. The Full Court confirmed the existence of the principle that a person may not recover damages in tort where the claim is based upon the illegal acts of the plaintiff. Reference was made to a number of cases (at 7 or BC11) including Gollan v Nugent (1988) 166 CLR 18 where, “five members of the High Court accepted, as a general principle, that the Court will not lend its aid to a person who founded his action on an illegal act: see per Brennan J at 27 and per Deane, Dawson, Toohey and Gaudron JJ at 46. They made clear the plaintiff’s illegal conduct must be central to his or her claim …”.
Mr Riggall, counsel for the plaintiff, provided written submissions on the question of illegality. I have considered those submissions in relation to the conclusions that I have reached on the topic of illegality. In my opinion, nothing in the written submissions requires the conclusions different from those set out above. In deference to his submissions, I propose briefly to deal with the main points raised by him.
He submitted that the loans totalling $480,000 were not for an illegal purpose. I disagree with this conclusion. Although the loan of moneys between the parties by itself is not illegal and although the payment of interest by cash is not in itself illegal, there was a clearly acknowledged purpose behind the payment of either some or all of the interest payments in cash because they were described as “mavra”. It does not matter whether or not the suggestion for payments of interest in cash came from Harry Paul, the defendant or Mr Patniotis. The contracting parties were the plaintiff and Magura and the plaintiff through Mr Harry Paul, and Magura, through either the defendant or Mr Patniotis, were aware and agreed to interest payments in cash for the purpose of facilitating non-disclosure of interest payments as income by the plaintiff.
Mr Riggall submitted that the plaintiff does not have to rely upon illegality in order to make out the causes of action based on breach of duty and misrepresentation. I disagree with this submission. Proof of the conversations giving rise to a breach of duty or to misrepresentation by themselves do not constitute a cause of action giving rise to damages. The tort is not completed until damage is suffered and the damage is suffered by the entry into the loan agreements. Consequently, it is necessary for the plaintiff to rely upon loan agreements which were for an avowedly illegal purpose.
It was submitted that if there was a relevant illegality it could be severed. In my view, for the reasons already given, the illegality was so pervasive that it did not fall within those classes of cases where illegality occurred but in such a way that it could be separated from the conduct relied upon by the plaintiff to found the cause of action.
It was also submitted that the ex turpi causa principle applied only to contract. In a technical sense, that may be correct but, as the cases cited by me above reveal, it does not mean that someone who founds a cause of action in tort based on illegal conduct is able to recover damages.
In his written submission Mr Riggall contended that where the defendant was a fiduciary, illegality on the part of the plaintiff would not prevent recovery from the defendant. I think there is an answer to that contention based on the findings of fact that I have made. I have previously referred to the evidence of Mr Patniotis, and, in preferring his evidence to that given by Harry Paul, I found that the question of interest and payment of interest in whole or in part in cash was something which was negotiated between Harry Paul and Mr Patniotis. Neither Mr Patniotis nor Magura could be said to have been in a position of fiduciary to the plaintiff. That being the case, the exception that sometimes applies enabling a plaintiff guilty of illegal conduct, or conduct that is contrary to public policy, to sue notwithstanding that conduct, does not apply because no relevant fiduciary relationship exists.
Even if I am wrong in that view, it does not mean that the plaintiff could recover damages. In my view, the reasoning of Helsham J in Sykes v Stratton [1972] 1 NSWLR 145, applies. He said (at 163A):
I shall turn at once to what is always stated in the books as being an exception to the operation of illegality, and that is the situation which may pertain when a fiduciary relationship exists between the parties: see eg per Knox CJ in George v Greater Adelaide Land Development Co Ltd. The basis of the exception is said to lie in the difference in the position of the parties which may exist where there is a fiduciary relationship, so that if the parties are not in pari delicto as a result of this relationship, then some relaxation of the principles relating to the effect of illegality may be permitted. But as was said by Gibbs J, a then judge of the Federal Court of Bankruptcy, Re Ferguson; ex parte E N Thorne & Co Pty Ltd (in liq):
However, there are very few reported cases in which the parity of the delictum has been held to be excluded by the existence of a fiduciary relationship, although Re Thomas, where a solicitor was held not to be entitled to rely on the illegality of an arrangement with his client, may be such a case, and the limits of this exception are no means firmly established. I shall return to Re Thomas.
But neither the researches of counsel nor myself can find any case which really explains the so-called exception. Nor is there any clear decision upon whether, whatever exception a fiduciary relationship raises, it can be availed of in a case of a transaction prohibited by statute.
I have decided that any exception that may arise out of the situation involving a fiduciary relationship does not apply here. Both parties, plaintiff and defendant, were in fact in pari delicto; each knew as much as the other about the factual or possible illegality of the whole deal, and, as I have said, the plaintiff was under no misapprehension as to what he was doing.
(Citations omitted)
In my opinion that reasoning and the conclusions expressed apply with equal force to this case.
The plaintiff also raised the question of whether or not there was sufficient evidence of illegality either as to purpose or to performance. For the reasons already given, I consider that there is abundant evidence that the purpose of the agreement was illegal to the extent that it facilitated the non-disclosure of income by the plaintiff to the Australian Taxation Office. As to the performance of that illegal purpose, I have already found that cash payments of interest were made. I accept that there is no evidence one way or the other as to whether or not there was an actual non-disclosure by the plaintiff to the Australian Taxation Office for the relevant financial year. However, on my understanding of the authorities, the finding of illegality in the circumstances of this case do not depend upon performance. The illegal conduct consists of the conspiracy between the plaintiff and Magura which I have found they engaged in at the time the loans were granted.
Mr Riggall relied heavily on the decision of Hill J in Western and Ors v Beaufils and Ors (1994) 122 ALR 240. That was a case where the plaintiff, through his solicitor, had transferred property (which had been acquired by him with undeclared income) to other entities in order to hide their true ownership from the taxation authorities. The plaintiff was held entitled to obtain declaratory relief and an account of profits and other relief notwithstanding the illegality.
Hill J dealt extensively with the question of illegality. He referred to three exceptions to the principle that a person may not rely upon his own illegal conduct to found a cause of action against another. The three exceptions referred to were:
(1) The transaction has been induced by the fraud of one of the parties or there has been a breach of fiduciary duty by one of the parties;
(2) Where the illegal purpose has not been carried into effect; and
(3) Where the illegality is merely collateral or extrinsic to the dealing which formed the foundation of the contract.
In my opinion that case, as was submitted by Mr Sallis in his written submissions in reply, is to be distinguished from the present case. For the reasons given above, no relevant fiduciary relationship arose, the illegal conduct consists of the conspiracy between the contracting parties and, in addition, as I have already stated, the illegal conduct by the parties was so pervasive that it could not be said to be collateral or extrinsic.
The other cases relied upon by the plaintiff related largely to recovery of property as opposed to cash and as such can be distinguished.
It was submitted by Mr Riggall that there was no evidence that there was any illegality associated with the payment of interest. This flies in the face of the evidence of the plaintiff who admitted that the interest payments by cash constituted “mavra”. The fact that Mr Patniotis may have kept a full record of payments made by Magura is not to the point. The money was “black money” in the hands of the plaintiff. On the plaintiff’s own case, no formal record was kept of the receipt of that money. The only record was one kept by Ms Weir which, I find, was not provided to the defendant for the purposes of the preparation of taxation returns.
The case of Iannotti v Corsaro (1983) 36 SASR 127 relied upon by Mr Riggall, is to be distinguished because the Full Court there dealt with a document not having been duly stamped.
I turn now to those aspects of the proceedings which depend on factual findings for their result. The plaintiff called two witnesses: Harry Paul and Ms Helen Weir. The defendant gave evidence and called Mr Patniotis and Mr Russell Temple. I shall deal first of all, briefly, with the evidence of Ms Weir and then Mr Temple.
The principal part of Ms Weir’s evidence was that she had a conversation with the defendant in which she said she asked him whether or not it was safe for the loans to be made. She said that the defendant replied that they were safe and that he would guarantee the loans. She also said that something was said about security for the loans in the form of a car, or a hotel or some other property. The defendant denied that he made such statements. Ms Weir was cross-examined repetitively on this subject. Having been cross-examined once, she had to be recalled to be cross-examined again so that parts of the defendant’s case could be put to her. It is not surprising that in those circumstances she became confused. Nevertheless, it is her recollection that such a conversation took place and I have no reason to doubt her. She appeared to me to be endeavouring to tell the truth. Specifically, she did not colour her answers either to support the plaintiff’s case or to cast doubt on the defendant’s case. She appeared to me to have been a loyal and conscientious employee of the plaintiff over a number of years who was worthy of the trust of the plaintiff’s principal, Harry Paul. She brought this history into the courtroom with her and as such, she was an impressive witness, notwithstanding the doubt she sometimes expressed about her own recollection of events. It seems to me that her self-doubt in the witness box was not a product of any inherent unreliability in her evidence; rather, it resulted from repetitive cross examination about, in particular, whether or not there had been a conversation between her and the defendant as she alleged.
The fact that ultimately she had to accept that the occasion of the conversation was at a different time from that referred to in her early evidence, does not detract from her reliability as a witness. She admitted, when confronted with relevant documentation that her earlier belief that the conversations took place at about the time of the second loan must have been wrong, but she was nevertheless unshaken that the conversation did take place. I accept Ms Weir as an honest and reliable witness.
Mr Temple gave evidence about a meeting convened at the Newmarket Hotel in about mid 2001. It was common ground that most, if not all, of the moneys advanced by the plaintiff to Magura were in turn advanced by Magura either to Mr Temple or to one of his companies. He was at the time involved in costly litigation and, according to his evidence, most of the moneys advanced by Magura were put towards legal fees.
It is common ground that this meeting was called to give the plaintiff and either the plaintiff’s brother, Kon Paul, or one of his companies, the opportunity to recoup the loan moneys that they had respectively made to Magura and which were in turn on-lent to Mr Temple or one of his companies. There were in attendance Mr Temple, Harry Paul, Kon Paul, the defendant, Mr Patniotis and Mr Purcell, a solicitor. Harry Paul, the defendant and Mr Patniotis all gave evidence about this meeting. They all agreed that Mr Temple put a proposal to those present the effect of which was that they would be given the opportunity to acquire an interest in the Newmarket Hotel and the Heaven Nightclub. In the case of creditors of Magura who wished to require a share, payment for the proposed purchase price be (in part) by way of crediting the creditor with an amount equivalent to the indebtedness to Magura. Whatever enthusiasm may have been expressed for the proposal at the meeting, it was not proceeded with.
It seems to me that the only relevance of the evidence relating to that meeting was to confirm that Kon Paul or his company had lent moneys to Magura prior to the plaintiff lending money to Magura and also in an indirect way to identify the existence of a hotel as being possible security for one or more of the loans. This ties up with Ms Weir’s reference to property including a hotel being referred to by the defendant in her conversation with him regarding the loans. This connection is one of the reasons why I have preferred the evidence of Ms Weir where it conflicts with that given by the defendant.
I found the defendant to be an unsatisfactory witness. In his evidence he was at pains to distance himself from the plaintiff’s contention that he acted as the plaintiff’s financial adviser in relation to the entry into of the loan agreements. This in itself is not surprising, given that his primary defence was a factual one as I have previously pointed out. However, his evidence had the flavour of being exactly tailored to achieve this purpose, to the point of contrivance. For example, he said that his initial involvement was merely to drive Mr Patniotis to the plaintiff’s factory in order to meet Mr Paul. He did not know what the purpose of the requested meeting was. He said that he took Mr Patniotis to the plaintiff’s factory and then left the two to discuss whatever business arose alone. He said that it was not until he was driving Mr Patniotis home that mention was made by Mr Patniotis of Harry Paul’s desire to lend money to Magura. Whilst it is possible that the idea for lending money to Magura came from Harry Paul rather than from the defendant, it seems quite improbable that the defendant would not have been aware, either directly or indirectly, of Harry Paul’s purpose behind his desire to meet Mr Patniotis.
Prior to August 1998, the defendant had “introduced” a number of persons, some of whom were clients, to Mr Patniotis which resulted in loans being made to those persons to Magura. On two occasions, the defendant gave guarantees of loans made by Kon Paul to Magura either personally or by his company. By August 1998 the defendant was a director of Magura. Whilst I accept that he became a director at the invitation of Mr Patniotis, I do not accept that his function as director was limited to being available to sign documents raised in the course of Magura’s business. There is no doubt that the defendant was and remains an experienced accountant and he must have been aware of his obligations as a director went far beyond the limited ambit deposed to by both the defendant and Mr Patniotis. Thus, it seems to me, the defendant was at least disingenuous when giving evidence in relation to issues which may have rendered him liable in damages to the plaintiff.
I have similar reservations about the evidence of Mr Patniotis. Like both the defendant and Harry Paul, I do not think that he told the whole story. Although I think that his evidence was less unreliable than that given by Harry Paul and the defendant, I am by no means satisfied that unconditional reliance may be placed upon his evidence. He was particularly unconvincing in his evidence in relation to the role played by the defendant both in relation to the loans advanced by the plaintiff and the loans advanced by others who had been introduced by the defendant.
It was Mr Patniotis’ evidence that Harry Paul insisted upon interest payments being made either partly or totally in “black money”. Prior to giving evidence he was informed of his rights in relation to declining to answer questions on the ground that the answer may tend to incriminate him. He was also given the opportunity to obtain legal advice in that regard which, he informed me, he did. Nevertheless, it was only on one occasion during the course of his somewhat protracted evidence, that he declined to answer questions. On that occasion he did so, I suspect, not so much because he thought that he might incriminate himself, but rather he was not prepared to continue to answer repetitious questions put to him in cross-examination.
Mr Patniotis said on a number of occasions that he was there (at the trial) to tell the truth and I am prepared to accept that, to some degree, that was a correct statement. However, I doubt that he was there to tell the whole truth. That doubt is based upon his previous association with the defendant and the fact that, because of guarantees given by the defendant in respect of other loans, the defendant suffered a loss of several hundred thousand dollars. It is clear that Mr Patniotis felt at least in part responsible for those losses. Whilst I accept that it is not open to me to find that Mr Patniotis told deliberate falsehoods during the course of his evidence, his evidence also (but to a lesser degree) seemed to be directed towards the defendant’s theme of non-involvement.
I should at this stage refer to Jones v Dunkel (1959) 101 CLR 298, cited and relied upon by Mr Sallis. He submitted that a crucial issue in this case was whether or not Harry Paul had been induced to make loans to Magura by his brother Kon Paul rather than by the defendant. This was put to Harry Paul during the course of his evidence and he denied that it was his brother who suggested that he lend moneys to Magura.
It is clear from the evidence of Harry Paul, the defendant and Mr Patniotis (and I so find) that Kon Paul or one of his companies, had lent moneys to Magura prior to the three loans made by the plaintiff, the subject of these proceedings. Had the plaintiff attempted to establish, by calling Kon Paul, that he did not advise his brother Harry to make loans to Magura, important evidence may have been before the court which may well have assisted in making findings as to who it was who caused the plaintiff to make the loans to Magura. Equally, however, had the defendant called Kon Paul, an attempt to adduce evidence that it was he (Kon Paul) who encouraged Harry Paul to make the loans through the plaintiff company, such evidence may well have been equally useful.
In Jones v Dunkel, the High Court dealt with the question of what inferences might be drawn “when a person presumably able to put the true complexion on the facts relied upon as the ground for [a particular] inference, has not been called as a witness … and the evidence provides no sufficient explanation of [the witnesses’] absence”: per Kitto J at 308. The plaintiff was a widow who claimed damages in respect of the death of her husband in a motor vehicle accident. The deceased was the driver of one of two trucks which collided. The other driver made a statement in writing briefly describing how the accident occurred but he did not give evidence at the trial.
Kitto J said (at 308):
The jury should at least have been told that it would be proper for them to conclude that if Hegedus [the other driver] had gone into the witness box, his evidence would not have assisted the defendant by throwing doubt on the correctness of the inference which, as I have explained, I consider was open on the plaintiff’s evidence.
The inference referred to was a possible inference that the vehicle driven by Mr Hegedus was on the wrong side of the road.
Mr Sallis submitted that, because the plaintiff failed to call Kon Paul as a witness, I should draw the inference that had he been called, he would not have supported the plaintiff’s case that it was the defendant who advised him to make the loans to Magura. The submission, put in that way, reveals that this is a case which is not on all fours with Jones v Dunkel. The onus was never upon the plaintiff to prove the negative. The contention that it was Kon Paul who advised his brother to make the loans was part of the defendant’s defence (paragraph 13) and consequently, the onus of proving that contention was upon the defendant. For this reason, I am not prepared to draw any inference adverse to the plaintiff’s case based on a contention that the plaintiff should have called Kon Paul.
I have earlier in these reasons referred to a number of grounds for the dismissal of these proceedings without having to resolve the fundamental conflicts in the evidence. Given the reservations that I have about the reliability of the evidence of the three main witnesses, I have come to view that it is neither possible nor appropriate to attempt to resolve the conflicts between the parties. I say “not possible” because I have a real doubt about the reliability of the evidence of each of the three major witnesses. It would be guess-work on my part to attempt to choose between them. I say “not appropriate” because, in view of the conclusions that I have reached as to the dismissal of the proceedings anyway, this is one of those cases where, even if it had been possible to resolve the factual differences, it was not necessary to do so.
I mention, finally, the submission by Mr Riggall that even if the defendant had not suggested or advised Mr Paul to make the loans, once he became aware of them he should have intervened because he was the plaintiff’s financial adviser and had a duty to warn Mr Paul about the inadvisability of the loans. I repeat now what I said to counsel during the course of argument, namely, that that was not the case that was pleaded and that the plaintiff cannot have it both ways. The case proceeded on a different series of contentions made by the plaintiff, namely that it was the defendant who advised Harry Paul to make the loans. It was not open to the plaintiff, in the closing stages of the trial, to rely upon a factual basis which was fundamentally different from that which was originally pleaded.
For these reasons the plaintiff’s claim will be dismissed. I will hear the parties as to costs.
Given my conclusions as to illegality, I propose to refer this matter to the Commonwealth Director of Public Prosecutions: cf Giorginis v Kastrati (supra). I make the following orders:
1. I direct the Registrar to forward a copy of these reasons to the Commonwealth Director of Public Prosecutions.
2. I direct the Registrar to retain the exhibits and the documents marked for identification until further order.
3. Liberty to any interested party to apply for the return of exhibits and documents marked for identification after the expiration of a period of three months from the date of publication of these reasons.
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