Harry Goudias Pty Ltd v Akakios - [2007] SASC 81

SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
HARRY GOUDIAS PTY LTD v AKAKIOS
[2007] SASC 81
Judgment of The Full Court
(The Honourable Chief Justice Doyle, The Honourable Justice Gray and The Honourable Justice David)
8 March 2007
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - ILLEGAL AND VOID CONTRACTS
Appeal from a decision of a District Court Judge – Judge rejected claims solely on the basis that the plaintiff entered into an agreement with the defendant for an illegal purpose – whether the finding of illegality could be sustained – whether a finding of illegality necessarily precludes relief – Held: the defendant did not plead the defence of illegality with adequate particularity and specificity – the Judge did not apply an appropriate onus of proof when considering the defence of illegality – a finding of illegality is not, by itself, fatal to a claim for relief – the Judge did not undertake a proper investigation of the relationship between the parties alleged to have been involved in illegality – appeal allowed – matter remitted for retrial before a differently constituted Court.
Trade Practices Act 1975 (Cth) s 52; Fair Trading Act 1987 (SA) s 56; Income Tax Assessment Act 1936 (Cth) s 161; Commonwealth Criminal Code s 135.4; Marriage Act 1928 (Vic) , referred to.
Holdcroft & Anor v Market Garden Produce Pty Ltd & Ors [2001] 2 Qd R 381; Gioginis v Kastrati (1988) 49 SASR 371; Nelson v Nelson (1995) 184 CLR 538; Fitzgerald v FJ Leonhardt (1997) 189 CLR 215; Middleton v O’Neill (1943) 43 SR (NSW) 178; Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liquidation) (2003) 214 CLR 514; Knowles v Fuller (1947) 48 SR (NSW) 243; Briginshaw v Briginshaw (1938) 60 CLR 336; Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170, considered.

HARRY GOUDIAS PTY LTD v AKAKIOS
[2007] SASC 81
Full Court: Doyle CJ, Gray and David JJ

DOYLE CJ: I would allow the appeal, set aside the judgment dismissing the plaintiff’s claims, and order that the plaintiff’s claims for payment pursuant to a guarantee, and for damages for negligence, breach of fiduciary duty and misrepresentation be remitted to the District Court for re-hearing by another judge.
There is no reason to interfere with the Judge’s decision dismissing the plaintiff’s claims under the Trade Practices Act and the Fair Trading Act.
I agree with the substance of the reasons of Gray J.
I agree with him that there are two broad reasons for the decision to allow the appeal.
The Judge’s finding that the contracts of loan were made for an illegal purpose should be set aside. The finding goes beyond the Defence as amended. There is a significant difference between the plea of illegality, and the finding made by the Judge. A finding that the defence as pleaded is made out might well have different consequences from the finding made by the Judge.
Apart from that, as best I can tell the trial proceeded on the basis that there was no issue of illegality by way of defence until almost the completion of the hearing, when the Defence was amended. On a number of occasions, during the cross-examination of Mr Paul, questions bearing on the issue of illegality were put to him. Some were disallowed. Others were allowed on the basis that they went only to the question of credit. Some were not objected to, and passed without comment. This approach to the evidence given by Mr Paul, which evidence is of central importance on the question of illegality, resulted in an unsatisfactory situation. The Judge’s finding is made on the basis of cross-examination that was, by and large, limited to the issue of credit. Even late in the cross-examination of Mr Paul this was the basis on which some questions bearing on the matter of illegality were justified. There is no indication that, when Mr Paul was giving his evidence, the plaintiff knew that it was facing an allegation of the kind the Judge found was made out. Granted, counsel for the plaintiff made only a formal objection when the defendant applied to amend his Defence, late in the trial. But the fact remains that the record was in an unsatisfactory state, and for this the parties must accept responsibility.
In effect, I consider that the trial has miscarried. A decision, central to the ultimate outcome, has been made on a basis that was not pleaded, and on the basis of evidence given for a limited purpose and at a time when no plea of illegality of any kind had been placed on the record. In those circumstances one cannot be satisfied that the plaintiff has had an opportunity fairly to put its case.
I agree also with Gray J that until findings are made about the part played by Mr Akakios and Mr Patniotis, and as to the extent to which they were aware of any unlawful purpose and participated in it, one cannot say that the plaintiff’s claims must necessarily fail because of illegality linked to or arising out of the loan agreements. The difficulty for this Court is that without findings as to the part played by these persons, it is difficult to test the conclusion that illegality arising out of or linked to the loan agreements means that claims against a person not a party to the loans agreements, in negligence, for misrepresentation and for breach of fiduciary duty must fail. I am not persuaded that these claims must fail. However, because I am satisfied that the trial has miscarried, there is no need to consider this issue any further.
It is for those reasons that I agree with the orders proposed by Gray J.
GRAY J
This is an appeal from a decision of a District Court Judge rejecting claims for reasons of illegality.
Background
Between August and October 1998, the plaintiff and appellant, Harry Goudias Pty Ltd, entered into three loan agreements with Magura Pty Ltd (“Magura”) - on 27 August in the amount of $180,000; on 29 September a further $200,000; and on 16 October a further $100,000. The natural person “standing behind” the plaintiff was Haralambos Paleologoudias, known as Harry Paul.
The defendant and respondent, Nicholas Akakios, was the plaintiff’s accountant and a director of Magura. Constantinos Patniotis was a co-director of Magura with the defendant.
Magura was liquidated on 26 June 2001. Only $50,000 of the total loan of $480,000 had been repaid to the plaintiff.
The plaintiff sought damages for breaches of section 52 of the Trade Practices Act1975 (Cth) and section 56 of the Fair Trading Act1987 (SA), misrepresentation, breach of duty of care, and breach of fiduciary duty. The plaintiff also alleged that the defendant guaranteed repayment of the loans.
The plaintiff alleged that the defendant, as well as being its accountant was also its financial adviser. The fact that the defendant was a director of Magura was not disclosed to the plaintiff.
The statutory claims were dismissed as statute barred and were not pursued on appeal. The trial Judge dismissed the remaining claims on the basis that each of the loan agreements was entered into for an illegal purpose. The illegal purpose, according to the defendant’s plea, was to “derive interest which it would not declare as income ... in breach of section 161 of the Income Tax Assessment Act 1936 (Cth)”.
The trial Judge accepted one witness as credible and reliable. Referring to Helen Weir, an office administrator and bookkeeper employed by the plaintiff, the Judge concluded:[1]
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.
Otherwise the Judge had reservations about the evidence of Mr Paul, the defendant and Mr Patniotis.[2]
[1] Harry Goudias Pty Ltd v Akakios [2006] SADC 69 at [71].
[2] Harry Goudias Pty Ltd v Akakios [2006] SADC 69 at [76], [78-[80].
The trial Judge took the view that he did not need to resolve whether the plaintiff had otherwise made out its claims:[3]
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.
[emphasis added]
The Judge concluded that the illegality was of such a nature that it was unnecessary to reach conclusions with respect to the other issues in the case.[4]
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.
[emphasis added]
[3] Harry Goudias Pty Ltd v Akakios [2006] SADC 69 at [36].
[4] Harry Goudias Pty Ltd v Akakios [2006] SADC 69 at [46].
The effect of the trial Judge taking this view was that his approach was restricted. The case was decided on the discrete issue of illegality. As the Judge was satisfied that the defence of illegality would defeat any claim, he did not resolve any other issue arising on the plaintiff’s claims.
There was a danger in the approach taken by the trial Judge. The failure to make relevant findings may preclude a Judge from deciding on the consequences that should follow from a finding of illegality. For example, in the present case, it was not known whether any attempt had been made to evade the payment of income tax. Other examples of relevant considerations are discussed later in these reasons.
The trial Judge concluded that there was a conspiracy to defraud the Commissioner of Taxation - in particular, a conspiracy contrary to the terms of section 135.4 of the Commonwealth Criminal Code.[5] The Judge found the conspiracy was between the plaintiff through Mr Paul, and Magura, through either the defendant or Mr Patniotis:[6]
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”. 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 s 135.4 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.
[5] The Commonwealth Criminal Code is schedule 2 of the Criminal Code Act 1995 (Cth).
[6] Harry Goudias Pty Ltd v Akakios [2006] SADC 69 at [39].
The Judge made the following further finding in relation to illegality:[7]
[Counsel for the plaintiff] 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.
[7] Harry Goudias Pty Ltd v Akakios [2006] SADC 69 at [56].
These findings involved the conclusion that at least two of the three individuals involved – the persons behind the plaintiff and Magura – were involved in the illegality.
Section 135.4 relevantly provides:
Obtaining a gain
(1)     A person is guilty of an offence if:
(a)     the person conspires with another person with the intention of dishonestly obtaining a gain from a third person; and
(b)     the third person is a Commonwealth entity.
Penalty:     Imprisonment for 10 years.
...
Causing a loss
(3)     A person is guilty of an offence if:
(a)     the person conspires with another person with the intention of dishonestly causing a loss to a third person; and
(b)     the third person is a Commonwealth entity.
Penalty:     Imprisonment for 10 years.
...
(5)     A person is guilty of an offence if:
(a)     the person conspires with another person to dishonestly cause a loss, or to dishonestly cause a risk of loss, to a third person; and
(b)     the first-mentioned person knows or believes that the loss will occur or that there is a substantial risk of the loss occurring; and
(c)     the third person is a Commonwealth entity.
Penalty:     Imprisonment for 10 years.
...
(9)     For a person to be guilty of an offence against this section:
(a)     the person must have entered into an agreement with one or more other persons; and
(b)     the person and at least one other party to the agreement must have intended to do the thing pursuant to the agreement; and
(c)     the person or at least one other party to the agreement must have committed an overt act pursuant to the agreement.
(10)    A person may be found guilty of an offence against this section even if:
(a)     obtaining the gain, causing the loss, causing the risk of loss, or influencing the Commonwealth public official, as the case may be, is impossible; or
(b)     the only other party to the agreement is a body corporate; or
(c)     each other party to the agreement is a person who is not criminally responsible; or
(d)     subject to subsection (11), all other parties to the agreement have been acquitted of the offence.
...
(12)A person cannot be found guilty of an offence against this section if, before the commission of an overt act pursuant to the agreement, the person:
(a)     withdrew from the agreement; and
(b)     took all reasonable steps to prevent the doing of the thing.
Appeal to this Court
The plaintiff submitted in this Court that the finding of illegality could not be sustained. The allegation that the plaintiff conspired with others to defraud the revenue was not pleaded or fairly or adequately put to relevant witnesses. It was further complained that a Briginshaw[8] onus should have been applied. It was finally contended that the decision in relation to illegality and its consequences was contrary to settled Australian authority - Nelson v Nelson,[9] Fitzgerald v FJ Leonhardt.[10]
[8] Briginshaw v Briginshaw (1938) 60 CLR 336.
[9] Nelson v Nelson (1995) 184 CLR 538.
[10] Fitzgerald v FJ Leonhardt (1997) 189 CLR 215.
Illegality
The finding of illegality cannot be sustained. The defendant did not plead the defence of illegality with adequate particularity and specificity. The Judge did not apply an appropriate onus of proof when considering the defence of illegality.
On 29 May 2006, after the conclusion of evidence at the trial, the defendant filed a Third Further Amended Defence to plead:
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 s 161 of the Income Tax Assessment Act 1936 as amended and the Taxation Administration Act 1953 as amended and constituting tax fraud or evasion;
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 s 161 of the Income Tax Assessment Act 1936 as amended and the Taxation Administration Act 1953 as amended and constituting tax fraud or evasion;
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;
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 unenforceable; and
The court should not aid and abet the illegality or act against public policy and should therefore dismiss the plaintiff’s claim.

It is to be observed that this plea did not assert the illegality found by the trial Judge – a finding of conspiracy to defraud.[11]
[11] Harry Goudias Pty Ltd v Akakios [2006] SADC 69 at [39].
A party seeking to raise illegality should do so with particularity. Allegations of illegality and fraud must be pleaded clearly, specifically and with detailed particulars.[12] However, a late amendment may be allowed provided a genuine justiciable issue arises, when the party has adequate notice to allow the opportunity to adduce evidence on relevant matters.[13]
[12] Middleton v O’Neill (1943) 43 SR (NSW) 178 at 183-185. See also Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liquidation) (2003) 214 CLR 514 at [38].
[13] Knowles v Fuller (1947) 48 SR (NSW) 243.
The defendant’s plea did not allege a conspiracy, did not allege that any party other than the plaintiff was involved in the illegality, and did not provide, with any particularity, the material facts from which it was said that a conspiracy was established or was to be inferred. No attention appears to have been given to which particular offence under section 135.4 was alleged. No attention appears to have been given to ss 135.4(9) and 135.4(10).
The pleading was not made with sufficient specificity to support a finding that the appellant had engaged in a conspiracy to commit fraud. The plea did not allege any conspiracy to commit fraud.
The plea of the illegality was not made until the conclusion of the evidence. Until that time the Judge had ruled that illegality was not an issue in the case and had rejected attempts to introduce evidence of illegality for that reason. A review of the transcript reveals that in the course of a lengthy cross-examination of Mr Paul, the Judge consistently refused to allow questions on the topic of illegality for the reasons that illegality was not a pleaded issue. However, almost at the conclusion of cross-examination the Judge did permit limited questions on the topic of illegality. However, this was only on the basis that the questions went to credit.
A detailed review of the cross-examination of Mr Paul and Mr Patniotis discloses that, in the context of cross examination as to credit, it was put that the loan transactions were constructed in a way that would allow interest to be paid predominantly in cash. Both witnesses acknowledged that interest was to be paid predominantly in cash. Admissions that this was to evade the payment of income tax were less clear.
The review of the transcript, however, does disclose that a case of a conspiracy between the plaintiff and Magura, reached through Mr Paul, the defendant or Mr Patniotis, was not the subject of cross-examination. It is evident from that review that the question of a conspiracy to defraud the revenue was not explored.
The unsatisfactory state of affairs was reached where the application to plead illegality was only formally opposed and all parties proceeded as though the evidence that had been led was sufficient to allow the plea to be determined. No application was made to recall witnesses or to re-open. It was against this background that the Judge made his findings. Those findings as earlier observed relate to serious criminal conduct that had not been pleaded and that had only been, at best, superficially addressed in the course of the evidence.
Where an allegation of criminal conduct is advanced in a civil case, stricter proof than a mere balance of probabilities is required to satisfy a court of the allegation.
Briginshaw involved a petition for divorce under the Marriage Act 1928 (Vic) on the grounds of adultery. The High Court held that while a court or tribunal did not need to satisfy itself beyond reasonable doubt of adultery, an allegation of this nature did require a higher degree of satisfaction than otherwise may ordinarily be required in meeting the civil onus. Dixon J appositely stated:[14]
The truth is that, when the law requires the proof of any fact, the tribunal must feel an actual persuasion of its occurrence or existence before it can be found. It cannot be found as a result of a mere mechanical comparison of probabilities independently of any belief in its reality. No doubt an opinion that a state of facts exists may be held according to indefinite gradations of certainty; and this has led to attempts to define exactly the certainty required by the law for various purposes. Fortunately, however, at common law no third standard of persuasion was definitely developed. Except upon criminal issues to be proved by the prosecution, it is enough that the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal. But reasonable satisfaction is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matters "reasonable satisfaction" should not be produced by inexact proofs, indefinite testimony, or indirect inferences.
…
This does not mean that some standard of persuasion is fixed intermediate between the satisfaction beyond reasonable doubt required upon a criminal inquest and the reasonable satisfaction which in a civil issue may, not must, be based on a preponderance of probability. It means that the nature of the issue necessarily affects the process by which reasonable satisfaction is attained. When, in a civil proceeding, a question arises whether a crime has been committed, the standard of persuasion is, according to the better opinion, the same as upon other civil issues. … But, consistently with this opinion, weight is given to the presumption of innocence and exactness of proof is expected.
[14] Briginshaw v Briginshaw (1938) 60 CLR 336 at 361-363.
In Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd,[15] Mason CJ, Brennan, Deane and Gaudron JJ observed:[16]
[T]he strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what it is sought to prove. Thus, authoritative statements have often been made to the effect that clear or cogent or strict proof is necessary “where so serious a matter as fraud is to be found”.
[15] Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170.
[16] Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170 at 171 (footnotes omitted).
In the present case, the issue of illegality as finally determined by the trial Judge was very serious. It involved the crime of conspiracy to defraud. The illegality pleaded also raised a serious matter, namely the evasion of revenue. In these circumstances, both the seriousness of the allegation and the consequences flowing from an adverse finding are considerations that affect the level to which the trial Judge had to be satisfied as to his findings. The Judge did not address the need for what has sometimes been called “a heightened standard of proof”. In particular, on a significant matter the Judge simply spoke of the simple preference of one body of evidence against another.
Counsel for the defendant suggested that although the Judge made no express reference to the need for a heightened level of satisfaction, it was evident that the Judge had been careful in his approach and had in fact applied a “heightened onus”. Further, it was said that a review of the evidence discloses that the evidence of illegality was overwhelming. These submissions should be rejected. The Judge found the principal witnesses to be unsatisfactory and reached his conclusion on a significant matter with respect to the unpleaded conspiracy to defraud through the simple preference of one witness against another. This approach was incorrect and compounded the failure of the defendant to properly raise, plead or particularise the defence of illegality.
In the above circumstances, the finding of illegality should be set aside and the issue retried.
The Judge’s Consideration of the Law Relating to Illegality
The trial Judge also erred in holding that the plaintiff’s claim must necessarily fail due to his finding that the loan agreement was entered into for an illegal purpose.
The trial Judge observed:[17]
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.
…
It follows … 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.
... 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.
[17] Harry Goudias Pty Ltd v Akakios [2006] SADC 69 at [46] and [50]-[51].
At the outset of this discussion it is important to recall that the trial Judge concluded that the loans of moneys between the parties was not illegal and that the payment of interest in cash was not illegal. The suggested illegality lay in the possible use of these contractual arrangements. It is also important to note that the plaintiff sought relief both in contract, tort, and equity from a person who was not a direct party to the contracts of loans.
An early statement of the general principle of the defence of illegality can be found in the following dictum by Lord Mansfield in Holman v Johnson:[18]
The objection, that a contract is immoral or illegal as between plaintiff and defendant, sounds at all times very ill in the mouth of the defendant. It is not for his sake, however, that the objection is ever allowed; but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, by accident, if I may so say. The principle of public policy is this; ex dolo malo non oritur actio. No Court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff’s own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the Court says he has no right to be assisted. It is upon that ground the Court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff. So if the plaintiff and defendant were to change sides, and the defendant was to bring his action against the plaintiff, the latter would then have the advantage of it; for where both are equally in fault, potior est conditio defedentis.
Holman involved a contract for sale of tea in Dunkirk. The plaintiff knew that the defendant intended to illegally smuggle the tea into England. But the original contract for sale involved no illegality; it was only the defendant’s intended use which was illegal. On that ground Lord Mansfield, with whom the three other Judges concurred, held that the plaintiff was entitled to recover.
[18] Holman v Johnson (1775) 1 Cowp 341 at 343 [98 ER 1120 at 1121].
In Nelson v Nelson counsel for the respondent cited Tinsley v Milligan[19] as authority for the proposition that the general principle formulated in Holman had hardened into a fixed rule that he who has committed iniquity shall not have equity; and what was required to invoke the maxim was no more than that the alleged misconduct had an immediate and necessary relation to the equity sued for. The High Court in Nelson, however, declined to follow Tinsley. Referring to the dictum of Lord Mansfield in Holman, McHugh J noted:[20]
The principle contained in this dictum applies in both law and equity. But it is subject to exceptions which allow relief to be granted despite the presence of illegality. First, the courts will not refuse relief where the claimant was ignorant or mistaken as to the factual circumstances which render an agreement or arrangement illegal. Second, the courts will not refuse relief where the statutory scheme rendering a contract or arrangement illegal was enacted for the benefit of a class of which the claimant is a member. Third, the courts will not refuse relief where an illegal agreement was induced by the defendant’s fraud, oppression or undue influence. Fourth, the courts will not refuse relief where the illegal purpose has not been carried into effect.
[19] Tinsley v Milligan [1994] 1 AC 340.
[20] Nelson v Nelson (1995) 184 CLR 538 at 604-605 (footnotes omitted).
In holding that illegality, by itself, is not necessarily sufficient to preclude a court from enforcing a contract, McHugh J observed:[21]
Accordingly, in my opinion, even if a case does not come within one of the four exceptions to the Holman dictum to which I have referred, courts should not refuse to enforce legal or equitable rights simply because they arose out of or were associated with an unlawful purpose unless: (a) the statute discloses an intention that those rights should be unenforceable in all circumstances; or (b)(i) the sanction of refusing to enforce those rights is not disproportionate to the seriousness of the unlawful conduct; (ii) the imposition of the sanction is necessary, having regard to the terms of the statute, to protect its objects or policies; and (iii) the statute does not disclose an intention that the sanctions and remedies contained in the statute are to be the only legal consequences of a breach of the statute or the frustration of its policies.
[21] Nelson v Nelson (1995) 184 CLR 538 at 613.
These passages were cited with approval in the joint judgment of Gummow and McHugh JJ in Fitzgerald v F J Leonhardt Pty Ltd. Their Honours stated:[22]
A case may come within one of the accepted exceptions or qualifications to Holman v Johnson. As indicated above, these are set forth, with examples from authority, in the following passage from the judgment of McHugh J in Nelson v Nelson:
“First, the courts will not refuse relief where the claimant was ignorant or mistaken as to the factual circumstances which render an agreement or arrangement illegal. Second, the courts will not refuse relief where the statutory scheme rendering a contract or arrangement illegal was enacted for the benefit of a class of which the claimant is a member. Third, the courts will not refuse relief where an illegal agreement was induced by the defendant’s fraud, oppression or undue influence. Fourth, the courts will not refuse relief where the illegal purpose has not been carried into effect.”
Even if the case does not come within one of those exceptions, the courts should not refuse to enforce contractual rights arising under a contract, merely because the contract is associated with or in furtherance of an illegal purpose, where the contract was not made in breach of a statutory prohibition upon its formation or upon the doing of a particular act essential to the performance of the contract or otherwise making unlawful the manner in which the contract is performed. Rather, the policy of the law should accord with the principles set out by McHugh J in Nelson v Nelson.
[22] Fitzgerald v F J Leonhardt (1997) 189 CLR 215 at 229-230 (footnotes omitted).
Kirby J was of a similar view:[23]
[23] Fitzgerald v F J Leonhardt (1997) 189 CLR 215 at 248-250 (footnotes omitted).
The decision of this Court in Yango rejects the proposition that any prohibited conduct, involved directly or indirectly in the performance of a contract sued upon, denies to the parties the facility of the process of the courts. Whatever may be the position in England following the decision of the House of Lords in Tinsley v Milligan, in Australia it must be accepted, from decisions of this Court, that the rule against enforcement is not inflexible.
Clearly it should not be so. It would be absurd if a trivial breach of a statutory provision constituting illegality, connected in some way with a contract or contracting parties, could be held to justify the total withdrawal of the facilities of the courts. It would be doubly absurd if the courts closed their doors to a party seeking to enforce its contractual rights without having regard to the degree of that party's transgression, the deliberateness or otherwise of its breach of the law and its state of mind generally relevant to the illegality. Similarly, it would be absurd if a court were permitted, or required, to consider the refusal of relief without careful regard to the relationship between the prohibited conduct and the impugned contract. Thus, different considerations may exist where the contractual rights being enforced arise directly from the illegality, as distinct from those which arise only incidentally or peripherally. It is one thing for courts to respond with understandable disfavour and reluctance to attempts to involve them and their processes in an inappropriate and unseemly way effectively in the advancement of illegality and wrong-doing. It is another to invoke a broad rule of so-called “public policy” which slams the doors of the court in the face of a person whose illegality may be minor, technical, innocent, lacking in seriousness and wholly incidental or peripheral to a contract which that person is seeking to enforce.
Considerations such as these led McHugh J in Nelson v Nelson to explore the ways in which a broad judicial discretion to withhold relief, the grant of which would affront “the public conscience”, could be given greater certainty of content. His Honour suggested that such a sanction would have to be proportionate to the seriousness of the illegality involved and not disproportionate to the seriousness of the breach. It would have to further the purpose of the statute and not impose a sanction for unlawful conduct beyond that which Parliament has expressly condoned. McHugh J proposed the following general propositions:
“[C]ourts should not refuse to enforce legal or equitable rights simply because they arose out of or were associated with an unlawful purpose unless: (a) the statute discloses an intention that those rights should be unenforceable in all circumstances; or (b)(i) the sanction of refusing to enforce those rights is not disproportionate to the seriousness of the unlawful conduct; (ii) the imposition of the sanction is necessary, having regard to the terms of the statute, to protect its objects or policies; and (iii) the statute does not disclose an intention that the sanctions and remedies contained in the statute are to be the only legal consequences of a breach of the statute or the frustration of its policies.”
Although these remarks may have been obiter, they resonate with similar suggestions in the opinion of Toohey J who recognised that:
“Although the public policy in discouraging unlawful acts and refusing them judicial approval is important, it is not the only relevant policy consideration. There is also the consideration of preventing injustice and the enrichment of one party at the expense of the other.”
As Kirby J observed in Fitzgerald, this is an evolving area of the law. The principles that govern the consequences of illegality, at common law and in equity, have yet to be definitively determined by the High Court. However, it is clear that the observations of McHugh J in Nelson have the approval of at least three other members of the Court.
The observations of McHugh J have been applied at the intermediate appellate court level. Holdcroft v Market Garden Produce Pty Ltd[24] involved a contract, which on its face, revealed nothing illegal. The illegality lay in its intended use by the parties to avoid revenue obligations. Although the court held that the illegal intention of the parties so permeated the plaintiffs’ cause of action that the court should decline to lend its aid to the enforcement of the contract, their Honours made it clear that they came to this conclusion only after considering various factors. It is not a conclusion which a court is compelled to reach simply because the plaintiff has entered into a contract for an illegal purpose. Thomas JA observed:[25]
In determining whether public policy requires the Court to refuse to enforce an agreement, the court will take into account many factors. These may include, where appropriate, the degree to which each party is involved in intended illegality, the expected level of benefit of each, the seriousness of the illegality, the consequences to other citizens or institutions, public morality, whether the court can bring about a just result without undermining respect for the law, and many others.
[24] Holdcroft & Anor v Market Garden Produce Pty Ltd & Ors [2001] 2 Qd R 381.
[25] Holdcroft & Anor v Market Garden Produce Pty Ltd & Ors [2001] 2 Qd R 381 at [31].

Relevant questions to be answered by the trial Judge before refusing relief on the ground of illegality in the present case included at least the following. Did the relevant statute disclose an intention that the plaintiff’s rights if otherwise established should be unenforceable in the circumstances? Would the imposition of a sanction of refusing to enforce the plaintiff’s rights be disproportionate to the seriousness of the unlawful conduct? Was the imposition of a sanction necessary, having regard to the terms of the statute, to protect its objects or policies? Did the statute disclose an intention that the sanctions and remedies contained in the statute were to be limited to any legal consequences identified in the statute? Was the plaintiff ignorant or mistaken about any relevant factual circumstance which rendered the loans illegal? Was the arrangement induced by fraud, oppression, undue influence or breach of any fiduciary duty? Was the illegal purpose carried into effect? To what degree was each party involved in the intended illegality? What was the expected level of benefit of each of the parties involved in the illegality? How serious was the illegality? Could the Court bring about a just result by the imposition of terms without undermining respect for the law?
It is to be noted that the above questions in the present case arise in a claim against a professional accountant. The plaintiff asserted a breach of fiduciary duty involving material non-disclosure. The plaintiff’s other causes of action alleged misrepresentation, breach of duty as well as a claim for relief pursuant to a guarantee.
As earlier observed, it is to be borne in mind that, in the present case, the contracts of loan and their terms were not illegal. They were not forbidden by a statute. The pleaded illegality related to an act of non-disclosure that may or may not have been acted on at a later time. There was no evidence that any relevant non-disclosure took place. There is no evidence that there was any evasion of taxation. These matters were not the subject of any questioning at the trial.
In the present case, the trial Judge should have undertaken an investigation of the relationship between the plaintiff, defendant and Magura. The Judge should have addressed most if not all of the above questions. He did not do so. Only after reaching relevant findings could proper consideration be given to whether any illegality was fatal to the plaintiff’s claims.
Conclusion
The judgment of the District Court should be set aside and the matter remitted for retrial before a differently constituted Court.
As earlier observed, there was no challenge by the plaintiff to the dismissal of the statutory claims as statute barred. These issues are not to be the subject of any re-trial.
DAVID J. I would allow the appeal. I agree with the orders of the Chief Justice and Gray J.