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…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2007] SASC 81
Decision Date: 8 March 2007

CaseChat Overview and Summary

In the case of Harry Goudias Pty Ltd v Akakios, the Supreme Court of South Australia considered an appeal from a decision of a District Court Judge who rejected claims made by the plaintiff, Harry Goudias Pty Ltd, against the defendant, Nicholas Akakios. The plaintiff sought damages for breaches of statute, misrepresentation, breach of duty of care, and breach of fiduciary duty. The District Court dismissed the claims, finding that the loan agreements between the parties were entered into for an illegal purpose, specifically to evade tax. The plaintiff appealed this decision.

The primary legal issues before the Court were whether the finding of illegality could be sustained and whether a finding of illegality necessarily precluded relief for the plaintiff. The Court considered whether the defendant had adequately pleaded the defence of illegality and whether the District Court Judge had applied the appropriate onus of proof when considering this defence. Additionally, the Court examined whether the Judge had undertaken a proper investigation of the relationship between the parties and whether a finding of illegality was fatal to the plaintiff’s claims.

The Court found that the defendant had not pleaded the defence of illegality with adequate particularity and specificity. Moreover, the Court held that the District Court Judge did not apply the appropriate onus of proof when considering the defence of illegality. The Court held that a finding of illegality is not, by itself, fatal to a claim for relief. The Judge had failed to undertake a proper investigation of the relationship between the parties and the nature of the alleged illegality. Consequently, the Court set aside the judgment of the District Court and remitted the matter for retrial before a differently constituted Court.

The Court’s decision emphasised the importance of ensuring that the defence of illegality is adequately pleaded and that the onus of proof is correctly applied. Furthermore, the Court underscored that a finding of illegality does not necessarily preclude relief and that a proper investigation of the relationship between the parties is required before reaching a conclusion on the consequences of illegality. The Court’s ruling provides guidance on the application of the defence of illegality in contract law and the need for a comprehensive examination of the circumstances surrounding alleged illegality.

Orders

Orders of the court

Full text does not contain this section.

Background

Background to the litigation

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].

Evidence

Evidence Before The Court

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].

Decision

Reasons for decision

DAVID J

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. I would allow the appeal. I agree with the orders of the Chief Justice and Gray J.

Ratio Decidendi

Legal Principle Established

Established by: DAVID J

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].