Tanaka v Tokyo Network Computing P/L - [2003] NSWSC 1114

No judgment structure available for this case.

CITATION: TANAKA v. TOKYO NETWORK COMPUTING P/L [2003] NSWSC 1114 revised - 22/03/2004

HEARING DATE(S): 24, 25 & 26/11/2003

JUDGMENT DATE:
11 December 2003

JURISDICTION:
EQUITY

JUDGMENT OF: Bryson J at 1

DECISION: Judgment for the plaintiff - see [99].

CATCHWORDS: CONTRACT - employment - repudiation by reduction of salary - Tanaka (Plaintiff) sold majority shares in Tokyo Net (1D), an ISP, to KDDI (2D) and was employed for 3 years as CEO. Tokyo Net depended on loan from KDDI for working capital - KDDI refused to renew the loan, directors considered preparation of a proposal to KDDI to renew loan with reduction in costs, and by majority resolved to reduce Mr Tanaka's salary - Tanaka treated this as anticipatory breach and repudiation, accepted repudiation and sued for damages: issues of fact about whether resolution was conditional on submission and approval of loan renewal proposal: on the facts, it was not conditional, reduction in salary was repudiatory, damages awarded. - VENDOR and PURCHASER - shares in private company - option - in the Sale Agreement Tanaka had Put Option to sell his remaining shares if his employment was terminated within 3 years - after accepting repudiation he exercised Put Option - option not available if he resigned: on the meaning of the Sale Agreement, he did not resign by accepting repudiation: Sale on exercise of option enforced by Specific Performance.

LEGISLATION CITED: Evidence Act 1995
Long Service Leave Act 1955

CASES CITED: Advertiser Newspapers Pty Ltd v. Industrial Relations Commission of South Australia (1999) 90 IR 211
Associated Newspapers Ltd v. Bancks (1951) 83 CLR 322
Federal Commerce & Navigation Co. Ltd v. Molena Alpha Inc. [1979] AC 757
Laurinda Pty Ltd v. Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623
Leotta v. Public Transport Commission (NSW) (1976) 50 ALJR 666
Rigby v. Ferodo Ltd [1988] ICR 29
Saad v. TWT Ltd (CA NSW 29 May 1998 unreported) Handley JA
Shevill v. Builders Licensing Board (1982) 149 CLR 620
Tramways Advertising Pty Ltd v. Luna Park (NSW) Ltd [1938] 38 SR (NSW) 632
Water Board v. Moustakas (1988) 180 CLR 491

PARTIES :
Yoji Tanaka - P
Tokyo Network Computing P/L (1D)
KDDI Australia P/L (2)

FILE NUMBER(S): SC 5126/2002

COUNSEL: A. Sullivan QC & N. Manousaridis (P)
A.S. Martin SC (D 1&2)

SOLICITORS: Elson Pow & Associates (P)
Abbott Tout Solicitors (D 1&2)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BRYSON J.

THURSDAY 11 DECEMBER 2003

5126/02 YOJI TANAKA v. TOKYO NETWORK COMPUTING PTY LTD and KDDI AUSTRALIA PTY LTD

JUDGMENT

1 HIS HONOUR: The first defendant (referred to as Tokyo Net) carries on business in Australia as an Internet Service Provider (ISP), mainly using Japanese language and script for Japanese companies and persons in Australia. The plaintiff Mr Tanaka commenced to conduct the business in 1996 with partners, and in 1998 he incorporated Tokyo Net which took over the partnership business. In 2000 Mr Tanaka owned all the shares in Tokyo Net. After negotiations which commenced about February 2000 he entered into the Share Sale and Subscription Agreement dated 23 June 2000 (Exhibit A, p1) with KDDI Australia Pty Ltd, which is the second defendant. KDDI Australia is owned by and conducts Australian operations for KDDI Corporation, a large Japanese business enterprise with headquarters in Tokyo.

2 Under the Share Sale Agreement, by transfer and new issue of shares KDDI Australia came to own 51 of the 100 shares in Tokyo Net and Mr Tanaka came to own the remaining 49 shares. The Share Sale Agreement was completed on 3 July 2000. KDDI Australia made payments to Mr Tanaka totalling $510,000. KDDI Australia subscribed $49 for newly issued shares and acquired two $1 shares which had already been issued; Mr Tanaka subscribed $47 for newly issued shares so that the subscribed capital of the company was $100. The Share Sale Agreement contained provisions which controlled the manner in which Tokyo Net and its business were to be carried on. Clause 8 related to management of Tokyo Net and provided that during the Guarantee Period, meaning three years commencing on and including 3 July 2000, the Board of Directors of Tokyo Net was to consist of three directors, one of whom was to be Mr Tanaka and the other two were to be persons nominated by KDDI Australia from time to time. Decisions were to be made by majority and the Chairman was not to have a casting vote. Mr Tanaka was to serve as Chief Executive Officer for at least three years in accordance with an Employment Agreement annexed to the Share Sale Agreement, and he was to cease to be a director of Tokyo Net automatically if the Employment Agreement was terminated in any way. Elaborate provisions controlled dealings with shares, with restrictions on Mr Tanaka dealing with his shares during the first three years. In some circumstances cl.11 gave KDDI Australia a Call Option over Mr Tanaka’s shares; there has been no exercise of the Call Option.

3 Clause 10 related to Mr Tanaka’s Put Option under which he could decide to sell his shares to KDDI Australia. Clause 10.1 related to exercise of the Put Option after the third anniversary of completion. Clause 10.2 related to the option price; its provisions for calculation of the option price are elaborate but it is not disputed in the present case that, if Mr Tanaka is entitled to enforce his purported exercise of the Put Option, the option price is $827,825.00. Clause 10.5 relates to Early Put Option and it is in these terms:

10.5 Early Put Option
(a) If, at any time before the third (3rd) anniversary of Completion Date Mr Tanaka ceases to be employed as CEO for reasons other than the reasons set out in Clause 11.2(a), then Mr Tanaka shall have the right (Early Put Option) to require KDD to buy Tanaka’s shares.
(b) Mr Tanaka may exercise that right after (and provided) it has arisen by giving written notice ( Early Put Exercise Notice) to that effect to KDD before the third (3rd) anniversary of the Completion Date.
(c) The purchase price that KDD must pay to Mr Tanaka if he exercises the Early Put Option shall be the Early Exit Price as at the date of the Early Put Exercise Notice.
(d) If Mr Tanaka exercises that right, completion of the purchase of Tanaka’s Shares by KDD shall take place on the date that is fourteen (14) Business Days after the date of the Early Put Exercise Notice.

4 Clause 11.2(a), referred to in cl.10.5(a) contained provisions relating to the Call Option which KDDI Australia does not claim to enforce. In cl.11.2(a) it sets out reasons for Mr Tanaka ceasing to be employed as CEO to which there is cross-reference in cl.10.5(a). Clause 11.2(a) is in these terms:

11.2 Call Option Price

Call Option Price

(1)

(2)

(3)

(4)

(A)

(B)

(C)

5 Clause 14 of the Share Sale Agreement related to the provision of working capital by loans from KDDI Australia. Clause 14.1 provided for a loan for working capital up to a maximum of $194,000 repayable in full on the first anniversary of the completion date. By cl.14.2 the Board of Directors of Tokyo Net were enabled to make a written request for a new loan, which KDDI Australia was to consider in good faith, but was not obliged to make. The Share Sale Agreement contained many other provisions, including a non-competition undertaking by Mr Tanaka.

6 When the Share Sale Agreement was completed on 3 July 2000 Mr Tanaka entered into an employment agreement as Chief Executive Officer of Tokyo Net, in the form annexed to the Share Sale Agreement. The Employment Agreement is a letter from Tokyo Net to Mr Tanaka dated 3 July 2000 with his written acceptance also dated 3 July 2000 endorsed on the letter; (Exhibit B, p.13). Clauses 2 and 9 provided:

Cl 2 Your employment as CEO will continue for three (3) years from the date of this letter, and thereafter indefinitely, unless and until it is terminated by agreement by you and the Company or otherwise terminated in accordance with the terms of this letter.

Cl 9 The Company will pay you one hundred and seventy three thousand dollars ($173,000) for each period of twelve (12) months ending on 30 June in each year during which you are employed as CEO, and a proportionate amount for any shorter period in a financial year during which you are employed as CEO. This salary will be paid to you monthly in equal monthly installments on the fifteenth (15th) day of each calendar month.

7 Clauses 10 to 14 gave Mr Tanaka entitlements for superannuation, annual leave, sick leave, long service leave and other benefits and reimbursement for expenses. Clause 13 relating to Long Service Leave was in these terms:

You will be entitled to Long Service Leave and any other benefits as determined by the Company from time to time in accordance with all applicable law.

8 Clauses 15 to 22 relate to resignation and other termination. Clauses 15 to 18 are in these terms:

Cl 15: You undertake to the Company, and it is a condition of your employment as CEO, that you will work as CEO in accordance with the terms of this letter for at least three (3) years following the date of this letter. You may at any time after the third anniversary of the date of this letter terminate your employment with the Company by giving three (3) months’ written notice of your resignation to the Board.

Cl 16 The Company may at any time after the third anniversary of the date of this letter terminate your employment by giving you three (3) months’ written notice of termination or by paying you an amount equal to three (3) months’ salary in lieu of notice. If the Company terminates your employment by giving you payment in lieu of notice, your employment will terminate on the date that the payment is made.

(c) terminate your employment by giving you notice to that effect expiring on the Liquidation Purchase Date if the Board resolves to wind up the Company.

9 Clauses 19, 20 and 21 contained further provisions relating to payments on termination.

10 Clauses 25 and 26 related to non-competition and restrained Mr Tanaka from competition anywhere in Australia with Tokyo Net’s business as Internet Service Provider during the employment and for nine months after termination of employment “(whether by resignation or notice of termination or otherwise)”.

11 Both agreements contained provisions choosing the law of New South Wales as the governing law.

12 Tokyo Net had only the nominal sum of $100 as subscribed capital and did not have resources of its own sufficient to provide working capital. It depended on money lent to it by KDDI Australia, its majority shareholder, for working capital. By 2002 its operations had not generated working capital sufficient for its needs. Mr Tanaka said, without support of accounting documents, to the effect that by July 2002 the company’s equity was about $29,000. In all practicality Tokyo Net’s business was completely under the control of KDDI Australia, which could decide whether to lend working capital to Tokyo Net, could and did appoint two of its three directors and owned the majority of its shares. Mr Matsumoto became a director on 6 April 2001. Mr Arai was a director until 6 September 2001, and became a director again on 24 April 2002. As well as being a director of Tokyo Net Mr Matsumoto is the secretary of KDDI Australia, for which he has worked since February 1999, and earlier he was employed by the Japanese corporation.

13 Mr Tanaka’s employment as Chief Executive Officer came to an end in August 2002. He also ceased to be a director of Tokyo Net. The issues in the proceedings include disputes as to when and in what way his employment came to an end. Mr Tanaka exercised or purportedly exercised the Put Option by notice on 16 August 2002. In the Statement of Claim issued on 16 October 2002 his principal claims are a claim against Tokyo Net for damages for breach of his employment contract bringing about the termination of his employment, and a claim against KDDI Australia for specific performance of an agreement for sale of Mr Tanaka’s 49 shares in Tokyo Net which he alleges arose when he exercised the Put Option. Mr Tanaka also makes claims for damages, interest and costs. Mr Tanaka’s claims depend, in both cases, on his establishing that his employment ended as a result of a resolution of the Board of Directors of Tokyo Net at a meeting on 8 August 2002 to reduce his remuneration from $173,000 per annum to $156,000 per annum. Mr Tanaka claims that this was an anticipatory breach and repudiation of his employment contract, that he accepted the repudiation and terminated his employment contract by a letter to Tokyo Net on 14 August 2002, and that in those circumstances he had an Early Put Option to require KDDI Australia to buy his shares in accordance with cl.10.5, because he had ceased to be employed as Chief Executive Officer for reasons other than reasons set out in cl.11.2(a). That is to say, he claims that he did not resign, his employment was not terminated by a lawful summary dismissal, and his employment was not terminated by three months’ notice in the ways referred to in cl.11(a)(i),(iii) and (iv).

14 The defendants claim that Mr Tanaka’s employment came to an end in a different way. They dispute that the resolution relating to reduction of salary was an anticipatory breach or a repudiation of the employment contract. The defendants say that on 15 August 2002 Tokyo Net gave Mr Tanaka notice in writing that he was to return to duties as Chief Executive Officer, and then told him that they would rescind the resolution to reduce his salary and that a further board meeting was convened for 20 August 2002. They further say that the resolution was rescinded at a directors’ meeting on 20 August 2002, that Tokyo Net on 28 August 2002 required Mr Tanaka to return to duty on or before 7 October 2002, and that when he did not return to duty, Tokyo Net on 11 October 2002 terminated Mr Tanaka’s employment pursuant to cl.17(b)(i) by paying him three months’ salary in lieu of notice.

15 The factual matters in dispute relate to the terms, meaning and effect of the resolution of 8 August 2002, and to whether that resolution constituted an anticipatory breach and a repudiation of the employment contract when viewed in the circumstances in which it took place; those circumstances include the financial position of Tokyo Net in relation to KDDI Australia’s requirement for repayment of its loan, and the terms of the discussion at the Board meeting on 8 August leading up to passing the resolution.

16 Much of the significant correspondence and documents are in the English language, but some significant notes and an email message at the heart of the matter are in the Japanese language, and the minutes are in the Japanese language. I am unable to understand these and I depend on translations which are in evidence. The two translations of the minutes differ slightly.

17 In the Defences filed by each defendant the plaintiff’s allegation about the terms of the resolution is, in substance, admitted. The Statement of Claim para.7 alleges:

At a meeting held on 8 August 2002, the board of directors of TokyoNet resolved, over the protest of the plaintiff, to reduce the remuneration TokyoNet agreed to pay to the plaintiff under the employment agreement from $173,000 per annum to $156,000 per annum and communicated that decision to the plaintiff.

18 In KDDI Australia’s Defence, KDDI Australia does not plead to paragraph 7 and hence should be taken to admit it. In para.7 of Tokyo Net’s Defence Tokyo Net answers para.7 in a way which admits its substance, although it does not admit that the resolution was made over the protest of Mr Tanaka, and it does not admit that the decision was communicated to Mr Tanaka at the meeting. On the evidence these allegations are correct, notwithstanding that they were not admitted.

19 The Defences do not in terms raise an issue to the effect that the resolution was intended only to take effect on a condition, or was hypothetical or was intended to operate only if an assumed outcome actually occurred. The manner in which the proceedings were conducted, and evidence given by Mr Matsumoto and Mr Arai show that the defendants intended to rely on a defence which was not formulated until defendants’ Senior Counsel handed me his Written Submissions. These included the following passages:

20 In my view the defendants should have raised in their pleadings any matter on which they rely to the effect that the resolution was conditional, or that it was hypothetical, or that when understood in accordance with the terms of the minute and other events forming part of its factual context, the resolution was not intended to operate unless some foreseen or assumed circumstances actually came about. The effect of Pt.15 r.11 of the Supreme Court Rules is that it is implied that the plaintiff made the (logically necessary) allegation that all conditions for the operation of the resolution were fulfilled, and it is for a defendant to allege any unfulfilled condition, and to allege that it was not fulfilled; in my understanding the burden of proof of fulfilment would be on the plaintiff, notwithstanding that the defendant introduced the condition into the pleadings. The matters raised in the Written Submissions are matters which the defendants ought reasonably to have raised expressly in their Defences to avoid surprise; they are enabled to do raise those matters by Pt.15 r.13. The issue came to be dealt with in the evidence by a side wind and over the objection of the plaintiff’s counsel. See transcript pp19-21. I regard it as altogether unsatisfactory that, where there are careful pleadings, an additional issue, in this case the principal issue for decision, can emerge in the course of evidence without being defined in writing. There is a failure of procedural justice in that parties do not clearly understand in advance what will be decided at the hearing and what case they should prepare to conduct, and also in that there is room for an element of surprise. If there is an appeal, departing from the issues as defined by written pleadings opens up the possibility of controversy about what was in issue at the trial, and the possibility of appellate interventions based on the view that the Judge misunderstood what the issues were before him.

21 It appeared to me that the approach expressed in the judgment of Stephen, Mason and Jacobs JJ in Leotta v. Public Transport Commission (NSW) (1976) 50 ALJR 666 at 668 required that I should adjudicate the defences in the Written Submissions although they are not found in the pleadings. See too Water Board v. Moustakas (1988) 180 CLR 491 at 497. Defendants’ counsel said, at a late stage, that he wished to amend the Defences, but I told him that as what was relied on appeared in the Written Submissions, I did not require him to make an amendment and that I would record the paragraphs in the Written Submissions in my judgment.

22 As appears from the statement of Gibbs CJ in Shevill v. Builders Licensing Board (1982) 149 CLR 620 at 625-626, repudiation of a contract can take place in several ways, the first of which was referred to by his Honour in these terms: [625-626]

Freeth v. Burr

Ross T.

Smyth & Co. Ltd. v. T. D. Bailey, Son & Co.

Carr v. J. A. Berriman Pty. Ltd.

Heyman v. Darwins Ltd

23 In Federal Commerce & Navigation Co. Ltd v. Molena Alpha Inc. [1979] AC 757 at 778-779 Lord Wilberforce set out several authoritative formulations and said, at 779C-D, that the common principle is “… to amount to repudiation a breach must go to the root of the contract.”

24 It is, in my opinion, elementary that the obligation of an employer to pay salary, and the whole salary, is fundamental to an employment agreement and goes to the root of the contract. It is perhaps not the whole basis of the employee’s involvement, but it is very close to being the whole basis of the employee’s involvement. In terms of ordinary human motivations and behaviour, no one could suppose that his employee would continue to work for him in the expectation that the employer might withhold part or all of the agreed salary. As is sometimes the case with overwhelmingly clear propositions, it is difficult to find distinct judicial authority for this. In Rigby v. Ferodo Ltd [1988] ICR 29 at 33B, Lord Oliver’s speech shows that the House of Lords accepted the following propositions:

It is common ground that the unilateral imposition by an employer of a reduction in the agreed remuneration of an employee constitutes a fundamental and repudiatory breach of the contract of employment which, if accepted by the employee, would terminate the contract forthwith.

25 It is correct, as defendants’ senior counsel observed, that this was not a conclusion reached by the House of Lords after the proposition had been tested in argument, and hence it is not a statement of authority, but I regard it as a significant illustration, as it was conceded in a hard-fought case in which there were two appeals and the House of Lords acted on the concession.

26 In Saad v. TWT Ltd (CA NSW 29 May 1998 unreported) Handley JA at p15 treated relevantly similar events as a repudiation:

When the appellant reported for work on 18 June 1990 she did not become involved in what could reasonably be described as a re-negotiation of her contract. She was confronted with its unequivocal repudiation by WIN on a take it or leave it basis, accompanied by an offer of a different and less advantageous contract. The appellant would have been fully justified in walking out immediately and suing for wrongful dismissal.

27 In Advertiser Newspapers Pty Ltd v. Industrial Relations Commission of South Australia (1999) 90 IR 211 Bleby J, with whom other members of the Full Court of the Supreme Court of South Australia agreed, gave, at 217 the following among examples of repudiation of a contract of employment by the employer.

It may also come about by the employer refusing to comply with the fundamental condition, such as refusing to pay the employee at the same rate or to pay the employee at all.

28 The following expression in a judgment of Jordan CJ in Tramways Advertising Pty Ltd v. Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 641-642, was approved in the judgment of the High Court in Associated Newspapers Ltd v. Bancks (1951) 83 CLR 322 at 337:

If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight.

29 In Laurinda Pty Ltd v. Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 Brennan J at 642 said:

A right to rescind depends on the importance of the term repudiated.

30 Defendants’ counsel referred me to a number of passages in Laurinda at 634, 641-642, 647-648 and 657-658 including the following statement of Deane & Dawson JJ at 658:

Carswell v. Collard

Forslind v. Bechely-Crundall

31 The reduction of $17,000, almost 10% of Mr Tanaka’s agreed salary was far more than slight. The right to salary is in my view of central importance.

32 By Memorandum of Understandings dated 21 July 2000 KDDI Australia agreed to lend Tokyo Net $150,000, repayable in full on 25 July 2001 (Exhibit B, p.20). This carried out the provision for working capital in cl.14 of the Share Sale Agreement.

33 The same parties made a loan agreement on 16 June 2001 regulating a loan of $10,000 repayable on 16 June 2002, and a further loan agreement on 2 July 2001 regulating a loan of $162,968 repayable on 25 July 2002 – Exhibit B, p39. According to Recitals in this Agreement KDDI Australia held a fixed and floating charge granted by Tokyo Net, and the further advance was secured by that charge.

34 By a letter of 1 July 2002 (Exhibit B, p48) Mr Nagase, Managing Director of KDDI Australia, in clear and formal entirely unmistakable language, asked for repayment of the principal of $162,968 and interest of $14,789.01 on 4 July 2002. When Mr Nagase delivered the letter of 1 July 2002 he spoke to Mr Tanaka in terms which showed that KDDI Australia proposed to enforce repayment, by going to Court if necessary, and when Mr Tanaka said that he would respond seriously, Mr Nagase asked him to draw up a repayment schedule and present it as soon as possible. Mr Tanaka remained in close contact with Mr Nagase during the events of July and August 2002.

35 Mr Tanaka replied by a letter of 3 July 2002 (Exhibit B, p49, translation Exhibit B, p52) setting out his thoughts regarding repayment of the loan. Mr Tanaka reviewed at length the history of the relationship between the parties and of the loans, and of the business results which had been experienced. Mr Tanaka contended that KDDI Australia should contribute to repayment of the loan. After reviewing the prospects of increasing the level of business he predicted that total repayments for the first year would amount to around $10,000, and with anticipated repayment support from KDDI Australia of $30,000 there was the possibility for a yearly repayment of $40,000 and for the entire loan to be repaid over a period of four years and several months; or possibly sooner. Mr Tanaka commented on the limited room for reduction of expenditure on human resources and hardware investment. Mr Nagase for KDDI Australia responded on 19 July 2002 calling for payment of the principal and interest, again in clear and formal terms.

36 An Extraordinary Board Meeting of Tokyo Net was held on 26 July 2002. Mr Matsumoto prepared Minutes (Exhibit B, p57, translation at p59) which record consideration of the history of the demands and discussion of responses, and discussion of the prospects of reopening negotiations with KDDI Australia based on a repayment schedule and on reducing outgoings. There was a further board meeting on 31 July (Minute Exhibit B, p61, translation p63), at which the company’s business and various prospects for reducing expenditure were considered and a decision was taken to hold a further directors’ meeting on 28 August.

37 On 31 July Mr Nagase sent Mr Tanaka a file of documents responding to Mr Tanaka’s earlier communication. Among many other things Mr Nagase said, in this file, to the following effects.

- He requested a valid schedule for repayment of the loan by 7 August 2002.

- He said that it had become much more problematic whether an independent ISP enterprise could be established.

- He commented that Tokyo Net had only attracted two major corporate clients and those through the marketing efforts of KDDI Australia.

- He gave emphasis to the demand for repayment and said that it was completely out of the question for KDDI Australia to agree with a new demand for support. “It is for these reasons that a repayment schedule that is dependent on additional support from us is not tenable.”

… Surely it is evidence that small scale ISP providers around the world have reached their limit as business model. Furthermore, as your market is confined to Japanese businesses and Japanese people in Australia, and the market share is at saturation point, it is highly unlikely that your business can continue unless a radical reform is undertaken. In order for you to repay the loan, you must undertake a radical reduction in cost. Of these human resources cost is the major component and it is therefore vital that these be reduced. It is our belief that any repayment schedule that does not include these points is doomed to failure.

38 Mr Nagase also said that KDDI Australia would no longer bear Tokyo Net’s payroll tax and required Tokyo Net to provide funding for the work of Mr Yanada, a KDDI Australia staff member who had been working at Tokyo Net since April 2002.

39 Mr Nagase also asked for the signatories to the Tokyo Net bank account to be altered so that authority for all disbursements was transferred to one of the two directors nominated by KDDI Australia, and asked that Tokyo Net’s accounting operation be transferred from its existing accountant to the accountants who worked for KDDI Australia.

40 All in all, the requirements indicated by Mr Nagase left Tokyo Net with very little room within which to act. Tokyo Net did not have enough resources to borrow the working capital it needed from banks or other financiers. Apart from Mr Tanaka there were only two staff members; it was not possible to operate with fewer staff, Mr Tanaka’s salary was by far the largest element in human resources costs, and the reduction in those costs which KDDI Australia called for was impossible without departing from Mr Tanaka’s contractual entitlement. Mr Tanaka replied to Mr Nagase on 2 August saying that he would immediately organise an extraordinary board meeting “to discuss our repayment schedule and resubmit this.” He arranged for the board meeting to be held on Thursday 8 August, and informed Mr Nagase who replied “I understand that you will present the repayment schedule by 13 August.” Mr Tanaka sent Mr Nagase a long letter on 7 August 2002 reviewing the state of affairs as they then stood.

41 At the meeting of 8 August 2002 the Minute records that the correspondence was tabled, and there were decisions by a majority, notwithstanding Mr Tanaka’s disagreement, to change the bank signatory authority and to change the accounting firm. The directors also decided to ask KDDI Australia to continue to pay the payroll tax, to fund the employment of Mr Yanada and to fund a payment to Niyo Denki. There was then extended discussion about payment of the loan. There was discussion of human resources costs and it was agreed that the two employees, Mr Yanada and Ms Ino were both essential in order to continue current Tokyo Net operations and that they were not to be dismissed nor were their salaries to be cut. The possibility of reducing the salaries or dismissing staff had been discussed several times earlier, and similar conclusions were always reached.

42 The discussion and the resolution about Mr Tanaka’s salary then followed. The last decision recorded is as follows:

“[7] A repayment schedule based on the above decisions should be drawn up and resubmitted to KDDI Australia.”

43 The minutes of the meeting of 8 August 2002 are at Exhibit B, pages 99 to 100. They are almost wholly in Japanese and they are signed by each of the three directors. The plaintiff produced and tendered in evidence, with the defendants’ consent, Exhibit B containing, where appropriate, translations into English made by Savena Delany, a translator accredited by National Accreditation Authority for Translators and Interpreters. Ms Delany’s translation of the Minute appears in Exhibit B, pages 101 to 103, and the passage relating to the resolution is as follows:

· Readjustment of Mr Tanaka’s salary

44 The defendants put in evidence some translations by Lotte Lawrence, also a translator accredited by National Accreditation Authority for Translators and Interpreters, whose translation of the same passage was as follows:

Re: Mr Tanaka’s employment cost

Tanaka: I am against this. As I have contributed to the 30% increase in Tokyo Network Computing’s sales and am fully executing the responsibilities of a CEO, I find dismissal or a reduction in salary unacceptable.

Mr Matsumoto and Mr Arai: Taking into account Tokyo Network Computing’s existing circumstances and the negotiations to date between Tokyo Network Computing and KDDI Australian Office regarding repayment of the loan, the reduction of Tanaka’s salary is unavoidable. Therefore, Tanaka’s salary will be reduced by $17,000 a year and this amount will be used to repay part of the loan. This amount was calculated with a view to repaying the loan within 3 years on the premise that KDDI Australia provides support of $30,000 per annum towards repayment of the loan.

Through a majority vote, it is decided that Tanaka’s annual salary of $173,000 is to be reduced by $17,000 to $156,000.

45 Given the nature of translation and its inherent difficulties I regard these two translations are quite close. Differences in the form of the second last sentence were the subject of some attention during the hearing; in Exhibit B it is said that “This amount has been calculated on the assumption that KDDI Australia provides Tokyo Net with AU$30,000 per year …” but in the Lawrence translation the sentence runs “This amount was calculated with a view to repaying the loan within three years on the premise that KDDI provide support …”. Unless the words I have emphasised significantly differ the two translations mean much the same thing, although the order of ideas is a little different.

46 The second last sentence was inserted in the Minutes which Mr Tanaka prepared at the end of the meeting. Mr Tanaka printed out his draft of the minutes on his personal computer and showed it to Mr Matsumoto, who asked that the sentence be inserted; Mr Tanaka agreed, and the draft was amended after discussion. When this sentence had been inserted the final form of the Minutes, it was then signed by all three directors. In both forms of the translation this sentence and the paragraph in which it appears are statements made by Mr Matsumoto and Mr Arai in support of their point of view, or explaining the reasons for their point of view. The decision of the Board of Directors is the sentence “Due to a majority decision, Mr Tanaka’s salary shall be reduced to AUD156,000, by subtracting AUD17,000 from AUD$173,000.” This is the resolution.

47 I will deal later with conflicts about what in detail took place at this meeting.

48 On 8 August Mr Matsumoto and Mr Arai, who were both employed by KDDI Australia as well as being directors of Tokyo Net told Mr Nagase, the Managing Director of KDDI Australia, and their superior in that company, the events at the board meeting. Mr Nagase’s evidence of what he was told (at para 25 of his affidavit) is:

I had been advised by them that a resolution was passed by a majority vote of the board to reduce the salary of Mr Tanaka.

49 As the Minute shows, Mr Tanaka did not vote for a reduction of his own salary or consent to it happening. After an interval of a few days he wrote to Tokyo Net on 14 August 2002, marking his letter for the attention of Mr Matsumoto and Mr Arai, and after referring to his salary entitlement and the employment agreement and to the decision of 8 August 2002 to reduce his salary, he said, (Exhibit B, p104):

Consequently I consider that the Employment Agreement is terminated. I also consider that the termination is harsh, unfair and unjust.

I reserve all of my rights including my rights under s.106 of the Industrial Relations Act of NSW.

50 Mr Tanaka did not submit a repayment plan or schedule to Mr Matsumoto or Mr Arai, or to KDDI Australia, after the meeting of 8 August 2002. The question whether KDDI Australia would provide any further financial support had not been taken any further by 14 August. Throughout August 2002 there was no significant reduction in the debt to KDDI Australia, which did not agree to any further extension of credit.

51 On 15 August 2002 Mr Matsumoto and Mr Arai wrote to Mr Tanaka in these terms:

15 August, 2002

Dear Mr Tanaka

Thankyou for your letter of 14 August, 2002.

It was not our intention to breach your contract of employment by reduction of your annualised remuneration by approximately 10% ($17,000). Rather, it was our intention to assist Tokyo Network Computing Pty Limited (“TokyoNet”) to meet its obligations under the loan agreements with KDDI to enable the company to continue to trade on its own account.

TokyoNet has not, as a matter of fact, given effect to the resolution to which you refer by reducing your contractual remuneration. Our contract of employment was not, therefore, breached.

What we propose is that a resolution be passed which revokes the resolution of 8 August, 2002 about which you complain. A suggested draft resolution, which we each support, is attached. We suggest a meeting of the directors of TokyoNet be held on Tuesday 20 August 2002, 2.00 p.m. at the office of KDDI Australia to pass this resolution.

We ask that you return to work immediately to discharge your obligations as the Chief Executive Officer, noting too that you have obligations to TokyoNet as a director.

Further, as it is clear from your letter that you are not willing to accept to accept a reduction in pay, we look forward to hearing your ideas on how TokyoNet might otherwise meet its obligations.

52 Mr Arai, representing Tokyo Net sent Mr Tanaka a cheque for $6,554.17 on 15 August 2002; this was the appropriate amount for the monthly instalment of Mr Tanaka’s salary, without reduction, which would be payable to him under his employment agreement on the 15th day of each month. Mr Tanaka replied on 16 August saying that he had received the cheque and also saying:

I consider that Tokyo Network Computing Pty Ltd has already terminated my employment. Accordingly, without prejudice to any of my rights against the company, I accept the cheque as part payment for damages I have suffered arising out of the company’s wrongful and unjust termination of my employment.

My solicitor will shortly write to you.

53 On 16 August 2002 Mr Tanaka wrote to KDDI Australia in the following terms:

I refer to the Share Sale and Subscription Agreement dated 13 June 2000 between KDDI Australia Pty Ltd (“KDDI”) and myself (“Share Agreement”).

I was employed as Chief Executive Officer of Tokyo Network Computing Pty Ltd (“TokyoNet”) pursuant to an Employment Agreement dated 3 July 2000 between TokyoNet and myself.

However, that Employment Agreement has been terminated as a result of action taken by TokyoNet. Such termination is for reasons other than the reasons set out in Clause 11.2(a) of the Share Agreement.

Pursuant to Clause 10.5(b) of the Share Agreement, I now give notice to KDDI that I require KDDI to buy all of my shares in TokyoNet. The date of the Early Put Exercise Notice is 16 August 2002. According to Clause 10.5(d) of the Share Agreement, completion of the purchase of my shares by KDDI should take place 14 business days after the date of the Early Put Exercise Notice. This means that completion should take place on 5 September 2002.

According to Clause 10.5(c) of the Share Agreement, the purchase price that KDDI must pay me for my shares shall be the Early Exit Price as at 16 August 2002. I have calculated the Early Exit Price in accordance with Clause 10.6 as follows:

The aggregate amount of the gross sales of TokyoNet for the 6 months from 1 February 2002 to 31 July 2002 is $211,180 (“Gross Sales”). The price payable to me by KDDI is:
8 x Gross Sales x 49%
= 8 x $211,180 x 49%
= $827, 825.60

54 Mr Nagase replied on 20 August saying:

Your purported notice of exercise is not valid as you have not ceased to be employed as CEO.

55 On 19 August Mr Tanaka responded to the letter of 15 August 2002 and said that he considered that his employment had been terminated and that he had ceased to be a director and that he would not attend the board meeting on 20 August.

56 On 19 August Mr Matsumoto and Mr Arai sent another letter to Mr Tanaka calling on him to return to work immediately, saying that his contract of employment remained on foot and his absence had not been authorised and asking him to join in attending at the bank to arrange an alteration of the bank signatories.

57 On 20 August 2002 Mr Matsumoto and Mr Arai held a board meeting; Mr Tanaka was not present. The minute of the meeting of 20 August 2002 states that Mr Tanaka did not attend the board meeting and that Mr Matsumoto was appointed Chairman. A resolution was passed in these terms:

RESOLVED

and the passage including the resolution about reducing Mr Tanaka’s salary was set out exactly, in Japanese, as it had appeared in the earlier minute

which contemplated the reduction of the salary of Mr Yoji Tanaka from $173,000 to $156,000, be rescinded, effective immediately.

58 On 21 August 2002 Mr Matsumoto and Mr Arai called on Mr Tanaka to attend another board meeting on 28 August. On the same day they sent him another letter giving him a third notice requiring him to return to work immediately and asserting that his contract was still on foot.

59 On 23 August 2002 Mr Tanaka wrote to Mr Matsumoto and Mr Arai adhering to his position, which he restated at length.

60 At a Directors’ meeting on 28 August Mr Matsumoto and Mr Arai resolved to give Mr Tanaka a notice referring to cl.17 of the Employment Agreement and requiring him to remedy his failure to perform obligations as Chief Executive Officer by 7 October. They sent him a letter accordingly. They also wrote to him on 28 August 2002 in these terms:

Dear Mr Tanaka
Thank you for your letter of 23 August 2002.

It is true that for some time past we have urged you to take a reduction in salary in the interests of TokyoNet, a company of which you are a Director. It is also true that you have not been willing to voluntarily reduce your salary.

Our legal advice is that the resolution of 8 August 2002 was not, unless and until put into effect, a breach of your contract of employment. On receipt of your letter evidencing that you proposed treating it as a breach, we took advice and the Company did not put it into effect, and instead continued to pay your salary without reduction. In addition, at the board meeting on Tuesday 20 August the Company rescinded the resolution of 8 August 2002.

We do not agree with your suggestion that the resolution of 8 August 2002 became effective immediately, nor has it become effective since then. Accordingly, your contract of employment has not been repudiated by the Company. Nor did you, at the meeting of 8 August, in your capacity as Director of the Company, indicate, in the interests of the Company, that if the resolution were passed you would treat it as a repudiation of your contract of employment by the Company.

The Company’s position is that it has not breached your contract of employment and it has directed you to resume your work. To date you have failed to do so. In these matters, the Company’s rights are reserved.

Yoshihko Arai

61 There was further correspondence, including a letter to KDDI Australia of 4 September 2002 in which Mr Tanaka attempted to make arrangements for completion of the Early Put Option and sale of his shares to take place on 5 September 2002. A further payment of salary was made in the middle of September. Neither side departed from its position. On 11 October the directors resolved to terminate Mr Tanaka’s employment under cl.17(b)(i) of the Employment Agreement by payment of three months’ salary in lieu of notice; and they wrote to him on 11 October 2002 to this effect. They enclosed a Statement of Benefit on Termination, asserting that his employment was terminated on 11 October 2002 and among many other things they gave him credit, in the calculation of final payment, for three months’ salary from that day. They also enclosed a cheque for the balance calculated in the Statement of Benefit.

62 Mr Tanaka attempted to obtain alternative employment in a generally similar position to that which he had held, and made inquiries by letter to a number of possible employers and employment agents without receiving any response. In these letters he said that his remuneration was $200,000 per annum, which he regarded as the net effect of arrangements he had made of which his salary was part. There was no challenge in cross-examination to steps he took to get employment, and there is no evidence on which it should be found that he failed to take any reasonably available mitigating course, so damages should be assessed on the basis that Mr Tanaka acted reasonably in seeking alternative employment.

63 I turn now to review the evidence about what in detail was said at the meeting of 8 August 2002 and to make findings on the matters about which there are conflicts.

64 All three directors gave evidence under cross-examination through interpretation. Although each of them works in Australia and has a knowledge of English, it appeared to me to be appropriate that they should give evidence in the language they know best, as they wished to do. See Evidence Act 1995 s.30. Cross-examination of all three witnesses was quite extensive, and took place through interpretation. The process of interpretation and my consciousness of cultural differences mean that I have been unable to form any impressions about reliability of witnesses based on their demeanour. Although cross-examination, particularly of Mr Matsumoto, achieved some answers which in other circumstances might be regarded as successes in a cross-examination directed at the reliability of recollection, the process of interpretation and the room for misunderstandings, great and small, neutralised the adverse effect of this material. Findings of fact about what took place at the meeting of 8 August and about the interpretation which participants in the meeting ought reasonably to have made about the significance of the resolution and the likely future course to be taken by Tokyo Net have to be based very largely on what is found in the Minutes which all directors immediately agreed to and signed, with some assistance from other documents dating from about the same time, and an overall assessment based on the probabilities. I am unable to resolve conflicts of evidence by relying on my impressions of the demeanour of witnesses.

65 There are some general considerations which appear to me to be important when considering the probabilities. There is no indication in the terms of the resolution that it was not intended that it should take effect straight away. There is no reflection in the terms of the resolution of its being based only on an assumption, or being conditional, or hypothetical. Clearly enough, the subject of reducing Mr Tanaka’s salary came under consideration in the context of considering what proposal could be formulated and put to KDDI Australia about continued support and about reduction of the debt over a period of three years. However there is no reflection in the minutes that the decision taken was limited to what was to be included in the proposal. If its operation was intended to be limited in that way, it is difficult to see what purpose it could have. Unless Tokyo Net fully and truly intended to make the reduction, there was no real point in including it in a proposal to KDDI Australia. If a proposal incorporating this element was made to KDDI Australia and was not accepted, there would be even more need than in any other case for reductions in expenditure. The proposition that there was no decision to reduce Mr Tanaka’s salary, but that his salary would go on as before if there was no support for working capital is tinged with absurdity. It is markedly improbable that a decision was made which had the effect that, if the proposal to KDDI Australia received an adverse answer and the company had no working capital, Mr Tanaka’s salary would stay at its full rate, but if the company came to have assurance of working capital his salary would be reduced. A decision like that would be so strange that it is difficult to understand how men of business would take the trouble to make it.

66 To my mind it is important that the terms of the resolution do not contain any expression of an idea that the reduction in salary would not be put in place until after Mr Matsumoto and Mr Arai had seen the proposal. The other passages in the minutes relating to matters that were discussed do not say that either. Nor does Mr Matsumoto’s email report to Mr Takahashi of 16 August 2003 give any confirmation that that statement was made.

67 The principal contemporaneous record is the minutes, which each director signed on the day of the meeting. Of less force, but also requiring reference, are the notes (Exhibit C) which Mr Matsumoto made at the hearing, and the email message (translation Exhibit D) which Mr Matsumoto sent to Mr Takahashi on 16 August. The email was forwarded to a number of persons who might have some concern with the events in Japan and in Australia. Mr Matsumoto made the email for the purpose of recording what had happened. The email message does not give any clear support to the idea that a decision to reduce the salary was qualified, conditional, hypothetical or based solely on an assumption.

68 As Mr Matsumoto’s evidence showed that in giving his evidence he relied heavily on the notes, the email and the formal letters exchanged in August, the absence of the idea that the resolution was based on an assumption or that it was conditional or hypothetical from the written records and the minute is significant (t44).

69 Mr Matsumoto’s notes (Exhibit C) are rough and incomplete, and were not intended to be a complete record. Mr Tanaka referred in evidence to having seen a figure of $30,000 in Mr Matsumoto’s notes; the figure is there but it is in such an abbreviated form that it cannot be accorded any significance. Mr Matsumoto denied that he had shown his notes to Mr Tanaka. The notes a little more than outlines and jottings, and if Mr Tanaka did in fact see them, that could not have much significance. Mr Arai made notes at the meeting, which he had available and looked through when he made his affidavit, but by the time of the hearing they were lost.

70 In affidavit evidence Mr Matsumoto gave an account of the oral exchanges at the meeting of 8 August about the possibility of reducing Mr Tanaka’s salary. Although it is clear that Mr Tanaka took part in the discussion, it is also clear that he did not ever in any way express agreement to any reduction in his salary.

71 Mr Matsumoto’s explanation of the reduction of $17,000 was to the effect that $141,000 remained due and owing by Tokyo Net to KDDI Australia, and that if it was assumed that KDDI Australia would forgive the loan at the rate of $30,000 per year, or $90,000 over three years, it would still be necessary to provide for repayment of another $51,000; and reducing Mr Tanaka’s salary by $17,000 per annum would provide $51,000. Mr Matsumoto also said to the effect that by the conclusion of the meeting Mr Tanaka said that he would prepare a repayment plan and circulate it to directors with a view to its submission to KDDI Australia; that Mr Tanaka said he wanted to continue running Tokyo Net, to clear all difficulties with KDDI Australia and remain in good relationship with KDDI Australia, and that it was necessary for Tokyo Net to come up with a solution for the repayment to KDDI Australia. Mr Matsumoto said in his affidavit:

There was no decision made as to when the reductions in Mr Tanaka’s salary would commence.

72 With the assistance of his evidence under cross-examination, my understanding of Mr Matsumoto’s evidence and the position he took is that the decision to reduce Mr Tanaka’s salary by $17,000 was a decision about an element which was to be included in the proposal which was to be prepared and sent to KDDI Australia; that it was not a decision to implement an immediate reduction in Mr Tanaka’s salary, and that it should not have been expected that Tokyo Net would reduce the salary unless KDDI Australia accepted the proposal. Mr Matsumoto said in oral evidence that the decision was made on an assumption.

73 In the email report which he sent on 16 August 2002 to Mr Takahashi, an officer of KDDI company in Japan, an agreed translation of which is Exhibit D, Mr Matsumoto gave an account of what was said in which, after discussion had reached an impasse and there had been a silence:

… Matsumoto reluctantly proposed that we have a hypothetical discussion, since there was the matter of Mr Tanaka’s contract and so it was not known how practical the discussion would be. Further, noting that the letter from Tokyo Net Co. dated 7th August again requesting KDDI’s financial support, had not yet been replied to by KDDI, Matsumoto proposed, also a hypothetical solution, that we should produce a repayment plan based on an amount of $30,000 per year of support from KDDI, as Tokyo Net was asking. Mr Arai agreed. CEO Tanaka consented.

Following this, Mr Tanaka explained that the amount he could squeeze out of Tokyo Net’s earnings would amount to less than $1,000 per month, or at most $10,000 per annum. So Matsumoto proposed that this amount be added to the suggested $30,000 pa of support from KDDI, and that the shortfall in repayment be made up from Mr Tanaka’s salary. Arai agreed. Mr Tanaka said, in that case, the shortfall is $51,000, amounting to $17,000 per year, and this would therefore be the amount of his salary reduction. He asked for confirmation of whether this was okay for Matsumoto and Arai and they both agreed. Mr Tanaka himself registered opposition.

CEO Tanaka said he will formulate the repayment plan based on these suggestions, and will forward it to Matsumoto and Arai and requested confirmation.

74 In his affidavit (para.19, p6) Mr Matsumoto said to the effect that at the directors’ meeting he said that the repayment plan should be considered on an assumption that KDDI Australia would forgive $30,000 per year of the outstanding loan. In his oral evidence (t49) he said that the discussion about reducing Mr Tanaka’s salary was on the assumption that it was hypothetical, and referred to his statement in his affidavit. “Hypothetical” appears in his email (Exhibit D), but in another context. This illustrates the difficulties of interpretation.

75 I do not find it difficult to accept that discussion of the reduction of Mr Tanaka’s salary arose at the meeting in the context of consideration of what would go into the repayment plan to be prepared for KDDI Australia. When considering what was to go into the repayment plan it would hardly have been possible to avoid addressing Mr Tanaka’s salary. What was to go into the repayment plan, and what reaction KDDI Australia might make to the plan were dominating considerations in all of Tokyo Net’s affairs; unless success was achieved in dealing with KDDI Australia, the company had no working capital, and no future in business. It would have been strange indeed if any attention had been given or any provision had been made about what was to happen to Mr Tanaka’s salary if the repayment plan did not produce favourable answer from KDDI Australia; that would have been hypothetical in the extreme. There is no trace in the form of words used in the resolution about Mr Tanaka’s salary being conditional, based on an assumption, hypothetical or qualified in any way, and in this it represents the realities of the company’s situation.

76 Mr Tanaka explicitly denied that Mr Matsumoto said at the meeting that any discussion of cost reductions should be considered on the assumption that KDDI Australia would be providing support to Tokyo Net in the amount of $30,000 per year (t16). Mr Tanaka said that that suggestion was made in the additional sentences which Mr Matsumoto wanted added to the minutes as a modification. That is to say, that it was made after the resolution had been passed. The passage so added is not, in fact, quite to the effect that the business plan was to be prepared on the assumption that KDDI Australia would be providing support to Tokyo Net in the amount of $30,000 per year.

77 Notwithstanding challenges in cross-examination, Mr Tanaka’s evidence shows that at the conclusion of the meeting nothing was said in his hearing and he did not understand that the decision to reduce his salary was provisional, conditional, hypothetical or was only taken to establish an element which was to be in the proposal to KDDI Australia. The position that Mr Tanaka took in his evidence substantially accords with the position which the contemporaneous records show, as they do not, to my reading, bear out any such qualification of the decision to reduce his salary.

78 Mr Matsumoto adhered when challenged to his affidavit evidence that Mr Tanaka said that he wanted to continue running Tokyo Net and clear all the difficulties with KDDI Australia to maintain a good relationship. Mr Matsumoto’s affidavit evidence was that in the course of the meeting and in relation to the proposal which Mr Tanaka was to prepare, Mr Matsumoto said:

We would like to see that proposal before we put the reduction of your salary into place.

79 Mr Matsumoto said (t42) that Mr Tanaka said at the meeting that before he re-submitted the revised plan, he would send it to Mr Matsumoto and Mr Arai for confirmation, and Mr Matsumoto requested that this happen. Mr Matsumoto was not clear about the point of time in the meeting, and whether it was before or after passing the resolution, at which Mr Tanaka said this. Mr Arai’s evidence was that the revised loan repayments plan was to be sent to Mr Arai for approval; he distinguished approval from confirmation (t61). Mr Matsumoto also adhered to his evidence that he told Mr Tanaka that Mr Matsumoto would like to see the proposal before the reduction in salary was put into place. He acknowledged that the time of putting the reduction into place was not written in the minute, although it was an important matter. Apart from Mr Matsumoto’s evidence there is no confirmation that there was such a statement about seeing the proposal before the reduction was put in place. Mr Arai’s evidence did not confirm that Mr Matsumoto said these words; Mr Arai did not remember Mr Matsumoto saying that he would like to see the revised repayment plan before the reduction when Mr Tanaka’s salary was put into place (t65). Mr Tanaka denied it, and it does not appear in the minutes, nor does it appear in Mr Matsumoto’s notes made during the meeting (Exhibit C) or in his email made eight days later (Exhibit D).

80 There are also conflicts about other matters which Mr Matsumoto said was stated at the meeting; but these are not of a high order of importance. Both Mr Matsumoto and Mr Tanaka were challenged in cross-examination and adhered to the positions they took on affidavit. If the statement “We would like to see that proposal before we put the reduction of your salary into place” were made it would not be consistent with the reduction being decided on only as an element to be included in the proposal to be put to KDDI Australia, but not to be acted on unless and until KDDI Australia approved of the proposal. I do not accept Mr Matsumoto’s evidence that these words were said. Nor do I accept that the decision to reduce Mr Tanaka’s salary was conditional and was not to take effect until there had been some further consideration of the proposal by Mr Matsumoto and Mr Arai.

81 As, according to the defendants’ view, the reduction was to operate if KDDI Australia approved a repayment schedule proposal, and as approval of the repayment schedule proposal was the only basis on which it could reasonably be expected that Tokyo Net would stay in business, the suggested conditionality or the characteristic of being an assumption or a hypothesis of the reduction in salary makes very little difference to the force of the decision to reduce salary, apart from postponing the time when it took effect; if finance did not become available Tokyo Net’s business could not continue and it would be of little importance what Mr Tanaka’s contractual entitlement to salary was.

82 Although Mr Tanaka said that he believed that there would be some sort of agreement with KDDI Australia, he also agreed that, thinking theoretically, without such an agreement the only option for Tokyo Net would be to go into liquidation if it did not get further loan from KDDI (t.7). It was actually in his mind at the time as a possibility that Tokyo Net could be forced into liquidation. Because of past experiences in dealing with KDDI Australia over loans Mr Tanaka expected, notwithstanding the terms of the demands from KDDI Australia, that these communications were a stage before compromise was reached. Mr Matsumoto regarded the reduction as unavoidable; the word appears in the minute and his evidence confirms that he said that.

83 It is no less a repudiation of the contractual obligations because in the company’s circumstances a reduction was unavoidable. I cannot see that it was any the less repudiatory conduct if the decision was to the effect that Mr Tanaka’s salary would be reduced only if there were a favourable turn of events which enabled the company’s business to continue. There can be no doubt that Mr Matsumoto and Mr Arai both intended that if there was a favourable decision by KDDI Australia, the reduction in salary would have been given effect.

84 The plaintiff’s senior counsel contended that the fact that, on 20 August, the remaining directors of Tokyo Net purportedly rescinded the resolution was an indication that it was not conditional, or that it was an indication against the view that the resolution was not intended to have effect. In my view however, the rescission is not an indication whether or not the resolution was intended to be conditional.

85 The company’s decision is found in the resolution. It is not found in the discussion at the meeting which preceded passing the resolution, or in the commercial context and the circumstances which led to the meeting being held with urgency and to consideration being given to the subjects before it. Mr Matsumoto is not the company, and what he said at the meeting, what other people said to him and what he understood was the effect of all the events are not a decision of the company. Decisions of the company cannot be found in those sources, but must be found in what the directors resolved.

86 The circumstances provide no support and give no room for an implication that it was intended that if KDDI Australia did not agree to the repayment plan there would be no reduction. It would be wrong to understand the events that way.

87 Passing the resolution was an anticipatory breach of contract. The next payment of salary was to take place, according to the Employment Agreement on 15 August 2002. On 14 August, when Mr Tanaka accepted the breach and repudiation and terminated the contract by his letter (Exhibit B, p104), there had not been an actual breach, but the first defendant’s repudiatory intention was fully expressed and altogether clear, and was unqualified. In its plain terms there was an unconditional resolution to reduce Mr Tanaka’s salary by $17,000. If the resolution is to be understood in a context, to be found in records elsewhere in the minute of discussion at the meeting, or in a wider context of evidence of the state of the company’s affairs, the demands before the company and evidence of persons who attended the meeting about statements that are not recorded in the minute, all of that material does nothing to alter the plain terms and unconditional character of the resolution. If however, in contrast to my finding, the correct view is that it ought to be understood as a decision which was only to be given effect by putting it forward as part of a repayment plan, to be carried out only if KDDI Australia accepted the repayment plan, that has no real force to reduce its repudiatory character. The resolution would still mean that Tokyo Net regarded it as open to itself to reduce Mr Tanaka’s salary in circumstances which it regarded as appropriate; and as it happens, those circumstances were the only circumstances in which the business of the company could be expected to continue the statement in the minute that the reduction was unavoidable expresses the perception of the majority directors which was the basis of the decision. The reasons which supported seeing the reduction as unavoidable add emphasis to the force of the resolution as an indication of intended conduct.

88 The force of the resolution is very little different as an anticipatory breach and repudiation if it were only to have effect in the only circumstances in which the company’s business was likely to continue, from the force it would have if it were completely unqualified. If the true position had been that the resolution for a reduction of Mr Tanaka’s salary was hypothetical, conditional or based on an assumption it would nonetheless have been open to Mr Tanaka to maintain that it constituted a repudiation of his employment contract, because it showed that Tokyo Net regarded it as open to itself to depart from the terms of his employment contract if the contemplated circumstances actually came about, so that if Mr Tanaka had waited to see whether they did come about he would do nothing to avert an adverse outcome. However he would, if he continued to work after the decision had been taken, expose himself to possible contentions that he had acquiesced in the decision, and he would also take on himself the risk of showing that the resolution had the conditional, hypothetical or assumption-based significance which Tokyo Net now attributes to it, and did not mean what on its face it literally says.

89 As the first defendant’s conduct was repudiatory, and as the plaintiff accepted the repudiation and terminated the contract of employment on 14 August, the steps later taken by the first defendant, including purportedly rescinding the resolution, and steps purportedly taken to terminate the employment, have no effect.

90 As no failure to take reasonable steps to mitigate damages was established, damages should be calculated on the salary to which Mr Tanaka was contractually entitled for the balance of the agreed term of employment that is, until 3 July 2003, and then for the period of 3 months to 3 October 2003, three months being the minimum period of notice of termination or payment in lieu to which he was entitled after the third anniversary by cl.16 of the Employment Contract. The effect of cl.9 of the Contract is that Mr Tanaka was entitled to a proportional amount of salary for any period shorter than a financial year; that is to say, that he was entitled to salary day by day at the annual rate of $173,000. Tokyo Net paid him salary up to 11 October 2002 which Tokyo Net maintained was the date of termination, and also paid his accrued superannuation entitlement up to that date and his accrued annual leave entitlement up to that date. Accordingly, in the calculation of damages, I should have regard to his entitlements to salary, superannuation and leave for the period of which the first day is 12 October 2002 and the last day is 3 October 2003. These entitlements are a matter of calculation. The plaintiff’s senior counsel put forward the following calculation.

91 Defendants’ senior counsel disputed entitlement to Long Service Leave, which is governed by cl.13 of the Employment Agreement and by the Long Service Leave Act 1955. Counsel also disputed inclusion of an element representing Annual Leave entitlement in the period of three months from 3 July to 3 October 2003 to which the notional payment in lieu of three months’ notice of dismissal would relate. After the conclusion of the hearing, the plaintiff’s counsel brought forward further contentions. These included a contention to which no submission made at the hearing had referred, in which the period of employment for calculation of leave entitlements began before 3 July 2000.

92 Although evidence was given and submissions were made at the hearing on the quantum of the plaintiff’s claims against the first defendant and I had regard to those in preparing my reasons for judgment, the plaintiff’s counsel asked me, in a written submission sent to my Chambers on 3 December, to reopen evidence and argument on damages. I am not prepared to do this, and will give judgment for the plaintiff against the first defendant for damages to be assessed and I will direct an inquiry to ascertain the amount.

93 The award of interest, on damages for loss of a stream of payments over a period, needs careful consideration and must be deferred.

94 Defendants’ Senior Counsel, referring to the definition of “resignation” in the Shorter Oxford English Dictionary, which has many shades of meaning, contended that Mr Tanaka resigned his employment because the event which terminated the contract of employment was the act of Mr Tanaka himself in that he accepted the repudiation; the employment continued until Mr Tanaka’s own act brought it to an end. I found no assistance in the Dictionary definition. Nor did I find any assistance in the review of the usage of “resignation”, “termination” and related words in the Employment Contract or in the Share Sale Agreement. The significant question is whether, in the meaning of cl.11.2(a)(i), Mr Tanaka resigned as Chief Executive Officer on 14 August. In my opinion, in the ordinary meaning of “resigns” and the meaning of the word as found in the Share Sale Agreement cl.11.2(a)(i) Mr Tanaka did not resign. On any reasonably available view, what took place was not a resignation. It could, I would think be classified as plaintiff’s counsel contended as a constructive dismissal, but what is significant in the circumstances is whether it was a resignation. Mr Tanaka’s acceptance of the repudiation and taking the last step in the events which ended his employment could be spoken of in many ways, but not, in any use of language which has reality, as a resignation.

95 It was contended that it was open to Mr Tanaka not to accept the repudiatory conduct but to affirm his employment contract, but that he elected not to do so. It would in my opinion have been perilous for Mr Tanaka to have continued to work after there had been repudiatory conduct; he would then have been exposed to a contention that he had acquiesced in it, and that this had produced some impact on his rights. Even if he were not exposed to that contention, it would have been fairly certain that he would have received less money than he was entitled to receive, and he would have been given the trouble and difficulty of controversy to collect the rest.

96 Defendants’ counsel’s analysis in which it was contended that Mr Tanaka resigned because the acceptance of the repudiation was his own act does not appear to me to leave any reasonably available field of action for the Early Call Option. The analysis presented by defendants’ counsel could be presented for any course of events in which there was a constructive dismissal, the employees’ position was made untenable and he decided to leave. To say, as counsel said, that the event was a voluntary act by Mr Tanaka in which he gave up his position was not to establish that he resigned. I asked the defendants’ counsel to formulate circumstances in which Mr Tanaka could exercise the option without it being said, within the limits of the defendants’ counsel’s analysis, that he had resigned and he was unable to do so in any way which I regarded as satisfactory.

97 The condition required by cl.10.5(a) for exercise of the Early Put Option has been satisfied as Mr Tanaka’s employment was terminated for a reason other than the reasons specified in cl.11.2(a). I will make orders for specific performance of the Early Put Option.

98 The plaintiff is entitled as against the second defendant to damages for late payment of the purchase price of the shares for the period from 30 August 2002 when completion should have taken place according to cl.10.5(d) until the time when completion actually takes place. When dealing in detail with specific performance I will require payment of interest at the rates in Schedule J to the Supreme Court Rules.

99 ORDERS:

(1) I give judgment for the plaintiff against the first defendant for damages and interest to be assessed.

(2) Order that it be referred to a Master to inquire, ascertain and certify the amount of damages and interest which ought to be awarded to the plaintiff against the first defendant, and further order that judgment be entered for the total of the amounts so certified.

(3) Declare that the exercise by the plaintiff of the Early Put Option in Share Sale and Subscription Agreement dated 23 June 2000 for the sale by the plaintiff as vendor to the second defendant as purchaser of 49 shares in the first defendant was valid and effectual and that the price of $827,825.00 was payable on 30 August 2002; and further declare that the sale of the shares ought to be specifically performed and carried into execution under the directions of the Court.

(4) Direct that on completion of the sale of the shares the second defendant is to pay to the plaintiff interest on the purchase price from 30 August 2002 until the date of payment of the purchase price at the rate in Schedule J to the Supreme Court Rules.

(5) Reserve further consideration of directions in detail for the time, place and manner of completing the sale of shares and any other proper direction relating thereto.

(6) Order that the defendants pay the plaintiff’s costs of the proceedings.

**********

Last Modified: 11/28/2007

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Citations

Tanaka v Tokyo Network Computing P/L [2003] NSWSC 1114

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CITATION:	TANAKA v. TOKYO NETWORK COMPUTING P/L [2003] NSWSC 1114 revised - 22/03/2004
HEARING DATE(S):	24, 25 & 26/11/2003
JUDGMENT DATE:	11 December 2003
JURISDICTION:	EQUITY
JUDGMENT OF:	Bryson J at 1
DECISION:	Judgment for the plaintiff - see [99].
CATCHWORDS:	CONTRACT - employment - repudiation by reduction of salary - Tanaka (Plaintiff) sold majority shares in Tokyo Net (1D), an ISP, to KDDI (2D) and was employed for 3 years as CEO. Tokyo Net depended on loan from KDDI for working capital - KDDI refused to renew the loan, directors considered preparation of a proposal to KDDI to renew loan with reduction in costs, and by majority resolved to reduce Mr Tanaka's salary - Tanaka treated this as anticipatory breach and repudiation, accepted repudiation and sued for damages: issues of fact about whether resolution was conditional on submission and approval of loan renewal proposal: on the facts, it was not conditional, reduction in salary was repudiatory, damages awarded. - VENDOR and PURCHASER - shares in private company - option - in the Sale Agreement Tanaka had Put Option to sell his remaining shares if his employment was terminated within 3 years - after accepting repudiation he exercised Put Option - option not available if he resigned: on the meaning of the Sale Agreement, he did not resign by accepting repudiation: Sale on exercise of option enforced by Specific Performance.
LEGISLATION CITED:	Evidence Act 1995 Long Service Leave Act 1955
CASES CITED:	Advertiser Newspapers Pty Ltd v. Industrial Relations Commission of South Australia (1999) 90 IR 211 Associated Newspapers Ltd v. Bancks (1951) 83 CLR 322 Federal Commerce & Navigation Co. Ltd v. Molena Alpha Inc. [1979] AC 757 Laurinda Pty Ltd v. Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 Leotta v. Public Transport Commission (NSW) (1976) 50 ALJR 666 Rigby v. Ferodo Ltd [1988] ICR 29 Saad v. TWT Ltd (CA NSW 29 May 1998 unreported) Handley JA Shevill v. Builders Licensing Board (1982) 149 CLR 620 Tramways Advertising Pty Ltd v. Luna Park (NSW) Ltd [1938] 38 SR (NSW) 632 Water Board v. Moustakas (1988) 180 CLR 491
PARTIES :	Yoji Tanaka - P Tokyo Network Computing P/L (1D) KDDI Australia P/L (2)
FILE NUMBER(S):	SC 5126/2002
COUNSEL:	A. Sullivan QC & N. Manousaridis (P) A.S. Martin SC (D 1&2)
SOLICITORS:	Elson Pow & Associates (P) Abbott Tout Solicitors (D 1&2)