Igaki Australia Pty Ltd & Anor v Coastmine Pty Ltd & Ors [1996] FCA 207

CATCHWORDS

TRADE PRACTICES - misleading and deceptive conduct - whether representations pleaded made out - whether representations pleaded false - whether representations pleaded relied upon - representation which induced contract not pleaded - application dismissed.

APPEAL - whether trial judge's findings against the evidence and weight of the evidence

EVIDENCE - credibility - whether trial judge's finding central to decision - whether appellate court should overturn trial judge's findings on credit.

PRACTICE AND PROCEDURE - amendment to pleading - whether appellate court should allow amendment - further evidence necessary if amendment allowed - respondents invited appellants to make same amendment at trial.

COSTS - review of trial judge's award - whether successful respondents should be awarded costs when appellants relied on representation not pleaded - whether successful respondent should be awarded costs when they had been engaged in conduct in contravention of Taxation Administration Act 1953 (Cth) and when that conduct was the inducement which caused applicants to enter agreement.

Trade Practices Act 1974 (Cth) s52

Taxation Administration Act 1953 (Cth)

Federal Court of Australia Act 1976 (Cth) s43

Waterboard v Moustakos (1988) 180 CLR 491

Gould v Vaggelas (1985) 157 CLR 215

Devries & Anor v Australian National Railways Commission & Anor (1993) 177 CLR 472

IGAKI AUSTRALIA PTY LTD & ANOR v COASTMINE PTY LTD & ORS

No. QG174 of 1994

Spender, Whitlam and Beazley JJ

26 March 1996

Brisbane

IN THE FEDERAL COURT OF AUSTRALIA )

) No. QG174 of 1994

QUEENSLAND )

DISTRICT REGISTRY )

)

GENERAL DIVISION )

BETWEEN: IGAKI AUSTRALIA PTY LIMITED

First Appellant

I.R. GAYKUEN

Second Appellant

AND: COASTMINE PTY LTD

First Respondent

ROBERT JAMES BURGESS

Second Respondent

NICHOLAS CASSAR KARLOS

Third Respondent

PAUL GERRARD STEER

Fifth Respondent

ROBERT JAMES BURGESS

Cross Appellant

IGAKI AUSTRALIA PTY LTD

First Cross Respondent

I.R. GAYKUEN

Second Cross Respondent

CORAM: SPENDER, WHITLAM AND BEAZLEY JJ

PLACE: BRISBANE

DATE: 26 March 1996

MINUTES OF ORDERS

The Court orders that:

1. The appeal be dismissed.

2. The appellants pay respondents costs.

3. The cross appeal be dismissed.

4. The cross appellant pay the cross respondents' costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA )

) No. QG174 of 1994

QUEENSLAND )

DISTRICT REGISTRY )

)

GENERAL DIVISION )

BETWEEN: IGAKI AUSTRALIA PTY LIMITED

First Appellant

R.I. GAYKUEN

Second Appellant

AND: COASTMINE PTY LTD

First Respondent

ROBERT JAMES BURGESS

Second Respondent

NICHOLAS CASSAR KARLOS

Third Respondent

PAUL GERRARD STEER

Fifth Respondent

ROBERT JAMES BURGESS

Cross Appellant

IGAKI AUSTRALIA PTY LTD

First Cross Respondent

I.R. GAYKUEN

Second Cross Respondent

CORAM: SPENDER, WHITLAM AND BEAZLEY JJ

PLACE: BRISBANE

DATE: 26 March 1996

REASONS FOR JUDGMENT

THE COURT: This is an appeal from the decision of Drummond J dismissing the appellants' claim against the respondents for damages for misrepresentation and negligence relating to the entry into a Shareholders' Agreement on 18 July 1990. The essential issue on the appeal is whether his Honour was justified
in finding that the factor which induced the appellants to enter into a Shareholders' Agreement with the first respondent (Coastmine) was the promise of substantial amounts of "black money" from the restaurant businesses operated by Coastmine. There is a cross appeal by the second respondent, Burgess, against the costs order made by Drummond J.

The parties and other persons

The first and second appellants are Australian and Japanese corporations respectively. Mr Toshihasu Igaki (Igaki), a Japanese businessman, resident in Nagoya, Japan, is the principal of both companies. Igaki gave evidence on behalf of the appellants, as did his wife, Mrs Igaki, his accountant, Mr Ishihara (Ishihara) and Mr Watanabe (Watanabe).

Coastmine was a shareholder in a company, Remobay Pty Limited (Remobay) which was, or entitled by agreement to be, the owner and operator of a number of restaurants in Surfers Paradise and Noosa Heads. The second and third respondents (Burgess and Karlos) were directors of Coastmine. Watanabe was a Japanese businessman who acted as Burgess' and Karlos' agent in the course of dealings with Igaki. Prior to the commencement of the hearing before the trial judge, the appellants settled the claim against the then fourth respondent, Watanabe. The fifth respondent (Steer) is an accountant who was retained by Coastmine in the course of the negotiations which led to the entry into the Shareholders' Agreement. Ms Carolan, Coastmine's office manager, gave evidence on behalf of the respondents.

Burgess and Karlos did not give evidence. His Honour applied the principles in Jones v Dunkel (1959) 101 CLR 298 to their failure to do so. He was also critical of respondents' failure to call Igaki's Japanese-speaking Australian solicitor, Mrs Feller.

The Shareholders' Agreement

On 25 June 1990, Igaki and Coastmine entered into Heads of Agreement, reflecting negotiations between Igaki, Burgess and Karlos, for Igaki or his nominee to purchase a "50% interest in the total ownership of the leasehold interest and business comprising the assets that [Coastmine] operates." On 18 July 1990, Coastmine, Remobay, Igaki, Burgess and Karlos entered into a Shareholders' Agreement. The agreement recited that Igaki and Coastmine were "the holders or entitled to be the holders subject to completion of an agreement between Coastmine and [Remobay] and to an application for shares in [Remobay] by Igaki of all the issued share capital...in the following proportions:-

(i) Igaki 4, 000, 010;

(ii)Coastmine 4, 000, 002."

The Shareholders' Agreement provided for the payment of a consultancy fee to Coastmine and Igaki of $200,000 in the first year, to be increased annually in accordance with the increase in the Consumer Price Index (All Groups) for Brisbane. The purchase price of the shareholding was $4 million.

Drummond J's judgment

The appellants alleged that the respondents had breached s 52 Trade Practices Act 1974 (Cth) by making various representations leading to the entry into the Shareholders' Agreement. The learned trial judge first dealt with the overall factual matrix. He then made findings in respect of the representations. His Honour dealt separately with Igaki's credit. Finally, his Honour dealt with the issue whether the appellants were, in any event, entitled to relief if the subject transaction was entered into in contravention of the Taxation Administration Act 1953 (Cth) (the illegality issue). His Honour found that although some of the representations alleged had been made out, the appellants had not established that any of those representations had induced the entry into the Shareholders' Agreement. Rather, the inducement had been the promise of "black money".

The essential ground of appeal is that his Honour's finding in this regard was against the evidence and the weight of evidence. It is necessary therefore to deal, both with his Honour's general findings of fact and with his findings in respect of the particular representations alleged. It is convenient to approach these findings in the context of his Honour's narrative of events.

Findings of fact

Reference has already been made to the Heads of Agreement entered into by Igaki with Coastmine on 25 June 1990. Prior to the entry into that agreement, Burgess had engaged Steer to prepare a document setting out financial information in respect of the operation of the restaurant business. Two such documents were prepared, each titled "A Private Sale" (the Private Sale documents). The documents were in identical terms, save that one document indicated an after tax profit of $2,259,008.00, being a return of 28.2% on a $4 million investment. The other document specified a slightly lower after tax profit reflecting a 25.4% return on a $4 million investment. His Honour described the Private Sale documents as "elaborate sales presentations". They contained financial projections for the restaurants for the 1991-1995 financial years. However, notwithstanding that the four Gold Coast restaurants had been trading for periods ranging from 14 months to 4 years, the documents did not contain any historical trading information. The only statement made in that regard, which appeared under the heading "Past Trading Results", was:

"Coastmine Pty Ltd will provide past financial details to assist Toshihasu Igaki in evaluating the proposal, if required. It should be noted that past trading results cannot provide a guarantee to future trading projections."

His Honour found that the documents were prepared as an invitation to Igaki to purchase a 50% interest in Coastmine's restaurant business for $4 million.

On 19 June 1990, Karlos and Watanabe travelled to Japan and stayed at Igaki's home. The purpose of the visit was to persuade Igaki to invest in the restaurant businesses. Before going to
Japan, Burgess and Karlos had obtained a valuation for each of the five restaurants, including the proposed kareoke bar. The total valuation was $8.14 million based "on the financial projections in the private sale document."

Both Private Sale documents and the valuation were given to Igaki during the June visit.

In his written statement of evidence, Igaki said that he expressed concern to Karlos and Watanabe about the absence of past trading figures in the Private Sale documents and in the valuations. Mrs Igaki gave evidence that she was suspicious of the proposal and caused Igaki to forward a copy of the Private Sale documents to their accountant, Ishihara and to their banker. Both Ishihara and the banker advised against entering into the venture unless past trading figures and a company history were provided. Ishihara also warned Igaki that the profit rate in the Private Sale document was too high to be true. He gave evidence that Igaki responded by stating that he thought he could trust Burgess and that "he trusted this document...and wanted to accept the proposal".

However, Igaki accepted the views of Mrs Igaki, Ishihara and his banker and informed Karlos and Watanabe that he was not prepared to enter into the transaction. Watanabe assured Igaki that Burgess would send whatever information Igaki needed. Igaki responded that if he received the past trading figures and company history, he would be prepared to discuss the matter
further with his banker and accountant. This was relayed to Burgess.

A few days later, Burgess arrived in Japan and also stayed with Igaki. He held a meeting with Igaki, Mrs Igaki and an interpreter. Karlos and Watanabe were in attendance. Burgess still did not give any past trading figures to Igaki. Igaki again expressed a lack of interest in the investment without that information. The learned trial judge described Burgess at this time as "persist[ing]" with his endeavours to persuade Igaki to enter into the venture. He told Igaki, amongst other things, that another Japanese company was interested in entering into an arrangement with them in respect of the restaurant businesses. His Honour found that this information, together with Burgess's description of the plans which he had for a building in which one of the restaurants operated, attracted Igaki's interest. However, Burgess still had not secured Igaki's commitment.

His Honour found that it was against this background that Burgess first mentioned that cash money was taken from the business and not declared for tax purposes (black money). Burgess gave a document to Igaki which showed that $2.75 million "black money", or 15% of sales for each restaurant, would be split equally between Igaki on the one hand and Burgess and Karlos on the other. The document became exhibit IG6 in theproceedings and was so referred to by his Honour. We will adopt the same terminology. Burgess told Igaki that the 15% was "an that he
"never paid much tax". According to Igaki's written evidence, the conversation between he and Burgess continued:

Igaki:

"How can you get away with it?"

Burgess:

"You are just careful. Only silly people pay tax."

...

"These figures are based on the past three years growth and I expect this trend of improvement to continue."

Igaki also gave evidence that:

"It was at this point that I started to think if I can get two million dollars per year the joint venture would not be a bad deal."

Mrs Igaki's statement largely confirmed Igaki's evidence on this point. The trial judge considered that exhibit IG6 was "strong confirmation" of Igaki's evidence. He accepted Igaki's evidence on this issue.

His Honour considered that the content of exhibit IG6 made the proposal highly attractive to Igaki "because of the very high returns he believed he would get". His Honour also accepted Igaki's evidence that when Burgess revealed the availability of substantial amounts of tax free monies, it confirmed Igaki's belief that he could trust Burgess personally, although he remained sceptical of the other documents prepared for the
purposes of the negotiations.

On 25 June 1990, Igaki entered into Heads of Agreement with Burgess and Karlos. Both Igaki and Mrs Igaki gave evidence that Igaki was reluctant to sign the Heads of Agreement and did so only on the assurance that it was not a binding contract. Igaki also said that he only signed it on the express condition that he was provided with the company history and past trading figures before entering into any binding contract.

It was intended that Burgess would return to Japan in three months with the formal contract. However, almost immediately upon their return to Australia, Burgess and Karlos arranged for solicitors to be engaged for the Igakis and engaged other solicitors to act for themselves and Coastline. Steer was also retained by this time, although the precise date when he became involved is not clear. Another accountant, a Mr Dixon, was also retained by Igaki's solicitor to give independent accounting advice to Igaki. Mr Dixon did provide advice but this was never passed on to Igaki and Mr Dixon was not further involved in the matter.

On 14 July 1990, Karlos, Steer, Watanabe and Michael Robinson, solicitor, who had been retained on behalf of Igaki, arrived in Japan. On either 15 or 16 July 1990, everyone met at Igaki's home. Igaki was informed that the contract was available for signing. However, he declined to sign because he had not been provided with past trading figures and a business history. The information was again promised.

Another meeting was held on 17 July 1990. Before that meeting, Igaki telephoned Burgess. His evidence was that he said:

"...I asked Bob Burgess to sign the black money document he had written in June of 1990. I told him "Unless you sign it I won't attend the meeting to discuss the contract." I asked him to sign the black money document as a means of guaranteeing that what he had written was true. I did this because I was worried I had not been given a company history or trading figures so I wanted things in writing and signed.

Bob agreed to sign the document and I received by facsimile a copy of the document with Bob Burgess's signature on it. I did not have the document translated into Japanese and I did not notice that Bob had added new words to the document when he signed it...."

His Honour held that it was Burgess' confirmation of the black money, rather than the sales figures, that Igaki sought in this telephone call. The signed faxed copy of IG6 contained the following representations:

(i) that total annual sales of the existing restaurants on the Gold and North Coasts and from three planned operations would be $19 million;

(ii) that 15% or $2.75 million could be retained as undeclared income;

(iii) Igaki would receive half of this if he bought into the business.

The document also specified that annual sales from the four operating Gold Coast restaurants and the planned kareoke bar totalled $12.75 million. Even after receipt of the signed fax, Igaki continued to press for the past trading figures and company history. Again these were promised. Igaki's accountant and bankers maintained their advice not to become involved. Igaki gave evidence that, at this stage of the meeting, Karlos and the solicitor were told that the deal was off. Watanabe questioned Igaki whether that was "his decision". At this point, Igaki left the meeting and had a private meeting with his accountant and bankers to discuss the "black money" document. Ishihara and the banker expressed their view that the figures prepared by Burgess "were too good to be true." They also expressed doubt as to whether Igaki would receive the black money. However, Igaki considered that the black money provided a reason why trading figures for the restaurants were not available.

Ishihara continued to advise Igaki against entering into the venture. He told Igaki that if he did enter the agreement "the black money must stop". According to Igaki, he, Ishihara and the bankers "all agreed to that". Ishihara's evidence was that Igaki's response was "I understand". The trial judge rejected Igaki's evidence on this point and accepted Ishihara's. His Honour also considered there was a significant conceptual difference in the two answers. He did not accept that by saying "I understand", Igaki thereby agreed that the "black money must stop".

Notwithstanding Ishihara and his bankers' advice, Igaki told them:

"I want to go ahead with the transaction because I trust Bob Burgess...I believe the deal is reliable because Bob has signed the black money document to say so."

Igaki's private meeting with his advisers concluded and they returned to the main meeting. Igaki signed the Shareholders' Agreement.

On the basis of this evidence, the trial judge concluded that the factor which induced Igaki to enter into the contract was the promise of "black money".

His Honour's conclusion was reinforced by other evidence in relation to matters which occurred after the Shareholders' Agreement had been executed. Thus, at a meeting between the parties on 31 July 1990 in Steer's office, Igaki was shown a letter dated 31 July 1990, which Steer had prepared. Attached as Appendix II was "a summary of the monthly profit and loss projections of Remobay Pty Ltd to 30 June, 1991, as prepared by [Burgess]". The summary showed a projected return to the first appellant for the 10 months to June 1991 of $364,550.00, comprising the consultancy fee of $200,000.00 and a 50% share of after tax profit. It will be remembered that in both versions of the Private Sale document, the after tax projection of profit for the 12 month period to June 1991 was in excess of $1 million and the black money was to be additional to that. Igaki became very upset upon reading the figures in Appendix II and told Steer he wanted to terminate the contract.

At a further meeting on 2 August 1990, Igaki again told Burgess and Karlos as well as Mr Robinson, the solicitor, that he wished to terminate the agreement. During the course of this meeting, Burgess promised that the new projections contained in Appendix II, together with the black money, would equal at least $600,000. When he saw this material, Igaki said that "the deal was off". At that point, according to Igaki:

"...Burgess produced [the black money document] from somewhere like his pocket or something, and then said firmly that he will keep his promise."

Burgess then wrote the following note on the bottom of the document:

"We will always honour our obligations in terms of the contract...also we will honour our above agreement."

Igaki said to him:

"If you can guarantee the figures in the black money document I will do the deal"

to which Burgess replied:

"I can guarantee it."

Igaki was satisfied. Burgess and Karlos signed both the note
which Burgess had added at the bottom of the document and the document itself. Igaki made no further threats to terminate the contract. Subsequently in his evidence, Igaki said that the low profit figures in Appendix II were "totally irrelevant".

The Igakis received at least 5 payments of cash between the end of September 1990 and the end of December 1990, totalling $80,142.00. Igaki described these payments as black money, although Ms Carolan insisted that she repeatedly sought to correct what she believed to be Igaki's misapprehension that the cash payments were black money and to convince him they were legitimate drawings properly recorded in the company's books. The trial judge rejected Ms Carolan's evidence on this point.

The Igakis banked the cash money into their Australian banking or building society accounts. His Honour accepted that Ishihara at all times made it clear that he opposed the receipt of black money and informed Igaki that if any was brought into Japan he would make sure it was recorded in the books he kept for Igaki and his Japanese company. In fact, in February 1991, Igaki did forward the black monies to Japan but only because he was then unable to pay the interest on his borrowings in Japan. His Honour concluded:

"That he did this only in these circumstances of necessity does not throw any doubt on the proper characterisation of the receipts as payments made by [Burgess and Karlos] from cash income of the restaurant business to Igaki, which none of them intended to be declared for tax purposes."

The trial judge also took into consideration the fact that Igaki was never asked what he would have done had he been shown the historical trading figures for the company. Nor were those figures shown to him during the course of his evidence, notwithstanding that they were available as discovered documents.

His Honour found that evidence of other witnesses supported his conclusion that the matter which induced Igaki to enter into the agreement was the promise of black money. For example, Ms Carolan said that the cash drawings stopped due to a downturn in business. She gave evidence that the dispute between Igaki and the respondents only arose when the cash drawings ceased.

Ms Carolan said that, on Burgess' instructions, she set aside the cash that made up the payments given to Igaki from the restaurants' daily takings. She also set aside an equal amount for payment to Burgess and Karlos. She said that these payments were recorded at the time in Coastmine's daily sales book. However, despite a recent search, she was unable to locate this book, which she said she last saw in June 1991 in Coastmine's office. His Honour rejected this evidence.

Ms Carolan also gave evidence of being instructed by Burgess in November 1990 in the presence of Igaki, his interpreter, Karlos and a solicitor, Mrs Feller to cease taking cash drawings out of the daily bankings for Igaki and Burgess and Karlos. His Honour observed that even if this instruction was given, the fact was, money continued to be set aside by someone associated with Burgess and Karlos and paid to Igaki. Further, it was not until after April 1991 when the dispute between the parties arose, that Ms Carolan, on Burgess's instructions, recorded the cash payments made to Igaki as loans in Coastmine's journal.

We consider that it was open to his Honour to make the findings which he did on this evidence. He was also entitled to take these findings and the other matters to which we have referred above into account in support of his conclusion that the relevant inducement was the promise of black money.

Findings on the representations

Having considered the factual background and made the findings to which we have referred, his Honour made specific findings in respect of the representations alleged.

Representation as to the value of the business and net profit: Paragraphs 2(a), (b), (c) of the further amended statement of claim alleged:

"2. In or about June 1990, the First Respondent, by the Second Respondent and Fourth Respondents, represented to the Applicants (by Mr Igaki) that:

(a) the First Respondent's restaurants:

(i) together had been valued at $13 million;

(ii) together were of the value of $13 million;

(iii) together made net

profit of $2.5 million

per annum

(iv) together would make, or continue to make, sustainable net profit of $2.5 million per annum;

(b) (implicitly) facts existed which justified and warranted the making of each of the representations in (a);

(c) (implicitly) the First Respondent, and each of the Second and Respondents, knew facts which justified and warranted the making of each of the representations referred to in (a);

His Honour did not accept that Watanabe represented that the restaurants had a value of $13 million. In reaching this conclusion, his Honour relied in part on inconsistencies between Igaki's witness statement and his oral evidence. Further, neither the Private Sale documents nor the valuation report, both of which were relied upon in support of the allegation, contained such a representation or anything from which such a representation could be inferred.

His Honour further found that the evidence did not support a finding that Burgess had made these representations.

His Honour found that Watanabe did make the representation as to the net profit figure of $2.5 million to Mrs Igaki, who relayed it to Igaki. However his Honour held that there was no reliance on the representation.

Representations as to the value of the business in the 'Private Sale' documents and in the valuation

Paragraph 2(d) of the further amended statement of claim alleged:

"2. In or about June 1990, the First Respondent, by the Second Respondent and Fourth Respondents, represented to the Applicants (by Mr Igaki) that:

...

(d) (orally and by proffering it) the information contained in writing constituted by:

(i) a document termed "A Private Agreement 50% Interest to Toshiharu Igaki" dated 14.06.90; and

(ii) five "valuations" written by D B Quinlan & Associates on the basis of information supplied by the Respondents

was true, accurate and reliable;"

His Honour found that it could be assumed that the effect of handing these documents to Igaki was to represent that the information contained in each was true, accurate and reliable. However, his Honour again found that there was no reliance upon this representation. Igaki realised that the information in both documents consisted of "projections only which he considered to be inherently unreliable."

Provision of business history and trading figures to Igaki

Paragraphs 3(a), 4(a) and (b) of the further amended statement of claim alleged:

3. (a) In or about June 1990 the Second Respondent represented to the Applicants, by Mr Igaki, and in the presence of the Third Respondent and the Fourth Respondent that the Applicants could not be provided with:

(i) a history of the development of the business of the First Respondent (including the First Respondent's restaurants);

(ii)trading figures in respect of the First Respondent's restaurants.

4. On or about 16 and 17 July 1990, the First Respondent, by the Fifth Respondent and Michael Robinson, and in the Third Respondent's presence represented to the
Applicants (by Igaki) that:

(a) a business history of the First Respondent;

(b) trading figures in respect of the First Respondent's restaurants;

was or were not available."

His Honour accepted that the conduct of Burgess, Karlos and Watanabe in relation to the provision of the historical information amounted to a representation by Burgess and Karlos that such information could not be provided. His Honour found this representation was untrue. His Honour also found that Steer, who had at least some such information in his own office had been instructed by Burgess not to provide this information to Igaki. However, notwithstanding that an inference of reliance is generally drawn where there is evidence of the making of a misrepresentation that is calculated to induce reliance: Gould v Vaggelas (1985) 157 CLR 215 per Wilson J at 236, his Honour was not prepared to draw that inference in this case.

Representations that the restaurant businesses had not been declaring its entire income for income tax purposes:

Paragraphs 3(b)(i) and (ii) of the further amended statement of claim alleged:

"3. (b) In or about June 1990, the Second Respondent represented to the Applicants, (by Mr Igaki):

(i) that the First Respondent in the past had not returned the entire income from the First Respondent's restaurants to assessment to income taxation;

(ii) that the Respondent had not returned, on average, 15% of its net income from the First Respondent's restaurants to assessment to income taxation;"

His Honour accepted that these representations were made. However, they did not reflect the entirety of the representations made. His Honour found that it was only in the context of showing Igaki IG6 (the black money document) and promising Igaki a share in these monies that Burgess told Igaki that, on average, 15% of the business income was not declared for income tax purposes. His Honour found that Igaki did not rely only on that part of the representation pleaded in committing the appellants to the Shareholders' Agreement. He found that it was the totality of the disclosure, repeated by Burgess in July, and by Burgess and Karlos in early August, that convinced Igaki that the businesses were in a general way very profitable and which convinced him to commit the appellants to the proposal and to pay over the $4 million.

In any event, his Honour found that even if the representations alleged in paragraph 3(b)(i) could be looked at in isolation, they were probably true.

Representation that the net income of the restaurant businesses had not been less than $1 million:

Paragraphs 3(b)(iii) of the further amended statement of claim alleged:

"3. (b) In or about June 1990, the Second Respondent represented to the Applicants, (by Mr Igaki):

(iii) that, from his experience in managing the First Respondent's restaurants, he could guarantee that there was no year in which the net income (in aggregate) from those restaurants returned to
assessment of income taxation had been less than $1 million."

His Honour found that the representation pleaded was not made.

Representation that other investors were prepared to invest $4m in the restaurant business

Paragraphs 5(a)(bb)(bc) of the further amended statement of claim alleged:

"5. (a) In the course of meetings held at Mr Igaki's house in Nagoya, Japan between 19 June 1990 and 26 June 1990 and further on or about 17 July 1990, the Fourth Respondent represented to the Applicants (by Mr Igaki) that the Second Respondent (meaning the First Respondent by the Second Respondent) had received a number of offers from others than Mr Igaki and his interests to invest in a half interest in the First Respondent's restaurants (implicitly) at the value of at least $4 million or more for such half interest;

(bb)In the course of a meeting held on a date between 19 June 1990 and 26 June 1990 at Mr Igaki's house in Nagoya, Japan the Second Respondent represented to the Applicants (by Mr Igaki) that the Second Respondent (meaning the First Respondent by the Second Respondent) had received a number of offers from others than Mr Igaki and his interests to invest in a half interest in the First Respondent's restaurants at the value of $4,000,000.00 for such half interest;

(bc)By facsimile transmission dated 17 July 1990 the Second Respondent represented to the Applicants (by Mr Igaki) that the First Respondent:-

(i) "Had the opportunity to do a 50/50 joint venture with three different Japanese companies"; and

(ii) (Implicitly) that the joint venture was in relation to the First Respondent's restaurants and at an amount not less than $4,000,000.00 for a half interest;"

His Honour accepted that a representation had been made that another Japanese company was keen to pay $4 million for the share in the first respondent that was being offered to Igaki. His Honour held that even if this representation was false, it did not play any material part in causing Igaki to commit the appellants to the purchase.

Net Value of restaurants

Paragraph 5 (b) of the further amended statement of claim alleged:

"5. (b) The First Respondent represented to the Applicant that, were the First Respondent's restaurants to be transferred to Gold Coast Restaurants Australia Pty Ltd, and Mr Igaki's interests to take up a half interest in Gold Coast Restaurants Australia Pty Ltd, such restaurants, net of the satisfaction of the First Respondent's trading debts in respect of the same, would be worth not less than $8 million;"

His Honour found that even if such representation was made, it was made only to Ishihara and there was no evidence that it was heard by or repeated to Igaki.

Representations made by Steer

Paragraph 5(c) of the further amended statement of claim alleged:

"5. (c) In July, 1990, (and prior to the events referred to in paragraph 15) the Fifth Respondent, represented to the Applicant (by Mr Igaki) that:

(i) the document "Private Agreement 50% Interest to Toshiharu Igaki" (referred to in paragraph 2(d)(i)) contained and reflected previous trading figures of actual business conducted by the First Respondent;

(ii) the Fifth Respondent well knew the business of the First Respondent and could therefore vouch for the accuracy of the documentation in respect of the business.

(iii) (implicitly) that the valuations (referred to in paragraph 2(d)(ii)) were based on previous trading figures of actual business conducted by the First Respondent;

(iv) that the figures contained in or basing the document referred to in (i) were true and accurate as the figures of or reflecting actual previous business conducted by the First Respondent;

(v) that the Fifth Respondent as an accountant had worked for the First and/or Second and/or Third Respondents long enough to know that the figures contained in or basing the document referred to in (i) were true and accurate as the figures of or reflecting actual previous business conducted by the First Respondent;

(vi) that the figures contained in or basing the document referred to in (i) had the Fifth Respondent's imprimatur as an accountant as being true and accurate as the figures of or reflecting actual previous business conducted by the First Respondent."

His Honour found that, having regard to his finding that the promise of black money had induced Igaki to enter into the venture, then, even if the representations alleged against Steer were made out, the appellants had not established reliance on them. His Honour then commented on the specific allegations and on Steer's evidence. However, because of our conclusion as to the outcome of the appeal, it is not necessary to deal with these matters.

Trial judge's findings on the matters which induced the appellants to enter into the Shareholders' Agreement

Having dealt with the individual representations pleaded, his Honour then made two findings, the second of which was critical to the outcome of the case. The first finding was of Igaki's trust in and friendship with Burgess. His Honour found that whilst that was an important factor in Igaki's consideration of the proposal, it was not enough to induce him to cause the first appellant to enter into the Shareholders' Agreement.

His Honour therefore found that the only matter which caused Igaki to have the appellants enter into the transaction was:

"...because he counted on receiving large amounts of money from the income of the business that he well knew would be paid to him in breach of the Australia income tax laws."

Appellants' case

The appellants challenge his Honour's finding that:

"it was the repeated promise of "black money" that was the critical factor which induced Mr Igaki to commit the [appellants] to this transaction and to pay over the $4,000,000.00 purchase monies"

and his further finding that the appellants:

"entered into the transaction for the purpose of getting illegal gains"

on the basis that these findings were against the evidence and the weight of evidence. Counsel for the appellants first
referred to the evidence which supported this finding. He then referred the court to other evidence from which a contrary conclusion could be drawn.

A trial judge is entitled to accept in full or in part, or to reject, the evidence of a particular witness. Depending upon the particular case, the court may evaluate evidence either with or without reference to other evidence. In reaching a conclusion as to the facts, it is not necessary that a trial judge set out all the evidence which has been given. Error, sufficient to overturn a judge's finding as to fact, is not demonstrated merely by pointing to other evidence which, if accepted, would have led to a different conclusion.

In this case, his Honour's decision was dictated by his finding as to Igaki's credit. In that regard, his Honour considered Igaki's written and oral evidence and referred to the inconsistencies between the two. He accepted some of Igaki's evidence but rejected substantial parts of it. His Honour also referred to evidence of Mrs Igaki and Ishihara. There were significant aspects of their evidence which did not support Igaki's evidence. His Honour found them more reliable witnesses than Igaki. His Honour's assessment of these witnesses was open to him.

It is well established that an appellate court should exercise caution in overturning a trial judge's finding on credit. In Devries & Anor v Australian National Railways Commission & Anor (1993) 177 CLR 472, Brennan, Gaudron and McHugh JJ stated at 479:

"More than once in recent years, this Court has pointed out that a finding of fact by a trial judge, based on the credibility of a witness, is not to be set aside because an appellate court thinks that the probabilities of the case are against - even strongly against - that finding of fact (see Brunskill v Sovereign Marine and General Insurance Co Limited (1985) 59 ALJR 842; Jones v Hyde (1989) 63 ALJR 349; Abalos v Australian Postal Commission (1990) 171 CLR 167). If the trial judge's finding depends to any substantial degree on the credibility of the witness, the finding must stand unless it can be shown that the trial judge "has failed to use or has palpably misused his advantage" (SS Hontestroom v SS Sagaporack [1927] AC 37 at 47) or has acted on evidence which was "inconsistent with facts incontrovertibly established by the evidence" or which was "glaringly improbable" (Brunskill at 244)."

There is no basis in this case to interfere with his Honour's findings of credit. Not only did his Honour have the advantage of seeing Igaki give his evidence, there was, as we have pointed out, other evidence, at times from Igaki himself, and at times from other of the appellants' witnesses, to support his Honour's findings. His Honour's finding on credit was central to his determination. Subject only to the question of leave to amend, his Honour's judgment should be upheld.

Application for leave to amend the further amended statement of claim

On the appeal, the appellants sought leave to amend the statement of claim by adding the following subparagraph to paragraph 3 of the further amended statement of claim:

"(c)In or about the months of June, July and August
1990, the Second and Third Respondents on their own behalf and on behalf of the First, Second and Third Respondents represented to the applicants, by Mr Igaki, that 15% of the sales of the First Respondent's restaurants would return $2,750.000.00 per annum income undeclared for taxation purposes."

The application to amend was opposed. Counsel for the respondents submitted that the proposed amendment raised new factual issues and thus should not be allowed. We agree that the amendment, if allowed, would most likely give rise to new factual issues. At the very least, it cannot be said that the respondents would have conducted their case in the same way had the amendment been sought and allowed at trial. That is sufficient to refuse the amendment. In Waterboard v Moustakos (1988) 180 CLR 491 Brennan and Dawson JJ stated at 497:

"More than once it has been held by this Court that a point cannot be raised for the first time upon appeal when it could possibly have been met by calling evidence below. Where all the facts have been established beyond controversy or where the point is one of construction or of law, then a court of appeal may find it expedient and in the interest of justice to entertain the point, but otherwise the rule is strictly applied..."

Their Honours further stated:

"It is true that in Maloney v Commissioner for Railways (NSW) (1978) 52 ALJR 292 it was recognised that in "very exceptional cases" a plaintiff's omission to put at trial a case formulated on appeal may not be conclusive against him. But it was pointed out that the opportunity to assert the new case at another trial should only be granted where the interests of justice require it and such a course can be taken without prejudice to the defendant. No exceptional circumstances arise in this case where the parties adopted the course which they took of their own choice."

These last words are apposite to this case. At an early point in the trial, the respondents had invited the appellants to amend. The circumstances were as follows. During the course of dealing with the admissibility of evidence, counsel for Coastmine, Burgess and Karlos objected to paragraph 47 of Igaki's statement. That paragraph referred to a handwritten document allegedly produced by the second respondent during the course of negotiations, which "showed that 15% of the sales for each restaurant [conducted by Coastmine] were to be deducted as "black money" and that on Bob Burgess's figures, 15% of the sales totalled $2,750,000.00." In the course of making the objection, counsel for Burgess and Karlos said:

"Paragraph 47 expresses some statement of belief by the witness in relation to that document. Well, our concern about that, apart from the fact that it is a statement of belief, is that it cannot go to any issue in the matter because, as we perceive the pleadings as they presently stand, that document is not relied upon as a representation by the...applicants...The only references we can find in the pleadings to 15% at the relevant time are in paragraph 3(b) of the statement of claim...

...then in paragraph 6 of the particulars, the only 15% representation relied upon is said to be an entirely oral representation.

...I want to make it clear that if there is going to be an attempt to rely on those documents as representations as distinct to anything said by Mr Burgess...

...I am really inviting them if they want to amend to amend their pleadings now because we are not going to conduct the case in the absence of amendment on the basis that these 15% documents are material representations.

His Honour: Yes...you have made your position very clear...what do you say Mr Douglas.

Mr Douglas: We understand that your Honour."

Mr Douglas QC was counsel for the appellants. No application to amend was made and paragraph 47 was not admitted into evidence. The case proceeded on the pleadings in the further amended statement of claim. Counsel for the respondents again raised the matter in written submissions made at the conclusion of the evidence. The appellants did not make any response to those submissions.

Thus the appellants were put on notice, in unequivocal terms, that the case was defended on the basis of the pleadings. They elected to proceed on that basis. They chose not to base their claim on the representation which his Honour found was the inducement to enter the contract and which was subject of the evidence in paragraph 47 of Igaki's statement. If leave was granted, then, potentially, the admissibility of paragraph 47, which was properly rejected at trial, would have to be reconsidered. Other evidence might also have to be given. It would be contrary to the interests of justice to allow an amendment in such circumstances. The application for leave to amend should be refused.

The illegality issue

One final matter should be mentioned. Although not pleaded by either party, Drummond J raised the question whether the appellants could obtain relief, even if induced to enter the Shareholders' Agreement by a misrepresentation, if Igaki intended to carry on the restaurant businesses in contravention of the Taxation Administration Act 1953 (Cth) by not declaring the "black money" for income tax purposes. Having regard to our conclusion that his Honour's finding that the offer of "black money" was the sole inducement, is not necessary to deal with the issue of illegality.

The cross appeal on costs

Burgess has cross appealed against his Honour's order:

"That the applicants' proceedings against the first, second and third respondents are dismissed without any order in respect of the costs of those respondents of or incidental to those proceedings."

In deciding that there be no order for costs his Honour stated:

"Although these respondents have ultimately succeeded in resisting all the applicants' claims, they were successful because I have found that the applicants acted on a representation not pleaded, i.e., that illegal moneys would be paid to them. They unsuccessfully argued against my reaching such a conclusion."

Counsel for Burgess submitted that his Honour's finding that the respondents had argued against his Honour reaching that conclusion was mistaken. He referred to the respondents' written submissions in which the respondents had argued that the appellants had not made out any reliance on the alleged representations, but rather, Igaki's motivation for entering the contract involved a combination of factors, including "a desire to get tax free money".

Counsel for Burgess acknowledged that the court had a discretion under s 43(2) of the Federal Court of Australia Act 1976 (Cth) to award costs. It was submitted that, it was appropriate for the court to review the exercise of the trial judge's discretion as his Honour had based the order as to costs on a misunderstanding of the respondents' submissions: House v R (1936) 55 CLR 499 at 504-5; Concrete Constructions Group Pty Ltd v McNamara (1990) 92 ALR 427 at 434-6.

It was submitted that there were several features of this case which made it appropriate to apply the usual rule that costs should follow the event. First, it was submitted that the appellants should never have commenced the proceedings, as the very basis upon which they were pleaded had failed. Secondly, it was in the respondents' interests to establish that there was reliance on a matter not pleaded, after the invitation to amend had not been taken up. Thirdly, it was submitted that an analogy could be drawn between a successful plaintiff who is responsible for substantial contributory negligence and a party who successfully pleaded illegality to resist enforcement. And fourthly, it was submitted that the respondents were kept in the litigation by the appellants and were entitled to defend it on the basis of the pleadings. Counsel submitted that, having regard to these various factors, Burgess should not now be deprived of his costs merely because the trial judge found other conduct of which he was critical.

In the view of the court, there is force in some of these submissions, but the costs order of the trial judge should be left to stand, albeit for reasons that are different from those which led his Honour to exercise the discretion as to costs as he did. As has already been stated, his Honour found that monies were being withdrawn from the restaurant and not declared for income tax purposes. That is clearly in contravention of the Taxation Administration Act 1953 (Cth). His Honour also found that it was the prospect of payment of such monies, a prospect which Burgess held out, which induced Igaki to enter into the venture.

We have found it unnecessary to deal with the illegality issue raised by his Honour and therefore have not come to any conclusion as to whether the appellants would have been entitled to succeed on the black money representation which his Honour found was the inducement to the appellants entering into the Shareholders' Agreement. However, we consider that the Court ought not be involved in any way in condoning conduct which is clearly in contravention of the income tax laws. To award costs to Burgess in this case would have that effect. Accordingly, we dismiss the cross appeal on costs.

I certify that the preceding 32 pages

are a true copy of the Reasons for Judgment

of the court.

Associate:

Dated: 26 March 1996

APPEARANCES

Counsel for the Appellants: Mr N Samios &

Mr G J Cross

Solicitors for the Appellants: Michael V Twohill

& Associates

Counsel for the Second Respondent: Mr P R Dutney QC &

Mr N E Ulrick

Solicitors for the Second Respondent:Steindls Solicitors

Counsel for the Fifth Respondent: Mr D J Jackson QC &

Ms E M O'Reilly

Solicitors for the Fifth Respondent: Feez Ruthning

Dates of hearing: 24 & 26 April 1996

Place of hearing: Brisbane

Top