Knudsen & Anor v Kara Kar Holdings Pty Limited & Ors S120/2002 [2002] HCATrans 558 (5 November 2002)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S120 of 2002

B e t w e e n -

NIELS KNUDSEN

First Applicant

SUCHINDRA KNUDSEN

Second Applicant

and

KARA KAR HOLDINGS PTY LIMITED

First Respondent

WILLIAM YARDY

Second Respondent

JENNIFER YARDY

Third Respondent

Application for special leave to appeal

GAUDRON J

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON TUESDAY, 5 NOVEMBER 2002, AT 10.14 AM

Copyright in the High Court of Australia

__________________

MR A.J. SULLIVAN, QC: May it please the Court, I appear with my learned friend, MR P.L. DODSON, for the applicants. (instructed by Koffels)

MR J.J. De MEYRICK: May it please the Court, I appear with my learned friend, MR J.D. COLLINS, for the respondent. (instructed by Lincoln Smith & Company)

GAUDRON J: Yes, Mr Sullivan.

MR SULLIVAN: Your Honours, in our submission, the interests of the administration of justice in this particular case require consideration by the Court of the - - -

GAUDRON J: I would have thought that was the least of the grounds that you would advance for special leave. The matter has gone on for how long?

MR SULLIVAN: It has gone on for about 10 years, I think, your Honour.

GAUDRON J: The costs must far exceed the amount now in issue.

MR SULLIVAN: They do.

GAUDRON J: And it would seem not to be in the interests of justice to continue litigation of this kind. I mean, either there is a question of law involved or there is not.

MR SULLIVAN: Well, there is a question of law involved.

GAUDRON J: And an important question of law.

MR SULLIVAN: There is an important question of law involved. May I just address the first prefatory comments of your Honour, though. Of course this is not a shining example of the way the administration of justice in New South Wales or Australia should be conducted.

GAUDRON J: It would seem that counsel may have to accept some responsibility for that rather than the courts.

MR SULLIVAN: It may well be a case of responsibility being manifoldly taken by a whole host of people within the process, your Honour, including the lawyers, we respectfully acknowledge, but, your Honour, in answer to your Honour's second question as to the principle of law involved, in our respectful submission, the Court of Appeal's judgment in this case may be seen, perhaps, as an illustration of a perceptible trend by intermediate appellate courts consciously, or unconsciously, to relax the well-established rules relating to the circumstances in which a court should interfere with the factual findings of a trial judge where they are not expressly based on an Abalos-type credit finding.

McHUGH J: Yes, but there is a limit to what we can hear in these cases. I mean, tomorrow in Canberra we are hearing two fact cases that we have granted leave in. These matters have to end with the intermediate courts of appeal, Mr Sullivan. We cannot be taking on every case that we think is wrongly decided on the facts.

MR SULLIVAN: Your Honour, of course that is correct. However, when one is considering the rights of an individual litigant and where it is, at least, clearly arguable that the Court of Appeal has transgressed the limits of intermediate appellate intervention in the factual-finding process, in our respectful submission, it is warranted for the Court to consider the matter in respect of the interests of justice.

Your Honour, I do not want to fall into the same mistake as my friend, Mr Rares, made by asking a rhetorical question of the Court, but, in our respectful submission, when one looks at the judgment of the Court of Appeal, one cannot identify where the judgment of the Court of Appeal in the majority of Justice Mason, the learned President, and Justice Ipp who agreed with him, there is any identification of any error on the part of the trial judge.

GAUDRON J: Is not the fundamental difficulty in this the nature and quality of the evidence at first instance? Is not that where this case got off on the wrong leg?

MR SULLIVAN: In hindsight, your Honour is perfectly correct to say that more evidence would have been desirable. The parties sought to overcome that, rightly or wrongly, in the interests your Honour identified of trying to get an end to this matter by setting out some agreed facts. One of our major complaints about the judgment of the majority of the Court of Appeal is that they ignore those agreed facts and, indeed, a linchpin of their reasoning is the finding of common understandings and the like which are inconsistent with the agreed facts by which the parties agreed to conduct the litigation below. Those agreed facts were deliberately framed by the parties with a view to trying to minimise or reduce the saga which had been going on, as your Honours says, for so long.

GAUDRON J: What are the agreed facts that you say were overlooked?

MR SULLIVAN: If your Honour goes to the application book page 10 in the judgment of Justice Austin at first instance, your Honour will see at paragraph 6 and paragraph 7 two of the agreed facts, particularly paragraph 6 which is the important one, in our respectful submission. That reads:

There were notations in the 1987 and 1989 accounts concerning the 9:1 ratio of retirement benefits. As the special reserve had not been exhausted, all that was indicated in these accounts was that Mr Knudsen and Mr Yardy had given intellectual assent to the proposition that if the special reserve had been used up there would be a restructuring to obtain the 9:1 ratio. That had not come to pass and never came to pass. Mrs Yardy, and Mrs Knudsen and Kara Kar Holdings Pty Ltd -

that was the trustee of the fund -

had not input into that understanding. The amounts in the fund were not beneficially held in a nine to one ratio.

7. By not bringing the $115,000 to account and in indicating that it wished to proceed on the nine to one ratio, the trustee was in breach of trust.

Now, in the judgment of the majority, there is frequent reference to a common understanding of all the parties, including Mr and Mrs Yardy, Mr and Mrs Knudsen and the company as to this understanding, although not finding. That first of all is inconsistent - - -

GAUDRON J: Let it be assumed that you are correct in all of that.

MR SULLIVAN: Yes, your Honour.

GAUDRON J: Why would not the end result be that you still got nothing?

MR SULLIVAN: Because, your Honour, the end result - - -

GAUDRON J: Why would it not? If it went back - let us assume you are right, and it were up to the trustee to apply the terms of the deed.

MR SULLIVAN: The trustee would have a discretion to give us nothing or to give us the lot.

GAUDRON J: Now, we can realistically rule out giving you the lot, I think, can we not?

MR SULLIVAN: With hindsight, your Honour, that may be correct.

GAUDRON J: Yes, but the question is this: in a situation in which a trustee might, if you are correct, legitimately exercise his discretion to give you nothing, and you have already received something which you might have to give back if the trustee sought it, why is it in the interests of your client or in the interests of the administration of justice to proceed with this matter and, moreover, why would this Court take on an appeal, the ultimate outcome of which might be not to benefit you at all?

MR SULLIVAN: In answer to the last part of your Honour's question, we would submit the following. First, the trial judge made a finding of fact that the trustee had made an exercise of discretion to effectively give us the lot. So that if that was upheld on appeal, there would be no need for revisiting it by another court.

GAUDRON J: Not to give you the lot; to give you what stood against your name.

MR SULLIVAN: Yes, and that is all we are seeking, your Honour. So that is the first point. The second point in answer to the first part of your Honour's question is the trial judge expressed great reservation that if the trustee, in fact, was to award us less on the 9:1 ratio, that there would be an improper exercise of the power. It was concerned to be for improper purpose. That appears from paragraph 111 of the trial judge's judgment.

So the third matter, of course, your Honour, is quite frankly this. As your Honour has said, the costs far outweigh the pecuniary sums involved. To leave the matter here exposes my clients to a very great financial penalty in respect of costs which may be avoided if, in fact, they are ultimately successful on an appeal.

So, in our respectful submission, although the monetary sums involved in the exercise of the discretion themselves are comparatively small, the financial costs to the parties are comparatively great. To demonstrate the point I wish to make about the failure to take into account the agreed fact in paragraphs 6 or 7, one needs to go to the judgment of Justice Mason in the Court of Appeal and particularly to paragraph 10 and following of that judgment which appears at application book page 90.

What is apparent from the learned President's judgment between paragraphs 10 and 28, that the difference between the majority view and that of Justice Austin comes down to a preference for different inferences from the same primary facts. In paragraph 10 the learned President quite clearly states that that is the approach he is about to embark upon and in paragraph 12 in the first part of his reasoning he sets out the first basis for wishing to come to a different inference, but the mistake which we have articulated is apparent in the second part of paragraph 12 starting with:

It had always been the common understanding of the parties, including the Knudsens, that this would be the way that the fund would be distributed -

That, as we say, is contrary to the agreed fact which we have taken your Honours to, and in that particular error, and is replicated in paragraphs 18, 19, 22, 24 and 26, and quite clearly is the linchpin of the basis upon which the majority sought to interfere with the inference drawn by the trial judge.

We respectfully say, first of all, conformably with the authorities of this Court, Warren v Coombes, and as articulated, a preference for one inference over another by the appellate court is not sufficient to interfere. Error has to be identified. In determining whether there is error, proper weight has to be given to the benefits enjoyed by the trial judge in the ability to consider all the evidence in context, to see the actual players in the drama giving the evidence themselves and to draw those inferences.

What emerges from the judgment of Justice Mason, with great respect, is nothing more than on a selective - and I am not saying this unfairly to his Honour or in any way seeking to criticise, but on a selective view of the evidence, not the totality, to say, "I would have drawn a different inference than the trial judge drew".

GAUDRON J: But do you not still come back to the difficulty that on any view this evidence is not going to give you the complete picture?

MR SULLIVAN: The evidence that is set out in the Court of Appeal, your Honour? Yes, we do say that.

GAUDRON J: No, but also set out in the judgments below.

MR SULLIVAN: That is true, your Honour. It may not give you the complete picture, but any court has to decide a case on the basis that the evidence before it is all that is available and that is what the trial judge did.

GAUDRON J: Well, except that the trial judge had already complained about the inadequacy of the evidence.

MR SULLIVAN: He did. He had complained about that and he had supplemented the agreed facts, but he did not say, at any stage, that he had insufficient evidence to base these findings. He said, and set out his reasons for doing so, as to the inference he drew. The Court of Appeal seeks to draw a contrary inference based largely upon a mistaken view of the common understanding and ignoring, with respect, the agreed facts upon which the parties sought to conduct the case below.

So, in our respectful submission, the two errors have been first of all a wrongful intervention in the fact-finding process without error being identified on the part of the trial judge and secondly, a compounding of that basic error by committing an error themselves of misinterpreting or misunderstanding or overlooking the agreed fact.

GAUDRON J: Well, I am not too sure that they misunderstood or overlooked. If you look back to paragraph 6 at page 10, maybe they were supplementing it. Maybe they were saying, when you look at it all over, that is not an exhaustive statement. That much can be agreed, but what further?

MR SULLIVAN: Paragraph 6, your Honour, of the judgment of Justice Mason is, to summarise the overall - - -

GAUDRON J: No, I am looking at the statement of agreed matters at page 10.

MR SULLIVAN: Of his Honour's judgment?

GAUDRON J: Page 10 of the application book.

MR SULLIVAN: But, your Honour, there was nothing upon which that could be supplemented on the evidence because at no stage was there any evidence of - - -

GAUDRON J: Was there not evidence from the Yardys that it was always going to be 10:1?

MR SULLIVAN: No, your Honour.

GAUDRON J: Did Mr Yardy not give - - -

MR SULLIVAN: No, Mr Yardy did not - - -

GAUDRON J: I am sorry.

MR SULLIVAN: Mr Yardy did not give such evidence. Mrs Yardy was not called. Mrs Knudsen was not called. What happened there, as was found - and the important thing was the finding:

That had not come to pass and never came to pass.

GAUDRON J: Yes, I know that.

MR SULLIVAN: The language of paragraph 6, your Honour, although it may be seen to be quite curious normally is deliberately chosen that way, because that was the language of a finding of fact made by Justice Young the first time that this case came before the court at first instance. So what the parties were seeking to do, it appears, was to avoid having to re-canvass the factual findings made by Justice Young in the first time it was heard by the Equity Division and to summarise that by way of facts, in the agreed facts.

So that, in our respectful submission, there was no evidence before the trial judge, Justice Austin, nor before the Court of Appeal which would have entitled the court to supplement it the way your Honour puts that understanding.

GAUDRON J: But that, again, is the difficulty. There either was some agreement or there was no agreement.

MR SULLIVAN: There was an agreement, your Honour, but it was in a very particular circumstance, as paragraph 6. It contemplated these two long-term partners working together in this company until they reached the normal retirement age and then it said, "Well, we've got this special reserve. When we use all that up then we'll restructure our payments to the contribution fund to achieve this result". They could not do it beforehand because if they did it beforehand they would not be able to maximise the taxation benefits allowable under the income tax legislation.

So the agreement was one which was to only come into existence, if at all, in the future and the agreed finding of fact was that the preconditions had not come to pass and never came to pass and that, in fact, was the fact because the special reserve was used up in a sense, but it was used up by reason of the breach of trust of the Yardys in taking out of those funds, as his Honour found at first instance, $115,000 to purchase a house in Queensland.

So, both factually on the evidence and also on the agreed fact, the understanding between the two gentlemen had never come to pass and it could never have been said to be a common understanding. Yet it was on that very basis that Justice Mason seems to have said, "That is the central factor in me saying that the trial judge erred", and he does not say that directly but inferentially - - -

GAUDRON J: So that, at the end of the day, there would be a resulting trust back to the company?

MR SULLIVAN: No.

GAUDRON J: Well, there might be.

MR SULLIVAN: No, what Justice Austin said - this was not challenged on appeal -and referring to Re Vandervell's Trusts, was that because there had been an existing trust, and this was an amendment to it, the situation was that the resulting trust would be back towards the objects of the original trust and on the facts of this case that would mean to the discretion of the beneficiary under the 1979 deed as found by his Honour and which was not the subject of any appeal by my learned friends in the court below. So, in our respectful submission, that is the first and, with respect, major reason why special leave should be granted.

The second reason is this, your Honours. The Court of Appeal purported to deal themselves with the determination of whether or not, if the discretion had been exercised as they had interpreted it on a 9:1 ratio, it was for an improper purpose. We submitted below and we submit before your Honours that the appropriate way to deal with that was to remit the matter back to the trial judge. The trial judge had already, having had the benefit of seeing the witnesses, indicated grave reservations with the exercise of the power if, in fact, that was the decision.

In a situation where, even if the test is an objective one, the evidence and the assessment of the character of the people concerned would have a major input, in our respectful submission, the proper course was to remit the matter back to the trial judge. The Court of Appeal dealt with that aspect in its second judgment by saying that effectively they accepted the submissions of the respondents to the present application. If I may summarise those submissions, the submissions were that it was not an improper exercise of power for two reasons: one, because it was in accordance with the non-binding arrangement and secondly, because other employees had been treated the same way in the past.

Now, your Honours, the first of those - and that appears at paragraph 16 of the second judgment in the Court of Appeal at application book page 122 - the first of those two reasons, with great respect, compounds the earlier arrangements because it proceeds upon the basis of a common understanding which did not exist by reason of the agreed facts.

The second of those matters, this is how it had been done in the past by other employees, first of all one might say, "So what? That doesn't make this exercise a proper one", and secondly, it ignores the fact that these were not any employees. These were the long-term partners of the business, who also happened to be the senior employees and non constat, with respect, that how you treated other employees would be the way you could properly treat these employees.

We respectfully submit that the trial judge having flagged, having heard all the evidence, in paragraph 111 of his judgment, grave concerns about the propriety of the exercise of the power if his construction of the instruction was wrong, the proper course in those circumstances was to accept the advantage the trial judge had to determine that issue, and return the matter to the trial judge so that he could determine it and the parties would then have their ordinary rights of appeal in respect of that finding.

They are our submissions, your Honour.

GAUDRON J: Yes, thank you, Mr Sullivan. No, we need not trouble you, Mr De Meyrick.

The outcome of the proposed appeal in this matter could well depend upon factual issues that arose in a context in which the evidence was far from satisfactory. That being so, this is not a suitable vehicle for the elaboration of any point of principle. Accordingly, special leave is refused and it will be refused with costs in accordance with the ordinary practice.

AT 10.36 AM THE MATTER WAS CONCLUDED