EAGLAND and ANOR v FAVRETTO and ANOR SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL PRIESTLEY, CLARKE AND SHELLER, JJA 20 February 1996, 11 March 1996 [1996] NSWCA 163 Procedural fairness — natural justice in interlocutory proceedings — adverse conclusions drawn by trial judge — parties to be given opportunity to explain — trial judge to have regard only to evidence before them This appeal arose from the trial of a separate question, heard by Bainton J, as part of the proceedings surrounding the affairs of Barlile Corporation Ltd. The question was whether the respondents had been full time executives of Barlile or a related corporation. His Honour reached the conclusion that the appellants had not discharged the onus of showing the respondents had held such positions. The appellants appealed on the basis that his Honour referred to and used in the determination of the issue before him, material which had been filed in court in accordance with orders of the court but which had not been tendered as evidence in the hearing of the separate issue and with which none of the parties had dealt or had an opportunity to deal. Further, they submitted that historical material which had been admitted into evidence to explain the development of the litigation had been used by his Honour to draw adverse conclusions against the appellants and against a witness, without apprising them that the material was to be used in that way. The appellants submitted that this constituted a denial of natural justice, was an irregularity and denial of procedural fairness, and gave rise, at the lowest, to apprehended bias against the appellants on the part of his Honour, and warranted the overturning of the judgment and the remittance of the matter for re-hearing. The Court of Appeal upheld the appeal. Held: The trial judge breached the fundamental principle that where a judge draws adverse conclusions against a party or witness, the matters upon which the adverse conclusions are based are to be found in the evidence of the case. It is also essential that the witness or party be given an opportunity to deal with and explain any circumstance from which, in the absence of a satisfactory explanation, those adverse conclusions were drawn: Unsted v Unsted (1947) 47 SR (NSW) 495; Hodge v Williams (1947) 47 SR (NSW) 489; Brinkley v Brinkley (1965) P 75. ORDERS 1) The appeal should be allowed. (2) The judgment of Bainton J set aside and the proceedings remitted to the Commercial Division to be re-tried. (3) The costs of the first trial to be in the discretion of the trial judge hearing the re-trial. (4) The respondents to pay the costs of the appeal and to have a certificate under the Suitors Fund Act. Priestley JA I agree with Clarke JA. Clarke JA By a notice of appeal filed on 3 November 1995, following the grant of leave to appeal, Paul Howard Eagland and Granville Russell Taylor, the appellants, sought an order that the decision of Bainton J answering a question posed for separate trial, and numbered 3(c), should be set aside. Initially they sought that an order be made that the question be given a different answer to that furnished by Bainton J or alternatively that the matter be remitted to the Equity Division for a re-hearing of question 3(c). Upon the hearing of the appeal they pressed only for the second remedy. 2 UNREPORTED JUDGMENTS The dispute between the appellants and the two respondents, Frank Anthony Favretto and Bruce McLeod, first came before the courts when summons were filed by each side (and including other parties) involving the affairs of Barlile Corporation Ltd ("Barlile"). During the course of the interlocutory proceedings orders were made by Brownie J (on 22 August 1995) which included the following: "3. Pursuant to Pt31 R2 as between the plaintiffs and the first, second and fifth defendants and as between the first and second plaintiffs and the third, fourth and fifth defendants in 3206/95 there be tried as separate questions the following questions: (a) Were the plaintiffs, or either of them, validly appointed directors of the company? (b) Were the first and second defendants, or either of them, validly appointed directors of the company? (c) Have the plaintiffs or either of them ceased to be directors of the company by reason of Article 91 of the Articles of Association of the company or by reason of any other article?" In that order the references to the plaintiffs were references to the respondents and the references to the defendants were references to the appellants. When the trial of the separate questions came on for hearing before Bainton J the parties announced that they had resolved questions (a) and (b). Accordingly, the sole question which fell for resolution by Bainton J was question 3(c). That question was itself refined by, in effect, the exclusion of the words "or by reason of any other article". Article 91 of the Articles of Association of Barlile read as follows: "A director who is also a full time executive of the Company or a Related Corporation (including a Managing Director) shall cease to be a director when he is no longer a full time executive of either the Company or of a Related Corporation. A person ceasing to be a director by virtue of the provisions of this article shall not thereby be rendered ineligible for appointment or election as a director under any other article." The respondents did not contest the proposition that they were not full time executives of either Barlile or of a related corporation at the relevant time so that there was no issue on that aspect of the article. What was directly in question was whether they had ever been full time executives of Barlile or a related corporation. The appellants accepted during argument that in order to make good their claim that the respondents had ceased to be directors of Barlile they had to establish that the respondents had been full time executives of the company or a related corporation at an earlier time. His Honour's reasons for decision covered 30 pages of which the first 15 dealt with the history of the events leading to the litigation, and the last 15 his Honour's reasons for reaching the conclusion that the appellants had not discharged the onus of showing that the respondents had ever been full time executives of Barlile or a related corporation. An examination of the second half of the reasons for decision reveals a perfectly proper and conventional approach to the construction of the articles and the resolution of disputed questions of fact, which appear from the reasons to have been fairly nicely balanced. It is the first 15 pages of the reasons which have given rise to the appeal. The contentions of the appellants may best be understood by reference to para3 and para4 of their written submissions. They read: URJ EAGLAND and ANOR v FAVRETTO and ANOR (Clarke JA) 3 "3. The appellants submit that it is clear that in coming to his decision Bainton J made numerous findings of fact including highly prejudicial findings against Mr Eagland (the first appellant): (a) On issues which were not, and could not conceivably have been before him; (b) On matters when there was no evidence before him his Honour having clearly relied on passages in affidavits not read and documents not tendered; (c) In circumstances where such findings were not foreshadowed, were not the subject of any submission by any party, and could not conceivably have been in contemplation of the appellants (or indeed the parties); (d) Which his Honour held were 'relevant to the credibility of assertions that are propounded on behalf of the defendants' and which in any event were and could not have been so relevant; (e) Which clearly played a material role in the outcome; 4. The appellants submit that the gravity and effect of those findings in the circumstances in which they were made and by reason of the role they played: (a) Constituted a denial of natural justice to the appellants; (b) Constituted an irregularity and a denial of procedural fairness to the appellants; (c) Gave rise, at the lowest, to apprehended bias against the appellants on the part of his Honour; and (d) Warrant that the judgment be overturned and the matter be remitted for re-hearing." The appellants also submitted that his Honour made findings critical of the credit of a witness, Mr Hayward, in reliance on material not before him. The appellants rely on the basic principle that a trial judge is bound to decide the issues ventilated before him or her, and only those issues, and to do so having regard only to the evidence put before the Court and those matters of which a judge may take judicial notice. The appellants also submitted that it was fundamental to the judicial process that a judge ought not to draw adverse conclusions against a party or a witness from material not in evidence or not brought to the attention of that party or witness. These propositions are correct and are so basic that I do not need to support them by reference to authority. Nonetheless it is useful to remind oneself of the relevant principles by reference to some short statements in the cases. In Unsted v Unsted (1947) 47 SR (NSW) 495 Davidson J said, at 498: "It is not permissible, however, for the judge to gather anything in the nature of extraneous evidence and apply it in the determination of the issues unless the facts are openly ventilated and exposed to the criticism of the parties." (See also statements by Davidson J in Hodge v Williams (1947) 47 SR (NSW) 489, at 492-3.) Again, and relevant to the second principle, there is the judgment of Scarman J, delivering the judgment of the court in Brinkley v Brinkley (1965) P 75. In that case a wife, having obtained an order against her husband on the ground of persistent cruelty in May 1958, which was followed by a reconciliation, obtained a further order against him on the same ground in 1962. From that order the husband appealed on the ground, inter alia, that the justices had erred in law in considering, after their retirement, evidence of cruelty given on the hearing of the earlier complaint. It was held that the justices, by the course they took, had denied the husband the right of knowing or dealing with some of the evidence on which they acted in reaching their decision. It was further held that the denial of that right was too fundamental to be treated as a mere 4 UNREPORTED JUDGMENTS irregularity and, in fact, vitiated the trial and there must, therefore, be a re-hearing. In the course of his judgment Scarman J said, at 78: "For a court to take into consideration evidence which a party to the proceedings has had no opportunity during trial to see or hear, and thus to challenge, explain or comment upon, seems to us to strike at the very root of the judicial process." What Mr Gyles QC, senior counsel for the appellants, says in this case is that his Honour had referred to, and used in the determination of the issue before him, evidentiary material which had been filed in court in accordance with orders of the court but which had not been tendered in the hearing of the separate issue and with which none of the parties had dealt or had an opportunity to deal. That was his primary complaint. But he went further and said that in some instances historical material which had been admitted into evidence to explain the development of the litigation had been used by his Honour to draw adverse conclusions against the appellants and a witness, Mr Hayward, without apprising them that that material was to be used in that way. In short he had drawn adverse conclusions from evidentiary material without informing the appellants that this may occur. The submissions direct attention to specific material and it is, perhaps, not necessary to do more than to deal with that material. However, I think it is preferable to introduce a discussion of the submissions with a short statement of the relevant history of Barlile. In the circumstances the description will be concise and not involve the expressions of any judgment upon the conduct of any of the actors. Barlile is a company incorporated in New South Wales and, at least until the second half of 1994, was administered from Adelaide. Its shares have been and still are listed on the Australian Stock Exchange. Until the second half of 1994 its assets comprised a building in Melbourne, leased out to tenants, and approximately $6 million. Hayward was the Chairman of the Board. The respondents, who were not directors of Barlile prior to November 1994, were interested in joint ventures investigating opportunities in Vietnam and China and each was a director of a company known as Food and Beverage Corporation Pty Ltd ("Food and Beverage'). On 23 September 1994 Barlile acquired the entire issued capital of Food and Beverage. Following this event, on 17 November 1994, the then directors of Barlile resolved to appoint each of McLeod and Favretto as directors of Barlile "each with the title Managing Director - Asian Operations". At that time it would appear that a company associated with Hayward, Samic Ltd ("Samic'") held 19.9 per cent of the shares in Barlile. In March 1995 Samic sold that share holding to Belonus Pty Ltd ("Belonus"), a company associated with the first appellant. Prior to the sale the directors of Barlile were: Hayward (Chairman), Whitbread, Kennedy, McGrouther, Favretto and McLeod. During and following a meeting of directors on Friday 10 March 1995 the first appellant and Messrs Maloney and Law were appointed to the board of Barlile, following which Hayward, Whitbread and Kennedy all tendered their resignations as directors. It seems reasonably clear from the judgment under appeal that from that time on there was division between the respondents and the first appellant and his supporters. Not surprisingly, the reasons for, and the development of, the hostilities between the parties leading to the litigation were not explored in submissions before his Honour. The issue with which he had to deal was very limited. Although there were factual conflicts between witnesses URJ EAGLAND and ANOR v FAVRETTO and ANOR (Clarke JA) 5 which gave rise to questions of the credit the respondents' counsel restricted the ambit of the material on which he invited his Honour to consider the case. In these circumstances while no one would deny that his Honour was entitled to form adverse conclusions on the credibility of a witness from that witness's conduct during the period between March 1995 and August 1995, when the proceedings were instituted, he was restricted, in his consideration of this period, to the evidence tendered in the trial. No unfavourable conclusions as to the credit of a witness could, consistently with procedural fairness, be reached unless that witness had been given an opportunity to deal with, and explain, the matters which were to be relied on to support those adverse conclusions. It should be emphasised at this stage that the question in issue involved incidents which occurred before the first appellant came on the scene and consequently he gave no evidence. The respondents, obviously enough, gave evidence relating to their appointments and their activities on behalf of Barlile and its related companies. Mr Hayward, who was the Chairman at the time the respondents were appointed, was called by the appellants and, in a number of respects, he denied evidence which the respondents had given. In determining the probable facts his Honour was required to resolve the issue thrown up by the disputed evidence and to determine, in the light of the evidence tendered, whether the appellants had established that the respondents had ever been appointed full time executives of Barlile or a related company. The first appellant's credit was irrelevant to the issues. He was not called as a witness. There was no suggestion by counsel for the respondents that he had behaved improperly or that his conduct should reflect adversely on the applicants' case. Nor did his Honour make those suggestions during the course of the hearing. In short the first appellant was given no opportunity to meet suggestions that he had behaved in an improper manner or to explain his conduct. In these circumstances there should have been no adverse comment made about him. While it may well have been relevant to his Honour's determination that the appellants, as his Honour believed, did not assert that the respondents had ceased to be directors because of Article 91 until very late in the piece that factor fell to be considered in the context of the evidence and the manner in which the parties joined issue. The essence of the appellants' submissions was that the trial judge, having read a lot of material which had not been tendered in evidence, formed a highly adverse impression of the case being made by the appellants which was reflected in his critical observations concerning the first appellant and, to a lesser extent, Mr Hayward. It was submitted that this impression pervaded his Honour's consideration of the issue joined between the parties and that in the circumstance that his mind was influenced by material not in evidence and material with which the appellants were not permitted to deal there had been a miscarriage of justice. The appellants have referred the court to a large number of findings in the introductory part of his Honour's judgment. It is convenient to refer initially to three statements which, it is conceded by the respondents, are not supported by any evidence tendered in the trial. The first, and most important passage, read as follows: "At some time before 30 June 1995 Eagland had caused to be acquired a company named 240724BC Ltd. It was incorporated in and was a resident of British Columbia. On or about 7 July 1995 Eagland attempted to transfer $4 million of Barlile's money to this company asserting it to have become a subsidiary of Barlile. Maloney (one of the persons who joined the board at the same time as Eagland) successfully frustrated 6 UNREPORTED JUDGMENTS that attempted transfer. I think it proper to record at this stage that I am quite satisfied that neither Maloney nor Law, each of them Australians who had been requested to joint the board of Barlile by Eagland, had any knowledge of what Eagland was up to: nor did they take any steps to assist him. Indeed, as I have just recorded, Maloney frustrated Eagland's endeavour to transfer $4 million to a Canadian company which was plainly to be under Eagland's control." These statements were, I repeat, not supported by any evidence in the case. They were not relevant to any issue in the case and were never addressed by the parties. Eagland was never advised that it was to be contended that he had, in effect, attempted to steal $4 million of Barlile's money nor an opportunity to deal with the allegation. The reason why his Honour included the passage and its highly critical finding in his reasons is unclear. The only reasonable inference is that his Honour considered these events to be relevant to the credibility of assertions that were propounded on behalf of the defendants. It is, or may be, appropriate to have regard to a history of events in order to determine a point in issue. It may also be relevant to have regard to those events in order to rule upon the bona fides of claims made by one or other of the parties. But it is fundamental that where a judge draws adverse conclusions against a party or witness that the matters upon which the adverse conclusions are based are to be found in the evidence in the case. It is also essential that the party or witness be given an opportunity to explain any circumstance from which, in the absence of a satisfactory explanation, an adverse conclusion might be drawn. What occurred in this case breached that fundamental rule and did so in a very important respect. I say that because it is clear that his Honour was there depicting Eagland as a man whose conduct was to be treated as thoroughly discreditable. In case there be any doubt that that was in his Honour's mind let me add a further passage from his judgment: "He (Eagland) obviously had it in mind to use Barlile's funds for his own purposes." Nothing could be plainer than that his Honour was expressing his view that Eagland was a commercial rogue who, having managed to obtain practical control of Barlile, was seeking to strip it of its funds. The second statement which it is conceded is not supported by evidence was as follows: "On or about 22 August 1995 the Australian Stock Exchange issued a release signed by Eagland as Chairman of Barlile announcing that Food and Beverage had entered into an agreement to sell its interest in a joint venture with NDAH Ltd (a misdescription, I think, of the correct name of the New Zealand joint venture) to Sung Wung Industries Co of Seoul, Korea, for a sale price of $500,000. Searches indicate that there is no company of that name in Korea, The release asserts that the sale price exceeds the book value of the assets by approximately $200,000. If the Tokan Holdings Inc bid price has been even approximately correctly calculated (and I would be very surprised if it has not), those joint venture assets are worth more than $1.5 million. I should add that the release to the Stock Exchange to which I have just referred is not mentioned anywhere in any Minute of any meeting of directors of Barlile." These statements have no relevance to the issue being considered and it is difficult to see why his Honour made them. Having regard to the fact that it was Eagland who was said to have signed the release and that the proposed sale at an undervalue was to a company which may have been fictitious the statements represent another disparagement of Eagland. URJ EAGLAND and ANOR v FAVRETTO and ANOR (Clarke JA) 7 The third passage in the judgment which was conceded by the respondents to be unsupported by evidence was a detailed reference to a meeting of directors of Barlile held at about 1 pm on 22 August 1995. His Honour said that no minutes of that meeting had been tendered but that the unchallenged evidence was as he there set out. Although it is not entirely clear to me it would seem that his Honour obtained the information in the passage of which complaint is made from para62 of the affidavit of Stephen Leonard Law sworn 28 August 1995 and it is agreed that that passage was not read. It may be that additional material was gleaned from part of the second respondent's affidavit but again there has been agreement that that part of the affidavit was not read. Although I find it difficult to understand why the impugned passage was included in the reasons for judgment the inference is open that it was included as it referred to a resolution enabling Eagland to negotiate a sale of Barlile's assets at a price of not less than $500,000. The appellants make a number of other complaints about passages in his Honour's judgments. These the respondents have endeavoured to explain as appearing implicitly, at least, from the evidence in the case. In some instances it is accepted that the whole of the statement was not justified by the material admitted into evidence. In others that all the details were not to be found in the evidence. Nonetheless it was contended that there was general material before his Honour from which he could draw an inference that supported most if not all of these statements. In the circumstances I have found it unnecessary to deal with each of these items. Accordingly, I should refrain from commenting upon the correctness or otherwise of the appellants' assertions. Overall it would seem to me that whatever use was made of the material actually in evidence there was considerable reference by his Honour to other material in order to fill in details and, as it were, paint the whole picture. The vice behind this approach is obvious. Material not in evidence was relied upon in circumstances which deprived the appellants of any opportunity to comment upon it. Let me now tum to his Honour's criticisms of Mr Hayward. The first concerns a statement made on the first page of the reasons for decision that "if what was required to administer Barlile occupied Hayward full time he must have been remarkably inefficient'. That that was a gratuitous criticism of the witness is clear from the fact his efficiency was neither in issue nor challenged. Then, when dealing with the issue before the court, his Honour recorded that "Tt is appropriate that I record at this stage that I did not find Hayward a credible witness. I thought he was more concerned (probably in the light of the way in which he passed over control of the company to Eagland) to protect himself than to give frank answers to questions he was asked. I do not accept the evidence of Hayward save where it is corroborated by contemporary documents or inherently probable." The parties disputed whether there was evidence concerning the circumstances in which control was passed over. In his written submissions Mr Cotman, counsel for the respondents, detailed a number of places where evidence could be found which enabled his Honour properly to make the statement which has been criticised. Mr Cotman went on to say "That his Honour found such conduct discreditable of Hayward is not surprising. It was." 8 UNREPORTED JUDGMENTS This submission provoked me to inquire during the hearing of the appeal whether it had ever been put to Hayward that he had behaved in a discreditable manner during the passing of control or whether Mr Hayward has been given an opportunity to comment upon the features of the incidents which occurred at that time which may be thought to reflect discreditably upon him. Mr Gyles informed the court, without objection, that the answer to both questions was 'No'. In these circumstances Mr Cotman's submission was not available. The next statement about which complaint was made reads: "The letters tendered do not attach any such letter. Piper Alderman had been the solicitors for Barlile so the probability is that this letter was written on Hayward's instruction. It illustrates, it seems to me, that no reliance can be placed upon what he says, a conclusion which I independently reached during the course of his cross-examination." The written submissions of the appellants point out that the letter said not to be attached was in fact tendered. Mr Cotman responded that the copy letter was not annexed to the first copy of the Piper Alderman letter reproduced in the bundle and that for some reason it was annexed to another copy of the same letter behind the first copy. Not surprisingly, it was said, his Honour missed it. I would be the first to accept that his Honour may inadvertently have missed the letter and that, in the circumstances, that was not surprising. But even so, the position remains that due to a mistaken view as to what was in evidence his Honour drew an adverse conclusion against Hayward. What is worse no relevant question had been put to Hayward. If he had in fact been challenged on the ground appearing in the judgment there is little doubt in my mind that the true factual position would have become clear. The adverse findings made about Eagland reflected upon the bona fides of the appellants' case. Those made about Hayward were directly relevant to the resolution of disputed questions of fact. On at least one issue there was a direct conflict between Hayward and the respondents. His Honour accepted the respondents. No one doubts his entitlement to do so but it is difficult to escape the conclusion that his acceptance was influenced to a significant degree by reliance upon material not in evidence and with which the rejected witness was not confronted. In my opinion those departures from the fundamental principles of a fair trial to which I have referred require that the judgment be set aside so that the issue between the parties may be retried fairly and in accordance with the evidence. In saying that I have had regard to Stead v State Government Insurance Commission (1986) 161 CLR 141. Insofar as this case does not fall within the qualification mentioned at 145 a new trial must be ordered. It is appropriate, however, that before I conclude these reasons I refer to a matter which was discussed in the argument. That was the practice followed in the Commercial Division of requiring that bundles of documents be lodged with the court prior to the hearing. There was, as it seemed to me, an implied criticism of this practice by counsel for the appellants. For my part, as a judge who sat for a number of years in what was, first, the Commercial List and, later, the Commercial Division, the practice is essential to the efficient working of the Division. It enables the judges to familiarise themselves with the evidentiary material, to focus on the issues and for those reasons to conduct the hearing in an expeditious and efficient manner. URJ EAGLAND and ANOR v FAVRETTO and ANOR (Sheller JA) 9 A corollary of the acceptance of the practice is that when only part of the evidentiary material which has been lodged with the Court is tendered it is absolutely essential that the judge attend only to that part and put anything else he or she has read out of his or her mind. Unless this occurs there will always be a danger of an unfair trial and the practice will justifiably come under serious attack. The appeal should be allowed. The judgment of Bainton J set aside and the proceedings remitted to the Commercial Division to be re-tried. The costs of the first trial to be in the discretion of the judge hearing the re-trial. The respondents are to pay the costs of the appeal and to have a certificate under the Suitors Fund Act. Sheller JA I agree with the reasons in the judgment of Clarke JA and the orders he proposes. (1) The appeal should be allowed. (2) The judgment of Bainton J set aside and the proceedings remitted to the Commercial Division to be re-tried. (3) The costs of the first trial to be in discretion of the trial judge hearing the re-trial. (4) The respondents to pay the costs of the appeal and to have a certificate under the Suitors Fund Act. Counsel for the appellant: R Gyles QC, DJ Hammerschlag and VF Kerr Solicitors for the appellant: Sharwood Eyers Wilkie Counsel for the respondent: N Cotman Solicitors for the respondent: Cowley Hearne