ROUSELLIS v MAIURANO SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL PRIESTLEY and BEAZLEY JJA and FITZGERALD AJA 21 September 1998, 19 November 1998 [1998] NSWCA 195 CONTRACT — necessary to differentiate between issue estopped and res judicata in its extended sense — possible to recover both debt owed under franchise agreement and damages for misrepresentation which induced entry into agreement. Priestley JA I agree with Fitzgerald AJA's reasons for his decision in this appeal, and with the orders he proposes. Beazley JA I agree with Fitzgerald AJA. Fitzgerald AJA The appellant was induced by misrepresentations to enter into a contract, described as a "franchise agreement", with two companies, which at the time were insolvent and were later ordered to be wound up on that ground. The appellant paid $100,000 to the companies as consideration for the franchise agreement. He also performed work under the franchise agreement for which he was underpaid the sum of $68,459. The respondents were directors of the companies and, at all material times, knew of the companies' "parlous financial position", to adopt a phrase used by Wilcox J in the Federal Court in a previous proceeding between the parties to this appeal. The appellant sued the respondents (and others) in the Federal Court for damages for breach of s51A and s52 of the Trade Practices Act 1974 (Commonwealth), s41 and s42 of the Fair Trading Act 1987 (NSW), deceit and negligence. Wilcox J, who was the trial judge, held that the appellant was entitled to damages equivalent to the $100,000 consideration paid for the franchise agreement plus interest, but refused to award additional damages for the amount unpaid to the appellant for work which he had performed under the franchise agreement, which presumably includes some profit". His Honour expressed the tentative view that "... costs incurred by [the appellant] in connection with the unpaid jobs... as distinct from the total sum owing to him..." might have been recoverable as damages, but the appellant "... did not allege or prove such a case, nor did he establish his costs". An appeal by the respondents and one of the other directors of the companies to the Full Federal Court was dismissed. The appellant did not cross-appeal, or give a notice of contention. The Full Court rejected the respondents' submission that, because the appellant had been able to earn and had in fact received payment under the franchise agreement, the trial judge "... was wrong to say that the [appellant] had received no value as a consequence of entering into the franchise agreement... It was therefore incorrect to take the view, as his Honour had, that the franchise agreement was shown to be worthless." Sheppard J, with whom Beazley J agreed, said that findings made in passages of the reasons for judgment of Wilcox J which were not the subject of any challenge destroyed the respondents' argument, "... and amply justify his ultimate finding that the value 2 UNREPORTED JUDGMENTS of the franchise was lost as from the time it was paid. [The passages] establish that the payment which the [appellant] made was indeed worthless". Einfield J delivered brief, concurring reasons. The appellant subsequently sued the respondents in the District Court for the amount which he had not been paid under the franchise agreement for work which he had done on the basis that the respondents, as directors, are liable for the companies' debt by virtue of s592 of the Corporations Law. The District Court judge who heard the action held that the appellant would have been entitled to succeed but for one matter, which was the basis upon which his District Court action was dismissed. This appeal from that judgment is concerned only with that matter, which has two aspects. The respondents' first contention is that there is an issue estoppel arising from the Federal Court proceeding which precludes the appellant from succeeding on his present claim. Their second contention is that the appellant's present claim must in any event fail because of his omission to raise and litigate it in the Federal Court with his damages claims. The judgment of Dixon J in Blair v Curran! is generally regarded as a classic exposition of the doctrine of issue estoppel. His Honour said:2 "A judicial determination directly involving an issue of fact or law disposes once for all of the issue, so that it cannot afterwards be raised between the same parties or their privies." Later, his Honour added that the doctrine of issue estoppel means that a matter of fact or law necessarily decided by a prior judgment cannot be relitigated for the purpose of some other claim or cause of action.3 The respondents do not assert that the Federal Court decided that either they or the companies are not indebted to the appellant. On the contrary, it was found that the appellant performed work under the franchise agreement for which he was entitled to be paid $68,459, which has not been paid. However, Wilcox J, in dismissing the appellant's claim for damages in the amount which he presently claims as a debt, said that that amount "presumably included some profit". The respondents argue that, on that hypothesis, the appellant's present claim is inconsistent with the Federal Court's conclusions that the franchise agreement was "worthless" to the appellant, and that the sum of $100,000 which he paid for it "was lost as from the time when it was paid". In my opinion, the respondents' argument on this point carries the seeds of its own destruction. If there is any issue estoppel arising from the Federal Court proceeding it operates in favour of the appellant. If there is an inconsistency between a conclusion that the money paid or payable to the appellant for work performed under the franchise agreement included or includes a profit component and a conclusion that the franchise agreement was "worthless", the former must yield to the latter. The argument now advanced by the respondents in support of the their assertion of an issue estoppel is the very argument which was rejected by the Full Federal Court. The respondents' alternative contention is that it was unreasonable of the appellant not to raise and litigate his present claim in the Federal Court with his damages claims. Unless they make that proposition good, it is unnecessary to 1. (1939) 62 CLR 464. 2. 62 CLR, at p531. 3. 62 CLR, p532. URJ ROUSELLIS v MAIURANO (Fitzgerald AJA) 3 attempt any more sophisticated discussion of the wider doctrine of res judicata, upon which this element of the respondents' argument is based. The Federal Court proceeding was instituted on 22 July 1992, and the pleadings had closed by the end of that year, although the appellant filed an amended statement of claim at the commencement of the hearing before Wilcox J on 25 October 1993. One of the companies was placed in liquidation on 8 June 1993 and the other on 2 August 1993, and it is at least strongly arguable that the appellant did not have a cause of action against the respondents for the debt owed to him by the companies until the later date.4 It is also at least strongly arguable that the appellant's action for debt could not have been added to the Federal Court proceedings under the Federal Court Rules as they then stood.5 The respondents did not assert that the appellant was aware that the companies had been wound up prior to 15 September 1993, ie, about 5 to 6 weeks prior to the commencement of the Federal Court action. Even if the appellant had immediately been able to obtain evidence that, immediately before the companies incurred the debt to him for which he now seeks to make the respondents liable, they had reasonable grounds to expect that the companies would not be able to pay all their debts as and when they became due or that, if the companies incurred the debt to the appellant, they would not be able to pay all their debts as and when they became due, it would have been necessary for him to formulate and notify proposed amendments to add a cause of action based on s592 of the Corporations Law with the Federal Court trial due to commence in about 5 or 6 weeks, and then to persuade a judge of that Court to permit the new claim to be added even though the authorities were against such a course. There would plainly have been significant costs involved, and the possibility of an adjournment of the Federal Court trial, with the appellant at risk of being ordered to pay the costs associated with the adjournment. In my opinion, it could not possibly be concluded in those circumstances that it was unreasonable for the appellant not to apply to include the cause of action for debt which he later commenced against the respondents in the District Court as an additional claim in the Federal Court proceeding. The respondents were effectively reduced to a submission that, instead of leaving it until later and bringing the action for debt against the respondents in the District Court, the appellant should have started a separate action against them in the Federal Court in September or October 1993 and sought to have that action consolidated and tried with his existing Federal Court action. No authority was cited for the proposition that res judicata in its extended sense is applicable in such circumstances. Assuming that the doctrine might be so applied, I am of opinion that, substantially for the same reasons as those which have been referred to in relation to the appellant's omission to add the claim for debt to his Federal Court action, it was reasonable for him not to commence a separate Federal Court action for debt shortly before his existing Federal Court action for damages was due to be tried. In his judgment dismissing the appellant's claim against the respondents based on s592 of the Corporations Law, the District Court judge did not differentiate between issue estoppel and res judicata in its extended sense, or, in discussing these issues, deal with the judgment of the Full Federal Court in addition to that of Wilcox J. 4. See Macquarie Bank Ltd v Focio Pty Ltd (1992) 27 NSWLR 203; Butler Rains Menzies & Co v Devine (1994) 1 QD R 1, Trans Pacific Investment Corporation Pty Ltd v Rusty Rees Pty Ltd (1995) 17 ACSR 182; Bush v Wright (1985) 3 ACLC 311. 5. See Federal Court Rules, O11 r7; Baldry v Jackson (1976) 2 NSWLR 415. See also now Federal Court Rules, O13, r2(7). 4 UNREPORTED JUDGMENTS Further, in my opinion, his Honour erred in his conclusion that the appellant cannot recover both the debt owed to him under the franchise agreement and damages for misrepresentations which cause him to enter into that agreement. That fundamental error was critical to his conclusion that, by reason of the Federal Court litigation, the appellant could not or should not succeed in his present. claim. As I have indicated I consider that conclusion incorrect. Accordingly, I would allow the appeal and set aside the judgment given below. A judgment for the appellant against the respondents in the sum of $68,459 with interest should be substituted. The parties should agree on the interest payable or, within 14 days, provide written submissions with respect to interest. The respondents should pay the appellant's costs of the District Court action and this appeal. Appeal allowed, judgment given below set aside. Substitute a judgment for the appellant against the respondents in the sum of $68,459 with interest. The parties should provide written submissions with respect to interest. The respondents should pay the appellant's costs. Counsel for the appellant: R G Forster Solicitors for the appellant: Alan Jessup Counsel for the respondent: M Evans Solicitors for the respondent: Muggletons