Haijing v Zhan
[2013] VCC 1261
•4 October 2013
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE CIVIL DIVISION | Revised Not Restricted |
COMMERCIAL LIST
EXPEDITED DIVISION
Case No. CI-11-06326
| CHEN HAIJING (also known as CRYSTAL CHEN) | Plaintiff |
| - v - | |
| DENG DA ZHAN & ORS (ACCORDING TO THE SCHEDULE ATTACHED) | Defendants |
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JUDGE: | HER HONOUR JUDGE KENNEDY | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 2, 3, 4, 5, 6 & 10 September 2013 | |
DATE OF JUDGMENT: | 4 October 2013 | |
CASE MAY BE CITED AS: | Haijing -v- Zhan & Ors | |
MEDIUM NEUTRAL CITATION: | [2013] VCC 1261 | |
REASONS FOR JUDGMENT
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Catchwords: Trade Practices – Investment in cake business – whether plaintiff entitled to damages against the first defendant for misleading or deceptive conduct in relation to representations about the business under ss9 & 159 Fair Trading Act1999 (Vic) – whether plaintiff entitled to damages also against the second and third defendants on the basis they were persons involved pursuant to s145 – whether plaintiff entitled to damages for breach of contract for third defendant’s failure to made requisite investment contribution
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P.S. Noonan | HWL Ebsworth Lawyers |
| Defendants | Mr R.W. Short | Xianyi Tan Barrister & Solicitor |
HER HONOUR:
This proceeding arises out of the plaintiff’s investment of $120,000 into a “Cake World” business at Elizabeth Street, Melbourne.
The plaintiff claims that various representations were made to her, primarily by the first individual defendant, Mr Deng, but also by his son, “Jackie” (the third defendant) to induce her to enter into a “Joint-Operation Contract” (the agreement). She alleges such representations were false under s52 of the Trade Practice Act 1974 (Cth) (TPA) and/or s9 of the Fair Trading Act 1999 (Vic) (FTA)[1] and claims damages as a result. She also claims relief against the second and third defendants on the basis that they were persons involved in the breaches of Mr Deng.[2]
[1] Given the first defendant was an individual, the plaintiff’s Counsel placed principal weight on the Fair Trading Act1999 (Vic) (FTA) which will be therefore be the focus, below. The relevant consumer protection provisions of the FTA were replaced by the Australian Consumer Law on 1 January 2011.However, the parties accepted that, notwithstanding such replacement, the former provisions continued to operate in respect of the conduct alleged in this case which occurred prior to such repeal (see Interpretation of Legislation Act 1958 (Vic) s14(2)).
[2] s145 FTA; s75B TPA.
The plaintiff also seeks damages for breaches of the agreement, in particular, by reason of the third defendant’s failure to contribute his 60% of the total investment amount as defined in the agreement; alternatively, by failing to check the overall accounts.[3]
[3] See para 13(a), (b) and (c)(iv) Further Amended Statement of Claim 4.9.13 (FASOC) & paras 28 and 29 of Plaintiff’s Closing Submissions dated 10 September 2013; no other breaches were pursued in submission and no loss was identified as flowing from any other alleged failures (cf para 13(c)(i)-(iii) Further Amended Statement of Claim).
An earlier claim based on unconscionability was abandoned at trial as was a claim based on a breach of the Franchising Code of Conduct.[4]
[4] Plaintiff’s Submissions, paragraph 43.
The defendants deny the making of the representations, while both the second and third defendants also deny being “persons involved” in any contravention of the FTA. The third defendant further alleges that he is not liable for any breach of agreement to make ongoing contributions given the agreement had already been terminated.
In relation to the FTA claims the critical issues are therefore:
a. whether Mr Deng and/ or Jackie made the alleged representations;
b. whether Jackie and/or Ms Liu Ying (the second defendant) were persons involved in any contravention.
In relation to the alleged breaches of agreement the key issue is whether the agreement was terminated such that there was no ongoing obligation to make the contributions alleged.
The defendants abandoned their counterclaim and accepted that the counterclaim should be struck out.
The fourth defendant was wound up on 21 June 2012. On 31 August 2012 His Honour Judge Lacava made an order dismissing the proceeding against the fourth defendant and dismissing the fourth defendant’s counterclaim.
Background
The parties
10.The plaintiff (Ms Chen) was born in China on 5 June 1982 and was 27 in May 2010. She came from China to Australia in June 2009 on a temporary student visa which expired on 30 August 2011.[5] She was studying a Masters of Marketing.
[5] Exhibit N, extract from plaintiff’s passport.
11.The first (Mr Deng), second (Ms Liu Ying) and third (Jackie) defendants are husband, wife and son respectively. Prior to migrating in 1996, Mr Deng was described as a “successful businessman” in China, with the family owning real estate and property in China. Mr Deng and Ms Liu Ying have since been involved with a number of businesses in Australia, while Jackie attended high school and university in Melbourne.[6]
[6] Exhibit J, Administrators Report of 13 June 2012 at page 3.
12.The three defendants were directors of the fourth defendant, Life Ocean Pty Ltd (LO).
13.From 1996-2007 LO engaged in various small business operations. Another family company, Melbright Pty Ltd, also operated a successful seven eleven store in St Kilda from 2004 – 2010.[7]
[7] Exhibit J, Administrators Report at page 3.
14.In December 2007 LO acquired the “Cake World” business which had three retail outlets and a factory where the products were manufactured. The “Cake World” business was established in 1997 and is well known in the Chinese community for its cakes and breads. In 2008 LO purchased a property in Box Hill to replace the former factory site.[8]
[8] Exhibit J, Administrators Report at page 3.
15.From 2009 LO adopted a strategy to expand market share by investing in new retail outlets. It thereafter opened five further retail outlets.[9]
Meetings in May 2010
[9] Exhibit J, Administrators Report at pages 3-4.
16.In this context, and in about May 2010, Jackie identified the shop at Elizabeth Street Melbourne, as a potential site for the establishment of a Cake World store.
17.On 15 May 2010, a meeting took place where Ms Chen was introduced to Mr Deng by a woman named Ms Linda Zhao. Ms Chen alleges that her husband, Mr Liu Jia, as well as Ms Liu Ying, were present at the meeting. She also alleges that various representations were made at this meeting.
18.The defendants deny the allegations and also deny that Ms Liu Ying was present.
19.On 28 May Ms Chen says that a further meeting took place between herself and her husband and Mr Deng. She also alleges that Jackie was present at this meeting.
20.It was during this meeting that Ms Chen alleges some significant representations were made. She also alleges that there were documents handed to her at this meeting (contained in exhibit A at PCB 83-84).
21.Firstly, there is a handwritten document with writing in Mandarin which contains six points (PCB83).
22.This handwritten document also contains some numbers: $5000 (with 2 arrows above it); 200 (underlined twice) and 40 (with a line after it and underlined). These will be referred to further below.
23.Ms Chen also alleges that a document with a diagram of the shop and some dimensions was also handed to her at this meeting (at PCB 84).
24.The defendants deny the making of the alleged representations and deny that Jackie was even present. Their evidence about the documentation will be referred to further below.
25.On 28 May Ms Chen paid an amount of $3000 to Mr Deng as confirmed by a receipt for this amount of the same date.
Signed Agreement
26.On 28 June 2010, the plaintiff, Jackie and a third party investor, Mr Zhao Liang-Zi signed the agreement which is entitled “Joint-Operation Contract of Cake World (Elizabeth St Store).”
27.The Agreement describes the three parties as parties to a “Joint Venture.” (party A being Jackie; party B Ms Chen; and party C Mr Zhao).
28.Pursuant to Article 2 the three parties were obliged to set up a company, Boneden Pty Ltd, to manage the Cake World store at Elizabeth Street and “all parties shall jointly manage the store, adopt a unified accounting system and share the profits or losses.”
29.In fact the company Boneden Pty Ltd had already been registered from 2 June 2010 with both Ms Liu Ying and Ms Chen as directors and shareholders (at 45/55 respectively).
30.Articles 3 and 4 related to “Method of Joint Capital contribution, investment amount and period.” Pursuant to article 3, the total investment amount was $300,000. Jackie was to contribute 50% ($150,000); Ms Chen 40% ($120,000) and Mr Zhao 10% ($30,000).
31.In terms of profit and risk sharing, article 5 provided that profit was to be distributed on a monthly basis in proportion to each party’s investment. Article 6 provided that if joint properties were insufficient to repay debts, then all parties were to contribute to the payment of debt in accordance with the proportions of their investment.
32.On the day of the agreement, Boneden also entered a lease of the Elizabeth Street premises for 5 years at a rent of $245,000 per annum which commenced on 5 August 2010 (although no rent was payable for 3 months until 5 November 2010 – see clause 5.12 Disclosure statement). Ms Liu Ying was a guarantor of this lease which also included provision for a bank guarantee of $60,000 (clause 12).
Post Agreement
33.Ms Chen made the following payments after executing the agreement:
·$70,000 by way of bank cheque to LO on 22 June 2010;
·$27,000 by way of bank cheque to LO on 30 July 2010;
·$20,000 by way of bank cheque to LO on 24 December 2010;
giving a total of $120,000 (when taken with her deposit of $3000).
34.At some stage in July 2010 the third party investor, Mr Liang-Zi Zhao, informed Jackie that he did not wish to proceed with the agreement. There is some dispute between the parties as to what occurred as a result of his withdrawal which will be analysed further, below.
35.In any event, a cheque butt dated 30 August 2010 was adduced into evidence for an amount of $27,000 in the name of Mr Zhao drawn on an account of both Mr Deng and Ms Liu Ying. The evidence of Ms Liu Ying was that Mr Zhao was repaid his share through this cheque and also by a cash payment (of $3000). The plaintiff’s case was that the agreement thereby continued on a “60/40” basis (with Jackie purchasing Mr Zhao’s share).
36.Although it was initially planned that the store should open on 15 August the plaintiff’s evidence was that this did not occur because the fit out had not been completed by the defendants until 21 November 2010.
37.All parties, however, made payments towards the new business.
38.Thus, in August 2010, the defendants paid $60,000 for the bank guarantee due under the lease.
39.Although the matter was initially in dispute (with different amounts claimed in various financial statements), the parties also agreed that the amount spent on fit out by the defendants was the sum of $100,000.
40.Although no formal accounting was in evidence, the way the payments occurred was apparently that the defendants utilised the monies provided by Ms Chen, as well as their own monies, to pay for the costs of the establishment of the Elizabeth Street store (including payments for tiles, plumbing and other fit out costs). The evidence of Ms Liu Ying was that Ms Chen’s monies were paid into LO which was then responsible to pay for the fit out.
41.The defendants also allege that they made further payments for other expenses, primarily rent, once the store was opened.
42.Meanwhile Ms Chen also continued to spend monies and spent $27,548 on the liabilities of the business between June 2010 and January 2013, including amounts for rental obligations. This meant that her total contribution was $147,548 ($120,000 + $27,548).
43.In the result it was accepted that the total contribution by both parties to the business was $239,702.05 with Ms Chen contributing $147,548 and the defendants an amount of $92,154.05. The defendants accepted that they did not contribute 60% ($143,821.23) but were “short” by $51,667.18. The defendants’ case, however, was that Jackie had no obligation to make the 60% contribution given the termination of the agreement.
44.As indicated already, in late 2010, the Cake World shop on Elizabeth Street opened for business.
Cessation of business at Elizabeth Street
45.Although there were some accounts of Boneden adduced into evidence they did not prove to be reliable.[10] However, consistent with the administrator’s report, below, it appears that Ms Chen received no return at all on her investment in the business with Boneden continually finding itself unable to pay rent and stock.[11]
[10] E.g. the financial accounts of Boneden prepared by TT Accountants (exhibit F) show shop renovations at only $35,909 while the annual return (exhibit H) gives a figure for general assets of $30,523; this despite the fact that LO invoiced Boneden for an amount of $83,838.45 in respect of fit out costs (exhibit G). In the result, as referred to already, $100,000 was agreed upon for the purpose of this proceeding.
[11] Exhibit J, Administrators Report at page 12.
46.On 28 April 2011 Ms Chen alleges that she was replaced as a manager of the Elizabeth Street store by the manager of the Cake World store in Preston. This was accepted by Ms Liu Ying though denied by Jackie.
47.On 2 August 2011 the Landlord issued a Notice of Default under the Lease to Boneden and later re-entered the premises.
48.In November 2011 the store ceased trading.
49.In December 2011 this proceeding was issued by the plaintiff.
50.On 16 May 2012 administrators were appointed by the defendants to LO.
51.Those administrators have completed a report which records:
·that on 2 March 2012 a contract for the sale of the business and land was executed between LO and the purchaser, Hirizon Pty Ltd (whose directors are Jackie and a Ms Min Ye; and whose shareholders include Melbright with 49%);[12]
·That from the proceeds of the sale, payments were made to Melbright of $255,047 on 22 March; and to J and ZF Pty Ltd (of which Jackie was a director/shareholder) of $133,297.00 on 27 March;[13]
·that backdated salaries for the directors totalling $584,388 were recorded which had not been previously recorded. Had they been recorded previously “it would appear that the company has been trading at a loss since the acquisition of the business.”[14]
[12] Exhibit J, Administrators Report at page 7.
[13] Exhibit J, Administrators Report at pages 8,17.
[14] Exhibit J, Administrators Report at page 5.
52.The administrators recommended that the LO company be wound up which subsequently occurred on 21 June 2012.
53.The entity Hirizon continues to operate the Cake World business.
Witnesses
54.As with each witness called in the case, both Ms Chen and her husband, Mr Liu Jia, gave evidence through the use of an interpreter.
55.Ms Chen gave evidence in a straightforward manner and her account of events was not the subject of any relevant challenge.
56.Mr Liu Jia was an impressive and straightforward witness who generally corroborated Ms Chen’s version of events.
57.Each of Mr Deng, his wife, Ms Liu Ying, and their son, Jackie were called by the defendant as well as an alleged “eavesdropper” to one of the meetings, a Mr Duo Wang.
58.Having had an opportunity to assess these witnesses under examination and cross examination, I formed the view that their evidence was highly unsatisfactory such that I am unable to be satisfied that it could generally be relied upon. Not only was the evidence unresponsive and designed to advance a particular position, it was, at times, demonstrably inaccurate.
59.Firstly, Mr Deng was unwilling to make even the most simple concession and appeared to be intent on only giving evidence he perceived would assist his case rather than responsive and reliable evidence.
60.By way of example, he appeared incapable of giving evidence as to whether he had only offered Ms Chen one shop, eventually suggesting that he had offered her two shops (though no such proposition had been put to her). His flat denial that J and ZF Pty Ltd was associated with his family was inaccurate given Jackie’s involvement as both director and shareholder. Further, his statement that he knew “nothing about immigration policy” was completely inconsistent with his position as a director and 45 % shareholder of Auspress Migration Pty Ltd an “operative entity specialising in migration service”.[15]
[15] Exhibit J, Administrators Report at page 20.
61.His evidence as to the pivotal meetings was also implausible and unsatisfactory and will be referred to in more detail below.
62.The evidence of Jackie was also utterly unsatisfactory. His evidence was unresponsive and argumentative and again appeared to be designed solely to advance what he perceived to be the defendants’ interests in the case.
63.By way of example he gave unresponsive evidence about his entitlement to a salary (which was the subject of the backdated claim in the administrator’s report). His long winded attempts to distance himself from responsibility for the $300,000 capital investment fit out figure was also both unresponsive and not credible given he had clearly chosen the site and had previous experience with the Preston outlet. His attempts to suggest that the amount was based only on what people had (to invest) was implausible.
64.He also gave patently untruthful evidence at times. Thus his claim that he had only taken an interest in the Preston shop “several months ago” was misleading since he later admitted that he had owned shares in the entity running that store since February 2009. His denial that he was present at meetings with the administrator was also false given he clearly attended as a director.
65.Finally, Ms Liu Ying also appeared to believe that the witness box presented an opportunity to advance a position rather than give responsive truthful evidence.
66.By way of example, on a number of occasions she sought to make the point that the agreement was “terminated”’ even where it had nothing to do with the question asked. Her adamant position that she did not become a director /shareholder of Boneden until 28 July 2010 was simply wrong given it occurred on 2 June 2010. Her inability to explain the transactions the subject of the administrator’s report was also inexcusable given she accepted she was responsible for the accounts.
67.This leaves the remaining witness, Mr Duo Wang. He was a friend of Jackie (of some 10 years) who was involved in the Cake World outlet in Preston with Jackie. His evidence was that he was in the “next room” during the second meeting that took place between Ms Chen and Mr Deng.
68.This evidence was not credible and did not assist the defendants’ case. It will be referred to in more detail, below.
69.Overall then, I have accepted Ms Chen’s version of events and preferred it to that of the defendants.
Misleading/Deceptive claims
Alleged representations
70.The plaintiff alleges that the following representations were made by Mr Deng in relation to the profitability of the business (the profitability representations):[16]
a. the Cake World business was a financially successful and profitable franchise business;
b. he had conducted specific market research over a three month period, which projected that annual sales of the Elizabeth Street Shop would be approximately $2million per annum;
c. based on Mr Deng’s market research, Ms Chen would get a return on her investment of $120,000 within the first year.
[16] FASOC at paragraph 6D(a) (ii), (iii) and (vii).
71.The plaintiff further alleges that Mr Deng (with Jackie) also made the following representations about the investment proportions/amounts (the investment representations):[17]
a. the cost of the fit out of the Elizabeth Street Shop would be approximately $250,000 to $300,000;
b. he and/or his family would invest or arrange 60% of the $300,000 investment amount for the fit out [of] the shop, with Ms Chen investing the balance of $120,000.
[17] FASC at paragraph 6D(a) (vi), (vii) and (b)(i).
72.Finally, the plaintiff alleges that, apparently by reason of the agreement itself, Jackie made representations that (the contractual representations):
a. he would invest or procure from others 60% of the $300,000 investment amount for the fit out [of] the shop, with Ms Chen investing the balance of $120,000;
b. he would strategically manage the Elizabeth Street Shop, develop business policy, make a general marketing plan, check overall accounts, distribute profits, purchase and supply raw materials and products, set wages and allocate staff.[18]
[18] FASC at paragraph 6D(b) (i), (j).
73.However, the “contractual representations” were not pursued in final submissions. This is appropriate. Thus, although I accept that it is possible for contractual terms to form the basis of an FTA claim, no reliance damages were established as flowing from any such representations contained in the agreement itself. The “contractual representations” will therefore not be considered further in terms of the FTA claim.
Plaintiff’s evidence
First meeting
74.The evidence of Ms Chen was that the meeting of 15 May was attended by herself and her husband as well as Mr Deng and his wife, Ms Liu Ying. It occurred at the factory (being the bakery of the Cake World business in Box Hill).
75.Her evidence was that Mr Deng gave an introduction to the business and said it was a “group company” and a “chain” business. The evidence continued:
MR NOONAN: Did Mr Den telling you anything else about the Cake World business?---He said that since he bought Cake World in 2007 which was at that time only two shops and after they are experienced management now they have increased the shops from two shops to seven shops….
Did Mr Den explain to you what role he had in relation to the retail outlets?‑‑‑He said he managed those shops and also he did strategic management.
Was there any discussion about who else was involved in the other retail outlets?‑‑‑He said he sold those chain businesses or franchise businesses to the shop owners and he helped to manage. …
When you were told these things by Mr Den at the meeting, how did you respond?....I would like to know whether there is a risk if I have bought…if I bought the business.
Was there any response to that?‑‑‑Okay. He said that their business is a group business and it was managed very well and each shop was doing quite well. There could not be such risks and besides he said he also put in funds in it.
When you say “he” you are referring to Mr Den, I take it?‑‑‑Yes.
Was there any discussion about future plans either for you or for the business?---He said that his company, the group company, were being listed in three to five years in the share market and it is a very good – it is very good timing to buy this business at that time and I would be able to make money with that…
What was said in the preliminary discussion [re investment]?...They asked us approximately how much we would like to invest.
And what did you say?---I said about $100,000.
And when you told them that how did Mr Den respond?---They said now they are considering establishing to set up a shop in the inner city centre, and they wanted to make that shop as brand name shop as the shop for the image of the business…
Second meeting
76.Ms Chen’s evidence was that following a phone call from Mr Deng, a second meeting occurred at the factory where she and her husband attended as well as Mr Deng and his son Jackie. At that meeting they talked about the prospects of the Elizabeth Street shop, their market survey and how they were going to fit out the shop.
77.Her evidence was as follows:
Mr Den said according to the survey of Life Ocean this shop would be very successful and the first year turnover will be $2m and we will be able to get back our investment in the first year.
78.Her evidence was also that “they” (Jackie and Mr Deng) said it would be around $250,000 for the cost of the shop-fitting and all equipment with a bank guarantee also of $60,000. The evidence continued:
Did he or Jackie say anything about who would pay the difference between the approximately 100,000 that you were looking to invest, and the full cost of 250 - 300?‑‑‑They said they would pay for it.
79.Her evidence was that Mr Deng said that it was okay that she only had $120,000, but that, given an amount of $300,000 was required, she would only hold 40% of the shares.
80.Ms Chen was taken to the handwritten documents at exhibit A including the diagram of the shop. She said these documents were given to her at the meeting.
81.She was asked about what the figures on the first page (at CB 83) represented. Her evidence was as follows:
You said that these were the drafts, or a draft of the agreement?‑‑‑Yes.
If you look at the top right hand corner there's sort of a drawing as well and 5,000, 200, and 40 with a symbol, do you recall what that was about?‑‑‑5,000 means our turnover , and the two arrows means would be over $5,000.
Do you remember what the 200 refers to?‑‑‑The 200 means $2m per year turnover.
The 40 with the symbol next to it?‑‑‑That means $400,000 usually, he said, the shop would be sold at $400,000.
Sorry, I should just clarify one thing, I’m jumping about a little bit here. If we could go back to p.83 of the court book, and you referred to the 5,000 up the top and you said that referred to turnover?‑‑‑The daily turnover of the shop.
82.The evidence of her husband was cohesive and credible and generally corroborated the plaintiff’s evidence, particularly as to Mr Deng’s statements about the turnover and survey (though he said the survey was undertaken by Jackie).
83.However, although Jackie appeared to be present when the profitability statements were made (while numbers were being written on exhibit A), his evidence was that Jackie was not there at the time Mr Deng said the defendants would make up the balance of the $300,000.
Defendants’ evidence
84.The evidence of Ms Liu Ying and Jackie was that they were not present at these meetings.
85.This left the evidence of Mr Deng and Mr Duo Wang.
Mr Deng
86.Mr Deng’s evidence was that there were in fact three meetings: of 15 May; 28 May and a subsequent one in June.
87.At the meeting of 15 May he claimed that it was only Ms Chen and her husband present at the factory. He claimed that Ms Chen did most of the talking at this meeting explaining in some detail that there were four criteria for a “entrepreneuring and investment” policy for students which included that the minimal turnover of the business was to be above $400,000. In response he claimed to know nothing about immigration policies. He further claimed to make some criticisms of his business including that the bread lines needed improvement and internal management (though none of this was put to Ms Chen).
88.He claimed Ms Chen then called him and a further meeting occurred on 28 May between himself and Ms Chen and her husband.
89.At the second meeting of 28 May, he claimed that Mr Duo Wang was outside. He further claimed that his son Jackie had identified a shop with “potential.” Mr Deng had observed that it had a flow of people but noted that the rent was rather high. His evidence was that, essentially on the strength of this Ms Chen stated “you must allow me to be part of it” and took out $3000 cash. Although he initially refused she insisted and indicated that a receipt was not necessary because of “trust.” He described her as in great urgency to obtain a shop for investment because of her visa.
90.His evidence was that there was then a third meeting in the first half of June with Ms Chen and her husband. At this meeting, Ms Chen brought up some “ideas of her own” because she was studying marketing. She suggested he should think of operating the businesses as franchises but because they were not yet (so operating) he should not charge franchise fees. Mr Deng suggested she talk to Jackie about details and she said: “Uncle Deng as long as you can help me, even though I will be making loss I’m willing to…”
91.The meeting concluded with her promising to contact Jackie
exhibit A
92.Under examination the evidence of Mr Deng was that he wrote on the two pages of exhibit A at the third meeting in June (although he also suggested the second page was not given to her until July). He also suggested that the sketch at CB 84 was done by him with a tape measure after they had keys on 28 June.
93.However, under cross examination he said he gave the first page of exhibit A to Ms Chen and her husband on 28 May.
94.Under examination, he claimed that the figure of $5000 was weekly rent based on annual rent of around $250,000 with the arrows referring to CPI increases. The figure of $200 was also discussed as based on taking the most conservative calculation of 2.5 CPI giving a weekly rent increase of 200. Finally the 40 with a symbol after it meant $400,000 as the estimate of the all up costs including fit out and bank guarantee.
95.This evidence should be compared with that of Jackie.
96.His evidence was that exhibit A contained his and his father’s handwriting (although he was not present at any of the meetings). He further claimed that he (not Mr Deng) drew the sketch before he went to bed one night prior to the agreement to record what was in his mind when he had nothing else to do.
Mr Duo Wang
97.As indicated already, Mr Duo Wang was also called to corroborate the evidence of Mr Deng, including the suggestion that Jackie was not even present at the relevant meeting of May.
98.An initial difficulty arose since there was inconsistency between Jackie and Duo Wang as to how Duo Wang came to give evidence in the case.
99.Thus Duo Wang stated that he had not spoken about the matter with Jackie before he called him whereas Jackie says that they had an earlier conversation wherein Duo Wang told him about the meeting back in 2010.
100.In terms of his actual evidence, under examination Mr Duo Wang said that the main topic was immigration business; that Ms Chen said it was not easy to obtain permanent residency and with her mentioning a category of “entrepreneur investing.” His evidence was that the subject of LO’s business was not discussed at the meeting.
101.However, under cross examination he was able to suggest that Mr Deng described the business as having good potential but with rent on the high side. He however went further and suggested that Ms Chen actually said “regardless of success or failure I am in.” This was expanded upon by the suggestion that she said “I trust you and I don’t need a receipt.” He did not recall Mr Deng saying anything about the potential turnover of the shop.
102.The troubling aspect of all this evidence was that, although it was consistent with the evidence of Mr Deng (quite strikingly in parts), the matters highlighted above described by Mr Duo Wang as occurring in a single meeting are said by Mr Deng to have been said over the course of three meetings (two of which Mr Duo Wang did not “overhear”).
Findings re representations made
103.The evidence of Mr Deng as to the meetings was inherently incredible.
104.The defendants submitted that the inherent probabilities of the case suggested the plaintiff’s evidence should be rejected and relied on, inter alia, the following:[19]
· that the plaintiff had a motive to invest, having first approached the first defendant;
· that the plaintiff had previous experience in sales and marketing;
· that sales in the accounts for June 2011 were only $243,433; nowhere near the $2 million figure allegedly represented;
· that Mr Deng had not been seeking investors in LO;
· that the defendants had significant exposure having invested significant monies in the business.
[19] Defendant’s Submissions, at paragraph 21.
105.However, although I accept that the plaintiff had an interest in investing, there was nothing to demonstrate that she was in any urgent hurry to invest “regardless of the loss” as the defendants attempted to portray. Thus the objective evidence was that her visa did not expire until 30 August, 2011.
106.The plaintiff’s evidence was that she had some previous experience in sales and marketing in China. However, she was very young and new to Australia. Her experience was also significantly inferior to that of Mr Deng.
107.Regardless of whether they had previously been seeking investors, the defendants also had a strong motive to obtain a further injection of funds particularly given the state of the business. The report of the administrators also suggested that there was a strategy to expand the number of retail outlets at the relevant time.
108.The exposure of the defendants generally also does not assist their case, but tends to make it more likely that they would press an investor for funds.
109.Finally, I accept that there was no evidence to support a turnover of $2 million. However, the evidence of the plaintiff was consistent, cogent and persuasive. It was also supported by her husband; neither being undermined at all under cross examination. Furthermore, there was some support for their account in the handwritten notes, as will be referred to below.
110.By way of contrast, as indicated earlier, the evidence of the defendants was totally unsatisfactory. Although I accept that this would not necessarily lead to a general rejection of every part of their evidence, their evidence about the crucial meetings was also implausible.
111.Thus, the general flavour of Mr Deng’s account was that Ms Chen made the running of the meetings and “pushed” Mr Deng into offering the business. There was no objective evidence which made this scenario likely, particularly given the plaintiff’s visa did not in fact expire until August, 2011. The suggestion that Ms Chen said she was willing to make a loss to get a visa also beggared belief, particularly given Mr Deng’s own evidence was that she said she needed a business with a turnover of more than $400,000.
112.Exhibit A also independently suggests that a turnover of 2 million was the topic of conversation. Thus the document contains a “2” consistent with the plaintiff’s case. Although there was some suggestion that there might be lines after the figure (to denote 10,000 amounts), the alternative evidence of Mr Deng made no sense. Thus, a CPI rate of increase of 2.5% on rent of $5000 appeared to have no correlation with the figure of 200. More significantly, it is hardly likely that Mr Deng would have been highlighting rental increases in seeking investment funds as he now seeks to suggest. The arrows above the figure of $5000 were also consistent with a statement that turnover would be increasing. Such daily turnover would also give a total of approximately $2 million.
113.The evidence of Mr Duo Wang also did not advance the defendants’ case.
114.Although it was suggested that he was not a party, he clearly had some relationship with the family, particularly Jackie.
115.Moreover, the “compaction” of his evidence as occurring in a single meeting was utterly implausible and inconsistent with the evidence of Mr Deng.
116.In any event, given he did appropriately concede that he could not remember all the detail of the meeting, his evidence was of little probative value in any event. If he was actually there, as he maintained, it was perfectly possible that he did not hear everything that was said, (including the matters the subject of the representations) particularly since he had no obvious vested interest at the time.
117.Having regard to my earlier comments as to the evidence generally, I therefore accept the evidence of the plaintiff.
118.In relation to the business, I accept that on 15 May, Mr Deng represented that the Cake World business was a generally successful franchise business given it had grown from 2 to 7 shops and was expected to be publicly listed in 3 to 5 years.
119.However, these statements were made in a preliminary meeting only. In my view the timing and nature of the statements in such a meeting were more in the nature of the puffing one might expect to be made at the commencement of negotiations. I therefore do not consider them to be actionable.[20]
[20] And See Sanders v Glev Franchises Pty Ltd [2002] FCA 1332 [270] – [274].
120.I do however accept the plaintiff’s evidence as to the other “profitability” representations as follows (the relevant profitability representations):
a. that Mr Deng represented that he had a market survey which showed that there would be $2 million per annum of sales made in the first year at the Elizabeth Street shop;
b. that Mr Deng represented that she would be able to get back her investment funds of $120,000 in the first year.
121.In relation to investment, I accept that the following investment representations were made, at least by Mr Deng:
a. that it would be around $250,000 for the cost of the shop-fitting and all equipment with a bank guarantee also of $60,000, giving a total fit out of approximately $300,000;
b. that “they” would pay for the difference between the amount she could pay ($120,000) and the $300,000 required.
122.Although it appears that Jackie also joined in the estimate of $300,000, the evidence of the husband was, specifically, that Jackie was not there when Mr Deng stated that “they” would make up the difference. I am therefore unable to be satisfied that Jackie made the investment representation at (b) above.
123.However, a real issue arises in any event as to the significance of the investment representations.
124.Firstly, insofar as (a) is concerned, it is true that the ultimate cost of the fit out appears to be only $100,000, and not $300,000. However, I am unable to be satisfied that the plaintiff relied on this (false) overstatement in entering the agreement. Instead, the essence of the plaintiff’s evidence was that she had only limited funds to invest and was looking to reduce expenditure. Any overstatement of expenses has not caused her to enter the agreement and lose her funds. There is also an insufficient nexus between her loss in doing so and any overstatement of outgoings.
125.Insofar as (b) was concerned, the representation is substantially mirrored in the terms of the agreement ultimately signed. Although it may be possible that a pre-contractual representation which later forms a term in an agreement to found a separate remedy under the FTA, I do not consider that it did so in the present circumstances. Given the plaintiff had an opportunity to, and did, read the actual terms of the agreement, I am not satisfied she was relying on the earlier representation when she actually entered the agreement. Instead, the earlier representation was later overtaken by the entry into a contract with Jackie which contained substantially similar terms.
126.It remains, however, to consider the other requirements in more detail for the relevant profitability representations I have found were made.
Reasonable ground/falsity
127.The defendants did not seek to challenge a finding that the representations were misleading or deceptive if made. This section will therefore be brief.
128.Pursuant to s4(1) of the FTA, if a person makes a representation about a future matter and the person does not have reasonable grounds for making the representation, the representation is deemed to be misleading.
129.Pursuant to s4(2) the person making the representation bears the burden of proving that he or she had reasonable grounds for making the representation.
130.It may be that the relevant profitability representations were, at least in part, a representation as to a present fact, namely that Mr Deng had a market survey which gave a particular forecast.
131.However, even if this was so, there was no evidence adduced that Jackie (nor anyone else at LO) had conducted any market survey which could support a claim of an annual turnover of $ 2 million or indeed any substantive turnover; the highest the evidence went was that Mr Deng had been out to the site and noticed a high flow of people.
132.Insofar as the representations related to future matters, it was also not suggested that there were reasonable grounds for the representation that there would be $2 million of annual sales in the first year (according to a market survey or otherwise) and/or that Ms Chen would get her investment back.
133.The report of the administrators also suggested an absence of reasonable grounds given it states that the LO company had been trading at a loss since acquisition.
134.The relevant profitability representations were misleading or deceptive.
Reliance
135.Pursuant to s159(1) of the FTA, a person who suffers loss “because of” a contravention of a provision in the Act may recover “the amount of the loss” against the contravener or a person involved in the contravention.
136.The principles concerning reliance were recently summarised in the Court of Appeal decision of Lord Buddha Pty Ltd (in liq) v Harpur as follows:[21]
[21] [2013] VSCA 101 [159].
a. In cases of deceit or cases brought under s 52 and s 82 of the Act (or under equivalent State legislation), if a material representation is made which is calculated (which is to say, objectively likely) to induce the representee to enter into a contract, and where the representation is of a kind that it is likely to provide an inducement, and that person in fact enters into the contract, an inference may be drawn that the representation operated as an inducement for the person to do so.
b. However, an inference of inducement is no more than an inference of fact, which may be rebutted on the facts of the case. In order to rebut the inference, the representor assumes an evidentiary onus to point to facts inconsistent with the inference arising….
c. The representation need not be the sole inducement. It is sufficient so long as it plays some part in inducing the representee to enter the contract, thereby acting as a real inducement, or one of the real inducements to him to do what caused his loss.
d. The inference may be drawn where commonsense would demand the conclusion that the false representation(s) played at least some part in inducing the representee to enter into the contract.
e. The drawing of the inference, on application of these principles, is but part of the fact-finding which must be undertaken on the whole of the evidence to determine the ultimate question on the issue of material inducement leading to reliance, namely whether or not the representee has satisfied the trier of fact on the balance of probabilities that the representation(s) in question contributed to the respresentee’s decision to enter into the contract such that, whether alone, or with or notwithstanding other things that accompanied it, the representation(s) operated as a real inducement or one of the real inducements, to the representee to do so
...
f. The fulcrum of the inquiry in relation to misrepresentation and reliance is the need to identify contravening conduct (the making of the misrepresentation) and a causal connection between that conduct and the loss and damage allegedly suffered, in the sense that the representation(s) played at least some part in inducing the representee to enter into the contract. This must be found on the balance of probabilities before liability can be established. The mere possibility that a misrepresentation might have induced a course of action by the representee is not sufficient to attach liability under s 82 of the making of it.
g. In the application of these principles, the drawing of inferences pursuant to Gould v Vaggelas, is not per se precluded because there is no direct evidence as to reliance upon the alleged representation, nor is it precluded by reason that direct evidence was called, even if the thrust of the direct evidence is rejected. An inference as to reliance may be open to be drawn, or it may not. In each case the totality of the evidence in its context, including any possible inference to be drawn when assessed against the effect of any direct evidence, needs to be examined (citations omitted).
Application of Principles
137.The evidence of Ms Chen was:
And why did you decide to go ahead with the investment?--- Because their continued words of guarantee and the – my understanding that the - of the franchise business mode - model and also my understanding that the money was paid to the general company - general office, or the franchise. And they ensured me, they promised that after the refurbishment, the fitting out I would be given a statement of all the things that had been done.
…
You also mentioned a matter that you relied on as their guarantees, what guarantees were you talking about there that you relied on?---First of all I was told that we were all experienced Australian people, and also they said that they themselves also invest money in it, and if it was - it was risky they wouldn't have done that. Also according to them that - according to their market survey they said it really wouldn't - surely wouldn't happen, and also - I also - - -
HER HONOUR: Sorry, you’ll need to repeat that. According to their market survey, what?‑‑‑According to their market survey, the risk surely wouldn’t happen, and the – I said - emphasised it to them that I really didn’t have more money other than the investment I put in. If for the first – in the first year the business fails, I wouldn’t be able to have any more money.
MR NOONAN: When you say you emphasised to them, who did you say that to?‑‑‑Mr Den and Yu Ying.
138.Her evidence under cross examination was also that “after this introduction and about the market survey, and prospect of the business, therefore I considered - I considered to join the shop.”
139.A statement about the prospective takings of the business was of a kind likely to induce entry into this agreement. Similarly a statement that an investor would be able to get their investment back within a year. This is particularly so in this case where the plaintiff had little relevant business experience and limited funds.
140.The defendants submitted that given the plaintiff’s motives for investing in the business and the fact that she signed the agreement without verifying the financial details of the business, that the plaintiff did not establish the requisite reliance.[22]
[22] Defendant’s Submissions, at paragraph 22.
141.However, the plaintiff’s evidence was that she did not know she had the right to verify financial information. Although she can be criticized for this, this was in a context where she was only on a student visa in Australia; without the benefit of legal advice; having been here for less than 12 months; and where she had not run any businesses.
142.The objective evidence also did not suggest that she was in such a hurry so as to invest regardless of financial considerations because of immigration concerns. Instead, as at May 2010 there was more than 15 months before her visa expired. Moreover, her evidence was that immigration concerns were interlinked with the prospects of the business. In her own words she believed that if the business was unsuccessful she could not get “PR” (Permanent Residency). I accept this evidence which was consistent with the evidence of Mr Deng (that she wanted a high turnover).
143.It is therefore likely that, as she herself says, the relevant profitability representations played at least “some part” in inducing her to enter in the agreement.
144.“Common sense” would also demand the conclusion that these representations played some part in inducing her entry into the agreement, consistent with her own evidence which evidence I accept.
145.I am satisfied that the relevant profitability representations induced Ms Chen to enter the agreement and invest the sum of $120,000.
Causation and Loss
146.I am further satisfied that the plaintiff’s payment of $120,000 occurred because of the relevant profitability misrepresentations pursuant to s159 of the FTA.
147.It is true that the plaintiff obtained an investment into the business at the Elizabeth Street store. However, the defendants did not suggest that this was of any value. This in my view was an appropriate stance to take given the report of the administrators was that the entire LO entity had essentially been trading at a loss since acquisition; that the Boneden business was unable to generate enough revenue to cover expenses for rent and stock; that the business ceased trading in late 2011 after the landlord re-entered; and that Boneden had no assets.[23]
[23] Exhibit J, Administrators Report at pages 5 and 12.
148.The plaintiff claimed the full amount of $147,548 expended. The plaintiff emphasized that, although she contributed beyond the amount of $120,000 contemplated by the agreement, article 6 provided that if joint properties were insufficient to repay the debts, all parties shall contribute to the payment of debt in accordance with the proportion of each party’s investment.
149.However, as is evident from the payments made, the plaintiff has actually contributed beyond the proportion of her investment. Although one might have sympathy for her doing this, this was a matter of her own volition and in my view is not attributable to the representations made in May 2010. This is particularly so since the amounts included amounts paid well after the time of the representations (in 2012 and even into 2013) when she must have known the dire state of the business.
150.I am therefore satisfied that the loss should be confined to the amount of $120,000.
Conclusion re Mr Deng
151. I am satisfied that Mr Deng represented, in trade or commerce:
a. that he had a market survey which showed that there would be $2 million per annum of sales made in the first year at the Elizabeth Street shop;
b. that Ms Chen would be able to get back her investment funds of $120,000 in the first year.
152.I am also satisfied that there was no market survey and that, insofar as the representations related to future matters, Mr Deng had no reasonable grounds for making the representations which were misleading or deceptive.
153.I am further satisfied that the representations induced the plaintiff to enter the agreement and pay $120,000 pursuant to that agreement.
154.Finally, I am satisfied that the plaintiff suffered loss of $120,000 because of the misleading or deceptive conduct.
155.It follows that the plaintiff is entitled to an award of damages against Mr Deng of $120,000.[24]
[24] The plaintiff’s Counsel made clear that no further remedy was sought to set aside the agreement if damages were obtained.
Whether other defendants are “persons involved”
156.As indicated above, pursuant to s159, Ms Chen may also recover the amount of the loss against a person “involved in” the contravention.
157.Pursuant to s145 of the FTA:
A reference in this Division to a person involved in a contravention of this Act means a reference to a person who –
a) has aided, abetted, counselled or procured the contravention;
b) has induced, whether by threats or promises or otherwise, the contravention;
c) has been in any way, directly or indirectly, knowingly concerned in or a party to, the contravention;
d) has conspired with others to effect the contravention.
158.Section 145 of the FTA further requires actual, not constructive, knowledge of the essential matters that make up the contravention (although where there is a combination of suspicious circumstances and a failure to make enquiry, it may be possible to infer knowledge).[25]
[25] Compaq Computer Australia Pty Ltd v Merry (1998) 157 ALR 1 at 4 – 5; see also Yorke v Lucas (1985) 158 CLR 661.
159.The plaintiff must therefore establish that each of the other defendants had knowledge both that the representations were made and that they were misleading.
Ms Liu Ying
160.Regardless of whether Ms Liu Ying was present at the introductory meeting on 15 May, she was not present when the relevant profitability representations were made on 28 May.
161.The plaintiff submitted that the court should infer that Ms Liu Ying had knowledge of the making of the representations and their falsity. In particular, emphasis was placed on her role as director (of both LO and Boneden) and person responsible for the accounts of LO.[26]
[26] Plaintiff’s Submissions, at paragraphs 20-24; FASOC para 19: particulars 2.
162.However, although this might have suggested awareness of the financial position of the business, it does not suggest that she knew the representation was actually made in the first place. Indeed such a proposition was not even suggested to her.
163.The claim against the second defendant is not established.
Jackie
164.Jackie was not responsible for making the relevant profitability representations. However, he does appear to have been present when the representations were made both on the plaintiff’s evidence and the husband’s evidence.
165.However, there was nothing highlighted which suggested that he had knowledge that the representations were misleading. The fact that he was a director of LO; a party to the agreement; and that he was present when the representations were made is insufficient.[27]
[27] FASOC para 19: particulars 3.
166.Rather, on the state of the evidence I am unable to be satisfied that he knew that a market survey had not in fact been undertaken.
167.Insofar as the relevant profitability representations are with respect to future matters, there was also no evidence that he knew that there were no reasonable grounds for making the statements. No such proposition was put to him. Indeed, insofar as the evidence went, it appeared that while he was responsible for identifying the site, his (more experienced) father undertook the assessment of the future prospects of the business, while his mother was responsible for the financial accounts.
168.I am therefore unable to be satisfied that Jackie had the requisite knowledge that the relevant profitability representations were misleading or deceptive.
169.The claim under the FTA therefore also fails as against the third defendant.
Alleged breach of agreement
170.The sole issue to be resolved here was whether the agreement had been terminated. The defendant otherwise did not suggest that Jackie had contributed 60% of the total investment monies (of $239,702.05) pursuant to article 3; and otherwise did not challenge that the quantum of the plaintiff’s loss was $51,667.18.
171.The defendants however alleged that on being informed of Mr Zhao’s departure, the plaintiff indicated that she would need to be the largest shareholder and that she would not continue unless she was. Given the parties were unable to agree that she should be the largest shareholder, it followed that the agreement was terminated.
172.The plaintiff’s evidence was that after signing the agreement Jackie told her that Mr Zhao had gone back to China and did not wish to proceed with the agreement. She denied agreeing that he be repaid his contribution because she had never received it. She also denied saying that she now “required to be the largest shareholder in the business.” Rather she said that Jackie simply advised that his shareholding was now 60%. She also rejected the notion that she thereafter had no further business dealings or conversations with Jackie after July (as he maintained).
173.By way of contrast, Jackie’s evidence was somewhat inconsistent on this point.
174.Under examination Jackie’s evidence was that, on being informed of Mr Zhao’s departure (in about early July), Ms Chen said that she needed to hold the majority of the shareholding. Further, that when Jackie refused to oblige, she said that if this was the case “there’s no more agreement” to which he agreed. He also alleged that there was no further discussion between himself and Ms Chen concerning the agreement or their role and obligations because it was terminated.
175.However under cross examination his evidence was that the only discussion in relation to the departure from the agreement was that he explained to Ms Chen that Mr Zhao was not going to be involved any more (because of going back to China) and that he had paid him back his money.
176.The suggestion of a termination was inconsistent with the conduct of the parties in continuing to operate, and make contributions to, the business. It was also inconsistent with Ms Chen continuing to manage the business until at least April 2011.
177.The defendants highlighted that the shareholding in Boneden did not reflect the percentages pursuant to the ongoing agreement. However, the shareholding/directorship in this operating company appears to have never reflected the investors and their proportions. This therefore does not support any termination of the agreement.
178.The defendants were also unable to profer any alternative basis on which the parties were acting save for the suggestions of Ms Liu Ying that Ms Chen requested her to join in as a new party to an ongoing agreement. This self serving statement was not consistent with any objective evidence and was never even put to the plaintiff.
179.For reasons given already, I have generally preferred the plaintiff’s evidence to that of the defendants. I accept her evidence in relation to the issue of termination which was more consistent than that of Jackie and which was also more probable given the conduct of the parties.
180.Thus, I accept, that the agreement was ongoing. Although this was with two parties rather than three, the agreement contemplated that the parties had the right to transfer their contributed capital under article 9.
181.I therefore consider that the agreement continued to subsist with Ms Chen (as to 40%) and Jackie (as to 60%, having purchased the 10% interest of Mr Zhao).
182.Given no other issues arose, it follows that the plaintiff is entitled to judgment against Jackie in the amount of $51,667.18 for breach of his obligation to provide the requisite investment monies under article 3.
183.It is unnecessary in such circumstances to consider the alternative breach for an alleged failure to check the overall accounts.
Conclusion
184.The plaintiff is entitled to an award of damages of $120,000 against the first defendant, Mr Deng, under s159 of the FTA.
185.The plaintiff is also entitled to an award of damages of $51,667.18 against the third defendant (“Jackie”) for breach of contract (but is precluded from any double recovery).
186.The plaintiff’s claims against the second defendant are dismissed.
187.The counterclaim should be struck out.
188.The parties should exchange a form of proposed order to give effect to these reasons before I resolve any remaining issues including costs.
SCHEDULE OF PARTIES
| CHEN HAIJING (also known as CRYSTAL CHEN) | Plaintiff |
| and | |
| DENG DA ZHAN | First Defendant |
| and | |
| LIU YING | Second Defendant |
| and | |
| DENG CHUANG | Third Defendant |
| and | |
| LIFE OCEAN PTY LTD (ACN 075 227 100) | Fourth Defendant |
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