LCY Pty Ltd v Ma

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2017 0049

LCY PTY LTD (ACN 157 713 178)	Applicant
v
DONG YAN MA	Respondent

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JUDGES:	TATE, OSBORN and ASHLEY JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	3 November 2017
DATE OF JUDGMENT:	20 December 2017
MEDIUM NEUTRAL CITATION:	[2017] VSCA 383
JUDGMENT APPEALED FROM:	[2017] VCC 264 (Judge Cosgrave)

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CONTRACT – Management agreement – Claim for unpaid management fees – Estoppel by convention – Common assumption between the parties – Detriment – Leave to appeal granted – Appeal allowed – Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226, Equuscorp Pty Ltd v Wilmoth Field Warne (2007) 18 VR 250, referred to – Thompson v Palmer (1933) 49 CLR 507, Grundt v Great Boulder Gold Mines Pty Ltd (1937) 59 CLR 641, applied.

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APPEARANCES:	Counsel	Solicitors
For the Applicant	Mr J L Bourke QC with Mr D K Carlile	RTC Legal
For the Respondent	Mr A T Broadfoot QC with Mr G J Redenbach	Henley Legal

TATE JA
ASHLEY JA:

On 12 April 2017, a County Court judge entered judgment for the defendant in a claim brought by LCY Pty Ltd (‘LCY’ or ‘the plaintiff’) against Dong Yan Ma (‘Ma’ or ‘the defendant’). The claim, laid in contract by writ filed 7 December 2015, had been defended on the basis that the contract was void ab initio. The judge found that the contract was unenforceable. His Honour further rejected reliance by the plaintiff upon an alleged estoppel.

The plaintiff seeks leave to appeal against the judge’s order and that its appeal be allowed. It does not challenge the judge’s conclusion that its claim founded in contract should fail. It does challenge the judge’s finding that the defendant was not estopped from denying that he owed the plaintiff unpaid ‘management fees’.

We will set out the proposed grounds of appeal later in these reasons. But to understand those grounds, it is first necessary to describe the circumstances of the matter, the pleadings, the conduct of the trial, and the judge’s reasons.

The circumstances generally described

LCY was the corporate vehicle for a Chinese businessman resident in Melbourne named Shuirong Yu (‘Yu’). LCY was trustee for Yu’s family trust. LCY was controlled by him.[1]
[1]LCY Pty Ltd v Dong Yan Ma [2017] VCC 264 [2] (‘Reasons’).

Ma, another Chinese businessman resident in Melbourne, also had a corporate vehicle — MYD Pty Ltd (‘MYD’). MYD was the trustee of a trust of which Ma was the beneficiary. Ma was the sole director of MYD.[2]
[2]A company extract of MYD was tendered at trial.

The judge said in his reasons that the case was ‘unusual in several respects’.[3] He stated that there was little evidence called, Yu giving short evidence, Ma giving none, and Ma tendering some documents. Second, said the judge, the parties agreed on some important facts notwithstanding the absence of evidence. In particular, they agreed in the total amount of payments made by Ma under the ‘management agreement’ — as to which, see below — and that no payments had been made after 19 May 2015. In the third place, the judge noted, Ma, though denying any responsibility to make payments to LCY, had not pursued a counterclaim seeking a return of monies paid. Finally, LCY had made no application to amend its claim to join other parties or to seek rectification.
[3]Reasons [36].

His Honour’s account of the material upon which he was entitled to act understated what was before him. The entirety of the relevant material — derived from the pleadings and further particulars,[4] from documents put in evidence, and from Yu’s evidence — established the following:
[4]Various allegations were admitted, or became uncontroversial at trial.

Purchase of business

(1) Ma approached Yu in about February 2011 with a proposition that a sushi business at Knox City be acquired and run. Yu gave this uncontradicted evidence through an interpreter:

First of all, we discussed about my investment return and his role in running the business. He said he would manage and operate this business. I can’t have any access to operation of this business.

And:
I didn’t have much to do with this purchase price. It was negotiated and decided between Mr Ma and Sushi Sushi head office. I was advised by Mr Ma clearly I was just an investor. He would run and manage this business, so the price didn’t have much to do with me, not decided by me.

(2)Yu had the money to finance the proposed acquisition. Ma did not. It was agreed that Yu would provide all the money, principally as his own investment,[5] but partly by a personal loan to Ma.
[5]We say ‘his’, although the investment was made, as might be expected, by LCY.
(3)At the outset, as we have already noted, there was discussion between Yu and Ma as to the former’s required return on his investment. It was agreed that it would be 20 per cent annually.
(4)Prior to its acquisition, the business was operated by Sushi Sushi Melbourne (No 2) Pty Ltd pursuant to a franchise agreement with Sushi Sushi Franchising Pty Ltd. The business was conducted at the Knox City premises pursuant to a licence granted by Sushi Sushi Realty Pty Ltd, itself a tenant of those premises.
(5)A sale of business agreement was entered into on 25 July 2012. The parties to the agreement were Sushi Sushi (No 2) Pty Ltd as vendor, MCLY Pty Ltd (‘MCLY’) as purchaser, and a number of guarantors — LCY, MYD, Yu, Ma and other individuals.
(6)The sale price was $1.8 million. The assets the subject of sale, relevantly, encompassed plant and equipment, goodwill, and stock on hand.

MCLY
(7)MCLY had been incorporated in April 2012.[6] It was evidently incorporated for the purpose of purchasing the business and taking a licence of the premises. It had two shareholders — LCY and MYD.[7]
[6]Reasons [3].
[7]Ibid.
(8)LCY was issued 140 E class shares in MCLY. An E class shareholder had:
(a)no right to attend and vote at any meeting of the company;
(b)the right to participate in the dividends (if any) determined by the directors to be paid on that share; and
(c)in a winding up of the company, a right to repayment of the paid issue price of such share, but no right to participate in the division of surplus assets or profits of the company.[8]
[8]Constitution of MCLY, cl 14.

(9)MYD was issued 50 ‘ordinary’ shares in MCLY, which were evidently A class shares. A holder of such shares had:
(a)the right to attend and vote at all meetings of the company and on a show of hands or poll to one vote for every share held;
(b)the right to participate in the dividends (if any) determined by the directors to be paid on that share;
(c)in a winding up of the company, a right to repayment of the paid issue price of such share and to participate in the division of surplus assets or profits of the company and in this regard to rank equally with all other shareholders so entitled.[9]
[9]Ibid cl 10.

(10)The sole director of MCLY was Ma.[10] This was consistent with the email from Henley Legal (solicitors for MYD/Ma) to RTC Legal (solicitors for LCY/Yu) of 5 July 2012, in which the relevant instructions were as follows: ‘Dong Ma will be the sole director of MCLY Pty Ltd.’
[10]Company extract of MCLY tendered at trial.
(11)The purchase price of the business was, as we have said, $1.8 million. This was initially funded in full by LCY. In financing the project, it purchased shares in MCLY for $1.4 million, represented by the 140 E class shares issued to it. Its loan of $500,000 to MYD enabled the latter to purchase the 50 A class shares in MCLY. The share issue price for both the A and E class shares was, inferentially, $10,000.
(12)The funds contributed to MCLY exceeded the purchase price by $100,000. Before this Court, counsel were not able to say to what use, if any, this $100,000 was put.
(13)At about the time when the business was acquired, MCLY also entered into a franchise agreement with Sushi Sushi Franchising Pty Ltd and took a licence over the premises from Sushi Sushi Realty Pty Ltd. Other than that MCLY was the contracting party in each instance, nothing turns on those documents.

Management agreement
(14)On 28 June 2012, Petrus Chow of RTC Legal sent drafts of a management agreement and a loan agreement referable to the loan of $500,000 to MYD/Ma to Henry Wong of Henley Legal. The covering email said this:
Dear Henry,
We advise that we act for MCLY Pty Ltd (MCLY) for the purchase of a business in Knox City shopping centre of which LCY Pty Ltd (LCY) and MYD Australia Pty Ltd (MYD) and Dong Yan Ma (Danny) are shareholders and directors respectively of MCLY.
There are two documents MYD and Danny asked me to forward to you for your perusal. In these two enclosed documents we act on behalf of LCY and understand that you act on behalf of MYD and Danny.

The two documents were drafts of the management agreement and a loan agreement.
(15)On 29 June 2012, Mr Wong emailed Mr Chow relevantly as follows:
Dear Petrus,
Before we are able to proceed further, please forward us the following documents:
1.Signed Contract of Sale of business;
2.Lease;
3.Disclosure statement;
4.Financial statement from the Vendor; and
5.Franchise agreement.

It is not apparent whether copies of those documents were forwarded by Mr Chow to Mr Wong. It is apparent, however, that what Mr Wong sought did not squarely relate either to the management agreement or the loan agreement to which we have referred.
(16)On 5 July 2012, Mr Wong emailed Mr Chow setting out, on a without prejudice basis, his instructions. Relevantly, they stated that Ma would be the sole director of MCLY, would borrow $500,000 from Mr Chow’s client, would provide only limited security, and that interest on the loan was to be 20 per cent per annum payable monthly. Amended agreements were provided under cover of that email. We pause to note two matters. First, the agreed interest rate of 20 per cent on the loan showed that LCY/Yu‘s consistent position was that 20 per cent per annum was to be the rate exacted for all moneys advanced by LCY/Yu to finance the project. Second, there was evidence that Ma repaid the loan.
(17)Mr Chow emailed Mr Wong that he would obtain instructions. That was on 6 July 2012.
(18)A management agreement was thereafter executed. It picked up only some of the queries and changes suggested by Mr Wong. The parties to the agreement were LCY and Ma. It included an obligation on Ma to pay what was described as the ‘Management Fee’. This was said to be ‘[i]n consideration for the use of chattels and grant by [LCY] to [Ma] of the … right and privilege of managing the Business’, being a sum of $23,333.33.[11] It was to be paid on the first day of every month. The sum of $23,333.33, paid monthly, is 20 per cent of $1.4 million calculated per annum. The obligation to pay the management fee was unrelated to the performance of the business and was not required to be paid out of business receipts.
[11]Management agreement, cl 3.
(19)A copy of the executed document was put into evidence.[12] It was the basis for the claim in contract made by LCY against Ma.
[12]The judge set out a number of its main terms at [25]–[26] in his reasons. His Honour did not refer to cl 18, which set out the financial consequences of sale of the business.
(20)The agreement, both in its draft and executed form, went beyond the abbreviated account of the discussion between the two men given by Yu in evidence. But this only confirms, as a reading of Yu’s evidence shows clearly enough, that his evidence lacked detail with respect to his agreement with Ma. In particular, the document in draft and executed form provided that not only was Ma to have the right of managing the business,[13] to ‘free access to the premises’ in order to do so,[14] and to the ‘use of the chattels’,[15] but that, under cl 12.2, he was to be entitled ‘to all the receipts and profits derived from the operation of the Business without being obliged to account to [LCY] in respect of any part of such Receipts and profits’. Moreover, a term of five years was specified,[16] and there was a provision for how sale proceeds were to be distributed.[17]
[13]Management agreement, cl 1.
[14]Ibid cl 2.
[15]Ibid cl 3.
[16]Ibid cl 1. On the term of the agreement Yu gave this evidence: ‘we have set conditions at the beginning we have to run this shop for five years’.
[17]Ibid cl 18.
(21)We pause to make these observations: First, the gist of this last provision was that, on a sale, LCY was to have the proceeds of sale up to $1.4 million, and that Ma was to have any residue. But if the sale was at below $1.4 million, Ma was to be liable to ‘compensate’ LCY for the shortfall up to $1.4 million.[18] The provision underlines, if underlining be needed, that Yu was intent upon retaining the value of his capital investment. It emphasises, together with Yu’s requirement, made plain from the outset, that he have a 20 per cent per annum return on capital, that his role (and thus the role of LCY) was purely that of an investor with no revealed interest otherwise in the running of the business. The provision by which Ma was to have all the receipts and profits of the business without having to account to LCY also fits that analysis. Second, Yu and Ma were agreed that the management agreement was to run for five years, during which time LCY was to be paid its required return on capital, and Ma was to conduct the business keeping receipts and profits. It was evidently contemplated that at the end of that term (and except if there was some agreement addressing a further term) the business would be wound up, LCY would be repaid its capital investment, and thus that Ma’s obligation to pay LCY a return on its investment would cease.
[18]Yu was evidently speaking about sale at above the level of his investment when he gave evidence that ‘the proceeds from selling upstairs will be paid back to me, downstairs to him.’ ‘Upstairs’ was a reference to a second sushi shop at Knox City financed by Yu and run by Ma. See [7(26)] below.
(22)The inevitable consequence of implementation of the agreement was that no profits would accrue to MCLY so long as implementation continued.
(23)It is possible to compare the document which was executed and the draft document containing Mr Wong’s queries and suggested changes. Whilst a number of changes suggested by Mr Wong did find their way into the executed agreement,[19] the executed agreement was in other respects different to the draft document. In particular — (a) the draft agreement had described LCY as the majority owner, Ma as guarantor, and MYD as the manager. But the executed agreement omitted reference to a guarantor and simply described Ma as the manager; (b) the draft agreement provided, by cl 19.1, that in the event of a sale for less than $1.3 million ‘the major owner is willing to absorb the part of the loss for the price’; and, by cl 19.2, that if there was a sale for more than $1.3 million the major owner was to be entitled to receive its investment of $1.3 million and the manager was to have any residue. By cl 18.1 of the executed agreement, however, the parties confirmed that, if the sale price was less than $1.4 million, then LCY was to have the whole proceeds, and Ma was to be liable to ‘compensate’ LCY for the difference between the sale price and $1.4 million;[20] and by cl 18.2, the parties agreed that Ma was to have the entire residue of a sale at above $1.4 million. The change between draft cl 19 and cl 18 of the executed agreement highlights the observation which we made a little earlier — that the role of Yu/LCY was purely that of an investor intent upon having a specified return on capital and protection of the capital outlaid.
[19]For instance, cl 12.5 in the draft was omitted; a provision with respect to indemnification was accepted; draft cl 18, which related to a guarantee and indemnification by a guarantor was omitted.
[20]Thus, cl 18 of the executed agreement was more favourable to LCY.

(24) Ma’s solicitor raised the question whether MCLY not LCY should be the contracting party. He questioned whether there was any such thing as a ‘major owner’. With respect to the management fee payable, Mr Wong noted ‘essential term: owner must be true owner etc’. Those queries went unanswered and, in the executed agreement, LCY remained the contracting party, still described as the ‘majority owner’.

(25) Commencing in July 2012, Ma in fact ran the business. In fact, he used the chattels which MCLY had acquired pursuant to the sale of business agreement. In fact, he used the premises. In fact, he paid LCY a monthly amount of $23,333.33.[21] In fact, he met running expenses. In fact, he kept any nett profits. There was no evidence that, in fact, he accounted either to LCY or MCLY. Throughout this period, it will be remembered, Ma’s corporate vehicle was the voting shareholder in MCLY, and Ma was that company’s sole director.
[21]Until the monthly amount was varied downwards.

(26) At the end of 2014, Ma approached Yu to sell the ‘downstairs shop’. That was a reference to the premises and business the subject of the management agreement. Those premises and business were thus distinguished from another sushi business at Knox City the acquisition of which LCY had very largely financed. That business had been acquired in November 2012, after the acquisition of the business the subject of the management agreement. Pursuant to a written agreement between Ma and LCY, Ma had operated that other business and had been obliged to pay LCY $200,000 per annum.[22] Ma gave two reasons why the ‘downstairs shop’ should be sold: that there was new competition and that he didn’t get along with the franchisor’s head office. Yu did not agree to sell the business because the management agreement was to run for a five-year period ending on 30 June 2017.[23]
[22]LCY/Yu had invested $700,000 and Ma $100,000. In July 2014, another company controlled by Yu bought out Ma’s share in that business.
[23]Management agreement, cl 1.

(27) But, after Christmas 2014, there were further discussions between the two men. They related to Yu’s return on his investment. It was eventually agreed that Ma would make monthly payments which represented a 17 per cent return on capital,[24] rather than 20 per cent, and that Ma, not then pressing for the business to be sold, would continue to operate it. The reduced monthly amount was to be paid as from January 2015. In his discussion of the variation in the monthly payment, the judge expressly linked the monthly payment to the agreed return on Yu’s investment; in other words, the monthly payment consisting in the ‘management fee’ represented in fact the return on Yu’s investment:
[24]Reasons [28].

Around December 2014, Ma had discussions with Yu about wanting to sell the downstairs franchise. As a result of their discussions, Yu agreed that instead of deriving (through LCY) a return of 20 per cent per annum on his investment, he would receive a return of 17 per cent per annum. This reduced the monthly payments which Ma made from $23,333 to $19,833.33.[25]
[25]Ibid.

(28) Up until October 2014, Ma had paid the agreed amount of $23,333.33 monthly. He made no payment in November 2014, but made payments of that amount in December 2014, February 2015 and March 2015. He made two reduced payments, each of $19,833.33, on 21 April and 19 May 2015. Those payments meant that Ma had paid up to the end of March 2015.

(29) Ma made no payments thereafter.

(30) Before this Court, it was intimated by counsel for Ma that some document existed, communicated to LCY or its solicitors in mid-2015, by which it had been asserted that payments would not be made because Ma had no contractual obligation to do so. But this intimation came to nothing. No such document was produced, and there is nothing to suggest that such a document was placed before the trial judge.[26]
[26]The particulars to [7] of the statement of claim referred to a letter from Henley Legal dated 18 July 2015 ‘the substance of which was that the defendant would refuse to pay’. Perhaps that was the letter to which counsel was referring. But whether that is so is beside the point if, as the matter was left before us, the letter did not go into evidence.

(31) In mid-2015, Ma told Yu that he did not want to continue running the business any more. Yu agreed to sell it. The business was sold by MCLY as at 3 December 2015.[27]
[27]Reasons [30]. The sale of business agreement was not included in the court book. Paragraph 2.5 of the defence pleaded that settlement took place on 1 December 2015.

(32) Yu gave some evidence about the operation of the business during 2015. He said, speaking of the time in about mid-2015 when there was discussion about selling ’the shop’:

He mentioned he didn’t want to continue running this shop anymore. I consented to his suggestion. I had been to the shop for a few times. He was not there as he went to university and teach there.

Other than that, Yu gave no direct evidence either that Ma worked in the business, or operated it, up until it was sold. But he did say that Ma ‘sold the shop’, which was ‘his right’. Ma was, of course, sole director of MCLY, as well as the long-time operator of the business. As a matter of principle, the sale must have been made by MCLY. But any accounts used to assist the sale must have been kept by Ma. It is improbable that he did not keep accounts of some kind, and improbable that he did not operate the business up until it was sold. A business which had been shut down was hardly likely to achieve a satisfactory sale price. It is theoretically possible that Ma ran the business, after ceasing to pay LCY, as an employee of, or contractor to, MCLY. But that seems improbable in the extreme. Ma’s whole understanding, from the outset, was that he was to manage and operate the business. It was, see later, part of the common assumption upon which the parties proceeded for years.

(33) Related to the matter just discussed, there was no evidence that Ma remitted any amount to MCLY in the period between his last, and late, payment to LCY on 19 May 2015 and the time of sale; or, indeed, that he remitted any amount to MCLY after late March 2015 (his next payment to LCY fell due on 1 April). Nor was there any evidence that he accounted to MCLY in respect of the activities of the business either from late March or 19 May 2015. Nothing suggests that he considered himself under any obligation to do so. These were matters about which Ma might have given evidence.

(34) At the time when the business was sold, assessed at the reduced monthly rate, the amount unpaid by Ma to LCY was $158,666.64.[28]

[28]For the months April to November 2015.

The pleadings

As we noted earlier, the plaintiff’s statement of claim pleaded a claim in contract, founded on the management agreement. Although the judge rejected that claim, and although his Honour’s decision in that respect is not challenged, we will refer to the pleadings sequentially in order to set the scene for the issue now before this Court.

The plaintiff pleaded that, pursuant to the contract, Ma commenced his term as manager from about early July 2012, that the contract was varied in or about December 2014 whereby Ma was to pay a reduced monthly amount, and that Ma made some reduced payments but then breached the contract by refusing to pay any more. An alternative claim baldly pleaded that the defendant had been unjustly enriched to the detriment of the plaintiff. The prayer for relief claimed damages and specific performance of the agreement as varied.[29]
[29]The claim for specific performance of the agreement as varied was not pursued. One good reason was that, as at December 2015, the business had been sold.

By his defence, Ma admitted entering into ‘a written agreement with the plaintiff which provided for a certain managing role for the defendant’, but pleaded circumstances to show that MCLY held the franchise, the licence and the chattels of the business. He admitted that he had commenced his term as manager pursuant to the terms of the agreement. He admitted agreeing to vary the agreement, but alleged that he had been misled into entering into the initial agreement and the variation, and making payments to LCY by the wrong advice of the plaintiff’s solicitor.

The defence further pleaded that Ma, being neither the tenant nor a licensee of the premises, and having no legal relation with the landlord, had nonetheless been saddled under the agreement with obligations as if he was the owner of the business, the owner of MCLY, the tenant and licensee of the premises. This paragraph of the defence also pleaded that:

7.9The ‘management fee’ referred to in clause 3 of the Agreement if valid, was grossly excessive, unconscionable and amounts to a penalty.

It is not difficult to perceive that underlying this plea was a practical difficulty faced by Ma — that is, meeting the plaintiff’s required rate of return on his investment, whether out of the proceeds of the business or from some other source.

The defence then pleaded that:

8.To the extent the Agreement sought to obtain any money from the defendant in consideration of the use of any ‘chattels’ the Plaintiff did not own and has no right to any ‘chattels’, the Agreement is void ab initio.

It also pleaded that payments which had been made ‘were mistakes’, made by reason of the wrong advice of the plaintiff’s solicitor; and that a number of identified clauses in the agreement were ’void ab initio and unenforceable against any party’. On these bases, Ma denied that the plaintiff was entitled to damages or other relief.

By its amended reply, LCY denied that its solicitor had misled Ma about the content of the management agreement. It pleaded that Ma had his own solicitor, and that the agreement reflected the intention of the parties. It denied that the agreement had wrongly saddled Ma with obligations that ought to have been the responsibility of MCLY. It denied that the management fee, assuming the agreement to be valid, was grossly excessive, unconscionable, and amounted to a penalty. It denied that the agreement was void ab initio because it had no property in the chattels and so could give no consideration for payments of money by Ma.

Then there was this pleading:

8.1It further says that:
(a)At all material times the defendant was the sole director of MCLY;
(b)At all material times the defendant was the sole director of MYD;
(c)By reason of the matters set out in paragraph 8(a) and (b) herein knew or ought to have known that:
(i)MCLY had the licence to operate the sushi franchise;
(ii)MYD’s and the plaintiff’s shareholding in MCLY;
(iii)MCLY’s obligations under the franchise licence;

(d)The defendant knew Shuirong Yu of the plaintiff would not be involved in the operation of the franchise;
PARTICULARS
The defendant’s knowledge is partly express and partly implied. To the extent it is express it was contained in the conversations with Yu prior to the agreement of the franchise. To the extent it is implied it is implied from the defendant’s operation of the franchise and the contents of the agreement.
(e)By reason of the foregoing the defendant knew or ought to have known that by operation of the Agreement:
(i)LCY would receive $23,333.33 each month from him, or MYD or MCLY; and
(ii)The defendant or MYD or MCLY would keep all receipts from the business.
(iii)He would have exclusive access and operation of the franchise business.

(f)In the circumstances by reason of the operation of the Agreement and the Agreement as varied that Plaintiff:
(i)Would forego have operational control of the franchise business;
(ii)Would forego receiving any distribution of profits from the franchise business from MCLY or in an agreement with MDY.
(iii)In the circumstances the plaintiff denies that there was no any consideration for the agreement.

(g)Further, or in the alternative, by reason of the foregoing and:
(i)That the agreement operated from 1 July 2012 until December 2015 (“the period”);
(ii)the defendant, or MYD or MCLY kept all proceeds from the operation of the franchise during the period;
(iii)during the period the plaintiff did not receive any benefit from the operation of the business franchise other than the payments set out in the agreement or the agreement as varied;
(iv)the defendant and the plaintiff entered into a similar agreement to the Agreement and the Agreement as varied in respect to Kiosk KB at Knox City Shopping Centre –

the defendant is estopped from denying he is obliged to perform the agreement and the agreement as varied.

The trial

In light of the way in which the judge dealt with the estoppel issue in his reasons, we think it of some importance to chart the progress of the trial.

In opening, plaintiff’s counsel referred to there having been oral discussions prior to the ‘written documents’. But he agreed with the judge that the discussions did not ‘alter or vary any of the terms that are in the agreement’.

Yu gave evidence of his discussions with Ma which gave rise to the acquisition and running of the business. As to the documentation, he said he entrusted that to his solicitor.

The plaintiff provided an outline of submissions dated 9 February 2017 to the judge. Counsel orally addressed his Honour on the same day.

With respect to estoppel, the plaintiff’s written submissions said this:

43.The plaintiff submits that the defendant should be estopped from denying the agreement in circumstances where he has received the benefit of the agreement and the plaintiff has foregone any entitlement to recover more on his investment than is set out in the agreement.
44.In Thompson v Palmer (1933) 49 CLR 507 Dixon J (as he then was) stated at 547 (citations omitted)
The object of estoppel in pais is to prevent an unjust departure by one person from an assumption adopted by another as the basis of some act or omission which, unless the assumption be adhered to, would operate to that other’s detriment. Whether a departure by a party from the assumption should be considered unjust and inadmissible depends on the part taken by him in occasioning its adoption by the other party. He may be required to abide by the assumption because it formed the conventional basis upon which the parties entered into contractual or other mutual relations, such as bailment; or because he has exercised against the other party rights which would exist only if the assumption were correct, as in Yorkshire Insurance Co v Craine; cp Cave v Mills; Smith v Baker; Verschures Creameries Ltd v Hull and Netherlands Steamship Co; and Ambu Nair v Kelu Nair; or because knowing the mistake the other laboured under, he refrained from correcting him when it was his duty to do so; or because his imprudence, where care was required of him, was a proximate cause of the other party’s adopting and acting upon the faith of the assumption; or because he directly made representations upon which the other party founded the assumption. But, in each case, he is not bound to adhere to the assumption unless, as a result of adopting it as the basis of action or inaction, the other party will have placed himself in a position of material disadvantage if departure from the assumption be permitted.

Thereafter, the submissions took the form of repeating the pleading at paragraph 8.1 of the amended reply, which we have earlier set out.

In the final address of plaintiff’s counsel, there was this interchange between the judge and counsel:

HIS HONOUR: Yes, it boils down from your perspective, doesn’t it, to some kind of estoppel by convention.
COUNSEL: Yes.
HIS HONOUR: So, you are saying, well, the situation as a matter of law when you look at the agreements might be a, b, c, but both parties operated on the basis that it was x, y, z, so even though strictly in law they were mistaken, that’s – they operated on the same basis and - - -
COUNSEL: For a number of years.
HIS HONOUR: - - - you can’t go back on that.
COUNSEL: On two occasions. Yes, I can’t – I can’t explain the format, Your Honour. I’ve set out Justice Dixon, as he then was, in Thompson v Palmer. I have to say, Your Honour, that the language is exquisite …

The estoppel issue was extensively debated between the judge and Ma’s counsel in his closing address. Thus:

HIS HONOUR: Really, doesn’t your case come down to the fact, you say, they can’t give what they weren’t entitled to give?
COUNSEL: Yes.
HIS HONOUR: That is really what it boils down to.
COUNSEL: Yes.
HIS HONOUR: On the other hand they say, ‘Well, that may be right, but everybody knew what was going on because if all these things happened at the same time, and for a period of time thereafter the commercial arrangement worked exactly as the parties had intended it would work; Mr Yu got his monthly money; Mr Ma, he had day to day responsibility for managing the operation and that’s what he did’.
COUNSEL: We would say that’s an estoppel argument rather than a construction argument.
HIS HONOUR: Yes, that is an estoppel argument. Yes, well that’s what I said, it’s conventional estoppel. I mean there might have been a muck-up with the documents, or it probably was a muck-up with the documents, but both parties knew what was what. To use my example before, the documents said A, B and C. The parties knew it was really X, Y and Z and they conducted themselves on that basis and all went along smoothly until a certain point.
COUNSEL: The problem with that construction, Your Honour, or the problem with that position is that they haven’t demonstrated the relevant unconscionability, and this is - - -
HIS HONOUR: But you don’t have to have unconscionability for conventional estoppel. I mean the fact is the parties conducted themselves on a particular basis and now one party wants to resolve (sic) from it, effectively.
COUNSEL: One party hasn’t actually given anything over and there’s been total failure of consideration.
HIS HONOUR: But how can that be?
COUNSEL: How can that - - -
HIS HONOUR: Simply because of your main point, that they sought to give what they didn’t have.
COUNSEL: They sought to give what they didn’t have. They never, and this is why I say the constitution is relevant, they never disclaimed any other entitlement from the business or from MCLY. As a matter of law they still have a pro rata right to dividends and they have a right for that $1.4 million to be repaid on a winding up. If they were to contend for what they say they’re entitled to, they should have disclaimed those. They didn’t.

And:
HIS HONOUR: No, I’m saying why did Mr Ma assume an obligation to make substantial monthly payments if he weren’t prepared to carry through on it? In fact for many months he was prepared to carry through on it.
COUNSEL: Your Honour, the issue is who — under that agreement Mr Ma never receives the rights to the profit of the business.
HIS HONOUR: He never receives what?
COUNSEL: The rights to the profits of the business because LCY didn’t have them. There is no evidence that’s been - - -
HIS HONOUR: Sorry, well who is entitled to the profits then?
COUNSEL: It would be MCLY. There is nothing before the court to indicate otherwise.

And:
HIS HONOUR: Where is the reference in these agreements to what happens to the profits then?
COUNSEL: 12.2.
HIS HONOUR: 12.2, thank you. How do you explain 12.2 then? I mean that says he’s entitled to all receipts and profits without having to account to the other party.

And:
HIS HONOUR: Yes, but even if one party is sort of — as in LCY, has certain difficulties, on your argument that you can’t give what you haven’t got, Mr Ma has signed up to an agreement where he agrees to make the monthly payments and he’s got the entitlement to all the receipts and profits.
COUNSEL: But he doesn’t have the entitlement to the receipt or profits. That is the key point, because it’s never LCY’s to give.
HIS HONOUR: Again, on your theory he doesn’t, but as a practical matter the agreement went on for 18 months or two years or three years, or whatever it was, and he paid the monthly things and he got the rest of the money, didn’t he?
COUNSEL: There is no evidence before the court of that, Your Honour. There is no evidence as to the profits of the business. This goes back to the point in my submissions, that it’s the plaintiff’s case to prove they could have called for the — because they are still a shareholder in MCLY Pty Ltd, they could have called for the accounts and they could have tendered them. They haven’t. It is their case to prove and they haven’t done that.
HIS HONOUR: Well, I don’t think you’re on very solid ground in terms of the estoppel. I mean if there was a real problem about this the defendant should have raised it.

And:
HIS HONOUR: Did he get to run the business?
COUNSEL: As a matter of fact MCLY continued to run the business. Mr Ma continued to be a director. I take you back to Baltic Shipping and David Securities.

And:
COUNSEL: … What we are coming down to is if you look at the substance of the agreement, LCY had $1.4 million invested in MCLY Pty Ltd. 1.4 million in. Gets E class shares. Has a right to dividends, and a right to return on the 1.4 million.
HIS HONOUR: What dividends are there going to be?
COUNSEL: Dividends as declared by the company.
HIS HONOUR: Yes, but the company under 12.2 does not get any money. MCLY does not get any money.
COUNSEL: MCLY does get the money, because we say that there has been — it was not LCY’s to give away. …

And:
HIS HONOUR: I don’t quite get why you say it is unfair or inappropriate in some ways. If the deal were that Yu puts in money, and he gets his 20 percent return, and that does not seem to be a matter of dispute, he gets a fixed return. Now, whether this agreement at p 41 has messaged things up a bit because they got the parties wrong and whatever — and perhaps the plaintiff should have sought rectification, but whether you seek rectification or rely on the estoppel, in one sense it is two sides of the same coin.
COUNSEL: But any argument which is — they certainly have not pleaded (indistinct), by the way, Your Honour, in terms of — or any delay.
HIS HONOUR: They do not need to. In a sense, the facts speak for themselves, that the deal went on for 18 months, or two years, or something, and monthly payments were made, and Mr Ma ran the business.

And:
HIS HONOUR: … but fundamentally what’s unfair about Yu being the investor getting a fixed return and Ma getting on with the rest?
COUNSEL: What is unfair about that?
HIS HONOUR: Yes.
COUNSEL: It is that they haven’t given up their rights to the shares. They haven’t give up their rights to dividends. They still have the same rights that they had before they signed the agreement.

The gist of the defendant’s submissions, as we apprehend it, was that LCY had nothing to give, and had given nothing, to Ma, that any profits were profits of MCLY and had been received by it (despite cl 12.2 of the management agreement), and that the plaintiff had not abandoned its rights as a shareholder in MCLY to a share in any dividends and to a capital return on a winding up.

The judge’s reasons

The judge dealt with the contract issue as follows:

From one perspective, LCY’s grant of control to Ma and giving him the exclusive entitlement to any profit seems like valuable consideration. However, the position is not that simple. Where LCY does not own or control the assets or business or have any right to the profits of the business, it cannot lawfully grant control of the business and the receipt of profits to Ma.
Clause 3 of the Management Agreement commences with the words:
In consideration for the use of chattels and the grant by the Majority Owner (LCY) to the Manager (Ma) of the said right and privilege of managing the Business the Manager (Ma) shall pay to the Owner...

In my opinion, this means that the obligation comprising the consideration for which Ma is to make monthly payments is an entire and indivisible obligation. Thus, LCY must be capable in law of providing the whole of the consideration bargained for, namely the use of MCLY’s chattels and the right to manage the business owned by MCLY. If any part of the consideration owed by LCY fails, then Ma is not obliged to pay because he will not receive the whole of the benefit for which he contracted.[30]
….
Under clauses 1 and 3 of the Management Agreement, LCY implicitly asserts an ability and entitlement to confer upon Ma the right to manage the business. Clause 3 implicitly assumes that LCY has the ability and entitlement to confer upon Ma the right to use the chattels, to manage the business. Clause 12 assumes that LCY had the ability and entitlement to permit Ma to receive the profits of the business which MCLY owned. Because LCY does not own the business or its chattels, plant, equipment, stock or anything else integral to the business, LCY cannot grant the purported rights in respect of the business and assets to Ma. In these circumstances, LCY is not in a position to grant Ma lawful title to, and possession of, the business, its chattels, plant and equipment or stock. Nor does LCY (or Ma) have any right to the profits of the business. The business and any profits it makes belong to MCLY. Because of the failure of consideration, Ma does not in my opinion have to make the outstanding payments to LCY under the Management Agreement.
Whether or not the failure of consideration means the Management Agreement is void ab initio is another issue – one which I do not need to decide because it is not directly relevant to the critical issue in the case, namely, whether Ma must pay LCY the balance of the outstanding monthly payments.[31]

[30]Reasons [46]–[47].

[31]Ibid [53]–[54].

With respect to estoppel, the judge first said this:

LCY relies upon estoppel to contend that Ma should be estopped from denying the agreement he made with LCY in circumstances where Ma has received the benefit of the agreement and LCY has foregone any entitlement to recover more on its investment than is set out in the Management Agreement. I note that there was no evidence of what amount, if any, Ma derived from the business. Indeed, there was no basis on the evidence adduced to conclude that the business made any profits while owned by MCLY. I note also that under MCLY’s Constitution, LCY as an E class shareholder, had the right to participate in the dividends (if any) determined by the directors to be paid. This position does not sit comfortably with LCY’s claim to have foregone an entitlement. Under the Constitution, an E class shareholder is also entitled in a winding up to repayment of the paid issue price for the shares.[32]

[32]Ibid [63].

Then, having set out the estoppel pleading,[33] his Honour said this:
[33]See [14] above.

LCY’s written closing submissions on estoppel were largely a repetition of this pleading. They added only an additional reference to Ma being the principal.
In oral closing submissions, LCY did not embark upon any detailed explanation of its estoppel argument even though it relied upon it as a central plank of its case. LCY did not explain which form of estoppel it relied upon but did not disagree with my suggestion during trial that conventional estoppel might be the most pertinent kind — that is, the parties assume the factual position to be of a particular nature when in fact it is of a different nature. Subsequent research has raised a query about the correctness of my suggestion. Whether or not my suggestion was correct is strictly irrelevant in circumstances where this form of estoppel was not pleaded by LCY, referred to in its outline of final submissions or the subject of any substantive oral submissions. Probably because of this, it was not referred to in Ma’s written or oral closing submissions.
In the written closing submissions, LCY quoted from the judgment of Dixon J in Thompson v Palmer where he discussed estoppel in pais. In his book Estoppel by Conduct and Election (Sweet & Maxwell, 2nd ed, 2016), Ken Handley, former Judge of the New South Wales Court of Appeal, says:
Estoppel by matter in pais was then part of the law of real property. It arose from acts such as delivery of possession or payment of rent which would be known to persons ‘in pais’, that is ‘in the area’, pays in modern French. This form of common law estoppel, under the influence of equity, developed during the first half of the 19th century into the modern law of estoppel by representation.

Accordingly, I infer from LCY’s submissions that the form of estoppel relied upon is estoppel in pais or estoppel by representation, its more modern manifestation. To rely upon an estoppel by representation, the party in question must prove:
(a)a statement or other conduct that constitutes a representation of fact;
(b)its communication to the representee;
(c)the representee’s justifiable belief in its truth and his alteration of position in that belief;
(d)an attempt by the representor to contradict his representation;
(e)prejudice to the representee as a result of his alteration of position if contradiction of the representation were permitted.[34]

[34]Reasons [65]–[68] (citations omitted).

Having inferred that the plaintiff relied upon an estoppel by representation, his Honour thereafter concluded that LCY had ‘failed to establish its estoppel case’.[35] His Honour explained his conclusion this way:

First, LCY did not identify in its pleading or any of its submissions any relevant representation which Ma made to it. Hence, it is unclear what statement or conduct of Ma is relied upon by LCY as constituting the representation.
Secondly, LCY did not prove that Ma communicated any alleged representation to it or that LCY relied upon such representation to alter its position.
Thirdly, the plaintiff’s pleadings and closing submissions on estoppel allege that Ma ‘knew or ought to have known’ certain facts which gave rise to an estoppel. In certain circumstances, knowledge of a state of affairs may form part of an estoppel by acquiescence. Again, however, this was not an argument which the plaintiff advanced at trial — the plaintiff made no reference to estoppel by acquiescence in either its opening or closing submissions. Perhaps more crucially, the plaintiff did not adduce any evidence that Ma did, in fact, acquiesce to certain facts. In short, the plaintiff did not plead or attempt to prove a case of estoppel by acquiescence.
From the evidentiary perspective too, LCY’s case was not satisfactory. It is one thing to plead allegations in a Reply but another to prove them. LCY asserted that Ma knew, or should have known, certain things. However, LCY did not adduce evidence to establish that Ma in fact knew all the things alleged. Neither Yu nor anyone else gave evidence of discussions or correspondence with Ma which revealed the extent of his state of knowledge. LCY did not make submissions, with supporting authority, to the effect that Ma could properly be estopped even if he lacked actual knowledge.
LCY did not prove that the only benefits it derived from the business were the monthly payments from Ma, or that Ma or entities associated with him kept all proceeds from the operation of the franchise.
In summary, I am not satisfied that LCY pleaded and proved to the requisite degree a case of estoppel against Ma.[36]

[35]Ibid [70].

[36]Ibid [71]–[76].

It will be observed that in the paragraph of his reasons last set out, the judge rejected what he took to be the species of estoppel relied upon by the plaintiff. Upon his Honour’s analysis, that was the end of it.

Nonetheless, his Honour thereafter addressed the question of conventional estoppel. This is what he said:

77.Lord Steyn, with whom the other members of the House of Lords agreed, gave a concise summary of the relevant principles of conventional estoppel in Republic of India v India Steamship Co Ltd (No 2) where he said:
It is settled that an estoppel by convention may arise where parties to a transaction act on an assumed state of facts or law, the assumption being either shared by them both or made by one and acquiesced in by the other. The effect of an estoppel by convention is to preclude a party from denying the assumed facts or law if it would be unjust to allow him to go back on the assumption: K Lokumal & Sons (London) Ltd v Lotte Shipping Co Pte Ltd [1985] 2 Lloyds Rep 28; Norwegian American Cruisers A/S v Paul Mundy Ltd [1988] 2 Lloyds Rep 343; Treitel, The Law of Contract 9th ed (1995) pp 112-113. It is not enough that each of the two parties acts on an assumption not communicated to the other. But it was rightly accepted by counsel for both parties that a concluded agreement is not a requirement for an estoppel by convention.

78.LCY contended in substance that the court should give effect to the Management Agreement by ignoring the particular corporate and individual litigants and focusing on the underlying economic interests of the parties. Using this prism, LCY submitted the court should then give effect to the parties’ commercial purpose, namely, to fix Yu’s return on his investment and give the remaining proceeds of the business to Ma.
79.Even if it were the case that LCY and Ma assumed that LCY owned the business, or MCLY had authorised LCY in some way to run the business, there was no evidence that Yu and Ma personally spoke or wrote to one another regarding this point. If the assumption were made, then it was made independently in each case and not through the two men communicating with each other. In the absence of communication on the point between the parties, no conventional estoppel can arise. So, for example, mutual ignorance about the death of the driver of a motor vehicle will not establish a convention. Nor is it enough for parties to understand a common assumption in the same way. It must be expressly shared between them.
80.To the extent there was evidence on the point, Yu said, and I accept, that he had simply signed the agreements put before him by his lawyer, Petrus Chow. The court cannot infer on the basis of this conduct any relevant assumption or belief by Yu. Ma gave no evidence and therefore no conclusions can be reached on this aspect of the case about him.
81.Because LCY did not run this case at trial and it was only in argument that I made reference to conventional estoppel, the parties did not canvas the communication point in any detail or indeed at all. However it seems to me that, notwithstanding the absence of direct evidence of dealings between Yu and Ma on this point, one might reasonably argue that when two parties enter a written agreement, albeit on an erroneous basis, the document embodies the agreement arrived at as a result of the communications between the parties and their legal representatives. On this basis, the Management Agreement might be seen as the result of the communications between the parties and/or their legal representatives.
82.As previously noted, this conventional estoppel argument was not advanced at trial and my comments are not strictly relevant to any issue in dispute. While it is possible that arguments involving some form of estoppel and/or acquiescence might have been advanced by LCY, it is not the job of the court to formulate, propound and then rule upon arguments which a party might have made but did not in fact make.
83.I note also that it would be unfair to Ma if the outcome of the case were to be affected by an argument or submission which was not raised squarely at trial and which he had no fair opportunity to address. LCY’s submissions referred only to estoppel in pais.[37]
[37]Citations omitted.

Proposed grounds of appeal

Having fully set out the circumstances of the matter, the pleadings, the course of the trial and the judge’s reasons, the proposed grounds of appeal may be set in context. Thus:

1.The learned primary judge erred in failing to find that the Respondent (Ma) was estopped from denying that he owed the Applicant (LCY) moneys by way of unpaid ‘management fees’ (the debt) having regard to the fact that at all material times the parties conducted themselves on the basis that:
(a)Ma would manage the Sushi franchise business (the business) and retain any profits from the business; and
(b)as a return for LCY’s investment in the business, Ma would pay LCY a monthly ‘management fee’.

2.(a) The primary judge erred in narrowly characterising LCY’s estoppel case, namely, by characterising the estoppel case as confined to an ‘estoppel by representation’ (at [67]) or an ‘estoppel by acquiescence’ (at [73]) when that did not reflect a fair reading of the pleadings and closing submissions of LCY.
(b)(i) The error in (a) was compounded by the fact that, during closing addresses, his Honour said to LCY’s Counsel that his estoppel case ‘boils down … to some kind of an estoppel by convention’ (T142.18), which LCY’s Counsel confirmed was correct.
(ii)Thereafter, without objection, the issue of estoppel by convention was debated between his Honour and Ma’s Counsel during Ma’s closing address in reply (for example, T149-158).
(iii)Despite the matters in (i) and (ii) above, his Honour in error considered he did not need to determine whether there was an effective estoppel by convention that prevented Ma from denying the debt to LCY because this argument ‘was not advanced at trial’ (at [82]).

3.Further to Grounds 1 and 2 (to the extent a specific type of estoppel was required to be identified by LCY at trial, which is denied (see Commonwealth v Verwayen (1990) 170 CLR 394 at 413)), his Honour erred in failing to find that Ma was estopped from denying the debt to LCY either by way of the doctrine of:
(a)estoppel by convention;
(b)estoppel in pais; and/or
(c)estoppel by acquiescence.

The plaintiff’s submissions

The written and oral submissions for the plaintiff (the applicant in this Court) may be synthesized this way:

(1)The assumed state of affairs was that Ma would operate the business and keep all the proceeds, save that LCY would be entitled to a monthly management fee as its return on its investment in the business. This assumed state of affairs operated from its inception for 33 months. Ma should not be permitted to carve out a period where he ran the business and retained the proceeds but was no longer required to pay the management fee to LCY.
(2)The assumption upon which the parties acted was that their rights and duties with respect to the original investment arrangement were in fact reflected in the management agreement, as implemented. The management agreement sought to effect the arrangement struck by Yu and Ma in February 2011. The underlying arrangement as to the plaintiff financing the venture and Ma conducting the business to the exclusion of Yu, was oral except insofar as the management agreement reflected its important terms.
(3)Contrary to the submission for the defendant, there was evidence that LCY, by its controller, Yu, had made an assumption. It was unnecessary for a witness to step into the witness box and use the word ‘assumption’. The whole notion of investment is rate of return, and the vehicle for that rate of return was signing the management agreement. Relying upon his solicitors, Yu evidently believed that the management agreement would be effective in ensuring his required rate of return on his investment. Further, the chronology of events provided clear evidence of the assumption that translated into the management agreement. The assumption was endorsed and adopted because, for years, Ma paid the management fee to LCY and LCY accepted the payments. Further again, there was recognition that the assumption was operative because of the discussion in December 2014 which led to adjustment of the rate of return. It showed that both parties were acting on the assumption that the management agreement was the vehicle for the rate of return being given to LCY for its investment in the business.
(4)The management agreement did not accurately reflect the corporate arrangements, but, as a matter of practical reality, it ensured that Ma would manage and operate the business and retain all profits after paying all outgoings and LCY’s required rate of return on its investment.
(5)The commercial reality was that MCLY, the true owner of the business, was not going to say or do anything to interfere with the management agreement, because Ma was its sole director, and, as a matter of practical reality, Ma was not going to disturb the relationship set up by the management agreement, and also because the shares issued to LCY precluded, inter alia, LCY attending a meeting of MCLY and thus having a vote with respect to the appointment of directors.
(6)The management fee, payable monthly, was precisely the 20 per cent per annum return on investment agreed to between Yu and Ma at the outset.
(7)The plaintiff should have succeeded in the proceeding on the basis of estoppel by convention. The question of estoppel by convention was squarely in play before the judge. The only debate in closing addresses was in relation to estoppel by convention.
(8)The judge had been wrong to treat estoppel in pais as being confined to estoppel by representation. It included estoppel by convention.
(9)The pleading by [8.1] of the amended reply, although addressing estoppel by representation, also contemplated estoppel by convention.
(10)There had been no suggestion for Ma, before the judge, that he was unable to meet a case based on estoppel by convention.
(11)The argument raised for Ma before the judge was essentially the same argument raised before this Court — that is, even if the plaintiff had been entitled to rely upon conventional estoppel, it would have lost because there had been no proof of detriment.
(12)The judge had not ruled upon the question whether the plaintiff had suffered detriment, but there was, in any event, detriment. The plaintiff had lost its fixed rate of return on the capital which Yu, through LCY, had invested for a period of eight months, during which period Ma continued to have the opportunity to make profits out of the business. To prove detriment, it was unnecessary for the plaintiff to prove that Ma made a profit. The management agreement gave him the business opportunity to make profits, and that never went away. In fact, it could be inferred from the course of events that profits were made.
(13)Detriment did not cease when LCY’s required rate of return stopped being paid. The detriment was that the plaintiff had its capital sitting in the business but without being paid a rate of return.
(14)There was no evidence that Ma had not managed the business subsequent to his ceasing to pay LCY the reduced management fee. That had never been put to Yu, nor had Ma, the sole director of MCLY, given any such evidence.

(15)The consequence of the management agreement and its implementation was that there would never be profits going to MCLY.
(16)Contrary to the defendant’s argument, it did not deny detriment because the plaintiff could still bring an oppression application. That would not yield a fixed rate of return. Moreover, it was a material disadvantage to have to launch an oppression application, with the stress, cost and risk involved. Further, the application might not succeed. But if it did, the company would be wound up and then LCY would not get a rate of return. The best it could get would be the value of the purchase of the shares.
(17)What was in play was anterior to the question of dividends. There was to be no accounting from the manager of the business to its owner. The shareholders did not contemplate that there would be any such accounting. There was to be no profit accruing to MCLY.
(18)The parol evidence rule had no application to an agreement relied upon as establishing the convention.
(19)The list of issues provided by the parties to the judge for determination by his Honour included this question: ‘If the management agreement is unenforceable, is Ma estopped from avoiding the agreement?’ No party had insisted on the plaintiff having to tell the judge what particular label was attached to the estoppel.
(20)The judge’s inference that LCY was relying upon estoppel by representation was not available.
(21)So far as the pleading of estoppel was concerned, the County Court is a busy trial court. This was a short and sharp case. Refined pleadings were not necessary before a judge can say what is before him for determination.
(22)The judge’s reasons, so far as they dealt with conventional estoppel, should be treated as obiter dicta.
(23)The assumption which the judge identified at [79] in his reasons[38] was not the assumption upon which the plaintiff relied. It was not an assumption that LCY owned the business. Paragraph 8.1(e) to (g) of the amended reply was a pleading that both parties operated pursuant to the management agreement. That was the assumption upon which the plaintiff relied. There was also the circumstances in which the agreement was varied, thus varying the common assumption of the parties.
(23)Further again, the adoption of an assumption could be inferred by the mere signing of the management agreement on legal advice.
(24)It is doubtful that convention by estoppel is now confined to an assumed state of facts, as distinct from an assumption as to the legal effect of the parties’ conduct. But if such a distinction still existed, the assumptions concerned a business arrangement as distinct from a legal relationship.
(25)In support of his submissions with respect to estoppel by convention, counsel referred to and relied upon Equuscorp Pty Ltd v Wilmoth Field Warne,[39] IOOF Building Society Pty Ltd v Foxeden Pty Ltd,[40] Thompson v Palmer,[41] Grundt v Great Boulder Gold Mines Pty Ltd[42] and Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd.[43] We will later refer to passages in the decisions upon which the plaintiff relied.
[38]See [29] above.
[39](2007) 18 VR 250, 265 [56], 267 [64]–[68], 268 [71]–[72], 269 [74] (‘Equuscorp’).
[40](2009) 23 VR 536, 563 [119]–[120] (‘IOOF’).
[41](1933) 49 CLR 507, 547 (‘Thompson’).
[42](1937) 59 CLR 641, 676–7 (‘Grundt’).
[43](1986) 160 CLR 226, 244–5 (‘Con-Stan’).

Submissions for the defendant

It was submitted for the defendant (the respondent in this Court) that:

(1)Regardless of which species of estoppel the plaintiff wished to invoke, the plaintiff led no evidence of any relevant detriment which is a necessary requirement.
(2)The plaintiff failed to establish the making, as a matter of fact, of any relevant assumption.
(3)The argument as to estoppel advanced in this Court was not advanced below and could have been the subject of evidence from the defendant had it been.
(4)No proposed ground of appeal sought to challenge findings of fact made below. In his Reasons, at [79]–[80],[44] the judge had found that there was no evidence of the assumption which he identified. The judge had found that there was an absence of necessary communication between the parties. When the judge stated that conventional estoppel was not raised, he had meant only that the aspect of shared communication had not been raised.
[44]See [29] above.
(5)On the evidence, there were competing available assumptions and thus uncertainty.
(6)An assumption must be proved as a matter of fact.[45] A subjective belief in an actual state of affairs must be established by evidence. Such a belief might be inferred,[46] but there was no room for inference in the circumstances of this case.
[45]Counsel cited Thompson (1933) 49 CLR 507, 547 (Dixon J); Grundt (1937) 59 CLR 641, 674-5, 677; Alpha Wealth Financial Services Pty Ltd v Frankland River Olive Co Ltd (2008) 66 ASCR 594, 632-3 [173], [177]–[178] (Western Australian Court of Appeal) (‘Alpha Wealth’).
[46]See Alpha Wealth (2008) 66 ASCR 594, 633 [181] (Buss JA).
(7)There was no evidence that Yu held a subjective belief that, for example, the management agreement was binding, or that the business was being carried on by LCY, or ‘that any arrangement with respect to the $1.4 million investment and the fixed return were reflected in the management agreement’, or that ‘if he agreed to receive $19,000 a month instead of $23,000 a month he would continue to receive a return’.
(8)Yu might have had an ‘expectation’ of receiving a 20 per cent per annum return on his investment, but he might have been happy to invest via a joint venture vehicle which would run the business, with an ‘expectation of dividends’.
(9)Ma did not ‘cavil with the fact that the parties operated on [the] basis’ that ‘for so long as the management agreement remained in place, [Yu] had an entitlement to a monthly return’; ‘but once the payments stopped being made, what [was] the detriment?’
(10)The plaintiff led no evidence of detriment, in the sense of acting or abstaining from acting, none was found to have been established by the judge, and none was identified by reference to evidence in the plaintiff’s written case. Detriment did not exist merely because the plaintiff did not receive the payments for which it sued. It was not entitled to them by reason of failure of consideration. Detriment must be proved as a matter of fact.
(11)Detriment must be identified ‘as from the time at which it is said that the common assumption is departed from’. ‘At that point of time there is no evidence that there were, in fact, any profits that Mr Yu, or LCY, did not receive, following the cessation of the monthly payments by Mr Ma’. Counsel cited ACN 074 971 109 Pty Ltd (as Trustee for the Argot Unit Trust) v The National Mutual Life Association of Australasia Ltd,[47] and Sidhu v Van Dyke.[48] Furthermore, for all that was known, LCY still had every dollar that it had received from Ma. It had not shown that it had acted or abstained from acting to its detriment.
[47](2008) 21 VR 351, 390–1 [156]–[159], 393–4 [167]–[169] (‘Argot’). The latter passages addressed the concept of ‘the minimum equity’.
[48](2014) 251 CLR 505, 522-3 [56], [58]–[59], 529 [84] (French CJ, Kiefel, Bell and Keane JJ), 531 [91]–[92] (Gageler J) (‘Sidhu’). This was a case of proprietary estoppel.
(12)The plaintiff had not advanced a case that Yu had abstained from formalising the investment arrangement because he assumed that the management agreement did that for him.[49]
[49]This was counsel’s response to a question from the bench.
(13)It would not be a relevant detriment if Yu had foregone the monthly payments which he would have received had there been independent formalisation of the investment arrangement.
(14)Once the management agreement fell over because of failure of consideration, MCLY was conducting the business of the company, at the shop. There could be ‘no suggestion’, once Ma stopped making payments to LCY, that he ‘could continue to receive’ profits from the business. He ‘was undoubtedly running the business on behalf of MCLY’.
(15)Despite asserting that the defendant was able to keep the proceeds of the business in respect of the period during which payments were not made, the plaintiff led no evidence about what amount the defendant in fact derived from the business. In any event, the business was operated by MCLY and, as a shareholder in that corporation, the plaintiff had a right to participate in dividends and an entitlement to participate in a winding up.
(16)No evidence was led that the arrangement that had been struck by Yu and Ma initially was referred to when the management agreement was drafted. And, in any event, no evidence was led of communications between the parties that were capable of giving rise to the existence of a common assumption.
(17)The parol evidence rule excluded pre-contractual negotiations from being able to be relied upon to give rise to an estoppel by convention.
(18)The plaintiff’s submission was incorrect in suggesting that it was not obliged to identify the species of estoppel to be relied upon. It is not the law that there is only one single unitary doctrine of estoppel. There was thus no error in the approach of the judge in seeking to characterise the kind of estoppel upon which the plaintiff wished to rely. Once counsel agreed with the judge that the estoppel relied upon would need to be an estoppel by convention, there was no error in the judge’s approach to that issue. It was correct for the judge to say, set in context, that a conventional estoppel argument was not advanced at trial. The matter was not so pleaded, nor the subject of evidence or argument.
(19)It was incorrect for the plaintiff to submit that estoppel by convention and estoppel in pais are discrete kinds of estoppel. In fact, estoppel by convention is one of a number of estoppels falling within the concept of estoppel in pais.
(20)Estoppel by convention requires the party invoking the estoppel in fact to make an assumption. It must be demonstrated by evidence that the party in fact formed the assumption. But the evidence in this case did not establish that the plaintiff made any relevant assumption. Thus, the evidence led: (a) did not establish the making of an assumption as a matter of fact, and what any alleged assumption actually was; (b) did not identify the factors that induced or led to the making of the alleged assumption; (c) did not address the taking of an action or omission to act on the basis of any alleged assumption; (d) did not identify the detriment that the plaintiff would suffer as a result of the departure from any alleged assumption; (e) did not say why any departure from an alleged assumption adopted by LCY should result in an estoppel. Yu gave no evidence on this point, and the plaintiff retained all rights in respect of its shareholding in MCLY, including to dividends and capital.
(21)The making of an assumption and detriment are important and necessary elements of an estoppel. That is so, other things apart, because the measure of damages is that which is necessary to avoid the detriment, and that may not require the party against whom the estoppel operates to be held to the assumed state of affairs.

The defendant’s outline of submissions further addressed a possible argument that this was an estoppel by acquiescence. But no such argument was orally advanced for the plaintiff in this Court, and the pertinent submissions for the defendant can be put to one side.

Analysis
General

The questions debated in this Court were whether estoppel was sufficiently pleaded and whether on the evidence adduced at trial the judge had erred by not upholding the plea. Neither party submitted that the consequence of any error made by the judge should be that the proceeding ought be remitted for retrial, or for the making of further findings of facts on the evidence already adduced.

Assumption

We reject the plaintiff’s submission that, as a matter of authority, there is a single, overarching doctrine of estoppel. It cannot be said that the High Court has adopted that position.[50] Only if it had done so would it arguably be irrelevant for a party relying upon estoppel to identify by its pleading the species of estoppel upon which reliance is placed. The plaintiff’s submission was directed to meeting the possible problem of a poorly drafted pleading which, so the defendant contended, did not advance a case of conventional estoppel. The submission being rejected, the possible problem must then be considered.
[50]The position is summarised by K R Handley, Estoppel by Conduct and Election (Sweet & Maxwell, 2^nd ed, 2016) 29–30 [1-034].

We reject the plaintiff’s submission that, because the County Court is a busy trial court, poor pleadings are acceptable. On the other hand, pleadings do not fall for consideration as they did before the forms of action were abolished. An important question is whether a pleading, despite any inadequacies, is sufficient to put the opposing party and the court on notice of what is being alleged.

The pleading by [8.1] of the amended reply was lengthy, not well-focused, and in part unnecessarily uncertain.[51] Nonetheless, we consider that the circumstances pleaded did raise an estoppel by convention. It was alleged that, for a period of more than two and a half years, the parties acted in apparent pursuance of the management agreement (including the agreement as varied) whereby the plaintiff received his required rate of return but no more, by which he forewent any operational role in the business and any distribution of profits, and by which the defendant had exclusive access to and operation of the business and would keep all receipts. A course of dealing was identified, likewise some detriment.
[51]See [14] above. As by references to what the defendant ‘knew or ought to have known’; and that ‘the defendant or MYD or MCLY [would keep] all receipts from the business’.

So far as estoppel was argued at trial, it was estoppel by convention.

The conduct of a case at trial may depart from the pleadings, and will be entertained if the parties are able to and do address the case as conducted. That seems to be what happened here, although the argument for the plaintiff was not well developed. In particular, apart from the amended reply itself and one paragraph in the plaintiff’s written submissions,[52] analysis of alleged detriment was lacking.
[52]See [19] above, submissions [43].

The defendant did not claim to be disadvantaged by having to meet a case of conventional estoppel at trial. With respect to detriment, the defendant raised at trial the general argument — though not the detail — which was raised on appeal.

The judge’s reasons reveal that he treated estoppel in pais as being, today, estoppel by representation. But estoppel by convention is a species of estoppel in pais.[53] Although Handley,[54] in a passage cited by the judge, as a precursor to his Honour’s analysis of equitable estoppel, states that the common law form of estoppel known as estoppel in pais developed ‘under the influence of equity’ into ‘the modern law of estoppel by representation’, the author treats estoppel by convention as a distinct entity, with its own characteristics. So much is evident from his treatment of estoppel by convention at Chapter 8, and from his analysis of the question whether there is a single, overarching doctrine of estoppel.[55] The defendant, we note, made no submission seeking to uphold the judge’s conclusion on this point. The argument pursued was rather that the plaintiff wrongly submitted that estoppel by convention and estoppel in pais are discrete kinds of estoppel.
[53]See, for instance, Thompson (1933) 49 CLR 507, 546–7 (Dixon J); Legione v Hateley (1983) 152 CLR 406, 430 (Mason and Deane JJ); Con-Stan (1986) 160 CLR 236, 244 (Gibbs CJ, Mason, Wilson, Brennan and Dawson JJ).
[54]K R Handley, Estoppel by Conduct and Election (Sweet & Maxwell, 2^nd ed, 2016) 1 [1-001].
[55]Ibid 29–30 [1-034].

It follows that the judge erred because, starting from the position that the plaintiff relied upon estoppel by representation, he resolved the estoppel issue within that framework.

Strictly, it may be, what the judge thereafter said about the issue of estoppel by convention was obiter dicta. The defendant submitted that the judge’s findings in that connection were unchallenged. The problem with that submission is that the assumption identified by the judge was not the assumption upon which the plaintiff relied either before the judge or in this Court.[56] The assumption (tentatively) identified by the judge was that LCY and Ma ‘assumed that LCY owned the business, or MCLY had authorised LCY in some way to run the business’.[57] Contrast the submission for LCY noted at Reasons [78]; this was not a submission about a mistake as to who had owned the business — it was a submission about giving effect to the commercial purpose of the management agreement, ‘namely, to fix Yu’s return on his investment and give the remaining proceeds of the business to Ma’.[58]
[56]See, especially, [31(2)]–[31(3)] and [23] above.
[57]Reasons [79].
[58]See [29] above.

Having (tentatively) identified (wrongly) what he understood the assumption to be, the judge said that there was an absence of the communication on the point between the parties, which was necessary to found an estoppel by convention. But his Honour then said that:

one might reasonably argue that when two parties enter a written agreement, albeit on an erroneous basis, the document embodies the agreement arrived at as a result of the communications between the parties and their legal representatives. On this basis, the Management Agreement might be seen as the result of the communications between the parties and/or their legal representatives.[59]

[59]Reasons [81]. See [29] above.

The judge was correct to consider that estoppel by convention requires that there be a common assumption. It must be an assumption subjectively held. It is not enough that each party makes the same assumption independently.

The assumption must be proved by evidence. But this does not mean that inferential reasoning is unavailable in order to prove the assumption.[60]
[60]So much was recognised, although it did not assist the party relying upon the estoppel in the particular case, by Buss JA in Alpha Wealth (2008) 66 ACSR 594, 633 [181].

As a corollary, it is not necessary that a party give evidence which employs the word ‘assumption’.

The assumption relied upon by the plaintiff was that the underlying agreement between Yu and Ma, by which rights and duties were created, was reflected in the management agreement in apparent pursuance of which LCY and Ma conducted themselves for more than two and a half years — including reaching an agreed variation in the monthly amount payable.

The plaintiff’s contention that the parties assumed that the management agreement reflected their underlying agreement at least implies that they assumed the existence of a binding contract.

We have described the key features of the underlying agreement between the two men. A few terms were identified by Yu in his evidence — see [7(1)], [7(2)] and [7(3)] above. Others were disclosed by the management agreement, as we have explained at [7(20)], [7(21)] and [7(23)] above. LCY’s role as a pure financier concerned to ensure payment of the agreed rate of return so long as its capital investment continued, and protection of that capital investment, was emphasised, together with Ma’s obligation to conduct the business, with the benefit of keeping receipts and profits, for a five year term.

Associated with the underlying agreement was an agreement between Yu and Ma that the former would loan the latter the amount necessary for Ma to have a share in the acquisition of the business. Yu’s financing of the acquisition of the business was to be total, but in part by way of a loan to Ma.

Except if the underlying agreement was reflected in the management agreement, the underlying agreement was oral and undocumented. The questions then arise whether the management agreement was intended by both parties to reflect the underlying agreement, and whether both parties assumed that it did so. In our opinion, the answer to those questions is ‘yes’. The following considerations are in point.

First, the parties, who acted by solicitors, should be taken to have understood that this was so. It does not deny that conclusion that Yu left documentation up to his solicitor. Ma, it will be remembered, gave no evidence. The document reflected Yu’s financing of the acquisition of the business and the men’s agreement that Ma operate it.

Second, drafts of the management agreement and the loan agreement were sent by LCY/Yu’s solicitor to MYD/Ma’s solicitor at the same time.[61] They were both the subject of comment by Ma’s solicitor.[62] Comments made by Ma’s solicitor show that he had clear and relevant instructions. Both documents were thereafter executed.
[61]See [7(14)] above.
[62]See [7(10] and [7(16)] above.

Third, interest payable on the loan was 20 per cent per annum. That rate correlated with the amount loaned. In the case of the management agreement, the management fee was precisely a 20 per cent return on the amount financed directly by Yu, to the cent (namely, $23,333.33). The management fee was unrelated to the performance of the business.

Fourth, the evidence was entirely opposed to the defendant’s submissions that Yu simply had an ‘expectation’ of receiving 20 per cent on his investment; or that he was content to put his money into a joint venture vehicle with an ‘expectation of dividends’. He was evidently an experienced, realistic and determined businessman, who required certainty of a specified return on his money. On the other hand, whilst it may confidently be said that Yu would not have been satisfied with an ‘expectation of dividends’ as his only return on financing the venture, it does not follow that he had no interest in receiving dividends.

Fifth, it is true that the management agreement did not specifically refer to Yu having financed the acquisition of the business in an amount of $1.4 million. But Ma’s solicitor was aware of the financing arrangement. He annotated the draft agreement ‘There are 2 Family trust – total invest $1.9M (including LCY Pty $1.4M and MYD $500,000)’. Further, as we have already noted, the amount of the ‘management fee’ was precisely a 20 per cent annual return on $1.4 million,[63] and there was a provision about the way in which proceeds of sale of the business were to be distributed, depending upon whether the sale price was above or below $1.4 million.[64] There could be no doubt that the parties understood, as reflected by the positions taken by their solicitors, that the ‘management fee’ correlated with the amount which Yu had put into the acquisition of the business, and which was unrelated to the performance of the business. The draft agreement and the agreement as executed both so provided. Ma’s solicitor did not demur; but he did raise the question of the ‘true owner’ of the chattels.
[63]Management agreement cl 3.
[64]Ibid cl 18.1.

Sixth, the management fee was varied downward by agreement between Yu and Ma in late 2014. The agreed monthly amount reflected a specific, but reduced, percentage return on the $1.4 million financed by Yu. As mentioned, the judge stated that the variation was effected so that ‘instead of deriving (through LCY) a return of 20 per cent per annum on his investment, [Yu] would receive a return of 17 per cent per annum’.[65] The monthly fee was precisely a 17 per cent return on the initial finance, to the cent, namely $19,833.33.
[65]Reasons [28]. See [7(27)] above.

Seventh, the draft clause which dealt with the distribution of sale proceeds,[66] and the different clause which addressed the same matter in the agreement as executed:[67] (a) had nothing to do with management of the business; (b) had everything to do with the amount financed by Yu; and (c) at very least did not sit comfortably with the provision in the constitution of MCLY dealing with return of share capital on a winding-up. Matter (b) underlines, as we have said earlier, LCY’s interest as pure financier to protect its investment.
[66]Draft management agreement cl 19.
[67]Management agreement cl 18.

Eighth, it could not sensibly be said that, in executing the management agreement, LCY/Yu and Ma were unaware that MCLY was the franchisee of the business and licensee of the premises. That was set out in the preamble of both the draft agreement submitted to MYD/Ma’s solicitors, and in the agreement as executed. One solicitor drafted the document, and the other commented upon it. Further, (a) LCY and MYD had agreed to MCLY’s constitution; (b) Ma was MCLY’s sole director; and (c) MCLY was the contracting party with the franchisor, LCY/Yu and Ma being guarantors.

Ninth, Ma’s solicitor was plainly alive to the problem, from a contractual standpoint, of describing LCY as ‘the Majority Owner’; and he raised with LCY’s solicitor queries as to the owner of the chattels of the business, and the ability of LCY to give consideration in the form of the use of chattels and the right to manage the business in return for payment of the management fee. But the agreement as executed maintained those features. It seems to us that this is explicable in that the parties wanted a document which reflected important aspects of their underlying agreement. The management agreement as they executed it met that need and to that extent suited their respective interests. Other issues may have appeared peripheral.

We pause to make these observations about the impact of the management agreement upon LCY and Ma, and its interrelationship with MCLY:

(1) The agreement, once implemented, was favourable from Ma’s standpoint. He was able to run the business, de facto using the chattels purchased by MCLY largely out of moneys financed by LCY/Yu, and de facto using the premises of which MCLY was the licensee. He was able to run the business free of intervention by Yu. He had no obligation to account to LCY or Yu. Effectively, any accounts which he kept were free of scrutiny; and yet they would be very relevant if the business came to be sold. Implementation of the agreement ensured that any nett profits were his, and would not flow to MCLY. Thus, no question could arise as it might have done had profits been received by MCLY and had Ma, as sole director of MCLY, not declared a dividend; or declared a dividend only in respect of A class shares. LCY might have brought an oppression proceeding in such circumstances. In all, Ma’s principal obligation to LCY under the agreement was to pay the latter its 20 per cent annual return on capital, the agreement thus documenting his oral obligation. There was also the obligation to make up any shortfall on sale of the business at below $1.4 million. In return, the agreement purportedly gave him not simply the right to operate the business and to retain any nett profits, but to do so using premises of which MCLY was licensee and using equipment purchased by MCLY.

(2) From LCY’s perspective, the management agreement had several favourable features. It recorded Ma’s obligation to pay a 20 per cent annual return on LCY’s capital investment. There was also the provision which dealt with LCY’s capital entitlement if the business was sold. Whilst any sale would be by MCLY, and the company would be obliged to deal with the proceeds of sale according to its constitution, cl 18 on its face imposed a personal obligation upon Ma. Further, and consistently with the underlying agreement, the management agreement obliged Ma to operate the business for a term of five years.

(3) On the other hand, the management agreement devalued LCY’s interest in MCLY. LCY had a right to share in any dividends which the company declared, and it had a right to repayment of the issue price of its shares in a winding-up. But the consequence of the management agreement was that it was inevitable that no profits would flow to MCLY for so long as the agreement de facto operated. It followed that no dividends would be declared, and that the assets of the company available to repay share capital if there was a winding-up (in the event that there were undistributed profits) would be the less.

(4) There is no evidence, or suggestion, that Yu and Ma discussed at the outset the structure by which their oral agreement was to be implemented. That is unsurprising. But there had to be some entity to record the capital contributions, acquire the franchise, become the licensee, and acquire the chattels and stock. In the event, MCLY was that entity. LCY and MYD agreed to its constitution on 10 April 2012. MCLY’s constitution is revealing.

(5) Under the constitution, as the company’s only shareholders, LCY and MYD had different rights. Whilst LCY’s rights were more circumscribed, it did have an entitlement to share in any dividends and it did have a right to repayment of the issue price of its shares on a winding-up. It is true that whether dividends were paid depended upon there being profits, and upon Ma, as sole director, determining that a dividend be paid on E class shares. But had profits been made and had Ma declined to determine that a dividend be paid, or determined that a dividend be paid only in respect of A class shares, the prospect of an oppression proceeding loomed — particularly as LCY had no right to a share of assets or surplus profits on a winding-up.

(6) Under the constitution, LCY had no right to a 20 per cent return on capital. From its standpoint, that was the obvious gap in the structure established by and under MCLY. That gap was addressed by the management agreement.

(7) The divergence between the structure established under MCLY’s constitution on the one hand, and the conception that Ma would run the business free of interference by LCY, retaining any nett profits, on the other, was more profound. To have run the business in accordance with the constitution of MCLY, and with the fact that MCLY was the licensee of the premises and owner of the chattels, Ma would have had to run the business as the employee of MCLY or pursuant to some other contractual arrangement. He would have had to account to MCLY. If he had been an employee of MCLY, nett profits would have flowed to MCLY. If he had entered into some other contractual arrangement by which he was to retain nett profits, such agreement would have had to allow for payment by Ma to MCLY of some fee, which would precede determination of nett profits. Had there been no such arrangement, it would have been uncommercial from the standpoint of MCLY, and intervention by LCY could not have been ruled out. Moreover, it would have been uncommercial in the particular context that Ma was contracting as an individual (or through his corporate vehicle) with an entity of which his company was the majority shareholder and of which he was sole director. Had profits flowed to MCLY, the question of determination of a dividend would have arisen.

(8) The management agreement, on its face, embraced the conception that Ma would run the business free of interference by LCY, and retain nett profits, and in doing so diverged, to Ma’s advantage, from conduct of the franchise in accordance with the constitution of MCLY.

Tenth, we return to the reasons why in our view the management agreement was reflective of the substance of the underlying agreement between the two men. Absent that agreement Yu would reasonably have needed: (a) documentation which provided for the agreed return on his $1.4 million investment; (b) documentation which would ensure protection of LCY’s capital investment — so that, if there was any shortfall in the amount repaid for LCY’s shares in a winding-up, it would have a right to recoup the shortfall from Ma; and (c) documentation which recorded Ma’s obligation to operate the business for a five year term and his right to retain receipts and profits.

Eleventh, for a period of more than two and a half years, the parties conducted themselves in accordance with the management agreement. They so conducted themselves to the point of reaching an agreed variation in the management fee payable each month, Ma then continuing to operate the business for a number of months.

The assumption upon which the parties proceeded, that the management agreement stated important aspects of their business agreement, was commonly held, and communication between their professional advisers, speaking for them, underscored their belief that such was the case. The agreement was the outcome of pertinent discussion between their professional advisers. It can safely be inferred that those advisers were given relevant instructions. The management agreement, deficient though it was with respect to consideration,[68] contained key elements of the underlying agreement. Only Yu could have given instructions about those matters. So far as Ma is concerned, his solicitor’s correspondence reflected, in a number of instances, specific instructions given by his client. Additionally, there was no demur to the central ideas in the draft document, that Ma was to operate the business free of interference by Yu, was to retain receipts and profits, and was to pay LCY a management fee unrelated to performance of the business. Further, there is the fact that the agreement in final form was executed by the parties, and that thereafter, for a lengthy period, they acted in accordance with it.
[68]As the plaintiff’s case was pleaded and argued, in light of the consideration stated in the agreement itself.

The way in which the judge recorded the plaintiff’s case on estoppel to have been advanced, that Ma should be estopped from denying the commercial purpose of the management agreement, to which the court should give effect — see Reasons [78], set out at [29] above — was close to, but not identical with, the assumption which the plaintiff advanced in this Court, and which we have concluded was the assumption made by the parties and upon which they acted. But the assumption then framed by his Honour — that ‘LCY and Ma assumed that LCY owned the business, or MCLY had authorised LCY in some way to run the business’[69] —was rather different. In our opinion, the parties’ common assumption was that the management agreement reflected key aspects of their underlying business agreement — the important elements of which we have set out at [50] above — and that being so it should be acted upon as a binding agreement between them. The fact that the draft agreement contained, as the judge found, a legal flaw (it had been flagged by Ma’s solicitor) and yet was executed in final form with the flaw remaining to our mind emphasises its essential character as a document setting out an agreed business relationship — notwithstanding that the relationship thus described did not accord with the consequences of the incorporation of MCLY.
[69]Reasons [79]. See [29] above.

It follows from what we have said that, in addition to submissions for the defendant to which we have already referred, we reject the submissions, referable to the question of assumption, that: (a) the plaintiff failed to prove any relevant assumption; (b) at the very least there were competing available assumptions; (c) the plaintiff had not relied upon the assumption identified in this Court; and (d) the judge’s finding that there was no shared communication between the parties had not been challenged, and was determinative against the plaintiff.[70]
[70]That is, because his Honour focused upon a different assumption.

Because we reject the defendant’s submission that the plaintiff did not rely at trial upon the assumption relied upon in this Court, it is unnecessary to address the submission that, had the argument been raised at trial, it could have been the subject of evidence by the defendant. It is, however, ironic, that in arguing that the plaintiff failed to prove detriment, the defendant relied upon what were said to be deficiencies in the evidence, in significant part deficiencies related to the defendant not having gone into evidence.

We have said at [49] and [66] above that the parties’ assumption carried with it, or encompassed, an assumption that there was a binding contract in existence which regulated their rights and obligations. Such an assumption would not seem to offend what was said in Con-Stan,[71] to the effect that an assumed state of affairs for estoppel by convention must be an assumed state of fact and not an assumption of legal effect. The operational ambit of what was said in Con-Stan has been considered, directly and indirectly, by the High Court itself and by intermediate courts of appeal in this country and the United Kingdom. Callaway JA identified relevant authorities in Riseda Nominees Pty Ltd v St Vincent’s Hospital (Melbourne) Ltd,[72] as did Buss JA in Alpha Wealth.[73] Both their Honours opined that the existence of a binding agreement may be an assumption of fact that supports a conventional estoppel. See also, among other decisions, Equuscorp.[74] We respectfully agree with the relevant conclusions expressed by each of Callaway JA and Buss JA.
[71](1986) 160 CLR 226, 245.
[72][1998] 2 VR 70, 77.
[73](2008) 66 ACSR 594, 627–30 [158]–[164].
[74](2007) 18 VR 250, 268–9 [70]–[73].

Detriment

It is an indispensable element of successful reliance upon an estoppel that the party relying upon the estoppel establishes that he[75]

so acted or abstained from acting upon the footing of the state of affairs assumed that he would suffer a detriment if the opposite party were afterwards allowed to set up rights against him inconsistent with the assumption. … [T]he real detriment or harm from which the law seeks to give protection is that which would flow if the assumption were deserted that led to it.[76]

[75]Or ‘she’ or ‘it’.

[76]Grundt (1937) 59 CLR 641, 674 (Dixon J).

As to the part which must necessarily have been played by the person against whom an estoppel is alleged:

he must have played such a part in the adoption of the assumption that it would be unfair or unjust if he were left free to ignore it. But the law does not leave such a question of fairness or justice at large. It defines with more or less completeness the kinds of participation in the making or acceptance of the assumption that will suffice to preclude the party if the other requirements for an estoppel are satisfied.[77]

[77]Ibid 675–6.

We referred at [19] above to a written submission made for the plaintiff at trial, noted by the judge in his reasons.[78] We will repeat it:

43.The plaintiff submits that the defendant should be estopped from denying the agreement in circumstances where he has received the benefit of the agreement and the plaintiff has foregone any entitlement to recover more on his investment than is set out in the agreement.

[78]Reasons [63].

The parties conducted themselves for more than two and a half years in conformity with the conventional basis which we have described. In that period, the plaintiff — in substance, Yu — (a) was content to receive interest on the capital which had been invested; (b) believed, as a matter of the clearest inference, that his capital investment was protected; (c) was content that Ma should conduct the business without having to account to LCY; (d) was content that Ma retain any nett profits of the business; and (e) took no step to require Ma to conduct the business through MCLY. The effect of matters (d) and (e) was that there was no prospect of profits flowing to MCLY, which could have been subject to a determination of dividends, and no prospect that any profits would be available in a winding-up to assist in a repayment of the issue price of LCY’s shares to which LCY had an entitlement under MCLY’s constitution. Meanwhile, Ma’s conduct of the business, pursuant to the management agreement, for reasons which we have described, was very much to his advantage, though being at odds with the structure of MCLY. As voting shareholder[79] and sole director of MCLY, and as the controller of MYD, he had an obvious interest in the business operating as it did, and at the least a lesser interest in the business being run so as to conform with the structure of MCLY.
[79]Through MYD.

Had Yu at any time been apprised, in the period between July 2012 and the time when Ma ceased to act in conformity with the common assumption by ceasing to pay LCY the monthly amount, that the assumption upon which the two men were proceeding was false, in that there was not a binding agreement in existence which protected LCY’s investment, we think the inference is inescapable that he would have taken action to protect LCY’s position. Inferential reasoning is not precluded when deciding if the person seeking to rely upon an estoppel has established detriment.

When we say that Yu would have taken action to protect LCY’s investment, we do not infer that he would himself have identified the need to take step A or step B. Rather, the inference to be drawn is that he would have asked his solicitor to regularise the position, leaving implementation to ‘lawyer Chow’.

The action which Yu could, and we are satisfied he would have taken, consisted of at least the first three, and probably all of the following: (1) have his solicitor prepare, and then obtain execution of documentation which recorded Ma’s obligation to pay him (or LCY) a 20 per cent return on the investment;[80] (2) have his solicitor prepare, and then obtain execution of documentation which recorded Ma’s personal obligation to pay LCY for any shortfall in its capital after a sale of the business and a winding-up of MCLY; (3) have his solicitor prepare and then obtain execution of documentation which recorded Ma’s obligation to conduct the business for a five year term, together with his right to keep receipts and profits; (4) require Ma, consistently with their agreement, to enter into a contractual arrangement with MCLY which would enable Ma to operate the business and retain nett profits after allowing for payment of an appropriate fee to MCLY; (5) require Ma to properly account to MCLY.
[80]That is, until the capital sum was returned to him.

The first action would have been taken because Yu was evidently concerned that there be documentation of Ma’s agreement to pay a 20 per cent per annum return on the capital provided by LCY. The management agreement evidenced that concern. Absent such agreement, LCY would have been left with an oral agreement, which opened up the prospect of evidentiary conflict.

The second action would have been taken because Yu was very evidently concerned to protect LCY’s capital investment. Such action would simply have replicated cl 18 of the failed management agreement.

The third action would have been taken because it was an element of the underlying agreement, reflected in the management agreement, that Ma operate the business for so long a period, and keep receipts and profits whilst doing so.

The fourth action would probably have been taken for two reasons. First, to set up an arrangement which was compatible with the agreement between the two men, and which at the same time removed the flaw in the management agreement. Second, to ensure that some moneys flowed into MCLY which would improve the prospect of LCY receiving payment of the issue price of its shares in a winding-up.

The fifth action would probably have been taken for two reasons. First, so that there could be oversight of the performance of the business by LCY as a shareholder of MCLY. Second, and relatedly, because the value of the franchise in a sale would significantly depend upon there being reliable accounts to present to prospective purchasers. A satisfactory sale price, in turn, would affect the ability of the company to pay LCY the issue price of its shares.

The detriment suffered by the plaintiff, in the event, was that, acting upon the common assumption to which we have referred, and throughout the life of that common assumption, he abstained from taking any of the actions to protect his investment which we have identified.

When Ma departed from acting in conformity with obligations inherent in the common assumption, by ceasing to pay the management fee which he was obligated to continue paying during the term of the management agreement,[81] LCY was left substantially unprotected. It is unrealistic to suppose that Ma would then have agreed to documentation of either of the matters referred to in (1) and (2) of [76] above. The clearest indication of his position about the management fee is that he left the plaintiff to sue for it. It is no answer that he had a good point about the unenforceability of the management agreement. Nor is it an answer, if one was to assume that Ma further departed from acting in conformity with the substance of the common assumption by working for MCLY in the period of non-payment of the management fee, that any business profits would have enured to the benefit of LCY. Business profits fell to be dealt with under the company’s constitution. They had nothing to do with Ma’s personal liability to pay LCY a 20 percent return on its capital investment. LCY’s ability to bring an oppression proceeding, depending upon what had been done with any profits flowing into MCLY, was likewise beside the point. Indeed, the stress, cost and risk involved in bringing such a proceeding could itself be characterised as a detriment.
[81]Remembering that Yu and Ma agreed in mid-2015 that the business should be sold — that is, before the expiration of the five year term — the obligation continued at least until a sale was completed.

Further, the past loss of the opportunity for profits to flow into MCLY, this giving LCY’s capital investment some protection, could not be redressed. Even if it was necessary for the plaintiff to have proved that the business was profitable for all or part of the period up until the management fee was last paid, we do not accept that, the business having operated for some two and a half years before Ma sought any reduction in the management fee, it should be concluded that the business had been operating unprofitably throughout that period. To the contrary. In any event, the proper arrangement of the underlying agreement would have required Ma to contract with MCLY, paying an appropriate fee for the use of premises and chattels.

Further again, because Ma had been conducting the business for two and a half years without having any obligation to account to LCY/Yu for its operation, the opportunity for timely oversight of, and testing the reliability of any accounts — which would bear upon the resale value of the business, and thus LCY’s capital investment — had been lost.

The case is not one in which, we consider, evidence by Yu that he would have instructed his solicitor to take step A or step B, or simply to better protect LCY’s position, would have been of any real weight; likewise, cross-examination of Yu to the effect that he would not have directed the taking of any such step. We are not at all persuaded that the course or outcome of the trial would or might have been different had the detriment which we have identified been highlighted by the amended reply or by plaintiff’s counsel at trial.[82] Evidence of what a witness would have done in a hypothetical situation, characteristically if unintendedly self-serving and influenced by what has happened in fact, is rarely of much worth.[83] In this case, the fact that the management agreement on its face provided protection for LCY’s financial interests is the clearest indication of what Yu would have sought to achieve had he not been lulled into a false sense of security by the common assumption of the parties.
[82]The amended reply referred to the plaintiff having foregone loss of profits, but did not tie this into protection of LCY’s capital return in a winding-up. It referred to Ma — or, curiously, MYD or MCLY — keeping all receipts from operation of the franchise. It also referred to Ma having full control of the business, but did not identify concomitant freedom from giving any accounting to LCY. It did plead that LCY’s entire financial benefit under the agreement was the payment of the 20 per cent return on investment, but did not highlight the importance which Yu evidently attached to that matter being documented.
[83]The limitations in the utility of such evidence has often been remarked upon. Some instances are Chappel v Hart (1998) 195 CLR 232, 272–3 (Kirby J); Rosenberg v Percival (2001) 205 CLR 434, 441–2 [15]-[16] (Gleeson CJ), 444 [26] (McHugh J), 468 [109], 485 [155] (Kirby J), 504–5 [221] (Callinan J); Hoyts Pty Ltd v Burns (2003) 77 ALJR 1934, 1943–4 [53]-[55] (Kirby J); Roads and Traffic Authority (NSW) v Dederer (2007) 234 CLR 330, 406 [270] (Callinan J); and Owens v Galvin [2014] VSCA 33 [66] (Beach JA and McMillan AJA). Compare Lederberger v Mediterranean Olives Financial Pty Ltd (2012) 38 VR 509, 541–2 [116]-[117].

Nor, in our opinion, could the outcome of the trial have been any more advantageous to the defendant if one were to put to one side evidence that Yu might have given in chief or under cross-examination. Defendant’s counsel did not propose any evidence that his client might have given.

The detriment which we have identified was in part the subject of written submissions for the plaintiff (see [31(12)], [31(13)], [31(15)] and [31(16)] above). Other than that, it was debated in argument in the course of oral submissions for the plaintiff (see [31(17)] above); and for the defendant (see [32(12)] above). This Court was properly seized of the matter, and the parties had an opportunity to deal with it.

It will be noticed that we have not treated detriment as including any possible loss by LCY of dividends out of profits[84] accruing to MCLY. Although, under the company’s constitution, LCY might have had grounds for complaint if no dividends had been declared, particularly since LCY had no right to a share in any assets or surplus profits on a winding-up, Yu’s agreement with Ma did not contemplate receipt of more than payment of the management fee and protection of Yu’s capital investment.
[84]Or income, as from a fee paid by Ma for the right to use the premises and chattels.

Remedy

The plaintiff contended that the measure of damages should be determined by the quantum of the management fees not paid in the period until the business was sold. It did not sue Ma for any shortfall in return of its capital.[85] The defendant submitted that the plaintiff was simply seeking to recover by reliance on an estoppel what it could not recover on an unenforceable contract. That was impermissible Moreover, argued the defendant, there was no evidence of any amount in profits which the plaintiff did not receive from MCLY in the period when the management fee was not being paid.
[85]Having regard to Port of Melbourne Authority v AnshunPty Ltd (1981) 147 CLR 589, though without the benefit of argument, our tentative view is that it would now be precluded from doing so.

In point of principle:

in the context of estoppel, detriment is what results from acts or inaction in reliance on the assumption rather than from the breach of promise or departure from the assumption per se.[86]

[86]Argot (2008) 21 VR 351, 391 [159].

But this does not mean that:

in some cases, such as Giumelli and Verwayen, the detriment which would otherwise have been suffered was such that, as the minimum necessary to do justice, it required the assumption to be made good.[87]

[87]Ibid 391 [160]; see also 393–4 [168]–[169] (citations omitted).

It is trite that every case must be decided upon its own facts. In the present case, it seems to us that the minimum required to do the plaintiff justice is that the assumption be made good. The defendant should be estopped from denying that the plaintiff was entitled to a monthly management fee in the reduced amount for the period when it was not paid. Even if the plaintiff had received a share in profits from MCLY referable to that period, it would not have been paid by Ma — upon whom the obligation to pay the management fee resided — and it would not have been that management fee. Nor again would it have been a return of LCY’s share capital. Any such supposed payment should not go in reduction of the management fee which was not paid.

Orders

We would grant leave to appeal and allow the appeal. We would set aside judgment for the defendant entered below and in lieu thereof order that there be judgment for the plaintiff in the amount of $158,666.64.

OSBORN JA:

I have had the considerable advantage of reading the reasons of Tate and Ashley JJA in draft. I gratefully adopt their analysis of the background facts and of the trial judge’s reasons. I also agree with their ultimate conclusions. I would wish only to express my own reasons with respect to the issues of detriment and remedy. Otherwise, I respectfully agree with their Honours.

In order to rely upon a shared assumption to establish an estoppel by convention, a plaintiff must show that he or she so acted or abstained from acting on the basis of the assumed state of affairs that he or she would suffer detriment if the opposite party were afterwards allowed to set up rights inconsistent with the assumption.[88]
[88]Grundt (1937) 59 CLR 641, 674 (Dixon J).

The relevant detriment was described by Dixon J in Grundt as follows:

It is often said simply that the party asserting the estoppel must have been induced to act to his detriment. Although superficially such a statement is correct and leads to no misunderstanding, it does not bring out clearly the basal purpose of the doctrine. That purpose is to avoid or prevent a detriment to the party asserting the estoppel by compelling the opposite party to adhere to the assumption upon which the former acted or abstained from acting. This means that the real detriment or harm from which the law seeks to to give protection is that which would flow from the change of position if the assumption were deserted that led to it. So long as the assumption is adhered to, the party who altered his situation upon the faith of it cannot complain. His complaint is that when afterwards the other party makes a different state of affairs the basis of an assertion of right against him then, if it is allowed, his own original change of position will operate as a detriment. His action or inaction must be such that, if the assumption upon which he proceeded were shown to be wrong and an inconsistent state of affairs were accepted as the foundation of the rights and duties of himself and the opposite party, the consequence would be to make his original act or failure to act a source of prejudice.[89]

[89]Ibid 674–5 (emphasis added).

In the present case, as the judgment of Tate and Ashley JJA demonstrates, the conventional basis of the relationship between LCY and Ma reflected the underlying agreement between Yu and Ma which underpinned the purchase of the franchise business through MCLY.

That basis involved two central elements of continuing reciprocal rights and obligations. On the one hand, Ma would be permitted to operate the business taking the whole of the profit and risk without accounting for that operation. On the other hand, Yu would through LCY be paid a fixed return on his investment.

The benefit derived by Ma under this arrangement involved continuing potential detriment to LCY if Ma departed from the common assumption in circumstances where LCY held a substantial beneficial interest in the franchise business through MCLY.

LCY accepted potential detriment on a continuing basis because of the mutual understanding that whilst Ma operated the business in accordance with that understanding he would pay LCY a fixed return on its capital investment.

This mutual understanding continued into the period which is in dispute between the parties, initially during which late payments were made in accordance with it.

The mutual understanding was not terminated by the agreement to sell the business. Yu’s evidence as to that agreement reflected no change in the understanding as to the basis on which the business would continue to operate up until sale. Moreover, Yu’s evidence was uncontradicted.

LCY thus permitted the franchise business to be conducted on the basis of an agreed and mutually assumed set of reciprocal obligations which Ma is now estopped from denying.

It is not necessary to be positively satisfied as to what steps Yu through LCY would in fact have taken if Ma had terminated the mutual understanding in accordance with which the business was operated.

It is sufficient to say that if that had occurred LCY had open to it a series of possible remedies reflecting the detriment which I have identified above. These include exercising its rights as a shareholder to require a full accounting in respect of the franchise business and the possible winding up of MCLY.

The potential detriment to LCY inherent in the continuing basis on which the business was conducted crystallised when Ma departed from the common assumption between the parties as to such basis.

Ma had the benefit of the mutual understanding as to the basis on which the business would be operated. It would be unconscionable for him now to contend that he was not bound to pay LCY a monthly fee during that operation.

The detriment suffered by LCY will only be made good by requiring Ma to be held to the common assumption of the parties as to the financial basis on which the business would operate.[90]
[90]Equuscorp (2007) 18 VR 250, 270 [80] (Buchanan, Ashley and Neave JJA); Giumelli v Giumelli (1999) 196 CLR 101, 125 [50] (Gleeson CJ, McHugh, Gummow and Callinan JJ).

[2017] VSCA 383

20 December 2017