LCY Pty Ltd v MA
[2017] VCC 264
•22 March 2017
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
| GENERAL LIST |
Case No. CI-15-05752
| LCY PTY LTD |
| v |
| DONG YAN MA |
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JUDGE: | HIS HONOUR JUDGE COSGRAVE | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 2, 7, 8, 9, 10, 13, 14 and 15 February 2017 | |
DATE OF JUDGMENT: | 22 March 2017 | |
CASE MAY BE CITED AS: | LCY Pty Ltd v Ma | |
MEDIUM NEUTRAL CITATION: | [2017] VCC 264 | |
REASONS FOR JUDGMENT
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Subject: CONTRACT;
Catchwords: Breach of agreement containing regular payment obligations – whether total failure of consideration - where party does not have legal title to goods to be transferred as consideration under agreement - whether agreement void ab initio – whether agreement void due to doctrine of mistake – whether party estopped from avoiding agreement where party received benefit
Cases Cited:Baltic Shipping Company v Dillon (1993) 176 CLR 344; Commissioners for Revenue and Customs v Bencholder Ltd [2010] 1 All ER 174; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; Hawcroft v Hawcroft General Trading Co Pty Ltd [2016] NSWSC 555; K Lokumal & Sons London Ltd v Lotte Shopping Company Pte Ltd [1985] 2 Lloyd’s Rep 28; Republic of India v India Steamship Co Ltd (No.2) [1998] AC 878; Rowland v Divall [1923] 2 KB 500; Ryan v Moore [2005] 2 SCR 53;Thompson v Palmer (1933) 49 CLR 507;
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr D K Carlile | RTC Legal |
| For the Defendant | Mr G J Redenbach | New World Pty Ltd |
HIS HONOUR:
Issue
1 This case concerns whether the defendant (“Ma”) breached an agreement with the plaintiff (“LCY”) to make monthly payments, and the extent of any loss which the plaintiff suffered.
Background
2 Shuirong Yu (“Yu”) is a Chinese businessman who controls LCY. He first met Ma at his house in North Balwyn in about September 2009. They became friends and used to spend time together. In around February 2011, Ma told Yu that he had a good project to invest in. Having been told something of the project, Yu agreed to invest in it. Ma’s plan related to a franchise of Sushi Sushi, a business which sold Japanese food, in particular, sushi, sashimi and related products (“the business”). The site in question was a shop at Knox City Shopping Centre.
3 MCLY Pty Ltd (“MCLY”) was incorporated in April 2012. MCLY has two shareholders, LCY and MYD Pty Ltd (“MYD”). LCY holds 140 E class shares in MCLY. MYD holds 50 ordinary shares in MCLY.
4 Ma is a director of MCLY. MYD is the corporate trustee of a trust in which Ma is a beneficiary.
5 By a franchise agreement also made in 2012 (“the Franchise Agreement”), Sushi Sushi Franchising Pty Ltd, as franchisor, granted a franchise to MCLY to operate the business at premises on the downstairs level of the Knox City Shopping Centre.
6 By email dated 28 June 2012, Petrus Chow, whom Yu said was his lawyer and appeared to be a partner or employee of RTC Legal, sent to Henry Wong, Ma’s solicitor, a loan document and a management agreement document for perusal. In relation to each of these documents, Chow said that he was acting for LCY and understood that Wong acted for Ma.
7 The loan document showed that it related to a loan between Yu and Ma. In order to purchase the Sushi Sushi franchise at Knox City Shopping Centre, Yu agreed to contribute $1.4 million and Ma agreed to contribute $500,000. Because Ma did not have the money available, he borrowed it from Yu. There was no dispute that Ma later repaid Yu the loan in full.
8 By email dated 5 July 2012, Wong sent to Chow a letter setting out some of his instructions with respect to the proposed transaction and enclosed copies of both the amended management agreement between LCY, MYD and Ma and the loan agreement.
9 On 6 July 2012, Chow advised Wong that he would obtain instructions and respond as soon as possible to the proposed amendments.
10 Pursuant to a Sale of Business Agreement made 25 July 2012, Sushi Sushi Melbourne (No 2) Pty Ltd, as vendor, sold the business conducted at the shopping centre to MCLY. The recitals to the Sale of Business Agreement (“SBA”) provided that:
·Sushi Sushi Melbourne (No 2) Pty Ltd as the vendor owned the assets and carried on the business from the premises;
·The vendor had agreed to sell and MCLY as the purchaser agreed to purchase the assets and the business as a going concern in accordance with the terms and conditions set out in the SBA;
·The guarantors which included Ma, LYC, MYD and others, agreed to guarantee MCLY’s performance under the SBA.
11 The terms of the SBA had a number of important clauses as follows:
“Cl 2.1On and subject to the provisions of this Agreement, the Vendor agrees to sell to the Purchaser and the Purchaser agrees to purchase from the Vendor the Business and the Assets for the Purchase Price free from all encumbrances on the completion date and subject to pre-conditions contained in clause 3.
Cl 2.2In full consideration for the sale of the Business and the Assets under this agreement the Purchaser shall pay the Purchase Price to the Vendor in accordance with clause 4.
Cl 3.1Completion shall be conditional on the fulfilment of the following conditions precedent on or prior to the Completion Date, which are for the benefit of the Vendor and may only be waived by the Vendor.
3.1.1The Franchisor granting a new franchise to the Purchaser and the Purchaser and the Guarantors properly executing and delivering to the Franchisor the Franchise Agreement in respect of the Business;
3.1.2The Licensor granting a licence to occupy the Premises and the Purchaser and Guarantors properly executing and delivering to the Licensor the Licence; and
3.1.3 The Purchaser paying any costs associated with:
(a)the Franchisor granting its consent to the sale of the Assets and the Business to the Purchaser and the Franchise Agreement including the Franchisor’s legal costs associated with the preparation, negotiation and execution of the Franchise Agreement;
(b)the Licensor granting its consent to the Licence to occupy the Premises to the Purchaser and the Licence including the Licensor’s legal costs associated with the preparation, negotiation and execution of the Licence; and
(c)the Lessor granting its consent to the Licensor granting the Licence to the Purchaser.
Cl 4.1The Purchaser shall pay to the Vendor in accordance with the terms of this clause:
4.1.1 the Purchase Price
Plus
4.1.2 the value of the Stock determined in accordance with clause 6
Less or plus
4.1.3 any adjustments determined in accordance with clause 5.”
12 The SBA contained detailed provisions defining the meaning of various terms within the SBA:
“‘Assets means all of the right, title and interest of the Vendor in the following assets of the Business as at the day immediately preceding the Completion Date including:
(a) the Plant & Equipment
(b)the Goodwill
(c)the Stock
(d)the Business Name
(e)the benefit (subject to the burden) of the Material Contracts, the Equipment Leases and to the extent that they are capable of assignment or novation the benefit (subject to the burden) of the Business Contracts entered into by the Vendor in the course of carrying on the Business and subsisting at the opening of business on the Completion Date
(f) services connected to the Premises
(g)licences, permits, approvals and registrations necessary for the conduct of the Business; and
(h)all other assets, properties, rights of every kind and character, whether real or personal, tangible or intangible, wherever located and whenever acquired owned by the vendor and used in connection with the Business;
but excluding the Excluded Assets.” (clause 1.1.3).”
13 “Business” means the business carried on by the Vendor prior to the completion at the Premises in accordance with and by virtue of the Franchise Agreement. (Clause 1.1.5)
14 “Completion” means the completion of the sale and purchase of the Assets and the Business in accordance with clause 11. (Clause 1.1.11)
15 “Completion Date” means 3.00pm on the day on which Completion takes place, being the date specified in Item 6 of Schedule 1. The date specified there was 28 July 2012. (Clause 1.1.12)
16 “Franchise Agreement” means the Franchisor’s then current agreement pursuant to which the Purchaser is to be granted the right and franchise to operate the Business from the Premises. (Clause 1.1.20)
17 “Franchisor” means the party described in Item 8 of Schedule 1. The party named there is Sushi Sushi Franchising Pty Ltd. (Clause 1.1.21)
18 “Lease” means the property lease entered into between the Lessor and the Vendor in respect of the Premises. (Clause 1.1.25)
19 “Lessor” means the party described in Item 9 of Schedule 1. The lessor is there defined as Knox City Shopping Centre Investments (No 2) Pty Ltd, SAS Trustee Corporation and Westfield Management Limited. (Clause 1.1.26)
20 “Licence” means a licence between the Licensor and the Purchaser pursuant to which the Purchaser is to be granted the right to occupy the Premises such licence to be in the form used by the Licensor. (Clause 1.1.28)
21 “Licensor” means the party described in Item 10 of Schedule 1. The party named there is Sushi Sushi Realty Pty Ltd. (Clause 1.1.29)
22 “Premises” means the premises from which the business is conducted, being the premises set out in Item 5 of Schedule 1, namely Shop 1046A/3117 Knox City Shopping Centre, 511 Burwood Highway, Wantirna South, Victoria. (Clause 1.1.33)
23 “Purchase price” means the total amount payable by the purchaser to the Vendor for the purchase of the assets and the business as specified in Item 7 of the Schedule 1. This provided for a deposit of $180,000 and a balance of $1.620 million. (Clause 1.1.35)
24 The “Excluded Assets” which were not the subject of the SBA comprised debtors, cash in hand, bank deposits, security camera and system and Coke fridge. (Schedule 4)
25 In July 2012, LCY and Ma entered into a management agreement (“the Management Agreement”). In the Management Agreement, LCY was identified as the majority owner and Ma as the manager. The recitals noted that Delapan Pty Ltd was the lessee of the premises and had obtained consent from the landlord to provide the premises to MCLY to occupy them by way of a franchise and licence agreement. It was noted that Ma and LCY agreed that Ma could manage the business on the terms, conditions and stipulations set out in the Management Agreement. As part of the agreement, LCY agreed to transfer its interest in the business and chattels to Ma.
26 Significant terms of the Management Agreement were as follows:
(a)LCY granted Ma, for a term of five years ending on 30 June 2017, the right to manage the business (Clause 1);
(b)In consideration for the use of chattels and the grant by LCY to Ma of the right and privilege of managing the business, Ma agreed to pay LCY a sum of $23,333.33 per month on every first day of the month from the date of commencement of the Management Agreement. Ma would also pay his own costs for operating the business and the monthly rent and outgoings for the period from July 2012 to 30 June 2017. (Clause 3)
(c)Pursuant to Clause 9 of the Agreement, Ma covenanted to do various things including maintaining the goodwill of the business, conduct the business efficiently, trade the business at particular hours, observe the terms and conditions of the lease, pay the rent and applicable outgoings. (Clause 9)
(d)Ma acknowledged he was solely responsible for the hiring and firing of employees in the business. (Clause 10)
(e)Subject to and conditional upon Ma complying fully with the terms and conditions of the Management Agreement, LCY covenanted that Ma would have access to the premises for the purposes of managing the business and that Ma would be entitled to all 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. LCY also agreed not to interfere in the manner in which Ma conducted the business. (Clause 12)
(f)LCY and Ma confirmed that, in the event that the business was sold at a price of less than $1.4 million, LCY would receive the proceeds of sale and Ma would compensate LCY for monetary loss up to the amount of $1.4 million. In the event that the business sold for a price greater than $1.4 million, LCY was entitled to receive its investment of $1.4 million and Ma was entitled to the residue.
27 Later, in about November 2012, Yu and Ma acquired another Sushi Sushi franchise on the upstairs level of the Knox City Shopping Centre. The acquisition price was $800,000. Yu contributed $700,000 and Ma contributed $100,000. LCY entered into another management agreement with Ma in respect of the upstairs franchise. They conducted this business until about late 2013 or early 2014, at which time LCY acquired Ma’s interest in the business. Thereafter, Yu, through one of his companies, took control and ran the business.
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. The reduced payments were agreed to start in January 2015.
29 I was informed at the trial that the downstairs franchise has subsequently been sold for $850,000 and that those proceeds currently sit in a trust account.
30 LCY is suing in the proceeding for the payments of $19,833.33 which were unpaid from 27 April 2015 to 27 November 2015. LCY alleges that Ma failed to make eight payments which were due in the period before the end of November 2015 when the downstairs business was sold. LCY alleges that the total debt is $158,666.64.
31 LCY says that the case is relatively simple. Ma is obliged to make the payments due under the Management Agreement.
32 Ma says that LCY is not entitled to claim the outstanding payments because LCY was never entitled to any payments in circumstances where LCY did not own the assets and business purportedly given to Ma to manage. Hence, LCY could not grant Ma the right or privilege of managing a business which it did not own.
33 In the pleadings, LCY admitted that, in respect of the downstairs business:
·Sushi Sushi Realty Pty Ltd was the tenant of the premises.
·The franchisor, Sushi Sushi Franchising Pty Ltd, granted MCLY a franchise to operate the business at the premises. Sushi Sushi Franchising Pty Ltd gave MCLY a licence to occupy the premises.
·MCLY was the owner of the business. This included the chattels referred to in paragraph 3 of the Management Agreement.
·MCLY later sold the business to Sushi Sushi Franchising Pty Ltd in 2015.
·MCLY had two shareholders, namely LCY and MYD.
34 LCY denied various issues raised in the pleadings, namely, LCY denied that:[1]
·Ma signed the Management Agreement on legal advice from Chow to the effect that LCY owned all the chattels referred to in the Management Agreement and so, in consideration of using the chattels, Ma as owner of the business, had to pay LCY.
·The alleged advice from Chow was wrong because LCY owned no chattels; LCY was not the owner of the business; MCLY was the owner of the chattels.
·Ma was neither the tenant nor a licensee of the landlord and had no legal relationship with the lessor of the premises.
[1]There appears to be some inconsistency between paragraphs in LCY’s Reply.
35 In its Reply, LCY alleged estoppel against Ma. I shall say more about this later.
36 This case was unusual in several respects. First, there was little evidence called. Yu gave some short evidence for LCY. Ma gave no evidence and, apart from tendering some documents, called no other evidence. Secondly, the parties agreed on some important facts notwithstanding the absence of evidence. In particular, the parties agreed that the payments which Ma made under the Management Agreement totalled $716,333.23 and he made no payments after 19 May 2015. Thirdly, although Ma denied that he was obliged to make any payments to LCY, he did not pursue at trial a counterclaim seeking the return of monies paid. Finally, although on one view, LCY acknowledged some problems with its claim, it made no application to amend its claim, to join other parties or to seek rectification.
37 The parties provided a joint list of the issues which they said that the court had to determine in this case. The issues were as follows:
(a)Is the Management Agreement void ab initio?
(b)Are payment obligations under the Management Agreement void by operation of the doctrine of mistake?
(c)If the Management Agreement is enforceable, is Ma estopped from avoiding the Agreement?
(d)What, if any, amount is payable by Ma to LCY?
Is the Management Agreement void ab initio?
38 Ma contends that the Management Agreement is void ab initio for total failure of consideration. This is because LCY never had legal title to that which it purported to grant Ma.
39 The position arrived at as a result of the SBA and Franchise Agreement was that Sushi Sushi Melbourne (No 2) sold to MLCY the Sushi Sushi franchise conducted by the vendor from the premises at Knox City Shopping Centre. MCLY was the purchaser. After completion, MCLY owned all the assets of the business including the plant and equipment, goodwill, stock and business name.
40 At about the same time, as a result of the Franchise Agreement, Sushi Sushi Franchising Pty Ltd entered a franchise agreement with MCLY as franchisee and Ma as the manager. Under the agreement, MCLY became the franchisee authorised to operate the franchise business from the premises at Knox City Shopping Centre and to use the image and system of the franchisor.
41 LCY was not party to either the SBA or the Franchise Agreement. There was no evidence that LCY paid any sums in relation to these agreements other than the price for its shares in MCLY.
42 As a result of the agreements made, MCLY became the franchisee and owner of the business, and the assets and chattels used in the conduct of the business. LCY led no evidence to suggest that MCLY or any of the companies in the Sushi Sushi Group had granted any rights to LCY to assert ownership of the business or any entitlement to manage, participate in, use or otherwise exploit any rights in relation to the business or its assets.
43 As a result of the legal effect of the written agreements, Ma submitted that MCLY, and not LCY, was the lawful owner and operator of the franchised business at Knox City Shopping Centre. Thus, he submitted that LCY could not, as a matter of law, purport to grant or license to him any rights in relation to property which was not its to deal with.
44 LCY relied upon the Management Agreement and in particular, Clauses 1 and 3. Pursuant to Clause 1, LCY granted to Ma for a term of five years as and from July 2012, the right of managing the business. Clause 3 was in the following terms:
“In consideration of the use of chattels and grant by the Majority Owner [LCY] to the Manager [Ma] of the said right and privilege of managing the business, the Manager shall pay to the Owner a sum of $23,333.33 (hereinafter called ‘the management fee’) of $23, 333.33 (per month) on every first day of the month on month from the date of commencement of this agreement. … . ”
45 LCY referred to various principles of interpretation or construction for commercial contracts and contended that the court should have regard to the whole of the Management Agreement to discern and give effect to the commercial intent of the parties. That intent was said to be for LCY to receive a monthly payment as the return on its investment and for Ma to have the use of the premises and to retain all profits earned by the business (after payment of outgoings). LCY argued it was an error to look only at the issue of ownership of the business and chattels and to ignore the balance of the agreement. To the extent that it was argued that LCY gave no consideration, LCY pointed to the grant of control to Ma and his exclusive entitlement to any profits.
46 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.
47 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.[2]
[2]See Baltic Shipping Company v Dillon (1993) 176 CLR 344 at 350.
48 If MCLY had licensed LCY and/or Ma to run the business and use the assets, plant and equipment and the like, then it would make sense for LCY and Ma to agree upon the division of responsibility for the day to day management of the business. However, LCY did not plead such a case, run such a case at trial or prove such a case.
49 Ma referred to various authorities relating to the factual situation as contended for by him. In David Securities Pty Ltd v Commonwealth Bank of Australia,[3] the appellants sued the respondent and others in the Federal Court alleging that they had suffered significant losses by reason of their entry into foreign exchange borrowing arrangements on the recommendation of the defendants. The claims against the bank relied upon alleged misleading conduct and representations. They alleged that the bank had breached either a contractual obligation or a common law duty to advise of the dangers inherent in foreign currency loans. The bank cross-claimed for the recovery of money due under the borrowing arrangements. The trial judge dismissed the appellants’ application but gave judgment on the cross-claim against the first two plaintiffs. An appeal to the Full Court was dismissed. The appellants’ appealed to the High Court against the successful cross-claim made by the bank.
[3](1992) 175 CLR 353.
50 The appellants successfully appealed against the order in the bank’s favour. The court held that a party paying money is prima facie entitled to recover moneys paid under a mistake if it appears that the moneys were paid in the mistaken belief that the payer was under a legal obligation to pay, or that the payee was legally entitled to the payment.
51 Mason CJ, Deane, Toohey, Gaudron and McHugh JJ said in the course of their judgment:[4]
“But we are not concerned in this case with what a hypothetical, experienced commercial person believed he or she was contracting for; in order to decide whether the appellants in this case have received consideration for payment of the additional moneys, we must ask what these particular appellants, in all the circumstances, thought they were receiving as consideration. In this context, consideration means the matter considered in forming the decision to do the act, ‘the state of affairs contemplated as the basis or reason for the payment’. And, as we have stated, the ‘state of affairs’ existing in the appellants' minds was that the withholding tax was their liability.
So, in the context of failure of consideration, the failure is judged from the perspective of the payer. …
On the other hand, there has been an insistence that the failure of consideration be total. The law has traditionally not allowed recovery of money if the person who made the payment has received any part of the "benefit" provided for in the contract. However, as the passage already quoted from Rover International Ltd[5] demonstrates, the notion of total failure of consideration now looks to the benefit bargained for by the plaintiff rather than any benefit which might have been received in fact. Thus, in Rowland v Divall,[6] the plaintiff succeeded in an action for repayment of the purchase price of a car he had bought from the defendant, unaware that the car had been stolen before it came into the defendant’s possession. The defendant resisted the claim with the argument that the plaintiff could not prove total failure of consideration because he had used the car for several months. The Court of Appeal, however, dismissed this argument on the ground that the plaintiff had not received ‘any part of that which he contracted to receive - namely, the property and right to possession’".
[4](1992) 175 CLR 353, 382.
[5][1989] 1 WLR 912, 923.
[6][1923] 2KB 500.
52 Mason CJ, with whom Toohey J agreed, made the same point in Baltic Shipping Company v Dillon,[7] where he said:
“Even if the buyer has had the use and enjoyment of chattels or goods purportedly supplied under the contract for a limited time, the use and enjoyment of the chattels or goods has been held not to amount to the receipt of part of the contractual consideration. Where the buyer is entitled under the contract to good title and lawful possession but receives only unlawful possession, he or she does not receive any part of what he or she bargained for. And thus, it is held, there is a total failure of consideration. As this Court stated in David Securities Pty Ltd v Commonwealth Bank of Australia: ‘the notion of total failure of consideration now looks to the benefit bargained for by the plaintiff rather than any benefit which might have been received in fact’”.
[7](1993) 176 CLR 344, 351.
53 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.
54 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. As counsel for Ma acknowledged during the trial, normally a case of this kind would involve someone making a counterclaim seeking restitution of monies paid under the Management Agreement which failed for want of consideration. But this is not that case because Ma has made no counterclaim and does not seek to recover from LCY the monies, in excess of $700,000, which he paid to LCY in the period between about August 2012 and May 2015. Ma seeks only to avoid the obligation to pay the balance of monies said by LCY to be outstanding under the Management Agreement.
Are payment obligations under the Management Agreement void by operation of the doctrine of mistake?
55 Ma raised the issue of mistake in paragraph 9 of his Defence dated 18 January 2016. LCY’s Reply dated 26 May 2016 did not make any plea directly responsive to the mistake allegation.
56 In his written final submissions, counsel for Ma contended that the Management Agreement was void ab initio for common or mutual mistake. These are two different forms of mistake. Common mistake denotes a situation in which both parties make the same mistake when entering into a contract. The term can also extend to fundamental misconceptions which go to the root of the contract. The term is to be distinguished from mutual mistake which relates to a situation in which both parties to the contract make a mistake, but in each case it is a different mistake.[8]
[8]See Hawcroft v Hawcroft General Trading Co Pty Ltd [2016] NSWSC 555 at [14].
57 Ma argued that the mistake in this case was obvious or self-evident. He contended that each party believed that LCY and/or Ma had title to the business and its assets and that I could infer that there was a common or mutual mistake.
58 In his final submissions, counsel for LCY did not seek to address or meet the mistake argument propounded by Ma.
59 My concern with Ma’s argument is the limited evidence available to the court. In his evidence, Yu, on behalf of LCY, did not disclose a detailed knowledge of the details of the contract. He did not speak or read English and was wholly dependent upon his solicitor with respect to the implementation of the transaction. Yu simply signed where and when his solicitor told him to and he gave no evidence as to any mistake which affected his approach to, or understanding of, the transaction. Ma gave no oral evidence.
60 In the circumstances, how is the court to know precisely what the position was with the state of mind of the two parties and whether they intended to sign the Management Agreement on the basis of any and what mistake?
61 I accept that it is possible that they both made the same mistake and believed erroneously that LCY and Ma owned and controlled the business and were entitled to divide the profits as they saw fit. However, there are other possible explanations for their conduct. In particular, I do not accept Ma’s submission that the only inference which the court can draw from the evidence is that Ma entered into the Management Agreement on the mistaken assumption that LCY was entitled to let him manage the business and use its chattels.
62 In the absence of better evidence, I am not prepared to find that the payment obligations under the Management Agreement are void due to the effect of mistake upon that agreement.
If the Management Agreement is enforceable, is Ma estopped from avoiding the Agreement?
63 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.[9] Under the Constitution, an E class shareholder is also entitled in a winding up to repayment of the paid issue price for the shares.
[9]The alleged entitlement itself is, in my view, not made out.
64 LCY pleaded its estoppel argument in paragraph 8 of its Reply as follows:
“It 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 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 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 of 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; (sic)
(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 not 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 of 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”.
65 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.
66 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.
67 In the written closing submissions, LCY quoted from the judgment of Dixon J in Thompson v Palmer[10] 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:[11]
“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.”
[10](1933) 49 CLR 507, 547.
[11]Ken Handley, Estoppel by Conduct and Election (Sweet & Maxwell, 2nd ed, 2016) at [1-001].
68 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:[12]
[12]Ken Handley, Estoppel by Conduct and Election (Sweet & Maxwell, 2nd ed, 2016) at [1-006].
(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.
69 An estoppel by representation resolves a contradiction between an earlier statement of fact by the representor and his latest statement by treating the earlier as the truth. Thus, an estoppel by representation prevents proof of the truth. As put by Handley:[13]
“(A)ny statement which affirms, denies, describes or otherwise relates to what is or is said to be an existing or past fact, positive or negative, is in law a representation. An event which did not occur, but is assumed to have done so, is an existing fact for this purpose”.
[13]Ibid at [2-003].
70 Viewed from this perspective, LCY has failed to establish its estoppel case.
71 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.
72 Secondly, LCY did not prove that Ma communicated any alleged representation to it or that LCY relied upon such representation to alter its position.
73 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.
74 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.
75 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.
76 In summary, I am not satisfied that LCY pleaded and proved to the requisite degree a case of estoppel against Ma.
Conventional Estoppel
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)[14] where he said:[15]
“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.”[16]
[14][1998] AC 878.
[15][1998] AC 878 at 913.
[16]This statement of principle spoke in terms similar to those used by the Court of Appeal in K Lokumal & Sons London Ltd v Lotte Shopping Company Pte Ltd [1985] 2 Lloyd’s Rep 28, 34-5 per Kerr LJ.
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.[17] Nor is it enough for parties to understand a common assumption in the same way. It must be expressly shared between them.[18]
[17]Ryan v Moore [2005] 2 SCR 53, 85.
[18]Commissioners for Revenue and Customs v Bencholder Ltd [2010] 1 All ER 174 at [52].
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.
What, if any, amount is payable by Ma to LCY?
84 In view of the matters addressed above, I find that Ma is not obliged to pay any amount to LCY.
Conclusion
85 In the circumstances, I find that LCY has not discharged its burden to prove its case on the balance of probabilities and I accordingly dismiss the case. I will hear the parties on the questions of final orders and costs.
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