Liang v Chen
[2020] VSC 106
•10 March 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST
S ECI 2018 00147
| JIE LIANG | Plaintiff |
| v | |
| LEO CHEN | First Defendant |
| PIIMAX GROUP PTY LTD (ACN 616 711 454) | Second Defendant |
| - and - | |
| LEO CHEN | First Plaintiff by Counterclaim |
| PIIMAX GROUP PTY LTD (ACN 616 711 454) | Second Plaintiff by Counterclaim |
| V | |
| JIE LIANG | First Defendant by Counterclaim |
| LIYAN CHEN | Second Defendant by Counterclaim |
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JUDGE: | LYONS J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 25 November 2019 |
DATE OF JUDGMENT: | 10 March 2020 |
CASE MAY BE CITED AS: | Liang v Chen |
MEDIUM NEUTRAL CITATION: | [2020] VSC 106 |
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MISLEADING OR DECEPTIVE CONDUCT – Whether first defendant borrower engaged in misleading or deceptive conduct in entering into loan agreement with plaintiff lender for purchase and development of land – Where nomination of first defendant’s alter ego company under contract of sale not disclosed to plaintiff – Whether alter ego company involved in misleading or deceptive conduct – involvement established.
EQUITY – Trusts – Breach of trust – Knowing receipt - Knowing assistance – Whether funds advanced pursuant to loan agreement held on trust – Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 – No mutual intention that funds advanced be used for exclusive and specific purpose and not form asset of defendant borrower.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Black | Wisewould Mahony |
| For the Defendants | No appearance |
HIS HONOUR:
Introduction
This proceeding relates to a loan of $1.5 million advanced to the first defendant, Leo Chen, in May 2017. The loan was made pursuant to an undated agreement entered into on or about 6 May 2017 between the plaintiff and Liyan Chen (no relation) as ‘Lenders’ and Mr Chen as ‘Borrower’. The recitals to the agreement recorded, among other things, that:
(1)Mr Chen intended to acquire the land known as 1043 Toorak Road, Camberwell (the ‘Land’) and develop three dwellings on it; and
(2)the loan was only to be used to pay for the acquisition of the Land and construction of the dwellings, as well as incidental and associated costs.
The recitals also provided that the plaintiff would contribute $1.48 million and Liyan Chen would contribute $20,000 (together, the ‘Principal’). The agreement provided that:
(1)the Principal was to be repaid by 1 June 2018 together with interest to that date, calculated as a ‘Fixed Return Amount’ lump sum of $225,000, of which $222,000 was payable to the plaintiff; and
(2)interest accrued thereafter on any outstanding Principal and Fixed Return Amount at the rate of 15% per annum.
The Principal was advanced on 9 May 2017. However, the Principal was used to purchase the Land by the second defendant, PIIMAX Pty Ltd (‘PIIMAX’) of which Mr Chen at all relevant times was the sole shareholder, director and secretary. In fact, Mr Chen nominated PIIMAX as the purchaser of the Land on 3 February 2017 (the ‘Nomination’).
The plaintiff alleges that she was unaware of the role of PIIMAX in the purchase and development of the Land. She alleges that, at all relevant times, Mr Chen informed her and she believed that Mr Chen as the Borrower under the agreement would purchase and develop the Land and that she agreed to advance the Principal on that basis.
Neither the Principal nor any interest has been repaid. As a result, the plaintiff brings a number of claims in this proceeding against Mr Chen and PIIMAX arising from or relating to the agreement. Relevantly, she alleges as against Mr Chen that:
(1)it was term of the agreement that Mr Chen would not transfer his interest in the Land prior to construction of the dwellings and, in breach of the agreement, pursuant to the Nomination, PIIMAX became the registered proprietor of the Land; and
(2)Mr Chen engaged in misleading or deceptive conduct in contravention of s 18 of the Australian Consumer Law (the ‘ACL’) by representing to Liang that he would personally purchase the Land (in light of the Nomination) and/or failing to inform Liang prior to her entry into the agreement that he had nominated PIIMAX to be the registered proprietor of the Land.
The plaintiff also alleges that there was a trust to the effect that Mr Chen held the Principal to purchase and develop the Land in Mr Chen’s name on trust for that purpose. In breach of trust, Mr Chen applied the Principal to purchase and develop the Land in PIIMAX’s name.
For all these breaches the plaintiff seeks a total of $1,702,000 (being that part of the Principal she advanced, namely $1,480,000, and that part of the Fixed Return Amount to which she is entitled under the agreement, namely $222,000, to 1 June 2018) and interest on that total at the rate of 15% per annum from 1 June 2018 under the agreement.
The plaintiff also brings two claims against PIIMAX. It is these claims that are now pursued given that Mr Chen is bankrupt.
First, she alleges that PIIMAX was involved in Mr Chen’s contravention of the ACL.
Second, she alleges PIIMAX knowingly assisted in Mr Chen’s breach of trust or received the Principal knowing it had been advance on trust for Mr Chen to purchase the Land and develop it in his own name.
The two claims against PIIMAX are based on the fact that:
(1)Mr Chen was the sole shareholder, director and secretary of PIIMAX and that Mr Chen’s knowledge can be attributed to PIIMAX;
(2) PIIMAX accepted the Nomination prior to the time the agreement was entered into; and
(3)the plaintiff was not informed by Mr Chen about PIIMAX or that it had been nominated as the purchaser of the Land and/or was the borrower of the funds.
For the reasons that follow, I have concluded that:
(1)in contravention of s 18 of the ACL, Mr Chen engaged in misleading or deceptive conduct by representing to the plaintiff that he would personally purchase the Land and/or failing to inform the plaintiff prior to her entry into the agreement of the Nomination of PIIMAX as the purchaser of the Land;
(2) PIIMAX was involved in that contravention;
(3)because of that contravention, the plaintiff has suffered loss and damage; and
(4)the plaintiff is entitled to damages against PIIMAX in the sum of $1,480,000 together with interest under s 60 of the Supreme Court Act1986 (the ‘SCA’).
However I have concluded that the plaintiff has not established that the Principal was trust money of the kind recognised in Barclays Bank Ltd v Quistclose Investments Ltd (‘Quistclose’).[1] As a result, the plaintiff has not established that PIIMAX knowingly assisted in the alleged breach of trust by Mr Chen or received the Principal knowing it had been advanced on trust for Mr Chen to purchase and develop the Land in his name.
[1]Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (‘Quistclose’).
The Facts
The defendants were represented during part of the proceeding. They filed a defence and counterclaim dated 31 August 2018 (the ‘defence’). Their solicitors filed a notice of ceasing to act on 26 October 2018. On 30 November 2018, I ordered that the evidence at the trial of the proceeding be by affidavit.
Mr Chen was declared bankrupt on 18 February 2019. As a result, the plaintiff now only pursues her claims against PIIMAX. An amended statement of claim was filed on 29 October 2019. PIIMAX was served with the amended statement of claim and given notice of the trial at the address provided in the notice of ceasing to act. Mr Chen was aware of the trial. Despite being called, PIIMAX did not appear at trial.
At trial, the plaintiff relied upon the affidavits of Wai Chong Gilli Chan sworn 25 June 2018 and 30 October 2019 and of the plaintiff affirmed 8 February 2019. Counsel for the plaintiff also led supplementary oral evidence from the plaintiff. He also relied upon admissions in the defendants’ defence.
The plaintiff entered into the agreement on 6 May 2017. The agreement is admitted in the defence. The defence also admits that, prior to entering into the agreement:
(1)on 9 June 2016, Mr Chen entered to into a contract of sale to purchase the Land for $2,450,000;[2]
(2)on 3 February 2017, Mr Chen nominated PIIMAX as purchaser under the contract of sale; [3] and
(3) on 3 February 2017, PIIMAX as purchaser signed a transfer from the vendors of the Land.[4]
[2]Defence and counterclaim dated 31 August 2018 (the ‘defence’) [8(b)].
[3]Defence (n 2) [9(b)].
[4]Defence (n 2) [9(c)].
As noted above, the agreement was between the plaintiff and Liyan Chen, together defined as the ‘Lender’, and Mr Chen as the ‘Borrower’. I note that the agreement does not appear to have been drafted by a lawyer: many of its terms appear unclear.
Notwithstanding Mr Chen’s nomination of PIIMAX as purchaser and that PIIMAX signed a transfer from the vendors of the Land on 3 February 2017, there is no mention of PIIMAX or any company associated with Mr Chen in the agreement.
Recital A of the agreement records that the Lender agreed to enter into the agreement at the request of the Borrower. Recital B records that the purpose of the agreement was to create a loan facility to the Borrower up to a maximum aggregate principal of $1,500,000.
Recitals C to G are as follows:
C.The Borrower intends to acquire land known as 1043 Toorak Road, Camberwell, Victoria (“the Land”).
D.The Borrower intends to develop the Land by constructing three dwellings.
E.The Lender Liang agrees to contribute the amount of $1,480,000 and the Lender Chen agrees to contribute the amount of $20,000 towards the Principal Sum.
F.The loan facility can only be used to pay for of [sic] acquisition of the Land and cost of construction of three dwellings on the Land as well as all incidental and associated costs.
G.The Lender and the Borrower have agreed to enter into this agreement to set out the terms and conditions on which the loan facility will be available to the Borrower.
Clause 3 provides in substance that, if the Borrower does not proceed with the purchase of the Land, then the agreement will come to an end.
Clause 5 provides in substance that the Borrower may at any time request an advance be provided to, or at the direction of, the Borrower for:
(1) on the first request, an amount equal to the deposit;
(2)on the second request, an amount equal to the balance of the purchase price plus fees and expenses associated with the acquisition;
(3)on further requests, costs associated with the planning phase of the proposed development.
Clauses 9 and 10 provide in substance that:
(1)the Borrower shall repay the Principal by 1 June 2018 together with the Fixed Return Amount of $225,000 (with $222,000 to be paid to the plaintiff and $3,000 to Ms Chen); and
(2)if the Principal and Fixed Return Amount were not repaid by the due date, interest shall accrue on the sum outstanding at a rate of 15% per annum.
Significantly, there was no security provided for the Principal under the agreement at the time of payment. However cl 11 provided that if the Borrower failed to pay either the Principal or the Fixed Return Amount by the due date, the Borrower agreed that the Lender may register a caveat over the Land.
There are other clauses of the agreement which are not presently relevant.
The circumstances leading up to the agreement are not set out in detail in the plaintiff’s affidavit or oral evidence. In summary, she deposed that:
(1)prior to entering into the agreement the plaintiff had a number of discussions with Mr Chen;
(2)at all times Mr Chen informed the plaintiff that he was purchasing and developing the Land in his own name;
(3)prior to entering into the agreement or advancing the Principal on 9 May 2017, Mr Chen never mentioned he had or intended to incorporate a company to become the owner of the Land or carry out the development; and
(4)prior to entering into the agreement or advancing the Principal on 9 May 2017, she had never heard of PIIMAX or been told it would purchase and/or develop the Land.
The plaintiff advanced the Principal (including the $20,000 from Ms Chen) on 9 May 2017 to bank accounts nominated by Mr Chen. The circumstances in which the Principal was advanced are not entirely clear on the evidence before me. Mr Chen provided a receipt to the plaintiff for the Principal. The receipt recorded, consistent with the agreement, that the Borrower was ‘Leo Chen’. However, the receipt was issued on the letterhead of PIIMAX. I note that the receipt was signed by Mr Chen and dated ‘16/8’, presumably 16 August 2017. The plaintiff did not give evidence on when she obtained the receipt or the circumstances in which she obtained it. She gave oral evidence that when she received the receipt it was the first time she had heard of PIIMAX. However, she did not give evidence about her reaction on receiving this receipt on PIIMAX’s letterhead.
I note that in the defence the defendants admit that:
(1) PIIMAX completed the purchase of the Land on 19 June 2017;[5] and
(2) the Principal advanced under the agreement was used by PIIMAX to complete the purchase of the Land and other costs relating to the development of the Land.[6]
[5]Defence (n 2) [9(d)].
[6]Defence (n 2) [9(e)].
There is a transfer of the Land to PIIMAX signed by the vendor and PIIMAX dated 19 June 2017 in evidence. I assume this document was the transfer signed on 3 February 2017, referred to in [17(3)] above. However, it appears from the title search of the Land that PIIMAX did not become the registered proprietor until 24 October 2017. It also appears from the title search that a mortgage in favour of Capital Securities XVII Pty Ltd (‘Capital’) was also registered over the Land on 24 October 2017. In the defence, the defendants admit these events[7] and that an initial advance from Capital of $1,500,000 on 19 June 2017.[8]
[7]Defence (n 2) [9(f), (g)].
[8]Defence (n 2) [9(e)].
The plaintiff said that the next time she heard about PIIMAX was when she sought assistance from lawyers in October to November 2017. At that time, she was informed that PIIMAX was the registered proprietor of the Land.
After that time, the plaintiff’s solicitors wrote to the solicitors for Mr Chen and PIIMAX. By email dated 10 October 2017, the plaintiff’s solicitors noted that the transfer to PIIMAX was contrary to the agreement which provided for the purchase to be made by Mr Chen. They sought details of how the Principal had been spent. The solicitors for Mr Chen and PIIMAX replied on 13 October 2017 providing a schedule detailing that the Principal had been used for the purchase of the Land and associated costs. This is consistent with their defence where the defendants admit PIIMAX used the Principal to pay for the Land and for costs associated with its purchase and development.
By letter dated 30 October 2017, the solicitors for the plaintiff asserted that Mr Chen had repudiated the agreement and sought repayment of the Principal and Fixed Return Amount. Those sums were not paid. By letter dated 22 December 2017, the plaintiff’s solicitors purported to terminate the agreement for breach of cl 3.
As noted above, the title search of the Land records that Capital had a registered first mortgage over the Land. The Land was sold by Capital for less than the amount owing to it under a Deed of Settlement and Release to which the plaintiff was a party. The mortgage was discharged for the amount received on the sale of the Land. As a result, the plaintiff has not recovered any of the Principal, the Fixed Return Amount or interest otherwise payable under the agreement and Mr Chen is now bankrupt.
In her affidavit, the plaintiff deposed that there was no mention by Mr Chen of his nomination of PIIMAX as substitute purchaser prior to the agreement or advancing the Principal and that she would not have lent funds to a recently incorporated company with no assets. She also said that she relied upon statements made by Mr Chen that he would be purchasing and developing the Land and that had Mr Chen said some other entity would be the purchaser or developer she would not have entered into the agreement.
In oral evidence, when asked if she would have entered into the agreement if she had known that the Land would be registered in the name of PIIMAX, she replied:
Probably not, because when I agreed to give him the money, I didn’t know about this company. Because if - if he was borrowing the money in the name of the company, then we would be negotiating different terms.[9]
[9]Transcript of Proceeding, Liang v Chen (Supreme Court of Victoria, S ECI 2018 00147, Lyons J, 25 November 2019) (‘Transcript’) 18:3–7.
The plaintiff did not give evidence about what those terms would have been or whether they would have been agreed to by Mr Chen or PIIMAX.
In their defence, the defendants denied many of the allegations and pleaded that the plaintiff was informed by Mr Chen about PIIMAX. They also alleged a breach of the agreement by the plaintiff by lodging a caveat over the property in breach of cl 15. Damages for that breach were sought in their counterclaim. Further, in their counterclaim, the defendants sought rectification of the agreement to substitute PIIMAX as ‘the Borrower’ in lieu of Mr Chen. This claim was premised on the basis that the plaintiff had been informed about the role of PIIMAX.
As noted above, the defendants did not appear at trial. There are two things to note about this. First, Mr Chen filed an affidavit in this proceeding in opposition to an application for an interlocutory injunction. In that affidavit, he disputed many of the facts alleged by the plaintiff, consistent with his defence. However, as the defendants did not appear or rely upon this affidavit at trial, I have not had regard to it. This is because it did not form part of the evidence at trial.
Second, consistent with the approach adopted in Banque Commerciale SA v Akhill Holdings Ltd[10] in relation to undefended proceedings, I have reviewed the defence to determine whether it gives rise to any legal defences which do not depend upon facts to be proved by the defendants. On my review of the defence, no such defences arise.
[10](1990) 169 CLR 279.
Misleading or Deceptive Conduct Claim
As noted above, the plaintiff claims that:
(1)Mr Chen engaged in misleading or deceptive conduct in contravention of s 18 of the ACL by representing to the plaintiff that he would personally purchase and develop the Land and/or failing to inform the plaintiff prior to her entry into the agreement that he had nominated PIIMAX as the purchase of the Land.
(2)the plaintiff suffered loss and damage as a result of the contravention, being the portion of the Principal she advanced to Chen, the Fixed Return Amount and interest thereon;
(3)PIIMAX was involved in the contravention by virtue of the fact that Mr Chen was the sole director, secretary and shareholder of PIIMAX, its acceptance of the Nomination, its receipt of the Loan Funds and it taking a transfer of the Land; and
(4)because of PIIMAX’s involvement, the plaintiff is entitled to recover her loss and damage from it under s 237 of the ACL.
Misleading or Deceptive Conduct by Chen
In order to establish a contravention of s 18 of the ACL, it is necessary to establish that:
(1) a person has engaged in conduct;
(2) the conduct was in trade or commerce; and
(3) the conduct was misleading or deceptive, or likely to mislead or deceive.
Conduct is misleading or deceptive, or likely to mislead or deceive, if it has a tendency to lead into error.[11]
[11]Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640, 651–2 [39]. See also Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, 319 [25].
It is clear that positive representations can constitute conduct that can be misleading or deceptive. However liability under s 18 is not limited to positive statements. The question is whether, in light of all the relevant circumstances, including acts, omissions, statements or silence, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive.[12]
[12]See, eg, Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31, 32 (Black CJ).
In Miller and Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd, French CJ and Kiefel J said:
In commercial dealings between individuals or individual entities, characterisation of conduct will be undertaken by reference to its circumstances and context. Silence may be a circumstance to be considered.[13]
[13](2010) 241 CLR 357 (‘Miller’) [20]–[21] (citations omitted).
In Australian Securities and Investments Commission v ActiveSuper Pty Ltd (in liq), White J cited Miller and said in relation to representations by omission:
I take the applicable principles to be as follows:
(1)Conduct involving silence or omission may, in some circumstances, constitute misleading or deceptive conduct;
(2)In considering whether conduct is misleading or deceptive, silence is to be assessed as a circumstance like any other;
(3)Mere silence without more is unlikely to constitute misleading or deceptive conduct. However, remaining silent will be misleading or deceptive if the circumstances are such as to give rise to a reasonable expectation that if some relevant fact does exist, it will be disclosed;
(4)A reasonable expectation that a fact, if it exists, will be disclosed will arise when either the law or equity imposes a duty of disclosure, but is not limited to those circumstances. It is not possible to be definitive of all the circumstances in which a reasonable expectation of disclosure may arise but they may include circumstances in which a statement conveying a half‑truth only is made, circumstances in which the representor has undertaken a duty to advise, circumstances in which a representation with continuing effect, although correct at the time it was made, has subsequently become incorrect, and circumstances in which the representor has made an implied representation;
(5)In considering whether a party engaged in commercial dealing may have a reasonable expectation that a fact, if it exists, will be disclosed, it is appropriate to keep in mind that it will often be the case in such dealings that one party has more knowledge about a relevant matter than the other and yet will not, in accordance with ordinary commercial expectations, be guilty of misleading or deceptive conduct in failing to make that knowledge known to the other.
Ultimately, the determination of whether a failure to disclose a matter is misleading or deceptive requires examination of all the circumstances. If, in the circumstances assessed objectively, the representees would have been entitled to expect or infer (that is, have a reasonable expectation) that particular matters would be disclosed and they were not, the representor may have engaged in misleading or deceptive conduct.[14]
[14]Australian Securities and Investments Commissions v ActiveSuper Pty Ltd (in liq) [2015] FCA 13 [388]–[389] (citations omitted).
In the present case, the plaintiff has given evidence of statements of Mr Chen, made prior to the agreement being entered into and the Principal being advanced, that Mr Chen would purchase and develop the Land in his own name. She has also given evidence that, prior to entering into the agreement and advancing the Principal, Mr Chen did not tell her about PIIMAX, its nomination by him as substitute purchaser, or that he had or intended to incorporate a company to become the owner of and develop the Land. I accept that evidence.
It is important to note that these acts and omissions took place notwithstanding that on 3 February 2017 PIIMAX had been nominated as the purchaser of the Land by Mr Chen and that PIIMAX had signed a transfer from the vendors of the Land.
Counsel for the plaintiff submitted that in the circumstances of the transaction, where the funds to be advanced pursuant to the agreement were to be utilised for the purchase of the Land, there was an obligation on Mr Chen, in all the circumstances, to disclose the Nomination of PIIMAX to replace Mr Chen as the registered proprietor of the Land.[15]
[15]Transcript (n 9) 10:27–31.
In the alternative, counsel for the plaintiff submitted that by entering into the transaction in the way that he did, Mr Chen represented to the plaintiff that he would be the borrower and the registered proprietor of the Land. He submitted that at the time the representation was made, Mr Chen knew of the existence of the Nomination of PIIMAX to be the registered proprietor (in place of Mr Chen) and knew that Mr Chen would not be the Borrower or registered proprietor of the Land.[16]
[16]Transcript (n 9) 11:2–10.
I am satisfied based on the evidence before me that the positive statements and omissions of Mr Chen relied upon by the plaintiff:
(1) constitute ‘conduct’ for the purposes of s 18 of the ACL; and
(2) were made in trade and commerce, namely in course of Mr Chen obtaining finance for the purpose of buying and developing property as part of his business;
I am satisfied that Mr Chen, expressly and by his conduct in the circumstances of the entry into the agreement between the plaintiff and Mr Chen (including his failure to inform the plaintiff of the existence of PIIMAX and that it had been nominated by him to be the registered proprietor of the Land), represented to the plaintiff that he would be the borrower and the registered proprietor of the Land. The representation was false and misleading or deceptive because, at the time it was made, Mr Chen, having nominated and accepted the Nomination of PIIMAX as the registered proprietor of the Land, knew of the existence of the Nomination of PIIMAX and knew that he would not become the registered proprietor of the Land.
I am also satisfied based on the evidence before me that the circumstances of the entry into the agreement between the plaintiff and Mr Chen gave rise to a reasonable expectation that, if PIIMAX had been nominated by Mr Chen to be the registered proprietor of the Land and had signed a transfer of the Land, that fact would have been disclosed to the plaintiff. This is because Mr Chen knew that the plaintiff was entering into an agreement to advance a large sum of money to him to purchase and develop the Land: the identity of parties to such an agreement is of commercial significance. Mr Chen was aware that the Nomination of PIIMAX had taken place when the agreement was being negotiated. His failure to inform the plaintiff of the existence of this fact was in all the circumstances misleading or deceptive.[17]
[17]See, eg, Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97, 114.
Causation, Reliance, Loss and Damage
Section 236(1)(a) of the ACL relevantly requires that a person ‘suffers loss or damage because of the conduct of another’ in contravention of the provisions of Chapter 2 or 3 (which includes s 18).
Causation of loss under s 236 of the ACL is a ‘common sense question of fact’ to be determined by reference to common sense and experience.[18] A number of courts have adopted a two-stage process in determining causation: first, whether the error induced by the misleading conduct resulted in particular acts being done or refrained from being done and second, a sufficiently of the link between the loss and damage sought to be recovered and the plaintiff’s reliance upon the defendants misleading conduct.[19] However, there is often an overlap between these two stages.
[18]See, eg, Lord Buddha Pty Ltd (in liq) v Harpur (2013) 41 VR 149, 202 [189]–[191] (Vickery AJA; Weinberg and Tate JJA agreeing); March v Stramare (E & MH) Pty Ltd (1991) 171 CLR 506.
[19]Australian Protective Electronics Pty Ltd v Pabflow Pty Ltd (1996) ATPR 41–524 at 42, 736 (Parker J; Kennedy and Murray JJ agreeing); Stone v Chappel (2017) 128 SASR 165.
Several important principles governing issues of causation and loss or damage under the precursor provisions to s 236 of the ACL were set out by the Court of Appeal in Protec Pacific Pty Ltd v Steuler Services GmbH & Co KG; BHP Billiton Olympic Dam Corporation Pty Ltd v Steuler Services GmbH & Co KG.[20]Those principles have continuing relevance under s 236 of the ACL. Relevantly, they include:
[20]Protec Pacific Pty Ltd v Steuler Services GmbH & Co KG; BHP Billiton Olympic Dam Corporation Pty Ltd v Steuler Services GmbH & Co KG [2014] VSCA 338 [540] (‘Protec’).
(1) there must be a sufficient causal link or connection between the loss or damage and conduct done in contravention of the Act;[21]
[21]Protec (n 20) [540(4)].
(2) determining questions of causation ‘will often involve considering how much worse off the plaintiff is as a result of entering into the transaction which the representation induced’;[22]
[22]Protec (n 20) [540(5)].
(3) in determining whether a plaintiff has suffered loss or damage it is ‘usually necessary’ to compare the position the plaintiff is in by reason of the contravention with the position the plaintiff would have been in but for the contravention: i.e. whether the plaintiff is worse off as a result of relying upon the misrepresentation;[23]
(4) the ‘but for’ test is not an exclusive test of causation;[24]
(5) once the causal connection is established, there is nothing that suggests that the amount that may be recovered should be limited by drawing some analogy with the law of contract, tort or equitable remedies.[25]
[23]Protec (n 20) [540(3)].
[24]Protec (n 20) [530(6)].
[25]Protec (n 20) [540(11)].
I would add three additional comments. First, the ‘but for’ test remains a potentially helpful aid but not an exclusive test of causation.[26] Second, common law damages principles may provide assistance in determining damages under s 236 of the ACL, in particular principles relevant to awarding damages for deceit.[27] Third, there is no strict requirement to prove a ‘no transaction’ or ‘alternative transaction’ case: what is necessary to prove is that in reliance on the contravention, the plaintiff acted in a particular way and then to prove the quantum of the loss.[28]
[26]See, eg, March v Stramare (n 18), 515–6 (Mason CJ), 522 (Deane J), 524 (Toohey J).
[27]Marks v GIO Australia Holdings Ltd (1998) 196 CLR 495 [41].
[28]Cummins Generator Technologies Germany GmbH v Johnson Controls Australia Pty Ltd (2015) 326 ALR 556 [133] (Beazley P; Gleeson and Leeming JJA agreeing).
In light of these principles, I will consider the evidence.
I have considered the evidence of the plaintiff as to reliance and causation. As noted above, in her affidavit, the plaintiff deposed that she relied upon statements made by Mr Chen that he would be purchasing and developing the land and had Mr Chen said some other entity was going to be the purchaser or developer she would not have entered into the agreement. Further, she said that she would not have lent funds under the agreement to a recently incorporated company with no assets.
Her oral evidence was less conclusive. When asked if she would have entered into the agreement had she known of the role of PIIMAX she said ‘probably not’. She then said that if she knew Mr Chen was borrowing the money in the name of the company ‘then we would be negotiating different terms’.
I have considered whether, based on all her evidence, the plaintiff has established, on the balance of probabilities, the necessary reliance and causation for the purposes of a claim for damages under s 236 of the ACL.
I am satisfied that the plaintiff relied on the misleading or deceptive conduct of Mr Chen in entering to the agreement and advancing the Principal. Further, I am satisfied that there sufficient link between the loss sought to be recovered, in particular her share of the Principal, and the plaintiff’s reliance upon Mr Chen’s contravention.
This is because, based on all her evidence, it is more likely than not that the plaintiff would not have entered into the agreement and advanced the Principal had she known that the Land was going to be registered in the name of PIIMAX. It may be that if she had known about the existence of that company, she may have negotiated an agreement with that company with different terms. However, the plaintiff’s oral evidence that she would have been negotiating different terms if she knew of the role of PIIMAX confirms that the plaintiff would have acted differently had the contravention not occurred. What is clear is that she would not have entered into this agreement and advanced the Principal had the contravention not occurred and she had known the truth.
The question then turns to the damages to which the plaintiff is entitled. Section 236 of the ACL requires the Court to determine a measure of damages that conforms to the remedial purpose of the ACL and to the justice and equity of the case. In Henville v Walker, McHugh J stated:
The purposes of the Act include promoting fair trading and protecting consumers from contraventions of the Act. Those purposes are more readily achieved by ensuring that consumers recover the actual losses they have suffered as the result of contraventions of the Act. Where a person contravenes the Act and induces a person to enter upon a course of conduct that results in loss or damage, an award of damages that compensates for the actual losses incurred in embarking on that course of conduct best serves the purposes of the Act and should ordinarily be awarded.[29]
[29]Henville v Walker (2001) 206 CLR 459 [135].
I will determine the damages that may be awarded to the plaintiff under s 236 of the ACL in accordance with this principle and those set out in [56(3)], [56(5)] and [57] above.
Counsel for the plaintiff asserted that, in addition to her share of the Principal which has not been recovered, the plaintiff’s loss was also the Fixed Return Amount and the interest otherwise payable on those amounts determined in accordance with the terms of the agreement. There was no real analysis of the assertion that the plaintiff was entitled to the Fixed Return Amount or interest otherwise payable in accordance with the agreement in the written or oral submissions of counsel for the plaintiff.
The plaintiff’s closing written submissions appear to suggest that her claim to damages for these amounts is put on the basis that the plaintiff could have advanced the funds elsewhere:
The Plaintiff could have advanced the Loan Funds elsewhere and the amounts payable under the Loan Agreement are a reasonable assessment of the damage caused by Chen’s misleading and deceptive conduct in accordance with the remedial purpose of the ACL.[30]
[30]Defence (n 2) [8].
As noted above, I have concluded, based on the plaintiff’s evidence, that the plaintiff would not have entered into the agreement and not advanced the Principal had the contravention not taken place. As is evident from my findings, I accept that the loss of the funds which the plaintiff advanced as part of the Principal and which she has not been able to recover is a loss suffered by the plaintiff as a result of the contravention.
It is then necessary to consider the plaintiff’s submission that the amounts payable under the agreement, in addition to the Principal, namely the Fixed Return Amount and interest otherwise payable, are a ‘reasonable assessment of the damage’ caused by Mr Chen’s misleading and deceptive conduct. The Fixed Return Amount is 15% of the Principal and represents an approximately 15% per annum rate of return on the Principal given repayment was due on 1 June 2018. Of course, 15% per annum is the rate of interest that applies under the agreement on any outstanding part of the Principal or Fixed Return Amount after the due date for repayment on 1 June 2018.
I have no evidence before me that this rate of return (in substance, 15% interest per annum) is a ‘reasonable’ rate of return which the plaintiff would have obtained had she not entered into the agreement and advanced or invested the Principal elsewhere. It is generally necessary to call evidence to establish what return would have been obtained in order to determine the quantum of damages sought or other evidence that show that the return claimed was a reasonable assessment of loss.[31] I consider that such principles apply when proving the quantum of loss under s 236 of the ACL.
[31]See, eg, St George Bank Ltd v Quinerts Pty Ltd (2009) 25 VR 666 [26]–[28] (Nettle JA; Mandie JA and Beach AJA agreeing). I note this was a case for breach of contract and professional negligence where the plaintiff asserted it was entitled to be put in the position it would have been in had it not made a loan. The Court held that evidence was required of the return that the plaintiff would have obtained on the loan funds if it had not made the loan.
It is important to recall in this case there is no evidence before me about what the plaintiff would have done with the funds advanced to Mr Chen if she had not entered into the agreement or how the plaintiff sourced the funds which were used to advance the Principal. As set out above, there is some evidence that, if the plaintiff had known about the existence of PIIMAX, she may have negotiated an agreement with different terms. However there is no evidence of what the terms of any such agreement might have been including what rate of return might have been agreed and obtained by the plaintiff.
In all these circumstances, based on the evidence before me, I have concluded that the amount of damages that compensates the plaintiff for her actual loss incurred because of Mr Chen’s contravention that conforms to the remedial purpose of the ACL and to the justice and equity of this case is an amount which represents her $1,480,000 share of the Principal. I am unable to conclude that the plaintiff should be awarded damages for the Fixed Return Amount and interest otherwise payable under the agreement as a ‘reasonable assessment of the damage’ caused by the contravention.
Involvement of PIIMAX
In light of my finding that Mr Chen contravened s 18 of the ACL and that the plaintiff suffered loss or damage of $1,480,000 by reason of the contravention, I now turn to the alleged liability of PIIMAX for that loss.
Section 236(1)(a) of the ACL relevantly provides that if a person suffers loss or damage because of the conduct of another person that was in contravention of a provision of Chapter 2 or 3 (which includes s 18), that person may recover the amount of the loss or damage by action against that other person or ‘any person involved in the contravention’.
Under s 2(1) of the ACL a person is ‘involved’ in a contravention of a provision of the ACL or in conduct that constitutes such a contravention if the person has, relevantly, aided, abetted, counselled, procured, induced, or has been in any other way, directly or indirectly, knowingly concerned in, or party to, the contravention, or has conspired with others to effect the contravention.
The plaintiff alleges that PIIMAX was involved in Mr Chen’s contravention by virtue of:
(1) PIIMAX accepting the Nomination by Mr Chen; and
(2) Mr Chen, its sole director and secretary, failing to notify the plaintiff of the Nomination.
Further I note that the plaintiff also relied upon the fact that PIIMAX received the Principal and became the registered proprietor of the Land and its sole director, secretary and shareholder made the statements to the effect that Mr Chen would purchase and develop the property in his name.[32]
[32]Plaintiff’s Closing Submissions (n 31) [6].
A person will not be knowingly concerned in a contravention unless that person knew of the facts and circumstances giving rise to the contravention. The person must have intent based on knowledge.[33] In Yorke v Lucas, Mason ACJ, Wilson, Deane and Dawson JJ said that:
There can be no question that a person cannot be knowingly concerned in a contravention unless he has knowledge of the essential facts constituting the contravention … [A] person could only properly be said to be a “party to” a contravention if his participation was in the context of knowledge of the essential facts constituting the particular contravention … In our view, the proper construction … requires a party to a contravention to be an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention.[34]
[33]Yorke v Lucas (1985) 158 CLR 661.
[34]Yorke v Lucas (1985) 158 CLR 661, 670.
There must be, at least, some practical involvement by the person in the acts or omissions constituting the contravention.[35]
[35]Australian Competition and Consumer Commission v SensaSlim Australia Pty Ltd (in liq) (No 5) [2014] FCA 340 [543] (Yates J).
I am satisfied, based on the evidence before me, that PIIMAX was knowingly concerned in or a party to Mr Chen’s contravention of s 18 of the ACL set out above, such that he was ‘involved’ in that contravention for the purposes of s 236(1)(a) of the ACL. This is because Mr Chen was the sole director, secretary and shareholder of PIIMAX at all relevant times, relevantly:
(1)at the time of Mr Chen’s conduct which I have found to be in contravention of s 18 of the ACL; and
(2)when PIIMAX was nominated, and accepted its nomination, as purchaser of the Land and signed the transfer of the Land.
As a result, PIIMAX knew of the facts and circumstances giving rise to the contravention.
Trust Claim
As noted above, the plaintiff alleges PIIMAX knowingly assisted in Mr Chen’s breach of trust or received the Principal knowing it had been advanced on trust for Mr Chen to purchase the Land and develop it in his own name.
In order to establish a claim for knowing receipt of trust property, a plaintiff must establish that:
(1) there was trust property;
(2) that property was received by the defendant;
(3) the defendant knew that the property was received in breach of trust.[36]
[36]Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 (‘Farah’), 143 [117], 144 [119], 145 [121].
In order to establish a claim for knowing assistance in a breach of trust, a plaintiff must establish:
(1) the existence of a fiduciary duty owed by the fiduciary (as trustee or otherwise);
(2) a ‘dishonest and fraudulent design’ on the part of the fiduciary;
(3) assistance by the third party in that design; and
(4) knowledge on the part of the third party of the circumstances constituting that design.[37]
[37]Farah (n 36), 159 [160]; Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296 (‘Grimaldi’), 361 [259].
I note that, in final submissions, counsel for the plaintiff submitted that there was no need to establish dishonesty for the claim or knowing assistance in this case because:
(1) Mr Chen is inextricably linked to PIIMAX and must have had full knowledge of all the relevant facts;
(2) Mr Chen was the agent of PIIMAX in his capacity as director of PIIMAX when the Principal was used for PIIMAX’s purposes; and
(3) PIIMAX procured Mr Chen’s breach of trust.[38]
[38]Plaintiff’s Closing Submissions (n 32) [13]–[15].
To support this submission, counsel relied upon the judgment in Grimaldi at [243]–[245]. However, I note that liability on these bases was not expressly alleged in the amended statement of claim.
Central to both of these claims in the present case is that the Principal was ‘trust money’. Counsel for the plaintiff submitted that the Principal was impressed with a Quistclose trust.In that case it was held that where money is advanced with a mutual intention that it be used for a particular purpose only and held separately by the recipient such that it is not at his or her free disposal, the law will imply a trust over the money in favour of the person who advanced the money, if the purpose for which the money was advanced fails. An attempt to separate such money advanced from the rest of the assets of the recipient can evidence an intention to hold the money on trust.
It is important to note that a court will not readily infer that funds provided for a specific purpose are impressed with a trust.[39] As a result, there are two ‘critical’ elements to satisfy before such a trust will arise: a mutual intention that the moneys are advanced for an exclusive and specific purpose, and a mutual intention that those funds are not to form part of the assets of the recipient.[40] The relevant intention is to be inferred from the language the parties have used, the nature of the transaction and the relevant circumstances attending the relationship between them.[41]
[39]Legal Services Board v Brereton (2011) 33 VR 126 (‘Brereton’) [96] (Tate JA, Nettle and Ashley JJA agreeing).
[40]Brereton (n 39) [94]–[96]. See also Australasian Conference Association Ltd v Mainline Construction Pty Ltd (in liq) (1978) 141 CLR 335, 353 (Gibbs ACJ).
[41]Brereton (n 39) [98] adopting the comments of Gummow J in Re Australian Elizabethan Theatre Trust (1991) 30 FCR 491, 502–3.
Counsel for the plaintiff submitted that both requirements had been established in this case, relying upon recitals C, D and F and cl 5 of the agreement. He submitted that, read together, they make plain that the Principal could only be applied for the purchase and development of the Land by Mr Chen with the result that a Quistclose trust arose.
As to the first element of a Quistclose trust, I accept the recitals and the agreement indicate a common intention that the Principal could only be applied for the purchase and development of the Land by Mr Chen. However I note that the actual intention of Mr Chen, in light of the Nomination, was that the Principal was to be applied for the purchase and development of the Land by PIIMAX.
As to the second element of a Quistclose trust, I am not satisfied that the provisions of the agreement relied upon by counsel for the plaintiff evidence an intention that the Principal was to be kept separate from the other assets of Mr Chen. There is no mention of any such intention in the recitals relied upon by counsel for plaintiff. The recitals only refer to the purpose for which the funds are to be advanced. Nor is there any mention of such an intention in the clauses of the agreement.
As set out above, cl 5 provides, in substance, that the Borrower may at any time request an advance be provided to, or at the direction of, the Borrower for:
(1) on the first request, an amount equal to the deposit for the purchase of the Land;
(2) on the second request, an amount equal to the balance of the purchase price for the Land plus fees and expenses associated with its acquisition; and
(3) on further requests, costs associated with the planning phase of the proposed development or any other costs and expenses relating to the Land.
I accept that this clause sets out and confirms the purpose for which the Principal was to be advanced. However in my view, this clause also does not indicate an intention by the parties that, if the Borrower requested an advance of funds pursuant to the agreement, those funds were to be kept separate from the other funds of the Borrower.
While authorities suggest that the absence of an express requirement that funds be kept separate is a significant, and often decisive, factor in determining the question of whether there is a mutual intention,[42] as set out above, it is necessary to look at all the relevant circumstances of the advance to determine this question.
[42]See, eg, the authorities referred to in Compass Resources Ltd v Sherman [2010] WASC 41 [70] (Beech J).
As noted above, the circumstances in which the plaintiff advanced the Principal (including the $20,000 from Ms Chen) to Mr Chen at his direction on 9 May 2017 are not entirely clear on the evidence before me. In any event, there was no evidence from the plaintiff as to whether it was discussed that the Principal was not to form part of the assets of Mr Chen.
As a result, based on all the evidence, I am unable to conclude on the balance of probabilities that there was an intention that Mr Chen would not mix the Principal with his other monies or assets.
In light of this conclusion, I am not satisfied that Principal was trust money. As a result, it is unnecessary to decide whether the plaintiff has established a claim for knowing receipt of trust property or of knowing assistance.
However, for completeness, I wish to record that, if I had concluded that the Principal was trust property, I am satisfied that:
(1)the Principal was received by PIIMAX. This is consistent with the admissions in the defence set out above and the schedule in the letter from the solicitors for the defendants referred to above, to the effect that the Principal was used by PIIMAX to pay the purchase price for the Land and related acquisition and development costs; and
(2)PIIMAX knew that the Principal was received in breach of trust. This is because the knowledge of the agreement of Mr Chen who was the sole director, shareholder and secretary of PIIMAX, is attributable to PIIMAX at the time it received those funds.
However, I do not consider it appropriate to set out any conclusions in relation to the claim for knowing assistance in light of the way in which the case was pleaded and the legal issues which arise in relation to the claim.
Conclusion
As a result of these reasons, the plaintiff is entitled to damages in the sum of $1,480,000 against PIIMAX in respect of her claim that PIIMAX was involved in Mr Chen’s contravention of s 18 of the ACL.
Although I have not allowed the Fixed Return Amount and interest otherwise claimed by the plaintiff under the agreement as part of this award of damages, I note that the plaintiff in paragraph E of her prayer for relief separately claimed ‘Interest’, presumably under the SCA.
In my view, the plaintiff is entitled to interest under s 60 of the SCA. I will ask counsel for the plaintiff to calculate the amount of interest to be awarded accordingly.
I will hear from counsel for the plaintiff on the question of costs.
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