Meng v Wang (No 2)
[2023] NSWSC 260
•16 March 2023
Supreme Court
New South Wales
Medium Neutral Citation: Meng v Wang (No 2) [2023] NSWSC 260 Hearing dates: 16 March 2023 Date of orders: 16 March 2023 Decision date: 16 March 2023 Jurisdiction: Equity Before: Parker J Decision: See [35]
Catchwords: CONTRACTS – performance – time of performance – performance within reasonable time – where argued that reasonable time extended by later events and circumstances – where reasonable time expired and extension relevant only to prejudgment interest
Cases Cited: Meng v Wang [2022] NSWSC 833
Category: Principal judgment Parties: Zihui Meng (Plaintiff)
Binbin Wang (Defendant)Representation: Counsel:
Solicitor:
J Mee (Plaintiff)
N Kabilafkas (Defendant)
Jurisbridge Legal (Plaintiff)
Juris Cor Legal (Defendant)
File Number(s): 2020/213480 Publication restriction: Nil
JUDGMENT- Ex Tempore
Revised from transcript; issued 24 March 2023
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This is the second substantive hearing in these proceedings. In May last year, I made orders dismissing the plaintiff's claim for specific performance. I delivered reasons for those orders in June: Meng v Wang [2022] NSWSC 833. The background to the proceedings is set out in my earlier judgment,[1] paragraphs of which will be referred to in this judgment by using "J1".
1. See J1 [1]-[54]. The parties are former business partners. They conducted a business, “Comfortzone”, which involved the provision of skin and beauty treatment services. The business was originally operated out of two companies in which the parties held shares. In 2017, the financial operations were combined in one of the companies, known as the “spa company”: see J1 [23]. The business operated from two shopfront premises – one in Ultimo (or perhaps Haymarket), and the other in Dixon Street in Chinatown. The Dixon Street shop was co-owned by the parties.
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Having failed in her claim for specific performance of the share sale agreement, [2] the plaintiff, Ms Meng, now seeks judgment for debt. The claimed sum is $378,000. The defendant, Ms Wang, does not now dispute that Ms Meng is entitled to judgment in this amount.
2. The agreement concerned the sale of Ms Meng’s shareholding in the two Comfortzone companies to Ms Wang (J1 [57]). The sale price was $378,000 (J1 [27]). If Ms Wang failed to pay, the price was to be satisfied, as to part, by the transfer of her share of the Dixon Street shop to Ms Meng (see [13] below). I found that, on its proper interpretation, the agreement obliged Ms Wang to purchase Ms Meng’s shareholding, rather than giving her an option to do so (J1 [65]). But I refused specific performance (which would have entailed the transfer of Ms Wang’s share of the Dixon Street shop to Ms Meng at the price specified in the agreement) because of unclean hands on the part of Ms Meng (J1 [80]-[87]).
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Two questions have been raised. The first is when pre-judgment interest should run from. That depends upon when the debt became due. I found in my earlier judgment, and it is not disputed for the purposes of these proceedings, that the time for purchase under the share sale agreement was a reasonable time after the agreement was entered into in October 2019 (see J1 at [15]). Counsel for Ms Meng invites me to award prejudgment interest from a date 12 months after that date, namely October 2020. Counsel for Ms Wang contends that a reasonable time did not expire until last year, and apparently the second half of last year.
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The second question in the case is whether Ms Wang should succeed in a counter-claim for $44,000 for an alleged breach of the share sale agreement.
Interest and reasonable time
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As I recorded in my judgment (J1 at [36]), both parties agreed in their evidence that there had been discussion between them before the share sale agreement was signed about when payment was to be made. I found (J1 at [74]) that the understanding between the parties was that Ms Wang would have 12 months to pay. I have not been asked to reconsider that finding for the purposes of this judgment. A WeChat message passing between the parties showed that this period was intended to give Ms Wang an opportunity to find someone to replace Ms Meng in the business (see J1 [39], [74]).
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In the circumstances, it seemed to me, and I did not understand this to be disputed, that there was at least an evidentiary onus on Ms Wang to demonstrate why a reasonable time exceeded 12 months. At the same time, it was accepted that events occurring after the contract had been made but before the putative date of performance were, at least if unforeseeable, to be taken into account in determining whether a reasonable time had expired (see J1 [67]).
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Counsel for Ms Wang identified three factors as leading to an extension of the period. Each event or circumstance was said to have interfered with the conduct of the business. The assumption was that events or circumstances which damaged the profitability of the business were factors which would reasonably allow Ms Wang an extended time to complete. This was on the basis that a decline in profitability of the business would have put off potential purchasers or interfered with Ms Wang's ability to raise finance.
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The three factors or circumstances were these. First, the events of 17 March 2020. As I described in J1 at [30], Ms Meng and her husband, Mr Xu, visited the Dixon Street shop and removed records of the spa company and some of its equipment. The allegation was that this made it impossible, or at least more difficult and less profitable, for the business to trade.
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The second factor was the effect of the COVID-19 pandemic. First, from 26 March 2020, emergency regulations banned businesses which supplied beautician services from trading. This ban remained in place until 15 May. At that point, such businesses were allowed to reopen but only for the purpose of making retail sales, selling vouchers and taking bookings. Customers were permitted from 1 June, but subject to a space limit. These regulations remained in force into 2021.
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There were also moratorium-type provisions affecting commercial leases which operated between 24 April 2020 and 28 March 2021, and again between 13 July 2021 and 30 June last year.
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The case for Ms Wang was that the restrictions on trading, and the general effects of COVID-19, damaged the profitability of the business for an extended period. According to the submission by counsel for Ms Wang, their effects would have continued into 2022. The moratorium-type restrictions on commercial leasing were not directly relevant to trading but could on one view affect the value of commercial property if that was to be used to raise monies to purchase the business.
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The third factor was said to be the bringing of these proceedings, which began in July 2020. The contention was that the defence of the proceedings forced Ms Wang to divert monies to pay legal costs, which affected her ability to meet her obligation to come up with the necessary money by October 2020.
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There was a debate before me about whether subsequent events which depressed the profitability of the business were relevant at all. Counsel for Ms Meng pointed to the clause in the share sale agreement which operated as a form of security for Ms Wang's obligations. [3] The clause provided that if Ms Wang failed to make payment in cash of the $378,000 due, she would instead be required to transfer ownership of her share of the Dixon Street shop to Ms Meng, at a specified value (determined by reference to the original purchase price), and to make up the difference in cash.
3. See clause 4 of the share sale agreement at J1 [57].
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Counsel for Ms Wang submitted that the clause should be disregarded. Counsel contended that it was a penalty, because its effect was that Ms Wang would be deprived of her share of the increased value of the shop since it had been acquired.
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I do not find it necessary to decide whether the clause would be unenforceable as a penalty. In my view, there is much to be said for the argument that even if it was unenforceable, the clause demonstrates that the parties’ contemplation at the time was that Ms Wang would effectively fund the acquisition through the capital value of her share in the Dixon Street property. That can be contrasted with necessarily having to rely on profits from the business or with obtaining a new investor, who would be influenced by the profitability of the business. But I am prepared to assume, for the sake of argument, that subsequent events affecting the profitability of the business are relevant, and to deal with the case on that basis.
17 March events and the COVID-19 pandemic
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It is I think possible to take the effects of the 17 March events together with those of the COVID-19 pandemic. That is because the effects of the pandemic on the business came soon after 17 March and continued well afterwards. Any ongoing effects of the 17 March events are unlikely to have made any difference.
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I think that Ms Wang's case about the effect of the pandemic faces numerous evidentiary difficulties. I have identified five of them.
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First, the evidence demonstrates that in June 2020, only shortly after beauty parlours were permitted to reopen, Ms Wang established a new beautician business of her own called V Cosmetic at Hurstville (see J1 at [54]). The establishment of the new business cost $70,000, of which $44,000 was borrowed in May. It seems unlikely that Ms Wang would have taken such a step if the effect of the pandemic had been to make the operation of such businesses uneconomical. It is also difficult to see how it would have been possible for her, having established this new venture, to have sustained the same level of business through the Dixon Street shop.
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The second point is that the evidence leaves it unclear exactly when the Dixon Street store did close. In evidence before me were text messages apparently between Ms Wang, or her employees, and customers. In those messages, customers were given to understand that services were still being offered by the business in August, albeit on a restricted number of days per week. When cross-examined on these messages Ms Wang sought to deny responsibility for them, but I found her evidence on this most unsatisfactory and I disbelieve it. I am satisfied that at least some customers of the business were still being offered services at the Dixon Street shop as late as August. As I have said, there is no clear evidence of when activities at that shop ceased.
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What seems to have happened is that Ms Wang ran the two businesses together for a period of time. This was presumably to extract the maximum value out of the Dixon Street operation, for the benefit of her new Hurstville business. This raises questions as to how much, if any, of the Dixon Street business was actually lost as a result of the COVID-19 pandemic.
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The third difficulty is that it is far from clear that after March 2020, Ms Wang had any intention of paying the $378,000 at all. Counsel for Ms Meng drew attention to her client's version of a conversation which took place in September 2019. That account of the conversation had Ms Wang making a veiled threat that she would simply retain the shares (which at that stage were already in her name due to previous dealings between the parties) and refuse to pay at all. The defence ultimately propounded by Ms Wang is also relevant. This was that on its true construction, the share purchase agreement was simply an option such that there was no obligation to carry it through (see J1 at [18]).
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Ms Wang was not cross‑examined about her intentions to pay. But her affidavit evidence for this hearing did not contain any express statement that she intended to pay the $378,000 to Ms Meng.
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The fourth point is that Ms Wang's evidence on her alleged losses associated with the COVID-19 pandemic (and the events of 17 March) was notably vague. In a broad sense, Ms Wang asserted that these events had made the conduct of the business difficult or, for periods of time, even impossible. That can be accepted as plausible. What was lacking was specific evidence of the actual losses, their quantum and timing, and how that interfered with Ms Wang's ability to come up with the $378,000 required under the contract by October 2020. In fact, the evidence did not provide a figure for the trading losses, if any, incurred between March and October 2020.
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The absence of evidence of a precise loss of profit is particularly important because the financial statements of the business demonstrated a pattern of losses in the previous two financial years. Ms Wang accepted that this pattern had nothing to do with the COVID-19 pandemic or the events of 17 March.
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The fifth and final point, is that while the COVID-19 pandemic no doubt affected the conduct of the business for a period of time, the effect was not all one way. Ms Wang also received some government benefits. Her evidence, however, did not disclose the quantum of those benefits. This only reinforces my previous point, that there was no demonstrated loss of profit during between March and October 2020.
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Taking all these matters together, Ms Wang's argument for an extension of time beyond October, based on the events of 17 March and the COVID-19 pandemic, must fail.
Costs of defending the proceedings
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I turn now to the argument based on the costs of defending the proceedings. The fundamental difficulty with this argument is that a reasonable time must be reasonable to both parties to the contract. Even if the costs of running litigation had an adverse impact on the performance of the business, I find it difficult to accept that costs of that type, flowing from the exercise of legal rights by Ms Meng, could be a relevant factor.
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In his argument, counsel for Ms Wang initially described the bringing of proceedings as premature. Counsel ultimately accepted, as I observed at J1 [55], that even if the time for payment had not arisen when the proceedings were brought, it still would have been possible to obtain an order for specific performance for the future, when the obligation fell due. There was no evidence nor suggestion that in bringing the proceedings, Ms Meng was actuated by some sort of collateral motive which would give rise to an abuse of process. Therefore, I do not accept that costs flowing from defending the proceedings are relevant.
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In any event, there are three further difficulties with Ms Wang's case on this point.
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First, the proceedings were brought against Ms Wang personally. They were not brought against the spa company, which was the entity operating the business. Accordingly, any costs incurred in the proceedings were in no sense part of the cost of running the business. Rather, they were a personal liability of Ms Wang. There would have been no justification for drawing the costs of defending the proceedings out of the business.
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The remaining difficulties parallel those identified above in relation to the effect of the COVID-19 pandemic. There was evidence before me that Ms Wang has other properties and assets in her own name. There was also no evidence quantifying the effect of the costs of defending the proceedings after July 2020 on Ms Wang’s ability to meet her obligations under the share sale agreement by October. In fact, there was no evidence that Ms Wang was intending to pay at all, and therefore, no evidence that having to pay the costs of defending the proceedings would have made any difference.
Counter-claim
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The basis for this claim was an alleged breach by Ms Meng of her obligations of co‑operation under the share purchase agreement. The contention for Ms Wang was that she outlaid $44,000 in paying out liabilities of the business, specifically, advance payments which had been made by customers and needed to be repaid. The allegation was that the need to make these repayments resulted from Ms Meng's conduct on 17 March which was calculated to damage the business. The implied obligation in the share sale agreement of reasonable cooperation on Ms Meng's part was said to prevent her from taking steps which would interfere with the trading of the business and accordingly prejudice Ms Wang's ability to comply with her obligations.
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Counsel for Ms Wang acknowledged that it was not possible to bring a claim for loss suffered by the company. But as counsel pointed out, it was still open to Ms Wang to bring a claim for loss that she herself had suffered.
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This argument faces several difficulties which parallel those which faced Ms Wang's argument for an extension of the completion date beyond October 2020. But it is not necessary to deal with those arguments again, because I think that the claim faces fundamental evidentiary problems in terms of proof of loss.
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In her affidavit, Ms Wang, consistently with the way the case was initially formulated on her behalf, alleged that in May 2020 she borrowed $44,000 from a friend to pay off creditors of the business. She annexed to her affidavit a copy of the loan agreement. But when asked in cross‑examination how she had funded the Hurstville business, she said that the borrowing had been made for that purpose.
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Counsel for Ms Wang made valiant efforts to rescue her case after this apparent repudiation of it. Counsel re‑examined Ms Wang and attained further evidence from her, which was to the effect that she had obtained $40,000 from some other source to pay off the business' creditors. Counsel submitted that Ms Wang had been confused in cross‑examination, and that I should accept the revised version of events given in re‑examination.
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Despite counsel's efforts, I am not prepared to accept this revised case. The fact was that Ms Wang simply abandoned her affidavit evidence under cross‑examination. The re‑examination is of little weight in the circumstances. I also do not think that I can accept the suggestion that Ms Wang misunderstood. That is because she was not asked in re‑examination to explain the obvious inconsistency between what she had said in her affidavit and in cross‑examination.
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Consistent with the view that I have formed of other parts of her evidence, I was left with no confidence that Ms Wang was a reliable witness. Furthermore, the belated assertion of expenditure of $40,000 was not supported by any financial evidence demonstrating that payments had in fact been made to customers, and if so, when or for what. In these circumstances, the counter‑claim must fail. It is not necessary to consider the other questions which arise.
Orders
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The orders of the Court are:
Adjourn the proceedings to 24 March 2023 before Parker J.
Direct that the parties confer on the form of orders to be made to give effect to judgment and to deal with costs.
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Endnotes
Decision last updated: 24 March 2023
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