Park v Koh & Anor

[2007] NSWSC 222

CITATION:	Park v Koh & Anor [2007] NSWSC 222
HEARING DATE(S):	6 March 2007
JUDGMENT DATE :	16 March 2007
JUDGMENT OF:	McDougall J at [1]
DECISION:	See para [50] of judgment
CATCHWORDS:	CONTRACT - franchise agreement - whether cross defendant's conduct misleading or deceptive - whether cross claimant relied on alleged misleading or deceptive conduct - representations by cross defendant as to future profitability and limitations of business - whether cross defendant had reasonable grounds to make representations - relief - deed of loan sought to be set aside - withdrawal of caveat sought - whether service of cross claim seeking removal of caveat may be effected at address for service of notices specified in caveat
LEGISLATION CITED:	Fair Trading Act 1987 Trade Practices Act 1974
CASES CITED:	Re H.M. Drinkwater (1929) 46 WN (NSW) 202 Howship Holdings Pty Ltd v Leslie (1996) 41 NSWLR 542
PARTIES:	Mikaella Park (Plaintiff) Il Woong Koh (First Defendant) Myung Hee Koh (Second Defendant)
FILE NUMBER(S):	SC 50055/03
COUNSEL:	E A White (Plaintiff) A P Spencer (Defendants/Cross-Claimants)
SOLICITORS:	TurksLegal (Plaintiff) Strathfield Law (First and Second Defendants)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

McDOUGALL J

16 March 2007

50055/03 MIKAELLA PARK v IL WOONG KOH & ANOR

REASONS FOR JUDGMENT

HIS HONOUR:

Introduction

1 The plaintiff (Mrs Park) lent amounts totalling $370,000 to the defendants (Mr and Mrs Koh) to help them acquire equipment for and set up a mineral spring water extraction and bottling plant at Wentworth Falls in the Blue Mountains. The bulk of that money has not been repaid. Mrs Park has recovered judgment for the unpaid balance together with interest. The judgment debt has not been paid.

2 The cross-claimants (Mr Kang and his wife, Mrs Choi) bought from Mr and Mrs Koh the issued shares in the company that carried on the business to which I have referred, and the land on which it was carried on. They say that they were induced to do so by fraudulent, misleading and deceptive representations as to the renewability of the necessary development consent, and as to the likelihood of its being extended to permit extraction at rates greater than the then current limit of 2,000 litres per day.

3 Mr Kang and Mrs Choi paid some $1.7 million, partly from their own resources and partly from borrowings, and agreed to pay a further amount of $600,000. The amounts payable were apportioned as to $400,000 to acquire the land (15 McLaughlin Street, Wentworth Falls) and as to the balance for the shares. The amount of $600,000 was the subject of a deed of loan made on settlement of the purchase transactions, 14 November 2002.

4 Mrs Park learned of the existence of the loan, and caused a garnishment notice to be issued and served on Mr Kang and Mrs Choi requiring them to pay the amount of the debt to her.

5 The essential issue for my decision is whether there is any debt owed by Mr Kang and Mrs Choi to Mr and Mrs Koh. Resolution of that issue turns on whether Mr Koh was guilty of misleading or deceptive conduct, relating to the representations that I have briefly summarised.

6 The issues were agitated through the mechanism of Mr Kang’s and Mrs Choi’s cross-claim. Had it been necessary to do so, I would have directed that Mrs Park be joined as a cross-defendant. However, she has reached an accommodation with Mr Kang and Mrs Choi. On the second day of the hearing (6 March 2007) I made orders by consent as between those parties.

7 I also made orders as between Mr Kang and Mrs Choi as cross-claimants and Mr and Mrs Koh as cross-defendants. I said that I would give my reasons for making those further orders. These are my reasons.

Background

8 In mid April 2001, Mr Kang read an advertisement in a Korean language newspaper circulating in Sydney. (Mrs Park, Mr and Mrs Koh and Mr Kang and Mrs Choi are all of Korean origin.) The advertisement referred to Mr Koh’s mineral water business. For reasons that were not explained in the evidence, Mr Kang contacted Mr Koh. They met at the Wentworth Falls premises.

9 Mr Kang’s evidence is that Mr Koh showed him the operation, and offered him a franchise for “the North Shore”. A bargain was struck, whereby Mr Kang agreed to pay a “deposit” of $100,000 and to become a franchisee. That bargain was recorded in writing on 10 May 2001: some three weeks after the meeting.

10 Relevant terms of the “franchise agreement” that was signed include the following:

“ …

· B and A have entered in to a contract that B must pay A franchise deposit fee of $100,000

· The distribution district is named above and through negotiations A and B will decide on other suburbs in Sydney

…

· B will charge for a 10L bottle of water for $8 per bottle

· A will charge B 10L bottle of water for $5 per bottle and every 5 bottles one bottle will be given without charge

· The duration of the franchise contract is for five years and all rules must be complied with and where there are no problems the contract will continue throughout

…

· After 2 years of B operating the business if B no longer want to continue the business A must repay the Franchise deposit fee to B

… “

This comes from a certified translation from the original, which was written in the Korean language. “A” refers to Mr Koh and “B” refers to Mr Kang.

11 Mr Kang acted as a franchisee for about 12 months. He said that the franchise business was “not successful”. He was not able to expand on this by giving any figures that might enable an assessment to be of its profitability.

12 At the same time, Mr Kang and Mrs Choi were buying a grocery business at Eastwood. They had the assistance of a solicitor and an accountant in that transaction. Mr Kang did not avail himself of the services of either in connection with the franchise agreement.

Negotiations for purchase

13 On or about 4 April 2002, according to Mr Kang, Mr Koh offered to sell “everything” to Mr Kang. Mr Kang said that they had a conversation in the Korean language (as were all relevant conversations) to the following effect:

“Koh: I will sell everything, the property, the business and equipment, the water rights to you. I can sell the Water Business to other people for $4,000,000.00 or $5,000,000.00. But to you I will sell for $3,000,000.00. I am too old to grow this business anymore. You can grow this business a lot more. This is wonderful water. You can pump out as much as you can sell. The business has a long way to grow. You can export this water world wide.
Me: Too much. I can’t afford more than $2,300,000.
Koh: OK. Lets use one Solicitor. You and me. Faster contract.
Me: No.
Koh: I cannot afford to pay too much tax. I need for the papers to show that you are paying me $900,000.00.
Me: I want it to show the full amount so that I can borrow against it.
Koh: Look I am doing you a big favour here. I am selling you a gold mine. You just have to pump it out of the ground to make money. If you cannot do it my way I will sell it to someone else.
Me: Alright if you think it is OK.”

14 Mr Kang paid Mr Koh a “holding deposit” of $150,000 and obtained a receipt, dated 4 April 2002. As I understand Mr Kang’s evidence, the deposit was comprised, as to $100,000, of the “deposit” under the franchise agreement, and, as to the balance, of $50,000 in cash that Mr Kang had borrowed.

15 Mr Kang set about raising the balance of the $2.3 million. He said that he could get to no more than $1.7 million. He said that he had a conversation with Mr Koh to the following effect:

“Me: I can only raise $1,700,000 including my franchise deposit. I guess the deal is off?
Koh: No. I need to close this deal off. I will accept the $1,700,000 in cash now and you can owe me the rest. It is a good business and you can grow it without limit.”

16 Negotiations dragged on.

17 Mr Kang and Mrs Choi retained a solicitor, Mr Julian McVittie, to assist them. Draft contracts for the purchase of the shares (in the company that ran the business) and the land were sent to Mr McVittie. It appears that he also had a copy of the development consent.

18 Mr Kang said that Mr McVittie warned him that:

(1) there were problems with the development consent; and

(2) the business was not a “gold mine”.

19 Mr Kang “understood him to be telling me that there was a problem with the right to extract water”, and told Mr McVittie “to wait until I gave further instructions” (affidavit sworn 29 August 2005, para 6).

20 About two days later, Mr Kang met Mr Koh. Mr Kang said that they had a conversation to the following effect:

“Me: What is this my Solicitor tells me that I might have a problem with the Council?
Koh: Don’t worry about that. I am telling you that there will be no problem. You can renew the DA without any problem and even increase the water extraction to meet market demand. This business is only limited by your capacity to market the water. Nothing else will hold you back.
Me: Why should I believe that. My Solicitor tells me that it is not true.
Koh: I am trusting you. I am trusting you to pay me the other $700,000 in cash without any paperwork. I am even trusting you with the additional $600,000 you could not borrow. Why would I cheat you. If I cheat you, you will just hold back the rest of the money. I guarantee that you will be able to renew all your licenses without any trouble and I even guarantee you that you will be able to increase production of water to meet demand.
Me: Alright. But it had better be true.”

21 Mr Kang said that, as a result of what Mr Koh said, he decided to proceed with the transactions.

22 The consideration shown on the two contracts – for the sale of the shares and the sale of the land – totalled only $1.7 million. On or shortly after settlement, Mr Kang and Mrs Choi signed a “deed of loan” whereby they acknowledged that they owed some $600,000 to Mr and Mrs Koh, and agreed to pay it, and interest, by instalments.

Assessment of Mr Kang’s evidence

23 Mr Kang was cross-examined at some length through an interpreter. He appeared to have a good recall of relevant events. His account of his conversations with Mr Koh was not shaken; indeed, in substance, it was not challenged.

24 My impression of Mr Kang is that he was both naïve and trusting. Indeed, with the benefit of hindsight, one might say that he was foolish. But I do not think that his evidence was untrue or manufactured, or that it was tailored to suit his cause.

25 It may seem implausible that Mr Kang would have committed himself and his wife to such a venture at so high a price without conducting some form of “due diligence” or investigation: particularly having regard to the warnings given by Mr McVittie. But I do not think that such implausibility as there may be renders Mr Kang’s evidence incapable of acceptance.

26 Mr Kang was cross-examined at some length about his failure to complain. The evidence makes it clear that Mr Koh departed these shores for Korea very shortly after settlement of the transactions. Mr Kang said that he made a number of attempts to contact Mr Koh, but that only once did Mr Koh speak to him. That is hardly surprising if (as I think the facts suggest very strongly) Mr Koh defrauded Mr Kang and Mrs Choi.

27 Mr Kang was cross-examined, again at some length, on what was said to be inconsistencies between his evidence and letters written by his solicitors, clearly enough on his instructions. Particularly in circumstances where English is not Mr Kang’s first language, I do not regard such inconsistencies as were demonstrated as requiring rejection of his evidence.

28 I accept that the effectively “ex parte” nature of the application (even though Mrs Park, through counsel, was a contradictor) means that Mr Kang’s evidence requires careful scrutiny. Having said that, and having considered it, and accepting the inherent limitation of not having heard anything that Mr Koh might wish to say in reply, I accept the substance of Mr Kang’s evidence.

Representations

29 Based on my acceptance of the substance of Mr Kang’s evidence, I find that Mr Koh made representations to the effect of those alleged in paras 1, 2 and 3 of the cross-claim; although this finding does not extend to the dates or the venues alleged and particularised. Of those representations, the most important are those set out in para 1 (b) and (e) and para 3 (a), (b) and (c):

“1. In or about July 2002 the Cross Defendants (respectively “Mr Koh” and “Mrs Koh”) represented to the Cross Claimants (respectively “Mr Kang” and “Mrs Kang”) that if the Kangs purchased from Mr and Mrs Koh:
…
(b) That Mr and Mrs Kang would be able to pump out of the ground as much mineral water as they could sell in the Business;
…
(e) That Mr and Mrs Koh were selling Mr and Mrs Kang a gold mine as all Mr and Mrs Kang had to do to make money was to pump the water out of the ground.
…
3. On a subsequent date in or about late July 2002 Mr and Mrs Koh represented to Mr and Mrs Kang that if the Kangs purchased the Land and all the shares in the Company
(a) They would have no problem renewing the then existing Development Approval;

(b) That they would be able to increase the water extraction to meet market demand;

(c) The only limit on the Business was their own capacity to market the water. Nothing else would hold them back.
…”

30 The significance of 1 (e) and 3 (c) relates not so much to what might be said to be the representation of “wealth beyond the dreams of avarice”, but to the clear implication that the business would not be impeded by any limit (eg, as to the amount of water that could be lawfully extracted) beyond Mr Kang’s and Mrs Choi’s control.

Causation

31 It is plain that these representations (and the others) were made with the intention of inducing Mr Kang and Mrs Choi to enter into the relevant agreements: including to become debtors of Mr and Mrs Koh in the sum of $600,000 and to enter into the deed of loan.

32 It is equally plain, in my view, that the representations had that effect. I do not think that Mr McVittie’s warnings require a different conclusion. On the contrary, the representations were repeated (or reinforced) after and by reference to those warnings. Mr Kang’s evidence, which I accept, is that those repeated representations reassured him, and led him to cause himself and his wife to enter into the contract.

33 Mr Kang may have been foolish. But s 52 of the Trade Practices Act 1974 and its analogues (including, relevantly to this case, s 42 of the Fair Trading Act 1987) do not exist only to protect the wise.

The representations were misleading and deceptive.

34 The representations as to renewal of the development consent, and as to the ability to increase the rate of extraction, were representations as to future matters. Thus, as s 41(1) of the Fair Trading Act makes clear, the question is whether Mr Koh had reasonable grounds for making them. Effectively, the onus is on Mr Koh to show that he did have such reasonable grounds. Mrs Park, as in substance the contradictor for the purposes of the cross-claim, did not adduce evidence to show that Mr Koh had any such reasonable grounds. (In saying this, I have taken at face value all the affidavit evidence on which, but for the settlement, she would have relied.) In my view, it is plain that he did not.

35 When Mr Koh sought development consent, it was refused. He appealed to the Land and Environment Court which, apparently after a contested hearing, granted consent on conditions. The conditions included a “deferred commencement condition”. There is no evidence of compliance with that condition, although the council did not rely upon non-compliance in its later attempts to close down the operation.

36 Regardless of the “deferred commencement condition”, there were a number of conditions of the consent with which, on the evidence, Mr Koh did not comply. For example, it was a condition of the consent that “monitoring of the water level in the bore and extraction rates shall be undertaken with a “Monitoring Plan … which is to be submitted to an [sic] approved by Council or the Land and Environment Court prior to the development commencing”.” It seems that a report may have been prepared. However, there is no evidence that it was submitted to or approved by council or the Court; and evidence that the operations that were in fact carried on from the land were not carried on in accordance with the terms of any such approved report.

37 Subsequent correspondence from the council to a consultant retained by Mr Kang and Mrs Koh stated, among other things, that “[n]one of the conditions that relate to the monitoring of the bore have [sic] been satisfied.”

38 There was evidence that neighbours opposed the development. That is not perhaps surprising, given that the land is located in a residential area.

39 The term of the consent was limited to five years; and any further consent would require the submission of a further development application. Plainly, that term was imposed to enable the development to be monitored, and to enable council to assess whether a continuation of it would have any detrimental effect on the locality or the environment.

40 It is clear from Mr Kang’s evidence of conversations that he had had with Mr Koh that Mr Koh had had a number of difficulties with the council. Mr Koh told Mr Kang not to worry about the council; that all council officers did was “nag”. Presumably their “nagging” consisted of requests to Mr Koh to comply with the conditions of the development consent.

41 It is probably sufficient to note that there is no evidence to suggest that Mr Koh could have had any reasonable grounds for making the relevant representations. However, the evidence satisfies me that in fact he had no such reasonable grounds.

42 I am therefore satisfied that the representations were misleading or deceptive.

Relief

43 Mr Kang and Mrs Choi sought relief including that the deed of loan be “set aside”. They also sought an order that a caveat lodged by Mr Kang be withdrawn. The caveat had been lodged to protect his interests under the deed of loan.

44 The cross-claim was “served” on Mr and Mrs Koh by serving it on a firm of solicitors whose office was given in the caveat as the address for service of notices. On the authorities, such service is valid not only for lapsing notices and the like but also for a summons seeking removal of a caveat. See the decision of Harvey CJ in Eq in Re H.M. Drinkwater (1929) 46 WN (NSW) 202; see also the decision of Young J in Howship Holdings Pty Ltd v Leslie (1996) 41 NSWLR 542. There is no sensible basis for declining to extend that proposition to cross-claims relating to (among other things) a caveat.

45 The evidence supports the proposition that the shares bought by Mr Kang and Mrs Choi had either no value or no value anywhere near the amount of $1.3 million paid (let alone the additional sum of $600,000 agreed to be paid). Mr Brook, a valuer (of real estate and businesses) called to give evidence for Mr Kang and Mrs Choi, opined that the business was worth nothing. Mr Russell, an accountant called to give evidence for Mrs Park, said that the material did not enable Mr Brook to come to that conclusion; but he did not say that the business did have any value.

46 Such evidence as there is showed that the company which ran the business made a loss during every year of its operations. Mr Kang’s evidence as to the inefficiencies of the operation (particularly bearing in mind the restrictions imposed by the terms of the development consent) were such that it could not achieve a turnover anywhere near sufficient to generate profits to support the level of borrowings or (alternatively) to generate an appropriate return on money invested.

47 Taking into account the whole of the evidence, I am satisfied that the value of the business, including such fixed assets as it had (valued by Mr Brook at a total of $23,500) was negligible.

48 I am therefore satisfied that it is appropriate to make an order pursuant to s 72(5)(a) of the Fair Trading Act declaring the deed of loan to be void and of no effect. I am also satisfied that it is appropriate to enter judgment for Mr Kang and Mrs Choi against Mr and Mrs Koh on the cross-claim and to reserve liberty to them to apply should they require further relief other than that to which I now turn.

49 Since the deed of loan is to be declared void, it follows that Mr and Mrs Koh cannot have (if ever they did have) any caveatable interest. I am therefore satisfied that it is appropriate to make an order that they withdraw the caveat.

Conclusion

50 To the extent that the orders made on 6 March 2007 were not made by consent, these are the reasons for making those orders.

51 I direct the cross-claimants to serve a copy of the orders made on 6 March 2007, together with a copy of these reasons, on the current address for service of notices specified for caveat No. AB 337093.

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