William Jingcheng He and Ors and (According to the Schedule attached) v LIANGPING Huang , Top Union Business Pty Ltd (in Liq) and (ACN 162 966 485) [No 2]
[2017] VSCA 349
•29 November 2017
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2017 0004
| WILLIAM JINGCHENG HE & ORS | Applicants |
| (According to the Schedule attached) | |
| V | |
| LIANGPING HUANG | First Respondent |
| and | |
| TOP UNION BUSINESS PTY LTD (IN LIQ) | Second Respondent |
| (ACN 162 966 485) [NO 2] |
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| JUDGES: | SANTAMARIA, BEACH and KAYE JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 21 November 2017 |
| DATE OF JUDGMENT: | 29 November 2017 |
| MEDIUM NEUTRAL CITATION: | [2017] VSCA 349 |
| JUDGMENT APPEALED FROM: | [2016] VCC 1658 (Judge Macnamara) |
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CONTRACT – Appeal – Agreement to conduct trailer parts business – Terms of agreement – Whether judge erred in inferring express term of the agreement requiring closure of the first applicant’s business – Whether agreement prohibited the second applicant from conducting business at premises of another business – Application for leave to appeal granted – Appeal allowed.
TORT – Conversion – Alleged conversion of stock of second applicant’s business – Whether sufficient identification of stock – Whether trial judge quantified value of stock on the basis of unpleaded claim – Whether judge erred in finding that stock belonging to second applicant had been sold to second respondent, therefore dismissing claim in conversion – No error made by trial judge.
APPEALS – Findings of fact – Inferences – Approach of appellate court in reviewing findings of fact – Principles on drawing inferences – Whether evidence supported inference of express term of agreement that business of second applicant would discontinue.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicants | Mr A W Sandbach | Katherine Moorhouse Perks |
| For the First Respondent | Mr R E T Wodak | Wharton Legal |
| For the Second Respondent | Mr C H Truong | Wharton Legal |
SANTAMARIA JA
BEACH JA
KAYE JA:
In early December 2013, the first applicant (‘Mr He’) and the first respondent (‘Mr Huang’) entered into an agreement to conduct a trailer parts business in Doveton in premises to be leased by the second respondent (‘Top Union’), which was a company controlled by Mr Huang. At that time, Mr He had already been conducting a similar business, for a period of approximately three years, in Rodeo Drive, Dandenong, through the second applicant (‘JC He’), which was a company that he controlled. As part of the agreement, Top Union employed Mr He as its general manager, and the third applicant, (‘Ms Liu’), as its online store manager. Ms Liu is the wife of Mr He. The business commenced to operate on 14 February 2014. However, shortly after the opening of the business in Doveton, disputes occurred between Mr He and Mr Huang. As a consequence, they terminated their relationship in April 2014.
Subsequently, Mr He and JC He commenced proceedings in the County Court against Mr Huang and Top Union claiming damages for breach of contract, estoppel, misleading and deceptive conduct and conversion. The principal allegation in those proceedings was that Mr Huang and Top Union had failed to return items of equipment, stock and other property belonging to JC He after the termination of their agreement in April 2014. Top Union counterclaimed against Mr He and Ms Liu claiming damages for breaches of the employment agreements, breaches of fiduciary duty and misleading conduct. Top Union also made a claim against JC He and Ms Liu based on the principles of Barnes v Addy.[1] The principal allegation in the counterclaim was that, in breach of their duties to Top Union, Mr He and Ms Liu had continued to conduct the business of JC He from the Doveton premises while they were both employed by Top Union.
[1](1879) LR 9 Ch App 244.
In December 2014, and before the trial of the proceeding, liquidators were appointed to Top Union. The applicants did not obtain leave to proceed against Top Union, so that their claim against that company was stayed.
After a trial that proceeded for some 20 days, the judge, in a reserved decision, gave judgment:[2]
(a) For JC He against Mr Huang in the sum of $10,870 by way of damages for conversion, and otherwise dismissed each of the other claims made by Mr He and JC He in the proceeding.
(b) For Top Union on its counterclaim, holding that each of the applicants was jointly and severally liable in the sum of $110,558.40, by way of damages and equitable compensation, for breaches of employment agreement and fiduciary duty, and, further or alternatively, on the basis that they were constructive trustees of that sum pursuant to the principles in Barnes v Addy.
[2]He v Huang [2016] VCC 1658.
In a subsequent decision, after hearing submissions as to the appropriate orders and as to costs, the judge further ordered, in effect, that the applicants pay 75% of the respondents’ costs.
The applicants seek leave to appeal those decisions. In turn, Mr Huang has filed a Notice of Contention. The substantive grounds of the application, and the Notice of Contention, raise four principal issues, namely:
(1)Whether the judge was correct in concluding that it was a term of the agreement between Mr He and Mr Huang that the business of JC He would close, and would not be conducted from the premises in Doveton. (Grounds 1 and 2).
(2)Whether the judge was correct in determining that all the stock, that had previously belonged to JC He, and that had been moved by that company to the Doveton premises, had been sold by JC He to Top Union, so that JC He could not maintain a claim in conversion against Mr Huang and Top Union for their retention of any of that stock after the termination of the agreement. (Grounds 3 and 4; Notice of Contention).
(3)Whether the judge was correct in concluding that amounts totalling $112,560, deposited by Mr He to the account of Top Union in March, April and July 2014, should not be offset against the damages awarded by the judge to Top Union. (Ground 5).
(4)Whether, in calculating the damages to be awarded to Top Union as a consequence of the applicants continuing to conduct the business of JC He at the Doveton premises, the judge was correct in applying a gross profit margin of 42% in respect of the revenue derived by JC He from trading at the Doveton store during the period February to April 2014. The applicants contend that the judge ought to have applied a gross profit margin of 11.5%. (Ground 6).
In addition, the applicants (by grounds 7 and 8) seek leave to appeal against the orders for costs made against them in the proceeding.
The facts
Mr He was born in the People’s Republic of China in 1987. He undertook tertiary education in Australia, completing a Degree in Accounting at Victoria University and a Master of Financial Management at the Australian National University, Canberra. Mr He incorporated JC He in December 2010. The financial statements for that company recorded sales income of $1,185,926 for the year ended 30 June 2013.
Mr Huang was born in the People’s Republic of China in 1956. He conducted a practise as an architect in China for 30 years. At the time of the trial, he was a resident of Sydney, having moved to Australia with his wife in 2010 on a temporary visa arrangement. In 2012, Mr Huang was granted a 163 visa that permitted his wife and him to stay in Australia for about four years. As Mr Huang and his wife wished to remain in Australia, he sought to apply for a visa which would have entitled him to permanent residency known as a ‘Business Owner Visa (Subclass 890)’ (‘the 890 visa’). In order to qualify for such a visa, Mr Huang was required to establish that he had managed his own business in Australia for two years, that he had an interest of at least 51% in an Australian enterprise with a turnover of $300,000 in the twelve months immediately before the application, and that it employed at least one full time employee. When he was living in China, Mr Huang was a friend of Mr He He, who was the father of Mr He. In November 2013, Mr Huang spoke to Mr He He, who suggested that Mr Huang contact his son (Mr He) who might be able to assist him to establish a business in Australia.
Accordingly, Mr Huang contacted Mr He by telephone in November 2013. Subsequently, Mr Huang and his wife travelled to Melbourne on 13 November 2013, and visited Mr He at his factory in Dandenong. Mr Huang told Mr He that he was interested in establishing a business in Australia. There was some discussion about a potential franchise arrangement between Mr Huang and an Indian supplier, whose company was known as ‘Trek’, but that proposal was not pursued.
Mr Huang again visited Mr He in Melbourne on 4 December 2013. The next proposal, that was discussed, was one by which Mr Huang might invest $150,000 in Mr He’s business to help him expand his business. However, that proposal also did not proceed. At the same time, Mr Huang had become interested in conducting a trailer parts business through his own company, Top Union. According to Mr Huang’s evidence, he told Mr He that he wished to employ Mr He as his general manager in such a business on a full time basis, but, as a precondition to that, Mr He had to stop his own current business. Mr Huang, in his evidence, stated that they did not then discuss the proposed trailer parts business in detail, because Mr Huang would rely on Mr He to assist him. However, they also discussed employing Ms Liu, and Mr He said that Ms Liu would look after the eBay aspect of the business in which she was experienced. Mr Huang, in his evidence, said that he told Mr He that he had to stop doing his own business, because otherwise he would be competing with him.
On the other hand, in his evidence, Mr He stated that, at that time, he understood that Mr Huang was under some time pressure, as his visa would expire in 2017, and he needed to be able to achieve $400,000 turnover each year for a period of two years to qualify for the 890 visa. Mr He said that the proposal was that he would conduct the business himself, and Mr Huang would not control it. Mr Huang would inject funds into the business as a loan, and that, after he had satisfied the immigration requirements and obtained his visa, everything would be put under Mr He’s name. In his evidence, Mr He said that the idea was that, regardless of whether the business was to be Top Union business or JC He business, it would all be Mr He’s business. According to Mr He, Mr Huang stated that he did not worry about profit, shares or ownership, that ‘Top Union’ was just a name that he had to use to apply for the visa, but that he did not want to make money in Australia, because he had enough money. In cross-examination, Mr He said that, as part of the agreement reached between himself and Mr Huang, Mr He would be entitled to operate the JC He business from the Top Union premises while he was employed by Top Union. Mr He also stated that Mr Huang had said that the monies, that he injected into the business, would be a loan by him to the business. The intention was that once the visa requirements had been satisfied, subject to repayment to Mr Huang of the loan monies and interest, Mr Huang would put everything into Mr He’s name.
In that respect, as noted by the trial judge, it was common ground that the parties agreed that if Mr Huang obtained a 890 visa from the Australian Government, Mr He would have the right to buy Mr Huang’s interest in the business for a price equal to the capital injections to be made by Mr Huang into the business together with interest at the rate of 10% per annum.[3] That agreement was referred to in the proceeding, and in the judge’s reasons, as the ‘exit strategy’.
[3]Reasons [142].
Mr He said that, in the course of the discussions that he had with Mr Huang, they talked about moving the stock of JC He from its present business premises in Dandenong. In his evidence, Mr He stated:
JC He International Trade cannot stop trading so all the stock we need to move from the older premises to new premises.
According to Mr He, Mr Huang told him that he (Mr Huang) could not purchase all of the JC He stock, because the Immigration Department would view such a purchase as the acquisition by him of the whole business of the company. So (according to Mr He) Mr Huang said that Mr He could keep running his own company at the premises.
On the other hand, in his evidence, Mr Huang said that, in February 2014, Mr He told him that he still had some stock available, and because the lease of his premises was due to expire soon, he needed to place the stock elsewhere. Therefore, (according to Mr Huang) Mr Huang told him that he could put the stock at the premises of Top Union, and if Top Union needed that stock in the future, Top Union could purchase it from Mr He at a price at or below market value.
In the meantime, after their meeting in December 2013, Mr He carried out investigations to secure suitable premises for Top Union. In doing so, he identified a property at 22A Princes Highway, Doveton, and Top Union entered into a written lease of those premises. Mr He paid a security deposit for the lease. The Doveton premises, leased by Top Union, opened for business in February 2014. At that time, short form employment contracts were signed between Top Union and Mr He as general manager, and Ms Liu as online store manager. They provided for a salary of $45,000 per annum for Mr Huang and a salary of $40,000 per annum for Ms Liu. Mr Peter Cochrane, who had been recommended to Mr Huang by Mr He, was also engaged at an annual salary of $50,000.
After the Doveton premises were opened for business, Mr He arranged for JC He’s stock to be transported from its former premises at Rodeo Drive to the Doveton premises. Mr He stated that some 220 pallets of stock were transferred in that process. Mr Huang then made a series of advances by way of loan to Top Union, and the security deposit, previously paid by JC He, was repaid to it.
When the Doveton premises opened for business in February 2014, Mr He was initially in control of the bank accounts of Top Union. In his evidence, Mr He stated that much of the business was conducted through an online ‘eBay system’ which was in his personal name, because Top Union had not established its own eBay account.
After a short period of time, Mr Huang became concerned that few deposits had been made into the bank account of Top Union. In his evidence, he said that when he raised that matter with Mr He, the latter stated that there were delays in transferring the eBay account to Top Union, and that there had also been delays in establishing an EFTPOS account in the name of Top Union.
In the ensuing two months, a number of disagreements arose between Mr He and Mr Huang concerning the business of Top Union. In particular, Mr Huang was concerned that the income of Top Union was quite minimal. Accordingly, he told Mr He that he wished to retrieve control of the financial affairs of Top Union, and he cancelled Mr He’s access to the Top Union bank account in April 2014. Ultimately, as a result of disagreements between the parties, Mr Huang terminated the employment of Ms Liu in the business. In response, Mr He also threatened to resign. In the course of a discussion that took place shortly before 15 April, Mr He offered to purchase the Top Union business at $300,000. Mr Huang initially agreed to that proposal, but later, when incensed by some conduct of Mr He, Mr Huang decided not to sell the business to Mr He.
A meeting then took place between Mr He, Ms Liu and Mr Huang on 15 April 2014, which Mr He recorded without the knowledge of Mr Huang. The discussion between the parties was largely inconclusive and did not resolve the issues between them. As a result, Mr He and Ms Liu ceased working at the business in Doveton. Mr Huang also dismissed Mr Cochrane from Top Union’s employment. Mr Huang tried to continue the business conducted by Top Union, but he was unsuccessful in doing so. As mentioned, ultimately, liquidators were appointed to Top Union as part of the creditors’ voluntary liquidation on 5 December 2014.
In the meantime, after departing from the Top Union business, Mr He did not resume trading through JC He. Instead, he operated the business, that was previously that of JC He, by a different company owned by him, Jingcheng Group Pty Ltd, from premises that had previously been leased by JC He on Frankston Dandenong Road, Dandenong.
The claim
As mentioned, the claim by Mr He and JC He, as pleaded in their further amended statement of claim, principally concerned the retention by Mr Huang and Top Union of equipment and stock belonging to JC He, after the agreement between the parties had been terminated in April 2014. The applicants relied on four causes of action to support that claim, namely, breach of contract, estoppel, misleading and deceptive conduct, and conversion.
The judge rejected the claims for breach of contract, estoppel and misrepresentation. On the conversion claim, the judge accepted the evidence of Mr Huang that, as part of the agreement, Top Union was entitled to purchase stock that had been transferred by JC He to the Doveton premises. The judge found that JC He should succeed in its claim for any of its stock that had remained at the premises and that had not been purchased by Top Union. However, the judge concluded that all of the stock, that remained at the premises of Top Union, had been invoiced by JC He to Top Union, which had the effect of transferring title in that stock to Top Union. Accordingly, that aspect of the claim by JC He failed. It is that conclusion, by the judge, that is the subject of grounds 3 and 4 of the proposed grounds of appeal, and we will return to the judge’s reasons, in respect of it, shortly. The judge upheld a small part of the applicant’s claim for damages for conversion of plant and equipment, primarily consisting of a forklift truck that had remained at the Doveton premises. The value of the plant and equipment, that was the subject of that finding, amounted to the sum of $10,870.
In its counterclaim, Top Union pleaded that it was a term of the agreement between the parties that Mr He would cease to operate the business of JC He and that he would close it down. It was also pleaded that there were implied terms of the employment contracts of both Mr He and Ms Liu that they would perform their work for Top Union in good faith and with fidelity. It was alleged that Mr He breached the express and implied terms of his contract of employment, and Ms Liu breached the implied term of her contract of employment, by continuing to operate the JC He business, and by doing so in competition with the business of Top Union. Top Union also made a claim against Ms Liu and JC He based on the principles in Barnes v Addy, alleging that they had each received funds that belonged to Top Union. The judge upheld those claims, and they are the subject of the first two proposed grounds of appeal. In addition, Top Union made a claim for damages against Mr He and JC He in respect of misleading and deceptive conduct, arising out of certain representations that were alleged to have been made by Mr He to Mr Huang in February 2014 concerning the revenue of JC He, and the expected revenue of Top Union. The judge rejected the latter claim, and it is not the subject of this application.
The judge’s reasons
Having summarised the relevant facts, and the claim and counterclaim, the judge turned to the question of the nature and terms of the agreement entered into between the parties in February 2014. His Honour found that the agreement was made between Mr He and Mr Huang, and it was not established that either Top Union or JC He were parties to the contract.[4]
[4]Reasons [166].
The judge then addressed the question as to what were the terms of the contract. The judge concluded that the primary purpose of the proposed agreement was to enable Mr Huang to qualify for a visa giving him Australian residency based on his conduct of a substantial enterprise in Australia.[5] In light of that primary objective of the contract, the judge noted that the ‘logic of the task’, on which Mr He and Mr Huang had embarked, dictated that the whole of the trailer parts enterprise should be funnelled through Top Union.[6] On the other hand, his Honour also noted that it would have required an ‘extraordinary sacrifice’ for Mr He to permit the whole of his business to be absorbed into the business of Top Union, for the benefit of Mr Huang and Top Union. However, his Honour then stated:
Yet, given the exit strategy which the agreement between the two men established, namely that Mr He would be entitled to acquire Top Union for an outlay limited to the amounts invested by Mr Huang plus simple interest, it could be seen that any business which was built up in the name of Top Union would ultimately accrue to the advantage of Mr He without him having to make any outlay to purchase goodwill.[7]
[5]Reasons [143].
[6]Reasons [175].
[7]Reasons [177].
The judge rejected the evidence of Mr He that, under the arrangement with Mr Huang, he was entitled to conduct both companies at the same premises. His Honour stated:
This view is at odds with the overall commercial objective of the arrangements between Mr He and Mr Huang, namely, to qualify Mr Huang for the 890 immigration visa by maximising the turnover of Top Union of which he appeared to be the principal.[8]
[8]Reasons [180].
Accordingly, the judge accepted the contention, advanced on behalf of Mr Huang, that JC He was not entitled to continue trading to its previous customer base, and that sales to those customers were to be ‘routed’ through Top Union to facilitate Mr Huang’s qualification for the 890 visa.[9]
[9]Reasons [184].
Having reached that conclusion, the judge noted that it was common ground between the parties that there were terms of the contract, first, that Mr He, Ms Liu and Mr Cochrane be engaged by Top Union, secondly, that Mr Huang was to inject capital into Top Union, and, thirdly, that if Mr Huang obtained the 890 visa, Mr He would have an option to buy out Mr Huang’s interest in Top Union for the cost of repaying Mr Huang’s loan advances to Top Union with interest at 10% per annum.[10]
[10]Reasons [186]–[189].
The judge noted that the parties disagreed as to what terms were contained in the contract relating to the ‘fate’ of JC He’s stock. Having referred to the conflicting evidence as to that issue, the judge concluded as follows:
In substance, I accept that a further term of the arrangements between the parties was that the stock brought to Top Union’s premises might be sold to Top Union by JC He ‘at cost’. Mr Huang’s evidence on this point fits with the probabilities and accords, at least partially, with the post-contractual conduct.
The position taken by Mr He and his company that they were entitled to sell the stock to customers in competition with Top Union is at odds with the entire rationale of the agreement between the parties, and I therefore reject it.[11]
[11]Reasons [204]–[205].
Having reached those conclusions, the judge then considered the causes of action pleaded by Mr He. As mentioned, the judge rejected the claims, made on behalf of Mr He, that Mr Huang breached the February 2014 agreement by purporting to dismiss Mr He, that Mr Huang wrongfully excluded Mr He and Ms Liu from the new premises, and that, by not returning any equipment or stock held at Doveton, Mr Huang had breached any term of the contract. In addition, as earlier stated, the judge rejected the claims based on estoppel and misrepresentation.
The judge then turned to the claim made by JC He in conversion. As mentioned, the judge found that, in the case of stock which had been sold by JC He to Top Union, property in that stock had also passed to Top Union, so that JC He did not have a remedy in conversion in respect of that stock. On the other hand, to the extent that the evidence disclosed that stock belonging to JC He was retained by Top Union, the failure of Mr Huang and Top Union to deliver that stock to JC He, despite demands made by JC He through its solicitors, would constitute a conversion by them of that stock.[12]
[12]Reasons [234].
In that respect, the judge noted that there was no clear accounting evidence as to the value of the stock that was moved by JC He to the Doveton premises in early 2014. The applicants relied on the valuation by its accountant, Mr Kabov, of the stock, that had been moved by JC He to those premises. Mr Kabov had calculated the value of the JC He stock, that was held by Top Union on 16 April 2014, at $317,874. A chartered accountant engaged by the respondents, Mr Smith of CFAS Advisory, had calculated the value of the stock at $177,182, but the judge accepted Mr Kabov’s valuation of that stock (at $317,874). On the other hand, the judge noted that stock worth $316,814.09 had been invoiced from JC He to Top Union. The judge then stated:
Regrettably, neither Mr Kabov nor Mr Smith appears to have been asked directly, or for that matter indirectly, anything about this large intercompany stock sale and the effect that it would have upon their calculations. With some hesitation in light of the perplexing uncertainties of all these matters, I conclude that the recorded invoicing of stock from JC He to Top Union had the effect of transferring title to Top Union for all JC He stock. As a result, the claim by JC He for conversion of stock must be dismissed.[13]
[13]Reasons [283].
As mentioned, the judge, however, upheld the claim by the applicants for conversion in respect of a forklift truck, and some other miscellaneous items of equipment, of JC He that had remained at the premises of Top Union.
The judge then turned to the counterclaim. Based on the evidence of Mr Smith, the judge found that, by reason of JC He’s competition with it, Top Union had lost revenue in the sum of $276,396.[14] The judge rejected the claim by Top Union that it should be compensated for the whole of that lost revenue. Rather, the judge considered that the appropriate measure of its loss was the gross profit which would have been derived from that revenue. His Honour considered that the appropriate gross profit margin, for the industry, was 42%. Applying that margin, he awarded damages to Top Union in the sum of $110,558.40.[15]
[14]Reasons [291].
[15]Reasons [295].
After the judge had delivered his reasons for judgment, the parties made submissions, first, as to the orders that should be made consequent upon his findings, and, secondly, as to the appropriate orders for costs in the matter.
In relation to the first matter, counsel for the applicants referred to evidence, that had been adduced in the trial, that between February 2014 and 19 April 2014, Mr He had deposited, from the accounts of JC He, and his own accounts, various amounts to the account of Top Union totalling $112,560.71 in respect of the proceeds of stock that was sold in that period. It was contended that those amounts should be offset against the damages, in the sum of $110,558.40, which the judge found was payable by Mr He and JC He to Top Union.
In a further ruling,[16] the judge rejected that submission. The judge noted that, in his reserved decision, he had found that Mr He had proceeded on the basis that he was entitled to operate the business of both Top Union and JC He in competition in the same market. In those circumstances, the judge considered that it was appropriate to assume that when Mr He made any deposits in favour of Top Union, he did so on the basis of his understanding of the agreement that he had with Mr Huang, namely, that the payments were only made in respect of sales that he had effected on behalf of Top Union, and not on behalf of his own company JC He.
[16]He v Huang (Unreported, County Court of Victoria, Judge Macnamara, 8 December 2016).
On the question of costs, the judge accepted that the amount of time that was spent on the one point on which the applicants were successful, namely, the conversion of plant and equipment, was very minor. His Honour rejected the submission made on behalf of the respondents that, as a consequence, the order to be made in their favour should only be discounted by 5%. His Honour considered that there had been excessively lengthy cross-examination and evidentiary objections by counsel on both sides, so that the proper order was that the costs to be ordered in favour of Mr Huang and Top Union should be reduced by 25%.
Proposed grounds of appeal and the Notice of Contention
As mentioned, the applicants seek to rely on eight proposed grounds of appeal, the first six of which are directed to the substantive findings made by the judge. Those grounds are as follows:
1.The trial judge erred in failing to find or hold that the first applicant and the second respondent agreed that the business of the second applicant would operate alongside that of the second respondent.
2.Alternatively, the finding of the trial judge that closure of the business of the second applicant was necessary to avoid a breach of duties impliedly owed by the first and third applicants to the second respondent by reason of their employment was against the weight of the evidence.
3.The trial judge erred in finding that the second applicant sold stock to the value of $316,814.09 to the second respondent in March 2014.
4.The finding of the trial judge that the stock of the second applicant was not converted because it had been sold to the second respondent was against the weight of the evidence.
5.Alternatively to grounds 1 and 2, the trial judge erred in finding that the sum of $112,560.00 paid by the first applicant in March, April and July 2014 to the second respondent ought not be taken into account and offset against the sum of $110,558.40 found to be payable by the applicants to the second respondent.
6.Alternatively to grounds 1 and 2, the trial judge erred in finding that the applicants should pay to the respondents 42% of the total sales revenue rather than the percentage the second respondent sought — namely 11.5% of total sales revenue.
7.The learned primary judge erred in the exercise of his discretion as to costs by failing to take account of the conduct of the first respondent in first agreeing to sell his interest in the second respondent to the first applicant for $300,000 in April 2014 and then resiling from that agreement.
8.The learned primary judge erred in the exercise of his discretion as to costs by failing to consider and/or failing to give reasons for rejecting the plaintiffs and defendants by counterclaim request for an order pursuant to Order 63A Rule 24(1) of the County Court Civil Procedure Rules that the said order not apply.
The Notice of Contention contained three grounds, each of which are directed, in effect, to the matters raised in grounds 3 and 4 of the proposed grounds of appeal. The grounds contained in the Notice of Contention are as follows:
1The learned trial judge erred in law in deciding that the second applicant (JC He) was entitled to claim in respect of the conversion of personal property notwithstanding that the personal property the subject of the claim was not identified.
2The pleaded conversion claim relates only to stock moved across by JC He to the premises of the second respondent (Top Union) in February 2014. The learned trial judge erred to the extent he permitted JC He to pursue an unpleaded claim in respect of stock purchased subsequently.
3There is no evidence to support a finding that any particular quantity of JC He’s stock moved across to Top Union’s premises in February 2014 remained at those premises on 16 April 2014.
Legal principles — appeal on findings of fact
The six substantive proposed grounds of appeal are each directed to findings of fact made by the judge. The principles, relating to an appeal in respect of such findings, are well established, and have been considered by the High Court in a number of cases, including Warren v Coombes,[17] Fox v Percy,[18] CSR Ltd v Della Maddalena[19] and Robinson Helicopter Company Inc v McDermott.[20] In the recent decision of this Court in Southern Colour (Vic) Pty Ltd v Parr,[21] those principles were sufficiently summarised as follows:
On appeal, the Court is required to undertake a ‘real review’ of the evidence in respect of the findings made by the judge, and the reasons for the judge’s conclusions. Where the finding, that is under review, depended on the acceptance or rejection by the trial judge of the evidence of a particular witness or witnesses, the appellate court should only set aside that finding if, after making due allowance for the advantages enjoyed by the trial judge, that finding is ‘glaringly improbable’ or ‘contrary to compelling inferences’. On the other hand, in general, an appellate court is in as good a position as the trial judge to decide the proper inferences to be drawn from facts which are undisputed, or which have been established by the evidence. In deciding the proper inference to be drawn, the appellate court should, however, give respect and weight to the conclusion of the judge, but, having reached its own conclusion, it must give effect to it.
In applying those principles, however, it is important to bear in mind that there is a necessary interrelationship between the finding of a particular primary fact or facts, and the drawing of a conclusion or inference. That relationship was described by this Court in Box Hill Institute of TAFE v Johnson in the following terms:
... while an inference is a conclusion based on established facts, nevertheless the interplay between the finding of a particular fact or facts, and the drawing of a conclusion, is not entirely discrete. The drawing of an inference, or reaching of a conclusion, is necessarily affected by precisely how and for what reasons a judge may have accepted, or rejected, a particular piece of evidence which is important to the drawing of that inference or conclusion. Secondly, in a civil proceeding, a judge may only draw an inference or reach a conclusion in favour of a party on whom the onus of proof lies, if that inference or conclusion is the more probable inference or conclusion available on the facts of which the judge is satisfied. The question whether an inference is more probable than another may be affected by the judge’s view of particular facts relied on in support of any competing inference, or of facts relied on to contradict the inference ultimately formed by the judge.[22]
[17](1979) 142 CLR 531.
[18](2003) 214 CLR 118.
[19](2006) 224 ALR 1.
[20](2016) 331 ALR 550, 558–9 [43] (French CJ, Bell, Keane, Nettle and Gordon JJ).
[21][2017] VSCA 301.
[22]Ibid [78]–[79] (Santamaria, Kaye and Ashley JJA) (citations omitted).
Grounds 1 and 2
Grounds 1 and 2 are directed to the conclusion by the judge that it was part of the agreement between Mr He and Mr Huang in February 2014, that JC He was not entitled to continue trading to its previous customer base, and that sales to those customers were to be routed through Top Union to facilitate Mr Huang’s qualification for the 890 visa.[23]
[23]Reasons [184].
In support of grounds 1 and 2, counsel for the applicants contended that, although Mr Huang, in his evidence, said that he had demanded of Mr He that the JC He business be closed, Mr Huang did not give evidence of any response by Mr He to that demand. Counsel submitted that although the judge acknowledged that the closure of the business of JC He, without compensation, would appear to require an ‘extraordinary sacrifice’ for Mr He[24], the judge incorrectly concluded that Mr He (and Ms Liu) agreed to make that sacrifice. Counsel noted that Mr He was a well-educated and successful businessman, and there was no good business reason for Mr He to have entered into a transaction on such disadvantageous terms.
[24]Reasons [176].
Counsel for the applicant further contended that the judge’s conclusion was not supported by dealings between the parties in December 2013, in which Mr He had already assisted Mr Huang to create the impression that JC He was trading in trailer parts, by diverting customers of JC He to Top Union, with Mr Huang then returning those profits to Mr He in cash ‘off the books’ dealings. It was submitted that those transactions demonstrated that the applicants had retained total control of the customers of JC He and had suffered no loss by nominally diverting them to Top Union.
Counsel submitted that those dealings, between the parties in December 2013, were of substantial significance. In particular, shortly after the parties had entered into their agreement, and in the lead up to the opening of the business of Top Union at the Doveton premises, the parties had devised a method by which Top Union was able to record income from customers of JC He, without JC He closing its business or suffering any other detriment. It was submitted that it was in that context that the parties then formalised their arrangement, by conducting the business of both Top Union and JC He at the Doveton premises, in a manner which continued to enable Top Union to derive sufficient revenue in order to satisfy the requirements of Mr Huang’s application for a 890 visa. Counsel for the applicant contended that the employment contracts entered into by Mr He and Ms Liu were part of the structure devised by the parties, but they were not intended to affect the ability of Mr He to trade through and continue the business of JC He.
In addition, counsel for the applicant referred to the evidence that Mr He had provided personal guarantees to the suppliers of Top Union. He contended that it would be most unusual, and highly improbable, that a mere employee of a business would guarantee suppliers of the business, unless the employee had a direct financial interest in the business itself. In addition, counsel noted that, in the financial year ended 30 June 2013, JC He had derived revenue in excess of $1,000,000. It was most unlikely, he submitted, that Mr He would have agreed to close that business, in order to enter into a short term employment contract with a new business, in the hope that, at some time in the future, he might be able to acquire that business by repaying the capital sums injected into it by Mr Huang with interest. Further, it was contended, it was not necessary for JC He to divest itself of all of its revenue, in order to enable Top Union to be able to earn at least $300,000 per annum. Thus, contrary to the conclusion by the judge, the underlying purpose of the venture — to enable Mr Huang to obtain the 890 visa — did not necessitate that the ‘whole’ of the trailer parts enterprise of JC He be diverted through Top Union.
In response, counsel for Top Union submitted that the judge was correct to conclude that JC He was not entitled to continue to trade to its previous customer base. Counsel contended that the judge correctly gave five reasons why he arrived at that conclusion. First, Mr Huang gave evidence he had expressly required that JC He cease business. Secondly, the commercial purpose of the agreement was to satisfy the relevant visa requirements by directing all of the trailer parts enterprise through Top Union, so as to maximise its income. Thirdly, although, on the one hand, the closure of JC He involved a sacrifice by Mr He, on the other hand, it was agreed that ultimately Mr He would be able to acquire the business of Top Union on particularly favourable terms. Fourthly, it was submitted that the judge based his conclusion on complaints made by Mr Huang to Mr He in the recorded conversation on 15 April 2014 about Mr He’s failure to conduct the whole of the trailer parts business through Top Union. Fifthly, it was not until the commencement of the trial that the applicants sought to plead that it was a term of the agreement that JC He would be entitled to continue to trade.
Accordingly, it was submitted that the judge had an appropriate basis upon which to reach the conclusion that, as part of the agreement between the parties, JC He was obliged to close its business.
In addition, counsel for Top Union submitted that there were other objective facts, which further supported the conclusion by the judge that, as part of the agreement between Mr He and Mr Huang, JC He was not entitled to continue to trade to its previous customer base. Counsel noted that, although the requirements for the 890 visa specified that an applicant engage at least one employee in the business, Top Union employed three persons, namely, Mr He, Ms Liu and Mr Cochrane. If the agreement had involved the continuation of the business of JC He, that company could have engaged two of those persons in its business. Counsel also submitted that the fact that Mr Huang retained the power to deprive Mr He of control of the bank account of Top Union was consistent with Mr He having no other authority in the business than that of an employee of it. In addition, counsel referred to a number of passages from the recorded conversation between the parties on 15 April 2014 which, he contended, supported the proposition that Mr He had agreed to discontinue the business of JC He, and to conduct only the business of Top Union at the premises at Doveton. Counsel contended that it was particularly significant that, at no stage during the recorded conversation, did Mr He seek to assert that it was part of the agreement that JC He could continue its business.
Counsel for the respondent also relied on the sale by JC He to Top Union of stock worth at least $316,000 which, he contended, would have been improbable if JC He had continued to conduct its business of its own right. Counsel further submitted that the provision by Mr He of guarantees to suppliers of Top Union did not support the conclusion that JC He was entitled to continue to conduct its business at Doveton. Rather, counsel contended, that conduct by Mr He was consistent with his expectation that, after Mr Huang had satisfied the visa requirements, Mr He would be able to acquire the business of JC He on advantageous terms.
Thus, it was submitted that the weight of the evidence, together with logic and commercial plausibility, supported the conclusion reached by the judge. It was further submitted that, in the absence of an express term that the JC He business be terminated, Mr He and Ms Liu would, in any event, have breached the implied duties of good faith and fidelity of their employment contracts by conducting a similar business, to Top Union, in direct competition to it. Counsel contended that the applicants had failed to adduce evidence that the parties had agreed to exclude the application of those implied duties to the employment contracts entered into by Mr He and Ms Liu.
Ground 1 is directed, principally, to the conclusion by the judge that as part of the agreement reached between Mr He and Mr Huang, JC He was not entitled to continue to trade to its previous customer base. The judge expressed that conclusion in the following terms:
In the circumstances, I accept the contentions advanced on behalf of Mr Huang that JC He was not entitled to continue trading to its previous customer base; sales to these customers were to be routed through Top Union to facilitate Mr Huang’s qualification of the 890 visa.
This conclusion necessarily entails rejection of the contention on behalf of Mr He to the contrary.[25]
[25]Reasons [184]–[185].
In order to assess the competing submissions in respect of grounds 1 and 2, it is necessary, first, to understand the nature of the conclusion so expressed by the judge.
As mentioned, Mr He and Mr Huang gave conflicting evidence as to their discussions concerning whether JC He was to continue to trade after the commencement of the business of Top Union at the Doveton store. In his evidence, Mr Huang stated that he had specifically stipulated to Mr He that, as part of the arrangements between them, JC He should cease to trade. On the other hand, the effect of Mr He’s evidence was that Mr Huang agreed that he would be entitled to continue the business of JC He at the Doveton store, and to sell the stock of JC He from that store to customers of JC He, provided that, in doing so, he enabled Top Union to generate sufficient revenue to satisfy the visa requirements. In concluding that there was a term of the agreement that JC He was not entitled to continue to trade to its customer base, the judge did not resolve the conflict in oral testimony between Mr He and Mr Huang. In particular, his Honour did not make any finding as to the credibility of the evidence of the two witnesses relating to that matter. Rather, the judge determined the issue on the probabilities, by examining the competing factors relied on by each of the parties.
In its further amended counterclaim, Top Union pleaded that there were express terms of the agreement between itself and Mr He that the latter would cease to operate JC He, and cause JC He to close down the JC He business upon commencement of his employment with Top Union, and that it would not otherwise engage in any activities in competition with Top Union upon the commencement of his employment with Top Union. In addressing the question whether the agreement contained that term, the judge set out the factors, which caused him to accept the ‘contentions’ on behalf of Mr Huang that JC He was not entitled to continue to trade to its previous customer base. The judge considered that such a term of the agreement conformed with the probabilities, because the purpose of the arrangement was to enable the whole of the income derived from the trailer parts enterprise to be funnelled through Top Union.[26] The judge stated that, notwithstanding that such an arrangement would have involved an ‘extraordinary sacrifice’ for Mr He, on the other hand, Mr He would benefit from the arrangement, because he would be ultimately entitled to acquire the whole of the business without making any outlay to purchase the goodwill. The judge further considered that the purpose of the transaction was consistent with dealings between Mr He and Mr Huang in December 2013, in which, in effect, sales achieved by JC He had been re-written as sales by Top Union to its customers, in order to make it appear that those sales had been made by that company.[27] In addition, the judge considered that the recorded conversation of 15 April 2014 also reflected the condition of the agreement that was contended for on behalf of Mr Huang.
[26]Reasons [175].
[27]Reasons [182].
As that analysis of the judge’s reasoning demonstrates, his Honour did not make a finding as to the credibility of the evidence of either Mr He or Mr Huang relating to the term of the agreement that was in contention. Rather, the judge determined the issue, that is the subject of grounds 1 and 2, by a process of inference from the objective facts and circumstances of the transaction. On this application it was common ground that the judge reached his conclusion in that way.
The process of inferring an express term of an agreement, and the distinction between inferential reasoning and implication, has been considered in a number of authorities. In Hawkins v Clayton,[28] Deane J stated:
In these circumstances, it is necessary to identify two distinct stages in the ascertainment of relevant terms. Those stages may well overlap and it will often be unnecessary to distinguish between them in practice. The first stage is essentially one of inference of actual intention: what, if any, are the terms which can properly be inferred from all the circumstances as having been included in the contract as a matter of actual intention of the parties? The second stage is one of imputation: what, if any, are the terms which are, in all the circumstances, implied in the contract as a matter of presumed or imputed intention?[29]
[28](1988) 164 CLR 539.
[29]Ibid 570.
As noted by Deane J, the two stages, of inferential reasoning and implication, may overlap, but they are distinct. That distinction was emphasised by Brennan CJ, Dawson and Toohey JJ in Byrne v Australian Airlines Limited.[30] Their Honours, referring to cases where there was no formal contract between the parties, stated:
In those cases the actual terms of the contract must first be inferred before any question of implication arises. That is to say, it is necessary to arrive at some conclusion as to the actual intention of the parties before any presumed or imputed intention.[31]
[30](1995) 185 CLR 410.
[31]Ibid 422. See also Breen v Williams (1996) 186 CLR 71, 90–91 (Dawson and Toohey JJ); Grocon Contractors (Victoria) Pty Ltd v APN DF2 Project 2 Pty Ltd [2015] VSCA 190 [176]–[180] (Santamaria, Kyrou and McLeish JJA); Nurisvan Investment Limited v Anyoption Holdings [2017] VSCA 141 [73] (Osborn, Santamaria and Kaye JJA).
The principles, relating to the drawing of conclusions or inferences in a civil proceeding, from proven facts, are well established. The inference must be the product of logical deduction rather than speculation, it must be based on evidence, and the party, which bears the onus of proving the fact, that is the subject of the inference, must demonstrate that that inference is the more probable conclusion to be drawn from the proven facts in the case.[32]
[32]Holloway v McFeeters (1956) 94 CLR 470, 480–481; Transport Industries Insurance Co Limited v Longmuir [1997] 1 VR 125, 129–30 (Winneke P), 141 (Tadgell JA); Marriner v Australian Super Developments Pty Ltd [2016] VSCA 141 [73]–[77] (Tate ACJ, Kyrou and Ferguson JJA); Masters Home Improvement Australia Pty Ltd v North East Solutions Pty Ltd [2017] VSCA 88 [101] (Santamaria, Ferguson and Kaye JJA).
In accordance with the authorities, relating to appeals on findings of fact, it is necessary for us to examine the inference drawn by the judge, as to the express term of the agreement that is the subject of grounds 1 and 2, and to determine whether the judge correctly determined that that inference was the more probable conclusion to be drawn from facts proven by the evidence in the case.
As mentioned, the judge accepted that the ‘entire purpose’ of the arrangement between Mr He and Mr Huang was to enable Mr Huang to qualify for a visa giving him Australian residency, based on Mr Huang’s conduct of a substantial business enterprise in Australia for the requisite period of time.[33] The judge considered that, as a consequence, logic dictated that the ‘whole’ of the trailer parts enterprise, to be undertaken at Doveton, be conducted by Top Union and by no other entity.[34]
[33]Reasons [143].
[34]Reasons [169], [176].
It is not in dispute that the sole rationale for the arrangement between the parties was to enable Mr Huang to satisfy the requirements to obtain a permanent residency visa in Australia. That conclusion, by the judge, was common ground, and was amply supported by the evidence of both Mr He and Mr Huang. However, that underlying purpose and objective of the parties did not necessitate, or support, the conclusion that, in order to achieve that objective, Mr He was required to discontinue the entire business of JC He. The evidence demonstrated that for the financial year ended 30 June 2013, JC He achieved a sales revenue of $1,185,286. There was no evidence that, at the time at which the parties reached their agreement in December 2013, the revenue of JC He had materially declined. In those circumstances, it was far from necessary for JC He to discontinue the whole of its business, so as to enable Top Union to achieve a turnover of $300,000 per annum in accordance with the 890 visa requirements.
Further, the underlying rationale of the arrangement is more consistent with the continuation by Mr He of his established business. Mr Huang had worked as an architect for 30 years in China, where he was a principal of a firm that had 50 employees. He had no interest in conducting, or playing an active role in, a business that involved selling trailer parts. Rather, his sole concern was to obtain a visa that entitled his wife and he to remain in Australia. Provided that that objective could be met, Mr Huang would have had no reason to require that Mr He not continue to operate a business that, on its face, was in competition with Top Union.
By contrast, Mr He gave evidence that, after a slow start, the business of JC He had become well established. As mentioned, in the previous financial year, it had earned revenue in excess of $1,000,000. On the face of it, that business was going well. At the time that Top Union was set up, JC He was holding a large amount of stock that it had purchased for resale to its own customers. Mr He was an educated and intelligent person. It would be improbable that, in those circumstances, he would agree to immediately abandon his own company, for no consideration, in order to become the employee of a new entity that conducted a similar, or the same, business. Indeed, the employment contracts signed by both Mr He and Ms Liu did not provide to them any security of employment. It was equally improbable that Mr He would have agreed not to sell the stock, then held by JC He, at a profit to its customers, but, instead, that he would agree only to sell that stock, at cost, to Top Union if and when Top Union required it. That arrangement would have left JC He (and Mr He) holding a large quantity of stock, for which it had paid, in the hope that it might sell some of that stock at cost to Top Union at its discretion.
The judge correctly acknowledged that, on the face of it, the discontinuance of the business of JC He would have required an ‘extraordinary sacrifice’ for Mr He.[35] However, the judge considered that there was a commercial explanation why Mr He would make such a sacrifice, namely, that the ‘exit strategy’ agreed between the parties was favourable to him. On analysis, that assessment of the ‘exit strategy’ needs some qualification. First, the parties only agreed that Mr He could purchase the business of Top Union if and when a 890 visa was obtained by Mr Huang and his wife. Second, the ‘exit strategy’ would only be favourable to Mr He if the new business was not only viable but also successful. It involved Mr He refunding to Mr Huang the capital injections made by him (approximately $300,000) together with a healthy rate of interest at 10% per annum. Those terms would only be favourable to Mr He if the value of the business of Top Union, at the time at which he exercised his option to purchase it, exceeded that amount.
[35]Reasons [176].
The arrangements between the parties, in December 2013, also provide some support for the submission by the applicants as to the terms of their agreement with Mr Huang. As noted by counsel for the applicants, Mr Huang, in cross-examination, gave evidence that in December 2013 he made an arrangement with Mr He, the effect of which was to produce turnover for Top Union before it had opened business at the Doveton store in February 2014. The gist of the arrangement was to re-write sales, that had already been made by JC He to its customers, but which had not yet been paid by the customers, so that those sales appeared to have been made by Top Union. As part of the arrangement, Top Union invoiced the customers for the sales, received payment in respect of those invoices from the customers, and then remitted the amount so received by it to JC He. In cross-examination, Mr Huang endeavoured to explain that the process, thus undertaken by the parties, was some kind of debt collection exercise, but the judge described that explanation as ‘intrinsically unconvincing’, as it was. Rather, it is clear that the parties, in that way, were artificially creating the impression that Top Union was receiving revenue, before it opened business at the Doveton premises.
No doubt, the arrangement in December 2013 was intended to assist Mr Huang to achieve his basic objective of satisfying one of the criteria for obtaining a residency visa in Australia. However, as counsel for the applicants has pointed out, that arrangement was effected shortly after the parties reached their agreement in December 2013. It was an arrangement whereby JC He continued to conduct its business, but by which Top Union also was able to record revenue in its books of account (albeit quite artificially) which would assist Mr Huang to achieve his objective of obtaining a visa. That arrangement between the parties was the background context to the formalisation by the parties of their agreement, both by entering into the lease of the Doveton premises, and by Mr He and Ms Liu entering into the employment contracts with Top Union. There is force in the submission made on behalf of the applicants that the formalisation of the agreement, in that way, was no more than a continuation of the arrangements made between the parties and implemented by them in December 2013, albeit by a different, and less artificial, structure.
Counsel for each side also sought to rely on aspects of the conduct of the parties after the business of Top Union commenced in February 2014. While post-contractual conduct is not admissible for the purpose of construing the terms of a formalised contract, on the other hand, it is recognised that, where no formal contract exists, such conduct may be admissible on the question whether the contract was in fact formed, and the terms agreed by the parties.[36]
[36]Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68, 77 (Griffiths CJ); Barrier Wharfs Ltd v W Scott Fell & Co Ltd(1908) 5 CLR 647, 668-69 (Griffiths CJ) and 672 (Isaacs J); Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, 548-9 (Gleeson CJ); Brambles Holdings Ltd v Bathurst City Council(2001) 53 NSWLR 153 [25] (Heydon JA); Regreen Asset Holdings Pty Ltd v Castricum Brothers Australia Pty Ltd [2015] VSCA 286 [134] (Warren CJ. Kyrou and McLeish JJA); Sagacious Procurement Pty Ltd v Symbion Health Ltd[2008] NSWCA 149 [105] (Giles JA); Johnston v Brightstars Holding Company Pty Ltd [2014] NSWCA 150 [124] (Basten JA); Feldman v GNM Australia Ltd[2017] NSWCA 107 [90]–[91] (Beazley P).
In the present case, however, some caution needs to be exercised in assessing the conduct of the parties after they had entered into the contract. It is clear, on any view, that Mr He and Mr Huang were most imprecise in the manner in which they discussed the arrangements that were to be implemented between them in December 2013. Further, the fact that Mr He or Mr Huang acted in a particular manner after the contract was concluded, did not, in the context of this case, necessarily mean that he was thereby intending to act in accordance with the agreement that had been concluded between them.
Counsel for Top Union contended that the unilateral exercise by Mr Huang of the right to terminate Mr He’s access to the bank account of Top Union supported the proposition that the formal structure of the arrangements between the parties properly reflected the agreement that they had made in December 2013. There are, however, two responses to that proposition. First, it seems fairly clear, from the terms of the discussion that the parties had on 15 April 2014, that Mr Huang, by virtue of his seniority, and his relationship with Mr He’s father, exercised a degree of personal superiority over Mr He. Secondly, as the director of Top Union, Mr Huang had the power to determine who should have access to the bank account of Top Union.
On the other hand, it is relevant that Mr He guaranteed a number of suppliers to the business that was conducted at the Doveton premises. If the formal arrangements between the parties reflected the substance of their underlying agreement, and Mr He was no more than a paid employee of the business, it would be most unlikely that he would have provided those guarantees to the suppliers to the business. The fact that he might, in due course, own the business, would have been a fairly tenuous incentive for Mr He to take such a risk on behalf of his employer. That is particularly so given that, on the version of the agreement contended for by the respondents, the business, that was being conducted at the Doveton premises, was a new business, that was divorced from the ongoing business of JC He.
Both parties also sought to rely on the contents of the conversation between Mr Huang, Mr He and Ms Liu on 15 April 2014, that was recorded by Mr He without the knowledge of Mr Huang. Again, some caution needs to be exercised in determining the weight that should be given to the contents of that discussion. The conversation occurred in Mandarin Chinese, and different translations of it were tendered to the Court. Further, the positions taken by the parties in that conversation may not necessarily have reflected what they had agreed five months earlier. Nevertheless, and bearing those caveats in mind, we consider that, on balance, while there are passages that are capable of telling in either direction, the contents of the conversation weigh more in favour of the proposition, contended for by the applicants, that the agreement between the parties in December 2013 did not contain a term requiring JC He to discontinue its business.
It is correct, as counsel for Top Union submitted, that the conversation did not contain a specific assertion by Mr He that there was an agreement that JC He be permitted to continue its business from the Doveton premises. Nevertheless, there are a number of passages in the conversation which supported that proposition.
At an early point in the conversation, Mr Huang discussed the various proposals that were under consideration in December 2013. He described, as the ‘second’ proposal (which appears to have been adopted), one which would enable Mr He’s business to grow and by which more income would be generated for it, while at the same time, Mr Huang would be able to fulfil the requirements of the 890 visa. Mr Huang said:
I will let you do the business on your own. I make no decisions, and I only give you advice based on my past business experiences. You can take all the profit you make, and I take back 10 percent of my investment. After I complete the visa process and become an Australian permanent resident, I will take all my investment back and you take all the other money you make.
Mr Huang continued by stating that the company must have normal business operations, and that he (Mr Huang) must sign all company paperwork, which ‘… indicates that I am the one who operates the business’. Mr Huang then pointed out that, when he had a closer look at the business after it had commenced operation, he found there were problems, because Ms Liu, and not Mr He, seemed to be taking charge of the business. Mr Huang stated that when he checked the company documents he found they did not meet the 890 visa requirements. Mr Huang then continued as follows:
… I even did not care how much money you earned. I do not intend to earn money. I just want the company transactions to show it is a healthy business. That is why I requested you to deposit money to the company account every Tuesday and Thursday. There must be money going into the account … But I now drew a conclusion, since you came here, you did not help me with my visa at all, and you made use of the company’s resources, business premises rented by the company, equipment and wages for you too and others to sell your own products. I allow you to earn the money. I told you before that you take the money away and do not get financially involved in the company. Jiangching had a business before and he quitted his business for the company. So I believe that I should not ask Jiangching to make money for me. But you need consider my needs … .
In that passage Mr Huang stated that Mr He quit his business. However, as a whole, the tenor of the passages, which we have quoted, was that Mr Huang was stating that Mr He was entitled to conduct a business at the premises, and earn a profit, provided that monies were deposited into the company account regularly to demonstrate that it was earning a viable income that was sufficient to meet the requirements for a 890 visa.
Consistently with that, in a further section, Mr He maintained that Mr Huang told him that he could sell his own products ‘at my own discretion’. Mr Huang agreed, but responded that what Mr He had done did not meet the visa requirement which was the problem.
As we stated, ultimately, some care must be exercised in giving weight to the contents of the conversation on 15 April. However, the foregoing analysis demonstrates that, at the least, the conversation contained aspects which gave more support to the contention of Mr He that it was part of the agreement between the parties that JC He be permitted to continue to trade from the Doveton premises, than it did to the contention, made on behalf of Top Union, that it was a term of the agreement that JC He not continue to trade to its previous customer base.
In summary, then, contrary to the conclusion of the judge, the evidence in the case did not, on the balance of probabilities, support the inference that it was an express term of the agreement between Mr He and Mr Huang that the business of JC He would discontinue. Rather, the matters which we have discussed have the effect that the more probable inference, from the circumstances, is that it was agreed between the parties that JC He would be able to continue to operate its business at the Doveton premises, provided that by doing so it ensured that sufficient income was derived by Top Union to satisfy the stipulated requirements for obtaining a 890 visa for Mr Huang.
The fundamental purpose of the arrangement, namely, to enable Mr Huang to obtain that visa, did not necessitate the closure of the business of JC He. On the contrary, and as indeed stated by Mr Huang in the conversation on 15 April 2014, Mr Huang was not interested in deriving a profit from the business that was to be conducted at the Doveton premises. On the other hand, the evidence made it clear that Mr He was primarily motivated by commercial considerations, as well as a desire to assist a friend of his father. It would have been improbable that Mr He would have closed his own business, without compensation, in circumstances in which he was left with a large quantity of stock owned by that business which he could only sell to Top Union at cost. It was even more unlikely that he would, in exchange, have entered into an employment contract of no fixed term, in the hope that he might be able to purchase the business at what might be favourable terms, in the event that Mr Huang was granted a visa.
The judge found that his conclusion, that there was a term of the agreement that JC He would cease to trade, was fortified by the fact that, although the proceeding was commenced in September 2014, it was not until the beginning of the trial in April 2016 that a term was alleged, in the statement in claim, that there was an entitlement for Mr He to have his company, JC He, continue to trade indefinitely in competition with Top Union. That consideration does, to some extent, weigh in favour of the conclusion drawn by the judge. However, it is of limited value. At no stage in the proceeding, even in its final amended statement of claim, did JC He make a claim for damages on the basis that Mr Huang had breached the term that he had ultimately relied on, namely, that it be permitted to continue to trade at the premises. It is not entirely clear why the term was pleaded in the further amended statement of claim dated 6 April 2016, as JC He did not claim damages for any breach of it. The pleadings on each side were subject to a series of amendments. In that context, the fact that the term, relied on by JC He at trial, was only pleaded on the second day of the trial, was of limited consequence in the determination of the issues raised by grounds 1 and 2.
Counsel for Top Union further submitted that, in the absence of the finding by the judge, that it was an express term of the agreement between Mr He and Mr Huang that the JC He business be terminated, Mr He and Ms Liu, as employees of Top Union, would have been subject to implied duties of good faith and fidelity. In its further amended counterclaim, Top Union pleaded and relied on those implied terms. The judge found that by continuing to operate JC He, Mr He and Ms Liu were each in breach of those implied contractual obligations and duties.
There are two responses that meet the submission so made on behalf of the respondents. First, for the reasons we have stated, we are satisfied that the inference that should be drawn, on the balance of probabilities, from the facts and circumstances of the transaction, is that it was an express term of the agreement between the parties that JC He be permitted to continue to trade at the Doveton premises. Secondly, and in any event, as we have observed, the employment agreements entered into by Mr He and Ms Liu, were part of the structure agreed by the parties by which they put into effect the primary objective of the arrangement, namely, to establish a business at the Doveton premises in the name of Top Union, with one or more employees, and which bore all the hallmarks of a genuine business owned and conducted by Mr Huang. While on their face the employment contracts were genuine, and in that respect Mr He and Ms Liu regarded themselves as employees of Top Union, the contracts were part of the broader arrangement whereby the business of Top Union be established, but in which, it is inferred, the business of JC He continue. As such, the duty of good faith and fidelity, that was an implied term of those employment contracts, did not preclude Mr He and Ms Liu from trading through JC He at the Doveton premises, provided that, by doing so, they did not thereby adversely affect the capacity of Top Union to achieve at least $300,000 by way of sales revenue in order to satisfy the relevant visa requirements. There is no evidence, nor was it alleged, that, by trading through JC He at the Doveton premises, Mr He and Ms Liu breached their implied duty in that way.
For those reasons, we have come to the conclusion that ground 1 and ground 2 of the proposed grounds of appeal should succeed.
Grounds 3 and 4
Grounds 3 and 4, and the grounds in the Notice of Contention, are directed to the conclusion by the judge that the applicants had failed to establish that the respondents remained in possession of stock, belonging to JC He, after the dissolution of the parties’ relationship on 16 April 2014.
As mentioned earlier, although the judge was satisfied that the value of the stock, belonging to JC He, that remained at the Doveton premises was $317,874, his Honour accepted that, between 14 February and 16 April 2014, Top Union had been invoiced by JC He amounts totalling $316,814.09 in respect of that stock. The judge therefore found that all of the stock, belonging to JC He, that remained at the Doveton premises, had been sold to Top Union, notwithstanding that Top Union had not paid for that stock. Accordingly, his Honour held that property had passed in that stock to Top Union, so that JC He was not entitled to maintain a claim for conversion in relation to it.
In order to examine the competing arguments in respect of that aspect of the case, it is necessary to return to the facts in a little more detail. When Mr He established the business of JC He in December 2010, he engaged an accountant, Mr Anatole Kabov, to establish the appropriate accounting systems for the business. Mr Kabov gave evidence that he established a system called MYOB Retail Manager, which managed the stock recording system, together with a MYOB AccountRight system which was a bookkeeping system. Mr Kabov stated that stock, recorded on the Retail Manager system, was then ‘imported into’ the MYOB system on a daily basis, so that the system recorded all the transactions of that day. He explained that when a purchase of stock was made, it was entered into the Retail Manager system by the staff, and when a sale of stock was made, the sale price would be credited to revenue, and the cost price would be automatically taken out of the assets of the business and put into a cost of sales figure.
Mr Kabov was subsequently engaged by the applicants, in November 2014, in order to ascertain (among other matters) the stock balance as at 16 April 2014. When he attended at the premises of Top Union at Doveton, and examined the records of the business, it became evident that some information was unavailable, and that the information that was presented to him was incomplete. Accordingly, Mr Kabov manually reconstructed the accounting records from primary documentation including supply statements, invoices, bank statement records, lodged business activity statements, and Australian Taxation Office industry information. In order to ascertain the value of the stock contributed by JC He to Top Union, and retained by Top Union at 16 April 2014, Mr Kabov developed a methodology which consisted, first, of ascertaining the figure for the opening stock of JC He as at 14 February 2014. Mr Kabov performed that calculation by identifying the value of the stock of the JC He business as at 30 June 2013, calculating the sales by JC He from 1 July 2013 to 2014, calculating the stock purchased by JC He during that period, and applying a gross profit margin of 42% to the sales. In that way he calculated the value of the stock held by JC He at 14 February 2014. As the records of JC He were no longer available, Mr Kabov extrapolated the sales and purchases of JC He to 16 April 2014. By doing so, and applying the same gross profit margin, he calculated that the balance of stock of JC He as at 16 April 2014 amounted to $317,847.
As mentioned, Mr Michael Smith, the accountant engaged on behalf of the respondents, took issue with the methodology employed by Mr Kabov, and in particular with the gross profit margin applied by Mr Kabov in his calculations. Mr Smith noted that Mr Kabov relied on the gross profit margin that the Australian Tax Office published as its benchmark. However, Mr Smith noted that that margin was higher than the historical data for JC He, and, in particular, that it was inconsistent with the 29% gross profit margin derived by JC He in the financial year ending 30 June 2013. Applying that margin, Mr Smith calculated that the value of the stock of JC He, as at 16 April 2014, was $177,182.
The judge accepted the valuation of Mr Kabov in preference to that of Mr Smith. His Honour then turned to the question of the effect of the evidence relating to the invoicing by JC He to Top Union of stock totalling $316,814.09. That evidence was contained in the ‘Aged Payables (Summary)’ Journal of Top Union that was tendered in evidence. In cross-examination, Mr He accepted that he had caused the entries to be included in Top Union’s accounts that recorded that Top Union had purchased $316,814.09 of stock from JC He.
The judge, referring to that evidence, stated:
Accepting Mr Kabov’s valuation of JC He’s stock at Top Union at $317,847 as at 16 April 2014 … one asks what effect does the invoicing of $316,814.09 worth of stock from JC He to Top Union … have? One plausible interpretation is that, in accordance with the arrangements made between Mr He and Mr Huang, this represented the total of stock progressively sold at cost from JC He to Top Union. If so much stock was, at the relevant time, sold across, what JC He stock would be left to convert? On the face of it, the whole of the JC He stock has been sold to Top Union. There is nothing to suggest that JC He was ever paid for this stock, but, as noted earlier, the liquidators have yet to call for proofs of debt and the apparent failure to deal with this debt for goods and sold and delivered in the Report as to Affairs signed by Mr Huang cannot be conclusive on the point.
Regrettably, neither Mr Kabov nor Mr Smith appears to have been asked directly, or for that matter indirectly, anything about this large intercompany stock sale and the effect that it would have upon their calculations. With some hesitation in light of the perplexing uncertainty as to all these matters, I conclude that the recorded invoicing of stock from JC He to Top Union had the effect of transferring title to Top Union for all JC He stock. As a result, the claim by JC He for conversion of stock must be dismissed.[37]
[37]Reasons [282]–[283].
In support of grounds 3 and 4, counsel for the applicants submitted that the finding by the judge, that JC He had sold stock to the value of $316,819.09 to Top Union, was against the weight of the evidence. In particular, counsel submitted that the sole support for that conclusion, by the judge, comprised a book entry, contained in the ‘Aged Payables’ of Top Union that recorded sales by JC He to Top Union, and invoiced to Top Union, totalling $316,814.09 between 13 March 2014 and 8 April 2014. Counsel submitted, first, that that record was insufficient to demonstrate a sale of that amount of stock by JC He to Top Union. In particular, counsel noted that it was a precondition, to any purchase of stock by Top Union from JC He, that Top Union agree to that purchase. Counsel contended that, in the absence of any evidence that Mr Huang had agreed to the purchase by Top Union of the stock, there could be no evidence that it was sold by JC He to Top Union.
In addition, counsel contended that, notwithstanding the recording of the purchase of the stock from JC He in the ‘Aged Payables’ ledger of Top Union, there were a number of other accounting records, of Top Union, that contradicted that entry. In particular, counsel relied on the profit and loss accounts of Top Union for the period February to June 2014, and for the period January to June 2014, and the profit and loss account of Top Union in the financial statements prepared by its accountants for the year ended 30 June 2014. Counsel noted that in each of those accounts, the cost of sales that was recorded was significantly less than $316,000.
Neither contention, advanced in support of grounds 3 and 4, can be accepted. It is correct that Mr Huang, in his evidence, stated that JC He was not entitled to sell its stock from the Doveton store, but that Top Union could acquire it from JC He at cost. However, while Mr Huang, in his evidence, said that Top Union had to agree to purchase stock from JC He, Mr Huang did not say that it was a prerequisite, to the purchase by Top Union of that stock, that he personally approve of it. Mr He was appointed the general manager of Top Union, and as such, it might be presumed, he had sufficient authority to acquire stock for Top Union from JC He.
In that respect, Mr He gave express evidence that, from time to time, Top Union did purchase stock from JC He. In his evidence in chief, he said that he had placed orders on behalf of Top Union with a number of companies. He said that in doing so he had purchased stock for Top Union from JC He. In that part of his evidence, Mr He specifically referred to the ‘Supplier Summary’ in the MYOB Retail Manager System of Top Union, which recorded purchases from JC He by Top Union between 13 March and 8 April 2014, totalling $316,814.09. In cross-examination, Mr He was taken to the ‘Aged Payables’ ledger of Top Union, which recorded that debt by Top Union to JC He. Mr He agreed that he had caused the relevant entries to be recorded into that account, and he agreed that JC He had sold that amount of stock to Top Union.
Pausing there, that evidence was a more than adequate basis upon which the judge was entitled to conclude, as he did, that JC He had sold stock worth $316,814.09 to Top Union, which equated to the value of the stock that remained on the premises of Top Union on the dissolution by the parties of their relationship in April 2014. The evidence, relied on by the applicant to the contrary, does not, in our view, affect that conclusion. As counsel for Mr Huang has pointed out, Mr Kabov’s evidence makes it clear that the item ‘stock purchases’ under ‘cost of sales’, in the profit and loss statements of Top Union, only related to the cost of stock actually sold by Top Union in the period. The sales, recorded in the profit and loss accounts of Top Union for that period, were substantially less than $316,000. Thus, the fact that the profit and loss accounts recorded purchases of stock, under ‘cost of sales’, that were less than that amount, does not contradict or affect the evidence, contained in the MYOB system of Top Union, that during the period JC He sold stock worth $316,814.09 to Top Union.
Accordingly, the applicant has not established that the finding by the judge, that JC He sold stock to Top Union to the value of $316,814.09 was against the weight of the evidence. Consequently, grounds 3 and 4 must fail.
It is therefore unnecessary for us to deal with the three grounds contained in the Notice of Contention. However, in deference to the submissions made in respect of those grounds, we shall consider them shortly.
The first ground, in the Notice of Contention, is based on the principle that the tort of conversion consists of dealing with a chattel in a manner repugnant to the immediate right of possession of the claimant. Counsel for Mr Huang submitted that the methodology employed by Mr Kabov to assess the value of stock, belonging to JC He, and held by Top Union, was essentially a mathematical construct, and that Mr Kabov did not, thereby, calculate or assess the stock that was actually so held by Top Union. It was submitted that, as such, the claim for conversion must fail, because JC He had failed to establish that Top Union had possession of any specific, identifiable item of personal property of JC He to which JC He had an immediate right of possession.
It is trite law that the essence of the tort of conversion consists of a dealing with a chattel in a manner that is repugnant to the immediate right of possession of another person.[38] There have been some cases in which that principle has been bypassed, particularly where claims are made for conversion of negotiable instruments, such as cheques. In such cases, the tort of conversion has been held to have been committed in respect of the piece of paper itself, the value of which comprises the money which is received or payable under it.[39] However, notwithstanding that somewhat artificial extension of the tort, the principle remains that the tort of conversion is confined to a wrongful dealing with the chattels, and does not extend to intangible items of property, such as a chose in action.[40]
[38]Penfolds Wines Pty Ltd v Elliott (1946) 74 CLR 204, 229 (Dixon J), 234 (McTiernan J), 242–3 (Williams J); Foulds v Willoughby (1841) 151 ER 1155, 1156 (Alderson B); Hollins v Fowler (1875) LR 7 HL 757, 766 (Blackburn J); Bunnings Group Ltd v CHEP Australia Ltd (2011) 82 NSWLR 420, 456 [124] (Allsop P) (‘Bunnings Group’).
[39]Lloyd’s Bank v The Chartered Bank of India, Australia and China [1929] 1 KB 40, 55–6 (MacKinnon J); OBG Limited v Allen [2008] 1 AC 1, 45 [105] (Lord Hoffman) (‘OBG Limited’).
[40]OBG Limited [2008] 1 AC 1, 42–44 [95]–[100] (Lord Hoffman), 92 [321]–[322] (Lord Brown); Hoath v Connect Internet Services Pty Ltd (2006) 229 ALR 566, 597–8 (White J).
On the other hand, counsel for the respondents did not point to any authority that supports the proposition that, in a claim for conversion, the plaintiff must be able to identify the specific item or items that are alleged to have been the subject of the wrongful dealing by the defendant. There are a number of cases in which the owner of stock, who has been wrongly shut out of its premises, has claimed damages for conversion of the stock contained within those premises.[41] In Brightside & Carbrook (Sheffield) Cooperative Society Limited v Phillips,[42] the plaintiff commenced a proceeding alleging that the defendant had converted unspecified pharmaceutical goods and other items at the plaintiff’s shop over a period of 14 years to a value of £14,456. The defendant applied to strike out the statement of claim as disclosing no cause of action, because the plaintiff had not been able to provide particulars as to the specific items alleged to have been converted by the defendant. The Court of Appeal upheld the decision of the judge at first instance declining to strike out the statement of claim, apparently accepting the submission made on behalf of the plaintiff that, notwithstanding that the plaintiff could not specify, item by item, the goods that were alleged to have been converted, it was sufficient for those goods to be particularised by general description, value, and the dates between which they were converted.
[41]See, eg, Upton v TVW Enterprises Limited (1984) ATPR 46, 934; Flowfill Packaging Machines Pty Ltd v Fytore Pty Ltd (Unreported, Supreme Court of New South Wales, Young J, 22 September 1993) 11; Bunnings Group (2011) 82 NSWLR 420.
[42][1964] 1 All ER 49 (‘Brightside’).
In Milltec Australia Pty Ltd v Burnes,[43] the defendant, by a cross-claim, pleaded a claim in conversion of its plant and equipment. The items of that plant and equipment were not particularised. At trial, the cross-claimant failed to adduce any evidence not only as to the identity, but also as to the value and amount, of that plant and equipment. Unsurprisingly that claim failed. However, in dismissing the appeal by the cross-claimant in respect of that aspect of the judge’s decision, Handley JA (with whom Hodgson JA and M W Campbell AJA agreed), referring to Brightside, stated:
A plaintiff is not required to particularise the chattels alleged to have been converted in all circumstances. This is the general rule but, where a plaintiff gives all the particulars he can, his statement of claim will not be struck out because he cannot particularise the actual goods converted. Thus where an employer alleged that its storekeeper had been stealing its goods for 13 years it could allege a general deficiency up to the value of the defendant’s assets which could not be explained by his earnings and the living expenses of himself and his family …[44]
[43][2006] NSWCA 13.
[44]Ibid [11].
Contrary to the submission made on behalf of the respondents, the methodology employed by Mr Kabov, and accepted by the judge, by which Mr Kabov calculated the value of the stock belonging to JC He that remained at the premises of Top Union, was not a mere mathematical construct. Rather, by that process, Mr Kabov was able to quantify the value of the items of trailer parts, belonging to JC He, and which remained at the premises of Top Union. Although, generically, those items were referred to as ‘stock’, they were not, as such, a mere chose in action or items of intangible property. Rather, they comprised unspecified trailer parts and other items, claimed to be the property of JC He, but which remained at the premises of Top Union. Accordingly, we would not accept the first contention contained in the respondents’ Notice of Contention.
Ground 2 of the Notice of Contention is that, notwithstanding that the claim for conversion pleaded by JC He related only to stock moved to Top Union’s premises in February 2014, the judge erred by permitting JC He to pursue a claim in respect of stock moved to those premises subsequent to that date. Counsel for Mr Huang submitted that, notwithstanding that the claim by JC He was subject to a number of amendments and revisions throughout the proceeding, nevertheless, at all times, it was confined to a claim for conversion for stock transferred or moved to the premises of Top Union in February 2014. The methodology employed by Mr Kabov, and accepted by the judge, took into account, not only stock initially placed by JC He at the Doveton premises, but also stock that was subsequently placed by JC He at those premises. In that way, it was submitted, the judge erred by permitting JC He to pursue a claim in respect of stock that it had not pleaded in its statement of claim.
That submission must be accepted. Paragraph 9 of the original statement of claim (dated 11 September 2014) pleaded that pursuant to the agreement entered into by the parties, JC He moved all its existing stock and other assets to the premises. The pleading alleged that the plaintiff had suffered loss and damage as a consequence of being excluded from the premises. On 13 March 2015, the plaintiffs provided further particulars of the statement of claim. In those particulars, it claimed damages in respect of the value of the stock of JC He transferred to the Top Union premises as at 14 February 2014. Subsequently, on 17 August 2015, the plaintiffs filed an amended statement of claim. In paragraph 11, it was specifically pleaded that pursuant to the agreement between the parties, JC He, on or about 1 February 2014, moved all its existing stock and other assets to the Doveton premises. The plaintiffs did not plead that, subsequently, JC He moved any further stock to the premises. Finally, on the second day of the trial, the plaintiffs filed a further amended statement of claim, which again pleaded a claim for conversion in respect of the stock moved by JC He to the Doveton premises in or about 1 February 2014.
It was on the basis of that pleading, no doubt, that counsel for Mr Huang asked a series of questions of Mr He, in cross-examination, the answers to which demonstrated that, as at mid-April 2014, the stock belonging to JC He at the premises consisted, not only of stock initially brought by JC He to those premises in February, but also of stock introduced to the premises at a later date. In particular, in cross-examination Mr He agreed that, during the two months between February and April 2014, JC He sold stock from Top Union’s premises, which comprised both stock that JC He had brought from its old premises and also stock that JC He first purchased at the Doveton premises. The following passage then occurred in the cross-examination of Mr He:
So you are unable to say, aren’t you, how much of the stock brought across remained on site in mid-April. Is that right? … I can’t.
You don’t know? … Yes.
It is clear, from that evidence, and from the report of Mr Kabov, that the assessment by the judge, of the value of the stock of JC He remaining at the Doveton premises as at 16 April 2014, was not confined at all to the stock brought to the premises by JC He in February 2014. Accordingly, ground 2 of the Notice of Contention would be made out, as the judge, in quantifying the value of the stock of JC He at the Doveton premises in April 2014, did so on the basis of a claim that was not pleaded by JC He, namely a claim that included stock purchased and introduced by JC He to the Doveton premises subsequent to February 2014.
Ground 3 of the Notice of Contention is similarly made out. That ground is that there was no evidence to support a finding that any particular quantity of stock, moved to Top Union’s premises in February 2014, remained at those premises on 16 April 2014.
Mr He agreed, in cross-examination, that between February and April 2014, JC He sold stock from the premises of Top Union. As noted, he also agreed that stock had been introduced to the new premises after February 2014. Mr He stated, in cross-examination, that most of the stock, that was sold by JC He from the Doveton premises, consisted of stock that it had brought across from its previous premises in Rodeo Drive, Dandenong. As noted, Mr He was not able to say how much of the stock moved from JC He’s old premises remained at Top Union’s premises in mid-April 2014. Mr Kabov’s report did not distinguish between stock moved to Top Union’s premises by JC He in February 2014, and stock purchased by JC He subsequent to that date and introduced to Top Union’s premises.
There was no specific evidence that any stock, brought by JC He, to the new premises in February 2014, remained at the premises in April 2014. On the state of the evidence, there are competing inferences, neither of which is more probable. For those reasons, the evidence would not permit a finding, on the balance of probabilities, that, as at 16 April 2014, stock belonging to JC He remained at the Top Union premises in Doveton, being stock that had been brought to the Top Union premises by JC He on 14 February 2014. Accordingly, if it had been necessary, ground 3 of the Notice of Contention would also succeed.
Grounds 5 and 6
As the applicants have succeeded on grounds 1 and 2, the Court will set aside paragraph 3 of the orders made by the trial judge on 8 December 2016, whereby the judge entered judgment, on the counterclaim, for Top Union against Mr He, Ms Liu and JC He in the sum of $110,558.40 together with interest. It will be recalled that the judge held that Mr He and Ms Liu had breached the terms of their employment agreements, with Mr Huang, by trading through JC He at the Doveton premises, and that, accordingly, they were liable to pay damages, and JC He was liable in equity to pay an amount, consisting of the gross profit earned by JC He on the sale of stock of JC He at the Doveton premises. Grounds 5 and 6 are directed to the judge’s assessment of that amount of damages so awarded against the three defendants to the counterclaim. As the applicants have succeeded on grounds 1 and 2, it is not necessary to address the matters raised in grounds 5 and 6. However, for completeness, we shall deal with those two grounds in short compass.
As we stated earlier in these reasons,[45] after the judge delivered his reasons for judgment, counsel for the applicants, by a written submission, contended that an amount of $112,560.71 should be offset against the damages assessed by the judge against them in the sum of $110,558.40. Counsel for the applicants contended that that amount comprised, first, a series of deposits, totalling $89,540, that had been made by Mr He (or JC He) to the account of Top Union between February and April 2014. In addition, it was contended, after the business closed in April 2014, JC He refunded $23,020.60 to customers who had purchased stock from the business at Doveton, but to whom that stock was not delivered, because of the closure of the business. The judge rejected that submission. His Honour noted that Mr He gave evidence that when he worked at the Doveton premises, he acted on the basis that he was only obliged to account to Top Union in respect of sales that he had effected on behalf of Top Union, and not in respect of sales that he had effected on behalf of JC He.
[45]Ibid [37]–[40].
In this application, counsel for the applicants has renewed the same submission, but restricted it to the various deposits, totalling $89,540, that were made by Mr He (or JC He) it to the account of Top Union between February and April 2014. Counsel also contended that, in that way, the judge did not ‘hold the second respondent to its pleadings’ and disregarded the evidence of Mr Smith.
If it had been necessary to decide ground 5, we would reject it. Counsel has not pointed to any evidence demonstrating that the amounts, totalling $89,540, deposited by Mr He (or JC He) to the account of Top Union, related to sales by JC He, and not by Top Union, in the relevant period. Rather, as the judge correctly stated, the evidence of Mr He was that, when he managed the Doveton premises, he acted in the understanding that he was running two businesses simultaneously at the Doveton premises, albeit under the same trading name. In doing so, Mr He maintained the accounts of JC He. There was a separate set of accounts for Top Union. In those circumstances, the judge was entitled to infer, as he did, that any deposits, made by Mr He to the account of Top Union, consisted of revenue derived by Top Union from sales by it, and did not consist of any of the revenue earned by JC He from sales made by it at the Doveton premises. Accordingly, the judge was correct to conclude that the amounts, that are the subject of ground 5, should not be deducted from the damages awarded against the applicants in respect of the claim against them in the counterclaim.
By ground 6, the applicants contended that the judge erred by finding that the applicants should pay to the respondents 42% of the total sales revenue of JC He, rather than 11.5% of total sales revenue. It was submitted that, in awarding damages comprising 42% of the revenue earned by JC He at the Doveton store, the judge departed from the claim pleaded on behalf of Top Union in its counterclaim.
On analysis, ground 6 would also fail. In its amended counterclaim, Top Union claimed the whole of the sales revenue earned by JC He at the Doveton store, or, alternatively, the net profits from that revenue plus an amount equal to wages, rental, insurance, fleet cars and others expenses. At trial, counsel for Top Union refined that claim. Counsel submitted that the damages to be awarded to Top Union should consist of the whole turnover earned by JC He at the store, but if that claim were rejected, then the damages should consist of the gross profit earned by JC He on that revenue. The judge accepted that alternative submission.[46]
[46]Reasons [295].
In our view, the judge was correct to do so. If, contrary to our conclusions on grounds 1 and 2, the defendants were liable to Top Union in respect of income earned by JC He from its sales at the Doveton premises, the applicants would have been entitled to have taken into account, in their favour, the cost to JC He of those sales. In those circumstances, it was quite appropriate for the judge to have assessed the damages payable to Top Union in an amount equivalent to the gross profit of JC He on the sales that it made at the Doveton premises. Further, and contrary to the submission made on behalf of the applicants, such an approach is quite consistent with the claim pleaded on behalf of Top Union in the counterclaim. The alternative claim by Top Union, in its counterclaim, did not comprise only the net profit on the JC He sales at the Doveton premises; rather, as stated, it comprised the net profit plus particular expenses. Accordingly, if it had been necessary to decide ground 6, it would fail.
Conclusion
For the foregoing reasons, grounds 1 and 2 of the proposed grounds of appeal should succeed, but grounds 3 and 4 should fail. Accordingly, we would grant leave to appeal on grounds 1 and 2, and allow the appeal on those grounds. We would dismiss grounds 3 and 4 of the application.
It follows that paragraph 3 of the orders made by the judge should be set aside. Orders 4 and 5 are the orders made by the judge for the payment of costs of the proceeding, and accordingly they should also be set aside. Order 6, that related to a payment into court, must also be set aside. As a consequence of the orders, that we propose to make, it is not necessary for us to decide grounds 7 and 8 of the application, which related solely to the orders made by the judge for costs. We shall hear counsel on the question of the costs of the proceeding, and of this application.
SCHEDULE OF PARTIES
| BETWEEN | |
| WILLIAM JINGCHENG HE | First Applicant |
| J.C. HE INTERNATIONAL TRADE PTY LTD | Second Applicant |
| CISELY LIU | Third Applicant |
| and | |
| LIANGPING HUANG | First Respondent |
| TOP UNION BUSINESS PTY LTD (IN LIQ) | Second Respondent |
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