Zhou v Caratti
[2022] WASC 363
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: ZHOU -v- CARATTI [2022] WASC 363
CORAM: ALLANSON J
HEARD: 6 OCTOBER 2022
DELIVERED : 2 NOVEMBER 2022
FILE NO/S: CIV 1390 of 2014
BETWEEN: LIANGZHANG ZHOU
Plaintiff
AND
ALLEN CARATTI
Defendant
Catchwords:
Contract – Where plaintiff invested and entered Investment Agreement with company carrying out development – Where plaintiff appointed director of company and issued with redeemable preference shares to the value of his investment – Where defendant guaranteed due and punctual payment by the company of the amount payable on redemption of the shares – Where company did not redeem shares – Whether redemption of shares under the Investment Agreement was conditional on plaintiff engaging in day to day management of the company – Whether defendant’s obligation under guarantee dependent on shares being redeemed
Legislation:
Corporations Act 2001 (Cth)
Result:
Judgment for the plaintiff
Category: B
Representation:
Counsel:
| Plaintiff | : | E Hensler |
| Defendant | : | J Schoombee & AP Rumsley |
Solicitors:
| Plaintiff | : | Hopgoodganim Lawyers (Perth) |
| Defendant | : | Alan Rumsley |
Cases referred to in decision:
Apparel Group Pty Ltd v Bettina Liano Pty Ltd [2014] NSWSC 670
Black Box Control Pty Ltd v TerraVision Pty Ltd [2016] WASCA 219
Brighton v Australia and New Zealand Banking Group Ltd [2011] NSWCA 152
Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1984) 153 CLR 491
EDWF Holdings 1 Pty Ltd v EDWF Holdings 1 Pty Ltd [2010] WASCA 78
Electricity Generation and Retail Corporation trading as Synergy v EIT Kwinana Partner Pty Ltd [2022] WASCA 3
Federal Commissioner of Taxation v Coppleson (1981) 39 ALR 30
GL Nederland (Asia) Pty Ltd v Expertise Events Pty Ltd [1999] NSWCA 62
Halvorson v Birkenhead Super Pty Ltd atf Birkenhead Superannuation Benefits Fund [2021] QCA 211
Harman Nominees Pty Ltd v Leighton Shores Pty Ltd [2012] WASCA 189
Heesh v Baker [2008] NSWSC 711; (2008) 67 ACSR 192
Horsell International Pty Ltd v Divetwo Pty Ltd [2013] NSWCA 368
Kandelka Management Pty Ltd v Pisces Group [2009] FCA 1379; (2009) 76 ACSR 113
Luxer Holdings Pty Ltd v Glentham Pty Ltd [2007] WASCA 209; 35 WAR 254
Sandbank Holdings Pty Ltd v Durkan [2010] WASCA 122
Segelov v Ernst and Young Services Pty Ltd [2015] NSWCA 156
Sino Iron Pty Ltd v Mineralogy Pty Ltd [2019] WASCA 80
ALLANSON J:
Introduction
The plaintiff, Liangzhang Zhou, invested in Parliament Place Pty Ltd in relation to a land development that company was carrying out. He was issued redeemable preference shares to the value of his investment. The shares were redeemable by Parliament Place within a specified time.
The defendant, Allen Caratti, guaranteed due and punctual payment by Parliament Place of the amount payable on redemption of the shares.
Parliament Place did not redeem the shares and, eventually, went into administration.
Mr Zhou now sues on the guarantee.
Mr Caratti denies liability under the guarantee, primarily on the basis that his liability only arose on the redemption of the shares.
The trial
The trial was brief. Neither party led oral evidence. The parties tendered a small number of documents - most of which were admitted by consent - and the plaintiff also relied on admissions which had been made in answer to notices to admit facts.
The pleaded cases
It will be necessary, later in these reasons to consider the Investment Agreement and the Guarantee in more detail. For the present, I will give an outline of the pleading in relation to those agreements.
The claim
In early September 2010, Ms Shu Hua Wu, on behalf of Mr Zhou, liaised with the solicitors for Parliament Place regarding Mr Zhou's investment in a land development project by Parliament Place.
In September 2010, Mr Zhou entered into a written Investment Agreement with Parliament Place, under which he agreed he would subscribe for 20 ordinary shares and 1,200,000 Redeemable Preference Shares in Parliament Place for the sum of $1,200,000.00. Mr Zhou and Parliament Place agreed that Parliament Place would redeem the Redeemable Preference Shares, by no later than within 19 months of receipt of the investment, by repaying to Mr Zhou an amount equal to the investment plus an amount equal to an annual return of 20% on the Investment, pro rata to the date of redemption.[1]
[1] Statement of Claim [7] ‑ [8].
Mr Caratti was not a party to the Investment Agreement. Clause 4 of the agreement, however, provided for a deed of guarantee and indemnity to be given by Mr Caratti.[2]
[2] Statement of Claim [8(l)].
On or about 28 September 2010, Parliament Place, Mr Zhou and Mr Caratti entered into a Deed of Guarantee. Mr Caratti guaranteed the due and punctual payment of the 'Redemption Payment' to Mr Zhou, and to pay the Redemption Payment on demand if Parliament Place did not pay on time.
Mr Zhou pleaded that, in breach of the Investment Agreement, Parliament Place failed to pay the Redemption Payment to Mr Zhou. By reason of the Deed of Guarantee and the breach by Parliament Place he became entitled to demand and receive payment of the Redemption Payment from Mr Caratti.
On 28 February 2014, Mr Zhou demanded payment by Mr Caratti under the Deed of Guarantee of an amount of $1,885,485, being the principal amount of the investment and an annual return of 20% to the date of the demand.
Mr Zhou now claims that amount, less the amounts received from the other former defendants. He also claims payment of an annual return of 20% per annum to the date of payment.
The defence
Mr Caratti raised several matters by way of defence that he abandoned at trial. The matters on which he proceeded were:
(1)no amount is payable under the Guarantee because on the proper construction of the Investment Agreement:
(a)the amount of the investment was payable to Mr Zhou only if the Redeemable Preference Shares had been lawfully redeemed;
(b)the time within which the shares were to be redeemed was the time within which they were able to be lawfully redeemed;
(c)the guarantee to be given would not apply unless there was a redemption of the Redeemable Preference Shares;
(d)the Investment Agreement was to be read subject to the constitution of Parliament Place and s 254K of the Corporations Act 2001 (Cth), and the Redeemable Preference Shares could only be lawfully redeemed from profits or from the proceeds of a new issue of shares made for the purpose of the redemption;
(e)no amount was payable under the Guarantee unless there had been a lawful redemption of the Redeemable Preference Shares;
(2)the obligation to redeem the Redeemable Preference Shares under the Investment Agreement was subject to Mr Zhou performing his obligations under the Investment Agreement as a director of Parliament Place, and Mr Zhou failed to perform obligations under the agreement.
Facts
The following matters were not in dispute.
Mr Zhou paid the deposit payable under the Investment Agreement on or about 14 or 15 September 2010, and paid balance of the amount on or about 27 or 28 September 2010. The payments were within the time provided in the Investment Agreement.
Mr Zhou and Parliament Place entered into the Investment Agreement on 26 September 2010.
On 28 September 2010, Parliament Place issued 20 ordinary shares and 1.2 million Redeemable Preference Shares in Parliament Place to Mr Zhou.
On 1 November 2010, Mr Zhou was appointed as a director of Parliament Place. On that day he also signed a letter of resignation as a director, which was subject to an escrow agreement between Mr Zhou and Parliament Place made the same day.
The Redeemable Preference Shares were to be redeemed on or about 27 or 28 October 2011. Parliament Place did not buy back the shares.
On 31 October 2012, Mr Zhou ceased to be a director of Parliament Place.
On 15 October 2013, Parliament Place entered voluntary administration, and entered into a Deed of Company Arrangement. A liquidator was appointed in 2017.
Parliament Place failed to pay to Mr Zhou the Redemption Payment or any monies at all within the time for the Redeemable Preference Shares to be redeemed.[3]
[3] Defendant's response to notice to admit facts, filed 4 May 2022.
On or about 28 February 2014, Mr Zhou, through his solicitors, demanded payment under the Deed of Guarantee from Mr Caratti.
Mr Zhou initially sued four other defendants who have collectively paid $570,000 in settlement of his claim.
There was no evidence about whether Parliament Place had made profits at the time provided in the Investment Agreement for redemption of the Redeemable Preference Shares.
There was no evidence about whether Mr Zhou had or had not complied with any obligations under the Investment Agreement.
Construction
The principal issues arose on the construction of two documents: the Investment Agreement and the Deed of Guarantee.
The principles governing the interpretation of commercial agreements are well settled.[4] The court must consider the language used by the parties in the contract, the circumstances addressed by the contract, and the commercial purpose or objects to be secured by the contract. Reliance on surrounding circumstances must be tempered by loyalty to the text. With limited exceptions - such as patent absurdity or mistake (none of which apply in the present case) - the contractual language cannot be construed as having a meaning that it cannot reasonably bear.[5]
[4] Electricity Generation and Retail Corporation trading as Synergy v EIT Kwinana Partner Pty Ltd [2022] WASCA 3; Black Box Control Pty Ltd v TerraVision Pty Ltd [2016] WASCA 219 [42]; Sino Iron Pty Ltd v Mineralogy Pty Ltd [2019] WASCA 80.
[5] Harman Nominees Pty Ltd v Leighton Shores Pty Ltd [2012] WASCA 189 [82].
Counsel for Mr Caratti sought to rely also on the contra proferentem rule, on the basis that the Investment Agreement was prepared by, or on behalf of, Mr Zhou. The 'rule' does not assist in the present case.
First, the evidence is equivocal as to who prepared the agreement and whether certain clauses only may have been prepared or advanced on behalf of Mr Zhou - primarily those clauses providing for his participation in management. It is agreed on the pleadings that Ms Wu, on behalf of Mr Zhou, liaised with the solicitor for Parliament Place regarding Mr Zhou's investment and for the purposes of finalising the then proposed investment agreement.[6]
[6] Statement of Claim [6]; Defence [6].
Second, as Campbell JA said in Brighton v Australia and New Zealand Banking Group Ltd (Giles and Hodgson JJA agreeing):
It is a striking feature of the case law that has invoked a 'contra proferentem rule' that judges have often used the term with little or no explanation, and in ways that are not consistent. One of the ways in which that 'rule' has been said to operate is that it operates against the interests of the person who confers a benefit by the disputed words in a document (North v Marina [2003] NSWSC 64; (2003) 11 BPR 21,359 at [57]-[72], and esp [62]-[65]), while another has been that it operates against the interests of a person who receives a benefit under the disputed words in a document (ibid at [66]-[68]).[7]
[7] Brightonv Australia and New Zealand Banking Group Ltd [2011] NSWCA 152 [99].
Third, the rule of construction contra proferentem applies 'only when, having applied all other aids to construction, ambiguity remains'.[8] The surest guide to the meaning of the agreements is the application of the accepted principles for the construction of commercial agreements.
[8] GL Nederland (Asia) Pty Ltd v Expertise Events Pty Ltd [1999] NSWCA 62 [27]; Sandbank Holdings Pty Ltd v Durkan [2010] WASCA 122 [34].
The Investment Agreement and the Guarantee were made at about the same time, and each refers to the other. In construing them, they should be read together to ascertain their proper construction and legal effect.[9]
[9] EDWF Holdings 1 Pty Ltd v EDWF Holdings 1 Pty Ltd [2010] WASCA 78 [104].
The main construction issues were, first, whether the Investment Agreement could and did oblige on Parliament Place to redeem the Redeemable Preference shares; second, was the obligation on Parliament Place conditional on Mr Zhou complying with any obligations under that Agreement; and, third, did Mr Caratti's liability under the Guarantee arise only on the Redeemable Preference Shares being lawfully redeemed.
The issues
Was Parliament Place in breach of the Investment Agreement for failing to redeem the shares
The Constitution of Parliament Place, cl 4, provides for the issue of shares 'carrying the right of redemption out of profits or otherwise in accordance with s 254A of the Corporations Act or liable to be so redeemed at the option of the Company …'.[10]
[10] Section 254A(3) defines redeemable preference shares, relevantly, as redeemable at a fixed time or on the happening of a particular event, at the company's option, or at the shareholder's option.
By cl 1.1 of the Investment Agreement, Mr Zhou subscribed for 1.2 million redeemable preference shares in the company for the sum of $1,200,000.
Clause 1.3.2 sets out the agreed amount for the redemption of the shares: the sum of $1,200,000 'plus an amount equal to an annual return of 20% on their face value pro rata to the date of redemption of the Redeemable Preference Shares'.
Clause 1.3.3 provides:
the Redeemable Preference Shares must be redeemed by the Company within 13 months of receipt of the Investment, the date being at the sole discretion of the Company, provided that should the development of the Property be delayed for any reason beyond the Company's direct control the Company may at its election extend the period for a redemption for a further period of up to six months.
The apparent effect of cl 1.3.3, read with cl 4 of the Constitution of Parliament Place, is that the shares issued to Mr Zhou were liable to be redeemed at the option of the company, the date of redemption being at its sole discretion but with Parliament Place agreeing to exercise that option within the prescribed period, or the further period at its election.
Mr Zhou neither pleaded, nor led evidence, that Parliament Place had profits from which it could redeem the Redeemable Preference Shares within the agreed period. As counsel for Mr Caratti argued, there are statements in the authorities to the effect that a company failing to redeem in accordance with an agreement would not be in breach of its contract with the shareholder as the parties could not be presumed to have assumed obligations that it would be unlawful for one of them to fulfil.[11] Parliament Place cannot have assumed an obligation to redeem the shares, and cannot be in breach for failing to redeem, unless it had profits from which it could do so.
Does that affect the Guarantee
[11] Federal Commissioner of Taxation v Coppleson (1981) 39 ALR 30, 36; Heesh v Baker [2008] NSWSC 711; (2008) 67 ACSR 192 [57]; Kandelka Management Pty Ltd v Pisces Group [2009] FCA 1379; (2009) 76 ACSR 113 [23], [24], [73], [74]; Halvorson v Birkenhead Super Pty Ltd atf Birkenhead Superannuation Benefits Fund [2021] QCA 211 [34].
Mr Zhou does not sue on the Investment Agreement, but on the Deed of Guarantee.
The two agreements are obviously connected. Mr Caratti was not a party to the Investment Agreement, but the terms of cl 4 of that agreement should be taken into account when construing the obligations he assumed under the Deed of Guarantee.
Clause 4 of the Investment Agreement was headed Guarantee and provided:
Mr Allen Caratti … agrees to provide Mr Zhou with a deed of guarantee and indemnify for repayment of the Investment upon redemption of the Redeemable Preference Shares.
The Deed of Guarantee was not in the same terms. It recited that, in consideration of Mr Zhou entering into the Investment Agreement, Mr Caratti, as Guarantor, guaranteed the Redemption Payment to Mr Zhou.[12]
[12] Background A.
'Redemption Payment' was defined in cl 1. That definition must then be read into each paragraph of cl 3, which sets out the terms of the guarantee, in construing that clause.[13] That is, in cl 3(a):
(a)The Guarantor unconditionally and irrevocably guarantees the due and punctual payment of the amount payable by Parliament Place upon redemption of the Redeemable Preference Shares, being the face value of the Redeemable Preference Shares plus an amount equal to an annual return of 20% on that face value pro rata to the date of redemption to Zhou.
[13] See Horsell International Pty Ltd v Divetwo Pty Ltd [2013] NSWCA 368 [158]; Segelov v Ernst and Young Services Pty Ltd [2015] NSWCA 156 [88].
The obligations in cl 3(b) and 3(c) must be construed similarly.
(b)If the Company does not pay the Redemption Payment on time in accordance with the Investment Agreement the Guarantor must pay the Redemption Payment to Zhou on demand.
(c)Zhou may make demand on the Guarantor at any time following the Redemption Payment becoming due whether or not it has made a demand on the Company.
By reference to the Investment Agreement, the time for redemption and payment was at the option of Parliament Place but cl 1.3.3 provided that redemption must be within 13 months, unless the company elected to extend it. Without an extension, the amount was payable by 28 October 2011.
The liability of Mr Caratti was, on the words of cl 3, to guarantee that Parliament Place would pay the amount that was payable on redemption, to pay that amount if Parliament Place did not pay it on time in accordance with the Investment Agreement, and to pay that amount on demand at any time following the amount becoming due.
His liability did not depend on Parliament Place being in breach by failing to pay within the time agreed.
It is not to the point that Parliament Place might not itself have been able lawfully to redeem the shares. The parties acknowledged that the Guarantee was a principal and independent obligation.[14] Clause 5 provided Mr Zhou's rights and Mr Caratti's liability under the Guarantee would not be affected by, among other things:
(f)the fact that any obligation to be performed (including payment of monies) by the Company under or in connection with the Investment Agreement may not be enforceable, may cease to be enforceable or may never have been enforceable or that any transaction affecting any obligation of the Company under or in connection with the Investment Agreement is or was wholly or partially void, voidable or unenforceable;
…
(j)any fact, circumstance, legal disability or incapacity which would otherwise release the Company from its obligations, whether express or implied, under the Investment Agreement;
(k)… entry into a deed or scheme of arrangement; entry into any assignment or composition for the benefit of creditors; liquidation; reduction of reconstruction of capital; appointment of a receiver and manager … (whether by a court or under any instrument); or the official management in relation to the Company or the Guarantor; or any notice of any one or more of these circumstances.
[14] Clause 4.
By cl 6:
The Guarantee:
(a)is irrevocable and continuing and will remain in full force and effect until Zhou has received the Redemption Payment in cleared funds; and
(b)will not be affected by any settlement or account, intervening payment, compromise, arrangement or anything else.
The defendant's submission that the Redemption Payment only became due, for the purposes of the Guarantee, when the shares were redeemed is not consistent with the purpose of the guarantee. Accepting that a Guarantee is read strictly, it is still necessary to attribute to the words of the Deed of Guarantee the meaning they bear, having regard to the commercial purpose of the agreement. The shares were fully paid and were redeemable for a set amount. Shares are redeemed when they are bought back and cancelled. It would not make commercial sense for the guarantee of due and punctual payment by Parliament Place, within an agreed time, to be dependent on Parliament Place in fact complying with agreement to buy back the shares, and for it to be rendered worthless by the company's failure to do the very thing that Mr Caratti guaranteed.
I am satisfied that, on the proper construction of the Deed of Guarantee, Mr Caratti is liable to pay the Redemption Amount, as defined, on demand.
Is the Guarantee affected by Mr Zhou's alleged failure to fulfil his obligations under the Investment Agreement
Mr Caratti relies on two clauses in the Investment Agreement. First, by cl 1.2, Mr Zhou would be offered a position on the Board of Parliament Place and participate in the daily management of the development of the property. Second, by cl 5:
It is intended that the finalisation of the transaction will be subject to Mr Zhou (acting reasonably) agreeing that the development costs are reasonable so that the development of the Property can proceed in line with the financial statements provided by the Company.
As to Mr Zhou participating in the daily management, there is no evidence about whether he did.
Further, if there was an obligation imposed on Mr Zhou, it is not apparent what he was required to do. Given the vagueness of the expression 'shall participate in the daily management of the development of the property', and with Mr Zhou's address given as Hangzhou, Zhejiang, China, I am not satisfied he assumed an enforceable obligation to do anything. The clause reads as a statement of intention, not one imposing a contractual obligation.
If I am wrong in that conclusion, cl 1.2 does not, in any event, impose an obligation on Mr Zhou that conditioned the terms for redemption of the Redeemable Preference Shares.
Clause 5 is similarly obscure. It is unclear what 'transaction' is referred to. There is no evidence that Mr Zhou was ever presented with development costs, and no evidence that he ever failed to agree them - whether reasonably or unreasonably.
Further, there is nothing in the text of the Investment Agreement to support a construction that the obligation on Parliament Place to redeem the Redeemable Preference Shares, or when those shares were to be redeemed, was in any way conditional on Mr Zhou doing anything under cl 5.
Proper construction of the amount payable
The obligation which Mr Caratti guaranteed was the due and punctual payment of the face value of the Redeemable Preference Shares plus an amount equal to an annual return of 20% on that face value pro rata to the date of redemption. There is an element of uncertainty in the reference to the 'date of redemption', where Parliament Place agreed to redeem within a specified period rather than on a set date. The task of the court is to ascertain, from the terms of the agreement and its context, what the parties intended.
The annual return of 20% was, on the proper construction of cl 1 of the Investment Agreement and cl 3 of the Deed of Guarantee, an annual return calculated to the date when the parties agreed the shares were to be redeemed. That is, there being no extension of the date for redemption by Parliament Place, the date 13 months after the receipt of the investment. Mr Caratti did not guarantee a continuing return of 20% per annum or a penalty or interest should Parliament Place fail to redeem on the agreed date.
Mr Zhou, through his solicitors, sent a letter of demand on 28 February 2014. After referring to the Investment Agreement and the Deed of Guarantee, the letter continued:
Pursuant to the Investment Agreement, our client was to be repaid his investment of $1,200,000 together with an annual return of 20% and therefore, as at 27 February 2014, our client is owed the sum of $1,885,485.
The amount of $1,885,485 is comprised of:
•the principal amount of $1,200,000; and
•the annual return of 20% per annum, which as at 27 February 2014, is the sum of $685,485.
In demanding a 20% return to the date of the letter, Mr Zhou claimed more than was due. The incorrect amount does not invalidate a notice of demand, provided it specified the debt of which payment was demanded with sufficient particularity and did not materially mislead as to the nature of the debt demanded.[15] The letter clearly stated that the demand was for the principal sum and the annual return. The error in calculating the return to the date of demand does not mislead as to the nature of the debt demanded.
[15] Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1984) 153 CLR 491, 503 ‑ 504; Apparel Group Pty Ltd v Bettina Liano Pty Ltd [2014] NSWSC 670 [13]; Luxer Holdings Pty Ltd v Glentham Pty Ltd [2007] WASCA 209; 35 WAR 254 [88] ‑ [90].
The defence of Mr Caratti did not put the validity of the notice of demand in issue.
Notwithstanding the error in the letter of demand, Mr Caratti is liable under the Deed of Guarantee to pay to Mr Zhou the principal sum of $1,200,000 and the 20% return to the date 13 months after the receipt of the investment by Parliament Place. From that sum, the amounts paid in settlement must be deducted.
I will hear the parties on the form of the orders, including the question of pre‑judgment interest and from when it might run.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
TB
Associate to the Honourable Justice Allanson
2 NOVEMBER 2022
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