De Rucci International Pty Ltd v Zhu

DRI, Ms Zhu, HQ and SIngways - 2016 to 2019

1. DRI supplies furniture and bedding under the "De Rucci" name to retail stores in eastern Australia. The furniture is manufactured in China under arrangements DRI has made with its Chinese suppliers. DRI then imports it into Australia for distribution through retail outlets, including a number with which the defendants are associated in Queensland and in New South Wales.
2. In October 2016, DRI signed a document entitled "Management Agreement" with the named third defendant to these proceedings, Singways Pty Limited ("Singways"). But Singways was deregistered in 2017 and no longer exists. There is reasonably strong evidence available that DRI has accepted the second defendant, HQ, as the active counterparty on the Management Agreement since the deregistration of Singways. Whilst the exact identity of the parties to the Management Agreement may yet be a subject of contention at final hearing, for the purposes of the grant or refusal interlocutory relief there is a sound basis to treat it as the contracting counter-party with DRI. Ms Lucy Zhu, the first defendant, controls HQ.
3. As its name suggests the Management Agreement is just that. When signed it acknowledged Singways conducts a retail business in premises in Moore Park in the southern suburbs of Sydney. It delegates all the operations of that business at a practical level to DRI. Now and since 2017 the Management Agreement should be treated as being performed between DRI and HQ. DRI did not contend in these proceedings that the Management Agreement was not binding on it before termination.
4. And some such agreement must explain the physical arrangements between these parties. HQ is a lessee of the retail premises in Moore Park. Employees of DRI occupied the Moore Park premises and retailed "De Rucci" furniture with Ms Zhu's consent, until the recent events the subject of these proceedings.
5. Ms Zhu initiated the termination of the Management Agreement by an email dated 7 September 2019. She immediately substituted her EFTPOS machine at the Moore Park premises for that used by DRI pursuant to the Management Agreement. This had the effect of transmitting the gross revenue from these sales to a bank account Ms Zhu controlled rather than one that DRI controlled and into which payments were directed, under the Management Agreement.
6. Since termination DRI commenced these proceedings claiming the return of furniture at the Moore Park store to it. DRI claims it owns the furniture and the furniture should be returned to it post termination. It says it commissioned the manufacture of the furniture in China, paid for it and that upon delivery of the furniture to the Moore Park premises that DRI retained title to the furniture. It has also reported Ms Zhu's conduct in relation to the stock and the EFTPOS machine to the police and alleged she has fraudulently converted its property.
7. Ms Zhu and HQ resist the relief sought. They contend that the Management Agreement affirms their ownership of the business at the Moore Park premises. They accept that HQ delegated almost the whole of the operations of the business at a practical level to DRI. But they contend HQ never ceased to own the business and prima facie is the owner of all the stock delivered to the business by suppliers such as DRI. They contend that the stock should remain at the premises and they should be allowed to sell the stock.
8. In answer to that DRI not only repeats its contention that it is the owner of the stock but it says: that if the stock is allowed to remain at the Moore Park premises then it will not be sold to its best advantage by HQ and Ms Zhu; that the DeRucci name will become associated with what DRI says is substandard presentation at the Moore Park premises; and, that the proceeds of sale of the furniture will be dissipated before a final hearing can prove that it was indeed the true owner of the goods. DRI says that if it is able to remove the goods it will be able to market them to their best advantage in its other stores.
9. The matter first came into the duty list before Robb J and later before Parker J. Their Honours made a number of interlocutory orders that stabilised the position between these parties before it came into the duty list again this week. As a result an interlocutory regime already exists in which the furniture, which has fairly readily been identified so far, would be sold in a controlled way and the proceeds of sale placed nominated bank account. So far as the Court can see, those orders have been complied with: furniture has continued to be sold from the Moore Park premises and the proceeds deposited to the nominated bank account. During the hearing the Court directed Ms Zhu to show the deposits to the nominated bank account to the plaintiff's legal representatives.
10. This revealed that some $46,869 had been deposited to the nominated bank account since the orders setting up that interlocutory regime were made on 20 September 2019. This is more or less the amount that DRI expected to be deposited during that period.
11. But the contest between these parties this week has evolved further in the duty list. DRI continues to press for the return of the remaining furniture to it. At one point it indicated that it may not wish to press the relief it seeks quite that far but ultimately it did. On the other hand, Ms Zhu contends that as the furniture belongs to HQ on delivery she should be entitled to use the proceeds of sale to pay the rent at the Moore Park premises, where HQ is the lessee.
12. The Management Agreement is an unusual document. Why would a business owner such as HQ delegate the whole of its business operations to one of its principal suppliers, DRI? Ms Zhu says the answer to this lies in an agreement concerning three other stores in south-east Queensland developed by companies she controls. These are stores that DRI also supplied with De Rucci furniture.
13. Ms Zhu's broader case is that she gave over the practical operation of Singways (and later HQ's) business at the Moore Park premises to DRI as part of the consideration under an agreement or arrangement ("the Syndicate Agreement") that her Queensland companies be able to market De Rucci products and would later transfer their established retail operations to DRI. This would allow DRI quickly to expand by acquiring the three successful stores she had developed in south-east Queensland. She says that DRI ultimately reneged on this agreement, causing her three companies considerable loss.
14. Ms Zhu foreshadowed a cross-claim based on the DRI's alleged breach of the Syndicate Agreement. Parker J ordered that Ms Zhu serve a cross-claim pleading these claims against DRI, so the full context of this dispute would be available.
15. Ms Zhu did that. The cross-claim is before me. It claims substantial damages against the plaintiff. HQ is one of the Cross claimants but the other companies controlled by Ms Zhu (each associated with a particular local store in south-east Queensland) are the other Cross Claimants. Whether it can be filed is still to be decided.
16. The following features of the Management Agreement are of principal relevance. The Management Agreement allows that the manager, DRI to select for sale any brand of goods considered to be most saleable and profitable for the business (clause 1(2)). The Management Agreement further requires the manager to represent Singways (HQ) in a proper and businesslike manner, in including "keeping financial records and books of account for the gross earnings of the business according to proper accounting principles" (clause 3 (1)). The Management Agreement gives the manager authority to use the "De Rucci" name to collect the gross proceeds of sale, and deposit them to a nominated account after obtaining HQ's prior consent.
17. But the management fee for these services is provided for in Management Agreement, clause 5, which requires DRI to indemnify the business owner for essential outgoings such as business rental, other statutory imposts, to pay suppliers and tax and then to retain any "remaining net profit" as "commission for its services". In other words, the business owner is assigning hundred per cent of the net profit of the business to the business manager as commission for undertaking this management. And this commission is paid to the manager from gross earnings actually received by the manager on behalf of the business owner (clause 6).
18. But importantly the Management Agreement does not provide for any special provisions about who would own stock acquired by the business. Although the Management Agreement allows the business to use the De Rucci name, it does not involve any transfer of the business operations on a permanent basis to the manager. Upon the proper construction of the Management Agreement the business is still conducted in the name of the second defendant, HQ, who is primarily obligated to pay any relevant tax to the ATO and is still obligated to make lease payments to the lessor of the Moore Park premises.
19. All the Management Agreement does is to delegate most of the functions of meeting these liabilities, through the making of sales and allocation of income to liabilities to the manager. This seems to be consistent with Ms Zhu's evidence that she agreed to give the Moore Park store's "one hundred per cent profit as management commission to the plaintiff". This was apparently in exchange for Ms Zhu's companies also receiving exclusive distribution agreements of De Rucci branded products in Queensland, together with the related Syndicate Agreement.
20. There are some disputes about how much stock was left with HQ when the Management Agreement was terminated on 7 September 2019. Because DRI's employees were at the Moore Park premises between 7 September and 12 September 2019 there is evidence that at about $19,500 worth of stock was sold up until 12 September 2019. Sales between 13 and 20 September 2019 are unaccounted for but are thought to be of the order of $200,000. Between 20 September 2019 and 9 October 2019 some $46,869 worth of stock was sold. The remainder has not been audited.

Applicable Legal Principles

1. In deciding whether or not to grant an interlocutory injunction the Court must consider whether there is a serious question to be tried and then whether the balance of convenience and questions of hardship and related factors warrant the grant of an interlocutory injunction. First, the plaintiff must prove a serious, not a speculative, case which has a real possibility of ultimate success and that property or other interests might be jeopardised if no interlocutory relief is granted: JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow & Lehane's Equity: Doctrines & Remedies (5th ed 2014, LexisNexis Butterworths) at [21-350] ("Equity Doctrines and Remedies"), discussing the requirements of the Beecham Group Limited v Bristol Laboratories Pty Limited (1968) 118 CLR 618 prima facie case test. Put another way, the plaintiff must show a sufficient likelihood of success to justify the preservation of the status quo pending the trial: Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57; [2006] HCA 46 at [70] - [71].
2. Then, it becomes a matter of analysing if in all the circumstances of the case, considering the balance of convenience and issues of hardship the Court should nonetheless exercise its discretion by declining to issue an interlocutory injunction: Equity Doctrines and Remedies at [21-350]; and see also Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 and Beese v Woodhouse [1970] 1 WLR 586. Other factors to which the Court will have regard include the adequacy of damages, the possibilities of alternative remedies, whether there has been any laches or delay, the strength of the grounds of defence suggested by the defendant, what, if any, undertakings the defendant is prepared to give, but hardship and balance of convenience are very important: Equity Doctrines and Remedies [21 - 375]. If any infringement of a plaintiff's right between writ and hearing would be properly compensated in damages, that fact alone can, but not must, be a ground for declining an injunction: McCarty v Council of the Municipality of North Sydney (1918) 18 SR (NSW) 210.
3. In Kolback Securities Ltd v Epoch Mining (1987) 8 NSWLR 533 McLelland J (as His Honour then was) when considering what must be established to obtain an interlocutory injunction, including when the restraint in question may have implications for the disposition of the proceedings at final hearing, said: "As I see it, the position is as follows. Where a plaintiff's entitlement to ultimate relief is uncertain, the Court, in deciding to grant or refuse an interlocutory injunction, must consider what course is best calculated to achieve justice between the parties in the circumstances of the particular case, pending the resolution of the uncertainty, bearing in mind the consequences to the defendant of the grant of an injunction in support of relief to which the plaintiff may ultimately be held not to be entitled, and the consequences to the plaintiff of the refusal of an injunction in support of relief to which the plaintiff may ultimately be held to be entitled: see, eg, Appleton Papers Inc v Tomasetti Paper Pty Ltd [1983] 3 NSWLR 208 at 216; A v Hayden (No 1) (1984) 59 ALJR 1 at 4-5; 56 ALR 73 at 79. Where the uncertainty depends in whole or in part on a contested question of fact it is not appropriate for the Court to decide that question on the interlocutory application. Where the uncertainty depends in whole or in part on a contested question of law, it may or may not be appropriate for the Court to decide that question on the interlocutory application, depending on circumstances, eg, whether the question is novel or difficult, or is susceptible of resolution on the present state of the evidence, or whether the urgency of the matter renders it impracticable to give proper consideration to the question: see, eg, A v Hayden (No 1) (at 4; 78); Cohen v Peko-Wallsend (1986) 61 ALJR 57 at 59;68 ALR 394 at 397. If the Court does decide the question of law the uncertainty is to that extent removed. Unless the plaintiff shows that there is at least a serious question to be tried which if resolved in its favour would entitle it to final relief, then the requirements of justice as between the parties will dictate that an interlocutory injunction should be refused: Australian Coarse Grain Pool Pty Ltd v Barley Marketing Board of Queensland (1982) 57 ALJR 425; 46 ALR 398; Tableland Peanuts Pty Ltd v Peanut Marketing Board (1984) 58 ALJR 283; 52 ALR 651; A v Hayden (No 1); Castlemaine-Tooheys Ltd v South Australia (1986) 60 ALJR 679; 67 ALR 553 and Cohen v Peko-Wallsend Ltd. Apart from this, although normally the Court "does not undertake a preliminary trial, and give or withhold interlocutory relief upon a forecast as to the ultimate result of the case" (Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 at 622), there are some kinds of case in which for the purpose of seeing where lies the balance of convenience (or more specifically "the balance of the risk of doing an injustice" - see per May LJ in Cayne v Global Natural Resources plc [1984] 1 All ER 225 at 237, cf per Brennan J in Brayson Motors Pty Ltd v Federal Commissioner of Taxation (1983) 57 ALJR 288 at 292; 46 ALR 279 at 285), it is desirable for the Court to evaluate the strength of the plaintiff's case for final relief: see, eg, Brayson Motors Pty Ltd v Federal Commissioner of Taxation (at 292; 285); Castlemaine-Tooheys Ltd v South Australia at 682; 559. One class of case to which this applies is where the decision to grant or refuse an interlocutory injunction will in a practical sense determine the substance of the matter in issue: see, eg, NWL Ltd v Woods [1979] 1 WLR 1294 at 1306-1307; [1979] 3 All ER 614 at 625-626 per Lord Diplock; Cayne v Global Natural Resources plc. The present is such a case. The substantial matter in issue is whether Epoch should be permitted to proceed with the issue of non-renounceable rights in accordance with the announcement of 13 March 1987. That will be irrevocably determined in a practical sense by the grant or refusal of an interlocutory injunction."
4. The application of these principles shows what should be done at this interlocutory hearing.

Is there a Serious Question to be Tried?

1. DRI contends there is a serious question to be tried. There clearly is in this case. DRI claims its goods have been converted. It may yet be able to establish title to the furniture on the basis of better evidence than is presently available. The contest raised against its claim has already been explained above. There may well be issues of final hearing as to whether damages are an adequate remedy for the claim for conversion of chattels.

The Balance of Convenience

1. The balance of convenience, or as it is better put the balance of justice, favours a continuation of the regime which presently exists, leaving the furniture in the possession of HQ at its premises at Moore Park but strengthening the regime for the sale of that furniture and making some allowances as to how the fund generated by the sale of furniture will be managed and applied, pending final hearing.
2. The relevant factors are the following. First, in the absence of a clause in the Management Agreement retaining title in DRI's name for DRI supplied goods and in the absence of any retention of title clause in any separate invoice for the goods and given the delivery of the goods and placement and display of the goods with other stock of HQ at Moore Park and given the lack of any clause in the Management Agreement requiring the De Rucci stock to be separately dealt with and quarantined from the rest of the stock of the business, in my view, there is a strong case that the intention of the parties to be inferred from the circumstances surrounding delivery is that title in the goods passed to HQ. HQ now arguably only owes DRI the cost price of the goods.
3. Although the strength of the plaintiff's case is not determinative, it is a factor to be borne in mind. In my view, the plaintiff on the evidence currently available does not have a particularly strong case at final hearing to demonstrate that it retains title to the goods rather than to be an unsecured creditor of HQ in respect of their purchase by HQ.
4. Secondly, it is to be remembered that the plaintiff is seeking a mandatory injunction. A combination of a relatively weak plaintiff's case and a claim for interventionist mandatory relief makes this a very difficult application for DRI. And a number of factors militate against a grant of mandatory relief here. The sudden removal of what still amounts to more than half of HQ's stock would have its own dramatic impact on the business, an impact which would be lessened considerably if stock was sold over time and replaced by other stock acquired by HQ.
5. Thirdly, the Court is not convinced that there is sufficient objectively agreed identification of the stock. Granting a mandatory injunction for its removal may result in further disputes and potentially breaches of the peace. The plaintiff says this could be done quickly after normal retail shopping hours over about two nights. The Court is not convinced that is practicable given the risks of further disputation. But further steps can be taken to identify the stock in situ.
6. Fourthly, the advantages of removal are not particularly high. DRI criticises the presentation of the goods by HQ and Ms Zhu. But that criticism, although it is backed up by photographs that show some disarray at the Moore Park premises, is not readily consistent with the other dealings that have been demonstrated between DRI and Ms Zhu's companies, which must show a degree of confidence in HQ. Ms Zhu has an interest in maximising the sale price of these goods for the benefit of HQ, or for the purpose of reducing her liability if established to DRI. She strikes the Court as an astute business woman who well understands this. Nor has it been established that such a significantly higher price could be obtained for the goods elsewhere compared with their present location that it is worth risking the removal.
7. Upon the Court's enquiry the plaintiff has indicated it is prepared to make a payment into Court to replace the stock. But upon reflection such a payment, although it secures the position for the future if the plaintiff is successful, it still allows too much physical dislocation to HQ's business and will not permit the gradual adjustment which is reasonable in the circumstances.
8. But HQ wishes to have access to some of the money already set aside. It says that it wants to meet its rental payments to the landlord at the Moore Park premises out of those monies. It does have a claim of some strength to the money now being set aside but it is nevertheless a contestable claim. HQ wants the whole of the money to be applied for that purpose.
9. This is a situation which requires a balance of justice to be struck between the parties. HQ's rent is a little under $40,000 per month. The Court will allow $20,000 of what is already in the nominated account to be paid out to HQ for the purposes of meeting its rental obligations, or other business liabilities.
10. If the orders continue, as HQ's De Rucci stock runs down, and other stock is replaced, HQ should be able to generate enough funds to pay its rent at the premises when it next becomes due.
11. But the nominated account should be regularised so that representative signatories of DRI and HQ are authorised to operate it so that there is security to ensure that unauthorised monies are not paid out. The Court is satisfied that the account has been properly kept so far but it is in the interests of both parties for the account to be locked in this way. Directions will need to be made for the filing of the cross claim, either in its present or an amended form as well.

Conclusion and Orders

1. Accordingly, the Court makes the following orders and directions: 1. Order that the Orders 3, 4, 5 and 6 of the orders made on 20 September 2019 be continued until further order subject to the directions in 2 below. 2. The parties are directed to bring in Short Minutes of Order to make such adjustments to the orders referred to in Order 1 hereof as will give effect to the Court's reasons and specifically to: (a) the allowance of the payment of $20,000 out to the second defendant from the funds already held in the nominated account; and (b) the adding to that account of a signatory on behalf of the plaintiff. 3. Liberty to apply. 4. These orders may be taken out forthwith. 5. List these proceedings before me for mention at not before 2pm, Monday 14 October 2019.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 11 October 2019