[2008] HCA 57
Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205
[2012] HCA 30
Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567
BIS Cleanaway (trading as CHEP) & Ors v Tatale & Anor
Brambles (trading as CHEP) v Tatale & Anor [2007] NSWSC 378
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
[1977] UKPCHCA 1
Byrne v Australian Airlines Ltd (1995) 185 CLR 410
Source
Original judgment source is linked above.
Catchwords
[2008] HCA 57
Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205[2012] HCA 30
Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567
BIS Cleanaway (trading as CHEP) & Ors v Tatale & AnorBrambles (trading as CHEP) v Tatale & Anor [2007] NSWSC 378
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266[1977] UKPCHCA 1
Byrne v Australian Airlines Ltd (1995) 185 CLR 410[1995] HCA 24
Cherry v Steele-Park (2017) 96 NSWLR 548[2017] NSWCA 295
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337[1982] HCA 24
Commissioner of Taxation v Reliance Carpet Co Pty Ltd (2008) 236 CLR 342[2008] HCA 22
Commonwealth Bank of Australia v Barker (2014) 253 CLR 169[2017] HCA 12
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471[2004] HCA 55
Franklins Pty Ltd v Metcash Trading Limited (2009) 76 NSWLR 603[2007] HCA 61
Lym International Pty Ltd v Marcolongo [2011] NSWCA 303
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457[1933] HCA 25
Moschi v Lep Air Services & Anor [1973] AC 331
Paciocco v ANZ (2016) 258 CLR 525154 ER 365
Secured Income Real Estate v. St. Martin's Investments Pty. Ltd. (1979) 144 CLR 596
[2004] HCA 52
Victoria v Sutton (1998) 195 CLR 291
[1998] HCA 56
WIN Corporation Pty Ltd v Nine Network Australia Pty Ltd (2016) 341 ALR 467
Judgment (11 paragraphs)
[1]
ins Pty Ltd v Metcash Trading Limited (2009) 76 NSWLR 603; [2009] NSWCA 407
Gaba Formwork Contractors Pty Ltd v Turner Corporation (1993) 32 NSWLR 175
Hadley v Baxendale (1854) 156 ER 145
Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26
Hyundai Heavy Industries Co ltd v Papadopoulos [1980] 2 All ER 29
Johnston v Brightstars Holding Company Pty Ltd [2014] NSWCA 150
Koompahtoo Local Aboriginal Land Council & Anor v Sanpine Pty Limited (2007) 233 CLR 115; [2007] HCA 61
Lym International Pty Ltd v Marcolongo [2011] NSWCA 303
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457; [1933] HCA 25
Moschi v Lep Air Services & Anor [1973] AC 331
Paciocco v ANZ (2016) 258 CLR 525; [2016] HCA 28
Photo Production Ltd v Securicor Transport Ltd [1980] AC 827
Re Clune (1988) 14 ACLR 261
Robinson v Harman [1848] 1 Ex 850; 154 ER 365
Secured Income Real Estate v. St. Martin's Investments Pty. Ltd. (1979) 144 CLR 596; [1979] HCA 51
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52
Victoria v Sutton (1998) 195 CLR 291; [1998] HCA 56
WIN Corporation Pty Ltd v Nine Network Australia Pty Ltd (2016) 341 ALR 467; [2016] NSWCA 297
Texts Cited: McDougall J, "The Interpretation of Commercial Contracts - Hunting for the Intention of the Parties", paper delivered at the College of Law, 2018
Edelman J and L. Bourke, "Hadley v Baxendale", 2017 FW Guest Memorial Lecture, University of Otago, 1 November 2017
Category: Principal judgment
Parties: Claim:
[2]
Plaintiff: De Rucci International Pty Ltd
First Defendant: Lucy Zhu
Second Defendant: HQ Living Pty Ltd
Third Defendant: Singways (Moore Park) Pty Ltd
Fourth Defendant: HQ Living (Moore Park) Pty Ltd
Fifth Defendant: HQ Bedding Pty Ltd
[3]
First Cross-Claimant: Lucy Zhu
Second Cross-Claimant: HQ Living Pty Ltd
Third Cross-Claimant: De Rucci Bundall Pty Ltd
First Cross-Defendant: Bing Kun Wang
Second Cross-Defendant: De Rucci International Pty Ltd
Representation: Counsel:
G. Gee (Plaintiff & Cross-Defendants)
L. Zhu (self-represented, Defendants & Cross-Claimants)
HIS HONOUR: By Further Amended Statement of Claim filed 30 March 2020 ("the Claim"), the plaintiff, De Rucci International Pty Ltd ("DRI"), seeks various declarations and orders from the Court in respect of the alleged breach and/or repudiation of a Management Agreement by one or other of the defendants.
By Amended Cross-Claim dated 7 April 2020 ("the Cross-Claim"), the cross-claimants, who include some of the defendants, allege that the plaintiff and a Mr Bing Kun Wang breached a series of oral and written agreements and/or resiled from certain representations, causing loss and allowing the defendants to terminate the Management Agreement.
Background
The relevant background to and history of these proceedings has been set out in one of the Court's earlier judgments on a separate question: [2020] NSWSC 374 at [6]-[21].
That judgment considered, in some detail, the construction of the Management Agreement, which was entered into by the plaintiff and the second defendant, HQ Living Pty Ltd (hereinafter "HQ"), on 20 October 2016, which remains central to these proceedings. [1] The relevant clauses of the Management Agreement were extracted in [2020] NSWSC 374 at [22]-[32].
Ultimately, the Court determined that "to the extent that the Management Agreement determined the respective rights of the parties, DRI acted as agent for HQ in purchasing stock from its Chinese manufacturers and, therefore, HQ has title to the stock and its proceeds". [2]
However, on the basis of the limited evidence and submissions received from the parties, the Court was unable to determine finally which of the plaintiff or one or other of the defendants had title to the De Rucci branded stock at the premises in Moore Park between 20 October 2016 and 22 November 2019 and which party owned the funds accumulated from the sale thereof. [3] The absence of evidence and submissions related, particularly, to the circumstances in which the agreement was terminated and the rights that may have accrued by that time.
Unless otherwise stated, the Court will adopt the terms defined in its earlier judgment.
The Defendant's/Cross-Claimant's Compliance with Case-Management Orders
Before summarising the relevant aspects of the parties' evidence and submissions at the final hearing, it is necessary to address an issue that arose during the course of proceedings regarding the self-represented defendants/cross-claimants substantial non-compliance with case management Orders in relation to the filing of pleadings, evidence and submissions.
[6]
Principles of repudiation of a contract
Historically, the classic expression of rights and obligations arising as a result of a repudiation of contract was provided in McDonald v Dennys Lascelles Ltd. [182] The passage is in the following terms:
"When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected. When a contract is rescinded because of matters which affect its formation, as in the case of fraud, the parties are to be rehabilitated and restored, so far as may be, to the position they occupied before the contract was made. But when a contract, which is not void or voidable at law, or liable to be set aside in equity, is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only and the party in default is liable for damages for each breach." [183]
The foregoing passage, oft cited, on its face, relates to remedies. Whether a party has the right to terminate as a result of conduct of the other party, under the rubric of repudiation, can be a difficult issue.
The issue is not assisted by the different use of the term "rescission" or "rescind" which can be used both for rescission ab initio, as a result of fraud or any other matter affecting the formation of the contract, and is sometimes used to refer to the right to terminate after repudiatory conduct by the other party to the contract. In these reasons, to the extent necessary, I shall refer to the right to terminate as a result of repudiatory conduct as the determination of the contract, rather than its rescission. [184]
It important to point out that there are essentially, if not only, two ways in which the discharge or termination of a contract may occur. The first of them is by agreement; the second is by operation of the common law (or in some instances statute).
[7]
Consideration of the cross claim
As stated above, the cross-claim relates to the First and Second Syndicate Agreements, to which reference has been made. Those agreements in turn comprise the oral agreement said to have been reached in March 2016 and described at [22(2)] above. This, it is said, is an "indemnity" from Mr Wang in relation to exclusive distribution rights for De Rucci furniture. There also exist the Exclusive Distribution Agreement, executed 21 September 2016, and the Management Agreement, dated 20 October 2016, which was the subject of the first judgment.
The Second Syndicate Agreement is said to have been reached on 27 July 2018 and is incorporated in the Business Sale Agreement and the Bundall Sale Agreement. The cross-claimants rely upon various promises by Mr Wang to Ms Zhu, to which earlier reference has been made. That which is most important in dealing with the cross-claim is what is alleged to be the breach of the agreements, assuming, for present purposes, that the agreements are as pleaded.
The allegations of breach relate to a failure to erect signage at Bundall; the non-payment of outstanding rent; the non-completion of the purchase of the three Queensland businesses; the non-provision of marketing subsidies; and the non-payment of other amounts. These are detailed in the above reasons for judgment dealing with the cross-claim. The total amount claimed by the cross claimants is almost one and a half million dollars.
It is clear from the material before the Court, and there is much in the material that is unclear, that the Exclusive Distribution Agreement was executed by, and names as a party, Dongguan De Rucci Bedding Co Ltd and De Rucci Queensland Pty Ltd.
The Exclusive Distribution Agreement has a choice of law provision, choosing Chinese law and granting exclusive jurisdiction to the Chinese courts and tribunals. No party has raised that the Court has no jurisdiction to deal with the matter or any pre-emptive application to disentitle the Court from dealing with the dispute. While the Court should be applying Chinese law, no expert on Chinese law has been called and the Court is unaware of any difference between Australian law and Chinese law on these issues. As a consequence, these issues will be determined in accordance with Australian law.
Mr Jinpei Wang is not a party to the proceedings, but is the signatory to the Business Sale Agreement. The agreement has express reference to the need to agree to additional terms, which are not specified. The cross-claim depends, on the submission of Ms Zhu, on alleged terms that were not specified and were required to be negotiated and/or determined over and above the terms of the agreement. Those terms do not appear on the face of the documents, as already stated in the course of the earlier analysis of the cross-claim. Nor is there evidence that they were the subject of subsequent agreement.
[8]
Repudiation
The claim that the second defendant repudiated the Management Agreement is based upon the conduct of Ms Zhu in replacing DRI's EFTPOS machine with a machine that paid the proceeds of the sale of stock at Moore Park to companies associated with Ms Zhu, being, inter alia HQ Bedding Pty Ltd, the fifth defendant. Further, it is based upon the conduct engaged in by Ms Zhu and/or HQ, which purported to terminate the Management Agreement immediately, without termination payment pursuant to the Management Agreement, and without notice of any kind.
As already indicated, the plaintiff submits that HQ had no right to take those steps and the steps are a repudiation of the Management Agreement. That repudiation, it is said, was accepted, at least in part, by the commencement of these proceedings.
Somewhat unusually, the plaintiff submits that the same conduct amounted to a breach of the Management Agreement by HQ, on which the plaintiff seeks to sue. The principles to which the Court has already referred require the plaintiff to elect. An election does not permit the treatment of a breach of a fundamental condition as repudiatory as well as the capacity to sue for breach in relation to the same conduct on the basis of continuing obligations, although there may be little practical effect in the difference.
As earlier stated, Ms Zhu relies, amongst other things, on the breach of the Syndicate Agreements on which the cross-claimants sue, as a repudiation of the Management Agreement, which repudiation was accepted by the defendants. As a consequence, the defendants maintain that the conduct, in altering the bank account into which payments would be made and taking over the management of the Supacenta store, was an acceptance of the repudiatory conduct of the plaintiff and associated entities from the De Rucci China group.
In relation to the Supacenta store, as earlier stated, Ms Zhu asserts that on around 15 June 2019, Mr Wang promised to pay $3000 - $5000 per month, if the Management Agreement was continued. No such payments have been made. The agreement is not documented and the terms are inconsistent with the terms of the Management Agreement.
If, as seems to be suggested, there is a collateral arrangement between Ms Zhu and Mr Wang for the payment of a monthly amount, if Ms Zhu were to continue the operation of the Management Agreement, it is not clear that such a collateral arrangement is binding on the plaintiff in this matter or, if it be different, the parties to the Management Agreement.
[9]
Cross-claim
To some extent, the issues associated with the cross-claim have already been the subject of consideration earlier in these reasons for judgment. Leaving aside the Chinese choice of laws and exclusive jurisdiction provision that is contained in the Exclusive Distribution Agreement, it is an agreement between Dongguan De Rucci Bedding Co Ltd and an entity associated with one of the defendants, Ms Zhu. As a consequence, the party that would, even if the submissions of the cross-claimants were correct, be liable to the cross-claimants is not a party either to the principal proceedings or to the cross-claim.
It may be that under Chinese law, which governs the Exclusive Distribution Agreement, the executed document is an agreement that is capable of being enforced. As earlier stated, there is no expert evidence to allow the Court to come to that conclusion.
Further, I accept that there is and was no binding agreement for the purchase of the three Queensland stores (leaving aside the Bundall Sale Agreement). Rather, at best, the Business Sale Agreement is an agreement to enter into a further agreement. In those circumstances, it is unnecessary to determine who or which party or non-party was at fault in reneguing on the agreement and refusing to process it.
Nevertheless, there are a number of aspects of the arrangements between the parties that require comment. It may be that the informal arrangements between Ms Zhu and Mr Wang were enforceable under Chinese law. Again, the Court is not privy to any expert evidence on Chinese law. It is, however, necessary to state that the Court accepts that the subjective intention of the parties was as outlined by Ms Zhu.
Further, the subjective intention of the parties was that the business arrangements between Ms Zhu (and companies associated with her) and Mr Wang (and companies associated with him) had overriding purposes that benefited Ms Zhu in return for the benefits otherwise provided to Mr Wang and/or his associated companies. Those associated companies include the plaintiff in these proceedings and the second cross-defendant. The Court, however, is not given the task or the jurisdiction to make orders on the basis of what it considers to be "fair". Rather, the justiciable controversy must be resolved in accordance with law. Nevertheless, that background informs a number of aspects that it is necessary to recite.
[10]
Endnotes
See further [2020] NSWSC 374 at [7]-[10] and [24].
[2020] NSWSC 374, [68].
[2020] NSWSC 374, [72]-[76].
Defendants' Further Submission as at 28 April 2020 [6].
Cross-Claim [2W]-[2Y].
Tcpt p 169.
Affidavit of Jia affirmed 10 March 2020, Annexure A pg 1-6 (Ex CBA p23-29).
An English translation of the Exclusive Distribution Agreement is contained in the Affidavit of Zhu affirmed 18 April 2020, Exhibit p. 26-33.
Exclusive Distribution Agreement, "Part Six: Arbitration" cl 6.1
See [2020] NSWSC 374, [7].
Affidavit of Jia affirmed 10 March 2020 (No 2) at [13]-[14]; Affidavit of Jia affirmed 14 April 2020 at [14].
Ex CBA p 63 (Bank Cheque and Chinese Loan Agreement); Ex CBA p 167 (English Translation of Loan Agreement); Affidavit of Jia affirmed 14 April 2020 at [17], Affidavit of Jia affirmed 20 November 2019 at [14] and Affidavit of Jia affirmed 10 March 2020 at [22].
Affidavit of Jia affirmed 14 April 2020, Exhibit JJ-1; Ex CBA pp 158 and 160.
Affidavit of Zhu affirmed 19 September 2019, Annexure; Ex CBA p 79 (bank guarantee).
Affidavit of Jia affirmed 14 April 2020, Exhibit JJ-1; Ex CBA p 623.
Affidavit of Jia affirmed 10 March 2020 Exhibit A; EX CBA pp 168-169.
Affidavit of Jia affirmed 14 April 2020 at [25].
Affidavit of Jia affirmed 14 April 2020 at [72].
Cross-Claim [4A]
Cross-Claim [4B]
Cross-Claim [4B]
In order to ensure there is no confusion, the first cross-defendant will be referred to as "Mr Wang" in what follows and Mr Jinpei Wang will only be referred to by his full name.
Tcpt p 109 l 14-18.
Tcpt p 129 l 7-9.
Cross-Claim [4F]
The agreement records that the document was signed on 27 July 2017 although Ms Zhu asserts that this was a mistake and the agreement was in fact signed on 27 July 2018: see CC [5] (particulars). Mr Jia asserts that 27 July 2017 was the correct date: Affidavit of Jia affirmed 16 April 2020 at [26].
[11]
Amendments
03 December 2020 - typographical error in catchwords
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: 03 December 2020
The Court made orders on 13 March 2020 (with slight variations on 30 March 2020) providing for the defendants/cross-claimants to file and serve their evidence on the Claim and evidence in chief on the Cross-Claim by 3 April 2020, with any evidence in reply on the Cross-Claim to be served by 10 April 2020.
At the suggestion of the Court, the matter was listed for Directions on Friday 17 April 2020, with the final hearing listed to commence on Monday 20 April 2020 for 3 days. On 17 April, Ms Zhu appeared before the Court and advised that the defendants/cross-claimants wished to rely upon a further bundle of documents which would be served over the weekend before the final hearing, which proposal was resisted by the plaintiff/cross-defendants.
Ultimately, the Court, as presently constituted, made orders that the defendants were to file and serve all evidence and material upon which they rely by 4pm on Saturday 18 April 2020 and submissions were to be filed by 10am Tuesday 21 April 2020.
A substantial folder of materials was served by the defendants on the plaintiff/cross-defendants over the weekend of 18-19 April. Both parties filed further evidence during the course of the hearing. On 20 April 2020, the Court made what has been referred to as a "guillotine order", to the effect that the Court would not consider any additional materials sought to be filed and served by the defendants/cross-claimants after 7:30pm on 20 April 2020.
According to the orders made on 17 April 2020, the parties were to file written submission by 4pm on Monday 20 April 2020, with submissions in reply to be filed by 10am on Tuesday 21 April 2020. On the first day of the hearing, orders were made vacating the original orders in respect of reply submissions and directing that reply submissions were to be filed by 10am on Wednesday 22 April 2020.
Written submissions were filed by the plaintiff in accordance with the orders, however, the defendants' written submissions in chief were only received by the Court on 22 April 2020. On the fifth day of the hearing, which was originally listed for 3 days, being 24 April 2020, the following exchange occurred at the close of the defendants' closing submissions:
HIS HONOUR: Thank you are those your submissions?
DEFENDANT: Thank you and I would follow your order to summarise everything to put it in the paper to you.
HIS HONOUR: Hold on, hold on. I said you could put in writing that which was a reply to ‑ that which may be put after you've used up your time.
DEFENDANT: Yes
HIS HONOUR: Yes. You're not to re‑open again and you're not to summarise everything again. Do you understand? But you can send a copy of the written ‑ I withdraw that. A copy of the submission that you read.
Despite that exchange, the Court received further, lengthy written submissions from the defendants on 28 April 2020. The plaintiff objected to various aspects of these written submissions on the basis that they were submissions in chief on both the Claim and Cross-Claim, which went beyond the grant of leave by the Court. The plaintiff further contends that to the extent those submissions purported to make an application to amend any pleading, that such application was opposed on the ground of prejudice and delay.
The Court seeks to accommodate self-represented litigants to the greatest extent possible, however, such indulgence is subject to the requirements of s 56 of the Civil Procedure Act 2005 (NSW) and the Court's obligation to facilitate the just, quick and cheap resolution of the real issues in proceedings. The requirement for fairness is not confined to self-represented litigants.
As a consequence of the foregoing, the Court has disregarded those aspects of the submission filed on 28 April to which the plaintiff has objected.
Evidence
In support of its Claim, the plaintiff relied on the Affidavits of Jeff Jia affirmed 19 September 2019, 20 November 2019, 26 February 2020, 9 March 2020, 10 March 2020 (x2), 14 April 2020 and a further Affidavit filed in court on 20 April 2020. Mr Jia is the general manager of the plaintiff.
In response to the Cross-Claim, DRI and Mr Wang rely on the Affidavit of Jeff Jia affirmed 16 April 2020. Mr Jia was cross-examined.
The defendants rely on the Affidavits of Lucy Zhu affirmed on 19 September 2019, 25 September 2019, 8 October 2019 (Part B), 9 December 2019, 12 March 2020, 18 April 2020 and 20 April 2020. [4] Ms Zhu was cross-examined.
The plaintiff made various objections to the material contained in the Affidavits of Ms Zhu and helpfully compiled these objections into a Schedule. In summary, the great majority of those objections related to the content of the Affidavits being submissions rather than evidence, alongside objections as to relevance and hearsay. Without dealing with those objections in any detail, and having regard to certain indulgences that ought to be made in proceedings where parties are not legally represented, the Court proposes to rely upon the evidence in the manner advocated for by the plaintiff for the reasons set out in the Schedule.
Since the Court's previous judgment was handed down on 8 April 2020, the following additional, relevant background information has emerged from the parties:
1. In 2014, the plaintiff ("DRI") and Ms Zhu formed a business arrangement, which included dealings regarding the distribution and sale of De Rucci branded products at a store in the Moore Park Supa Centre, then operated by Singways (Moore Park) Pty Ltd (Singways). That arrangement was not documented. The parties agree that this arrangement came to an end in 2015.
2. In March 2016, Ms Zhu and the first cross-defendant, Mr Bing Kun Wang, conducted a meeting in Dongguan, China. [5] Mr Wang is the sole director of the plaintiff (the second cross-defendant) and a shareholder of Dongguan De Rucci Bedding Ltd, the main company in the Chinese corporate group which owns and operates the 'De Rucci' bedding and furniture brand (hereinafter, referred to as the "De Rucci China group"). During this meeting, Ms Zhu alleges that they discussed an agreement whereby Ms Zhu would have exclusive distribution rights for De Rucci products in Queensland in exchange for Ms Zhu allowing an entity associated with Mr Wang to operate the Moore Park store. Ms Zhu alleges that this general agreement was formalized in the Management Agreement and the Exclusive Distribution Agreement, described below.
3. At certain times between 2016 and 2018, Ms Zhu, through various corporate entities, owned and operated four furniture businesses selling De Rucci products, namely, the Moore Park store and three stores in Queensland, located at:
1. Fortitude Valley (often referred to by the parties as "De Rucci Brisbane" or "Shop 1"),
2. Logan (referred to as "Shop 2"); and
3. Bundall (referred to as "Shop 3"). [6]
1. In July 2016, Ms Zhu emailed Mr Jia to propose that DRI sub-lease the Moore Park premises, but to avoid a breach of the lease of those premises, Ms Zhu suggested that there should be an "agreement for administration". [7] The defendants have objected to this email chain being before the Court on the basis that pre-contractual negotiations are not relevant to the construction of an agreement. This objection is dealt with below.
2. On 21 September 2016, Dongguan De Rucci Bedding Co Ltd and De Rucci Queensland Pty Ltd signed a document entitled "Overseas Distribution Agreement" (hereinafter referred to as the "Exclusive Distribution Agreement"). [8] De Rucci Queensland is an entity controlled by Ms Zhu. The agreement provides that De Rucci Queensland would become the exclusive distributor of De Rucci products in Queensland and that Dongguan De Rucci Bedding Co Ltd would subsidise marketing activities in Queensland. The agreement was said to "be interpreted in accordance with the laws of the People's Republic of China" and any dispute was to be submitted to the South China International Economic and Trade Arbitration Commission for arbitration. [9] There is no reference to the Management Agreement within the Exclusive Distribution Agreement. Further, no expert evidence of the law of People's Republic of China is before the Court.
3. On 20 October 2016, the plaintiff and HQ entered into the Management Agreement. [10] On the same day, Mr Jia arranged for an entity related to DRI to obtain a bank cheque in the amount of $107,317.90 and provided that bank cheque to Ms Zhu. The payee on the bank cheque was 'Supacenta Pty Ltd'. [11]
4. Shortly after providing that bank cheque to Ms Zhu, Ms Zhu provided Mr Jia with an undated "loan agreement" in Chinese. By that document, Ms Zhu stated that she owed DRI $107,317.90, which she would repay as soon as possible, but by no later than 31 December 2016, which date DRI would consider extending if DRI could sell its products at HQ Living Moore Park Supa Centre by that time. [12]
5. On 21 October 2016, Ms Zhu arranged for the bank cheque funds to be deposited into the account of the lessor of the Moore Park premises, Supacenta Pty Ltd (Supacenta), [13] presumably to form part of the security for the lease or eventually, directly or indirectly, so to do (see below).
6. Those funds were then returned by Supacenta to HQ, to allow HQ on 27 October 2016 to arrange for the issue of a bank guarantee to Supacenta. [14]
7. Since then, and at least as of 25 March 2020, the funds were credited to an account in the name of HQ, as security for the bank guarantee provided by HQ to Supacenta. [15]
8. On 7 November 2016, Ms Zhu emailed DRI's solicitor to notify that HQ needed to defer the management handover of the Moore Park store to DRI to 31 December 2016 and to provide an "attached agreement" for the solicitor's review. [16] Ms Zhu attached to that email a document entitled "Loan Agreement Confirmation", which she had executed. By that document, Ms Zhu recorded that "by mutual agreement" the commencement date of the Management Agreement had been deferred to 31 December 2016; that Ms Zhu took an "interest free personal loan" in respect of the "bank guarantee funds" of $107,317.90; and that she was responsible for repaying that loan "as soon as possible". Ms Zhu also recorded that DRI agreed that it will waive the "penalty cost of $100,000" as a result of the delayed business commencement date from 1 November 2016 to 31 December 2016, as specified in cl. 9 of the Management Agreement.
9. DRI commenced managing the Moore Park store pursuant to the Management Agreement around 2 January 2017. [17] Ms Zhu asserts that the management handover occurred on or before 31 December 2016. From the time of management handover onwards, DRI had day-to-day control of the Moore Park store.
10. DRI did not pursue HQ for the agreed damages of $100,000 due to the delayed start of the Management Agreement. [18]
11. In or around February or March 2018, Ms Zhu alleges that she reached an oral agreement with Mr Wang whereby Mr Wang would provide additional capital to Ms Zhu to assist with the development of the three Queensland stores in the amount of $500,000. [19] Furthermore, Ms Zhu alleges that Mr Wang agreed to provide additional credit support for the purchase of De Rucci display stock by stating "I will extend the display stock payment for Store 2 (Logan) for another 12 months, and two years for the display stock payment Store 3 (Bundall)." Ms Zhu alleges that the value of this credit support amounted to $400,000. Ms Zhu alleges that Mr Wang "defaulted" on these agreed credit facilities on or around 19 May 2018. [20]
12. From May 2018 onwards, Ms Zhu alleges that the provision of stock to her 3 Queensland stores by the De Rucci China group was significantly delayed. [21]
13. On 18 July 2018, Mr Jia attended a meeting in Mr Wang's house, along with Ms Zhu and Mr Jinpei Wang [22] , which lasted 8 hours (hereinafter referred to as "the 8 hour meeting"). Mr Jia accepted that the meeting concerned the purchase of Ms Zhu's three shops in Queensland and that Mr Wang had instructed that Jinpei Wang would be the person who purchased the shops. [23]
14. Ms Zhu stated that the 8 hour meeting was attended by Mr Wang and not Jinpei Wang, although this was not put to Mr Jia. [24]
15. Ms Zhu alleges that whilst it was agreed that Jinpei Wang would take over the operation of the stores, Mr Wang (the first cross-defendant) personally agreed that he would ensure that Ms Zhu was paid for the transfer of her three stores. [25]
16. On 27 July 2018, [26] a Chinese language document entitled "The Plan for Acquiring 3 shops in Brisbane and Gold Coast" was signed by Jinpei Wang and Ms Zhu (and witnessed by Mr Jia) (hereinafter referred to as "the Business Sale Agreement"). [27] The Business Sale Agreement provided that Jinpei Wang would purchase the 3 De Rucci shops operated by Ms Zhu in Queensland for $295,000 + GST.
17. On 19 September 2018, Ms Zhu was provided with a Chinese language document entitled "Summary of the Handover in Brisbane" (hereinafter referred to as "the Settlement Summary"). [28] The document provides certain amounts that "Sydney" was to pay to "Brisbane" in relation to the transfer of shops from Brisbane to Sydney. It seems that "Brisbane" refers to Ms Zhu and entities associated with her, whilst "Sydney" refers to the plaintiff (and/or associated entities). The document provided that $400,177.95 was payable to entities associated with Ms Zhu by "Sydney" to finalise the "handover" of the three Queensland stores.
18. On 26 October 2018, De Rucci Bundall Pty Ltd (described as the "vendor") and DRI ("the purchaser") signed a document entitled "Agreement for Sale and Purchase of a Business" (hereinafter referred to as "the Bundall Sale Agreement"). [29] The agreement provided for the transfer of Ms Zhu's business operating as De Rucci Bundall in consideration for $150,000. The agreement expressly stated that it was conditioned on the "Landlord's consent on the lease transfer". [30]
19. On 30 October 2018, Ms Zhu sent a message to Mr Jia indicating that the landlord of the Logan store refused to consent to the assignment of the lease for that store due to outstanding rent. [31]
20. On 1 November 2018, Ms Zhu received communications from the landlords of her three Qld stores indicating that they refused to consent to the transfer of the leases because of outstanding moneys owed. [32] A formal Breach Notice dated 1 November 2018 from the landlord of the Bundall store to Ms Zhu indicated that the landlord refused to consent to the transfer of the lease because Ms Zhu had failed to erect signage in accordance with the lease. [33]
21. On 3 November 2018, Mr Wang sent Ms Zhu a WeChat message confirming that he would only transfer her $150,000 in connection with the Bundall Sale Agreement once the lessor had consented to the transfer of the lease and not before. [34]
22. On 20 November 2018, Ms Zhu attended a meeting with the representatives of the landlord of the Logan store along with Mr Jia. Mr Jia asserts that during this meeting the landlord asked whether Mr Jia would pay for Ms Zhu's outstanding rent and Mr Jia said that he would not. The parties agree that at this meeting the landlord offered Mr Jia a new lease for the premises. [35]
23. Also on 20 November 2018, Annie Pao (a representative of the landlord for the De Rucci Bundall store) emailed Ms Zhu and Mr Jia. [36] In that email, Ms Pao states that the landlord agreed to the assignment of De Rucci Bundall Pty Ltd's lease to the plaintiff if certain conditions were satisfied. Ms Pao advised that the landlord would not consent to the assignment unless correct signage in accordance with the existing lease was installed.
24. On 20 December 2018, DRI's solicitor sent an email to Ms Zhu's solicitor indicating that the purchaser had 'rescinded' the Bundall Sale Agreement. [37] It was said that the Agreement was rescinded because the Vendor had breached essential terms of the existing lease agreements and could not settle the matter with the purchaser by the Possession Date and Settlement Date.
25. On or around 20 December 2018, the landlord for the Logan store called on the bank guarantee in the amount of $96,380.00 and the lease was surrendered. [38]
26. On 21 December 2018, Mr Jia received an email from representatives of the landlord of the Bundall store which indicated that DRI had secured a lease of the premises for the plaintiff. [39]
27. Also on 21 December 2018, the landlord for the Bundall store terminated the lease with the Third Cross-Claimant and called on the bank guarantee in the amount of $62,700. [40]
28. On 24 December 2018, Ms Zhu received an email from a representative of Dongguan De Rucci Bedding Co Ltd (the counterparty to the Exclusive Distribution Agreement representing the De Rucci China group) attaching a document entitled "Notice of Terminating Cooperation" dated 22 December 2018. [41] That document provided the following:
Since the commencement of the cooperation in distribution in September 2016, your company has accumulated and owed us a large sum of overdue payments for goods. Our company has received a large amount of complaints from the clients. Your company is unable to provide normal services to the clients, and negatively affects the service quality and image of the company. Our company decides to terminate the cooperation with your company.
1. The document went on to demand that Ms Zhu pay all outstanding amounts, dispose of any De Rucci samples and stock in her possession and cease using the name "De Rucci" in her business activities.
2. On 26 December 2018, the landlord of the Fortitude Valley store changed the locks, preventing Ms Zhu from gaining access to the premises. [42] The lease was terminated and a lease termination penalty charge became payable to the landlord in the amount of $150,000.
3. On 20 January 2019, Ms Zhu asserts that she met with Mr Wang in relation to the $150,000 owing to the landlord of the Fortitude Valley store. Ms Zhu asserts that Mr Wang agreed that he, or an entity associated with him, would pay this amount to the landlord. [43]
4. On 27 February 2019, a representative of Supacenta emailed Ms Zhu requesting the removal of some signs in the store, or Supacenta would remove them and charge Ms Zhu for the time and labour. [44]
5. On 8 April 2019, Ms Zhu signed a letter confirming that the funds supporting the bank guarantee for the Moore Park store would be returned once the landlord agreed to release the bank guarantee. [45]
6. Ms Zhu asserts that on or around 15 June 2019, Mr Wang promised Ms Zhu that he would pay her $3000-$5000 per month if Ms Zhu allowed the Management Agreement to continue (and allowed the plaintiff to continue operating the Moore Park store), whilst the terms of a new agreement were being negotiated. [46] Ms Zhu asserts that no such monies were subsequently received by her.
7. On 18 June 2019, a meeting occurred between Ms Zhu and Mr Wang in Dongguan, China. [47] Ms Zhu asserts that she told Mr Wang that the existing Management Agreement had been terminated and that they discussed the terms of an arrangement moving forward involving the setting off of debts owed by the parties to each other and the payment of a monthly management fee to Ms Zhu.
8. Around late June 2019, Supacenta asked Ms Zhu to reduce the number of bed settings in the Moore Park shop from above 10 to no more than 6. [48]
9. On 5 July 2019, an issue arose during an inspection by Supacenta regarding internal signage in the store and the issue was rectified. [49]
10. On 10 July 2019, Ms Zhu asserts that she informed Mr Jia that she would take back her Moore Park store by the end of August 2019 and replace the EFTPOS machine, if she did not receive outstanding payments under the Business Sale Agreement. [50] Mr Jia denies that they had a conversation to that effect on 10 July 2019. [51]
11. On 31 August 2019, Ms Zhu changed the locks to the Moore Park store. [52]
12. From 1 September 2019, Ms Zhu opened and closed the Moore Park store, allowing DRI's employees to work at the store and allowing DRI to continue to collect revenue from sales. [53]
13. However, on 7 September 2019, Ms Zhu sent a WeChat message to Mr Wang in which Ms Zhu said "we terminate the cooperation from our shop, HQ Living at Moore Park. I will take the shop back today and manage it by myself". [54]
14. On that same day, Ms Zhu changed the ETFPOS machine, so that the revenue from the business no longer went into DRI's bank account. [55] From 7 September 2019, the proceeds of sale of the De Rucci branded stock from the Moore Park shop have been paid into a bank account in the name of HQ Bedding Pty Ltd (the fifth defendant). [56]
15. On 12 September 2019, Ms Zhu sent an email to DRI's solicitor confirming that she had informed Mr Wang by WeChat message on 7 September 2019 that the Management Agreement was terminated immediately. [57] Ms Zhu stated:
"I have replaced the EFTPOS machine to take over the payments from the trading in order to offset the debt owed by De Rucci Intl to our group of companies…I have also advised that the security deposits and the display products will also be taken over to offset the debt owed by De Rucci International."
1. There were 153 items of De Rucci branded display stock in the Moore Park store on 12 September 2019, with a cost price of $96,821.95 and a recommended retail price of $398,824. [58]
2. From 13 September 2019, DRI has been denied access to the Moore Park store, except to conduct a stocktake or obtain sales information pursuant to orders of the Court. [59]
3. On 16 September 2019, DRI demanded access to the store and the return of the display stock. HQ refused that request on 17 September 2019. [60]
4. Since at least 12 September 2019, HQ has sold the De Rucci branded display stock and applied the proceeds of sale of that stock to the expenses of running its business. On Ms Zhu's undertaking to the Court, since late 2019, Ms Zhu has caused $98,000 to be withdrawn from the HQ Bedding Pty Ltd account to pay the rent and other liabilities owed by HQ to Supacenta.
5. On or about 27 September 2019, Ms Zhu received a written communication from the landlord which stated "as previously discussed, having more than 6 bed settings in your store is in breach of the current lease and as such I give you fourteen (14) days to remedy this before further action is taken". [61]
6. On 29 February 2020, HQ's lease of the Moore Park premises expired. [62]
7. On 3 March 2020 and 11 March 2020, DRI made written demands for the return of the $107,317.90 that had been provided by DRI to HQ in October 2016 for the bank guarantee. [63] On 6 March 2020 and 12 March 2020, Ms Zhu replied, stating that she refused to return the $107,317.90. [64]
Orders sought by the plaintiff in the Claim
The plaintiff seeks:
1. Repudiation: A declaration that the second defendant (HQ) repudiated the Management Agreement on 7 September 2019;
2. Title to Display Stock: A declaration that the plaintiff had title to the display stock that was at the Moore Park premises at the time of HQ's repudiation of the Management Agreement (Display Stock), together with:
1. an order to account for the profit derived from the sale of that Display Stock; or, in the alternative,
2. consequential damages for detinue and conversion of the Display Stock,
1. Agency: In the alternative to (2), a declaration that the plaintiff operated the business pursuant to the Management Agreement at the Moore Park premises as agent of HQ and:
1. An order that HQ pay damages equivalent to the net profit that DRI would have earned if it was permitted to manage the store from September to November 2019; or, in the alternative,
2. A declaration that DRI is entitled to the net profit from the sale of the Display Stock; or, in the alternative,
3. An order that HQ indemnify DRI for the cost of the Display Stock that DRI acquired prior to the termination of the Management Agreement.
1. Further, and in addition to the above, DRI claims to be entitled to:
1. Early Termination Clause: An order that HQ pay DRI agreed damages for early termination of the Management Agreement of $100,000; and
2. Bank Guarantee: An order that:
1. HQ and HQ Living (Moore Park) Pty Ltd (the fourth defendant) pay DRI $107,317.90, an amount provided as security for a bank guarantee; and/or
2. the first defendant pay DRI $107,317.90.
Submissions on Liability for Claim Relief (1): Repudiation
Clause 10 of the Management Agreement provides:
"(1) The manager shall manage the store pursuant to all terms and conditions of the lease and terms of this agreement. If the manager breached any terms of the lease, then Singways can terminate the Management Agreement by giving 28 days' notice in writing. (2) If Singways terminates the Management Agreement before the lease expires providing that the manager has not breached the terms of the lease, Singways must give 3 months written notice to the manager and shall pay $100,000.00 to the manager for compensation and damages within 10 business days from the date of termination (3) If the manager wishes to terminate this Management Agreement before the lease expires, the manager must give 3 months' written notice to Singways and shall pay $100,000.00 to Singways for compensation and damages within 10 Business days from date of termination"
The plaintiff submits that HQ repudiated the Management Agreement on 7 September 2019 by:
1. replacing DRI's EFTPOS machine with an EFTPOS machine that paid the proceeds of the sale of stock at the Moore Park premises into an account in the name of HQ Bedding Pty Ltd (the fifth defendant) and controlled by Ms Zhu, when the Management Agreement authorised DRI to collect and receive all payments due to the business (cl 4(1)(b)); and
2. purporting to terminate the Management Agreement immediately without any termination payment, when the Management Agreement required three months' notice of early termination and a termination payment of $100,000 (cl 10(2)), or 28 days' notice (and no termination payment) in the event that DRI breached any terms of the lease (cl 10(1)).
The plaintiff submits that HQ had no right to take those steps and, in so doing, HQ evinced an intention no longer to be bound by the Management Agreement. [65]
The plaintiff says it accepted the repudiation by commencing these proceedings. [66]
Furthermore, the plaintiff submits that the same conduct also amounted to a breach of the Management Agreement by HQ.
Whether or not DRI had breached the Management Agreement, the plaintiff submits that HQ was not entitled to terminate immediately and unilaterally the Management Agreement. HQ breached cl 10 by failing to give the requisite notice in advance of termination. [67]
HQ submits that, prior to any alleged breach or repudiation on 7 September 2019, DRI breached or repudiated the Management Agreement by (1) causing HQ to breach the lease for the Moore Park store and/or (2) by repudiating or terminating various collateral contracts, including the Exclusive Distribution Agreement. [68]
Collateral Contracts
In relation to the second aspect, the various agreements, said by the defendants to be collateral contracts, and the circumstances of the alleged breaches or repudiations of those agreements, are more fully set out below in the section summarising the submissions made in respect of the Cross-Claim. [69]
For the purposes of the defendants' submissions on the Claim, it is sufficient to note that the defendants allege that the parties entered into an overarching oral agreement at the time the various agreements (including the Management Agreement) were executed to the effect that the repudiation or termination of the collateral agreements would immediately cause the Management Agreement to be repudiated and/or terminated.
The defendants accepted that, on their face, neither the Management Agreement nor the allegedly collateral agreements expressly or impliedly provided such a term. Moreover, there is in fact no specific reference to any other agreement within any of the written documents.
The defendants submit that the only reason HQ (and its predecessor) entered into the Management Agreement, being an agreement which appears to provide the defendants with little or no consideration, [70] was (primarily) because doing so would ensure that the plaintiff (and/or associated entities in the De Rucci China group) would provide Ms Zhu's Queensland entities with exclusive distribution rights for De Rucci products in Queensland (by way of the Exclusive Distribution Agreement), as well as financial support for marketing and other costs.
In response to the plaintiff's submission that the various alleged collateral agreements were entirely unconnected to the plaintiff (in the sense that the plaintiff was not a party to these agreements) and unconnected with the Management Agreement, the defendants submit:
1. Extracts of WeChat messages between Ms Zhu and Mr Jia show that Mr Jia was (at least, partially) aware of the arrangements in place between Ms Zhu's Qld entities and the De Rucci China group. Mr Jia referred to these arrangements as the "Brisbane contract". [71] Certainly, the parties agree that Mr Jia witnessed the Business Sale Agreement, shown by his signature on the document.
2. According to Ms Zhu's handwritten translation of various WeChat messages, it appears that certain "containers" (presumably carrying De Rucci stock destined for one of the stores operated by Ms Zhu) were withheld from Ms Zhu as a consequence of her not having executed the Management Agreement. [72]
3. Ms Zhu also points to instances during the cross-examination of Mr Jia when Mr Jia appeared deliberately to attempt to limit the connection between the plaintiff and the De Rucci China group. For example, Mr Jia was asked whether he ever received instructions from the first cross-defendant, Mr Wang, and he responded "I don't know" [73] , despite later stating that Mr Wang was his manager [74] .
4. During the course of the hearing, the Court indicated to the parties that these conflicting responses would be relevant to the Court's view of Mr Jia's credit. Counsel for the plaintiff did not cavil with that comment other than to observe that Mr Jia was willing to make certain concessions, that did not assist the plaintiff's case. For example, he accepted that he was told by Ms Zhu that she would terminate the Management Agreement, if the Exclusive Distribution Agreement was terminated. [75]
5. Mr Jia stated that he "knew" the terms of the Settlement Summary and "we discussed these terms", [76] however, in response to the question "do you know what ["item 5 amount to be paid by Sydney to Brisbane" [77] ] means?", he responded, "I don't know". [78]
6. Mr Jia was copied to an email from Umi Wu, on behalf of the De Rucci China group, to Ms Zhu on 24 December 2018 which attached the "Notice of Terminating Cooperation". [79]
7. Ms Zhu cross-examined Mr Jia about the installation of a light box advertising sign at her Bundall store. Mr Jia accepted that he had signed a Quote from CV Signage Solutions in respect of an amount of $36,872.84 + GST for the installation of the light box. [80] Mr Jia accepts that he advanced $20,000 as a security deposit in relation to the quote. [81]
8. Mr Zhu stated, whilst she was being cross-examined, that she negotiated the Exclusive Distribution Agreement with the first cross-defendant in China. [82] Ms Zhu was asked whether she negotiated the agreement with Mr Jia and she indicated that she recalled WeChat conversations with Mr Jia at around this time. Ms Zhu accepted that she asked De Rucci International overseas to send Mr Jia a copy of the Exclusive Distribution Agreement on about 18 October 2016. [83]
9. Ultimately, as explained in detail below at [152]-[154], on the plaintiff's own submissions in respect of the Cross-Claim, the De Rucci China group and/or Mr Wang asked or directed the plaintiff to undertake the obligations of Jinpei Wang under the Business Sale Agreement.
Assuming the Court accepts the defendants' submission that the termination or repudiation of one of the allegedly collateral agreements would immediately result in the termination or repudiation of the others, the defendants submit that the Management Agreement was immediately terminated or repudiated as a consequence of the email Ms Zhu received on 24 December 2018, attaching the Notice of Terminating Cooperation. [84]
Alternatively, if the termination or repudiation of the Exclusive Distribution Agreement did not immediately terminate or repudiate the Management Agreement, but, rather, provided the defendants with the right to terminate, the defendants submit that Ms Zhu gave oral notice that the Management Agreement was terminated, as a consequence of the termination of the Exclusive Distribution Agreement, during a conversation with Mr Jia on 24 December 2018. [85]
Further in the alternative, the defendants submit that the defendants exercised their right to terminate or gave oral notice of termination of the Management Agreement on 18 June 2019 and again on 10 July 2019. On 10 July 2019, Ms Zhu alleges that she expressly told Mr Jia that if a new arrangement could not be reached with the plaintiff and the De Rucci China group in relation to her Queensland stores by 31 August 2019, she would reassume control of her Moore Park store and replace the EFTPOS machine. [86]
In response, the plaintiff primarily contends that there was no overarching agreement, oral or otherwise, between the defendants and the plaintiff, to the effect that the termination of the Exclusive Distribution Agreement, or other allegedly collateral agreements, would result in the immediate termination of the Management Agreement or provided the defendants with the right to terminate the Management Agreement, with or without notice.
The plaintiff noted that Ms Zhu explained, under cross-examination, that her initial relationship with the plaintiff in 2014 was terminated because Ms Zhu believed that the plaintiff was not paying her a fair profit share. [87] Ms Zhu further alleged that the plaintiff "manipulated" its accounts in order to ensure that she would not receive a profit share. She accepted that she had a "breakdown in trust" with the plaintiff in 2015. Ms Zhu further accepted that, as a consequence, she was concerned to document all arrangements with the plaintiff in writing and in a "signed legal document". [88] Ms Zhu accepted that because of her experience in 2015, she was very concerned, at the time of entering into the Management Agreement and the Exclusive Distribution Agreement, to ensure that the documents she signed with the plaintiff reflected her understanding of the obligations between her companies and the De Rucci companies. [89] On the basis of the foregoing, the plaintiff urged the Court to draw the inference that there was no overarching oral agreement in the terms pleaded by the defendants.
In relation to whether sufficient notice of termination was provided by the defendants, the plaintiff submits that there are two reasons why it should be found that such notice was not provided. First, HQ alleges prior oral notice only and not prior written notice. Clause 10 of the Management Agreement required notice of termination to be given in writing. Further, the plaintiff states that Ms Zhu's evidence regarding prior oral notice of termination should not be accepted. According to the plaintiff, the discussions occurring on the dates specified by Ms Zhu (if there were discussions) did not involve any advance notice of HQ's intention to terminate the Management Agreement.
In terms of the alleged notice said to be provided on 24 December 2018, the plaintiff notes that Ms Zhu summarised the content of that same conversation in her Affidavit of 8 October 2019 at [55] without any suggestion that she gave notice on behalf of HQ at that time. The plaintiff further submits that it was also unlikely that Ms Zhu in fact gave such notice, in the circumstances that followed. This is because Ms Zhu is most unlikely to have allowed DRI to continue to manage the business at the Moore Park shop for the 9 months to 7 September 2019 if she gave notice of termination on 24 December 2018. The risk to the goodwill of the business and the risk of HQ being exposed to liabilities under the lease (without DRI's continued management of the business) would have been too great.
In terms of the alleged notice on 18 June 2019, Ms Zhu summarised the effect of that same conversation in her Affidavit of 8 October 2019 at [67]-[68]. Again, according to the terms of that Affidavit, there is no suggestion that she discussed the termination of the Management Agreement with Mr Wang during this discussion.
In terms of the alleged notice on 10 July 2019, the plaintiff notes that Mr Jia denies that Ms Zhu told him that she would take back her shop and replace the EFTPOS machine by the end of August. [90] The plaintiff further submits that such a conversation was also very unlikely, as it would have exposed HQ to the risk that DRI would have vacated the premises and removed the stock before HQ could re-enter the premises. In any event, this conversation only occurred two months before 7 September 2019 (and thus, three months' notice was not afforded in accordance with cl.10).
Breach of the lease
Separately from the defendants' submissions regarding the collateral contracts, the defendants also submit that the plaintiff had breached and repudiated the Management Agreement by causing various breaches of the Moore Park lease (aspect (1) referred to in [30] above).
The defendants submit that the plaintiff caused breaches of clauses 11.1(a) and 13.16(a) of the lease by displaying more than 6 bedding sets and improper marketing material. [91]
The plaintiff submits that such breaches of the lease, even if they were breaches, could not be regarded as amounting to breaches of the Management Agreement, let alone a repudiation of the Management Agreement.
In relation to cl 10 of the Management Agreement, the plaintiff submits that a reasonable business person would construe the references in cl. 10(1) and 10(2) to a breach of the terms of the lease as referring to a breach that is being actioned by the landlord. That construction is said to make commercial sense as it would allow HQ to terminate the Management Agreement on 28 days' notice to rectify any breaches notified by the landlord, prior to any threatened action being taken by the landlord. HQ would necessarily have advance notice of such action, given s 129 of the Conveyancing Act 1919 (NSW) (which requires landlords to give lessees notice of any breach of the lease before exercising a right of re-entry or forfeiture). A reasonable business person would not construe cl. 10(1) as applying to any breach of the lease, however minor. That construction would work a commercial inconvenience, as it would allow HQ to rely on any technical breach of the lease to reduce the notice period even if HQ was not itself facing any action under the lease from the landlord.
The plaintiff states that, as at 7 September 2019, it had not been notified of any breach of the lease. [92] Further, as at 7 September 2019, Supacenta had not issued any notice of breach of the lease.
The plaintiff accepted there was evidence that on 27 February 2019 Supacenta required removal of some signs in the store, or they would remove them themselves and charge for the associated costs. [93] Further, in late June 2019, Supacenta had asked Ms Zhu to reduce the number of bed settings in the Moore Park shop from above 10 to no more than 6. [94] However, there is no suggestion that this request was put in writing, or that any formal notice of breach was given under the lease, prior to 7 September 2019. It was not until 27 September 2019 that the landlord put any request in writing by email to Ms Zhu, [95] which was some three weeks after Ms Zhu and HQ had retaken possession of the premises from DRI, at which time the landlord gave HQ 14 days to remedy the situation before further action was taken.
Moreover, the defendants submit that the plaintiff breached the Management Agreement by failing to provide accurate account information (per cl. 7 of the Management Agreement). [96] This aspect was not specifically pleaded in the Amended Defence, other than a brief reference to "very inadequate sales figures" in Amended Defence [42(b)], so I will not further consider the issue.
Finally, the defendants also briefly submitted that the plaintiff made a "bad faith" approach to the landlord of the Moore Park store, allegedly with a view to taking over HQ's lease. Whilst the plaintiff accepts that there is some hearsay evidence and speculation about the motives of DRI staff engaging in conversations with the landlord, the evidence clearly does not rise above speculation.
Submissions on Claim Relief (4)(a): Agreed Termination
The Court will next summarise the submissions on Claim Relief (4)(a), alongside the submissions on quantum arising from the purported breach of cl 10, because they are interrelated issues.
The plaintiff submits that it is entitled to an order that HQ pay $100,000 to DRI, being the agreed damages for early termination of the Management Agreement, where there has been no relevant breach of the Management Agreement.
HQ submits that the agreed contractual damages of $100,000 for early termination is a penalty and, thus, unenforceable. [97]
The plaintiff submits that the critical issue in determining whether such a payment is a penalty is "whether the sum agreed was commensurate with the interest protected by the bargain". [98]
The plaintiff submits that DRI had a legitimate commercial interest to protect in discouraging early termination of the Management Agreement. DRI was intending to manage the business for profit. If the Management Agreement were to be terminated early, DRI would have to incur the cost of leaving the premises, without having an extended opportunity to obtain commission for the stock it had sourced by selling down the stock. DRI would have to deploy its staff to new premises, fund the acquisition of new stock from other revenue and find new premises. Accordingly, the $100,000 payment is not unenforceable as a penalty.
Submissions on Quantum for Claim Relief (1): Repudiation
The plaintiff submits that as a result of HQ's breach of the Management Agreement in purporting to terminate the agreement without providing the required notice, the plaintiff is entitled to damages that would place it in the same position as if the contract had been performed. [99]
On this basis, the plaintiff submits that it is entitled to the net profit that DRI would have earned if it were permitted to manage the store from September to November 2019, as this is the three-month notice period which DRI would have traded under the Management Agreement if HQ had given notice in accordance with (and not repudiated) the Management Agreement.
The plaintiff submits that the quantum of these damages is $364,940, assuming equivalent revenue to that recorded for September to November of the year before, 2018, and forecasting costs based on DRI's average monthly operating costs for 2019. The plaintiff's written submissions at [65] provide:
[65] DRI would have traded during the three months' notice period from 7 September 2019 to on or about 7 December 2019. In 2018, DRI's net revenue from the Moore Park for the same three months (September, October and November) was $606,395 and net profit was $333,822. DRI's average monthly operating costs for 2019 were $80,485. On the assumption that DRI's revenue for September, October and November 2019 would be equivalent to the net revenue for those months in 2018, DRI's net profit for September, October and November 2019 is [sic] would have been $364,940. [100]
The source of the revenue and cost figures is set out at [41]-[45] of the Affidavit of Mr Jia affirmed 14 April 2020, which provides:
"[41] The data in these spreadsheets is referable to the Moore Park store only and are [sic] extracted from the business management and accounting software (Management Software) used by the Plaintiff in the running of its furniture stores in Australia. As the plaintiff runs multiple stores, the plaintiff inputs data for each store into the Management Software which is then consolidated into a general database applicable to the Plaintiff's business as a whole. It is from this consolidated data that the Plaintiff prepares its usual tax lodgements and business activity statements.
[42] I have caused data to be extracted for all income and expenditure data pertaining to the Moore Park store for the months of September, October and November in 2018.
[43] It is the Plaintiff's practice that, for each store, including the Moore Park store, all sales and all expenses are recorded using this Management Software. Whenever a sale is made by a store, it is recorded, and whenever an invoice for costs or expenses is paid, it is also recorded. This data entry is done by the accounting and finance staff of the Plaintiff.
[44] The major cost items for each store, including the Moore Park store, are:
a. Cost of goods sold;
b. Rent;
c. Staff remuneration and entitlements;
d. Sales commissions;
e. Rates and utilities; and
f. Logistic and freight.
[45] These costs are marked out in the spreadsheet I have provided in the Exhibit. In particular, the 'cost of goods sold' is the purchase price of the furniture that were sold during the relevant month as invoiced to the Plaintiff by the supplier/manufacturer."
During the course of the hearing, an issue arose as to whether the historical evidence of the revenue, costs and profit from the business was admissible. The plaintiff sought to rely on the rule provided in ss 146 and 147 of the Evidence Act NSW (1995), which has been referred to as the 'business records' rule. [101] That rule relates to the form of the document and the mechanism by which it was produced. It does not relate to the veracity of the material produced. However, it assumes, where production occurs from business records held, for example, on computer, the document produced as a result of the computer software, even though not containing all of the information, is admissible. The evidence is admitted on the basis that it is a business record.
Separately, the Court also expressed concern about whether the figures could be relied on because there was little explanation of how amounts such as employee entitlements for persons such as Mr Jia, who work across multiple De Rucci stores, had been apportioned to each store. [102]
The defendants submit that the figures relied upon by the plaintiff are not accurate. The defendants refer to the bank statements for the plaintiff spanning July - August 2019, which allegedly demonstrate that the business experienced a net cash outflow of $13,895.24, during the period. [103] The defendants submit that, therefore, it is very unlikely that the business could have made a profit of $364,940 in September - December 2019. This issue is different to the issue raised by operation of ss 146 and 147 of the Evidence Act.
Submissions on Claim Relief (2): Title to Display Stock
The plaintiff submits that DRI had title to the Display Stock on the basis that, by virtue of the Management Agreement, DRI acquired the Display Stock as principal, rather than as agent for HQ; or there is an implied term in the Management Agreement that the Display Stock would belong to DRI.
The plaintiff noted that, in its 8 April 2020 judgment, the Court set out its construction of the Management Agreement and its preliminary view on the ownership of stock up to and including 7 September 2019.
Since that judgment was reserved, the plaintiff has prepared and served evidence regarding the termination of the Management Agreement. Further, the plaintiff has served evidence of circumstances known to both parties at the time of entry into the Management Agreement, which support the implication of the implied term and a construction of the Management Agreement by which DRI retains title in the Display Stock.
In particular, the plaintiff refers to the email chain, described above at [22(4)]. Within that chain, Ms Zhu sent an email to Mr Jia on 26 July 2016 in the following terms:
"…Our lease cannot be transferred. As a result, we can only have an agreement for administration. In relation to correspondence with others and lease administration, I will cooperate with you. On principle, you should obey the terms of the lease and subject to the administration of the owner. Pay your rent on time, and keep it confidential to others. Not everyone can know our cooperation relationship. The logo on the shopfront cannot be changed, etc.
We can discuss the issues relating to the 4th store and Brisbane together after you make your appointment with a lawyer. We can sign the 2 agreements together." [104]
Also within the chain is an email from Mr Jia to the plaintiff's then solicitor on 9 August 2016, wherein he forwards an earlier email dated 23 July 2016. The 23 July email appears to record the terms of the agreement that had been reached with Ms Zhu for the operation of the Moore Park store. In the 9 August email, Mr Jia instructs the solicitor to prepare a "contract" in the terms of the 23 July email, which is set out in full below:
"The proposal for the co-operation for the 4th store
Lucy Zhu hereby agrees to sub-lease the shop under the name of her company, being HQ Living at Moore Park Supa Centre in Sydney, to DeRucci International Co., Ltd to be operated as the specialised store for DeRucci products (the 4th store). To avoid a breach of contract and the consequential termination of the lease of the shop by the owner, it is hereby suggested that the parties should cooperate and operate the 4th store as the following:
Lucy Zhu will provide a bank guarantee.
The 4th store will resume the DeRucci business model implemented in 2015 and will be managed by DeRucci.
Lucy Zhu will not participate in the management of the store, but will assist Chief Manager Jia of DeRucci to communicate with the owner in relation to the administration of the lease agreement and ensure the terms of the lease agreement are adhered to, so the lease can be maintained.
De Rucci will pay Lucy Zhu a monthly lease administration fee of $5000+GST.
If DeRucci provides the takeover of the shop, in the first few months DeRucci may be required to obtain finance and provide a bank guarantee in advance. During the period that DeRucci provides the bank guarantee, there will be no need to pay the monthly lease administration fee of $5,000+GST. This fee will become payable by De Rucci since the the [sic] that Lucy Zhu provides the bank guarantee.
The administration of HQ Living at Moore Park Supa Centre will be hand over to De Rucci International Co., Ltd. On 1 November 2016.
If, due to the reasons on the side of Lucy Zhu, De Rucci International Co., Ltd. Was unable to move into HQ Living at Moore Park Supa Centre on 1 December 2016, Lucy Zhu will compensate DeRucci International Co., Ltd AUD 100,000." [105]
During the course of the hearing, the defendants objected to the admissibility of these emails on the basis that they consist of pre-contractual negotiations that were inadmissible for the purpose of construing the Management Agreement. [106]
The plaintiff submits that these emails consist of evidence of the surrounding circumstances known to the parties at the time of entry into the Management Agreement. As a result, the plaintiff submits that the emails are admissible, in accordance with the principles enunciated in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales. [107]
According to the plaintiff, it is not first necessary for the Court to find that the contract is ambiguous before having regard to the evidence of surrounding circumstances known to the parties. However, the evidence of subjective beliefs of the parties about their rights and liabilities may not be used to construe the agreement. [108]
The plaintiff referred to an extra-judicial paper prepared by McDougall J, [109] in which his Honour states at [36], [40]-[42]:
"As a useful rule of thumb, to the extent that pre-contractual communications refer to matters external to the terms of the contract, they are admissible (subject, of course, to other rules of admissibility). But to the extent that the evidence to be relied upon involves discussion or negotiation of the actual terms of the contract those communications will likely tend to reveal no more than the subjective intentions of the party, and are thus inadmissible.
…
In Codelfa itself, evidence of pre-contractual communications was admitted to demonstrate a common understanding as to how work under the contract was to be performed (namely on a continuous basis). This appears to infringe our rule of thumb which prohibits admitting evidence of discussions of any terms of a contract.
Upon closer inspection, however, this is not so. This is because the relevant terms being negotiated in Codelfa were terms regarding price, and not terms regarding how work was to be performed. Evidence of the "common understanding" as to work hours was held to be admissible for the purpose of determining whether a related term should be implied into the contract. Consequently, the discussions which were admitted were entirely external to the contractual document itself. Those discussions demonstrated the mutual objective basis which grounded the remaining negotiations of the actual terms of the contract (e.g. as to the amount of payment). It is for this reason that Mason J said that "the consequence is that the discussions [as to work hours] did not have the character of negotiations in the course of which the parties gradually evolved the terms of a bargain ultimately embodied in written form" [citing Codelfa at 354]. As a result, those discussions were never merged into the terms of the contract, nor did they suggest what the parties actual intentions were.
Properly understood, therefore, this aspect of Codelfa is also entirely compatible with the rule of thumb which I earlier identified as the discussions as to work hours were also external to the terms of the contract."
In summary, the plaintiff submits that the 2016 email chain evidences the joint commercial intent of both parties to contract in such a way as to achieve an effective sub-lease of the premises, without contravening the lessor's prohibition on subleasing the premises. The plaintiff refers, in particular, to Ms Zhu's exhortation that the plaintiff should pay "your rent on time". The plaintiff submits that this matter is not addressed in the Management Agreement and the evidence is, therefore, admissible "to demonstrate a common understanding as to how work under the contract was to be performed". [110]
The plaintiff says that the relevance of this background fact to the construction of the Management Agreement is that it suggests that the parties intended for DRI to operate the business as principal and not as agent. Accordingly, when DRI was receiving payments out of turnover from "sales in the business" for "stock" (cl. 5), it was doing so as principal.
In response, the defendants refer to an email from Ms Zhu to the solicitor for the plaintiff on 18 October 2016 [111] , in which Ms Zhu indicates that her solicitor has advised her that it was important for the Management Agreement to "embod[y] the following principles":
The business must always be shown to be operating as HQ Living business not De Rucci's
The turnover from the business must be nominated as HQ Living Turnover not De Rucci's;
De Rucci management duties have to be spelled out as would be the case in any management contract;
It must be emphasised that De Rucci's presence in the premises must not appear to give any right to possession.
In the same email, Ms Zhu requests that the plaintiff's solicitor merge these 'principles' into the draft agreement in order to "avoid any misinterpretation of subleasing or licensing without the owner's consent…[otherwise] there is clear evidence that we have breached the lease".
The defendants submit, contrary to what the plaintiff contends, that the Management Agreement was carefully drafted to ensure that it did not amount to a sub-lease of the premises because the defendants were mindful to ensure that they retained control of the Moore Park premises. The defendants referred to the parties' previous disagreements in relation to a store in Auburn in 2015.
The plaintiff also seeks to rely upon evidence that the parties were aware that the account nominated in the Management Agreement to receive payments from the business operated at Moore Park was the plaintiff's general bank account, where payments would be pooled with other funds to which DRI was entitled. The plaintiff again asserts that the Management Agreement did not address this issue.
Mr Jia affirms knowledge on the part of the parties to the Management Agreement that DRI would use DRI's general trading account for the purpose of managing the business pursuant to the terms of the Management Agreement. [112] He further stated that it was known to both parties that there would be no separation of funds that DRI accrued under the Management Agreement and the funds DRI earned in its other businesses.
Ms Zhu confirmed that she consented to the use of DRI's general trading account for the purpose of DRI managing the business pursuant to the terms of the Management Agreement. [113]
The plaintiff submits that this background fact also suggests that the parties intended for DRI to operate the business as principal, and not as an agent. That is, because both parties knew that the proceeds of the business were to be paid into a bank account and mixed with other funds to which DRI was beneficially entitled, the parties' common understanding was that DRI was to operate the business on its own behalf, as DRI was to be beneficially entitled to the proceeds of the business.
In addition, the plaintiff submits that these same background facts also support the implication of a term that DRI had title to the Display Stock. The plaintiff submits that such a term is reasonable and equitable, and is so obvious that it goes without saying, [114] as it is entirely consistent with the payment waterfall in cl 5 of the Management Agreement. [115]
By cl 5, DRI could take as commission any profits from the business, after payment of HQ's expenses and liabilities, including liabilities incurred to suppliers or for tax and other statutory liabilities. The effect of the payment waterfall in cl. 5 is that, after payment of HQ's outgoings, DRI could take as its commission any profits from the business. It was entirely within DRI's control how much to reinvest back into the business by the purchase of stock. Accordingly, the plaintiff submitted that the Display Stock was only purchased because DRI had decided to invest further in stock, rather than take higher commission and profits.
The plaintiff submits that such an implied term is capable of clear expression and there is nothing in the Management Agreement which is inconsistent with DRI having title to the Display Stock. Moreover, the term is necessary to give business efficacy to the contract, as the uncertainty as to the ownership of the Display Stock would otherwise render the Management Agreement unenforceable, as the sale of stock is the sole contributor to the generation of revenue in the business.
The defendants submit that they consented to the plaintiff receiving turnover from stock sales into the plaintiff's general account in order to assist the plaintiff to minimise their administrative costs. [116]
The plaintiff submits that these background facts and the payment waterfall in cl 5 confirm that DRI operated the business as principal. It is merely coincidental that, in doing so, its conduct reflected many of the aspects of the implied authority of mercantile agents. [117] How DRI conducted the business materially differed to the implied authority of such agents - in selling stock, DRI was not required to have regard to what it thought best for HQ. [118] Rather, the effect of the payment waterfall in clause 5 was that DRI was free to sell on terms that it thought best for itself. It was DRI and DRI only that would benefit from the profitable sale of stock.
The plaintiff submits that if the Court accepts that DRI had title to the Display Stock, the Display Stock has been detained and converted by HQ. [119] The plaintiff submits that the evidence of the pre-contractual negotiations is admissible because it touches on whose business was being operated out of the premises and this is a matter which the terms of the Management Agreement do not deal with. [120]
By letter dated 16 September 2019 [121] and these proceedings, the plaintiff has demanded the return of the Display Stock. However, HQ has sold and delivered the Display Stock to third parties. It is unknown how much, if any, Display Stock remains at the Moore Park premises. That is a matter that is entirely within the knowledge of HQ and, despite being served Notices to Produce, HQ has failed to provide evidence of the stock remaining in its possession.
In terms of quantifying its loss, DRI puts its loss at $418,769, based on the recommended retail price of the 153 items of Display Stock on the premises on 12 September 2019 ($398,824), [122] together with the $19,945 that HQ earned from selling De Rucci branded stock between 7 September 2019 and the stocktake conducted on 12 September 2019 [123] .
The defendants submit that the figure of $418,769 is not an accurate reflection of the value of these goods in circumstances where De Rucci typically offers 70% off for display stock clearances. [124]
During cross-examination, Ms Zhu stated that no physical stocktake occurred on 7 or 12 September 2019 and she could not confirm whether the stocktake relied on by the plaintiff was accurate. [125]
In answer to the question "all the stock on 7 September [2019] in the store was De Rucci branded stock. Yes or no?" Ms Zhu responded "I think so. I can't recall." [126] Ms Zhu accepted that, after 7 September 2019, when a De Rucci branded item of stock was sold via card, the proceeds of sale went into an account in the name of HQ Bedding Pty Ltd. [127]
Ms Zhu was asked whether she or HQ had a record of the sales of all De Rucci branded products from 7 September 2019 to the date of the hearing and Ms Zhu stated that she had some records but not all. [128] No records were put before the Court.
Submissions on Claim Relief (3): Agency
In the alternative to Claim relief (2), and if the Court determines that DRI conducted the business as an agent of HQ, the plaintiff submits that it is entitled to the net profit from the sale of the Display Stock, as DRI accrued that right from the partial performance of the Management Agreement prior to the termination of the Management Agreement. [129]
The plaintiff asserts that at the time of HQ's repudiation on 7 September 2019, DRI had already paid suppliers for the Display Stock on the premises [130] and had paid HQ's essential outgoings for September 2019, including $39,082 for rent, a monthly workers compensation insurance premium in the amount of $1,398.26 and annual business insurance in the amount of $3,558.54 (being 7/12 of an annual premium for the period from April 2019 to March 2020). [131]
The plaintiff asserts that a reasonable business person would construe the right under cl 5 of the Management Agreement to be a right to payment of commission from gross earnings received by DRI or HQ or held by DRI on behalf of HQ, whether or not those earnings were received before or after termination or repudiation by HQ of the agreement, provided the stock the subject of the earnings was paid for by DRI prior to the termination or repudiation of the Agreement.
The plaintiff submits that any other construction would work a commercial inconvenience. DRI would simply pay more profit to itself, rather than investing in further stock. If the profit was only paid on gross earnings received by HQ or DRI prior to HQ's repudiation of the agreement, this would cause DRI to miss out on commission that DRI could have earned if, prior to HQ's repudiation, DRI chose to pay itself profit rather than invest in stock. It is submitted that such a commercially inconvenient construction should be avoided.
DRI's best calculation of the quantum of the net profits from the Display Stock is $380,000. [132] That is the sum of the sales made by HQ between 7 and 12 September 2019, plus the recommended retail price for the 153 items of Display Stock left on the premises on 12 September 2019, less the pre-paid costs of the business, paid for by DRI prior to HQ's repudiation of the Management Agreement.
Further in the alternative, the plaintiff submits that it is entitled to an order that HQ indemnify DRI for the cost of the Display Stock that DRI acquired prior to the termination of the Management Agreement. The plaintiff submits that it is entitled to an indemnity as an agent for costs and expenses incurred in carrying out its role for the benefit of the principal, unless that right is clearly excluded by the Agency Agreement. [133]
The plaintiff accepts that cl 6(2) of the Management Agreement does exclude the right of indemnity in respect of expenses, including but not limited to certain classes of expenses, including for example wages and ancillary costs of office personnel. However, the plaintiff submits that it does not exclude the right of indemnity in respect of the cost of stock.
Clause 6(2) of the Management Agreement provides:
(2) The Manager will be solely responsible for paying any and all of the manager's expenses, including but not limited to those relating to:
(i) The conduct and maintenance of the manager's office and facilities;
(ii) Telephone and facsimile costs;
(iii) Wages and ancillary costs of office personnel;
(iv) Travel costs.
The plaintiff submits that the objective intention of the parties was to distinguish between DRI's own internal costs and expenses, which are excluded from the indemnity by clause 6(2), and expenses and costs DRI incurred as agent for HQ, such as payments for stock, HQ's rent, insurances or expenses, which are set out under cl 5.
Clause 5 of the Management Agreement relevantly provides:
5.(1) [HQ] agrees to pay to the manager the following commission in payment for the manager's service…out of the turnover of receivable from sales in the business the manager shall as a priority
(i) pay [HQ's] essential outgoings of the business, rental, wages to staff, repairs for damage, insurances for damage, public risk, loss of profit or any other insurances held for [HQ] in relation to the business;
(ii) …
(ii) payment to suppliers for stock and any charges in relation to delivery of same…
(iii) GST payroll tax and any other tax liability in relation to the business…
(iv) and any remaining net profit shall by [sic] the commission for its services.
The plaintiff relies in particular on the second cl 5(1)(a)(ii) [134] which requires HQ to pay DRI for payments made to suppliers for stock and any charges in relation to delivery of the stock and thus it seems it was intended that such expenses were excluded from cl 6(2) and remain the subject of a right of indemnity.
DRI quantifies its costs and expenses at $120,000, being the cost price of the stock recorded during the stocktake on 12 September 2019 ($96,821.95), [135] plus an allowance for shipping and logistics costs for delivery of that stock (estimated to be $14,550) [136] and an allowance for the cost of stock that was sold between 7 and 12 September 2019 (where those sales netted HQ and HQ Bedding Pty Ltd approximately $19,945).
In response, the defendants reiterate their primary submission that the plaintiff repudiated the Management Agreement on 24 December 2018 and, therefore, the plaintiff did not accrue any rights pursuant to the Management Agreement thereafter.
Further, the defendants submit that the plaintiff, acting as HQ's agent, did not pay for the display stock from their own funds, in fact the display stock was paid for out of the turnover of the business, which remained the property of HQ as principal. Moreover, the same can be said for the rent and outgoings of the Moore Park store.
Submissions on Claim Relief (4)(b): Bank Guarantee
As already mentioned, the plaintiff also seeks an order for HQ and HQ Living (Moore Park) Pty Ltd to pay DRI $107,317.90, which amount was provided by DRI to HQ as security for the bank guarantee provided by HQ Living (Moore Park) Pty Ltd to Supacenta, for the duration of the Management Agreement.
The only aspects of the Management Agreement which expressly address the provision of a bank guarantee are Recital F and cl 1(1) of the Management Agreement, which are in the following terms:
RECITALS
…
F. [HQ] is required to deliver a bankers guarantee to the lessor of the business under the terms of its lease on or before the 30 of October 2016…
…
1. (1) In consideration of the Manager providing a bankers guarantee to [HQ] on or before the 30 of October 2016 as required by its lease to the lessor in relation to its performance of the lease of the business aforesaid. [sic] [HQ] appoints the manager as its manager…
The Management Agreement does not expressly address whether the bank cheque or the fund of $107,317.90 is to be repaid on termination of the Management Agreement.
The plaintiff relies on three grounds for its claim to return of the fund of $107,317.90, or equitable compensation in that amount.
First, the plaintiff submits that the payment made on behalf of DRI in that amount was subject to a trust. That is, DRI arranged for $107,317.90 to be paid by bank cheque for the sole purpose of allowing HQ to fund the issuance of a bank guarantee to Supacenta, in connection with the lease of the premises, for the duration of the Management Agreement. That purpose is now not fulfilled, as the Management Agreement has been terminated; and in accordance with the principle in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, HQ is now obliged to account for the $107,317.90.
Second, the plaintiff submits that HQ has an obligation to repay the fund, pursuant to an implied term in the Management Agreement. The plaintiff submits that the effect of such an implied term would be that the fund of $107,317.90 was to be returned to DRI at the termination of the Management Agreement, or at least so much of the fund that had not then been utilised because of DRI's failure to perform its obligations under the lease, as incorporated into the Management Agreement.
The plaintiff submits that such a term is reasonable and equitable. The purpose for which DRI delivered the bank cheque was for the "bankers guarantee" to be provided by HQ to Supacenta. That bank guarantee was necessary to meet Supacenta's requirements for security in relation to performance of the obligations under HQ's lease. HQ Living (Moore Park) Pty Ltd was exposed to DRI's performance of those lease obligations, for the duration of the Management Agreement. The duration of the Management Agreement was "for the remaining period of the lease" pursuant to cl 2. It is reasonable and equitable to require the return of the funds supporting the bank guarantee, when that purpose is no longer served, as the Management Agreement has been terminated. [137]
The plaintiff further submits that such an implied term is also necessary to give business efficacy to the contract, as there is no express provision in the Management Agreement that addresses what is to happen with the bank guarantee at the end of the contract. Such uncertainty would make the Management Agreement ineffective.
Moreover, the plaintiff asserts that such an implied term is so obvious that "it goes without saying". By its very nature, a bank guarantee provided to a lessor to secure a tenant's obligations under a lease is returned by the lessor at the end of a lease, subject to any deductions that arise because of breaches of the lease. It is then obvious that any party that supplies the funds to support the issuance of the bank guarantee on behalf of the lessee is entitled to the return of the funds, when they are returned by the lessor.
The plaintiff asserts that such an implied term is capable of clear expression and does not contradict any express term of the contract.
The plaintiff submits that the implied term would be consistent with the letter signed by Ms Zhu on 8 April 2019 in which she confirms that the funds supporting the bank guarantee will be returned upon release of the bank guarantee by the landlord. [138] The plaintiff accepts that the letter, being post-contractual conduct, is not admissible in relation to the construction of the Management Agreement, [139] although notes that no part of the Management Agreement deals expressly with the issue of the return of funds to support the bank guarantee.
In relation to the plaintiff's first and second grounds for return of the fund, HQ asserts that under clause 1 of the Management Agreement and/or pursuant to certain oral representations made by Mr Wang, the $107,317.90 had been provided by DRI to the defendants (without an obligation to repay) as consideration for entry into the Management Agreement. [140]
The plaintiff asserts that clause 1 should not be so construed. Clause 1 refers to delivery of a bank guarantee at the commencement of the Management Agreement. It is not addressed to what happens to that bank guarantee at the end of the Management Agreement. Nor does clause 1 provide for what is to happen if DRI provides a fund to support the issue of a bank guarantee, rather than delivering a bank guarantee.
The plaintiff submits that the difference between an obligation to provide a bank guarantee and an obligation to provide funds that can be used to support a bank guarantee is material. [141] The express reference to "a bankers guarantee" suggests that it was the parties' manifest intention that the fund be used only for a specific purpose and for a finite duration. The finite duration was for the duration of the Management Agreement. As mentioned, HQ Living (Moore Park) Pty Ltd was only exposed to the effect of DRI's performance of the obligations under the lease for the duration of the Management Agreement. There could be no further purpose of a bank guarantee in this context.
Moreover, the plaintiff says that it could have satisfied its obligations under the agreement by having a bank guarantee issue in its name to the landlord, rather than in the name of HQ, and the plaintiff could have kept a fund in an account (in its name) with the relevant bank to support the guarantee.
The third and final basis upon which the plaintiff seeks the return of the fund of $107,317.90, is that DRI is entitled to an award of $107,317.90 against Ms Zhu personally, as a consequence of her written representation made when Ms Zhu received the bank cheque [142] and her oral and written representations on 7 November 2016 [143] that she would personally pay this amount to DRI.
Mr Jia relied on Ms Zhu's representation that she would repay this amount to DRI when he caused DRI not to seek to enforce the agreed damages clause under the Management Agreement (cl 9) for $100,000, due to the late commencement of the Management Agreement. [144] The plaintiff submits that it would, accordingly, be unconscionable to allow Ms Zhu to resile from her representation.
Mr Jia's evidence of reliance on these representations was unchallenged.
During her cross‑examination, Ms Zhu said she did not recall signing the "Loan Agreement Confirmation" document, despite the fact that she attached the signed document to an email on 7 November 2016. [145]
Moreover, in the Defence at [35] under particular (f), Ms Zhu pleads that she did indeed sign this agreement but that she did so under duress. The Defence pleads that the duress arose from the plaintiff (or associated entities) withholding shipments of stock for Ms Zhu's Queensland stores (in breach of the Exclusive Distribution Agreement) until the agreement was signed. [146]
The plaintiff submits that these are serious allegations of duress that have not been proved. [147] Moreover, the plaintiff relies upon the inconsistency in Ms Zhu's evidence as to whether she signed the document, in relation to Ms Zhu's credit. [148]
In relation to the Chinese language document termed a "Loan Agreement" (referred to above at [22(7)]), Ms Zhu submits that that agreement was void for lack of consideration. [149]
Ms Zhu also submits that if her representations that she would repay the funds could be relied upon, that the representations were made subject to the De Rucci group complying with the Exclusive Distribution Agreement and the other purportedly collateral contracts referred to above. [150] It is said that the Exclusive Distribution Agreement was repudiated by the plaintiff and, therefore, the plaintiff could not rely upon Ms Zhu's representations in relation to the return of the funds.
Further, Ms Zhu submits that if the loan agreement was not procured by duress and it is an enforceable agreement, then the funds to support the bank guarantee had, as a matter of law, been provided by the defendants and not the plaintiff and thus the defendants were entitled to a monthly management fee of $5,500 per month. [151]
Finally, in answer to this claim for relief more generally, the defendants submit that the funds used to support the guarantee were an expense of the business, under cl 5 of the Management Agreement, which the plaintiff was entitled to, and did, recoup out of the turnover of the business. [152]
Orders sought by the Cross-Claimant in the Cross-Claim
By the Cross-Claim, the cross-claimants seek:
1. Declarations that the cross-defendants repudiated the following agreements:
1. Exclusive Distribution Agreement dated 21 September 2016;
2. Business Sale Agreement dated 27 July 2018;
3. Bundall Sale Agreement dated 26 October 2018; and
4. various oral and written agreements (said to have been entered into over the messaging application, WeChat).
1. Compensatory damages arising from breaches of the agreements listed above (at [134(1)]) in the amounts of:
1. $648,977.95 as a consequence of the failure to complete the purchase of the three stores in Queensland, as agreed (described as "Part I" damages) [153]
2. $805,689.55 on account of what might be described as consequential "damages and losses due to the disrupted handover…result[ing] from the breaches of the agreements listed above at (1)(b)-(d) (described as "Part II" damages) [154]
1. Along with interest and costs.
Summary of the Background to and Loss Claimed under the Cross-Claim
The cross-claimants allege a series of partially written and partially oral agreements, which they say were breached, causing loss and also permitting HQ to terminate the Management Agreement unilaterally.
The cross-claimants referred to several of these agreements collectively as "the First Syndicate Agreement" [155] and "the Second Syndicate Agreement" [156] .
The First Syndicate Agreement was said to be partly oral and partly written, incorporating:
1. the oral agreement in March 2016 (described above at [22(2)]), which was said to include an 'indemnity' from Mr Wang in respect of exclusive distribution rights for De Rucci furniture in Queensland and a "good financial assistance package" such as "marketing subsidy, free supplies of fit out materials and future credit facilities for display stock or trading stock";
2. the Exclusive Distribution Agreement signed 21 September 2016; and
3. the Management Agreement dated 26 October 2016.
The Second Syndicate Agreement was said to have been entered into on or around 27 July 2018 and was allegedly partly oral, partly written and partly in performance. In terms of being in writing, it is alleged to be incorporated in the:
1. Business Sale Agreement; and
2. Bundall Sale Agreement.
Ms Zhu also relied on the terms of various other agreements pleaded in paragraphs [10]-[15] of the Cross-Claim, which appear to involve:
1. an alleged promise made by Mr Wang to Ms Zhu on 20 January 2019 to pay $150,000 to the landlord of the De Rucci Fortitude Valley store; and
2. an alleged promise made by Mr Wang to Ms Zhu on or around 15 June 2019 to pay Ms Zhu $3000-$5000 per month if Ms Zhu allowed the Management Agreement to continue, whilst the terms of new business ventures between Mr Wang and Ms Zhu were negotiated.
The cross-claimants allege that the cross-defendants breached these various agreements as a consequence of the cross-defendants failing to:
1. erect signage at the Bundall store, which caused the landlord to fail to consent to the assignment of the lease of that store to the plaintiff and the termination of that lease;
2. pay the cross-claimants' outstanding rent in respect of the three Queensland stores, which caused the landlords to fail to consent to the assignment of the leases, the termination of the leases and the calling upon of the bank guarantees;
3. pay the cross-claimants the amounts set out under the Business Sale Agreement and then the Settlement Summary for the purchase of the 3 Queensland businesses;
4. provide (i) marketing subsidies (ii) prompt supply of stock and (iii) credit facilities in accordance with the Exclusive Distribution Agreement;
5. pay $150,000 to the landlord of the Fortitude Valley store; and
6. pay the defendant $3000-5000 a month from 15 June 2019 onwards.
As a consequence of the above breaches, the Cross-Claimants seek damages in the amount of $1,454,567.50, [157] comprising:
1. Part I, in the amount of $648,877.95, comprising:
1. $400,177.95, being the amount agreed under the Settlement Summary for the transfer of the three Queensland stores;
2. $96,380.00, being the amount of the bank guarantee for the Logan store that was called upon by the landlord;
3. $62,700.00, being the amount of the bank guarantee for the Bundall store that was called upon by the landlord; and
4. $89,000, being amounts owing to the cross-claimants based on customer orders made at the three Queensland stores whilst they were managed by the cross-claimants, payments for which were received by the cross-defendants once they obtained control of the businesses.
1. Part II, in the amount of $805,689.55, comprising: [158]
1. $150,000, being the amount Mr Wang allegedly agreed to pay the landlord of the Fortitude Valley store. This amount is claimed twice to a total value of $300,000 in the Cross-Claim, with no explanation;
2. $90,000, being the estimated trading profit from the Fortitude Valley store from 27 December 2018 to 7 September 2019 (assuming that profit amounted to $10,000 per month for that 9-month period);
3. $180,000, being the estimated trading profit from the Bundall store from 22 December 2018 to 7 September 2019 (assuming that profit amounted to $20,000 per month for that 9-month period);
4. $40,000, in relation to a management fee of $5,000 per month from 7 February 2019 until 6 September 2019;
5. $16,000, being the landlord's legal fees in respect of the Fortitude Valley store;
6. $18,000, being amounts said to be payable under the Exclusive Distribution Agreement in respect of marketing or advertising;
7. $40,000, being the amount of an ATO penalty for delayed superannuation payments;
8. $1,689.55, being the landlord's legal fees in respect of the Logan store; and
9. $120,000, being staff redundancy / leave entitlement / miscellaneous charges (said to include the cost of 5 trips that Ms Zhu made to China and Sydney).
Various additional purported breaches of the various agreements were raised, for the first time, in oral submissions and in various written submissions received during and after the hearing.
For example, the defendant's written submissions dated 22 April 2020 refer to the cross-defendants breaching the Exclusive Distribution Agreement by permitting interstate sales from De Rucci stores in other states to customers in Queensland. [159] This allegation had not previously been pleaded. [160]
The cross-defendants objected to the cross-claimants seeking to plead additional allegations in this way [161] and to the extent that the cross-claimants can be taken to have impliedly sought to apply to amend their pleadings, I refuse such an application and refer in these reasons only to those matters raised in the Cross-Claim. I refer, in particular to the various indulgences that have been granted to the cross-claimants in terms of extensions of the time for filing pleadings, evidence and submissions, which have been summarised earlier in these reasons.
Further, the case has been "conducted" (about which I will make later comment) on the basis of the issues in the proceedings and to allow this claim to be agitated would involve a whole new proceeding, at least in part.
Submissions on Cross-Claim Part I ([141(1)])
I next deal with the parties' submissions on the cross-claimants' alleged entitlement to the sum of $400,177.95, said to arise from the cross-defendants' breach and repudiation of the Business Sale Agreement (and the Settlement Summary document prepared in relation thereto) and the Bundall Sale Agreement (together, "the Qld Acquisition Agreements").
The cross-claimants submit that the Qld Acquisition Agreements gave rise to an enforceable agreement whereby the cross-defendants were required to purchase the cross-claimants' three Qld businesses for $400,177.95, which sum is identified in the Settlement Summary.
The cross-defendants submit that there was no binding agreement for the purchase of the three Qld stores. They further submit that, even if there were a binding agreement, they were not parties to it. Further again, if they were parties to any such agreement, they submit that there was no obligation to complete any purchase in circumstances where the cross-claimants did not procure the landlord's consent to the assignment of the leases for the properties on which the stores operated.
In relation to the submission as to which entities were party to what purported agreements, I note the following. The cross-defendants emphasise that the Exclusive Distribution Agreement was entered into by Dongguan De Rucci Bedding Co. Limited and De Rucci Queensland Pty Ltd, an entity associated with and owned by Ms Zhu. As already mentioned, the agreement provides a right for both parties to terminate on 30 days' notice and a Chinese choice of laws and exclusive jurisdiction provision.
The cross-defendants note that the signatories to the Business Sale Agreement were Ms Zhu and Mr Jinpei Wang, who is not a party to the proceedings. [162] Further, the cross-defendants submit that the agreement appears to be unenforceable between the parties to it, primarily on the basis of uncertainty as to key terms, including the settlement price of the "office equipments [sic] and display items" and as to which premises it related.
Indeed, there is an express reference in the agreement to the need to agree additional terms, although the nature of the additional terms is not specified. The cross-defendants note that the cross-claimants have referred, in the Cross-Claim, to various purported terms of the agreement which do not appear on the face of the document. [163] Ultimately, the cross-defendants submit that this was an agreement to agree. [164]
The cross-defendants submit that what transpired following the execution of the Business Sale Agreement was that Mr Jinpei Wang advised Mr Jia that he was not able to complete the purchase of the three Queensland stores because the landlord wouldn't consent to the transfer of the leases to his companies. [165]
A Mr Zhang from the De Rucci China group then proposed to Ms Zhu that it would arrange for DRI to purchase the three Queensland stores, on the terms and conditions set out in the Settlement Summary. The cross-defendants submit that the Settlement Summary contains the terms and conditions of the De Rucci China group's offer, including that the purchase of each of the stores was subject to entry into a contract for each shop and that payment would only be made after "Sydney" (DRI) acquired the "right of management and control" of the shop without debts (associated with the former tenant).
These terms came to be reflected in the express terms of the Bundall Sale Agreement, to which DRI, but not Mr Jinpei Wang, was a party. The Bundall Sale Agreement required landlord's consent to the transfer of the lease. That consent was prepared but never obtained. The proposal set out in the Settlement Summary did not complete as contracts were not entered into for any store other than the Bundall Store. The companies associated with Ms Zhu (including De Rucci Bundall Pty Ltd) failed to obtain each lessor's consent to the transfer of or entry into new leases, which was a condition precedent to the proposal in respect of each store.
In response, Ms Zhu accepted that she typed the Chinese version of the Business Sale Agreement. [166] She stated that she inserted the name Mr Jinpei Wang as a signatory on the instruction of the first cross-defendant, Mr Wang. The cross-claimants submit that whilst Mr Jinpei Wang was the signatory under the Business Sale Agreement, he signed as agent for Mr Wang, the first cross-defendant.
The cross-claimants also allege that Mr Wang made certain oral representations during the 8 hour meeting, [167] whereby Mr Wang stated that he would ensure that Ms Zhu's three Queensland businesses would be purchased for a fair price, which would eclipse the cost of the fit-out of the premises, the trading stock of the three stores, and outstanding rent, outgoings and wages. [168]
The cross-claimants allege that they entered into the Second Syndicate Agreement in reliance on these representations by Mr Wang, [169] which they submit gives rise to a claim of promissory estoppel against Mr Wang. On this basis, the cross-claimants submit that Mr Wang is separately liable to an order for equitable compensation in the amount of $1,454,567.50, payable to the cross-claimants.
Ms Zhu accepted that she needed to obtain the Landlord's consent to the transfer of the lease in order to complete the Bundall Sale Agreement. [170] Ms Zhu accepted that the consent was not obtained and submits that this was because the cross-defendants failed to pay the existing tenant's outstanding rent and failed to erect signage in accordance with the existing lease.
In relation to the first aspect, Ms Zhu understood that clause 4 of the Bundall Sale Agreement [171] provided that the plaintiff was to pay the outstanding rent to the landlord. [172] Clause 2 provides that the purchase price of the business was $150,000, consisting of a deposit of $1 and a "balance" of $149,999. Clause 4 provides that the "balance" was to be paid "at settlement", with the vendor to direct the proceeds to the outstanding rent payable to the lessors of the 3 Queensland stores.
In relation to the signage issue, the cross-claimants refer to the fact that Mr Jia signed a Quote from CV Signage Solutions in respect of an amount of $36,872.84 + GST for the installation of an advertising light box at the Bundall store. [173] Although this was not expressly submitted, the Court presumes the cross-claimants rely on this as circumstantial evidence that the cross-defendants agreed to pay for the erection of the signage on behalf of the cross-claimants, which the cross-claimants seem to be submitting was a collateral contract or an implied term of the Bundall Sale Agreement.
The cross-defendants refer the Court to cl 1.1.2 and Schedule A of the Bundall Sale Agreement, which provide that the vendor was to deliver multiple light boxes to the purchaser. On that basis, it was submitted that the agreement was clearly that the vendor (Ms Zhu's entity) was to procure the relevant signage. [174]
The cross-defendants submit that the obligation to pay for the light box at the Bundall premises was not a condition under any of the Qld Acquisition Agreements, and thus the plaintiff had no obligation to pay for it. Mr Jia accepts that he advanced $20,000 as a security deposit in relation to the quote, but says that there was never any agreement that he (or the cross-defendants) would pay for the remainder. [175]
Whilst she was being cross-examined, Ms Zhu accepted that in November 2018, she did not have available funds to pay for the signage. [176]
In general, the cross-defendants deny the allegedly oral components of the Qld Acquisition Agreements. Ms Zhu has not adduced evidence of certain of the representations referred to in the pleadings. Ms Zhu has also given inconsistent accounts of the conversations that allegedly encapsulate the agreements. [177]
In addition to the payment of $400,177.95, the cross-claimants submit that they are entitled to the amounts of $96,380 and $62,700 which amounts correspond to the value of bank guarantees which were seized by the landlords of the Logan and Bundall stores, respectively, as a consequence of outstanding rent payments. As with the submissions in respect of the completion of the Qld Acquisition Agreements, the cross-claimants submit that the cross-defendants agreed to pay the outstanding rent owed by the existing tenants to the landlords, which the cross-defendants failed to do. For the same reasons, the cross-defendants submit that they owed no such obligation.
Finally, the cross-claimants submit that they are entitled to $89,000, said to be the profit arising from orders made at the Logan store whilst Ms Zhu's entity operated the store, in respect of which payment was only received by the cross-defendants after Ms Zhu's entity ceased operating there. The Court was not directed to any evidence substantiating this figure, during the course of the hearing.
Submissions on Cross-Claim Part II ([141(2)])
I next deal with the submissions made by the parties in relation to the Cross-Claim Part II heads of damage.
In relation to the $150,000, which Mr Wang allegedly promised to pay to the landlord of the Fortitude Valley store, and the $40,000 ($5,000 per month for 8 months) which Mr Wang allegedly agreed to pay Ms Zhu as a management fee, the cross-defendants deny that Mr Wang ever made these representations. Moreover, the cross-defendants submit that there was no consideration identified in the Cross-Claim as being provided by the cross-claimants for these agreements.
In relation to the $18,000 said to be payable pursuant to the Exclusive Distribution Agreement for marketing or advertising. The cross-defendants submit that they were not parties to the Exclusive Distribution Agreement and cannot be held liable to make any payments thereunder.
In relation to the other amounts claimed as heads of damage under Part II of the Cross-Claim, the cross-claimants submit that they are consequential losses for which the cross-defendants are liable as a consequence of failing to pay the rental arrears of Ms Zhu's three Queensland entities and failing to complete the purchase of the three businesses. The cross-defendants respond by way of the same submissions as were made in respect of the Cross-Claim Part I heads of damage, namely there was no obligation for the cross-defendants to pay the outstanding rent or complete the sales in circumstances where completion was conditioned on the landlords consenting to the transfer of the leases, which consent was not forthcoming. Accordingly, the cross-defendants cannot be held liable for any losses arising from the failed sale of the three Qld businesses.
Although this characterised much of the defendants'/cross-claimants' case, it is important to note that the Court was not directed in submissions, in writing or orally, to any evidence which supported the monetary amounts sought under Part II of the Cross-Claim. To take one example, as far as the Court is aware, there is no evidence before the Court that is relevant to the question of the estimated trading profit of any of the Queensland stores aside from Ms Zhu's mere assertions.
Comments on the evidence
Despite the best efforts of counsel for the plaintiff, the evidence was a shambles. Apart from the material to which the Court has already referred, the defendants, through Ms Zhu, failed to distinguish at all between that which was evidence of fact and arguments of "fairness".
All of the witnesses in the proceedings asserted facts, without, in most instances, any substantiating material to corroborate such assertions. Of course, a witness is entitled to assert a fact that is seen or heard, but when one is dealing with the costs of items; profits and losses of entities; the nature of communications; and the like, one should be able to expect that source documentation, notes or other corroborative material can be supplied.
In part, a reason that may be applicable to the absence of source documentation or other corroborative material is that the proceedings came before the Court by way of interlocutory injunction application and were heard urgently. Part of that urgent application was the determination, or proposed determination, of a separate question. [178]
As was made clear in the first judgment, the separate question was necessary because, fundamentally, the defendant relied upon the terms of the Management Agreement in circumstances where the Management Agreement had been terminated and, on its face, may have been repudiated. Once the separate question was unable to be answered, as a result of the absence of relevant evidence, the final hearing of the matter was expedited and the matter may have been heard too quickly to allow for all material to be marshalled. Nevertheless, there was significant compulsory production and the last mentioned basis for the absence of source material or corroborative evidence is, at best, a possibility.
The evidence of Mr Jia, to which earlier reference has been made, was problematic. Some of his assertions cannot be accepted. Some of them are inconsistent with evidence otherwise before the Court or inconsistent with the terms of agreements reached (if that latter aspect be different). However, there are some aspects of the evidence of Ms Zhu about which the same comment can be made.
It may be that each of them is suffering as a consequence of the fact that English is not their first language. I made some allowances for that proposition during the course of the proceedings and continue to make them in terms of the material that is now before the Court.
As has already been made clear in the discussion of the material before the Court, some, at least, of the arrangements between the De Rucci China group and the defendants are made expressly subject to determination under the laws of the People's Republic of China and subject to the jurisdiction of their courts and/or tribunals.
It is tempting, from the perspective of the Court, faced with a difficult choice between the material that is asserted by or on behalf of the various interests, to determine the matter simply on the basis of the burden of proof and reach a conclusion based only on the documentation, otherwise finding that neither party that bears the onus of proof has satisfied it. In some respects, my conclusions will be based upon such a proposition; but not totally.
Notwithstanding the foregoing, it seems to the Court that, informally, there is much to be said for the assertion by Ms Zhu that none of the agreements upon which the parties rely can be dealt with in isolation. At [69] above, the Court recites an email from Ms Zhu to Mr Jia of 26 July 2016. In it, in a manner that was seemingly uncontroversial in the proceedings before the Court, Ms Zhu asserts that the "two agreements" can be signed together.
The foregoing correspondence was not relied upon by Ms Zhu, notwithstanding the length of her submissions. Yet it may well be the best evidence available as to the collateral nature of the Management Agreement and the Qld Agreements, upon which relationship Ms Zhu relies.
It seems to the Court that there was an informal arrangement relating to the Queensland agreements, the distribution of the De Rucci product and the management of the Moore Park premises, but that arrangement was never formally expressed. Nor are the agreements that relate to those exercises and/or that conduct on their face collateral or interdependent.
It seems that Ms Zhu and Mr Zhang and/or Mr Wang operated on the basis of a certain degree of trust and unstated understanding. The difficulty with such a course arises when the understanding of the different parties involved in such an arrangement differs and/or the trust does not manifest. Fundamentally, that is the nature of the controversy between the plaintiff, on the one hand, and the defendants on the other, including those persons on each side of the cross-claim.
Before dealing with the claims themselves, it is necessary to deal with a statement of some of the principles that need to be applied, to which I will next turn. In doing so, I do not again deal with the principles relating to the construction of contract, which is dealt with in the first judgment. [179]
While the first judgment makes clear that the Court will apply an objective approach to the determination of the intention of the parties, which is derived from the terms of contracts, and which principle I reiterate, it is necessary also to express the view, implicit in the foregoing, that parol evidence of the parties' intentions in executing contracts is not admissible to determine the proper and appropriate construction to be utilised by the Court. Unless the conversation can be said to give rise to a collateral contract, not otherwise inconsistent with the terms of the written document, or one of the other exceptions, such evidence is irrelevant to the task upon which the Court is engaged.
Further to the foregoing, the first judgment also deals with the principles relating to agency and the terms of these reasons for judgment should be read in conjunction with the first judgment and, without reiterating same, adherence to the principles that are expressed therein.
As to the rule against parol evidence, in determining whether conversations amount to an agreement that can be described as a collateral contract, the Court must acknowledge the pre-eminence given to a written agreement. The importance of the written agreement between the parties was emphasised by the High Court, when it said:
"[32]. It is, and always has been, common ground that each of the respondents executed a written loan agreement on 30 June 1989. The respondents alleged that the "operative agreement" was not contained in that writing. It was said that the relevant agreement was reached earlier and was wholly oral. Yet it was not said that the written agreement should be rectified. It was not said that a defence of non est factum was available. It was not said that the written agreement was executed by mistake, or that its execution was procured by misrepresentation as to its contents or effect. (The misrepresentation alleged was as to what had been said in the conversations, not what the document was or provided.)
[33]. The respondents each having executed a loan agreement, each is bound by it. Having executed the document, and not having been induced to do so by fraud, mistake, or misrepresentation, the respondents cannot now be heard to say that they are not bound by the agreement recorded in it. The parol evidence rule, the limited operation of the defence of non est factum and the development of the equitable remedy of rectification, all proceed from the premise that a party executing a written agreement is bound by it. Yet fundamental to the respondents' case that the operative agreements between the parties were wholly oral, and reached earlier than the execution of the written agreements, was the proposition that the written agreements subsequently executed not only may be ignored, they must be. That is not so. Having executed the agreement, each respondent is bound by it unless able to rely on a defence of non est factum, or able to have it rectified. The respondents attempted neither.
[34]. There are reasons why the law adopts this position. First, it accords with the "general test of objectivity [that] is of pervasive influence in the law of contract". The legal rights and obligations of the parties turn upon what their words and conduct would be reasonably understood to convey, not upon actual beliefs or intentions.
[35]. Secondly, in the nature of things, oral agreements will sometimes be disputable. Resolving such disputation is commonly difficult, time‑consuming, expensive and problematic. Where parties enter into a written agreement, the Court will generally hold them to the obligations which they have assumed by that agreement. At least, it will do so unless relief is afforded by the operation of statute or some other legal or equitable principle applicable to the case. Different questions may arise where the execution of the written agreement is contested; but that is not the case here. In a time of growing international trade with parties in legal systems having the same or even stronger deference to the obligations of written agreements (and frequently communicating in different languages and from the standpoint of different cultures) this is not a time to ignore the rules of the common law upholding obligations undertaken in written agreements. It is a time to maintain those rules. They are not unbending. They allow for exceptions. But the exceptions must be proved according to established categories. The obligations of written agreements between parties cannot simply be ignored or brushed aside."
[36]. The conclusion that the respondents are bound by the written loan agreements may leave open the possibility that an earlier consensus reached by the parties was in each case a collateral agreement (made in consideration of the parties later executing the written agreement), but that has never been the respondents' case. In another case it may leave open the possibility that the contract is partly oral and partly in writing. But that cannot be so here. The oral limited recourse terms alleged by the respondents contradict the terms of the written loan agreement. If there was an earlier, oral, consensus, it was discharged and the parties' agreement recorded in the writing they executed. It is the written loan agreement which governed the relationship between Rural Finance and each respondent." (Footnotes omitted.) [180]
The parties are entitled to enforce the contracts that exist and to which they are party. There may be issues in the enforcement of one or more of the contracts because of the use of technical language or language that has a special meaning to the parties. Evidence is admissible in relation to those issues.
Further, to the extent that the discussion between the parties gave rise to a collateral contract, then that contract could be enforced. What is impermissible, as well, is the use of ex post facto conduct and/or discussions to construe the contracts that might otherwise be formed. [181] It is permissible to adduce evidence of a particular business context and permissible to examine the relationship between the parties to the contract or between any collateral contract. Nevertheless, it is the objective of construction of the contracts that are sought to be enforced and, in the case of alleged collateral contracts that are determined to exist, which must prevail.
In the first situation, namely, termination by agreement, there are, in turn, two kinds of agreement as to termination. The first, which is common, is that the contract that is executed has a term, in the contract, relating to termination of the contract. In that scenario, the parties agree on the method of termination of the contract by an agreement that forms part of the original contract. The second subset is that a contract may be terminated by agreement, which amounts to some collateral or subsequent agreement.
Where, whether in the original contract or in a subsequent or collateral contract, the termination is by agreement of the parties, often the consequences of termination will be specified or necessarily implied from the contract's terms.
Where, on the other hand, termination occurs, otherwise than by frustration of the contract, but for an alleged breach or repudiatory conduct, the terms or result of that termination will be specified under the express terms of the original contract or under a collateral contract or under the common law. Under the common law, such a right to discharge or terminate occurs when the promisor has breached a condition (or essential term) or there is a sufficiently serious breach of an intermediate term. [185]
The majority judgment in Koompahtoo [186] made clear that an essential term is one which the parties have agreed will always justify termination, if breached. The agreement of the parties is determined by the terms of the contract into which they have entered. Those terms will either expressly define that which is essential and would justify termination of the contract or, by the words of the contract, including words of necessary intendment, as understood in the context of the relationship between the parties that the contract creates and the commercial purpose that it serves, will be implied as essential. [187]
The majority in Koompahtoo cite, with approval, the UK Court of Appeal in Hong Kong Fir [188] in relation to the issue of repudiation. However, there may be a nuanced difference between some of the aspects of the judgment in Hong Kong Fir and the judgment of the High Court in Koompahtoo. In particular, the differences may relate to the use of the term "non-essential" and "going to the root of the contract".
The High Court approach involves the possibility of greater flexibility, but, in so doing, leaves some discretion or grey area when drawing the distinction between essential and non-essential terms. So much seems more clearly to be the view expressed by Kirby J in Koompahtoo. [189]
In Hong Kong Fir [190] , Lord Diplock described the determinative factor, entitling a party to discharge the contract, as being that the breach of the other party "deprived the [terminating party] of substantially the whole benefit" of the promise for which they had originally contracted. [191]
In describing the test that way, his Lordship described the test in similar terms to the test under the doctrine of frustration, but in circumstances where the fault of the party engaged in the repudiatory conduct was super-imposed. [192]
Whatever be the nuanced differences between the expressions used by the High Court in Koompahtoo and those used in Hong Kong Fir, the Court, as presently constituted, is bound by the judgment of the High Court. In any event, in these proceedings, there seems to be little practical effect to the different terminology, if there be a difference. Nevertheless, as a consequence, it is sufficient to state that, subject to any express terms of the contract, a breach of a condition or a sufficiently serious breach of an intermediate term by one party provides, in the other party, a right, under the common law, to elect to discharge or determine the contract.
That which is required is an election. [193] An election is a choice between two mutually exclusive courses of conduct, between which mutually exclusive courses of conduct choice must be made. In other words, once repudiatory conduct has occurred, the innocent party must decide either to terminate the contract or to keep it on foot. A party cannot do both.
This necessarily brings the Court, in discussing these principles, back to the remedies discussed by Dixon J in McDonald v Dennys Lascelles Ltd. Before explaining that course, it is appropriate to understand the fundamental nature of contractual terms. Again, these were described by Lord Diplock [194] where, in the context of a guarantee, which is relevantly indistinguishable from the current circumstances, he said:
"The law of guarantee is part of the law of contract. The law of contract is part of the law of obligations. The English law of obligations is about their sources and the remedies which the Court can grant to the obligee for a failure by the obligor to perform his obligation voluntarily. Obligations which are performed voluntarily require no intervention by a court of law. They do not give rise to any cause of action.
English law is thus concerned with contracts as a source of obligations. The basic principle which the law of contract seeks to enforce is that a person who makes a promise to another ought to keep his promise. This basic principle is subject to an historical exception that English law does not give the promisee a remedy for the failure by a promisor to perform his promise unless either the promise was made in a particular form, e.g., under seal, or the promisee in return promises to do something for the promisor which he would not otherwise be obliged to do to, i.e., gives consideration for the promise. The contract which gives rise to the instant appeal does not fall within this exception. In return for the guarantor's promise to the creditor the latter promised to extend credit to the debtor and to release his lien upon the debtor's goods.
Each promise that a promisor makes to a promisee by entering into a contract with him creates an obligation to perform it owed by the promisor as obligor to the promisee as obligee. If he does not do so voluntarily there are two kinds of remedies which the court can give to the promisee. It can compel the obligor to pay the obligee a sum of money to compensate him for the loss that he has sustained as a result of the obligee's failure to perform his obligation. This is the remedy at common law in damages for breach of contract. But there are some kinds of obligation which the Court is able to compel the obligor actually to perform. In some cases, such as obligations to transfer title or possession of property to the obligee or to refrain from doing something to the detriment of the obligee, a remedy to compel performance by a decree of specific performance or by injunction is also available. It was formerly obtainable only in a court of equity. In these cases it was an alternative remedy to that of damages for breach of contract obtainable only in a court of common law. But, since a court of common law could make and enforce orders for payment of a sum of money, where the obligation was itself an obligation to pay a sum of money, even a court of common law could compel the obligee to perform it. Historically this was the only remedy which the Court would grant at common law when an obligor failed to perform this kind of obligation. The remedy of damages for non-performance of the obligation was not available as an alternative."
The combination of the principles expressed in McDonald v Dennys Lascelles Ltd and of those expressed by Lord Diplock in Moshi results in the termination of a contract for repudiation putting an end to the primary obligation of the party not in default. That party is not then required to perform any of the contractual promises that have not already been performed by the time of the repudiation. It does not give rise to any secondary obligation in substitution for the primary obligations in the contract. It also deprives the non-defaulting party of any right, as against the other party, to continue to perform contractual promises.
Further, the primary obligations of the party in default, remaining unperformed, similarly come to an end. So too does the defaulting party's right to continue to perform those promises. But, in the case of the defaulting party, secondary obligations are substituted by operation of law, which require the defaulting party to pay, to the party not in default, a sum of money in compensation for the loss, by the non-defaulting party, that he or she has sustained as a result of the failure by the defaulting party to perform the primary obligations in the contract.
Moreover, it is abundantly clear, and has been at least since the judgment in McDonald v Dennys Lascelles Ltd, that all primary obligations arising from a terminated contract are, from the time of the termination, discharged. There is one possible exception to that principle, to which Dixon J alluded in the passage recited above, and that exception is that rights that have already been unconditionally acquired are not discharged. Having been unconditionally acquired, such rights are enforceable.
The foregoing principles have been difficult, at times, to apply. [195] Notwithstanding the difficulty sometimes experienced in application of the principle, the principle, itself, is clear. That principle determines the rights, if any, of any party who has determined one or more of the contracts with which these proceedings are concerned as a result of repudiatory conduct by the other party.
Further, the Second Syndicate Agreement depends, as already stated, on a number of oral representations that were, on the allegation of the cross-claimants, made by Mr Wang during the course of the eight-hour meeting to which reference has already been made.
As already stated, the cross-claimants required the landlord's consent to the transfer of the lease in order to complete the Bundall Sale Agreement. It is said by the cross-claimants and Ms Zhu that the only reason the landlord had not consented was because the cross-defendants failed to pay the existing tenant's outstanding rent and failed to erect signage, to which reference has already been made. Beyond that assertion, there is little support.
But the agreement does not correlate with the understanding of Ms Zhu. I reiterate that it is not the subjective understanding of the parties that determines the proper construction of the contract or agreement. Fundamentally, for the reasons already stated in the Court's summary of the issues associated with the cross-claim, and leaving aside the exclusive jurisdiction clause in the Business Sale Agreement, the cross-claim cannot succeed. Once the cross-defendants denied the oral components of the Queensland Acquisition Agreements, in the absence of evidence of the representations on which Ms Zhu relies and given the inconsistent accounts of the conversations that allegedly encapsulated the agreements, it is impossible for the Court to determine that there has been a breach for which damages arise. This claim must fail.
Further, to the extent that the cross-claim relates to the payment of lost profit said to have been received by the cross-defendants after Ms Zhu's entity ceased operating in the Queensland stores, there is no evidence of loss and no basis upon which the Court could determine damages in relation to any such claim.
To the extent that amounts have been received as bank guarantees for rent that has been unpaid, those amounts were seized by the landlords. Nothing in the agreements, and no substantiated oral agreement, requires the cross-defendants to indemnify the cross-claimants in relation to the amounts of bank guarantee or the amount of outstanding rent owed to the landlords by the existing tenants.
As to the second aspect of the cross-claim, to which the Court referred in [141(2)], the same uncertainty exists. As already stated, the Court has been taken to no evidence supporting the monetary amounts sought under Part II of the cross-claim. Moreover, the cross-claim depends upon informal agreements and promises made, it is alleged, by Mr Wang to Ms Zhu. If there were such promises, they do not amount to a contract that is enforceable under law and the claim, in this regard, must also fail.
In short, the conduct upon which Ms Zhu relies for the purpose of asserting repudiation, by the plaintiff or interests associated with the plaintiff, of the Management Agreement, allowing acceptance of the repudiation and the conduct about which complaint is made in the Moore Park store, is not conduct that is conduct by the plaintiff or any party to the Management Agreement. Nor is the conduct repudiatory, in the legal sense, of the Management Agreement. It is incapable of being repudiatory, in the absence of a collateral contract binding upon the parties, including the plaintiff, to the Management Agreement.
In those circumstances, the conduct of Ms Zhu, in altering the account into which monies were paid, seems, on its face, to deny to the other parties to the Management Agreement the benefits of the Management Agreement. Such denial goes to the "root of the contract"; to the whole or substantially the whole benefit of the promise for which they had originally contracted and, as such, is a repudiation of the contract. [196]
The conduct of Ms Zhu, on behalf of the defendants is and was a repudiation of the Management Agreement, which provided the plaintiff the capacity to elect between the two mutually exclusive courses of conduct, namely, to sue on the contract as if the contract continued and for which there was a breach, or to accept the repudiatory conduct and sue for damages as a result of a repudiation. It seems that the plaintiff has sought to do both. That is impermissible.
It is not permissible to accept the repudiation, terminate the contract and yet still seek to keep the contract on foot and to perform the contract or obtain rights under it.
In my view, the conduct of the defendants was repudiatory of the Management Agreement; there was a repudiation and, as a matter of fact a termination of the contract and the arrangement. Whether or not the plaintiff sought to continue the contract on foot, it was physically impossible so to do. As a consequence, the proper treatment of the relationship between the parties to the Management Agreement is that, repudiation having occurred, the contract has been terminated and damages run for the repudiation.
The question that necessarily next arises is the formulation and calculation of the remedy in damages. In this area, there may be little difference between the remedy in damages for the repudiation or repudiatory conduct, which is a breach of an essential term of the Management Agreement, and treating the contract as being on foot and suing for damages arising from the contract itself.
Pursuant to the terms of the Management Agreement, as explained in the first judgment, the provisions of clause 10 thereof allowed the defendants to terminate the Management Agreement for any breach of the lease, whether or not essential. If there has been no breach, termination may still be effected, but the defendants were required to give three months' written notice; and within 10 days from the date of termination, pay $100,000 to the manager for compensation and damages.
Clause 11 required the plaintiff to adhere to the terms of the lease to which the defendants were bound and provided that any "non-adherence" would be a breach of the Management Agreement. But, as a matter of proper construction, this could not include any breach, however minor, which could be quickly rectified.
As a consequence, as at the date on which the defendants changed the account into which all monies were to be paid, the plaintiff was in a situation where it had failed to adhere fully to the terms and conditions of the lease, even though notice had been given to rectify such non-adherence. But no time, or no sufficient time, had been given to effect adherence.
In those circumstances, Ms Zhu was entitled to terminate the Management Agreement, but not under the "breach" provision. In order to terminate the Agreement, HQ was required to give written notice of three months and pay an amount of $100,000. No notice was provided and no compensation in or to the effect of $100,000 was paid.
The defendants submit, as has been already stated, that the payment of $100,000 is unenforceable as a penalty. There has been little or no attempt to justify the $100,000 as referable to the damages that would be suffered, particularly in circumstances where there is a requirement to provide three months' notice. It would seem, on its face that the $100,000 is referable to the damages that would be suffered as a consequence of the loss in profits or commission over the three month period.
I gain comfort from the foregoing conclusion by the fact that the same conditions applied to termination by the manager, being the plaintiff in these proceedings. Yet, the defendants received no benefit or profit from the terms of the Management Agreement. The foregoing is not intended to suggest that there was no consideration in the Management Agreement. It seems, on its face, that the $100,000 is, in those circumstances, a penalty and unenforceable.
Nevertheless, the commission over the three month period is part of the damages that would otherwise apply as a result of the failure of the defendants to provide notice of termination and, instead, to conduct themselves in a way which repudiated the contract.
On claim 1, the Court concludes that the defendants are unable to rely upon repudiation of the Management Agreement by parties other than the plaintiff, but would have been entitled to rely upon the failure by the plaintiff to adhere to the terms of the lease as a breach of the Management Agreement, if sufficient time had been given to rectify the breach. It was not.
In those circumstances, while the repudiation by the defendants is a breach of an essential term of the Management Agreement, damages run only for the loss, which is, at least in part, confined to the period of the termination notice that would otherwise have applied and, the defendants are liable to pay the plaintiff the loss of profit, being equivalent to the amount of commission, payable for the three month period following the defendants' repudiation of the Management Agreement. Later in these reasons, I will deal with another aspect of the loss to be added to the three-month period.
As to the second claim in the statement of claim, being the title to the display stock, essentially the plaintiff's argument and claim relies upon the proposition that it was the plaintiff who paid for the display stock on the basis that it reinvested the profit derived from the sale of stock in the purchase of display stock.
There are a number of difficulties with this claim by the plaintiff. First, at the time that the Management Agreement came into operation, there was stock on the floor. This stock had not been purchased by the plaintiff. Secondly, the evidence before the Court is that orders for furniture were made by the manager, being the plaintiff, to the manufacturer, on the basis of purchase orders already received from the public.
As a consequence, the orders for stock, beyond that which has been sold from the floor and was originally in the store at the time that the Management Agreement commenced operation, is referable to particular stock that was on sold to predetermined clients on order.
The only "profit" available, over and above the commission on stock that was immediately to be delivered to members of the public who had ordered it, was "profit" from the sale to members of the public of display stock. In those circumstances, the initial display stock, which was and would have been owned by the defendants, was sold and reinvested in subsequent display stock.
Over and above the foregoing, there are the terms of the Management Agreement to which the first judgment refers. As the Court, as presently constituted, sought to make clear in that first judgment the plaintiff herein acted as agent for HQ and, therefore, HQ was entitled to the stock and, subject to the terms of the Management Agreement, its proceeds.
The evidence adduced on behalf of the plaintiff as to the "reinvestment" in display stock does not, for the reasons outlined above, overcome the provisions of the Management Agreement. The stock is the property of the defendants and not the property of the plaintiff. Claim 2 fails and no damages arise as a result of any alleged detinue or conversion, because there has been none.
In relation to the claim for damages arising from the termination of the Management Agreement, this claim for damages is subsumed within the consideration, already outlined, of the effect of the repudiation. In other words, the repudiation, and its acceptance, had the effect of terminating the Management Agreement, which termination gave rise to damages which are the equivalent of the net profit that the plaintiff would have earned were it to have been permitted to manage the store for the three months from September to November 2019.
In relation to claim 4, it comes within two parts and seeks damages being the $100,000 arising under the termination clause, which the Court has concluded was a penalty and to which the plaintiff is, therefore, not entitled, because that provision is and would have been unenforceable. The second aspect of claim 4 is reimbursement of the amount of the bank guarantee.
For the reasons already given and the facts already outlined, it is clear that the plaintiff paid to the defendants, or one of them, an amount of $107,317.90, being the amount that was then used, by the defendants, as the basis for the bank guarantee payable to or provided to the defendants' landlord.
On the basis that the Management Agreement has been terminated, that amount is repayable. The defendants shall be ordered to pay to the plaintiff an amount of $107,317.90.
I return to deal with the conclusions reached by the Court on the issue of penalty and the estimate of the amount of damages. The plaintiff has chosen not to call expert accounting evidence. There is some documentation relating to the operation of the plaintiff, but it is less than complete.
The failure to call accounting evidence and to provide the Court with all of the source documents from which Mr Jia's conclusions have been reached allows the Court to draw the inference that such evidence would not assist the plaintiff's case. The assertion by Mr Jia as to profit and revenue, without all of the source documentation from which such figures are drawn, does not provide great comfort to the accuracy of the figures utilised by Mr Jia in his Affidavit.
I have already commented as to the credibility of Mr Jia and I adhere to those comments. Nevertheless, there are some source documents from which some material can be obtained, with some level of confidence and, in that respect, sufficient confidence to enable a conclusion on the balance of probabilities.
The net revenue for September, October and November 2018 for the Moore Park store was $606,395 from which it is asserted there was a "net profit" of $333,822. That "net profit" is not, in truth, a profit. It seems, on the documentation (and ignoring for present purposes the assertions of Mr Jia) that it is a surplus of retail receipts over the cost of goods sold.
Over and above that amount, the plaintiffs' monthly operating costs were approximately $80,485 and, therefore, for three months approximate $241,455.
The foregoing figures are for 2018 (except in relation to the operating costs). Doing the best that the Court can do with the figures that have been provided, and assuming that the three months (September, October and November) in 2019 would have realised the same revenue and profit as it did in 2018, the surplus of sale receipts over cost of furniture would have been, for that three month period, $333,822, less the operating costs for the same three months, being $241,455, resulting in a profit, that would, pursuant to the Management Agreement, be required to be paid as commission, for that period, of $92,367. That is the only amount that, on the balance of probabilities, the Court can conclude was lost as a result of the failure to provide three months' notice of termination.
Dealing further with the issue of the $100,000 said to be payable under the termination clause, it is necessary to recite somewhat trite propositions in relation to the determination of whether an amount is contractual damage, pre-assessed, or a penalty. Fundamentally the issue turns on whether the amount is commensurate with the interest protected. [197] The $100,000 is described in the Management Agreement as "compensation and damages" and is payable over and above the three months' notice.
While the compensation and/or damages that are expressed in a contract need not represent a precise or genuine pre-estimate of the loss that might be caused, it must be for damages. It is unclear what damages arise, behind the notice period payment.
The plaintiff asserts, in its written submissions, that the plaintiff had a legitimate commercial interest to protect "in discouraging early termination". That submission amounts to a proposition that the amount of $100,000, at least in part, relates to deterrence, rather than compensation for the termination and would place the amount more obviously in the category of penalty.
The other matters that are said to require compensation are the "costs of leaving the premises"; the absence of "an extended opportunity to obtain commission for the stock it had sourced" by selling down the display stock; and the need to deploy its staff to new premises, fund the acquisition of new stock from other revenue and find new premises.
The deployment of staff to new premises and the finding of those premises is a matter covered by the three months' notice. It is not damage otherwise.
The notion that the stock on display could be sold down to obtain commission presupposes that the stock on display is the stock belonging to DRI and is inconsistent with the evidence that very little sales were made of stock on display. Rather, stock was ordered by clients and that order generated an order to the manufacturer and delivery to the client after the ordered stock had been delivered to Australia.
Further, that would be double counting an entitlement, which the plaintiff asserts, to the loss of profit. Over and above the foregoing, the "cost of leaving the premises" is de minimis. The premises belong to the defendants. The stock is the stock of the defendants. It is unclear what then is required to be "moved" or would be "leaving the premises" apart from staff.
On the basis of the material before the Court, the $100,000 is a penalty when it is to be paid over and above the three months' notice of termination. The foregoing does not take account of the commission that would be payable on that stock that was ordered as a result of the efforts of the manager, being the plaintiff. That is not a matter relied upon by the plaintiff in its submissions as a matter upon which the $100,000 payment is based.
The Court is not there criticising the submission of the plaintiff. The non-reliance upon that factor is, it seems, a result of the fact that the commission, otherwise payable, is, according to the plaintiff, recoverable as a result of the termination, in any event. With that submission the Court agrees.
The turnaround for orders is approximately one month, on the material before the Court. Presumably, if a three-month notice period were provided and operated, these amounts could be accommodated within that arrangement.
However, in the circumstances pertaining to the matter before the Court, the three months was not worked and was not the subject of any arrangement. In those circumstances, the efforts expended by the manager, or its staff, in effecting sales in the month prior to the repudiation by the defendants would result in profits that were earned by the efforts of the plaintiff, being received by the defendants for a month.
I do not take into account in the foregoing any actions taken by the related companies of the plaintiff, which were the manufacturers and suppliers of the ordered furniture. Nevertheless, that factor would entitle, it seems, the plaintiff to damages of the lost profit of one month, which is an additional $30,789.
I accept that there were pre-contractual negotiations between Mr Jia and Ms Zhu, regarding their intention to sublease the premises at Moore Park. That intended arrangement could not be effected.
The fact that the intended arrangement could not be effected does not inform the purpose of the arrangement that was effected. The parties, on the evidence before the Court, not being able to achieve the original intention, embarked upon a totally different relationship which was effected by the terms of the Management Agreement.
Further, no part of the Management Agreement, on the submission of the plaintiff, transferred title to the display stock to the defendants or any one of them. It is said by the plaintiff that the plaintiff commissioned the manufacture of stock and paid for it and that, given the original intention of the parties to sublease the premises as a background circumstance, that is sufficient to enable the Court to construe the Management Agreement in a manner that there was an implied term that the stock belongs to the plaintiff. I make it clear there is no such implied term.
The additional material does not detract from the proposition that the parties chose to express their relationship by the Management Agreement. The Management Agreement makes clear and express that the manager is acting as an agent of the defendants. When it commissioned the stock, it did so on behalf of the defendants. When it paid for the stock, it did so from the receipts of the defendants' earnings. The commission was that part of the earnings that was not otherwise expended on the costs of running the premises, including the ordering of stock.
The implied term for which the plaintiff submits is neither necessary to achieve business efficacy nor goes without saying. [198]
Further, it is insufficient, if the implication is intended to be an implication of an implied term in fact that the implied term expresses that which it would have been reasonable for the parties to agree. The implied term must be what the contract actually is. [199]
Further, if the implication is said to be an implication in law, that requires the limiting criterion of "necessity", [200] including necessity to give business efficacy to a contract or where, absent the implication, "the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless, or, perhaps, be seriously undermined". [201]
It is neither necessary nor appropriate to imply the contractual term for which the plaintiff agitates. Moreover, if the Court were to take into account the subjective intention of the parties as a background circumstance in the interpretation of the Management Agreement, that background circumstance would be the overarching arrangements between the parties in these proceedings, relating to mutual distribution agreements and the arrangements between Ms Zhu and her associated companies, on the one hand, and Mr Wang and his associated companies, which would include the plaintiff and the second cross-defendant.
For the reasons already given, the Court is also of the view that the cross-claim should be dismissed and that there has been a repudiation of the Management Agreement for which damages flow. Those damages include the three months' notice period plus a further month's profit associated with the loss of commission earned, but not paid, as a result of the termination.
The principle being applied by the Court is that which requires the Court, to the extent possible, to place the non-defaulting party in the same position as it would have been if the contract had not been breached and, in so doing, determine what may fairly and reasonably be considered arises naturally from the breach and/or that which may reasonably be supposed to have been the contemplation of the parties, if breach occurred.
It is unnecessary to deal with the issue of whether the rule in Hadley v Baxendale [202] conveys one or two bases upon which to award damages or two ways in which you describe the same principle. [203] Nevertheless, it is a slightly narrower approach than that for which the plaintiff agitates, based upon the restitutio in integrum principle generously described in Robinson v Harmon. [204]
Applying the foregoing principles, which has been done in the body of the reasons for judgment, and for the foregoing reasons, the Court makes the following declarations and orders:
1. A declaration that the second defendant, HQ Living Pty Ltd, repudiated the Management Agreement on 7 September 2019;
2. A declaration that the second defendant, HQ Living Pty Ltd, had title to the display stock that was at the Moore Park premises at the time that the Management Agreement was repudiated;
3. Judgment for the plaintiff on the statement of claim;
4. The defendants shall, jointly and severally, pay the plaintiff an amount representing damages for repudiation of the Management Agreement and the return of the amount of guarantee, being a sum, in total, of $230,473.90;
5. Judgment for the cross-defendants on the cross-claim;
6. The defendants shall pay the plaintiff's costs of and incidental to the proceedings;
7. Pursuant to the terms of s 100 of the Civil Procedure Act 2005 (NSW), the defendants shall pay pre-judgment interest on the amount of $230,473.90 from 7 December 2019, at the rate prescribed for pre-judgment interest in Supreme Court Practice Note SC Gen 16;
8. Pursuant to the terms of s 101 of the Civil Procedure Act 2005 (NSW), the defendants shall pay post-judgment interest on $230,473.90 at the prescribed rate therefor;
9. Otherwise, proceedings dismissed.
Ex CBA p 182; Tcpt p 165 l 17.
Ex CBA pp 195-6.
Ex CBA pp 215 ff.
Ex CBA p 216 (bottom of the page).
Tcpt p 188 l 24-37.
Tcpt p 173 l 17-22; see the communication from the Bundall landlord at Ex CBA p 233.
Ex CBA p 238; also note that it states the rent payable is $89,459.58; c.f. the email from the landlord demanding that signage is rectified at Ex CBA pp 236-237
Affidavit of Jia affirmed 20 April 2020 at [12], Annexure A.
Tcpt p 188-189; Affidavit of Jia affirmed 20 April 2020.
Affidavit of Zhu affirmed 20 April, Annexure pp 16-17
Affidavit of Zhu affirmed 20 April 2020, Annexure p 30.
Cross-Claim [6Aa(b)] and [6B(b)]
Affidavit of Zhu affirmed 20 April 2020, Annexure p 33.
Cross-Claim [6A(a)]
Ex CBA pp 250-252.
Cross-Claim [6B(c)].
Cross-Claim [11].
Ex CBA p 319.
Affidavit of Zhu affirmed 22 November 2019, Annexure B; Ex CBA p 350.
Cross-Claim [12].
Affidavit of Zhu affirmed 8 October 2019 (B) at [67]-[68]; Tcpt p 148 l 44 - p 149 l 26.
Ex CBA p 374. Ms Zhu claims (Affidavit of Zhu affirmed 9 December 2019 at [20]) to have passed that request on to Mr Jia, who says he had no notice of it before 5 July 2019 (Affidavit of Jia affirmed 14 April 2020 at [29]).
Affidavit of Jia affirmed 14 April 2020 at [29]; Ex CBA p 374 (WeChat messages)
Affidavit of Zhu affirmed 9 December 2019 at [27]; Tcpt p 160-1.
Affidavit of Jia affirmed 16 April 2020 at [98];
Affidavit of Jia affirmed 9 March 2020 at [21], Affidavit of Zhu affirmed 9 December 2019 at [5] and [29].
Affidavit of Jia affirmed 9 March 2020 at [22].
Affidavit of Jia affirmed 9 March 2020 at [23]; EX CBA p 400.
Affidavit of Jia affirmed 19 September 2019 at [10]; Affidavit of Jia affirmed 20 November 2019 at [29], Affidavit of Jia affirmed 9 March 2020 at [23].
Tcpt p 161 l 32-36.
Affidavit of Jia affirmed 19 September 2019, Annexure B; Affidavit of Jia affirmed 20 November 2019, Annexure H; Ex CBA p 411.
Affidavit of Jia affirmed 14 April 2020 at [54] and [56]; Stocktake at Ex CBA pp 403-409. Conceded as "possibly close to the true value but yet to be verified": Affidavit of Zhu affirmed 10 October 2019 at [7] and [9].
Affidavit ofJia affirmed 9 March 2020 at [25].
Ex CBA pp 412 and 435.
Ex CBA p 454.
Affidavit of Zhu affirmed 9 December 2019, Annexure C; Ex CBA p 91, Item 10.
Ex CBA pp 536-537 and 544-545.
Ex CBA pp 538, 448-550.
Referring to Koompahtoo Local Aboriginal Land Council & Anor v Sanpine Pty Limited (2007) 233 CLR 115; [2007] HCA 61 at [44].
Tcpt p 210 l 15.
The submissions in relation to whether the plaintiff is entitled to damages arising from the alleged breach of cl 10 of the Management Agreement are summarised below at [53] and following.
Defence at [34(b)].
See [135]-[139].
Although there is dispute about the bank guarantee funds, further described below.
See Affidavit of Zhu dated 18 April 2020 Annexure pp.180-183.
See Affidavit of Zhu dated 18 April 2020 Annexure p.41.
Tcpt p 50 l 12-30.
Tcpt p 54 l 47.
Tcpt p 233.
Tcpt p 58 l 27.
A phrase which appears on the face of the document.
Tcpt p 59 l 4-16.
CB 250.
Signed quote is located in Affidavit of Zhu 20 April 2020 Annexure p. 26.
Jia Affidavit 20 April [14].
Tcpt p 132 l 11.
Tcpt p 132 l 44-45.
Referred to above at [22(29)]; Tcpt p 151-152.
Affidavit of Zhu affirmed 9 December 2019, [8].
Affidavit of Zhu affirmed 9 December 2019, [27]; Tcpt p 160-1.
Tcpt p 128 l 13-49.
Tcpt p 128.
Tcpt p 131 l 26.
Affidavit of Jia affirmed 16 April 2020 at [98].
Affidavit of Zhu affirmed 9 December 2019, [20]. The lease is contained at Ex CBA p 90 ff.
Affidavit of Jia affirmed 14 April 2020 at [28]-[30].
Ex CBA p 319 (Email from landlord to Ms Zhu requesting that signs be removed).
Ex CBA p 374. Ms Zhu claims (Zhu 9 December 2019 at [20]) to have passed that request on to Mr Jia, who says he had no notice of it before 5 July 2019 (Jia 14 April 2020 at [29]).
Zhu 9 December 2019 Annexure F; Ex CBA 454 (email from Supa Centa landlord to Ms Zhu of 27 September 2019).
See Affidavit of Zhu affirmed 18 April 2020, Annexure p 166-172 (WeChat messages between Ms Zhu and an individual who appears to be a representative of the plaintiff).
Defence at [33].
Referring to Andrews v ANZ (2012) 247 CLR 205 at 236; [2012] HCA 30; confirmed in Paciocco v ANZ (2016) 258 CLR 525 at 534; [2016] HCA 28.
Referring to Robinson v Harman (1848) 1 Exch 850 at 855.
Referring to the Affidavit of Jia affirmed 14 April 2020 at [40]-[49]; Ex CBA p 314 & 505; with certain corrections provided in the Affidavit of Jia affirmed 20 April 2020 at [16]-[19].
Tcpt p 179-281.
Tcpt p 281 l 36 - p 282 l 22.
See Defendants Further Written Submissions filed 28 April 2020 at [47]; Ex CBA pp. 469, 483 and 494
Ex CBA p 29.
Ex CBA p 25.
Tcpt p 3 l 19 - p 32 l 13.
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24.
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 at [40]; WIN Corporation Pty Ltd v Nine Network Australia Pty Ltd (2016) 341 ALR 467; [2016] NSWCA 297 at [57] (per Barrett AJA, with whom McColl JA and Sackville AJA agreed; Cherry v Steele-Park (2017) 96 NSWLR 548; [2017] NSWCA 295 at [57]-[58] (per Leeming JA, with whom Gleeson JA agreed); Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12.
Annexure A1 to the Affidavit of Zhu affirmed 12 March 2020 (Ex CBA p. 55).
See the Affidavits affirmed 26 February 2020 at [13] and 9 March 2020 at [14].
See Zhu Affidavit affirmed 12 March 2020 at [3(b)].
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266; [1977] UKPCHCA 1, which decision was confirmed in Secured Income Real Estate v. St. Martin's Investments Pty. Ltd. (1979) 144 CLR 596 at 606; [1979] HCA 51.
See [2020] NSWSC 374 at [28].
Affidavit of Zhu affirmed 12 March 2020 at [3(b)].
Referring to [2020] NSWSC 374 at [38].
Referring to [2020] NSWSC 374 at [38(2)].
Per McDougall J in BIS Cleanaway (trading as CHEP) & Ors v Tatale & Anor; Brambles (trading as CHEP) v Tatale & Anor [2007] NSWSC 378 at [38]-[40]; c.f. Gaba Formwork Contractors Pty Ltd v Turner Corporation (1993) 32 NSWLR 175 at 177-178.
Tcpt p 200 l 21-42.
Ex CBA p 412.
Ex CBA p 403-410.
Ex CBA p 551.
Defendants' Further Written Submissions filed 28 April 2020 [64].
Tcpt p 161 l 47 - p 162 l 46.
Tcpt p 161 l 24-26.
Tcpt p 161 l 32-36.
Tcpt p 163 l 39-43.
Per Dixon J in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476-477; [1933] HCA 25.
Referring to the Affidavit of Jia affirmed 19 September 2019 at [12].
Referring to the Affidavit of Jia affirmed 14 April 2020 at [51]; Ex CBA p 349, 380-1, 398.
Plaintiff's written submissions for the final hearing at [95].
Referring to Re Clune (1988) 14 ACLR 261 at 266 (per French J).
There are two clauses 5.1(1)(a)(ii).
Ex CBA p 403-409.
Affidavit of Jia affirmed 14 April 2020 at [54], [59].
In the Amended Defence at [30], the defendants submit that the "remaining period" of the lease in cl 2 of the Management Agreement is not limited to the period recorded on Lease AJ679622W, but also includes any further extension period or holding over period.
Referred to above at [22(33)]; Contained at Ex CBA p 350.
Plaintiff's written submissions at [111], citing Johnston v Brightstars Holding Company Pty Ltd [2014] NSWCA 150 at [121] (per Basten JA); Lym International Pty Ltd v Marcolongo [2011] NSWCA 303 at [103]. See also Tcpt p 9 l 31.
Amended Defence at [28(b)]
Plaintiff's written submissions at [107], citing Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; [2008] HCA 57 at [35] (per Gummow, Hayne and Kiefel JJ); Franklins Pty Ltd v Metcash Trading Limited (2009) 76 NSWLR 603 at 683; [2009] NSWCA 407.
Referred to above at [22(7)].
Referred to above at [22(11)].
Affidavit of Jia affirmed 14 April 2020 at [72].
Tcpt p 141 l 40 - 44
Defence at [35], particulars.
Tcpt p 225
The cross-defendants also relied on various aspects of Ms Zhu's evidence where she was argumentative, and did not directly answer the question posed, as a basis for the Court not to accept her evidence about the oral terms of agreements e.g. Ms Zhu initially refused to accept that there is no term in the Management Agreement or the Distribution Agreement which says that the agreements are interdependent at Tcpt p 139 l 18-35; Ms Zhu also resorted to the response that she did not have a recollection when she perceived a direct answer to the question would be damaging to her case; Ms Zhu also repeatedly asserted that she sent WeChats to the plaintiff and/or Mr Jia terminating the Management Agreement in writing although she did not produce any such messages (see Tcpt p 156 l 45).
Defence at [35(c)].
Defence at [35(e)].
Both loan agreement documents referred to at [22(7)] and [22(11)] above, provide that if Ms Zhu repaid the $107,317.90 to DRI, DRI would then pay her $5,000+GST.
Defendants' further submissions filed on 28 April 2020 at [79].
See Cross-Claim [7].
Particularised in the Cross-Claim at [16].
Cross-Claim [3]
Cross-Claim [5]
However, the Cross-Claimants' Written Submissions for Final Hearing dated 22 April 2020 in the table under [6(d)] suggests that this amount was revised down $1,304,567.50. It appears this was because an amount of $150,000 was erroneously included in the Cross-Claim twice. See below for more on this.
Cross-Claim [16].
See submissions at [6(a)(iii)].
See the exchange between Ms Zhu and the Court appearing at Tcpt p 84-87.
In relation to the allegation of permitting interstate sales in breach of the Exclusive Distribution Agreement see Tcpt p 285 l 1-14.
Ms Zhu accepted this at Tcpt p 130 l 13 and Tcpt p 167 l 5.
Plaintiff's written submissions at [118(c)], referring to the Cross-Claim at [5(b)], [5(c)], [5(g)] and the Affidavit of Zhu affirmed 18 April 2020 at [68(c)], [68(d)] and [68(g)].
Tcpt p 14 l 40.
Affidavit of Jia affirmed 16 April 2020 at [30].
Tcpt p 129 l 41.
Referred to above at [22(16)].
Cross-Claim at [4F].
Cross-Claim at [5].
Tcpt p171 l 45.
CB 217.
Tcpt p 172.
Signed quote is located in Affidavit of Zhu 20 April 2020 Annexure p. 26.
Tcpt p 283
Jia Affidavit 20 April [14]
Tcpt p 188 l 21-22.
See Plaintiff's Written Submissions at [128]-[130].
De Rucci International v Zhu [2020] NSWSC 374 ("the first judgment").
De Rucci International v Zhu, supra, at [36] and following.
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471; [2004] HCA 55 at [32] - [36].
Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; [2008] HCA 57.
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457; [1933] HCA 25, per Dixon J, as the Chief Justice then was.
McDonald v Dennys Lascelles Ltd, supra, per Dixon J, at CLR 476-477.
Commissioner of Taxation v Reliance Carpet Co Pty Ltd (2008) 236 CLR 342; [2008] HCA 22 at [2], 346, per Gleeson CJ, Gummow, Heydon, Crennan and Kiefel JJ; and Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 at 844, per Lord Wilberforce..
Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115; [2007] HCA 61.
Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd, supra, per Gleeson CJ, Gummow, Kirby, Heydon and Crennan JJ.
Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd, supra, at [47], citing Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 641-642, and Koompahtoo at [48] and [49].
Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26.
Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd, supra, at [106].
Hong Kong Fir Shipping Co Ltd, supra, at 71.6.
Hong Kong Fir Shipping Co Ltd, supra, at 72.3, per Lord Diplock.
Hong Kong Fir, supra, per Lord Diplock, at 65.9 - 66.5 and at 69.3.
Victoria v Sutton (1998) 195 CLR 291; [1998] HCA 56 at [40].
Moschi v Lep Air Services & Anor [1973] AC 331 at 347-348.
See Hyundai Heavy Industries Co ltd v Papadopoulos [1980] 2 All ER 29.
Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (1962) 2 QB 26; Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115; [2007] HCA 61. See the discussion at [197]-[202] above.
Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 at 236; [2012] HCA 30.
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24.
Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; [2014] HCA 32 at [22].
Commonwealth Bank of Australia v Barker, supra, at [28].
Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 450; [1995] HCA 24, cited with approval in Commonwealth Bank of Australia v Barker, supra, at [29].
Hadley v Baxendale (1854) 156 ER 145.
Director of Public Prosecutions v Camplin [1978] AC 705.
Robinson v Harman [1848] 1 Ex 850 at 855; 154 ER 365. See also the learned article by Edelman J and L. Bourke: "Hadley v Baxendale", which is available on the website of the High Court of Australia.