De Rucci International Pty Ltd v Zhu & Ors [2020] NSWSC 374 | Case summary

Solicitors: Direct Solicitors (plaintiff) until 9 December 2019, then unrepresented File Number(s): 2019/293452 Publication restriction: None

Procedural History

Before turning to a consideration of relevant legal principles, it is necessary to set out some of the recent history of these proceedings.
On 9 December 2019, the Court delivered an ex tempore judgment. The judgment details the inappropriate way in which this matter came before the Court on that occasion. Those matters will not be repeated here save to note that the plaintiff failed to comply with orders made by the Court for the filing and service of evidence and submissions in respect of the separate question. The evidence and submissions related, in part, to the circumstances of the termination of the Management Agreement referred to above.
As a result, it was determined that the Court would decide the separate question, if it were capable of being decided, on the basis of the evidence and other material that had then been adduced and the submissions that had been lodged. In view of the lack of submissions and evidence before the Court on the circumstances of the termination of the Management Agreement, for the purposes of answering the separate question, the Court will assume that the relationship between the parties was governed by, and the parties acted in accordance with, the Management Agreement, at least up until the purported termination on 7 September 2019.
Management Agreement
The key document setting out the legal relationship between the parties during the relevant period up to 7 September 2019 is the Management Agreement.
Under the Management Agreement, DRI is described as the "manager".
In the extracts from the Management Agreement, which appear below, there are multiple references to Singways. Based on the foregoing, references to Singways will be considered references to HQ, the second defendant.
As mentioned above, the Recitals to the Management Agreement relevantly provide: "Singways conducts business as a retailer of furniture, bedding and associated items at premises leased by it at GF 05 Super Centre Moore Park… ("the business")….Singways has offered to contract the management of the business to the manager on the terms set out herein"
Clause 3 relevantly provides: "…The manager agrees….(c) to advise on the selection of saleable stock; (d) to advise on the selection of supplies for stock and trading terms thereof…(f) to represent Singways in a proper and businesslike manner…"
Clause 4 relevantly provides: "…Singways authorises the manager to…(a)… permit the use of "De Rucci" name [sic]… for purposes related to the business; (b) to collect and receive all payments due to the business and to immediately deposit the payments to the [Nominated Account]"
Clause 5 relevantly provides: "Singways 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 Singways' essential outgoings of the business, rental, wages to staff…(ii) payment to suppliers for stock…(iv) and any remaining net profit shall by [sic] the commission for its services"
Clause 6 relevantly provides: "Commission shall be paid to the manager from gross earnings actually received by or held by the manager on behalf of Singways. (1) The term 'gross earnings' when used in this agreement is deemed to include any and all payments of money or any other form of value which has been paid to or applied from the sale of stock in the business directly or indirectly and derived from Singways [sic] business, prior to the deduction of any commissions or expenses…"
Clause 7 provides that Singways is "entitled to audit the turnover kept by the manager…to ascertain any amounts that may be due to the manager."
Clause 10 relevantly 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"
Finally, clause 11 relevantly provides: "…(A) the parties agree that no right of tenancy, subletting, licensing, or parting with possession has been given by Singways or can be inferred or by the terms of this agreement; (B) the manager agrees that at all times will adhere to the terms and conditions of Singways' lease…"
Principles of Construction
The task of the Court in construing the terms of a contract is the determination of the intention of the parties from the written terms of their bargain. In other words, the contract is determined objectively; not subjectively: Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 351 per Mason J (with whom Stephen and Wilson JJ agreed); Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 62; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179.
In Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, the High Court (French CJ, Hayne, Crennan and Kiefel JJ) the objective determination approach was more recently reaffirmed, where the Court observed (at [35]): "[35] … this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating"." [Footnotes omitted]
This, in turn, confirmed the approach in Toll v Alphapharm (supra), where the High Court (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ) said (at [40]); "This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction."
The court will apply the objective determination of the intention of the parties derived, in this case, from the terms of the Agreement into which they entered.
Principles of Agency
Mercantile agents
Because the Management Agreement refers to various aspects of agency and DRI acting on behalf of HQ, it is necessary to examine whether the principles associated with agency inform the nature of the relationship. It is well recognised that principals can appoint agents to sell goods, consign goods for the purpose of sale, buy goods, or to raise money on the security of goods and all of the foregoing. See for example s 3 of the Factors (Mercantile Agents) Act 1923 (NSW). Such agents are typically referred to as 'mercantile agents'.
According to Halsbury's Laws of Australia at [15-110] (and the authorities referred to therein), the implied authority of a mercantile agent includes, subject to special instructions, authority: 1. to sell in his or her own name; 2. to sell on reasonable credit and at the time and price which he or she thinks best for the principal; 3. to warrant; and 4. to receive payment where he or she has sold in his or her own name.
At [15-200], the learned author states that where a person has acted as agent on a principal's behalf in any transaction, he or she is estopped from denying the rights which have accrued to the principal in consequence of those acts, and from setting up any claims adverse to the rights of the principal, whether in himself or herself, or in third parties.
In Mooney v Williams (1905) 3 CLR 1 at 8, Griffith CJ noted that the practice of an agent acting for an undisclosed principal in the case of a contract for the sale of goods is "a very ordinary practice", the rule being that "the principal may come in and claim the benefit of the contract subject to any rights that the third party may have as against the agent."
In Maynegrain Pty Ltd v Compafina Bank [1982] 2 NSWLR 141 at 152, Hope JA explained that: "the position is that the principles have been developed to enable contracts for the sale of goods to be made in favour of undisclosed principals, and undisclosed principals to obtain the title to goods, although concurrent rights may be given at the same time to the known party who in fact was acting as agent."
Whether a principal-agent relationship is established will not depend on the terminology adopted by the parties, but on the true nature of the agreement: Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389 at [182] per Allsop P, with whom Bathurst CJ and Campbell JA concurred.
The Agency and Vendor-Purchaser distinction
In cases which have considered whether an agency relationship arises in a commercial, sale of goods context, the decision has frequently turned on whether the relationship was that of vendor-purchaser rather than principal-agent: see Law of Agency (3rd ed, 2014) at [2.2]-[2.9].
In Custom Credit Corporation Ltd v Griffith-Jury Co Pty Ltd [1965] WAR 77, the agreement between the plaintiff financier and the defendant motor dealer was that the defendant should act as agent of the plaintiff in the acquisition and disposal of motor vehicles which the defendant was to display in its showroom. It entitled the defendant to draw against funds to be provided by the plaintiff for the purchase of the vehicles, and, upon the sale of a vehicle, the plaintiff was entitled to be refunded the moneys disbursed for its purchase together with interest, the defendant being entitled to any profit and liable for any loss on the sale. Upon the defendant's insolvency, the plaintiff claimed ownership of the vehicles in the defendant's possession at the date of liquidation. Virtue J rejected the plaintiff's claim, concluding that, notwithstanding the description of the defendant as an agent, this was not the substance of the transaction. His Honour justified this conclusion reasoning as follows at p.79: "[T]he contractual rights and liabilities of the [defendant] with regard to the goods are those which are more appropriate to ownership rather than mere agency. The obligation to pay interest on moneys utilized to purchase the chattels, the obligation to defray all charges in relation to the goods, the right to all profits earned by the disposal of the goods and the duty to make up all losses, the lack of concern of the plaintiff with the actual process of marketing and disposal of the goods except to the extent of providing for the refund of moneys disbursed for the purchase of goods and the securing of payment of interest on such moneys, all point to the relationship of money lender and owner rather than principal and agent." [emphasis added]
It has been held that where a person who may be an agent receives a commission, upon sale, usually calculated as a percentage of the sale price, this is likely to constitute an agency rather than a vendor-purchaser relationship: Livingstone v Ross [1901] AC 327 at 333-4, 337 per Sir Ford North; Weiner v Harris [1910] 1 KB 285 at 291-294.
The decision in Ex parte Bright (1878) 10 Ch D 566 involved the consignment of goods by manufacturers to consignees as "agents" of the manufacturers for sale. The agents described themselves on both a plate affixed at their place of business and on invoices as "merchants and manufacturers' agents". Upon the agents' insolvency, the issue arose as to whether or not they were instead purchasers. The English Court of Appeal determined that an agency relationship existed at pp.570-1: "There is nothing to prevent the principal from remunerating the agent by a commission varying according to the amount of the profit obtained by the sale. A fortiori there is nothing to prevent his paying a commission depending upon the surplus which the agent can obtain over and above the price which will satisfy the principal. The amount of the commission does not turn the agent into a purchaser … It seems to me impossible to say that with such a mode of remuneration the character of the agent can change. But in addition to that we have a great number of other circumstances which shew that it was intended to be an agency. In the first place, it is to be noticed that the debtors guarantee all accounts, that is, the agents are to be liable for the purchasers of the goods paying the money, so that the commission is what is called a del credere commission. That is wholly inconsistent with the notion that the debtors were the real purchasers, for then they would be guaranteeing themselves; they would be personally liable to pay as purchasers, and what would be the use of guaranteeing payment by themselves?" [emphasis added]
The decision in Bruce v Good [1917] NZLR 514 involved a cooperative dairy company receiving butter-fat from suppliers to be manufactured into butter and cheese. As the butter-fat went into the bulk, the identity of each supplier's property was lost. The practice of the cooperative was to consult with suppliers as to the disposal of the manufactured product and then the proceeds of the sale would be distributed among the suppliers after deducting the cost of manufacture. It was argued that the cooperative was an agent of the suppliers, rather than a purchaser from them, so to achieve priority over the claim of the defendant who had guaranteed the cooperative's overdraft and seized the butter. The New Zealand Court of Appeal at pp.535-6 upheld the trial judge's ruling that the transaction established an agency relationship and did not amount to a sale.
In reaching this conclusion, the Court was influenced by the fact that the cooperative treated the transaction as an agency, this being evidenced by passages in the cooperative's reports to that end: see p. 535. Although the cooperative was invested with wide powers in effecting the sale of the product, the facts were nonetheless inconsistent with the idea of a purchase, namely the consultation of suppliers and the differentiation in the dealing with milk suppliers for local purposes and for sale overseas. That the cooperative had an interest in the product - to get 1d per pound for manufacturing - did not serve, in the Court's opinion, to negative the fact of agency, as this was as consistent with agency as with purchase, if not more so: see p. 535. The only persuasive evidence of purchase, according to the Court, was the cooperative's control of the manufactured product, but "so must an agent for sale have": see p. 536. To this end, their Honours observed at p.537 that "[t]here is nothing inconsistent with the agency relationship in having such a control, but there is an inconsistency with an alleged sale if the purchaser had to consult the suppliers as to the manner in which it was to deal with the products, and this was done and, according to the evidence, had to be done."
Right of reimbursement
The relationship of principal and agent raises by implication an obligation on the part of the principal to reimburse the agent in respect of all expenses, and to indemnify the agent against all liabilities, incurred in the reasonable performance of the agency, provided that this implication is not excluded by the express terms of the contract between them, and provided that the expenses and liabilities are in fact occasioned by the agent's employment: see Jones v Canavan (1972) 2 NSWLR 236; Re Clune; Ex parte Verge v Isabella Nominees Pty Ltd (in liq) (1988) 14 ACLR 261 at 266 per French J.
Agent's lien
Every agent has a lien on the goods and chattels belonging to his or her principal in respect of all claims against the principal arising out of the agent's employment, whether for remuneration earned or for expenses or liabilities incurred, except where the right of lien is inconsistent with the contract between the parties, or is otherwise ousted by statute: Re Clune (supra); Active Property Marketing Services (Aust) Pty Ltd t/as Alpha Realty v Joelco Pty Ltd (2007) Q ConvR ¶54-673; [2007] QSC 167 at [22]-[27] per Wilson J.
The agent's lien, whether particular, general or equitable, survives the termination of the agency or other revocation of the agent's authority: Hill v Venning (1979) 4 ACLR 555 at 557-8 per Connolly J.
To enable an agent to exercise the lien, the goods must be in his or her possession, actual or constructive. An agent loses his or her lien by parting with the possession of the goods, unless at the time of parting with them the agent reserves expressly or by implication his or her right of lien, or they are obtained from the agent by fraud or other unlawful means: see Halsbury's Laws of Australia at [15-250]; Mercantile Credits Ltd v Jarden Morgan Australia Ltd [1991] 1 Qd R 407; (1990) 1 ACSR 805; 8 ACLC 431.
Application of the Principles
The Management Agreement does not explicitly address the ownership of stock purchased by the manager for the business.
In short, the effect of the agreement is for Singways and then HQ (hereafter, I will refer solely to HQ), to delegate substantially the whole of the operation of its business to DRI. Whilst the agreement permitted the manager to use the "De Rucci" name, it did not involve any transfer of the business operations on a permanent basis and the business was still conducted in the name of HQ.
The plaintiff submitted that in circumstances where the Management Agreement does not explicitly state who owns the stock, the only basis upon which title to the stock could pass from DRI to HQ was by way of an implied term in the agreement. [14]
The defendants submitted that the Management Agreement gave rise to an agency relationship whereby DRI acted as a mercantile agent on behalf of HQ. The defendants drew particular attention to clauses 1 and 3 - 6 of the agreement, for this proposition. The defendants submitted that the effect of these clauses was to authorise DRI, expressly and impliedly, to order, deliver, sell and receive payment for goods on behalf of HQ.
The defendants emphasised that clause 11 specifically denied that HQ had transferred any "rights of tenancy, subletting, licensing or parting with possession" by the agreement and thus HQ remained the owner of the business. Ms. Zhu gave evidence that she was accustomed to inspecting the store and its stock, reviewing the accounts and receiving monthly turnover information, on behalf of HQ. On the basis of the foregoing, the defendants submitted that DRI purchased the goods on behalf of HQ (and acting as HQ's agent) pursuant to the terms of the Management Agreement and thus HQ has title to the stock.
It should be noted that DRI alleges that Ms. Zhu played no active role in managing the store, that she never visited the store during the operation of the agreement, and that she never contacted the General Manager of DRI in connection with the operation of the business.
By reference to the authorities set out above, the following matters militate against a finding that DRI acted as agent for HQ: 1. DRI is not entitled to a commission, rather, DRI is entitled to all profits after certain of the defendants' expenses are met (Custom Credit; Livingstone; Weiner) and DRI is not liable to the defendants for the purchasers of stock paying the money (Ex parte Bright). See clauses 5 and 6 of the Management Agreement, extracted above; and 2. The defendants have generally shown a lack of concern as to the actual "process of marketing and disposal of the goods" except to the extent to which such matters may infringe the terms of the lease (Custom Credit; Bruce v Good). Whilst Ms. Zhu asserts that she inspected the store (which is disputed by the plaintiff), it would appear that DRI carried out all day-to-day functions of the business and did so without consulting with the defendants.
Against these matters, the terms of the agreement evince a clear intention that the business that was selling the stock was, nevertheless, owned by HQ and that all actions undertaken by DRI were taken on behalf of the business owner, which is strongly suggestive of an agency relationship. The following aspects of the agreement are noteworthy: 1. The Recitals and clauses 6 and 11 (and the agreement, generally) make clear that the "business" remained the property of the defendants and that the plaintiff was to manage the business (at least, implicitly) on their behalf; 2. Clause 3 provides that DRI agrees "to represent [HQ] in a proper and businesslike manner"; 3. Clause 4 provides that DRI may receive payments "due to the business" (in other words, not due to DRI); 4. Clause 5 provides that the manager is authorised to make certain payments out of the turnover from "sales in the business" (in other words, not sales by DRI acting on its own behalf); and 5. Clause 6 provides that gross earnings are held by DRI "on behalf of" HQ.
The Court makes the following comments on the latter arrangement. This seems to be the more probable effect of the business relationship between the parties.
None of the authorities, referred to in paragraph [59] above, involve precisely the same arrangements as are found here. Here, the relationship, at least nominally, involves a business owner delegating functions to a manager.
While the plaintiff may submit that even though the agreement is termed a Management Agreement and nominally the business owner delegates the operation of the business to DRI, practically the arrangement amounted to a sub-lease of the premises, having regard to the limited involvement of the defendants in the business, such that this matter is relevantly analogous to the circumstances before the Court in Custom Credit, involving a financier and a business operator. This submission, on the evidence currently before the Court, cannot be accepted.
Significantly, the defendants operated a business selling stock out of the premises before the inception of the Management Agreement. As a result, it cannot be said that the delegation of the operation of the business is artificial and one cannot read the agreement as a quasi-property arrangement. At most, the practical operation of the agreement could be seen as the sale of a business and, even then, the sale, transfer or disposal of rights in the business is expressly denied by the terms of the agreement (cl 11).
Moreover, it has been said, and the Court agrees, that since it is the parties' intention that governs whether the relationship created is one of agency or otherwise, decisions tend to be fact specific and cases decided on other agreements provide limited assistance: W T Lamb & Sons v Goring Brick Company Ltd [1932] 1 KB 710 at 718; Fraser-Ramsay (New Zealand) (Ltd) v De Renzy (1912) 32 NZLR 553 at 575.
Despite the plaintiff carrying out the day to day functions of the business, most of these functions fall within the implied authority of mercantile agents: see paragraph [38] above. As Slattery J found in [2019] NSWSC 1375 at [34], in the absence of a clause in the Management Agreement retaining title in DRI's name for DRI supplied goods; and in the absence of any retention of title clause in any separate invoice for the goods; and given the delivery of the goods and placement and display of the goods with other stock of HQ at Moore Park; and given the lack of any clause in the Management Agreement requiring the De Rucci stock to be separately dealt with and quarantined from the rest of the stock of the business; it is likely that the intention of the parties to be inferred from the circumstances surrounding delivery was that title in the goods was held by HQ and remained with HQ.
Whilst the monies used to purchase the stock from Chinese manufacturers were obtained from an account held in the name of DRI, the parties do not dispute that this was the Nominated Account into which the turnover of the business was deposited and these payments were "due to the business" per clauses 4 and 5 of the agreement. [15] Further, as already stated, clause 6 of the agreement is inconsistent with the stock being the property of DRI.
As mentioned above, whether a principal-agent relationship is established will not depend on the terminology adopted by the parties: per Allsop P in Tonto (supra). However, the plain meaning of the terms of the agreement, demonstrated by the careful language referred to in paragraph [60] above, evidences that the common intention of the parties was that DRI was to undertake its activities as "manager" on behalf of HQ and the manager's activities (at least, implicitly) included the acquisition and delivery of stock for the business. In the circumstances, 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: per Mooney (supra) and the other authorities referred to above.
DRI is unable to assert any agent's lien in respect of the stock, because the stock is no longer in its possession. DRI may submit that it did not voluntarily part with possession of the stock in that the defendants changed the locks to the premises and denied the plaintiff entry, such that possession was lost through unlawful means. However, the stock was brought to premises subject to a lease held by a company associated with the defendants and the lessee was entitled to possession of the property and thus to change the locks and deny entry to the plaintiff. Moreover, and as previously mentioned above, clause 11 of the Management Agreement specifically denies that the agreement could be interpreted such that the defendants transferred any rights or interests in the lease to the plaintiff.
If the rights and interests of DRI are or have been adversely impacted by what it claims is an unlawful act of HQ, or another of the defendants, its rights may be the subject of suit, but the unlawfulness does not effect a transfer of property not otherwise owned by them.
That said, pursuant to an agent's right of reimbursement, DRI is entitled to be reimbursed by HQ in respect of all expenses incurred in the reasonable performance of the agency. These expenses would include any costs associated with the purchase and delivery of the subject stock. Again, this does not equate with ownership of the property here in question.
Ancillary issues
There is an open question about whether the Management Agreement was validly terminated or repudiated. The answer to that question is relevant to resolve the dispute between the parties, because it may influence whether the relationship between the parties was governed by the agreement at certain critical times: see McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476-477. For example, whether the agreement was terminated or repudiated and, in either case, by whom, may determine whether the plaintiff has any right to the profits from the sale of the stock that is the subject of this separate question.
That said, and as mentioned above, the Court was not provided with evidence and submissions on these questions and has instead been asked to determine the separate question on the basis that the relationship between the parties was governed by the operation of the Management Agreement at least until the purported termination on 7 September 2019. However, the separate question for determination is not confined to the period up to and including 7 September.
The defendants submitted that the effect of section 23 rule 4 of the Sale of Goods Act 1923 (NSW) was that since the stock was ordered and paid for on HQ's behalf, HQ obtained title to the stock. [16] It is unnecessary to resolve the correctness of this submission as the Court has already determined that HQ owns the stock, at least under the agreement, if it were defining the rights of the parties, because it was purchased on their behalf by DRI. That said, as between DRI and HQ there is no suggestion in the terms or practical operation of the Management Agreement that the stock was delivered by DRI to HQ "on approval or on "sale or return" or other similar terms," within the meaning of rule 4. Rather, the stock was received by DRI, acting as agent for HQ, from DRI's Chinese manufacturers. As a matter of law, the stock was never delivered by DRI to HQ.
The Court has set out its relevant interpretation of the Management Agreement and the effect of that Agreement on the ownership of the stock up to and including 7 September 2019. However, as stated, the preliminary question is not limited in time and its answer must depend on the details of the termination and the rights that may have accrued at the time of termination. That issue is, as has been stated, not the subject of evidence. For that reason, the question, separately identified, cannot at this stage be answered.
Orders
The Court makes the following orders: 1. The Court answers the following question in the following manner:
"which of the plaintiff or one or other of the defendants has title to the De Rucci branded stock at the premises in Moore Park between 20 October 2016 and 22 November 2019 and which party has ownership of the funds accumulated from the sale thereof."
Answer: The question is not answered. 1. Costs are costs in the cause.

De Rucci International Pty Ltd v Zhu & Ors

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (4 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (18)

Cited By (2)