James Australia Group Pty Ltd v Ling Kui Yu [2012] NSWSC 892 | Case summary

Judgment (10 paragraphs)

[1]

Introduction 1The first plaintiff, James Australia Group Pty Ltd (JAG), is a member of the James Australia group of companies, which is controlled by Mr David James. The group, which is based in Newcastle, is involved in the manufacture of wine and the wholesale distribution of liquor. One of the brands of wine manufactured by the group is "Basedow". The group also operates an offset and digital printing business. Like most corporate groups, individual companies within the group perform specific activities for members of the group. One activity engaged in by JAG is the exporting of wines manufactured by other group companies. In September 2008, Mr James was approached by the first defendant, Mr Yu, with a proposal to set up a wine importing and distribution business in China. For that purpose, the second plaintiff, James Australia Group (Shanghai) Wine Trading Pty Ltd (JAG (Shanghai)) was incorporated in China as a subsidiary of JAG and, on Mr Yu's recommendation, the second defendant, Ms Fan, who resides in Shanghai, was employed to assist in establishing and operating that business. 2The plaintiffs plead their case in various ways. Essentially, however, the case they put at trial was that Mr Yu and Ms Fan came up with a plan by which they would take advantage of JAG (Shanghai) for the benefit of entities associated with Ms Fan. In particular, the plaintiffs say that it was part of the plan that the defendants, or Ms Fan with Mr Yu's knowledge, would establish a company, which became known as Shanghai Long Yu Wine Trading Co Ltd (Long Yu Wine), for the purpose of acquiring wine from JAG (Shanghai) at an undervalue, which it would then resell at a profit. The plaintiffs also allege that it was part of the plan that Mr Yu would cause or permit JAG (Shanghai) to pay all or some of the operating costs of a company associated with Ms Fan known as Shanghai Congyun Trading Development Co Ltd (Congyun) and to pay other benefits to Congyun. 3The plaintiffs say that, at least by the time JAG invested in JAG (Shanghai) and incurred other costs in establishing the business in China, Mr Yu knew of the plan but failed to disclose it to Mr James. It is alleged that that failure constituted misleading and deceptive conduct in contravention of s 42 of the Fair Trading Act 1987 (NSW) (FTA), as it then was, and that Ms Fan was involved in that contravention. JAG says that, had the plan been disclosed to it, it would not have invested in JAG (Shanghai) and incurred the other costs that it did. It claims as damages the amount of its investment in JAG (Shanghai) together with other costs it incurred, including the salaries it paid to staff, less the current value of the assets of JAG (Shanghai). Originally, it also claimed the profit it says it would have earned on the sale in Australia of the wine that was sold to JAG (Shanghai). That claim, however, was abandoned on the last day of the hearing. 4The plaintiffs put an alternative case in conspiracy. Although the essential elements of a cause of action in conspiracy are quite different from those that underlie a claim for damages based on a contravention of s 42 of the FTA, the former claim relies on the same facts as the latter and it was not suggested that the former claim could succeed if the latter one failed. Mr Loughnan, who appeared for Mr Yu, did suggest in written submissions that there was a question whether Mr Yu's alleged conduct in failing to disclose the plan on which the plaintiffs rely was conduct that occurred in trade or commerce or whether it was conduct that occurred in connection with Mr Yu's employment by JAG. However, in final oral submissions, Mr Loughnan conceded, on the basis of the decision in Blackmagic Design Pty Ltd v Overliese [2010] FCA 13, that misleading and deceptive conduct engaged in by an employee for the purpose of benefiting a company associated with the employee to the detriment of the employer was conduct engaged in trade and commerce. If the plaintiffs succeed in establishing the facts on which they rely, that is this case. The result is that the case turns on whether the plaintiffs can succeed in establishing that Mr Yu engaged in misleading or deceptive conduct in contravention of s 42 of the FTA. 5There was no appearance by Ms Fan, although I am satisfied that she was properly served in accordance with an order for substituted service. The plaintiffs seek judgment against her in default of her appearance. 6Mr Yu does not deny that at least some of the conduct engaged in by Ms Fan involved, at a minimum, a breach by her of her duties as an employee of the plaintiffs. Mr Yu's principal defence is that he was not a party to the plan that I have described and was not aware of Ms Fan's conduct and that, consequently, he did not engage is misleading or deceptive conduct by failing to disclose it. He also took issue with the way in which JAG calculates its claim for damages.

Factual background 7Prior to August 2007, Mr Yu worked for a company known as Dealquip Imports and Exports Pty Ltd for a number of years. Dealquip imported goods from China and Mr Yu was responsible for managing that aspect of its business. From about 2003, Dealquip used Congyun, Ms Fan and other staff members of Congyun to source products in China for its customers. It continued to do so up until about June 2010. 8At some stage prior to 2008, Mr Yu and Ms Fan formed a romantic relationship. Initially, in his affidavit evidence, Mr Yu denied that he and Ms Fan had an intimate or sexual relationship. He said that they became friends and in the past had flirted innocently with each other. However, in cross-examination, faced with a series of MSN messages between them, which were extracted from Mr Yu's computer in circumstances I describe below, he was forced to concede that they had a romantic relationship, although precisely when that developed remains unclear. Mr Yu continued to maintain that the relationship was not sexual. Having regard to the tone and content of some of the messages, that is doubtful. But nothing turns on the resolution of that issue. What is clear is that it was a very close personal relationship and was one that existed before Mr Yu first met Mr James. 9On 2 May 2007, a company known as Versaquip Centre Pty Limited was incorporated to operate a business in competition with Dealquip. Ms Fan and a Mr Darren Ashton were the directors of that company and its shareholders included Ms Fan, Mr Ashton and Yi Qun Xia (also known as "Tony"), who later became wine marketing manager for JAG (Shanghai). The ASIC records for that company show Ms Fan as holding 40,000 shares on trust for an unnamed beneficiary. The plaintiffs submitted that that unnamed beneficiary was Mr Yu. They also submitted that that evidence supported their ultimate submission that Mr Yu and Ms Fan planned to set up Long Yu Wine to operate in competition with JAG (Shanghai). 10The evidence in relation to Versaquip is only relevant to a submission that Mr Yu and Ms Fan had a tendency to engage in the conduct which is the subject of complaint in the present proceedings. Mr Loughnan did not object to the tender of that evidence on that basis, although he did take issue with the proposition that the evidence established that Ms Fan held shares on trust for Mr Yu. However, s 97 of the Evidence Act 1995 (Cth) relevantly provides (in subs (1)): Evidence of the character, reputation or conduct of a person, or a tendency that a person has or had, is not admissible to prove that a person has or had a tendency (whether because of the person's character or otherwise) to act in a particular way, or to have a particular state of mind unless: (a) the party seeking to adduce the evidence gave reasonable notice in writing to each other party of the party's intention to adduce the evidence, and (b) the court thinks that the evidence will, either by itself or having regard to other evidence adduced or to be adduced by the party seeking to adduce the evidence, have significant probative value. 11No notice was given in accordance with s 97(1)(a) and no submissions were directed to the question whether the evidence had significant probative value. In those circumstances, I have concluded that it is not appropriate to place any weight on that evidence. 12Mr Yu left Dealquip in August 2007 and worked for a period of time in Dubai. However, in July 2008, he returned to Australia and asked an acquaintance of his, Mr Danny de Carvalho, if "he knew anyone in the wine industry that wants to export to China". 13Mr Yu said in his affidavit evidence that he did not discuss the idea of becoming involved in the business of importing wine into China with Ms Fan until he saw Ms Fan in Shanghai in November 2008. However, in cross-examination, Mr Yu conceded that he discussed the idea with Ms Fan before mid October 2008. In particular, he gave the following evidence: Q. One of the reasons why you wanted to set up the James business in Shanghai was so that you could spend more time with Ms Fan, wasn't it? A. WITNESS: Part of the reason. ... Q ... . Before mid October 2008 you and Ms Fan had discussed you setting up a business in Shanghai, hadn't you? A. WITNESS: I tried. Q. And you told her that if you could set up this business you could spend more time with her, didn't you? A. WITNESS: Yes Later, Mr Yu also conceded that he discussed with Ms Fan before mid October 2008 her possible involvement in the business that he was hoping to set up. 14At the time, Mr Yu had no knowledge of the wine industry. However, Ms Fan had some contacts who had some involvement in the industry. In particular, a friend of hers who she had met at university, Aiming Qian, who is apparently a judge, had a connection with a wine retailer known as "9519". Although Mr Yu denies it, in my opinion, the likelihood is that Ms Fan mentioned her friendship with Mr Qian and his association with 9519 in connection with her possible involvement with the proposed business. It would have been natural for her to do so in the context of a discussion about her involvement in the business and given the nature of the relationship between her and Mr Yu. As I will explain shortly, that conclusion is supported by the evidence given by Mr James and what happened subsequently. 15On 8 September 2008, Mr de Carvalho sent Mr Yu's contact details to Mr James. Mr Yu and Mr James met on a number of occasions including on 11 September 2008 and again on 18 September 2008. There is a dispute about what was said during those meetings. Mr James claims that Mr Yu made representations concerning the prospects of success of a business in China which Mr Yu denies. However, given the way that the plaintiffs now put their case, it is not necessary to resolve that dispute. It is not disputed that Mr Yu indicated that he did not want a part share in the business, but was only interested in being an employee and professional manager. Mr Yu also indicated that he wanted an annual salary of $105,000 plus all expenses, including business class airfares. 16Mr James says that Mr Yu told him that he had an established relationship with Congyun, which was run by Ms Fan. According to Mr James, Mr Yu said that he did not think that Ms Fan was still at Congyun and that she may be someone who could help with the new company. Mr James also says that, at the meeting on 18 September 2008, Mr Yu said that he already had orders for 4,500 cases from 9519, who was a retailer in Shanghai and it would be logical to open up in that city as 9519 could purchase 4,000 cases per month, which would be enough to fund the operations of the new business. Mr Yu, on the other hand, denies that he said words to that effect. According to him, he had no knowledge of 9519 at the time of that meeting. 17I prefer Mr James's evidence on these points. In my opinion, Mr Yu was not a reliable witness. He was forced to resile from his position that he was not romantically involved with Ms Fan. He was also forced to resile from his position that he first raised the proposal for Ms Fan to become involved when he visited Shanghai in November 2008. In addition, Mr James's evidence is inherently plausible. Mr Yu wanted Ms Fan to be involved in the new business. It would have been natural in those circumstances for Mr Yu to raise that possibility with Mr James at the earliest opportunity. It is unlikely that Mr James was mistaken about the conversation concerning 9519. Mr James needed to be satisfied that Mr Yu was an appropriate person to employ to establish a wine distribution business in China. Mr Yu's indirect connection with 9519 was one of the few matters that Mr Yu could point to, to satisfy Mr James in that regard. 18On 17 October 2008, Mr Yu received from a Mr Wang an email setting out the necessary first steps to set up a foreign owned enterprise in China. That email attached an enterprise name pre-approval application form, which needed to be completed as a first step in registering a company in China. The email explained how the form was to be completed. It also requested a number of other documents and information. Mr Wang said in the email that as soon as he received that material "I can start the enterprise name pre-approval application immediately". Mr Yu forwarded that email to Mr James and Mr Brooks, who was an employee of the James Australia group. 19Mr Yu responded to Mr Wang's email on the same day saying "I work all pre pr-approval documents .wish send express to you very soon." In cross-examination, Mr Yu admitted that he told Mr Wang that he was responsible for all pre-approval documents and that he would send those documents by express very soon. Originally in cross-examination Mr Yu conceded that he did not send any such documents. However, subsequently, he resiled from that position and said that he could not remember whether he sent them or not. There is, however, no evidence to suggest that those documents were sent by Mr Yu and in my opinion they were not. 20On 20 October 2008, Mr Yu and Mr James signed an employment contract. Mr James says in his affidavit that Mr Yu was employed by Killara 10 Pty Ltd, one of the company's in the James Australia Group. The employer, however, is stated in the agreement to be JAG. 21On 23 October 2008, an application for pre-approval of the name of James (Shanghai) Wine Trade Co Ltd was lodged with the relevant authority. In accordance with the requirements of the application, a number of alternative names were given including "James Shanghai Wine Trading Co Ltd". The registered capital was nominated as being "USD500,000". The "investor" was named as JAG. 22On the same day, another application for pre-approval was lodged in the name of "Shanghai James Wine Trading Co Ltd". Various alternative names were given. The proposed business scope of that company was described as "wholesale and sale of wine". The named investors were Mr Qian as to 35 percent and Jiapeng Fan as to 65 percent. Mr Jaipeng Fan is Ms Fan's father. The total paid up capital was nominated as being "RMB1,000,000". 23The forms in evidence include what is described as a "Notice of the Acceptance of Application for Pre-approval Company Name". At the end of each form is a space for the form to be signed by a person as "receiver of this notice". The notice in respect of JAG (Shanghai) was signed by Mr Qian. The notice in respect of Shanghai James Wine Trading Co Ltd was signed by Luo Minhua. Ms Luo subsequently came to be employed as a driver by JAG (Shanghai). 24Nothing seems to have come of the application for pre-approval in the name of Shanghai James Wine. However, on 24 October 2008, the relevant authority gave notice of pre-approval of the name "Shanghai Long Yu Wine Trading Co Ltd". The investors in that company were Mr Fan as to 65 percent and Mr Qian as to 35 percent and the total paid up capital was RMB1,000,000. A company search of that company conducted by the solicitors for the plaintiffs produced the original application in respect of Shanghai James Wine Trading Co Ltd. Given the results of the search and the fact that the investors and capital structure of the two companies are the same, in my opinion it can be inferred that the two companies are the same. The likelihood is that the original application was rejected because the name was identical to one of the alternative names given for JAG (Shanghai) and instead Shanghai Long Yu was chosen as an alternative name for the second company. 25Mr Yu says that he was unaware of the application for pre-approval of either JAG (Shanghai) or Shanghai Long Yu. I do not accept that evidence. 26Mr Yu was the only source of information necessary to complete the pre-approval application form in respect of JAG (Shanghai). Mr Yu appreciated that lodgment of the documents was an essential first step to enable JAG (Shanghai) to trade. He accepted that he was the person responsible for arranging for that to be done. He took no steps to lodge the documents through Mr Wang. The only reason he could have had for not doing so was that he knew that the application was going to be lodged by Mr Qian, or at least that Ms Fan was going to arrange for it to be lodged. That conclusion is supported by events which occurred on 13 November 2008 which I describe below. Mr Yu could not give a satisfactory explanation of what steps he took to have JAG (Shanghai) registered. First, he denied he took any steps. Then he said he could not remember. Given that that was a critical first step for which Mr Yu was responsible and given that Mr Yu gives detailed evidence concerning other events that occurred at about the same time, it is implausible that Mr Yu could not remember whether or not he took steps to register JAG (Shanghai). Mr Yu never suggested that he had arranged to leave the task to Ms Fan. In my opinion, it is reasonable to infer from these matters that Mr Yu knew what was going on. If he did not, he would have given instructions to Mr Wang to proceed with the registration. If he had simply asked Ms Fan to make the arrangements, he would have said so when giving evidence. It is hard to believe that he would have known of the circumstances surrounding the establishment of JAG (Shanghai) but not those surrounding the establishment of Long Yu Wine, given the connection between the two companies and, in particular, the fact that Mr Yu must have agreed to Mr Qian lodging the form on JAG (Shanghai)'s behalf. 27On 3 November 2008, Mr Yu travelled to Shanghai to start setting up the Shanghai office. Apart from a brief trip back to Sydney, he remained in Shanghai until 19 December 2008. JAG paid for the costs of those trips, which included an initial amount of $5,000. It also transferred an amount of $25,000 to Mr Yu on 13 November 2008 and a further sum of $30,000 on 27 November 2008 in payment of costs incurred in setting up the new office. The actual amounts were transferred by Liquor National Wholesales Pty Ltd, the only company in the James Australia Group with an online global payment facility. JAG was reimbursed for those amounts through an intercompany loan account. 28At about the same time as Mr Yu went to Shanghai, he signed on behalf of JAG (Shanghai) an employment contract with Ms Fan. The contract is dated 2 November 2008. There is no evidence of how the contract came to be signed on that date. It is quite possible that it was signed shortly after Mr Yu arrived in Shanghai. Under the terms of the contract, Ms Fan was to become a full-time employee of JAG (Shanghai) in the position of "Vice General Manager". Mr Yu says that he spoke to Mr James shortly after arriving in Shanghai about employing Ms Fan. Although there is a dispute about the precise timing of that conversation, there is no dispute that Mr James agreed that she should be employed. The date of the contract, however, is obviously inconsistent with the position initially taken by Mr Yu that he had not discussed with Ms Fan the proposal for JAG to establishing a wine importing business in Shanghai until after he arrived. 29A number of things occurred while Mr Yu was in Shanghai. It is not necessary to refer to them all, but some of them are important to the way in which the plaintiffs put their case. 30On 6 November 2008, Ms Fan sent Mr Yu an email enclosing details of a possible order from 9519. Mr Yu forwarded that order to Mr James and arrangements were made to fill that order, which occupied two containers. Since JAG (Shanghai) had not been incorporated, it was proposed that the order be supplied directly to EOS, an import agent, who would pay JAG for the costs of acquiring the wine and on-sell the wine to 9519, but account to JAG (Shanghai), once it was established, for the profit on that sale after taking a commission. There were discussions and correspondence between Mr James and Mr Yu concerning the wholesale price at which JAG would supply wine to JAG (Shanghai). Mr James initially proposed a price of $36 per case. However, Mr Yu persuaded him to reduce the price to $30 per case, although for reasons which remain unclear the first two containers were shipped at $31 per case. 31On 20 November 2008, Mr Yu sent two orders to Mr James each for two containers of wine. The total cost of the first two containers was $75,560 and the total costs of the second two containers was $79,800. The first order was destined for 9519. Mr Yu says he told Mr James that he had negotiated a sale price for that order of RMB670,000. He says that on his calculations $75,600 was approximately RMB350,000. After making allowance for customs duties and taxes of RMB100,000, he calculated that JAG (Shanghai) would earn a profit of RMB220,000. 32There is a dispute between Mr James and Mr Yu concerning the second two containers. Mr James says that Mr Yu told him that those containers were also destined for 9519, and that was consistent with the conversation he had with Mr Yu on 18 September 2008 during which Mr Yu told him that he already had orders for four containers. Mr Yu, on the other hand denies that the second two containers were for 9519. He says that initially Ms Fan told him that the second two containers were for Mr Qian for other contacts he could sell to. Then, in late November 2008, he says that Ms Fan told him the second two containers were for Long Yu Wine, which, when Mr Yu asked about that company, she described as "the judge's company". Nothing turns on the resolution of this dispute. However, Mr Yu's account is inconsistent with the conclusion I have reached that he knew the circumstances in which Long Yu Wine had been established. 33On 13 November 2008, Long Yu Wine and JAG (Shanghai) were each granted food hygiene licences by the relevant governmental authority and, on 27 November 2008, the Chinese authorities issued a certificate of approval for establishment of JAG (Shanghai) as a wholly owned foreign enterprise. JAG (Shanghai) was finally registered on 17 December 2008. 34The plaintiffs sought to make something of the fact that Long Yu Wine and JAG (Shanghai) were granted consecutive food hygiene licences on the same day. In my view, that evidence simply confirms that the establishment of the two companies was being progressed by the same people at the same time. 35It also appears that on 13 November 2008, Mr Yu accompanied Mr Qian to the offices of the governmental agency responsible for the registration of companies to sort out an issue concerning the registration of JAG (Shanghai). Among the documents filed with the relevant authority in relation to the establishment of JAG (Shanghai) is a document headed "Certificate of Appointed Representative or Agent" dated 13 November 2008. That document purports to be signed in the name of JAG as investor by Mr Yu, although the signature is not the one normally used by him. The document records that Mr Qian was appointed representative or agent for the proposed new company during the period from 23 October 2008 to 30 October 2008. The document includes a copy of Mr Qian's identity card. Mr Yu does not refer to this document. However, there is an MSN messenger discussion between Mr Yu and Ms Fan on 13 November 2008 in which Ms Fan says that Mr Qian would collect Mr Yu and in which she gave directions to Mr Yu on where Mr Yu was to meet Mr Qian. In my opinion, it can be inferred from these documents that Mr Yu accompanied Mr Qian to the relevant government office to lodge the form. It can also be inferred that the form was necessary because Mr Qian had lodged the original application for Pre-approval of Company Name on behalf of JAG (Shanghai). These events support the conclusion that Mr Yu was intimately involved in the process by which JAG (Shanghai) became registered and is likely to have known that pre-approval was also being sought at the same time for the company that became Long Yu Wine. 36While in Shanghai, Mr Yu made arrangements to obtain accommodation, office space and warehouse space. Mr Yu reported back to Mr James on his progress from time to time. 37On 12 November 2008, Mr Yu emailed Mr James to say that he had found offices at suites 1309/1310 in the Baohua Building, Changde Road. JAG (Shanghai) moved into those offices on 18 December 2008. Long Yu Wine leased a suite next door (suite 1308). On 15 December 2008, Mr Yu on JAG (Shanghai)'s behalf entered into a lease for certain office furniture from Congyun and at the same time arranged to employ the employees of Congyun. It appears from a floor plan of the office that the fit out work for the office was undertaken by a company known as "Cong Yun Architect Decoration Design and Engineering Co Ltd". It is unclear whether that company was at the time associated with Ms Fan. In my opinion, the name alone is not sufficient to establish an association. 38Mr Yu says that it was a coincidence that the two companies occupied adjacent offices. He also says that he raised with Mr James the proposal to lease office equipment from Congyun and to take a few of Ms Fan's employees and that Mr James approved that proposal - something Mr James denies. I do not accept Mr Yu's evidence. The fact that the two companies were located in adjacent offices cannot be a mere coincidence having regard to the other connections that existed between them. Mr James says he became aware that JAG (Shanghai) had employed 13 staff members in about January 2009. He raised with Mr Yu why it was necessary to employ so many staff and he conducted an internet search of some of the key staff members. That search suggested that one employee, Dongdong Zhu, was employed by EOS. Mr James sent an email to Mr Yu on 13 January in which he said: I was just wondering when Ellen [Ms Fan] operated her company was it part of EOS? Did Dongdong work for Ellen or EOS? I am just trying to piece it together where the staff all came from etc for my peace of mind. Mr Yu responded on the same day in which he said "Dongdong, Tony and other 2 girls all were working for Ellin, they started working for James Shanghai on 15th Dec". He went on to explain why he thought it was desirable to employ former employees of Ms Fan. The information Mr Yu gave about the other employees and the explanation he offered for what he had done would not have been necessary if he had obtained Mr James's approval to the lease and to employing staff from Congyun. Moreover, in my opinion, Mr James would have asked for further details concerning the lease if he had known that it was with Congyun. However, there is no suggestion that he did so. According to Mr Yu, Mr James said that he was happy to leave the details to Mr Yu. That statement is not consistent with what Mr James actually did in relation to the employees. 39There is a suggestion in Mr James's affidavit that the warehouse space used by JAG (Shanghai) was leased by Long Yu Wine. However, I am satisfied that that suggestion is wrong. The evidence is that on 25 December 2008 JAG (Shanghai) entered into a lease with Shanghai Kanghong Plastic Tray Manufacturing Pty Ltd for 210 square metres of warehouse space, and that was that warehouse space that it used. Long Yu Wine did enter into a lease for a smaller amount of space, but there is no evidence that JAG (Shanghai) used that space or paid for it. 40The first two containers of wine for 9519 arrived in Shanghai on 16 December 2008. There is no dispute that they were supplied to 9519 and that, on 21 January 2009, James Estate Wines Pty Limited, the manufacturer, was paid directly the sum of $74,392 for that wine; and it seems clear that the ultimate source of that payment was 9519. Mr Loughnan submitted that the balance payable in respect of the two containers - that is, the RMB220,000 that Mr Yu expected would be earned by JAG (Shanghai) - was ultimately paid by EOS in September and October 2009 and that that amount was paid on Mr James's instructions to a company controlled by Mr James's wife known as Douglas Hawkins Pty Ltd. Mr Loughnan relied on two matters in support of that submission. First, Mr Yu gave evidence that he had a conversation with Mr James in January 2009 in which Mr James asked Mr Yu to pay part of the proceeds from the sale to 9519 to his (Mr James's) wife. Secondly, he says that the amount paid to Douglas Hawkins totalling $35,577 was roughly equivalent to RMB220,000. 41I do not accept Mr Loughnan's submission. Mr James gave evidence that the amounts paid to Douglas Hawkins were for commission payable in respect of paper product sales. That evidence is supported by a number of invoices from Douglas Hawkins to EOS for commission which total $38,292.43. It is consistent with the fact that there are companies in the James Australia group that operate in the offset and digital printing business. There is no explanation for why 9519 would pay the balance of the purchase price for the wine it acquired in September and October 2009. The true position appears to be that 9519 never paid the balance of the purchase price for the wine it acquired. As Mr Ashhurst SC, who appeared for the plaintiffs, conceded, there is no evidence to suggest that was anything other than the result of a genuine commercial dispute concerning the amount owed by it. 42Mr Yu returned to Australia on 19 December 2008. 43On 21 December 2008 and 5 January 2009, Ms Fan as agent for JAG (Shanghai) entered into contracts with Long Yu Wine for the sale of wines. In entering into those contracts, Ms Fan used the chop of JAG (Shanghai) which apparently was kept in a safe in the Shanghai office to which she had a key. Those contracts were only discovered by JAG after Mr Yu's and Ms Fan's employment with JAG (Shanghai) was terminated in the circumstances described below. 44Mr Yu returned to Shanghai on 8 January 2009. 45On 6 February 2006 JAG paid a further $20,000 to Mr Yu to enable him to meet the expenses of setting up the office and a further $20,000 on 11 March 2009 for the same purpose. In addition, on 26 February 2009, JAG paid USD500,000 ($748,279.38) to JAG (Shanghai)'s capital account. Mr James was the signatory on that account. 46On 30 March 2009 JAG (Shanghai) paid $78,794 from its capital account to James Estate Wines Pty Limited for the second two containers of wine that had been shipped on 4 December and 11 December. 47During the period from 9 April 2009 to 13 June 2009 a further 4 containers of wine were shipped to JAG (Shanghai). How those orders came to be placed and what JAG (Shanghai) did with that wine and the wine contained in the second two containers is not entirely clear. Mr Yu offers no explanation for those orders or what became of them. After Mr Yu's contract of employment was terminated in August 2009, Mr Brooks went to Shanghai and examined the records of JAG (Shanghai). Following that examination, he told Mr James that it appeared that a large quantity of wine had been sold cheaply to Long Yu Wine. An affidavit from Mr Brooks was read in the proceedings, although he did not give evidence concerning that matter and he was not cross-examined. There is some documentary support for what Mr Brooks told Mr James. In particular, Mr Brooks found a memory stick in the office when he went there. On that memory stick was a document which suggests that Long Yu Wine was buying wine from JAG at a discount to the prices shown on a price list that Mr James says he gave Mr Yu in March 2009 and reselling that wine at a 30 percent mark up. There are also, of course, the two contracts signed by Ms Fan in early January 2009 for the sale of wine to Long Yu Wine, although it is difficult to discern the price from those contracts. 48Mr Yu says that he was unaware of the contracts signed by Ms Fan. However, in cross-examination, he admitted that in January 2009 he intended that Long Yu Wine would be the distributor for JAG (Shanghai). That admission is consistent with the fact that, on 4 January 2009, Dongdong Zhu sent proposed wine labels to Mr James in the Chinese language. Those labels show EOS as the importer and Long Yu Wine as the distributor and give Long Yu Wine's business address. 49Having made the admission he did, Mr Yu said that he told Mr James of that fact and that he told Mr James "everything". When it was pointed out to Mr Yu that he did not have an email in which he told Mr James everything, Mr Yu replied "I got e-mail but somebody stolen and delayed my e-mail". In my opinion, this evidence is fanciful. There is no evidence to suggest that Mr James was aware of what was happening until after Mr Yu left as an employee in August 2009. 50On 9 March 2009, Mr James received an email from a person who identified himself as "Michael Ryan". The email said in part: Yu Lingkui has 30% shares in the agency company in Shanghai which is doing wine business with Jame's. and besides, he took 10% as commission fee when he was sourcing advertisement. 51Mr James visited Shanghai in March 2009 and on 13 March 2009 he asked Mr Yu about the email he had received from Mr Ryan. Mr Yu said it must have been from Ms Fan's husband and denied the allegations made in it. 52On 29 April 2009, Long Yu Wine applied for registration of the "Basedow" trademark. Mr Yu claims he had no knowledge of that event. I do not accept Mr Yu's evidence on that point. For the reasons I have given, I do not regard Mr Yu as a credible witness. It is apparent that he had intimate knowledge of the activities of Long Yu Wine which he sought to deny. In my opinion, he was aware of and played a part in a plan to take advantage of JAG (Shanghai). The registration of the "Basedow" trademark was one element in that plan. However, precisely when a decision was made to register the trademark in the name of Long Yu Wine is unclear. 53In June 2009, Mr James made a further visit to Shanghai. During that visit, he was given a tour of the warehouse facilities and while on that tour he observed papers on the manager's desk that looked like engineering drawings. Ms Fan told him that they related to an old order from Dealquip. Following his return to Australia, Mr James wrote to Mr Yu insisting that he obtain information about the other businesses being conducted by Ms Fan. Mr Yu responded to that email on 26 June 2009 saying that Ms Fan had done nothing wrong in respect of the Chinese business. On 29 June 2009, Mr James responded by saying that he proposed to close the Shanghai office immediately. Subsequently, Mr James reconsidered his position. 54In the meantime, on 31 July 2009, Mr James received a second email from Mr Ryan in which Mr Ryan said: Now Ling-Kui Yu works in Shanghai with his girl friend Ellin Fan. I am afraid that Ellin is not a qualified person. She always wants to get more from the company. She bought her own car and warehouse. Your company pays rent for her car and warehouse with an unreasonable price. I should say Ellin is too clever. Ling-Kui Yu always obeys her. They have their own company and make their own business under the name of your company. There are 7 containers of goods from your company in China totally. Three containers of goods were sold out. Please pay attention to the payment of another four containers of goods, as Ling-Kui Yu and Ellin plan to occupy the payment. 55On 14 August 2009, Mr James informed Mr Yu that he proposed to relocate Mr Yu's position to Newcastle. Mr Yu returned to Newcastle and went into the office on or about 25 August 2009. At about that time and in circumstances which are in dispute, Mr James obtained a copy of the hard drive of Mr Yu's laptop, which had been supplied to him in connection with his employment. Included in the material on the hard drive was the MSN messenger log that I have referred to earlier. There is a dispute about what happened then. It is agreed, however, that Mr James accused Mr Yu and Ms Fan of being involved in a scam and the result was that Mr Yu's position with JAG was terminated on 28 August 2009. On the same day, Mr Yu sent Ms Fan the following MSN message: I have to take my name stamp for bank.no more business can operate. Do not full trust anyone in office now, I do not know how DJ knew too many information from Shanghai office, where he get from ?after 10 days we will find out. In my opinion, this message provides further support for the proposition that Mr Yu was aware from an early stage of what Ms Fan was doing. 56Following Mr Yu's termination, Mr James sent Mr Brooks to the Shanghai office. It was while he was there that he discovered a number of the documents and the memory stick which I have referred to earlier. Ms Fan's employment was terminated on 29 September 2009. 57There were four other shipments of wine to JAG (Shanghai) after 28 August 2009. The evidence is that JAG (Shanghai) paid for the fifth to tenth shipments from its capital account, making total payments from its capital account in respect of shipments of wine of $321,994. There is no evidence concerning the circumstances in which the last four shipments were made. A total of 1,500 cases remains in store in Shanghai.

62In my opinion, it did. Mr James was plainly the controlling mind of JAG. In my view, it is clear that he would not have agreed to employ Mr Yu if he had known either or both of the matters which Mr Yu failed to disclose; and if he had not employed Mr Yu he would not have proceeded to establish JAG (Shanghai). In my opinion, the first limb of this conclusion flows from the nature of the information. It is inconceivable that Mr James would have agreed to employ Mr Yu if he had known either that Mr Yu was going to be involved in setting up a company that would buy wine cheaply from JAG (Shanghai) and resell it at a profit or that Mr Yu would engage the services of Ms Fan and the employees of Congyun when Mr Yu was romantically involved with Ms Fan and those employees were going to continue to do work for Dealquip. The whole purpose of setting up JAG (Shanghai) was to enable that company to sell directly to customers rather than for the James Australia group to sell its wine in China through distributors. Mr James was clearly concerned about conflicts as was demonstrated by the position he took when he thought Dongdong Zhu was working for EOS and when he found out that Ms Fan was continuing to do work for Dealquip. 63Mr James had no experience himself in doing business in China and could not speak Mandarin. It was essential in order for JAG to establish a business in China that it have an employee who was familiar with doing business in that country and who could speak the language. There is no suggestion that it had other employees who had those qualities. The whole point of employing Mr Yu was because he had the relevant expertise. There can be no question that if he had not been employed then JAG would not have established JAG (Shanghai). 64Mr Loughnan submitted that JAG had failed to establish that any misleading and deceptive conduct on the part of Mr Yu caused the loss that it claims. In making that submission, he relied on the following passage from Blacker v National Australia Bank Ltd [2001] FCA 254 per Whitlam, Tamberlin and Sackville JJ: [92] In addressing the appellants' contentions, we assume that the principles governing the assessment of damages for breach of duty are not materially different from those applicable to a claim founded on deceit. This assumption, if anything, is favourable to the appellants. [93] On this assumption, there is a basic difficulty with the way in which the damages case was put to the primary Judge. It was never part of the appellants' case that the dairy farm was worth less than they paid for it. Mr McGovern accepted that there was no evidence to this effect. Rather, the appellants seem to have proceeded on the basis that it was sufficient for them to show that the misleading conduct or negligence of the Bank had caused them to purchase the dairy business and that they had thereafter suffered losses in conducting the business. [94] That the appellants' approach was incorrect is shown by the decision of a Full Court of this Court in Netaf Pty Ltd v Bikane Pty Ltd (1990) 26 FCR 305. After referring to Gould v Vaggelas and other authorities, Sheppard and Pincus JJ said this (at 308): "These cases illustrate the proposition that allowance of trading losses is by no means automatic, particularly in businesses of a kind where trade is particularly prone to fluctuation, as in restaurants: see Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 at 100. In our opinion, it may be very difficult to determine to what extent trading losses were a product of the 'inherent vice' of the business and to what extent they were avoidable by the purchaser. ... We reiterate that, where a purchase has been induced by misleading conduct, it is not enough, in order to recover losses subsequent to the purchase, to prove that but for the misleading conduct or as a partial consequence of it, the agreement to purchase would not have been made; that is so in every successful application of that kind. It is not the law that in every such case the party held to have been engaged in misleading conduct (who may have acted quite innocently) becomes the insurer of the other's success and prima facie liable to indemnify him against the consequences of the purchase. As the trial judge said in the present case: 'To recover a loss sustained in the business, the applicant must show more than that it was sustained in the conduct of that business; for to show only that is to establish what is perfectly consistent with the loss having arisen from his own misguided management decisions, or even total neglect.' His Honour said that he was '...not, however, persuaded the applicant has discharged the onus of showing that losses suffered after the completion of the purchase are attributable to the breach...'." (Emphasis added.) [95] The same point was made by the Full Court in Kenny v Good Pty Ltd v MGICA (1992) Ltd (1997) 77 FCR 307 (aff'd Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413), at 328: "This formulation recognises that the defrauded purchaser is not necessarily entitled to all losses flowing from the transaction he or she was induced to enter. It is not enough that the fraud caused the purchaser to enter the transaction and that the losses would not have been incurred but for the transaction. As Doyle CJ has recently remarked, the exclusion of losses from a 'supervening cause' imposes a limiting factor on an otherwise wide test: Copping v ANZ McCaughan Ltd (1997) 67 SASR 525 at 537. Examples of supervening causes include losses attributable to business ineptitude or unexpected competition: Kizbeau v W G & B Pty Ltd [(1995) 184 CLR 281] at 291." 65In Mr Loughnan's submission, JAG's loss was caused by a premature decision to close down the business of JAG (Shanghai). It was not caused by the fact that JAG (Shanghai) paid Long Yu Wine commissions. Mr James was willing to agree to pay commissions, as was illustrated by the fact that JAG paid commissions to EOS. Moreover, according to Mr Loughnan, there was no evidence that the commissions paid by JAG (Shanghai) were uncommercial. 66In my opinion, this submission fails to address the way in which JAG puts its case. JAG's position is that it would not have proceeded with the investment in JAG (Shanghai) and to incur the other expenses it did unless it had employees who were experienced in doing business in China, who could speak the language and who would act in the best interests of JAG and JAG (Shanghai). On that basis it engaged Mr Yu, Ms Fan and other employees. It invested in JAG (Shanghai) and incurred other expenses. Much of its investment has been lost while JAG (Shanghai) was under the control of Mr Yu and Ms Fan. There can be no question of a supervening event in this case. The losses claimed under s 68 of the FTA, as it then was, are losses incurred in setting up a business that would not have been established if JAG knew that Mr Yu and Ms Fan had serious conflicts of interest which they had failed to disclose. Mr Loughnan's submission is in effect a submission that JAG should have sought to mitigate its loss by continuing to operate the business of JAG (Shanghai) after its key staff had been terminated for good reason. No such duty is imposed by a claimant for damages for a contravention of s 42 of the FTA; and there is no merit in a submission that seeks to dress up the failure to comply with such a duty as a supervening event that breaks the causal chain on which a claim for damages for a contravention of s 42 depends.

James Australia Group Pty Ltd v Ling Kui Yu

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Judgment (10 paragraphs)

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Legislation Cited (2)

Cases Cited (11)

Cited By (1)