Lee v Passiontree Velvet Pty Ltd & Ors

Lee v Passiontree Velvet Pty Ltd & Ors - [2019] NSWDC 710 - NSWDC 2019 case summary — Zoe

[3]

Appearances in the Court

An appearance was announced for the plaintiff, who was represented by Counsel. The second defendant appeared unrepresented.
After the matter was called by the Court officer, no appearance was announced for Passiontree Velvet. This was no surprise. Earlier this year, Passiontree Velvet entered into administration. It entered into a Deed of Company Arrangement. On 10 December 2019, the plaintiff obtained leave from the Supreme Court of New South Wales to continue this proceeding against Passiontree Velvet. Attempts were made on behalf of the plaintiff (by his solicitor) to notify Passiontree Velvet of that particular circumstance. At any rate, correspondence was placed before the Court which plainly indicates the administrator's encouragement to the plaintiff to proceed with the action and his own unwillingness to involve the company in terms of active participation.
The status of Passiontree Velvet explains, if not heightens, the significance of the personal claim against Mr Kim. This claim is brought as a claim for damages for contravention of section 18 of the Australian Consumer Law (being Schedule 2 to the Competition and Consumer Act). The misleading or deceptive conduct is said to consist of representations made by Mr Kim, verbally and in writing, concerning Passiontree Velvet's promises to repay the franchise fee in accordance with the arrangements entered into with that entity. It is said that these representations were relied upon, in the sense of inducing, the plaintiff to enter into those arrangements. Now that the incapacity of the entity to repay the monies has been established, it is said that the alleged misrepresentations caused Mr Lee to suffer loss.
After the indication that no appearance was announced on behalf of Passiontree Velvet, Counsel for the plaintiff brought an application pursuant to rule 29.7(3) of the Uniform Civil Procedure Rules, in effect to proceed to judgment against that entity, as an absent party. I determined, however, that because the plaintiff also brought a case against Mr Lee, arising out of the same factual substratum, and the prospect could not (as it appeared at that point) be discounted that there may be a conflict in findings made in the plaintiff's cases against both defendants, the matter should proceed to run against both defendants.

[8]

What was the agreement sued upon?

Counsel for the plaintiff initially submitted during the hearing that the 9 November 2017 agreement superseded the June 2017 agreement, which in turn, had superseded the franchise agreement. The first defendant's promises to repay the sum were not honoured: the monies were not paid.
After judgment was reserved, and leave was given to the plaintiff to supplement his submissions on his case against Mr Kim, the plaintiff's counsel supplied further submissions with the intent of correcting his submissions on the plaintiff's case against Passiontree Velvet.
For reasons to be elaborated below (see paragraph 40-41), these submissions exceeded the grant of the leave to supply further submissions and would entitle the Court to disregard them, but since no forensic prejudice arises because of the attitude of the administrator to, in effect, submit to the Court's orders, the circumstance that the rights of Mr Kim are not affected, and since the issue really concerns which one of a number of pleaded arrangements are applicable, I am disposed to take the exceptional course of addressing these supplementary submissions.
Counsel for the plaintiff sought to correct his earlier submission that the subsequent repayment arrangements of June and November 2017, respectively, superseded the franchise agreement and instead submitted that it was the franchise agreement that was being sued upon. Counsel said that the latter arrangements could not supersede the franchise agreement since no further consideration had passed and that the franchise agreement endures.
I do not agree with this submission. In my view, the franchise agreement was terminated by consent. It was not the imputed intention that the obligations of the parties under the franchise agreement would endure. So much is apparent in the preamble to both the June and November 2017 letters where the parties expressed themselves in the following manner: "… we have mutually agreed that (the first defendant) will not be proceeding with this investment opportunity with (the plaintiff)."
Further, the intention was apparent that their "deals and proceedings ... (were) null and void" on the basis of 'key details of the deal'. The material key provisions of 'the deal' here were the return of the franchise fee in two instalments. In my view, this was a clear manifestation of agreement that rights or obligations assumed under the franchise agreement were discharged and the rights and obligations of the parties, after such termination, were to be governed by the new arrangement in July 2017.
The obvious way to test the proposition that the franchise agreement was the agreement which conferred the right to be repaid on the dates and in the amounts was to ask, by what provision? The answer was none. There may be scope to have argued the existence of an implied term, or even an equitable right to recoupment, but here the parties expressly agreed to an arrangement to repay the monies. The express contractual rights to repayment on certain dates and in certain amounts arose in June 2017 (and those rights were varied in November 2017)
As to the point of consideration, in my view there was consideration moving from the plaintiff in the July 2017 arrangement. It was that of a forbearance to sue (in restitution) if necessary, Passiontree Velvet to recover the franchise fee paid in contemplation of the franchise arrangement which did not materialise. It is not necessary for this form of consideration to be express [2] . Put another way, nothing that Mr Lee said or did after paying the fee in August 2016 provided any objective indication that he was giving up his claim to be repaid. He was maintaining his right to be repaid if the franchise did not proceed, but was eschewing immediate enforcement of it by granting an extended time to Passiontree Velvet to repay it. This was recognised, and accepted by Passiontree Velvet and benefitted that entity in the sense of buying time for it to repay the fee in order to enable it to deal with its financial problems.
After the June 2017 agreement was entered, 5 months later, Passiontree Velvet's obligation to repay by instalments in accordance with the June 2017 arrangement was itself discharged by consent. Its new obligation was to repay the instalments by different dates, and in different amounts. Technically, in my view, it is preferable to regard the arrangement in November 2017 as amounting to a variation of the June 2017 arrangement; rather than a new agreement [3] . The consideration moving from Mr Lee was his further, or additional, forbearance in suing Passiontree Velvet. However, I do not consider that it makes much difference whether Passiontree Velvet's obligation to repay arises under the arrangement entered into in June 2017, as varied by what occurred in November 2017; or whether it was simply pursuant to the November 2017 arrangement.
On the view that I favour, the plaintiff sues upon the arrangement entered into in June 2017, whose terms for repayment were altered in November 2017 so that the dates and amounts for repayment were set out in the November 2017 document. Those terms were not complied with by Passiontree Velvet.
There is no issue that the repayments have not been made in accordance with those terms. Accordingly, I accept that the plaintiff's claim is made out against the First Defendant.

[10]

Two formulations of the case on representation

In his closing address, during the hearing, Counsel for the plaintiff submitted that I should infer, or imply, that representations were made by Passiontree Velvet in June and November 2017 that it had the actual capacity to repay the sums on the dates that they were agreed as being due.
In his supplementary written submissions, he put a different formulation: the representations (of a promissory nature) concerned the dates (and amounts) by which Passiontree Velvet would repay the Franchise fee. This is not an implied, but rather an express representation and the plaintiff invokes s 4 of the Australian Consumer Law (or cognate provisions) to say that, being a representation as to the future, an evidentiary onus is then cast upon Passiontree Velvet to adduce evidence to establish that it had reasonable grounds for making them; lest its conduct be deemed to be misleading or deceptive. On this formulation, in the absence of evidence from Mr Kim, Passiontree's future capacity to perform its obligations did not need to be established.
There is an important issue of procedural fairness which needs to be noted here. It is that the grant of leave to the plaintiff to put on supplementary submissions was to address and respond to authorities identified by the Court, which had not been hitherto considered, which would respond to the first of these formulations on the representation case. The grant of leave was conferred partly because at the point where the case was about to finish, it was not possible for the Court to deliver judgment there and then, because of other matters. The grant of leave was not an invitation to the plaintiff to re-fashion his argument as to what the representation is. That, however, is the effect of what has happened, and it has happened in a context where the second defendant is not only unrepresented, but speaks little English and requires an interpreter. On that basis, in my view, it would be open to the Court to disregard the supplementary submissions.
However, since I do not consider that their inclusion will affect the result, I propose to address the second formulation of the representation case, in addition to the first. The supplementary submission did not indicate that the first formulation was abandoned.

[11]

Was the representation implicitly conveyed by the entry into the franchise agreement?

When I asked Counsel what the circumstances were which the plaintiff relied upon to sustain the suggested implication or inference underpinning the first formulation of the representation, Counsel pointed to no more than the bare circumstance that a contracting party (here Passiontree Velvet) promised to pay a sum of money (by two instalments) to the plaintiff on future dates. This, it was said, was sufficient to generate a representation that it would have (in the future) the capacity to fulfil its promises to pay.
In my opinion, the circumstance that a promise to pay (or, in this case, repay) money was made does not, of itself, convey a representation about the promisor's capacity in the future to meet the repayment. The law distinguishes statements of present intention, and possibly also present capacity to honour a promise, and a representation as to the capacity to honour a promise in the future. In Concrete Constructions Group v Litevale & Ors [2002] NSWSC 670, where Mason P (at [163]-[169]) approved observations made by Ormiston J in Futuretronics International Pty Ltd v Gadzhis [1992] 2 VR 217 (at 239-241), concerning the circumstance when representations as to future matters (capable of sustaining conduct, for the purposes of the consumer protection provisions) could be implied from a contractual promise. The relevant passage from Litevale, in which Mason P summarised his views, was as follows: "[166] But this provision (now s 4 of the Australian Consumer Law - the former being s 51A of the Trade Practices Act 1974 (Cth)) does not say in what circumstances a representation as to a future matter shall be implied for a contractual promise ... A fortiori, it does not import into every contractual promise an implied representation as to intent and capacity to perform; nor does it prove that any such implied representation was relied upon by the other contracting party. [167] I readily accept that will be comparatively easy to establish that a contracting party is implicitly representing a present intention to perform according to its tenor. If the other party can establish causation and loss then damages should ensue, although there is usually little point in addressing such a claim because the law of contract will compensate the innocent party of the consequences of non-performance without even having to prove misleading intent from the inception. [168] But when one turns to an alleged implicit representation as to capacity to perform things are not so simple, nor should they be. There are policy reasons for restraint. The law arms the parties to a contract with rights to damages and other forms of relief if breach occurs or is threatened. A complex set of common law, equitable and statutory rights are superimposed on the terms of the bargain chosen by the parties. That bargain may have the simplicity as a contract to sell a loaf of bread or the complexity of a building agreement … [169] Why should the parties be found or presumed to have intended more by what they expressly represented and understood? Of course s52 (of the Trade Practices Act) goes beyond intentionally misleading or deceptive conduct but it does not follow that the innocent party understood or relied upon anything more than the express representations and the usually adequate consequences stemming from breach of them stemming from the law touching the mutually chosen regime, i.e. contract."
The last part of this passage was cited, with approval, by the Court of Appeal, in Secure Parking Pty Ltd v Woollhara Municipal Council [2016] NSWCA 15 (per Meagher JA, with whom Beazley P and Ward JA agreed) at [95]-[99]; as well as the Victorian Court of Appeal in RCR Energy Pty Ltd v WTE Co-Generation Pty Ltd [2017] VSCA 50 at [60]-[65]).
In Secure Parking, Meagher JA quoted with approval observations made by Allsop J (as his Honour then was) (in McGrath v Australian Naturalcare Products Pty Ltd (2008) 165 FCR 230 (at [138]) that the divining of representations from promises was to be treated with caution, with an eye to all the facts and not by implying representations mechanistically from equivalent promises.
For further authority on the distinction, see also Penrith Whitewater Stadium v Lesvos Pty Ltd [2007] NSWCA 176 at [51]-[59].
In my view, the most that can be implied from Passiontree Velvet's entry into the agreement in June (or November) 2017 was a representation of its present intention to repay the sum of $400,000 at the dates and in the instalment amounts referred to in the document and arguably its present capacity to pay on the later dates.
There is no evidence to falsify such representations.

[13]

Was such representation relied upon?

If I am wrong about the point of an implied representation, it would remain necessary for the plaintiff to establish the causal connection between misleading or deceptive conduct and loss required to found the claim for damages under s 236 of the Australian Consumer Law. In practical terms, in this context, this would mean that the plaintiff would need to establish that he acted to his detriment on the faith of the representation in June (or November) 2017 that Passiontree Velvet had the capacity in the future to honour its promise.
This test requires what Gaudron J once described [5] as proof that that the representation was a 'decisive consideration' for the plaintiff having taken a particular course of conduct.
There are, in my opinion, two problems for the plaintiff in this regard.
First, it appears that, at its highest, the plaintiff only assumed that Passiontree Velvet would have the financial capacity. There was nothing that Passiontree Velvet said or did between August 2016 and June 2017, beyond making the promises of repayment, which said anything about its future capacity to repay. In this period, no balance sheet, or other financial information was proffered by Passiontree Velvet or sought by or on behalf of Mr Lee. Nothing was indicated in Mr Lee's affidavit indicating that he had turned his mind to the likelihood of Passiontree Velvet's capacity to repay as a consideration taken into account when reaching the agreement in June 2017.
It is true that at an earlier point, in May 2016, Mr Lee had requested a profit and loss statement, to assist him to decide whether to enter into the franchise agreement. But there was no evidence that this document had been supplied, or that it had the request had been renewed. What was supplied (in conjunction with the proposed franchise agreement) was a disclosure document. Clause 19 of that document indicated that Passiontree Velvet did not give earnings information. But the issue is not what compelled Mr Lee to enter the transaction in August 2016. It is what was in his mind about Passiontree Velvet's capacity to repay in June 2017 (and November 2017).
Secondly, there were indications from Passiontree Velvet, prior to the 2017 arrangement was entered into, that would have generated doubt as to its capacity to repay. At paragraph 11 of Mr Lee's affidavit, Mr Lee deposed to Mr Kim saying in January 2017 (prior to the agreement reached in June) that the company (Passiontree Velvet) would refund the amount as soon as possible. Of course, this occurred 10 months before the transaction was entered, but already, the statement, viewed objectively, could hardly have induced confidence in the company's capacity to repay a not insignificant sum of money.
I have already referred to the evidence from the plaintiff's Australian agent - Mr Seung Kim - that in July 2017, he had a communication with a Mr Hugh Lee, who, it seems was an agent for Passiontree Velvet, in which the latter was reputed to have referred to financial problems as being the reason for a requested extension.
No request was sought for security, or provision of financial information about Passiontree Velvet's capacity to pay was sought after the franchise agreement had been entered into and up to the point when the June 2017 arrangement was entered into.
To the contrary, in light of the evidence of what Mr Hugh Lee said to Mr Seung Kim (the plaintiff's agent) in July 2017, it appears that, when confronted with an indication as to Passiontree Velvet's financial problems, the plaintiff was prepared to press on regardless, without instituting any inquiry as to its future capacity to repay.
If I am wrong that no implied representation was conveyed, then I find that the causal connection is not made out in any event. This being so, regardless of the extent of the second defendant's involvement in making the putative representation, the case against him fails.

[14]

The plaintiff's supplementary argument on the representation

In the supplementary submissions, Counsel for the plaintiff maintained that the representation was made in the June 2017 and November 2017 arrangements. The representation was that monies owed under the franchise agreement would be returned in accordance with the terms of that, or those arrangements. That is, a representation concerning the 'time' by which Passiontree Velvet would repay the franchise fee.
The supplementary submissions recorded that the observations of Ormiston J in Futuretronics and Mason P in Litevale are distinguishable.
It was submitted that what distinguishes this case from Futuretronics and Litevale is that in those cases, representations were made in the course of entering into a contract. I take this to be a reference to pre-contractual representations. Here the representations were said to have been made subsequently to the entry into a subsisting contract, being the franchise agreement.
The argument is rejected on several bases. First, the distinction does not apply in circumstances where the representations relied upon were not 'subsequent' to a subsisting contract. As I have found, the franchise agreement was not a subsisting contract but had been discharged in June 2017; when a new arrangement was entered into (which was varied in November 2017).
Secondly, although the plaintiff says that Ormiston J in Futuretronics noted that no reliance was placed by the claimant in that case upon (the equivalent to) s 4 of the ACL, it was in Litevale. As Mason P pointed out in Litevale, s 4 does not remove the need for a claimant to identify and prove what the representation is. Here, it must be a promise(s) that something will happen - that is, repayment on agreed future dates in certain agreed amounts. So in my view, for this additional reason, the authorities in Futuretronics and Litevale are not distinguishable.
Thirdly, the plaintiff has not pleaded or proven how representations made in June or November 2017 about the time and dates for repayment of the franchise fee has caused detriment to Mr Lee, even if they were relied upon. In this case, the loss of the $400,000 had occurred no later than August 2016. In Marks v GIO Australia Holdings (1998) 196 CLR 494, McHugh, Hayne and Callinan JJ said (at 513-514 [46] - 48]) observed: "[46] (loss or damage arises where) the plaintiff has sustained (or is likely to sustain) a prejudice or disadvantage as a result of altering his or her position under the inducement of the misleading conduct. …. [48] A party that is misled suffers no prejudice or disadvantage unless it is shown that that party could have acted in some other way (or refrained from acting in some way) which would have been of greater benefit of less detriment than the course in fact adopted
As at June and November 2017, Mr Lee had already parted with his $400,000. It is hard to see how, at these times, he altered his position to his disadvantage, under the inducement of misrepresentations, other than, perhaps, not bringing a law suit earlier then he might to recover his debt against Passiontree Velvet.
Fourthly, there remains the difficulty for the plaintiff in establishing reliance upon the representations which I had noted earlier in these reasons. In particular, there is no indication in Mr Lee's affidavit that he was motivated, or took, as a 'decisive consideration' for entering into the arrangement in June 2017 the belief, induced by representation, that Passiontree Velvet would be in position to comply with its promise to repay on those particular dates. Even if, because of the absence of evidence from the second defendant, his conduct (representations) in authoring promises as to when Passiontree Velvet would repay the franchisee is deemed to be misleading, the conduct has not occasioned the loss.
These findings make it unnecessary for me to address Mr Kim's submissions.

[17]

ORDERS

There should be judgment for the plaintiff against the first defendant and an order that it pay the plaintiff's costs. Pursuant to the terms of the leave for the plaintiff to proceed against the first defendant granted by the Supreme Court on 10 December 2019, such judgment and the costs order should not be enforced without the leave of the Supreme Court.
In relation to the plaintiff's claim against the second defendant, the ordinary rule is that costs should follow the event. Here, the event is the plaintiff's claim against the second defendant and I have determined that his claim is unsuccessful. Prima facie, it is not apparent to me that there was any conduct by the first defendant that necessitated the joinder of the second defendant and which should therefore result in a variation of the usual costs outcome. Prima facie, it appears that it was the altered status of Passiontree Velvet which induced Mr Lee to join Mr Kim - not because of any conduct on the company's part. Nevertheless, the parties shall have liberty to apply to vary the costs order I make in relation to that claim.
I make the following orders: 1. Judgment for the plaintiff against the first defendant for the sum of $453,495.89 (incl of interest). 2. The first defendant is to pay the plaintiff's costs of the proceeding referable to the plaintiff's claim in debt against the first defendant. 3. Orders 1 & 2 are not to be enforced without the plaintiff obtaining the leave of the Supreme Court. 4. The first defendant's cross-claim is dismissed with the cross-claimant to pay the cross-defendant's costs. 5. The plaintiff is directed to notify the administrator of the first defendant (subject to a deed of company arrangement) of these reasons and these orders made within 2 business days' and is thereafter to file in Court an affidavit proving service of such notification. 6. Within 14 days of its being served with these reasons and orders, the administrator is at liberty to apply to set aside or vary orders 1-4 (incl). 7. Judgment for the second defendant against the plaintiff. 8. The plaintiff is to pay the second defendant's costs of the personal claim against him. 9. The plaintiff and second defendant each have liberty to apply for a different costs order to order 8 within 14 days. 10. The exhibits may be returned within 28 days.

At a glance

Court

Decision date

Source

Judgment (20 paragraphs)

Parties

Legislation Cited (5)

Cases Cited (11)