Waterwood Hotel Management Pty Ltd v KOP International Pty Ltd

The Hotel

1. The subject matter of the dispute is a hotel at Newport on Sydney's northern beaches - not the iconic 'Newport Arms' which has one of the largest waterfront beer gardens in Sydney, but a quieter hotel, almost adjacent, known as the 'Newport Mirage'.
2. In 2014, Mrs Xu decided to purchase this hotel. She owned and controlled two companies as sole director and shareholder - KOP International Pty Ltd (the first defendant), which was the trustee of the KOP Investment Trust, and Moot Hotel Management Pty Ltd (the second defendant), which she caused to be registered in late March 2014. On 4 April 2014, KOP entered into a contract for the purchase of the land on which the hotel stood. The purchase price was $8.55 million and the vendor was Bayfield Hotels Wharf Pty Ltd. On the same day, Moot entered into a contract for the purchase of the hotel business. The purchase price was $950,000 and the vendor was a different Bayfield entity - Bayfield Hotels Mirage Pty Ltd.

Involvement of Mr Lye

1. Mr Lye became involved with the business of the hotel in about November 2014. He was introduced and encouraged by Ricky Ho, with whom he had been acquainted at university. Mr Lye provided book-keeping services, was given access to Moot's banking arrangements and permitted to make payments on its behalf, subject to Mrs Xu's approval. And he was rapidly entrusted with a range of management responsibilities.
2. Matters proceeded so quickly that by January 2015, Mr Lye had discussed and agreed in principle to a proposal that from 1 March, he take over for a period the management of the hotel business. Ricky Ho had encouraged Mrs Xu to allow him to do so because she travelled frequently to China and had already considered engaging a professional hotel management company. Mrs Xu probably thought that Mr Lye was a cheap option. She was prepared to entrust the business to him for a specified term in return for the payment of a 'rental'. Mrs Xu came to regret her decision.
3. On 9 January, Mr Lye caused Waterwood Hotel Management Pty Ltd (the plaintiff) to be registered. On the same date, he entered into a costs disclosure agreement on behalf of Waterwood with Joseph Ho's firm 'Onward Legal'. The agreement described the scope of work as 'Acting on your behalf generally in the lease of the hotel known as Newport Mirage'. On 13 January, Waterwood paid $15,000 as a part deposit towards the proposed transaction.
4. It is clear that from the start there was a degree of conceptual ignorance about the legal nature of the transaction. Nonetheless, Mr Lye well understood that Moot, not KOP, owned and conducted the hotel business. He knew the arrangements pursuant to which the business was operated. He knew that Moot was liable for the payment of PAYG taxation liabilities in connection with the business. He even suggested to Mrs Xu that, because the transition of supplier and employee contracts into the name of his management company (Waterwood) would be slow and tedious, she should transfer her shares in Moot to his company.
5. This ill-advised idea was given temporary effect on 1 March. Mrs Xu signed a minute of meeting of shareholders of Moot approving the transfer of her shares in Moot to Waterwood. On the same date, she tendered her resignation as a director and a resolution was passed that ASIC be notified. She and Waterwood executed an instrument of transfer of shares. And Mr Lye was briefly appointed as the sole director of Moot. However, all was quickly reversed with Mr Lye's concurrence as soon as Mrs Xu was told that the effect of the share transfer would have been to hand ownership of the company and its business to Mr Lye. She always intended to retain ownership of Moot and its business.

Agreement - 5 March 2015

1. The principal document in dispute was described as a 'Hotel Lease Agreement'. Mrs Xu and Mr Lye executed it on 5 March on behalf of KOP and Waterwood respectively. The document was prepared by Joseph Ho of Onward Legal, acting for both parties. It recited that the parties had agreed to the 'lease of the business' of the Newport Mirage Hotel. This is an unusual and unorthodox legal concept: Harrington v Harrington Services Pty Ltd (in liq) [2002] NSWSC 859 at [7]. But if possible, the parties' agreement should be given effect.
2. The initial term of the 'lease' was five years and the 'rent' payable by Waterwood was $550,000 per annum. The document contained many provisions normally found in a lease of land, which were inappropriate or awkward in what was intended to be some sort of agreement for the transfer of the management rights of the business. Some of the terms, of which Clause 6 is an example, were gobbledygook. By its terms, the agreement was incapable of performance and ineffective to achieve the objective that appears to have been intended. KOP was not the owner of the business and was in no position to agree to 'the lease of the business' to Waterwood. Moot was not a party to the agreement.
3. Mr Lye's carelessness was transparent - despite his actual knowledge. And his evidence on this issue was unsatisfactory. He has only himself and his advisors to blame. Although Mr Lye asserted that he was not quite sure about the distinction between the owner of the land and the owner of the business, I am satisfied that he well understood the distinction. I was not impressed, on reflection, with the alacrity with which he agreed to a number of leading questions on the topic.
4. Mr Lye was a qualified accountant. He had been given apparently full access to the books of Moot since November 2014. He knew Moot owned the business and that KOP owned the land. He understood the liability of a landowner to land tax. He knew that KOP, not Moot, was liable for land tax in respect of the land on which the hotel stood.
5. As early as 9 January, Mr Lye wrote to Joseph Ho, telling him to 'double check with their [sic] actual name and please advise it is a 'real' owner'. His email mentioned KOP but the context was the need to draft a contract 'in regard to Lease of Business'. On 12 January, Joseph Ho wrote to Mr Lye. Mr Ho should have ascertained the true contracting parties himself. A competent solicitor certainly would have done so. Instead, Mr Ho left it to Mr Lye. Despite Mr Ho's apparent failure to appreciate the true nature of the transaction, and to draft an agreement with parties and terms appropriate for that purpose, he at least had a sufficient sense of self-preservation to state in his email to Mr Lye: I have assumed the Lessor is KOP … You should satisfy yourself (perhaps through books and records or the accountant of the Lessor) that it is the correct entity.
6. But Mr Lye took no steps. He did not satisfy himself. He did not do as his solicitor suggested - despite his abundant knowledge that 'what was happening here was in relation to Moot Hotel Management rather than KOP'. Mr Lye did not follow the most elementary suggestion of his solicitor, when he was in a position to do so without any real difficulty.
7. On 10 April, Mrs Xu and Mr Lye executed a supplementary agreement on behalf of KOP and Waterwood. The supplementary agreement provided for amendments and additions to the hotel lease agreement and revocation of a share transfer indemnity deed, which had become otiose. It stated that KOP had contracted with Waterwood 'for operating the hotel mentioned in the Hotel Lease Agreement' and that the agreement should therefore be renamed 'Hotel Responsibility Contracting Agreement'; the term 'rent' should be amended to 'Contracting Fee'; and the term 'Lease' should be amended to 'Contract'. Various other provisions addressed the machinery of the commercial relationship.

Nature of Relationship

1. A significant element of the legal and commercial relationship embodied in the hotel lease and supplementary agreement was one of trust. Mrs Xu, through her companies KOP and Moot, retained ownership of the 'hotel' - the hotel land through KOP and the hotel business through Moot. Mr Lye was to be a custodian, for a term, of the business. Through his company Waterwood, he was given an opportunity to conduct the business of Moot on specified terms and subject to significant obligations. The contract 'established a relation between the parties intended to subsist for a period, and it involved some degree of mutual confidence and required a continual co-operation': Shepherd v Felt & Textiles of Australia Ltd (1931) 45 CLR 359 at 378 (Dixon J).
2. Among others, Clauses 8 and 9 of the hotel lease agreement required Waterwood not to change 'the nature, type or activities of the business' and to run the business 'with a view to maintaining its value'. Clause 4 of the supplementary agreement obliged Waterwood to provide KOP's bank 'with statements and reports upon request'. The purpose of doing so was to ensure that KOP's 'bank loan amount and the loan term can be successfully continued'. Waterwood was even required to 'take full account of the bank's loan requirements for KOP'. Clause 7 required KOP to issue a 'Letter of Attorney' to Waterwood to enable it to 'deal with its daily business affairs and bank transactions'. Clause 9 required Waterwood to 'return the hotel' when the contract expires. And Clause 14 entitled KOP to terminate the agreement if Waterwood did 'anything which would damage the reputation of the hotel'.
3. Finally, Clause 10 of the supplementary agreement provided that Waterwood 'could continually [sic] use the bank account' of KOP's 'subordinate company Moot Hotel Management Pty Ltd, with [sic] no longer changes'. Moot was not, of course, a 'subordinate company', although Mrs Xu was its sole director and shareholder, just as she was of KOP. But the clause recognised that the business was to continue being operated through and with the banking facilities of Mrs Xu's company, Moot, and in its name.

Operation of the Business

1. Between 5 March and 5 June 2015, Mr Lye operated the business of the hotel using the bank account of Moot. The revenue was banked into Moot's account and the expenses, including salaries and wages, consultants' fees and supplier invoices were paid from Moot's bank account. It is not apparent that Waterwood expended any of its own funds. I would not expect that it did, although it is unnecessary at this stage to make a finding.
2. During this period, the parties also engaged in discussions and negotiations over the amount of the adjustments due to Waterwood on and from the transfer of control. By 5 June, final agreement had not been reached although the parties appeared to be close. An adjustment schedule as at 28 May contains the following entries for 'payment to new management' - 'Cory Calculation' $220,778.69 and 'Lucy Calculation' $202,873.27. On 3 June, Mr Lye wrote to Lucy Lu contending that the final settlement figure, after taking account of the rent due by Waterwood for May and June, and certain other adjustments should be $114,157.61.
3. At the same time, a continuing source of dispute and dissatisfaction appears to have been the failure of Mr Lye to lodge BAS statements on behalf of Moot and to cause its outstanding liabilities for PAYG and payroll tax to be paid. Mrs Xu was receiving notifications from the Australian Taxation Office that Moot's business activity statements for December 2014 and January, February and March 2015 were overdue and that penalty interest was accruing.
4. Mr Lye adopted the position that he would only cause the outstanding liabilities to be paid when he received the final settlement adjustment sum due to him. On 19 May, he wrote to Mrs Xu stating 'As we are currently under process of settlement, once we have finalised that we will prepare the BAS and lodgement'. On 1 June, he said to Mrs Xu, 'I am not paying anything unless and until the settlement adjustment amount is paid by you to me'.
5. The parties were in a stand-off. Mrs Xu's confidence and trust in Mr Lye had dissipated. She was angry about the non-payment of tax and the incurring of interest. Mr Lye was obstinate. A heated discussion took place on 5 June. Mrs Xu insisted on payment of the outstanding tax liabilities but had not agreed on the final adjustment sum. She said that Mr Lye demanded that she leave the premises, telling her that 'This is my hotel, and you are no longer welcome'. In fact, it was not Mr Lye's hotel and he had no express entitlement under the Hotel Lease or the supplementary agreement or otherwise to exclude Mrs Xu.
6. Mrs Xu's evidence was that: After a period of around four hours, Cory effected a transfer of monies to the Second Defendant's bank account by way of electronic transfer, and payments were then made by Ms Lu from that bank account to the Australian Taxation Office for payment of the Hotel Business' overdue tax liabilities.

Termination

1. Understandably in the circumstances, Mrs Xu terminated the hotel lease agreement as it had been amended by the supplementary agreement. The notice of termination relied expressly on Clause 15(a) of the hotel lease agreement and Clause 14 of the supplementary agreement. The former refers to Waterwood's obligation to comply with 'essential terms of this lease'. In retrospect, it appears likely that other grounds may have been available to justify the termination: Shepherd v Felt & Textiles of Australia Ltd at 359.
2. A central concern of Mrs Xu was Mr Lye's cavalier attitude to the late payment of Moot's taxation liabilities. She signed another document dated 9 June 2015, that stated, among other things: Due to your company and your company's legal person … disregard of the warning letters issued by the Australian Taxation Office, our company's reputation has been greatly damaged. Your company did not comply with the agreement, the contract fee were in arrears (rent) for a few months, along with some other issues.
3. I have considerable sympathy for the position in which Mrs Xu found herself. The man to whom she entrusted her hotel business - to enable her to travel to and from China while retaining ownership - proved to be unsuitable. More importantly, he seemed to lack an understanding of the mutual confidence and co-operation on which the arrangement was predicated. He regarded himself as the 'owner' and demonstrated an inappropriate temerity. It is sufficient to point to Mr Lye's unreasonable refusal to pay Moot's taxation liabilities and his obligation not to damage the reputation of the hotel. The basis of the termination could possibly have been put more widely but I will limit myself to what was pleaded and addressed.

The Plaintiff's Claim

1. Much was said about the plaintiff's pleading. It is therefore important to point out what the plaintiff's claim is not. There is no allegation of mistake. It is not a claim for rectification of a written instrument. It is a claim for damages for breach of contract; or compensation for damages resulting from misrepresentation; or restitution for monies had and received. There are some other subsidiary contentions, less clearly articulated, referring to agency, resulting or implied trust and estoppel. They include the proposition that KOP was the authorised agent of Moot and that it therefore 'held its title to the Land on a resulting or implied trust for [Waterwood] for the purposes of and subject to the terms of the Hotel Lease'. And toward the end of the amended statement of claim, there is an allegation that KOP and Moot are estopped from denying their pleaded representations; from alleging that KOP had no right, title or interest in the hotel business; or [from denying] that the various agreements were not binding on them.
2. In addition, during addresses, the plaintiff's counsel contended that the defendants were bound by an estoppel by deed. This was said to be based on Recital A in the hotel lease agreement, which stated that 'The lessor is the owner of the business'. There was objection to this on the ground that no such claim was pleaded and that it was bound to fail in any event. I am satisfied that the claim was not pleaded and I agree that it would have failed, if allowed. The position in equity has always been that a party will not necessarily be prevented by an estoppel from proving the true facts in relation to a patently untrue statement appearing in the recitals to a deed: Kettle v Greer [1938] AC 156 at 171; Berry v Wong [2000] NSWSC 1002 at [16]-[23]; Handley, Estoppel by Conduct & Election, 2nd ed, Sweet & Maxwell, (2016) at p125. This is all the more so perhaps, where the party contending for the estoppel knows it to be untrue, has not alleged mistake and has not sought rectification.
3. The representation case and the broader estoppel claim must also fail. I am not satisfied that Mrs Xu ever, in fact, made any representation as alleged in paragraph [4] and elsewhere of the amended statement of claim, other than that KOP was the owner of the hotel land. In addition, there was no reasonable reliance by Mr Lye on any supposed representations. Such as they were, they became subsumed in the terms of the written agreement entered into in early March. Mr Lye understood that the hotel lease agreement - for what it is worth - and on which he received legal advice, governed the parties' legal relationship.
4. Nor is there any sound basis for finding that KOP was the agent of Moot in relation to the 'lease' transaction or that it held the hotel land on a resulting or implied trust for the purpose of the hotel lease agreement. The facts and circumstances indicate ignorance and confusion but they do not lead to an inference that the parties implicitly intended a relationship of agency between KOP and Moot for the benefit of Waterwood; let alone that KOP held real property on an undocumented trust, as agent for Moot, and for the benefit of Waterwood.
5. For those reasons, the plaintiff's claims based on contract, representation and estoppel cannot be sustained, absent a claim for rectification or mistake. I should reiterate, however, that it should not be assumed that any claim for rectification or mistake would necessarily have succeeded. The hotel lease agreement does not produce the desired effect because KOP could not do what it agreed to do. The agreement could not be specifically performed. Nor could damages be recovered for any breach of it. And Moot was not a party. The agreement is ineffective and unenforceable.
6. Furthermore, for the reasons that I have explained, even if the hotel lease agreement were valid and enforceable, its termination by KOP was justified in the circumstances that prevailed in early June 2015.
7. The restitution claim is less controversial. The claim is pleaded on a narrow basis, namely that 'the defendants have been unjustly enriched by the plaintiff's satisfaction of their liabilities'. I was told in effect, that the parties recognise the need for such an outcome and desire an accounting between themselves. I am satisfied that the plaintiff should have this opportunity. The situation is not unlike that in Pavey & Matthews Pty Ltd v Paul (1986-7) 162 CLR 221. As Deane J said at 256: The quasi-contractual obligation to pay fair and just compensation for a benefit which has been accepted will only arise in a case where there is no applicable genuine agreement or where such an agreement is frustrated, avoided or unenforceable. In such a case, it is the very fact that there is no genuine agreement or that the genuine agreement is frustrated, avoided or unenforceable that provides the occasion for (and part of the circumstances giving rise to) the imposition by the law of the obligation to make restitution.
8. For those reasons, the only order I need make is that the plaintiff's pleaded claim for restitution be referred to a referee for enquiry and report. I will reserve costs pending the outcome. The parties should submit agreed short minutes to my associate, nominating a referee.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 14 February 2018