FEDERAL COURT OF AUSTRALIA

Luo v Zhai [2015] FCA 350

THE COURT ORDERS THAT:

1.    Judgment be entered for the Applicant against the First Respondent for $820,000 with interest up to judgment.

2.    The matter be listed for any argument on costs on a date to be fixed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

I. Introduction

1    These are proceedings arising from a share acquisition agreement. The applicant is Mr Xiangnan Luo, who I will call Mr Luo and who is also called ‘Jack’. Mr Luo sues the first respondent, Ms Sutao Zhai, who I will call Ms Zhai, and her company, Jantom Furniture Pty Ltd, which I will call Jantom. Ms Zhai is also sometimes called ‘Rebecca’. Jantom conducted the business of importing office chairs from China into Australia and selling them wholesale. Following negotiations between Mr Luo and Ms Zhai, Mr Luo agreed to buy from Ms Zhai a 40% stake in Jantom for $800,000. The agreement also contemplated that this stake would be lifted to 55% at a later time. The agreement was embodied in a share acquisition agreement dated 29 May 2012 (‘the Agreement’).

2    Mr Luo paid Ms Zhai $800,000 but he did not receive any shares. Subsequently he paid a further $20,000 to Jantom to assist with its expenses. He was not obliged to make this smaller payment under the Agreement. Ms Zhai was, however, obliged to transfer the shares to Mr Luo by 30 June 2012. She did not do so. On or about 25 September 2012 he asked for his money back but Ms Zhai did not return it. He now sues her for the return of his money.

II. The nature of the claims

3    Mr Luo claims to be entitled to recover the money on three bases:

(a)    a breach of the Agreement;

(b)    an action for money had and received following a total failure of consideration; and

(c)    a claim against Ms Zhai and Jantom that Ms Zhai had engaged in misleading conduct, in which Jantom was complicit, which caused Mr Luo to enter into the Agreement, thereby causing him loss and damage. This conduct was said to consist of the provision of profit and loss statements which substantially overstated the profitability of Jantom together with statements made by Ms Zhai that two clients, Harvey Norman and Corporate Express, planned to increase their purchases. But for this conduct, Mr Luo claims that he would never have parted with his $820,000.

4    In short I have accepted (a) and (b), but not so as to allow Mr Luo to recover twice. I have rejected (c). There will be judgment for Mr Luo against Ms Zhai in the sum of $820,000.

III. The claim for breach of contract

5    The Agreement contemplated the transfer of the shares in two tranches totalling 55% of the issued capital in Jantom. The first tranche was to equal 40% and was to occur no later than 30 June 2012, in return for Mr Luo’s payment to Ms Zhai of $800,000. The $800,000 was, in fact, paid in three instalments: first, a payment of $110,000 by way of deposit on 30 May 2012; and, secondly, the payment of two further instalments of $290,000 and $400,000 on 29 June 2012.

6    Clause 4 dealt with the initial transfer of the 40% in these terms:

‘4.    Partial Completion

4.1    On Partial Completion date, the title and ownership of 40% of the shares of the Company shall be transferred to the Purchasers once and only when the Purchasers pay the Minimum Purchase Amount to the Vendor less the initial deposit of $110,000.00.

4.2    The Minimum Purchase Amount shall be paid to the Vendor before or on the Partial Completion Date.

4.3    Upon the Minimum Purchase Amount being paid by the Purchasers, the Purchasers may nominate one person to be appointed as one director of the Company and becomes entitled to enjoy all entitlements and rights in accordance with the Corporations Act 2001.

4.4    In the event that the Purchaser does not pay the amount as referred to in clause 4.2, the Vendor is entitled to terminate the Agreement and initial deposit shall be forfeited to the Vendor. This is an essential term of this Agreement.’

7    Notwithstanding the reference to ‘the Purchasers’, there was under the Agreement only a single ‘Purchaser’ and this was Mr Luo. By cl 1.2 the plural was said to include the singular and ‘Purchasers’ in cl 4 should, therefore, be read as ‘Purchaser’. The Agreement defined Ms Zhai to be the Vendor. The ‘Minimum Purchase Amount’ was defined to be the sum of $800,000 and the ‘Partial Completion Date’ was defined to be 30 June 2012. The consequence of Mr Luo paying Ms Zhai $800,000 by 30 June 2012 was, therefore, that cl 4.1 purported to transfer title to 40% of the shares in Jantom to Mr Luo and by cl 4.3 Mr Luo became entitled to appoint a director to Jantom’s board. As a matter of law, it is generally the case that the owner of a share is the person whose name appears in the company’s register of members: Corporations Act 2001 (Cth), s 231(b). The effect of cl 4.1 was, therefore, most likely to confer on Mr Luo an equitable interest in 40% of Jantom’s shares (although it is not necessary to decide that question). By itself, however, cl 4.1 did not expressly impose any obligation on Ms Zhai to convey the legal title to Mr Luo. That work was done instead by cl 6 which provided:

‘6.    DOCUMENTS TO BE PROVIDED ON PARTIAL COMPLETION

6.1    Instruments of transfer of the shares naming the Purchasers as transferees which have been duly executed by the Vendor and is in registrable form;

6.2    financial statements and profit & loss statements of the Company for the past 3 years;

6.3    a duly completed authority for adding the Purchasers as signatories of each bank account of the Company in the manner required by the Purchasers by notice before Final completion date;

6.4    a copy of the Constitution, if applicable;

6.5.    Cheque books, financial and accounting books and records, copies of taxation returns and assessments, mortgages, leases, agreements, insurance policies, title documents, licences, indicia of title, certificates and all other records, papers, books and documents of the company, that are in the possession of the Vendor.’

8    For reasons I give later at paras [53] and [54] below, the effect of cl 6, in general, was to require the materials listed in it to be handed over to Mr Luo by 30 June 2012. In this case, cll 6.1, 6.2 and 6.5 are all of relevance, but for present purposes it is cl 6.1 which matters. It required Ms Zhai to give to Mr Luo an executed instrument of transfer in registrable form so that he could become a shareholder. She never did so.

9    Ms Zhai denies that she has breached the Agreement by failing to transfer the shares to Mr Luo. Her submission to this Court was that Mr Luo had repudiated the Agreement by refusing to complete the share transfer. This was because, to quote from Ms Zhai’s written submissions, Mr Luo:

‘(a)    did not nominate a person to be appointed as a director of the Second Respondent pursuant to clause 4.3 of the Share Acquisition Agreement;

(b)    failed to create and/or nominate a beneficiary entity for which the First Respondent could transfer the title and ownership of forty (40%) of the shares in the Second Respondent pursuant to clause 4.1; and

(c)    was otherwise not ready, willing and able to proceed with the share acquisition.’

10    Proposition (a) goes nowhere. Under cl 4.3 of the Agreement Mr Luo was entitled, but not obliged, to nominate a director. There was no evidence to which I was taken that Mr Luo did nominate a director but this has no legal consequence. His doing so was neither obligatory nor a condition precedent to Ms Zhai’s obligation to transfer the shares.

11    Proposition (b) has no legal foundation. The obligation was for Ms Zhai to transfer the shares to Mr Luo, not his nominee. It is true there were negotiations antecedent to the formation of the Agreement in which the parties had left open the possibility that Mr Luo might nominate such a person. An email dated 23 May 2012 from Mr Luo to Ms Zhai and her solicitor (who was involved in the drafting of the Agreement) had, for example, said this:

‘Dear Nolan & Rebecca,

There are a few changes I would like to make in the agreement.

As I will register a trust to hold shares, the buyer’s name should be myself, Xiangnan Luo or his nominee. My address is: XX-XX XXXX Drive, XXXX XXXX, XXXX.’

(address deleted for privacy reasons)

12    However, this is not what the Agreement eventually provided for. The obligation under cll 4.1 and 6.1 was to transfer title to the shares to Mr Luo when the $800,000 was paid. This had occurred by 29 June 2012. Mr Luo had honoured his side of the bargain. At that moment and by the next day, 30 June 2012, Ms Zhai became obliged to give to Mr Luo, under cl 6.1, an instrument to transfer the shares in registrable form.

13    Ms Zhai’s contention is therefore contrary to the terms of the Agreement. It is, in any event, contrary to the facts. On 14 August 2012 Mr Luo sent an email to Ms Zhai (and her solicitor) in which he said:

‘In relation to share agreement, would you please transfer it to me as soon as possible? 40 days have passed since I paid the total amount.

I want you to transfer the shares under my personnel [sic] name which I told you last month. Do we need amend the agreement? What else I should do?

How much I should pay stamp duty?

Please contact Nolan and get the thing done soon!

Jack Luo’

14    Ms Zhai replied in these terms:

‘Hi Jack,

All the delay about transfer is because you are not ready to have name to transfer, we haven’t delayed any. You ask to transfer now, fine, please talk our solicitor. I already give him instruction to cooperate to you.

Kind Regards,

Rebecca Zhai’

15    Mr Luo then replied:

‘Hi Rebecca,

I have left message to him and wait him come back to me.’

16    At this point Ms Zhai appears to have been labouring under the misapprehension that there was a need for Mr Luo to nominate someone as a shareholder but this, of course, was not what cll 4.1 or 6.1 said. In any event, this hardly matters because even if this were necessary under the Agreement it is clear that Mr Luo had done so by no later than 14 August 2012 in his email of that date. Indeed, that email suggests that he had made this clear the previous month (‘I want you to transfer the shares under my personnel [sic] name which I told you last month.’). There was no submission made to this Court on Ms Zhai’s behalf that this aspect of Mr Luo’s email was a confabulation and I find, therefore, that Mr Luo had indicated to Ms Zhai at some point in July 2012 that he himself would be the purchaser of the shares. I also find that he indicated this again on 14 August 2012.

17    Some effort was made in the cross-examination of Mr Luo to have him concede that he did not notify Ms Zhai of the identity of the purchaser until around 22 August 2012. I am unable to accept this because Mr Luo’s email of 14 August 2012 shows that he had in fact already done so on that day. Although Mr Luo eventually agreed to the date of 22 August 2012 this cannot be correct. He was not shown the email of 14 August 2012 during the cross-examination which significantly diminishes the value of his evidence on this point.

18    The situation then is that Ms Zhai was bound, once Mr Luo paid her $800,000, to give Mr Luo an instrument to transfer 40% of her shares in Jantom by 30 June 2012. There was nothing in the contract entitling or requiring Mr Luo to nominate a purchaser which, under the Agreement, was simply to be him. By 1 July 2012 Ms Zhai was in breach of this term. The obligation to give Mr Luo what he had paid for under the Agreement was fundamental and hence a condition. From 1 July 2012 Mr Luo was entitled to terminate the Agreement and sue for breach if he so wished. As explained shortly, Mr Luo pressed Ms Zhai to complete her end of the bargain for nearly three months.

19    The email of 14 August 2012 in which Mr Luo told Ms Zhai that she should give him the shares was not alleged by Ms Zhai to constitute a waiver of Mr Lou’s entitlement to terminate and nor could it have been, since demanding that Ms Zhai do what the contract required of her was not inconsistent with the later exercise by him of a right to terminate when she failed to do so: Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 at 489 [55]; Sargent v ASL Developments Ltd (1974) 131 CLR 634; Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26. Neither was it said by Ms Zhai that the email was such as to give rise to an estoppel.

20    In her affidavit evidence, Ms Zhai referred to a number of emails with Mr Luo but these did not include his email of 14 August 2012 requesting the transfer to him of the shares.

21    Proposition (c) turns on Ms Zhai’s characterisation of Mr Luo’s demand for the return of his money as an act of repudiation. This requires some explanation. There is no doubt that Ms Zhai has never delivered the shares. Her explanation for this is that, towards the end of August 2012, she asked her solicitor, Mr Qin, to take care of the transfer and that he had said that the transfer of the shares could not be done without ‘the ASIC corporate key’ which Ms Zhai went home to find but was unable to locate. By 25 September 2012, Ms Zhai had still not delivered the shares. On that day Mr Luo and Ms Zhai spoke by phone and Mr Luo told her that he no longer desired the shares in Jantom but that he did want his money back. An email sent the same day confirms this:

‘Hi Rebecca,

I have told you the reasons through phone that I don’t want to be shareholder and director of Jantom. The reasons are sufficient.

You have agreed my decision. As I am not yet director of Jantom, I think the way to separate is quite simple.

What you need to do is only that: return my investment for AUD800,000 (no less and no more).

I won’t charge any interest from 1 July 2012 to 15th Oct 2012. Majority of the fund is bank loan, I will pay the bank’s interest by myself.

I wish Jantom’s business grow and I will continuously support Jantom’s business.

I will still do my best to be Jantom’s agent in Victoria.

Best regards,

Jack Luo’

22    Ms Zhai characterises Mr Luo’s indication that he no longer wanted the shares but did want his money back as an act of repudiation. On this view, according to Ms Zhai, she had always been willing to deliver the shares and her delay in doing so was caused by:

(a)    Mr Luo’s failure to nominate the identity of the purchaser and the director; and

(b)    her inability to locate the ‘ASIC corporate key’.

23    I do not accept the legal efficacy of either of these propositions. As to (a), Mr Luo was not obliged under the contract to nominate the identity of the purchaser: he was the purchaser. Even if he had been so obliged, he had in fact done so in writing on 14 August 2012 and had once before done so at some point in July 2012. Nor was he obliged to nominate a director. As to (b), the fact that Ms Zhai could not find the ‘ASIC corporate key’ was without legal significance. Her obligation under cl 6.1 was to deliver an instrument of transfer in registrable form. Why Ms Zhai believed she could not deliver that instrument is of no relevance to the operation of cl 6.1. All that matters is that she did not do so. There can, in those circumstances, be no legally or factually coherent suggestion that Mr Luo was the cause of Ms Zhai’s difficulties.

24    It follows, as I have said, that from 1 July 2012 Mr Luo was entitled to terminate the Agreement. Although he did not use the word ‘terminate’ in the email of 25 September 2012, this is what he did in substance. Being entitled to terminate for Ms Zhai’s breach of the condition requiring her to deliver an instrument of transfer, Mr Luo did in fact terminate the Agreement and thereby became entitled to sue for breach. It follows that Mr Luo did not repudiate the Agreement and that Ms Zhai’s purported termination on 5 November 2012 was bereft of legal consequence.

25    In his pleading Mr Luo claimed, at para 7, that he had suffered loss and damage by reason of the breach of contract which was said to be in the sum of $820,000. This sum was derived from the $800,000 Mr Luo had paid Ms Zhai which was referable to the Agreement, together with a further $20,000 he paid on 23 August 2012 towards the running expenses of Jantom. He was not contractually obliged to pay this latter sum.

26    The general principle governing the contractual measure of damages is that the innocent party is to be placed in the position, so far as money can, as if the breach had never occurred. This amounts to asking what would have happened if the promise which was not kept had been kept: Clark v Macourt (2013) 304 ALR 220 at 223 [7], 226-227 [26], 233 [60]-[62], 241 [106].

27    A plaintiff, in that circumstance, is entitled to damages for the loss of the bargain but also for any other damage suffered including expenditure incurred in reliance on the contract: Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 81, 86, 89, 104, 126, 135, 154-155. The award of reliance based damages is not inevitable and care is needed in situations where the contract in question, if performed, would have led to a loss. There was in this case, however, no exploration of any such issue. One is left with Mr Luo having parted with $800,000 to acquire a parcel of shares which Ms Zhai never delivered and where she refuses to return the money even after the termination of the contract. It would be an affront to commonsense if the law of contract permitted Ms Zhai to retain this money. That consideration makes appropriate an award of reliance damages. I also think that Mr Luo is entitled to recover the additional $20,000 he injected into Jantom on 23 August 2012. This was done by Mr Luo on the understanding that he had become a proprietor and is correctly characterised as expenditure incurred in reliance upon Ms Zhai’s promise to transfer the shares.

28    Accordingly, there will be judgment for Mr Luo in the sum of $820,000.

29    Before turning to the restitutionary claim, I should say something about the way the case was framed. The written submissions filed on Mr Luo’s behalf summarised the claim in contract this way:

‘43.    There was a total failure by Rebecca to perform her obligations under the SA Agreement, namely to transfer 40% of shares in Jantom to Jack and appoint him as director, and therefore she breached the contract between the parties.’

30    This is a confused statement and could refer to two matters. It could be that it represents the assertion of a claim for breach of contract. On the other hand, it could involve a restitutionary claim arising from a total failure of consideration. The former is a contract count, the latter a claim for moneys had and received. Mr Luo’s pleading at [6] and [7] claimed damages for breach of contract in these terms:

‘6.    In breach of the Share Acquisition Agreement, the first respondent:

(a)    has failed to transfer the title and ownership of 40% of the shares in Jantom to the applicant; and

(b)    did not appoint the applicant as a director of Jantom.

Particulars

A copy of the ASIC Current Company Extract of Jantom dated 30 April 2013 and the search certificate from the Personal Property Securities Register dated 30 April 2013 can be inspected at the offices of the applicant’s lawyers by appointment.

7.    For the reasons aforesaid the applicant has suffered loss and damage in the sum of $820,000.’

31    The statement of claim contained no pleading of a common law money count. On the other hand, there are references in Mr Luo’s written submissions which appear to proceed on a restitutionary, rather than contractual, basis including, for example at [8], a reference to Baltic Shipping Co v Dillon (1993) 176 CLR 344, a case concerned with a claim for restitution following a total failure of consideration. The quote above at [43] in Mr Luo’s written submissions appears to assume that the claim in restitution is a claim for breach of contract. I do not think that it can be said that the pleaded contract case was unequivocally abandoned because I do not think Mr Luo’s advisors distinguished the restitution claim from the contract claim. Accordingly, it is open to me to accept it.

32    As I have indicated above, the claim for the recovery of the money paid by Mr Luo to Ms Zhai is straightforward and depends on Commonwealth v Amann Aviation. I have already indicated above that I accept that case. I turn then to the claim for restitution.

IV. Moneys had and received

33    An action lies for money had and received, inter alia, where money has been paid for a consideration which has failed: see, for example, Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516 at 525 [15], 539 [62]. In that context (but not in others such as the law of contract) the word ‘consideration’ denotes not a promise (which might itself be consideration in the contractual sense) but the performance of that promise: Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 at 48 per Viscount Simon LC.

34    None of this is controversial in this case. What is controversial is the further requirement that the failure of the consideration should be total. The controversy is not as to whether this is a requirement that legally exists but rather as to what it requires.

35    On Ms Zhai’s behalf it was said that the failure was not total because Mr Luo had received benefits from her. Counsel for Ms Zhai submitted that there had been partial performance of the Agreement in a number of different ways. First, he pointed to cl 6.2 which required Ms Zhai to furnish Mr Luo with copies of profit and loss statements and financial statements for the preceding three years and submitted that Ms Zhai had, in fact, done this. I accept that this is so. Further, there is no doubt that this was a benefit which the Agreement contemplated might be conferred on Mr Luo under cl 6.2. This case is not, therefore, like Rowland v Divall [1923] 2 KB 500 where the purchaser of a car from a vendor who did not have title to the car obtained no benefit under the contract simply because he had possession of the vehicle for a period of time. Possession of a vehicle which he did not own was not a benefit which the contract conferred on the purchaser, although it was a benefit. This cannot be said in the current circumstances. The Agreement contemplated that Mr Luo would receive financial statements and he did.

36    This will defeat Mr Luo’s claim for moneys had and received unless one of two matters can be established. The first is if it can be shown that the benefit conferred on Mr Luo under cl 6.2 in the form of the financial statements was trivial or de minimis; the second is if it can be shown that that consideration was severable.

37    As to the first matter, Mason CJ explained the point this way in Baltic Shipping Co v Dillon (1993) 176 CLR 344 at 350:

‘When, however, an innocent party seeks to recover money paid in advance under a contract in expectation of the entire performance by the contract-breaker of its obligations under the contract and the contract-breaker renders an incomplete performance, in general, the innocent party cannot recover unless there has been a total failure of consideration. If the incomplete performance results in the innocent party receiving and retaining any substantial part of the benefit expected under the contract, there will not be a total failure of consideration.’

(references omitted and emphasis added)

38    This poses the question as one of substantiality. The receipt by Mr Luo of any substantial benefit under the Agreement will deny him restitutionary relief. What is substantial? We have it in the strength of the result in Baltic Shipping itself that to receive 10 days of a 14 day cruise on the Mikhail Lermontov before it sank off New Zealand did not involve a total failure of consideration and that Mrs Dillon was not entitled to get her fare back. Mason CJ (at 353) (with whom Brennan and Toohey JJ agreed at 367 and 383) thought the eight days of uninterrupted and presumably serene cruising a sufficient benefit under the contract, as did Deane and Dawson JJ (at 378-379), Gaudron J (at 386) and McHugh J (at 392). Significant to each Justice was the idea that the cruise was not to be characterised as a mere transportation contract to carry Mrs Dillon from a point of embarkation (Sydney) to a point of disembarkation (also Sydney). A significant element in the benefit bargained for by Mrs Dillon was not just her transportation but also the mode of that transportation. This might suggest that one might get a different outcome where the substantive bargain is only about transport rather than transport as a recreational activity.

39    Indeed, Deane and Dawson JJ contemplated this very possibility (at 378):

‘There can be circumstances in which there is, for relevant purposes, a complete failure of consideration under a contract of transportation notwithstanding that the carrier has provided sustenance, entertainment and carriage of the passenger during part of the stipulated journey. For example, the consideration for which the fare is paid under a contract for the transportation of a passenger by air from Sydney to London would, at least prima facie, wholly fail if, after dinner and the inflight film, the aircraft were forced to turn back due to negligent maintenance on the part of the carrier and if the passenger were disembarked at the starting-point in Sydney and informed that no alternative transportation would be provided. Thus, in Heywood v Wellers, Lord Denning M.R. regarded it as self-evident that, in some circumstances where part of a journey had been completed, money paid to the carrier or “driver” was recoverable “as of right” for the reason that it was “money paid on a consideration which had wholly failed”.’

40    It is not entirely clear conceptually how this operates but it may not be altogether inapposite to see the airline meal on the flight that was forced to turn back as a trivial and merely ancillary part of a substantive bargain which concerned transport from the origin to the destination (I make the assumption that the airline meal was provided as a benefit under the contract of carriage.). I say nothing of Federal Commissioner of Taxation v Qantas Airways Ltd (2012) 247 CLR 286 at 299 [33] which is most likely best understood as being confined to its own specialised revenue context. There the High Court held that what was ‘supplied’ by Qantas to its customers were not flights on planes but bundles of contractual rights.

41    My conclusion is that Mr Luo’s receipt of the financial statements was of this character; that is to say, it was a trivial and ancillary benefit which accompanied the substantive bargain which was the transfer of 40% of the shares in exchange for $800,000.

42    The second way in which one may arrive at the same conclusion is to consider whether the consideration under the Agreement was severable. Gleeson CJ, Gaudron and Hayne JJ thought, in Roxborough, that consideration would be severable in the following circumstances (at 526 [17]):

‘But there are cases, of which the present is an example, where it is possible, both to identify that part of the final agreed sum which is attributable to a cost component, and to conclude that an alteration in circumstances, perhaps involving a failure to incur an expense, has resulted in a failure of a severable part of the consideration.’

43    Their Honours were discussing the rather unusual situation where a tax component in the price of a packet of cigarettes was passed along at each stage of the supply chain to the eventual smoker. The tax was held invalid. The retailers sought to recover from the wholesalers the tax they had paid to them. It was feasible and plausible to imagine what the price of a packet of cigarettes would have been without the invalid tax component.

44    If such an approach were to be applied here it would require one to conclude that the benefit contemplated under cl 6.2 (the financial statements) was regarded by the parties as having no economic value in itself and was merely an adjunct to the substantive right to receive the shares.

45    One of the rationales advanced to support the idea that an action for monies had and received must fail unless the failure of consideration has been total is that the common law knows no concept of apportionment independently of the intention of the parties: see, e.g., Mason K, Carter JW, Tolhurst GJ, Mason & Carter’s Restitution Law in Australia (2nd ed, LexisNexis Butterworths, 2008) at 327-328 [918] (‘Mason & Carter’). The general exception to this where the contractual consideration is severable still depends on ascertaining the intention of the parties from the terms of their bargain. Roxborough is, perhaps, merely an example of this at the factual level.

46    In this case, the Agreement read as a whole justifies a finding that the obligation to hand over the financial statements was regarded by the parties as having no value. It is unimaginable that if it had been deleted from the Agreement that it would have had any impact on the price. I conclude therefore that the consideration was apportionable and that the value apportionable to the provision of the financial statements was nil.

47    It follows that I do not accept that the fact that Ms Zhai provided the financial statements under cl 6.2 means that the failure of consideration was not total. The benefit was trivial; alternatively, the consideration for it is to be seen as severable but as having no value.

48    For completeness, it should be noted that Ms Zhai advanced three other reasons why there had not been a total failure of consideration. None is persuasive. The first was that Mr Luo had participated in the capacity of a new shareholder in the day to day operations of Jantom from 29 June 2012 to 5 November 2012. Mr Luo accepted that he had done so from 29 June 2012 to 25 September 2012 at T111 and this is consistent, I think, with the parties’ expectation that Mr Luo, as 40% owner, was to become involved in the business.

49    But that process of involvement was not a benefit which was conferred under the Agreement on Mr Luo. As I have mentioned already, it is established that for a benefit conferred on a party to have the effect of preventing a total failure of consideration it must be a benefit which the contract itself contemplates or provides for. As the High Court stated in David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 at 381-383 ‘the notion of total failure of consideration now looks to the benefit bargained for by the plaintiff rather than any benefit which might have been received in fact’; see also Rover International Ltd v Cannon Film Sales Ltd (No 3) [1989] 3 All ER 423 and Rowland v Divall [1923] 2 KB 500.

50    In this case, the contractual benefits the Agreement contemplated for Mr Luo involving management responsibility were those set out in cl 6 and were only to give him an instrument of transfer for the shares and, at his option, a directorship. Neither of these occurred. The fact that outside the four walls of the contract Ms Zhai permitted Mr Luo to be involved in the management of Jantom does not, therefore, matter because that was not a benefit bargained for under the Agreement.

51    The second further reason why it was submitted that the failure of consideration had not been total was that Ms Zhai had, allegedly in conformity with cl 6.5, given access to all documents of Jantom from 29 June 2012. Leaving to one side the requirements of cl 6.5, the evidence establishes that Mr Luo received only two documents from Ms Zhai:

(a)    a draft ‘Operations and Product Development Action Plan’ attached to an email of 16 July 2012; and

(b)    a document entitled ‘Jantom Furniture: Company Update and Action Plan’ attached to another email of 16 July 2012.

52    Mr Luo agreed that he had received the document attached to the email in (b). It seems likely, however, that in light of the two emails he received both documents. It was not submitted to me that Mr Luo received any other documents from Ms Zhai and I conclude that this was all he received.

53    Ms Zhai’s submission was that Mr Luo had been granted access to all of Jantom’s documents ‘pursuant to cl 6.5’. However, this is not what cl 6.5 required. Clause 6 contains a list of materials which its heading suggests were to be handed by Ms Zhai to Mr Luo on ‘partial completion’. There are no express words to that effect anywhere in cl 6 other than in the heading. By cl 1.2(b), however, headings ‘are for convenience only and do not effect interpretation of this Agreement’. Shorn of its heading, cl 6 does not contain any stipulation but is merely a list whose purpose appears unknowable. The answer to this conundrum lies in the opening words of cl 1.2 which make clear that it does not apply where the context requires that it should not: ‘In this Agreement, unless otherwise indicated by the context…’. The context to cl 6 indicates that the heading was to contain the substantive stipulation so that cl 1.2(b) does not apply. Any other approach renders cl 6 meaningless.

54    It follows that Ms Zhai was obliged on ‘Partial Completion’ to hand to Mr Luo all of the documents in cl 6.5. Contrary to her submissions, her obligation was not to have Jantom make these documents available. Ms Zhai gave evidence that Mr Luo had attended Jantom’s premises on 17 July 2012 at which time she had given him access to the books and records, as well as introducing him to the staff. Mr Luo did not deny this and I am prepared to accept that this occurred. However, whilst I accept that this was a benefit conferred upon Mr Luo, it was not the benefit which cl 6.5 contemplated which was, in contradistinction, the possession of Ms Zhai’s documents and not access to Jantom’s. Accordingly, I do not accept that the events of 17 July 2012 prevent the failure being total. Largely for the same reason, I do not think that Mr Luo’s receipt of the two emails of 16 July 2012 can be characterised – even remotely – as some sort of compliance with cl 6.5. What was required was for Ms Zhai to give to Mr Luo all of the documents of Jantom which were in her possession. There is no evidence to which I was taken as to how many of Jantom’s documents were in Ms Zhai’s possession. It is apparent, however, that her case on compliance with cl 6.5 is based only on the granting of access to Mr Luo by Jantom to its own documents on 17 July 2012. But this is misconceived on three counts: what was required was delivery of documents, not a granting of access to them; that delivery was to be of documents in Ms Zhai’s possession, not Jantom’s; and it was to be made at the time of ‘Partial Completion’, not some weeks later.

55    The third additional reason why it was said that the consideration had not wholly failed was that Jantom had given Mr Luo possession of stock which had still not been returned. This fails for the same reason. There was no provision in the Agreement under which Mr Luo was to receive stock. There was a clause which provided for an adjustment to the purchase price depending on the amount of stock held by Jantom (cl 3.4) but that does not have any relevance in the present context.

56    In those circumstances, there was a total failure of consideration. The parties did not explore before me what the relationship between the contract and restitutionary claims was. Plainly enough there cannot be double recovery: see, e.g., Mason & Carter at p 588-591 [1410]-[1411]. Since Mr Luo has recovered $820,000 for breach of contract he cannot also recover on his restitutionary count. Had the contract case failed, however, I would have awarded him $800,000 on the basis of money had and received. I would not have given him the additional $20,000 paid on 23 August 2012 as no basis for its recovery on a common law money count was advanced to me.

57    I reject Ms Zhai’s contention that Mr Luo should be denied the return of his $110,000 deposit on the basis that it was non-refundable. Clause 2.3 of the Agreement provided as follows:

‘The Vendor and the Purchasers agree that, upon exertion [sic] of this Agreement, the purchasers must pay a sum of $110,000.00 as deposit to the Vendor: this deposit is not refundable in any event and must be released to the vendor immediately and unconditionally. This is an essential term of this Agreement.’

This clause does not apply in circumstances where Mr  Luo has terminated the contract because of Ms Zhai’s breach of a condition. This construction is consistent with the proposition that one cannot be permitted to take advantage of one’s own wrong: see, for example, TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 147, 161 and 163.

V. The claim based on misleading and deceptive conduct

58    Mr Luo also claims that Ms Zhai misled him into signing the Agreement in two ways:

(a)    by providing him with profit and loss statements for the financial years ending on 30 June 2009, 2010 and 2011 which significantly overstated the profitability of Jantom’s business; and

(b)    by telling him that Jantom would be obtaining increased business from a retailer, Harvey Norman, and a stationery and office supplies business, Corporate Express.

59    It is convenient to consider these separately.

(a) Misleading profit and loss statements

First issue: was there misleading conduct?

60    During the negotiations leading to Mr Luo’s execution of the Agreement on 29 May 2012, Ms Zhai provided him with profit and loss statements for Jantom on three separate occasions, each time by email. They painted three very different pictures of the business. They were as follows:

(i) The 2011 Profit and Loss Statement provided on 13 February 2012

61    This was sent by Ms Zhai to Mr Luo by email. It disclosed a net profit of Jantom for the financial year ending 30 June 2011 of $433,481. Mr Luo said that he told Ms Zhai that if the profits of Jantom were only around $400,000 he would have no interest in the business. He says that she then sent him three years’ worth of financial statements which showed average profits of around $800,000 (I return to these in the next section). It is puzzling to me why Mr Luo would be satisfied by profit and loss statements which Ms Zhai appeared to be able to produce on demand at specified levels. This puzzlement is not abated by Mr Luo’s email of 26 February 2012 which was in these terms:

‘Dear Rebecca,

I understand what you said in your message.

Jantom developed under your efforts and contribution; you will not be willing to sell it at low price. If it was my business, I will think the same way. But you have to evaluate it correctly as the profit reported was above $400,000, and some of the expenditure is not counted to the cost. If tax is deducted, there would be little profit. Compared to the huge investment, return is not high. The profit of Jantom for this year is even lower. And this is on the basis that we make a loss.

For the plan I provided to you, there is a total of 1.2 million working capital, plus 500k-600k premium. From the investment perspective, the rate of return is quite low.

I am not pushing down the price while you are looking for partners. Maybe my calculation is not correct, but it was based on the rule of fair trading.

We can turn aside the issue of purchasing shares. In the future, besides being you agent, I will look for other opportunities to cooperate with you. I hope you can solve the stock problem. We are making the loss of more than 10k every month; I think it will be extremely difficult to make up this amount. So Jantom must perform well in management. I am a bit soft and always considering the stock for you. But you have to do well in the future. Large scale of stock occurred at the beginning of last year, and this time it is more serious. This cannot happen again.

I hope we can communicate better in the future.’

62    I think it may be possible to read this as Mr Luo indicating that he did not wish to proceed if the profits were only $400,000 (particularly, the second last paragraph). I have come to the view that although I cannot understand Mr Luo’s motives in this regard, I should nevertheless accept his evidence. I do this principally because the contrary was not put to him and because he may have reasons of which I am simply unaware. The upshot, in any event, is that he subsequently received further profit and loss statements. It follows from this discussion that Mr Luo did not rely on the initial profit and loss statement provided on 13 February 2012 after the second set was provided on 14 March 2012. I turn then to the second set.

(ii) The 2009-2011 Profit and Loss Statements provided on 14 March 2012

63    These were provided by email on 14 March 2012. They suggested that Jantom had made net profits for the financial years ending on 30 June as follows:

64    It will be observed that the 2011 figure was nearly twice that which had been indicated on 13 February 2012.

(iii) The 2009-2011 Profit and Loss Statements provided on 21 May 2012

65    These were provided by email on 21 May 2012 following a conversation between Ms Zhai and Mr Luo on that day. The terms of that conversation are in dispute. The profit and loss statements sent through on this occasion were only for the financial years 2010 and 2011 but the 2010 year also contained the results for the 2009 financial year. The picture disclosed in these profit and loss statements was as follows:

66    These figures were, of course, dramatically less than the figures provided on 14 March 2012. For example, the 2011 figure provided on 21 May 2012 is only around 8% of the figure provided on 14 March 2012.

67    The much smaller figures contained in the profit and loss statements provided on 21 May 2012 preceded the signing by Mr Luo of the Agreement by just eight days on 29 May 2012.

68    The critical question is why it was that Mr Luo proceeded to sign the Agreement in light of provision to him of profit and loss statements revealing a dramatically less profitable business than the earlier ones had.

69    Mr Luo’s evidence was that Ms Zhai had told him during their discussion on 21 May 2012 that the set of profit and loss statements she was about to send through did not include all of Jantom’s sales or profits. She said they were maintained only for the purposes of being given to the Australian Taxation Office (‘the ATO’) and this was because she did not want to pay more tax to the ATO. He says that she confirmed to him, at the same time, the correctness of the profit and loss statements provided to him on 14 March 2012.

70    Ms Zhai, on the other hand, claims that this is not what passed between them at all. She says Mr Luo explicitly asked for the profit and loss statements which had been provided to the ATO; that she told him that these profit and loss statements were the ‘formal tax lodgement papers’ and were not the same as those which had been earlier provided, which were ‘only drafts’ and which had ‘no legal effect’. She did not say that the profit and loss statements provided on 21 May 2012 were incorrect, in fact, to the contrary what she told him was that these were the correct versions.

71    There are three issues between the parties:

    which of the above accounts is correct;

    whether the profit and loss statements provided on 14 March 2012 were incorrect; and

    whether, assuming Mr Luo’s version is accepted, he relied on the profit and loss statements provided on 14 March 2012.

72    As to the first matter, I accept Mr Luo’s version of events. There are a number of reasons for this. I found Ms Zhai’s explanation for the discrepancy between the two sets of profit and loss statements unpersuasive. Her explanation was that Jantom did not include its overseas sales in the profit and loss statements prepared for the ATO (and provided on 21 May 2012) but it did include them in the profit and loss statements provided to Mr Luo on 14 March 2012.

73    Ms Zhai explained the overseas sales this way at [16]-[17] in her affidavit:

‘16.    The forth [sic] category is international sale on behalf of the abovementioned Chinese Factory. The Chinese Factory, owned by me and Wunjun, not only supplied products to the Second Respondent in Australia, but it also sold products to various customers in many different countries and regions, such as UK, USA, NZ, South America, Germany, Russian and Middle East.

17.    As the Chinese Factory and the Second Respondent were both owned by me and Wunjun, I often operated the Chinese Factory in the name of the Second Respondent. For example, I often arranged the products from Chinese Factory directly being shipped by FOB term to Australian and overseas customers; if so requested by customers, received FOB payments into Jantom Furniture’s Australian bank account and then directly transferred the payments back to Chinese Factory’s Chinese bank account. For tax purposes, I kept a separate US account for the Chinese Factory from the Second Respondent’s Australia dollar account.’

74    On this view of affairs, Jantom’s receipt of money on international sales was not for its own benefit. For that reason, it would have been misleading to include them in the profit and loss statements. This creates, of course, the puzzle of why Ms Zhai ever provided Mr Luo with profit and loss statements which included overseas sales. Her explanation for this is that before she sent those profit and loss statements through to Mr Luo she had a conversation with him in which she explained the situation with the Chinese factory and that he should therefore disregard the international sales disclosed in them.

75    That explanation involved two steps: first, that Jantom acted as the agent for a Chinese factory which made office chairs and which was also owned by Ms Zhai. This factory sold office chairs into countries in addition to Australia; secondly, whilst Jantom acted in its own right in relation to the office chairs which were imported into Australia, it acted as the Chinese factory’s agent when importing office chairs into countries other than Australia.

76    There were included in its profit and loss statements, therefore, amounts which were described as international sales but, properly understood, these were not sales of Jantom but rather of the Chinese factory of which Jantom was but the agent.

77    According to Ms Zhai, these international sales explained the difference between the profit and loss statements provided on 14 March 2012 (which were said to include the international sales) and those of 21 May 2012 (which, it was said, did not). This explained why the profit and loss statements of 21 May 2012 were the ‘correct’ ones which were appropriate to form the basis upon which tax returns might be submitted to the ATO: the money collected by Jantom as agent on the international sales was not beneficially held and therefore not returnable by Jantom.

78    I do not accept Ms Zhai’s evidence about this. The profit and loss statements provided to Mr Luo on 14 March 2012 make no mention of international sales. Ms Zhai’s attempt to explain how international sales were included in these statements made no sense to me at all. Further, it is apparent from the trading statements which accompanied the profit and loss statements delivered on 21 May 2012 that overseas sales were included in them: $1,819,536 for 2009, $1,500,358 for 2010 and $954,101 for 2011. One has the odd situation, therefore, that the very documents relied upon by Ms Zhai directly contradict her assertion. There is the further difficulty that the trading statements also include amounts for the corresponding overseas purchases. To understand this requires a slight diversion. On Ms Zhai’s version of events, Jantom’s overseas sales of office chairs were made on the Chinese factory’s behalf. Yet Jantom’s books record entries for overseas purchases, i.e., money expended by Jantom in acquiring office chairs from the Chinese factory to fill the overseas orders. But if the overseas business was only being conducted as the Chinese factory’s agent then a question arises as to where the money which appears recorded as international purchases came from and whose money it was. On the basis of Ms Zhai’s contention that the overseas business was not Jantom’s, however, it must follow that it was not Jantom’s money. It is therefore necessary to bring to account not only the international sales but also the international purchases. When this is done, one then sees this:

79    There are thus three problems:

    the profit and loss statements delivered on 14 March 2012 which show the larger profits and which Ms Zhai says included the international sales contain no reference to any such sales and her oral evidence about this was incoherent;

    the profit and loss statements which were provided on 21 May 2012 and which show dramatically decreased profits and which Ms Zhai says did not include the international sales do in fact do so; and

    in any event, the overseas sales when brought to account with the overseas purchases simply are not sufficient in magnitude to explain the difference.

80    I therefore conclude that Ms Zhai’s evidence about this cannot be true and, indeed, that her evidence about this aspect of the matter was false. I therefore accept Mr Luo’s evidence that Ms Zhai explained the dramatically lower profits disclosed in the profit and loss statements handed over on 21 May 2012 as having been prepared for the ATO to avoid paying income tax and that she told him the true state of Jantom’s business was as disclosed in the profit and loss statements which had been provided on 14 March 2012. This conclusion is of some gravity for it inevitably involves the conclusion that the ATO was provided with false information as part of a concerted effort to avoid paying income tax. I take that gravity into account in drawing the conclusions.

Second issue: whether the profit and loss statements provided on 14 March 2012 were false

81    Both parties proceeded on the basis that the profit and loss statements, which Ms Zhai provided on 21 May 2012, correctly recorded the financial position of Jantom. I am not satisfied, however, that they do. It is implicit in accepting Mr Luo’s account of his discussions with Ms Zhai that she was proceeding on the basis that the earlier profit and loss statements were correct and the later ones were false. Having accepted that this is in fact what Ms Zhai said, I do not think it likely that she was lying when she said it. It is possible that Ms Zhai believed the profit and loss statements provided on 21 May 2012 were true and that she was lying when she told Mr Luo that it was the profit and loss statements provided on 14 March 2012 that were true. However, I think this unlikely. An attempt to paper over the truth does not usually involve what appears to be a confession of tax fraud. Ms Zhai’s remarks, as I have found them, appear to be unusually frank in their directness. I do not think she was, therefore, lying. If she was not lying about that matter then the only conclusions which are open are:

    Jantom kept two sets of books;

    one was the true set, the other was a false set to be provided to the ATO; and

    Mr Luo was provided with both sets and told of the difference.

82    It now suits both parties to say that the profit and loss statements provided on 21 May 2012 were the correct ones but for quite different reasons. For Mr Luo it is convenient, because it allows him to point to material suggesting the earlier profit and loss statements were incorrect. For Ms Zhai it is convenient because she can thereby avoid the spectacle of being found to have misled the ATO.

83    I am not bound by these positions. I am not satisfied that the position disclosed in the profit and loss statements provided on 21 May 2012 was its true position. Consequently, I have no material available to me which permits the conclusion to be drawn that the profit and loss statements which were provided on 14 March 2012 were inaccurate. I do not find, therefore, that Mr Luo has proved that the profit and loss statements provided to him on that date were misleading or deceptive. Consequently, his claim under s 18 of the Australian Consumer Law fails, there having been no conduct to which it applied.

Third issue: whether Mr Luo relied on the earlier profit and loss statements

84    This issue does not arise. Had it arisen I would have concluded that Mr Luo did rely upon the profit and loss statements provided to him on 14 March 2012. I reject the argument advanced at [62] of Ms Zhai’s written submission that Mr Luo’s email of 26 February 2012 showed that he was ‘acutely aware of the modest profit’ which was being made by Jantom. For the reasons I have given above, the February figures were supplanted by the March figures. For completeness, I do not accept that Mr Luo’s earlier role as Jantom’s agent would have given him sufficient insight into its business to allow him to form any view about its internal profitability. This is particularly so in circumstances where my impression is that Ms Zhai’s conduct of Jantom’s business was chaotic.

Fourth issue: the entire contract clause

85    Clause 12.1 of the Agreement provided:

‘12.1    This Agreement contains the entire agreement of the parties with respect to its subject matter. It constitutes the only conduct relied upon by the parties and supersedes all earlier conduct by the parties with respect to its subject matter.’

86    Such clauses are ineffective to prevent action under s 18 of the Australian Consumer Law. However, they may have some use if it can be demonstrated that a person, as a matter of fact, did not rely upon anything but the Agreement. In this case, I am not satisfied that Mr Luo understood what this clause potentially did. This was his evidence at T70-71 and I accept that evidence. Consequently, it is irrelevant.

(b) Misleading statements about increased custom from Harvey Norman and Corporate Express

87    Mr Luo said in his second affidavit that during the period between February and May 2012 Ms Zhai said to him (in response to his observation that the profit and loss statements provided on 14 March 2012 were very impressive):

‘Yes, they are. This year will be even better, as my big customers such as Corporate Express and Harvey Norman plan to increase their purchases from us. We will also have New Zealand customers. That is why I have asked for $2 million for my business initially and you are virtually guaranteed to recoup all your investment in just about three years. In addition, to combine my business with your existing business, you will be able to achieve a much better results than what I have done.’

88    It was submitted that this involved a representation as to a future matter attracting the operation of s 4 of the Australian Consumer Law which puts the onus on a respondent to prove that the conduct alleged was not misleading. That provision, however, is not engaged on this evidence. The statement in question was not about a future matter. It was a statement about what Harvey Norman and Corporate Express were presently intending to do. There is no evidence that either entity did not hold the intention, consequently it is not shown that there was any misleading conduct.

89    There was an additional allegation that Ms Zhai had said that she had two other purchasers in the wings, but I was not taken to any evidence that this did happen and I consider it no further.

VI. Conclusion

90    There will be judgment for Mr Luo against Ms Zhai for $820,000 with interest up to judgment. Jantom was said to have been an accessory to Ms Zhai’s misleading and deceptive conduct. The claim that Ms Zhai engaged in such conduct has failed and Mr Luo would, therefore, have failed against Jantom. However, prior to judgment it was placed in administration and the proceedings against it are stayed: Corporations Act 2001 (Cth), s 440D. It is inappropriate to make any order in its case.

VII. Rulings

91    During the course of the trial I rejected Ms Zhai’s objections to certain parts of Mr Luo’s affidavit evidence which were advanced on the basis that the conversations he recounted had not been set out in direct speech. I did so because there is no such requirement: Hamilton-Smith v George [2006] FCA 1551 at [79]-[83] per Besanko J.

Associate:

Dated:    17 April 2015