Wang v Liu & Anor [2017] VCC 1480 (17 October 2017)

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IN THE COUNTY COURT OF VICTORIA

AT MELBOURNE

COMMERCIAL DIVISION

Revised

(Not) Restricted

Suitable for Publication

RUNBING WANG	Plaintiff

v

LU LIU and WEI GAO	Defendants

JUDGE:	HIS HONOUR JUDGE ANDERSON
WHERE HELD:	Melbourne
DATE OF HEARING:	25 & 26 September 2017
DATE OF JUDGMENT:	17 October 2017
CASE MAY BE CITED AS:	Wang v Liu & Anor
MEDIUM NEUTRAL CITATION:	[2017] VCC 1480

Catchwords: Contract – Plaintiff purchased 50% of shares in a company operating a franchise business – Document signed by parties – Subsequent document signed by parties over 2 years later – Second document stated to be “executed as a deed” – Whether second document binding as a deed without consideration – Nom de Plume Nominees Pty Ltd v Fingal Developments Pty Ltd [2016] VSCA 159 and Atco Controls Pty Ltd v Newtronics Pty Ltd [2009] VSCA 238 applied.

For the Plaintiff	Mr A. Sandbach	AJH Legal Group Pty Ltd

For the Defendants	Mr A. Silver	Pentana Stanton Lawyers Pty Ltd

1 From September 2011, Lu Liu and her husband, Wei Gao, conducted a franchise business of Michel’s Patisserie at Melbourne Central (“the business”) through their company, L & G Blue Ocean Pty Ltd (“Blue Ocean”).

2 Ms Liu and Runbing Wang had a connection through their fathers. In July 2014, Ms Liu and Ms Wang discussed the possibility of Ms Wang becoming involved in the business. Ms Liu and Mr Gao wished to sell the whole of the business. Ms Wang wanted them to remain in the business as she had little business experience and had family responsibilities.

3 They agreed that Ms Wang would purchase 50 percent of the shares in Blue Ocean for the sum of $300,000 and they would operate the business together. They executed a four page agreement written in Mandarin (“the Mandarin agreement”). This document was prepared by the solicitors for Ms Liu and Mr Gao. An agreed English translation of the document is headed “Share investment and cooperation agreement”.

4 Ms Wang paid the sum of $300,000 and commenced working in the business. She said that, from the time of their earliest discussions, Ms Liu and Mr Gao agreed with her, that if she ceased to be involved in the business for whatever reason, that her investment of $300,000 would be repaid. Ms Liu and Mr Gao denied that they ever made any such promise, and the matter is not referred to in the Mandarin agreement.

5 The lessee of the premises at Melbourne Central from which the business was conducted was the franchisor, Michel’s Patisserie System Pty Ltd (“the franchisor”). The lease was due to expire in July 2016. Ms Wang said that the dealings with the franchisor, including negotiations for the continued occupation of the business premises, was something for which Ms Liu and Mr Gao continued to accept responsibility.

6 During February and March 2016, there was email correspondence between the franchisor and Ms Liu about the negotiations for a new lease. On 3 June 2016, the franchisor wrote to Ms Liu by email informing her that the franchisor was not proposing to enter into a new lease of the premises as the base rental the lessor wanted was too expensive. It is likely that this email was forwarded to Ms Wang.

7 Ms Wang agreed that she was informed of this problem in early June 2016 by Ms Liu and Mr Gao, and that they discussed the matter. Mr Gao said that he consulted his solicitors about how they should reply to the franchisor’s email as he was very concerned. He told Ms Wang words to the effect that, “It would be a disaster if they could not keep the shop”.

8 At about this time, Ms Wang consulted lawyers for the first time about her arrangement with Ms Liu and Mr Gao. The lawyers produced a draft agreement dated 7 June 2016 in English comprising 28 pages and headed “Shareholders Agreement”. The parties discussed the draft. Mr Gao had concerns about some matters, particularly clause 7.1 which referred to Ms Wang’s investment of $300,000 as a “loan”, and clause 7.3 in relation to the distribution of the proceeds of any sale of the shares in or the business of Blue Ocean.

9 Ms Wang’s lawyers prepared an amended document dated 14 June 2016. This document was executed by Ms Liu, Mr Gao and Ms Wang on a date after 14 June 2016 (“the English agreement”). It is in respect of this agreement that Ms Wang brought the present proceeding to recover the sum of $300,000 she had invested in Blue Ocean.

10 The business continued to operate until mid-January 2017. The parties had been informed in December 2016 by the franchisor that the business would need to cease so that possession of the premises could be returned to the lessor. Through her lawyers, Ms Wang demanded the repayment of the sum of $300,000. This was not done by Ms. Liu and Mr Gao.

11 The writ was issued on 8 March 2017. A defence and counterclaim was filed on about 1 May 2017. Ms Liu and Mr Gao alleged in their pleading that the English agreement was executed in circumstances which constituted misleading or deceptive conduct in breach of the Australian Consumer Law and the agreement should be regarded as void ab initio.

12 Shortly prior to the commencement of the trial, Ms Liu and Mr Gao sought leave to file an amended defence. On 22 September 2017, leave was granted. The counterclaim was withdrawn and the sole ground of defence relied upon was that “the June 2016 English agreement was void for lack of consideration [as] any consideration provided ... by the plaintiff to the defendants was either past consideration or illusory consideration”.

13 On 25 September 2017, Ms Wang filed a reply in which she asserted that “the June 2016 English agreement is a deed and that it is enforceable without the necessity for consideration [and/that] her entry into the June 2016 English agreement provided consideration to the defendants which consideration is neither past consideration nor illusory consideration”.

b. whether, if the document was not a deed, there was consideration for the English agreement.

15 Oral evidence was given by Ms Wang, Ms Liu and Mr Gao, primarily for the purpose of providing the “factual matrix” in which the English agreement had been executed by the parties.

17 The last page of the English agreement commenced with the words “EXECUTED as a Deed on [space] 2016”. The space for the insertion of the specific date of execution was left blank. Below, each party signed the document in the same format. For example, Mr Gao executed the document as follows:

19 “Effective Date” was defined in the definition provision as meaning “the date when this Agreement has been executed by all parties”.

20 The principal authorities on this issue referred to by counsel were Nom de Plume Nominees Pty Ltd v Fingal Developments Pty Ltd [2016] VSCA 159 (“Nom de Plume”) and Interchase Corporation Ltd (in liq) v Commissioner of Stamp Duties (Qld) [1993] QCA 485; [1993] 27 ATR 154 (“Interchase”).

21 In Nom de Plume, the principal judgment was delivered by McLeish JA, with whom the other members of the Court of Appeal (Tate JA and Ginnane AJA) agreed. The following propositions were referred to by McLeish JA:

a. whether a document “was to operate as a deed or according to the law of contract is to be determined by reference to the intention of the parties” (para 68);

b. “the intention [of the parties] is to be ascertained objectively” (para 66);

d. regard may be had to “the context of the factual matrix as known or assumed by the parties” (para 68).

22 In the present case, viva voce evidence was led from Ms Wang, Ms Liu and Mr Gao of the “context” in which the English agreement was executed. However, as in Non de Plume, no evidence was led “as to what each party thought was the effect of the relevant document when they executed it” although, as McLeish JA noted at paragraph 68, there “is some authority to the effect that [such] evidence may be admitted”.

23 In Nom de Plume, one of the issues for determination was whether documents constituting a loan and a charge were valid and enforceable, being each “operative as a deed” or “supported by consideration” (para 65). The relevant factors considered by the Court of Appeal, in concluding that the loan agreement was intended by the parties to operate as a deed, were:

a. the “unambiguous indication” given by the fact that the document “describes itself as a deed in the execution provisions and states that it was executed as such” (para 69). McLeish JA stated that, “the words ‘Executed as a Deed’, if they are operative, would suffice to indicate an intention that the instrument be signed sealed and delivered” (para 69);

b. the “surrounding circumstances point rather in the same direction” and there is nothing in the “loan or the evidence surrounding its execution to displace the unambiguous indication that the parties intended it to operate as a deed” (para 85).

24 In regard to the “surrounding circumstances”, McLeish JA specifically relied upon the fact that the sole director of both the lender and borrower executed the loan agreement on behalf of “both parties at the same time” (para 77).

25 The Court of Appeal rejected three matters, which it had been submitted, indicated that the parties’ intention was for the loan document “to operate according to the law of contract rather than as a deed”:

a. the loan document “was described as an agreement throughout, including in all operative clauses [and] the recitals purported to specify consideration passing between the parties” (para 66). McLeish JA said at paragraph 77 that, “the fact that it contained a mutual exchange of promises and thereby evinced consideration by the parties is not inconsistent with it being a deed. Nor is the repeated description of the instrument as an ‘agreement’ a strong indication that the parties did not intend the instrument to operate upon execution”;

b. the “loan was not immediately binding, because the parties to it lacked the power to grant that which they promised and [there were] specific clauses providing for conditions precedent” (para 66). At paragraph 71, McLeish JA stated that the provisions of the loan “do not suggest that the conditions precedent are intended to be prerequisites to the formation of a contract ... The better view is that the conditions precedent were prerequisites to performance [where] it is merely the performance of the obligation that is delayed pending satisfaction of the condition”;

c. It had been submitted by the party challenging the document’s operation as a deed, that “the document made no reference to having been sealed or delivered” (para 66).

26 The Court of Appeal in Nom de Plume distinguished the decision of the Queensland Court of Appeal in Interchase where the Court had concluded that a “guarantee was ... tendered by way of contractual offer rather than so as to have immediate effect” (para 75). In Interchase, the guarantee was tendered to the vendor of a property together with a contract for the sale of land. The guarantee and the contract of sale had been executed by the guarantor and purchaser respectively.

27 However, the guarantee expressly provided that the guarantor’s “obligation was not intended to come into existence until the contract for sale of the land had been executed” and therefore “the tender of the form of contract ... was plainly the communication of an offer capable of withdrawal prior to acceptance”. The Court of Appeal in Interchase considered that the clear intention of the express words of the guarantee “accorded with the commercial reality of the situation. There was no reason for thinking that the guarantor intended to make its offer irrevocable” (para 76).

28 In Nom to Plume, McLeish JA distinguished two situations where the parties had not intended that the relevant document was executed as a deed, even though there might be a reference to that effect on the signing page:

a. where “the instrument began by referring to the mutual promises it contained, which were described as ‘consideration’ ... which was inconsistent with the suggestion that [the party signing] intended immediately to be bound while the other parties were not” (para 83);

b. where “some parties purported to sign, seal and deliver the document while others did not [and] the agreement ... was expressly subject to the promises of the parties who had not yet signed” (para 84).

a. the parties signed the document on a page headed by the words, “EXECUTED as a Deed on [space] 2016”. The further details of the date were not inserted in the space provided;

b. the document had a cover page titled, “SHAREHOLDERS AGREEMENT”. Throughout the document, it was referred to as “this Agreement”;

c. the recitals in the document recorded that the parties “propose to enter this agreement in order to replace the previous agreement dated 12 July 2014 between” them;

d. the agreement was to commence on “the date when this Agreement has been executed by all parties”;

e. each of the parties represented and warranted that “this Agreement has been validly executed and delivered by it [sic] and constitutes the valid, binding and enforceable obligations of it [sic]”;

f. “this Agreement comprises the entire agreement between [them] and no earlier agreement including the ... 12 July 2014 [agreement], in relation to any matter dealt with in this Agreement will have any effect from the date of this Agreement”.

30 Other matters of context, said by the parties to be relevant to the parties’ intention as regards the document were as follows:

a. plaintiff’s counsel, Mr Sandbach, relied on the fact that the Mandarin agreement in July 2014 provided in clause 5 that, “matters not yet covered by this agreement may be amended by signing separate agreement/s after negotiation by co-investors”;

b. defendants’ counsel, Mr Silver, submitted that, “all discussion between the parties was in respect of an ‘agreement’. The evidence before the court was in respect of an ‘agreement’ in all regards”;

c. Mr Silver also submitted that the description by the plaintiff of the English agreement in her Statement of Claim and Defence to Counterclaim and in a Notice to Admit as an “agreement” was an admission that she did not regard the document as a “deed”. I reject that submission, particularly as the issue had no significance until the defendants filed their Amended Defence.

31 I consider that Mr Silver’s submission in relation to the evidence overstates the position. There was no clear evidence from which it might be found that the parties either expressly or by implication, and otherwise than by their execution of the document, indicated an intention as to whether the document “was to operate as a deed or according to the law of contract”.

32 As regards execution of the document itself, the High Court in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; 219 CLR 165 at paragraph 47 stated:

b. she presented a draft of the document to Ms Liu and Mr Gao on about 7 June 2014;

c. Mr Gao read the recitals page and at least clause 7 (he said “roughly”) and he probably looked at the earlier clauses;

d. Mr Gao, with probably some participation by Ms Liu, discussed clause 7 with Ms Wang;

e. they told Ms Wang that the $300,000 paid by Ms Wang in 2014 was not a “loan”;

f. Ms Wang returned the document to her lawyers who redrafted the contentious sections of the document;

g. the second draft of the document was presented to Ms Liu and Mr Gao on about 14 June 2016. Mr Liu read through the first page and also noted that clause 7.1 had been amended to delete any reference to a loan.

34 Mr Gao said that he told Ms Wang that he wanted to take the document to his lawyer, but Ms Wang “refused” to let him. Mr Gao was unable to remember exactly what Ms Wang had said to him in this regard. This was not a matter put to Ms Wang in cross-examination. In the circumstances, I cannot attach very much, if any, weight to the suggestion by Mr Gao that he was denied the opportunity to obtain legal advice by Ms Wang.

35 Both Mr Gao and Ms Liu went ahead and signed the document in the presence of a witness. The execution clause was preceded by the words that the document was “executed as a deed”. This statement was effected by each of the parties affixing their signatures.

36 The parties each signed the document one after the other. By the terms of the document, and as the parties objectively appeared to intend, they each bound him or herself by its terms and it commenced to operate from that time.

37 In the circumstances, the document “having been executed as a deed [was] the clearest indication of the intention of the parties”. There was, in my view, “nothing in the [document] or the evidence surrounding its execution to displace the unambiguous indication that the parties intended it to operate as a deed”.

38 The fact that Mr Gao challenged the critical term of the first draft and it was altered in the second draft executed by the parties points in the direction of a conclusion that the parties intended by their “solemn writing” to be immediately bound by its terms and that the document was a deed not requiring consideration.

Whether Ms Wang provided good consideration if the English agreement were not a deed

39 Ms Wang sues upon the English agreement. She does not seek to have the Mandarin agreement rectified or to rely upon what she said was the prior oral agreement of the parties that she be repaid the $300,000 she invested in Blue Ocean.

40 Mr Silver, on behalf of the defendants, submitted that the English agreement offered nothing to Ms Liu and Mr Gao and therefore the covenants in that agreement provided consideration which was either illusory or was past consideration derived from the obligations under the Mandarin agreement. Mr Silver said that when one “scratched the surface” of the covenants in the English agreement, there was nothing behind them.

41 To a large degree, this submission rested upon an assumption that Mr Silver submitted arose from the evidence. He submitted that, in mid-June 2016 when the English agreement was executed, effectively the business of Blue Ocean was “finished” and the sole purpose of the agreement was to create a mechanism by which Ms Wang could obtain the return of her $300,000 investment.

42 Mr Silver also relied upon the fact that Ms Wang produced the first draft of the English agreement on 7 June 2016, only days after the franchisor had written on 3 June advising that the lease of the business premises would not be renewed and that Blue Ocean must “defit the site” before the expiry of the lease on 28 July 2016.

43 This submission would have had more significance if the defendants’ counterclaim had not been abandoned when they amended their defence. The counterclaim alleged misleading and deceptive conduct constituted by Ms Wang representing in June 2016 that the second draft of the English agreement included certain matters that had been agreed (namely the calculation of the distribution of the proceeds from the sale of shares in Blue Ocean), but not other matters (primarily, the requirement that Ms Liu and Mr Gao must repay the $300,000 invested by Ms Wang).

44 In my view, the evidence did not support Mr Silver’s submission, for the following reasons:

a. Mr Gao said that he was “shocked” when Ms Liu received the email from the franchisor on 3 June 2016, and he and Ms Liu had discussed with Ms Wang that they “could not lose the shop”;

b. Mr Gao said that at the time he discussed the drafts of the English agreement with Ms Wang in June 2016, they were “planning to sell the business for more than $600,000” and that this was a “realistic prospect”;

c. Blue Ocean continued to operate the business until it closed in mid-January 2017. The decision to vacate the premises at that time was not made until December 2016.

45 The recitals in the executed version of the English agreement recorded the following matters:

a. a distinction was drawn between the franchise business conducted at Melbourne Central (defined as the “Business”) and the “Company’s business” which was stated as “including but not limited to the Business”;

b. Ms Wang’s “investment of $300,000” would be “repaid to Wang in full” minus the costs of sale, even if the business “generates no profit or return”;

c. the English agreement was “to replace the previous agreement dated 12 July 2014” and was to “record their aims and objectives in relation to the company and to provide for the operation and administration of the company”.

46 Other provisions of the English agreement make it clear that, whilst the agreement provided for the distribution of the proceeds of the sale of the shares in or the business of Blue Ocean, the agreement contained many clauses which anticipated that the company would have a future business operation with the existing shareholders. These provisions included:

a. rectification of the share register to show both Ms Wang and Ms Liu as 50% shareholders in the company (clause 2);

b. provisions relating to how the company should operate (clauses 3-6) and governing relations between the company and its shareholders (clauses 8-12);

c. the circumstances which would trigger an obligation upon Ms Liu and Mr Gao to immediately repay Ms Wang’s contribution of $300,000 to the company (clauses 7.1-7.3);

d. obligations of the shareholders in relation to “confidential information”, as defined in the agreement (clause 13).

47 There was general agreement by counsel as to the applicable law, principally as applied by the Court of Appeal in Atco Controls Pty Ltd v Newtronics Pty Ltd [2009] VSCA 238 (“Atco”). At paragraph 62, the Court of Appeal in references to High Court authority, described the concept of consideration as “a reciprocal conventional inducement, each for the other, between consideration and promise”, and that “to establish the existence of good consideration, it must be made to appear that the promise was really offered as the price or quid pro quo for the action taken”.

48 In Atco, the Court of Appeal was not satisfied that a promise by a parent company to a subsidiary of continued support was offered after a request by the parent company that the subsidiary continue to trade or that the subsidiary was moved by a request by the parent company.

b. this would be decided from a reasonable person’s view of the relevant circumstances; in Atco, as to whether the subsidiary had been requested to continue trading;

c. commercial arrangements ordinarily convey the presumption that parties intend to create legal arrangements.

50 In the present case, Mr Silver submitted that the promise by Ms Liu and Mr Gao in clause 7.3 of the English agreement to repay Ms Wang’s investment of $300,000 was not supported by consideration as:

a. the reciprocal promises by Ms Wang had no appreciable value, and the consideration was therefore illusory;

b. the reciprocal promises merely were an expression of existing legal obligations (either under the Mandarin agreement or generally at law) and therefore constituted part consideration which was insufficient.

51 In support of the first proposition, Mr Silver referred to the dissenting judgment of Kirby P in Beaton v McDivitt (1987) 13 NSWLR 162 (“Beaton”). At page 168, Kirby P considered a promise by landowners to transfer the title in subdivided farmland to a person who would pursue horticultural practices similar to their own. He said that the “hope that such person would be a congenial neighbour, sharing with them their peculiar ideas about horticulture ... scarcely amount to a quid pro quo for such a substantial promise [and cannot] properly be classified as consideration”. This view was not supported by the other two justices of appeal. Beaton was cited with approval in Atco but not in respect of the conclusion reached by Kirby P. Kirby P himself stated that in reaching that conclusion, he did not “overlook the fact that the law is not concerned with the sufficiency of the suggested consideration”.

52 The second submission advanced by Mr Silver involved an examination of whether anything was offered to Ms Liu and Mr Gao in the English agreement to which they were not already entitled. To a degree this submission rested on the conclusion that in June 2016, “there was no value in the business or in the shares of the company” as “the lease was about to expire and not be renewed [and] the business must close in the near term”. For the reasons I have mentioned, I do not consider that this was necessarily the view of the parties at the time.

53 Mr Silver submitted that the covenants in the English agreement, other than the promises for Ms Wang’s benefit, were “solely of boilerplate terms” and “none of these terms were requested by the defendants”.

54 In my view, however, the English agreement was a fresh agreement by which the parties expressed their rights and obligations in respect of their ongoing relationship as shareholders in Blue Ocean. Their first challenge was to salvage the franchise business conducted by the company at Melbourne Central. The parties had not excluded that as an option or that other business ventures might be pursued. Failing these options, the parties made provision for the distribution of the proceeds of a sale of the business then conducted by the company.

55 From about July 2014 to June 2016, the parties’ relationship as shareholders in Blue Ocean was, in large part, governed by the Mandarin agreement. That agreement stated that “matters not yet covered” by that agreement might be the subject of negotiation and separate agreement.

56 Recital 10 of the English agreement expressed the parties’ intention that the agreement should “replace” the Mandarin agreement “and record their aims and objectives in relation to [Blue Ocean] and to provide for [its] operation and administration”. Clause 21 expressly provided that all earlier agreements, including the Mandarin agreement, would have no effect “in relation to any matter dealt with” in the English agreement.

57 The parties, including Ms Liu and Mr Gao, by executing the English agreement, committed themselves to its terms. Those provisions made it clear that the parties anticipated an ongoing relationship, with mutual promises and benefits and in circumstances where earlier rights and obligations were to be replaced.

58 By their defences, Ms Liu and Mr Gao admitted the allegation that since about 12 January 2017, Blue Ocean had “permanently or indefinitely ceased operating” the franchise business. This activated clause 7.3(a)(ii) of the English agreement which provided that the sum of $300,000 paid by Ms Wang in July 2014 would “be immediately repayable in full” upon the “permanent or indefinite cessation of the company’s business (including, but not limited to ... cessation of the franchise agreement)”.

59 In the circumstances, Ms Wang is entitled to judgment against the defendants that the defendants pay to the plaintiff the sum of $300,000.

I certify that these 18 pages are a true copy of the reasons for decision of His Honour Judge Anderson delivered on 17 October 2017.

County Court of Victoria

Wang v Liu & Anor [2017] VCC 1480 (17 October 2017)