Waterwood Hotel Management Pty Ltd v KOP International Pty Ltd & Anor.

It was once said that abstract art confused people, causing them to say “things don’t look like that”. To the considerable misfortune of the parties to these proceedings, the same could be said of the documents which give rise to their dispute. While the general nature of the commercial transaction they are intended to bring about may be easy to imagine, it is difficult to see how they do so in fact or law. This judgment resolves whether that difficulty, or some other reason, precludes the plaintiff (“Waterwood”) from maintaining ex parte interlocutory relief originally granted to it in the circumstances described in the next paragraphs.

These proceedings came before me in the Duty List after hours on Friday, 12 June 2015. They concern the ownership and operation of a function centre known as the “Newport Mirage Hotel” (the “Business”) located on the land known as 2 Queens Parade, Newport (the “Land”), directly across the road from the well-known Newport Arms Hotel.

The case presented for urgent relief at the ex parte hearing was to the effect that Waterwood was the lessee of the Land and the Business. On Friday, 5 June 2015 persons representing one or both of the defendants purported to re-enter and take possession of the Land and the Business without apparent cause. The Court was taken to correspondence which made only very vague allegations of breach of the arrangement between the parties. Counsel for Waterwood assured the Court that no rent was outstanding. There was said to be special urgency because on the following Sunday a well-advertised wedding expo was to be held at the Business with a view to generating orders that would be an important feature of the Business for the year ahead. The successful conduct of that expo was threatened unless Waterwood was let back into the Business.

By reason of the lack of specificity of the allegations of breach, Waterwood’s confident statement to the Court through its counsel that no rent was owing and because of the threat to the wedding expo, upon Waterwood giving the usual undertaking as to damages and undertaking to keep proper accounts in respect of the operation of the Business, the Court made ex parte orders (the “ex parte orders”) which included:

The proceedings returned to Court at 2.00pm on Monday, 15 June 2015. The defendants appeared and filed in Court a notice of motion seeking to have the ex parte orders dismissed (the “defendants’ motion”). The defendants’ motion also included prayers for relief:

The matter returned to Court the next day and further directions were made for the hearing of the defendants’ motion. That hearing then occupied the entire day on Thursday, 18 June 2015. At that hearing Mr S Burchett of Counsel appeared with Mr F Santisi of Counsel for Waterwood. Mr G Sirtes of Senior Counsel appeared with Mr N Carney of Counsel for the defendants. The Court reserved its decision.

At the hearing of the defendants’ motion, Senior Counsel for the defendants conceded, correctly, that there was no jurisdictional basis for the Court to make the orders sought in paragraphs 6 and 7 of the defendants’ motion (see paragraph [5] above). The defendants confined their case to pressing for the ex parte orders to be discharged. They also submitted that the statement of claim should be struck out with leave to replead.

Waterwood submitted that the ex parte orders should continue undisturbed and also sought an additional order:

Upon a proper examination of all the material presented by the parties at the hearing of the defendants’ motion, it became apparent that this case is nowhere near as straightforward as it was originally presented to the Court at the ex parte hearing. In making that observation the Court intends no criticism of those who appeared at that first, urgent occasion. Nevertheless, the Court has concluded that the ex parte orders should be discharged because:

The first defendant (“KOP”) is a company controlled by Ms Xiufeng Xu (“Ms Xu”). It is the trustee of the KOP Investments Trust.

The second defendant, MOOT Hotel Management Pty Ltd (“MOOT”) was registered on 27 March 2014. Ms Xu was its sole director, secretary and shareholder (holding 100 ordinary $1.00 shares).

By contract made on 4 April 2014 KOP as trustee for KOP Investments Trust agreed to buy the Land from Bayfield Hotels Wharf Pty Ltd for $8,550,000. That purchase was settled in June 2014.

By a business sale agreement made on 4 April 2014, MOOT agreed to buy the Business from Bayfield Hotels Mirage Pty Ltd. The purchase price for the Business was $950,000 for the goodwill plus the value of stock on completion and some adjustments. The purchase of the Business also settled in June 2014. The evidence does not disclose the actual final figure for the purchase price.

For the purposes of completing the purchases referred to in paragraphs [12] and [13] above, Ms Xu applied about $4,000,000 of her own funds and borrowed a further $6,000,000 through a commercial loan facility with the ANZ Bank. The Court infers that ANZ has a mortgage over the Land to secure that commercial loan facility.

At the time of the transactions referred to in paragraphs [12] and [13] above Bayfield Hotels Wharf Pty Limited leased the Land to Bayfield Hotels Mirage Pty Ltd. The lease was for a term of 12 months terminating on 31 December 2014. Bayfield Hotels Mirage Pty Limited assigned its interests as lessee under that lease to MOOT. The annual rent payable under that lease was approximately $690,000 plus GST.

At the start of 2015 Mr Lit Moon Lye (also known as Corey Lye) was employed as manager of the Business. He is an accountant and tax agent and also operated an accounting consultancy known as AGC Advisory Pty Ltd.

Waterwood was registered on 9 January 2015. Mr Lye is its sole director, secretary and shareholder.

Between 10 and 13 January 2015 Mr Lye arranged for $15,000 to be paid to KOP for what his bank records at the time describe as “Hotel lease deposit”.

On 5 February 2015 Mr Lye emailed Ms Xu’s daughter:

On 16 February 2015 Ms Xu arranged for $100,000 to be deposited into MOOT’s bank account.

A series of unchallenged corporate records demonstrate that on 5 March 2015 with effect from 1 March 2015 a number of things happened. Ms Xu resigned as a director of MOOT. Mr Lye became a director of MOOT. Ms Xu transferred her 100 shares in MOOT to Waterwood for $100. Those appointments and transactions, all of which were signed by Ms Xu, were then apparently reversed on 5 March 2015 with effect from 1 March 2015. I use the word apparently because there is evidence the reversal may have occurred later, but nothing turns on this. Mr Lye says that those reversals were done without his knowledge or authority.

On 5 March 2015 Ms Xu on behalf of KOP (described as “Lessor”) and Mr Lye on behalf of Waterwood (described as “Lessee”) entered into identical agreements in Chinese and English entitled “Hotel Lease Agreement” (the “HLA”). There is a question, irrelevant for present purposes, as to whether the solicitors who prepared the HLA were acting solely for KOP or for both KOP and Waterwood.

The HLA included:

At the same time, Ms Xu in her personal capacity (described as the “Indemnifier”) and Mr Lye on behalf of Waterwood (Waterwood being described as the “Indemnified Party”) executed a document entitled “Share Transfer Indemnity Deed”, the purpose and operation of which is sufficiently described by its recitals:

For reasons which are set out in paragraph [30] below, the copy of the Share Transfer Indemnity Deed which in evidence has been marked as “Cancelled”.

From early March 2015 Waterwood, through Mr Lye, took control of the Land and the operation of the Business, including MOOT’s bank account for the Business. Mr Lye at least had password access to operate the account by internet banking. Income received from the operation of the Business was paid into MOOT’s bank account. Expenses were paid by Mr Lye from that account. The employees who up to March 2015 had been engaged in the operation of the Business continued to be paid from MOOT’s bank account.

The first monthly rental instalment of $48,833 was due in advance under the HLA.

On 30 March 2015 KOP received $113,333.33 for what was described as “Deposit and Lease pay”. This was paid from MOOT’s bank account.

On 1 April 2015 the second monthly instalment and balance of rent was due. Therefore as at that date $97,666 in rent was payable and Waterwood submits that it had in fact paid $128,333.33 (comprising the $15,000 deposit – see paragraph [18] above – and the payment made on 30 March – see paragraph [28] above).

On 10 April 2015 Ms Xu (again on behalf of KOP and described as “Lessor”) and Mr Lye (again on behalf of Waterwood and described as “Lessee”) entered into a Chinese language document entitled “Supplementary Agreement” (the “SA”). They prepared the SA without legal assistance. Given its somewhat unusual terms, it is necessary to reproduce the entire operative terms of the SA in translation (including deletions).

It is not necessary for present purposes to delve into the details of why the parties entered into the SA. Ms Xu says one reason was that she did not understand the effect of what was being done in relation to her ownership of MOOT and the operation of the Share Transfer Indemnity Deed. The Court makes no finding about that. However there is some agreement that another reason was difficulties encountered with ANZ as KOP and MOOT’s banker. The Court takes judicial notice from its own knowledge of mortgage documentation that the transfer of the complete beneficial ownership of MOOT as mortgagor, without ANZ’s consent, was probably an event of default under the relevant loan facility documents (see paragraph [14] above).

On 10 April 2015 KOP received a further $17,500 from MOOT’s bank account described in the banking records as “Lease Payment; Newport Mirage”.

Between October 2014 to early December 2014 Ms Lihua Lu (also known as Lucy Lu) had been MOOT’s accounts manager. When she left she handed over MOOT’s financial records to Mr Lye. In early May 2015 Ms Xu appointed Ms Lu to review MOOT’s accounts up to February 2015. Ms Lu’s evidence was that as far as she was aware the purpose of her appointment was “to assist with finalising the adjustments with respect to the settlement of the change-over between” KOP and Waterwood.

On 18 May 2015 Ms Lu emailed Mr Lye, copied to Ms Xu’s daughter, with a number of accounting and other queries which, at least in part, are the sort of accounting queries made when parties are agreeing adjustments as to pre and post completion liabilities in connection with the sale of a business.

On 28 May 2015 Ms Lu emailed Mr Lye:

The attached settlement sheet includes a number of items under a heading “Corey calculation” next to another heading “Lucy comment” and “Lucy calculation”. It appears from the document that Ms Lu agreed with most of Mr Lye’s calculations. The literal bottom line was an entry described as “payment to be made to the new management” (presumably by KOP) of $202,873.27.

On 3 June 2015 Mr Lye responded to Ms Lu (again copied to Ms Xu’s daughter) by an email headed “Settlement final” which included:

According to Mr Lye, at a meeting at the Business on 5 June 2015 attended by Ms Xu and Ms Lu, Ms Xu told Mr Lye that she would not agree to the final settlement figures unless Waterwood agreed to pay tax liabilities of $138,631.00 which, according to Mr Lye, related to the operation of the Business prior to 1 March 2015. Mr Lye contended that those were not liabilities that Waterwood had to pay. His evidence is that in order to get Ms Xu’s agreement to the final settlement figures, he caused Waterwood to pay those tax liabilities. Those liabilities were again paid out of MOOT’s bank account for the Business. Mr Lye also says that it was not until 5 June 2015 that he was informed that he had been removed as a director of MOOT and that the transfer of Ms Xu’s shares in MOOT had been reversed.

Despite paying the tax liabilities, later on 5 June 2015 Ms Xu, excluded Waterwood’s executive staff and purported to take control of the Land and the Business.

On 6 June 2015 KOP gave a notice in Chinese addressed to Waterwood:

Also on 6 June 2015 Ms Xu wrote a long letter in Chinese to Mr Lye. With no disrespect intended, that letter is very discursive. In essence it makes allegations against Mr Lye of embezzling funds, refusing to pay taxes (this is a reference to the email of 5 February 2015 – see paragraph [19] above), failing to enter into appropriate insurances for employees and ignoring warnings from the Australian Taxation Office. The letter concludes (emphasis in original):

On 9 June 2015 Waterwood’s solicitors wrote to KOP setting a deadline of 5.00pm on Wednesday 10 June 2015 for KOP to restore possession of the Land and Business to Waterwood. Failing compliance, the letter threatened the commencement of proceedings including injunctive relief of the kind that was ultimately sought two days later.

Also on 9 June 2015 Ms Xu on behalf of KOP wrote another letter in Chinese to Waterwood generally restating, although more briefly, the contents of the letter referred to in paragraph [41] above.

From a traditional conveyancing perspective, the history set out above can only be politely described as a mess. Insofar as Waterwood claims to be entitled to operate the Business on the Land, Waterwood has at least three fundamental legal problems.

Possibly the only clear and straightforward aspect of this matter is the initial legal position. KOP owned the Land. MOOT owned the assets which comprised the Business and employed the persons who worked in the Business. Waterwood’s problems begin where that clarity ends.

First, by the HLA KOP purported to grant a lease of something it did not own (the Business) and failed to grant in terms a lease of what it did own (the Land). Clearly intended to be a lease of the Business, it is difficult to see how the HLA operates as a lease of the Land. The HLA contains no operative provision of demise of the Business or the Land, although this defect can be overcome in relation to the Business by reading Recital B (see paragraph [23] above) as an operative provision. While that course was anathema to an earlier generation of black‑letter lawyers, it is common enough today where the customary prohibition against including operative provisions in the recitals is often applied more in the breach than the observance. Even in what might be thought to have been stricter times it was accepted that “a recital in a deed may operate as a covenant, where it appears to have been the intention of the parties that it should so operate” (Norton on Deeds, Sweet & Maxwell Ltd, London, 1928, p 215).

Second, Waterwood has a problem of privity. MOOT, which does own the assets of the Business, is not a party to the HLA. Nor is it referred to anywhere in the HLA. For example, there is no express obligation on KOP to procure MOOT to do anything with the latter’s assets for the benefit of Waterwood. Nor is there any pleading or evidence that there was any type of relationship between KOP and MOOT whereby KOP could bind MOOT (for example, agency or partnership).

Third, Waterwood no longer controls MOOT, the latter being the company which owns the assets and employs the employees of the Business. While perhaps technically cumbersome, what occurred on 5 March 2015 with effect from 1 March 2015 made legal and commercial sense: Waterwood acquired the shares in MOOT, Mr Lye became MOOT’s sole director and Waterwood had the benefit of an indemnity from Ms Xu for MOOT’s pre-acquisition liabilities. However, there is no evidence of any agreement pursuant to which those steps were taken. Paragraph 5 of Waterwood’s Statement of Claim (see paragraph [50] below) pleads that those steps occurred “incidental to the [HLA]” but it does not specify by what legal obligation those steps were taken (for example collateral contract or implied term). In any event, Waterwood’s rights in relation to MOOT, in particular the all important question of control of MOOT’s bank account, are now governed by the unusual arrangements set out in clauses 4, 7 and 10 of the SA (see paragraph [30] above). However, to describe those arrangements as unusual is not to conclude that they are illegal or unenforceable.

Waterwood’s statement of claim needs to be read cognisant of the difficulties referred to in the preceding paragraphs. In order to maintain the ex parte orders and to obtain the additional order which it seeks, Waterwood must satisfy the Court that there is a serious question to be tried as to its entitlement to the final relief which it claims. That final relief is:

Waterwood’s claim for final relief must itself be understood by reference to the case which it pleads. The most pertinent parts of its Statement of Claim are:

Waterwood did not demur from the proposition that it bore the onus of satisfying the Court that Waterwood was entitled to the continuation of the ex parte orders. Its arguments may be summarised as:

The defendants’ submissions may be summarised as:

The Court accepts Mr Sirtes SC’s submission that in granting interlocutory relief it is not for the Court to seek to make good the deficiencies in whatever bargain the parties have made. While it is clear from a legal point of view that the HLA as amended by the SA is a mess, that did not mean it was for the Court to try to clean up that mess, particularly through the medium of interlocutory relief.

The Court accepts that it may be possible, if the evidence is available, that through the application of any or all of the law relating to various forms of estoppel, statutory and common law misrepresentation, interpretation of contracts, implication of terms and rectification that Waterwood could plead a case that might give it title to both the Business and the Land. But it is not for the Court to find that case for Waterwood. The Court can and should only deal with the case which Waterwood has pleaded and the evidence which it has adduced. That means that Waterwood’s case must rise and fall on the basis of the effect of the HLA pleaded in paragraph 4 of Waterwood’s statement of claim (see paragraph [50] above). Even that pleading has been in part superseded by Waterwood’s sensible concession that, contrary to the allegation in paragraph 8 of its statement of claim, the SA was intended by the parties to it to have legal effect according to its terms, whatever they might mean. Therefore, the HLA had to be read with the SA. However, the parties to the SA are again KOP and Waterwood without MOOT.

In the course of address Mr Sirtes SC did not abandon the defendants’ submissions that rent was outstanding and that Waterwood had breached the HLA. However, he did not put those arguments at the forefront of his submissions. Rather, he focused the defendants’ attack on the matters which have been identified as Waterwood’s difficulties in paragraphs [44] to [48] above, in particular the fundamental problem of how Waterwood could demonstrate it had any rights against MOOT at all. The defendants were correct to take that approach because it is far from clear that Waterwood is in arrears of its rent or that it has committed some non-monetary breach of the HLA.

Before turning to the reasons why the Court has concluded that the ex parte orders should be discharged, I should first dispose of one of the defendants’ preliminary submissions, namely that a “lease of a business” is not something known to the law. This question was considered by Palmer J in Harrington v Harrington Services Pty Ltd (in liq) [2002] NSWSC 859; (2002) 11 BPR 20,211. Sharing Palmer J’s feeling that the “lease of a business” sounds a little strange to a black-letter property letter, I respectfully adopt his Honour’s analysis:

The definition of business in the HLA, including as it does goodwill (see paragraph [23] above) satisfies so much of Palmer J’s analysis of what is required for the lease of a business. However, that is no answer to Waterwood’s fundamental difficulty that KOP did not own the Business. It is to that issue to which the Court now turns as the first of six reasons for its conclusion that the ex parte orders should be discharged.

First, Waterwood has failed to demonstrate that there is a serious question to be tried as to its entitlement to the Business in circumstances where KOP did not own the assets or employ the employees which comprised the Business. Waterwood’s statement of claim does not plead any basis for what might be described as an equity against MOOT which would form the basis of a final order compelling MOOT, as the owner of the Business, to give Waterwood possession of the Business as lessee.

Putting the matter slightly differently, Waterwood’s statement of claim completely fails to address the issues identified in paragraphs [44] to [48] above as Waterwood’s difficulties. For example, it is no answer for Waterwood to point to Recital A of the HLA (see paragraph [23] above) which records that KOP is the owner of the Business. While that recital may have consequences for the case as between KOP and Waterwood arising from an estoppel by deed, it cannot affect MOOT as a non-party to the HLA. Nor would such an estoppel prevent the true position being relied upon by Waterwood for rectification or possibly rescission for misrepresentation (see N. Seddon, Seddon on Deeds, The Federation Press, 2015, para [5.5]). Furthermore, Waterwood’s reliance on Gentsis (see paragraph [51] above) does not assist it. In that case the lessor undoubtedly had an interest both in the land and the business which it leased. At least as presently pleaded, Waterwood’s argument does not surmount the difficulty that MOOT is not a party to the HLA.

Second, damages are an adequate remedy. The Court does not accept Waterwood’s submission that because it is, on its case, the lessee of both the Land and the Business, the Court’s usual reluctance to accept that damages are an adequate remedy in cases about land applies to the case at bar.

Waterwood’s case is primarily that it is the lessee of the Business with an incidental and necessary right to occupy the Land. Putting it another way, Waterwood’s entitlement (if any) is to occupy the Land for the purpose of it conducting the Business. Waterwood’s claim for specific performance is in essence a claim in ejectment to recover possession of the Business and the Land. Assuming it succeeds at final hearing, Waterwood’s damages would generally be limited to loss arising from the period of KOP and MOOT’s wrongful occupation of the Business and Land. Such claims for damages in relation to land, broadly described as mesne profits, are well understood by the law (see McGregor on Damages, Sweet & Maxwell Thomson Reuters, 2014, [1360] ff). On the other hand, if Waterwood is unable to establish a right to reoccupy the Business and Land, but is otherwise entitled to damages for breach of the HLA (perhaps referable to the profits it expected to make from the Business), this is again a process familiar to the law. Waterwood has been unable to demonstrate there is something unique about the Business for which it could not be adequately compensated by damages.

Third, the Court accepts the defendants’ submission that even if the HLA gives Waterwood the right to occupy the Land, there is no utility in making an interlocutory order for it to do so when it has failed to demonstrate a serious question to be tried on its current case as to how it says it is entitled to operate the Business on the Land.

Fourth, the arrangement to which the parties have come in the SA for the operation of MOOT’s bank account set out in paragraphs 4, 7 and 10 of the SA (see paragraph [30] above) are, at worst, unclear and, at best, convoluted. On any view they appear to contemplate a necessary degree of ongoing co‑operation between the parties both in dealing with each other and in dealing with ANZ as MOOT’s bank and mortgagee. Equity is traditionally reluctant to enforce by way of specific performance obligations which require personal co‑operation between parties whose relationship has broken down. The best example of this is in relation to attempts to enforce contracts of employment. However, that is only an example of the application of a more fundamental principle derived from an understanding of human nature and common sense. The law will only come into disrepute if it forces people to continue to cooperate with each other when the relationship of personal trust has broken down. That appears to be the case in the present proceedings.

Having access to MOOT’s bank account is a practical, critical requirement for Waterwood. So much is apparent both from the parties’ attempt to agree something about that access in the SA and from the further interlocutory order for which Waterwood presses in the present application (see paragraph [8] above). But any trust between the parties has clearly broken down. The discretionary consideration referred to in the preceding paragraph is a further reason why the Court both declines to extend the existing orders and declines to make the further orders sought by Waterwood.

Fifth, the Court accepts the defendants’ submission that, as a matter of discretion, the Court should not continue the existing orders because of the difficulty in which it places third parties, being the employees of the Business and those who wish to deal with the Business including, for example, people who might wish to book for a major event such as a wedding.

Waterwood submitted that MOOT had not proven it still employed the Business’ employees. That submission is rejected. The evidence shows the employees are paid out of MOOT’s bank account. There is no evidence that as at 1 March 2015 the employees were terminated as employees of MOOT and were re-hired by Waterwood. Prima facie they are Waterwood’s employees. An eloquent example of Waterwood’s position is provided by the employment of a new head chef not by MOOT or Waterwood but by Mirage F & B Pty Ltd t/as Newport Mirage Restaurant, a company registered on 1 May 2015 and controlled by a person with the same surname as Mr Lye.

Employees who were employed before 1 March 2015 will find themselves in the invidious position of being directed in their duties by persons who do not represent their employer. The relationship of employer and employee is a fundamental social contract and employees are entitled to know what their precise legal position is, from whom they are required to take direction and, importantly, against whom they may have recourse in the event of some difficulty in the relationship.

The same proposition about certainty of contract arises in relation to third parties who, in good faith, deal with Waterwood in connection with the Business. The Court will be slow to continue a situation where Waterwood enters into contracts with innocent third parties in connection with significant events such as weddings or other major functions in circumstances where there is a real doubt as to Waterwood’s title to the Business. It is not a sufficient answer to say that those parties might have an action against Waterwood for breach of something such as an implied warranty of authority.

Sixth, and finally, in circumstances where it appears a plaintiff has a weak case, the issue of a plaintiff’s capacity to meet any undertaking as to damages becomes a more significant issue in the interlocutory equation. The searches undertaken by the defendants have not disclosed any real property owned by Waterwood. A notice to produce for Waterwood’s financial records has produced only accounts for the Business. The Court infers that Waterwood was established for the purposes of running the Business. The only evidence of any assets apart from whatever its rights under the HLA may be, is its paid up capital of $100.

At the hearing of the defendants’ motion an undertaking as to damages was also proffered to the Court from Mr Lye personally. However, that was not accompanied by any evidence as to his personal circumstances. In considering the question of the adequacy of any undertaking, what the Court does know is that other than the $15,000 in deposits (see paragraph [18] above), all the other payments purportedly made under the HLA, as well as the payment of the disputed tax liabilities, were made from the operating account of the Business held by MOOT. In other words, all of those payments appear to have been made out of operating revenue of the Business rather than from the independent resources of MOOT or Mr Lye. Taking these matters together, the Court is not satisfied that MOOT’s undertaking as to damages has any value or that any additional value is provided by the further undertaking offered by Mr Lye personally. While not the decisive consideration, this conclusion is an additional reason for the Court’s decision not to extend the existing orders.

Mr Burchett, for Waterwood, accepted during the course of argument that, whatever happened, the statement of claim would require amendment. KOP and MOOT submitted that the statement of claim ought to be struck out with leave to re-plead. In paragraph 7 of the outline of KOP and MOOT’s submissions in support of the defendants’ motion (the overall effect of which is summarised in paragraph [52] above), they made eight specific complaints about the form of the statement of claim. Those complaints are justified.

Furthermore, as the Court has already observed, in its current form the statement of claim completely fails to grapple with the problem of how Waterwood says MOOT has any enforceable legal, equitable or other obligations to Waterwood in respect of the Business when MOOT is not a party to either the HLA or the SA. Insofar as Waterwood wishes to assert any entitlement to the Business it will have to re-plead its case. The statement of claim will be struck out with leave to Waterwood to re-plead.

Subject to affording the parties an opportunity to be heard as to their precise form, the Court proposes to make orders to the following effect: