The current fast-paced world of commerce with complex transactions and multiple parties with distinct interests means we must ensure our contracts accurately identify the parties or they may be found to be invalid and ineffective. This was shown in the recent case of Waterwood Hotel Management Pty Ltd v KOP International Pty Ltd [2018] NSWSC 102.

The Waterwood Case

Background

The disputed agreement related to the ‘Newport Mirage’, a hotel on Sydney’s northern beaches. Mrs Xiufeng Xu was the sole director and shareholder of both KOP International Pty Ltd (KOP) the owner of the land on which the hotel was located and Moot Hotel Management Pty Ltd (Moot) which owned the hotel business.

In January 2015, Mr Corey Lye agreed, in principle, to a proposal under which he would take over the management of the hotel’s business for a period of time in exchange for a ‘rental’. To facilitate this arrangement, Mr Lye registered Waterwood Hotel Management Pty Ltd (Waterwood) on 9 January 2015.

On 5 March 2015, the agreement for the “lease of the business” of the Newport Mirage was entered into between KOP and Waterwood. Mr Lye then operated the business of the hotel until 5 June 2015 using the bank account of Moot. During this time the relationship soured leading to the termination of the agreement on 5 June 2015.

Issues with the Agreement

The nature of this transaction was both unusual and unorthodox, with the documents displaying a clear degree of conceptual ignorance with regard to the legal implications of the agreement. Essentially, KOP had purported to grant a lease of something it did not own, the business, and failed to grant a lease of what it did own, the land. Further, the contract contained many provisions that would normally be found in a lease of land, which, in the context of this agreement, were inappropriate.

The Court’s Finding

The plaintiff (Waterwood) pleaded a number of matters in respect of this failed agreement including:

  1. Agency, Trust & Estoppel (in support of finding a contract); and
  2. Damages and Compensation if a contract could be found; or
  3. Restitution in the alternative.

Interestingly neither mistake or rectification were raised.

The Court deemed that the plaintiff’s claims based on contract and misrepresentation could not be sustained given that the agreement was both ineffective and unenforceable. Accordingly, damages were not available in the event of a breach. In any case, the Court not only highlighted that it should not be assumed that any claim for rectification or mistake would have succeeded, but it also found that termination was justified in these circumstances.

Lessons from the case

Where the contracts are complex, the transactions are large and our clients have a number of related entities with separate and distinct legal identities and assets, it is more important than ever to:

  • Undertake proper due diligence on your contracting counter-party including proper ASIC checks and property searches; and
  • Properly identify the contracting parties; and
  • Ensure the party conferring or giving a right is legally able to confer or give that right.