Ambiguous and Vague contract terms? Determining parties to a contract: Bi v Wu [2021] VSC 447

By Alicia Hill, Principle and Angela Wang, Law Clerk

The case of Bi v Wu [2021] VSC 447 exemplifies a contract where the parties to the agreement are unclear and ambiguous. How do courts act in these circumstances when determination of the exact parties affects the award of damages?

Background

The plaintiff, Ms Bi is the sole director and 50% shareholder of Zhongda Investment Pty Ltd (‘Zhongda’). The defendant, Mr Wu is the former chief executive officer of Faster Enterprises Ltd (‘FEL’).

Ms Bi and Mr Wu signed an ‘Investment Agreement’ on 1 September 2016.  Ms Bi agreed to invest $1,200,000 through Zhongda, in exchange for 6,000,000 shares in FEL at $0.20 per share. Mr Wu agreed to buy-back these shares at a price of $0.50 per share if, at Ms Bi’s choice and within a 3-month period, the average closing stock price of the shares for a consecutive period of 45 trading days was less than $0.50 per share.

Mr Wu induced Ms Bi to enter into the agreement by setting up a new company (Zhongda) for purposes of tax benefits, and to act as a special purpose corporate vehicle to subscribe for purchasing and receive shares.

The share price never closed above $0.25 per share and Ms Bi exercised this buy-back option. Mr Wu refused to transfer the shares back.

Arguments

Mr Wu, as Party A to the agreement, argued that the contract is strictly between him and Ms Bi as natural persons, rendering the Buy-back option inapplicable due to the FEL shares being purchased in Zhongda’s name.

Ms Bi, as Party B, contended that the Buy-back obligation extends to Zhongda as a corporate entity and claims an entitlement to damages. Alternatively, she argued that Mr Wu is estopped from denying his liability to buy-back the FEL shares.

Judgment

Ultimately, the court found that both Ms Bi and Zhongda were principal parties to the agreement. Therefore, Zhongda is entitled to enforce the Buy-back obligation, and Mr Wu is estopped from denying that it was a party on whom this obligation fell.   

In construing the meaning of ‘Party B’, the Court referenced authority from Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales[1], whereby contracts wholly evidenced in writing should be interpreted objectively, from the perspective of a reasonable businessperson.  Such an approach requires some – even if limited – reference to factors external to the text of the contract.

  • Whilst there are some hints of formality, the agreement is colloquially written in Mandarin and between persons with no legal training nor concept of separate legal personality.
  • In interpretation of the agreement, it is clear Ms Bi wanted the comfort of having a guaranteed provision of Buy-back as a fallback option, and she relied upon this in entering the agreement.
  • Discussions reveal that Mr Wu encouraged Ms Bi to invest through a corporate vehicle, such that a reasonable person would understand ‘shares of Party B’ to extend to shares acquired in the name of a special purpose corporate vehicle.
  • The parties followed habits referred to in the case of Davies v Apted[2], where Kourakis CJ observed that principals operating a business through a corporate vehicle in which they control, is likely to use personal pronouns in the course of contractual discussions.

The Court was satisfied that Mr Wu should be prevented from denying that the Investment Agreement should be applied to the purchase of shares in Zhongda’s name.  The Court made reference to Brennan J’s principles set out in Waltons Stores (Interstate) Ltd v Maher[3] in support of this finding, namely:

  • Ms Bi assumed that Mr Wu would buy-back the shares if acquired in the name of Zhongda;
  • Mr Wu’s statements and conduct in meetings induced Ms Bi to adopt such assumption;
  • Ms Bi acted in reliance on this assumption by proceeding with the share subscription in Zhongda’s name and by not specifically ensuring Zhongda’s name was referred to in the agreement;
  • Mr Wu had knowledge that Ms Bi would not have effected the purchase in her company’s name had she believed otherwise;
  • Ms Bi’s actions in effecting the purchase constitutes detriment if the assumption relied upon is not fulfilled, and she loses the benefit gained with the Buy-back obligation; and
  • Mr Wu has failed to act in avoidance of Ms Bi’s detriment, as he refuses to be bound by the Buy-back obligation.

Takeaways
This case reaffirms some long-standing principles in contract law. That being an objective, reasonable businessperson’s perspective is to be used in construing ambiguous contract terms.

It also affirms the promissory estoppel principles laid out in Walton Stones where if promises are made, then relied on by a party, with the other party’s knowledge of this reliance and the conduct of the party appears to support the existence of an agreement, then the court will prevent a party from attempting to assert no such agreement existed.

This case also reiterates to parties intending to enter into commercial contracts:

  • Attaining lawyers and legal persons to draft a substantial contract is advantageous and avoids (at least to a greater extent) vague and ambiguous contract terms; and
  • The importance in the clarity and preciseness of contract terms, especially when natural persons and corporations in which they are in control of are present.

If you have any queries about any of the matters raised by this case, then please contact Alicia Hill on (03) 8540 0292 or alicia.hill@mst.com.au

 

[1] (1982) 149 CLR 337.

[2] [2013] SASCFC 92.

[3] (1988) 164 CLR 387.