$12 million commission on $24 million sale upheld, but not without collateral damage

The dangers which real estate agents face in seeking to broker creative arrangements between a seller and a buyer to circumvent foreign exchange controls has been the subject of two recent decisions of the Federal Court of Australia. The first instance is in the matter of APD Technology Pty Ltd v Maximo Developments Pty Ltd,[1] and in an appeal to the Full Court of the Federal Court of Australia in the same case, delivered on 25 August 2022.[2]

The facts of the case are complex but of significant interest.

Facts

APD Technology Pty Ltd (the seller) owned certain vacant land at Varsity Lakes and sold that land to a company controlled by Chinese nationals, Bondbao, for $24 million plus GST, in circumstances in which the commission charged by the seller’s agent (the agent) was $12 million plus GST, that is, $13.2 million inclusive of GST.

The seller sued the agent, and its directors, in the Federal Court seeking to recover the whole of the commission paid to the agent, less an amount said to be reflective of a fair and reasonable commission – which, it was contended, on a sale of $24 million, would have been no more than $528,000, being 2.2% of the sale price inclusive of GST.

The seller sued the agent alleging misrepresentation, breach of contract and breach of fiduciary duty.

It was found by the court, both at first instance and on appeal, that the purchase price was inflated to almost double the true price of the vacant land to achieve an ulterior purpose, that is, the circumvention of Chinese foreign exchange controls.

The claims

The various formulations of the case brought against the agent turned upon the proposition that it was allegedly represented by the agent to the seller that the bulk of the commission – being half of the sale price – would go back to the buyer.

The seller argued at trial that the agent:

• had failed to disclose to the seller that the claim for commission of $12 million exceeded the commission which was agreed to be paid under an earlier agency contract; and
• misrepresented that most of the commission on the inflated sale price was to be refunded to the buyer.

The evidence

The seller’s case against the agent turned upon the evidence given by the seller’s principal, Mr Doan (Doan).

Fortunately for the agent, Doan’s evidence at trial was not accepted and, on appeal, the Full Court of the Federal Court held that the trial judge made no error in not accepting Doan’s evidence as to his dealings with the agent.

It was held at trial that the seller’s argument that no reasonable seller of real property could conceivably agree to pay half of a sale price of $24 million for a commission “unless they had been told that this was in fact an artificially inflated purchase price to achieve some other purpose, such as assisting the purchaser in circumventing foreign exchange controls, cannot be accepted”.[3]

The reason for that finding was that the seller had “concluded essentially the same commission structure with Mr Rahmani (the principal of the agent) on numerous previous occasions where there was no suggestion of an artificially inflated purchase price or some ulterior purpose”.[4]

In fact, the court accepted, at first instance, that Doan was aware that most of the sale price above $12 million was to be paid back to the buyer.  It was not accepted that this was something he was ever told by the agent.

The failure of the seller’s case against the agent was referrable to the fact that the court at first instance found – which finding was upheld on appeal – that Doan was not an honest witness.  Doan’s dishonesty was evidenced by the fact that he was knowingly participating in a dishonest scheme, that is, the seller had:

“falsely reflected the purchase price which was in truth only $12 million plus approximately $300,000 in commission … as a sham to achieve the ulterior purpose being the circumvention of Chinese foreign exchange controls. On his (Doan’s) version he was a knowing participant in that sham. That reflects a propensity to dishonesty which might equally affect Mr Doan’s approach to the present case by falsely claiming to his advantage that he was told certain things by Mr Rahmani”.[5]

Having said that, the court at first instance also found that the principal of the agent’s credit was not “unscathed”. The agent was criticisedfor his conduct in backdating a Form 6 appointment and supplying a false invoice to assist Doan. Justice Stewart at first instance observed, “All that can be said for Mr Rahmani in that regard is that the scheme was not for his benefit”[6] and, unlike Mr Doan, he was upfront and candid about it in his evidence."[7]

A key finding of the court at first instance, that the seller, acting through Doan, was well aware of the commission to be charged and the manner in which the commission would be disbursed, arose from the evidence of the solicitor who acted on behalf of the seller (who was also sued), who gave evidence – which the trial judge accepted – that Doan was “one of the smartest and most cunning business people he had ever dealt with”.[8]

The appeal court judgment

The appeal court upheld the trial judge’s findings of credit against Doan and observed that the fallaciousness of the seller’s case was underlined by how he presented a different argument on appeal to the case argued at the trial.

The appeal court observed:

“The case presented at trial involved the proposition that the property was not worth more than $12 million and the bulk of the excess in the purchase price above $12 million would go back to the buyer via the commission. In contrast, the case now presented involves the proposition that the property was in fact worth more than $12 million and Mr Rahmani failed to disclose his belief to this effect to Mr Doan”.[9] (emphasis added)

The changing nature of the seller’s pleaded case, and the fluid character of Doan’s evidence, meant defeat for the seller.

The terms of the appointment

Ultimately then, the appointment entered into between the agency and the seller on 5 November 2016 – signed by Doan for the seller and Mr Rahmani for the agent – was upheld. That appointment provided for a list price for the property of $12 million, an exclusive agency appointment commencing on 2 November 2016, and a commission clause which provided as follows:

“Up to a purchase price of $12,245,000 the commission is 2.2% of the contract price including GST.  Any amount above $12,245,000, the commission is 2.2% of $12,245,000 plus 99% of the difference between the contract price and $12,245,000 (example: if the contract price is $15 million, the commission is $2,996,840 including GST) which, on the basis of a contract price of $15 million would see an effective commission of 20%”.[10](emphasis added)

Conclusion

The case is a fascinating insight into the machinations of foreign developers and the agents with whom they do business.

Whilst the agent in this case was found not to have engaged in misrepresentation, breach of contract or breach of a fiduciary duty, the disposition of the case turned upon the acceptance of the terms of an agency appointment which had been carefully drawn and properly executed and, most importantly of all, the rejection of the evidence of the principal of the seller.

Having said that, the agent did not escape criticism from the court for its involvement in a dishonest scheme.

Whilst the majority of agents will never be involved in transactions of this nature, the salutary lesson of the case is that, if one is engaged in transactions of such complexity and deviousness, structured in an attempt to avoid the requirements of foreign exchange controls, it is essential that agents carefully document their role and seek independent legal advice concerning their exposure to such a transaction.

References

[1] [2001] FCA 678.

[2] [2022] FC AFC 141.

[3] See paragraph 108 of the judgment at first instance.

[4] See again paragraph 108 of the judgment at first instance.

[5] See paragraph 111 of the judgment at first instance.

[6] Insofar as the significant commission was distributed to various parties at the direction of the seller and buyer.

[7] See paragraph 121 of the judgment at first instance.

[8] See paragraph 127 of the judgment of the Appeal Court.

[9] See paragraph 120 of the judgment of the Appeal Court.

[10] See paragraphs 30 and 31 of the judgment of the Appeal Court.