CONSIDERATION
34 The Hu Parties oppose the Illegality Amendment on the basis that it is both not arguable and futile. For the reasons which follow, I am satisfied that leave to amend to include the Illegality Amendment should be refused.
35 The illegality defence on which IPPL seeks to rely is informed by the public policy of international comity. Australian courts will not will not enforce a contract that provides for the commission of a criminal offence in a foreign country with which Australia is not at war, regardless of whether the contact is implemented and the criminal offence is committed. In order for IPPL to avail itself of a defence based on the principle it must first establish that there is an act, or a contemplated act, on Chinese soil which is necessary for the performance of the contract sued upon which is said to be illegal under Chinese law: Fullerton Nominees Pty Ltd v Darmago [2000] WASCA 4 at [28]-[32] per Ipp J (Kennedy and Wallwork JJ agreeing).
36 A useful illustration of the principle in the present context is provided by the facts in Xinfeng Australia Internal Investment Pty Ltd v GR Capital Group Pty Ltd [2021] NSWSC 614. That decision arose in circumstances where an application was made to set aside a judgment obtained pursuant to consent orders. The judgment had not been enforced. The defendants moved to set it aside on the ground of illegality. The illegality relied upon concerned an alleged contravention of Chinese exchange control laws arising from a facility agreement that was relied upon as the basis for a debt claim in the proceedings which had been settled by consent. In that context, having concluded that the primary contention of illegality under Chinese law was not established, Parker J observed, in obiter, that the "agreement to settle the proceedings was a separate and distinct contract which cannot be impeached even if the underlying claim by the plaintiffs was arguably invalid": Xinfeng at [207].
37 IPPL in essence contend that the precise boundaries of the defence are not defined and submit that there is no judgment which says that the defence does not apply where there is no act on foreign soil. IPPL points to the observation made by Parker J in Xinfeng at [143], to the effect that there are a number of uncertainties about how far the illegality principle extends, one of which is the connection between the violation of foreign law and the obligation being enforced (at [152]ff). That may be so. However, the fact that the metes and bounds of the defence are not defined does not alter the fact that IPPL has not identified any case in which an illegality defence has been recognised in remotely similar circumstances nor advanced any sound basis rooted in comity to support the application of the principle to the facts as alleged by it. An analysis of the pleadings presently in issue demonstrates that IPPL's Illegality Amendment is predicated on allegations which do not form part of the claim advanced by the Hu Parties. Even taking IPPL's allegations at their highest, the facts alleged are divorced from the obligation which the Hu Parties seek to enforce and at their highest are incidental factual allegations about events adjacent to the anterior convertible debentures agreement. There is no allegation that the China subscription amount was made or required to be made under contract that is relevant to the Hu Parties' claim such that it would attract the policy considerations that inform the illegality defence.
38 The Hu Parties sue on the Hu Deed. The Hu Deed secures obligations that arise from the First Judgment Debt and extends to the Second Judgment Debt. In the present proceedings, the Hu Parties do not claim under the convertible debentures agreement with Blue Whale. They do not sue in respect of or in reliance on the antecedent debt owed in respect of the convertible debentures. The Hu Parties' cross-claim does not refer to the convertible debentures. No aspect of the performance of the Hu Deed requires or even involves an act on Chinese soil.
39 The Illegality Amendment is underpinned by an allegation that there is an overarching or composite contract which is illegal under Chinese law and/or that the payment to the Hu Parties from the surplus funds would be illegal under Chinese law. Although IPPL equivocated on this issue in its submissions on this application, the amendment proffered expressly contends that there is one agreement. Indeed, the overarching contract allegation appears to be directed to establishing the requisite connection with China in order to engage the public policy which informs the illegality defence. The allegation that there is an overarching or composite contract is not fairly arguable for the following reasons.
40 First, IPPL does not plead any facts to support its contention that there is one composite contract. The sequence of the individual agreements, which are implicitly relied on to form the component parts of the composite contract alleged, do not support the allegation of a composite contract and is not otherwise addressed in the pleading.
41 Secondly, an illegality defence based on the existence of a composite contract is further flawed in that there are different parties to the Hu Deed on the one hand and the composite contract which is alleged. The contract for convertible debentures, which forms part of the alleged composite contract, is between the Hu Parties, Blue Whale and IPPL, whereas the Hu Deed does not involve Blue Whale, but involves the Hu Parties, IPPL, Mr Gu and ICM.
42 The third impediment to the Illegality Amendment arises from the settlement agreement, formed when the Calderbank offer was accepted on about 15 April 2020. This is an intervening event between the agreement to invest in the convertible debentures in 2019 and the Hu Deed in 2020. The Hu Parties submit, and I accept, that the settlement agreement strengthens their contention that the Illegality Amendment is futile. Not only do the Hu Parties not sue on the convertible debentures, they could not sue on the convertible debentures following the settlement of the First Proceedings because they sued on the settlement agreement to obtain the First Judgment Debt. If the settlement agreement was an accord and satisfaction, then it had the effect of extinguishing the underlying cause of action on the convertible debentures. In that case, the Hu Parties' only rights were to sue on the settlement agreement itself. If the settlement agreement was an accord and conditional satisfaction, then the Hu Parties were precluded from enforcing their rights under the contract for convertible debentures before performance under the settlement agreement was due: Osborn v McDermott [1998] 3 VR 1 at 10-11. Upon default in the performance of the settlement agreement, assuming the default was a repudiation or essential breach, the Hu Parties faced an election between terminating the settlement agreement and pursuing their cause of action on the convertible debentures or suing on the settlement agreement in place of the original cause of action: Deutsch v Deutsch [2012] VSC 227; 6 ASTLR 386 at [86]-[103]. In the Second Proceeding, the Hu Parties sued on the settlement agreement itself. They did not sue in reliance on the agreement pursuant to which the convertible debentures were issued. This constituted an election to affirm the settlement agreement. Thereafter, they were prevented from terminating unless there was a further breach entitling them to terminate, or a further or continuing repudiation: see Galafassi v Kelly [2014] NSWCA 190; 87 NSWLR 119 at [73]-[84] (Gleeson JA; Bathurst CJ and Ward JA agreeing).
43 Relatedly, IPPL's reliance on Moffet v Dillon [1999] 2 VR 480 to support the submission that it is at least reasonably arguable that Chinese law may provide that a subsequent contract - in this case the Hu Deed - is unenforceable, is misplaced. The principle relied upon by IPPL is that one can sue on a negotiable instrument and it does not destroy the underlying cause of action until payment is received. Here, the Hu Parties do not sue on a negotiable instrument. They sue on the Hu Deed. Further, they have sued on the debt the subject of the Hu Deed to judgment.
44 Fifthly, insofar as IPPL contends that Chinese law may treat the convertible debentures and the Hu Deed as one composite contract, that does not remedy the inherent flaws in the Illegality Amendment because the illegality defence is a defence to the enforcement of an Australian contract in an Australian court. Through the lens of comity considerations, Chinese law is only relevant to whether performance of the Australian contract sued upon involves an illegal act on foreign soil. Here, the Australian contract is the Hu Deed and it does not involve an illegal act on Chinese soil.
45 Sixthly, IPPL's submissions based on unclean hands depend on the Illegality Amendment being fairly arguable. It falls with the Illegality Amendment. In order to rely on the Hu Parties having unclean hands, IPPL must establish that the Hu Parties must rely on the alleged illegal act in order to establish their cause of action: Black Uhlans Inc v New South Wales Crime Commission [2002] NSWSC 1060; 12 BPR 22421 at [179]-[181] and [185]. The Hu Parties do not rely on the alleged illegal act in the requisite way or at all. The Hu Parties do not need to establish any advance occurred pursuant to the convertible debentures in order to establish their claim.
46 Finally, in the context of the complicated procedural history, and having regard to the flaws I have identified, I am satisfied that case management considerations weigh against granting leave to amend. If the amendment is permitted at this stage of the hearing it will likely prolong the final hearing, noting that foreign law is a matter which is proved as a fact. That is so even though an illegality defence forms part of the Hu Parties' defence to Great Lands' cross-claim. I do not see force in what was essentially a goose and gander submission advanced by IPPL. An integral part of the Great Lands' cross-claim is based on an advance which is alleged to have occurred in China. The Hu Parties rely on that act in China as the relevant illegal act for the purpose of the illegality defence that they raise to Great Lands' claim. By way of contrast, the Hu Parties do not base their claim on any act which occurred in China. While there will be some overlap in the evidence as to the content of the relevant Chinese law if the amendment is allowed, the evidence in relation to the manner in which that law applies, if at all, to the different facts and circumstances alleged in the Illegality Amendment will necessarily travel beyond that relevant to Great Lands' Cross-claim.
47 Conscious of the caution that is necessarily warranted in the context of an application for leave to amend in the face of a strike out application, for the reasons identified, I am satisfied that leave must be refused in respect of the Illegality Amendment.
48 I now turn to the Priority Amendment.
49 As mentioned above, the Priority Amendment is dependent on the Illegality Amendment. It is pithily expressed ([30A(aa) of the proposed amended defence):
30A And in answer to all of paragraphs 15 - 30 of the SFASOCC, [IPPL] says:
…
(aa) that [IPPL's] interest in the Surplus Funds has priority over any interest of any of the [Hu Parties], including because the [Hu Parties] acquired their interest in violation of the laws of a friendly country as pleaded above.
50 The Priority Amendment relies on the alleged illegal conduct on the part of the Hu Parties to support IPPL's contention that it has a better equitable interest.
51 The proposed amended defence does not allege any material facts which in any way connect the impugned alleged illegality on the part of the Hu Parties in a way that relevantly impacts the competing interest that IPPL asserts. Rather, IPPL relies on what Young J described in FAI Insurances Ltd v Pioneer Concrete Services Ltd (1987) 15 NSWLR 552 at 554-555 as "general naughtiness", and does not raise any issue which could, according to principle, have a bearing on the respective priorities of the parties' asserted equitable interests.
52 Both parties relied on Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd [2017] NSWCA 99; 18 BPR 36,683. In Linfield, Ward JA (as her Honour then was) (with whom McColl and Gleeson JJA agreed) considered the question as to whether disentitling conduct is confined to conduct that causes or contributes to the creation or acquisition of the later interest. After considering the historical development and context of the priority principles, her Honour concluded that such principles "do not rest upon any narrow concept of disentitling conduct": at [232]. Her Honour held at [228] that "in an appropriate case…the concept of disentitling conduct can extend to conduct which contributes to a failure by the holder of a later interest to have taken steps at an earlier time to protect the rights that it had". The identification of the better equity turns upon all the circumstances of the case: Linfield at [257]. That said, there must be some connection or impact on the other party's equitable interest or the other party's conduct in relation to its equitable interest. Indeed, Ward JA observed that the emphasis on a party's alteration of position is "instructive", by reference to the dissenting joint judgment of Duffy and Starke JJ in Lapin v Abigail [1930] HCA 6; 44 CLR 166, which may extend to a decision not to act: Linfield at [242]-[243].
53 IPPL does not allege any material facts in its proposed amended defence which allege the requisite connection between the conduct they seek to impugn as illegal under Chinese law and the interest they seek to assert or their conduct in respect of that interest. Taking the proposed amended defence at its highest, I am satisfied that the Priority Amendment is not fairly arguable - it does not rise above an allegation of general naughtiness on the part of the Hu Parties. Accordingly, leave to amend must be refused. Again, I have reached this conclusion conscious of the caution attendant on the exercise of discretion in the present circumstances.