Mao v Bao

Background

1. The factual background to the dispute is set out in the principal judgment (and the factual findings are not here the subject of challenge). It is convenient, however, briefly to note the chronology of events. In what follows, references to paragraph numbers, unless otherwise indicated, are to the principal judgment.
2. On 27 May 2004, Mr Mao purchased the Vaucluse Property in his name with the intention (and this was common ground) that it be for the benefit of Mr Bao (who was then living in China but interested in establishing a home in Australia) ([41]-[42]). The primary judge found that when Mr Bao and his wife, Ms Qiu, visited Australia in late 2003/early 2004 an unwritten agreement was reached between Mr Mao and Mr Bao ([42]); and that, by this agreement, Mr Mao agreed with Mr Bao to hold the Vaucluse Property in his name and pay the expenses, provided that Mr Bao contributed the necessary funds to meet those expenses ([216]-[217]). Pursuant to the arrangement, Mr Bao was to provide funds to cover the ongoing interest and holding costs in respect of the Vaucluse Property ([42]).
3. Funds for the purchase of the Vaucluse Property were provided from three sources: funds provided by Mr Bao to Mr Mao's now ex-wife, Ms Zhang (between March and May 2004, Mr Bao transferred ¥12,586,200 ($2,076,113) via an intermediary, KVB Kunlun, to Australia ([43], [156])); a mortgage loan from National Australia Bank (NAB) in the name of Mr Mao (in the sum of $2.275 million - [42], [44]); and an additional sum of approximately $200,000 lent by Ms Zhang's mother, Ms Xia Zheng Bao ([43], [44]).
4. On completion of the purchase of the Vaucluse Property for $3.8 million ([44]; [199]), $2.275 million was drawn down under the NAB loan facility ([44]). That facility was established as a loan account with an associated offset account. Monthly loan repayments were, for most of the relevant period, automatically debited to the offset account ([45]).
5. To cover the loan repayments, and other costs such as council rates, Mr Bao initially sent remittances on an "as-required" basis, typically every few months ([46]). From 8 June 2004, Mr Bao commenced making remittances in respect of the mortgage finance for the Vaucluse Property and also in relation to the holding costs of the property ([46], [157]-[159]). The total amount of the remittances made was $1,162,475 ([159]). While some of these payments were made by parties other than Mr Bao (including payments by Ms Qiu), there was no dispute that these payments were made on Mr Bao's behalf ([157]).
6. There was no dispute between the parties that the consequence of this arrangement was that Mr Mao held the Vaucluse Property on trust for Mr Bao ([10] of the quantification judgment).
7. The Vaucluse Property was initially kept available for Mr Bao to use as a home in Sydney (although the primary judge noted that he seemed not to have done so) ([6] of the quantification judgment).
8. In October 2007 and March 2008 (and without Mr Bao's knowledge), the NAB loan facility limit was increased to a total of $3.44 million; and an additional total of $1.59 million was drawn down on the facility ([47]). First, in September or October 2007, Mr Mao obtained an increase in the NAB loan facility in respect of the Vaucluse Property by $950,000 to $3.25 million. At this stage, the amount drawn on the loan had been reduced to about $2.205 million. Mr Mao then drew down approximately $1.41 million ([47]). Second, in March 2008, Mr Mao obtained a further increase of $190,000 in the NAB loan facility, increasing the limit to $3.44 million; and Mr Mao drew down a further $181,000 ([47]).
9. Of those draw downs, $200,000 was used to repay Ms Zhang's mother (Ms Xia). There was no evidence as to how Mr Mao deployed the balance of the funds drawn down in 2007/2008, but the primary judge accepted that the funds were applied for Mr Mao's personal purposes ([47]-[48], [205], [222]-[225], [265]-[268]); ([7] of the quantification judgment).
10. Mr Bao obtained no benefit from these borrowings (except to the extent that the $200,000 loan to Ms Xia was repaid) ([47]-[48]); nor did Mr Bao know about them ([222]-[223]).
11. In his written submissions (at [22]), Mr Bao notes that it was Mr Mao's unchallenged evidence that he borrowed most of these funds from NAB as a precaution, to guard against the risk of Mr Mao defaulting upon Mr Bao failing to repay any moneys that Mr Mao would lend to him (see Mr Mao's affidavit affirmed 6 August 2019 at [29]-[30]). The primary judge did not expressly reject Mr Mao's explanation but doubted it, since drawing down on the mortgage in fact increased Mr Mao's own exposure to NAB ([222]-[223]).
12. In 2009, Mr Bao and his wife (Ms Qiu) obtained residency status in Australia. They established a home in Melbourne and bought a winery in rural Victoria ([49]). The couple also established an Australian company, Guang Tian International Group Pty Limited (GTIG), ([50]), which in August 2010 acquired a property in Parramatta (the Harris Park Property) for development purposes ([52]).
13. Mr Bao and Mr Mao, together with a third party, also became involved in a venture for the acquisition of a development site in Burwood (the Burwood Property) for the sum of $24.75 million ([55]).
14. Mr Mao provided to Mr Bao some statements of account regarding the state of financial dealings between the parties in relation to the Vaucluse Property (the primary judge discussing these statements at [174]-[185], [207]-[208], [221], [224]-[227], [269]-[271]) the last of which was provided in February 2010 for the year to 31 January 2010 (showing Mr Bao in credit on the remittances in the sum of $30,000, and his share of the loan principal as $2.072 million) ([269]). The February 2010 account did not disclose the amount of the additional borrowings or any interest thereon.
15. By early 2011, Mr Bao had been late with some of the regular monthly payments on the Vaucluse Property ([62]) and, on 28 March 2011, Mr Mao leased the Vaucluse Property to a tenant ([62], [28]-[229]), the rental payments being deposited into the offset account from which mortgage payments were made (see [74], [166], [274]).
16. On 11 April 2011, Mr Mao made the payment of ¥11 million to Mr Bao which was the subject of Mr Mao's claim in the proceedings below ([65]), the status of which was disputed. The primary judge held that it was a loan made pursuant to an agreement between Mr Mao and Mr Bao reached on 30 March 2011 ([151]), the terms of that loan being that it was to be repaid by 1 August 2011, and that interest would be charged at a rate of 2% per month ([107], 387).
17. On 16 and 20 August 2011, Mr Mao sent text messages to Mr Bao seeking repayment of his loan, which by then was overdue ([101], [102]). Mr Bao did not repay the loan.
18. By the end of October 2011, Mr Bao stopped making payments on the Vaucluse Property (and did not reply to text messages from Mr Mao about this; nor did Ms Qiu, to whom Mr Mao had also sent text messages). The last payment by Mr Bao to Mr Mao in respect of the Vaucluse Property occurred at the end of October 2011 ([74]).
19. From December 2011 to February 2012, Mr Mao paid a total of $54,000 into the offset account to facilitate mortgage repayments ([74]).
20. As part of the dealings in relation to the Burwood Property, $800,000 was transferred to Mr Bao in November 2011 ([71]-[72]). The primary judge found that the transfer of these funds was part payment of the ¥11 million loan ([71], [137]).
21. The primary judge noted that by this time the relationship between Mr Mao and Mr Bao had apparently become strained ([67]).
22. On 23 February 2012, Mr Bao placed a caveat over the Vaucluse Property ([77]).
23. On 9 March 2012, Mr Mao sent Mr Bao's solicitor (Mr Ku) a letter, calling upon Mr Bao to repay the remainder of the ¥11 million loan, together with (among other things) $2 million in relation to the loan on the Vaucluse Property (i.e., Mr Bao's share of the loan balance in respect of the Vaucluse Property) ([78]; [105]). (The actual loan balance at that time was in fact over $3 million by reason of the additional drawdowns on the mortgage by Mr Mao in 2007 and 2008 ([78]).) Mr Bao did not comply with that demand and Mr Mao stopped paying moneys into the offset account. The mortgage then fell into arrears as the lease payments on the Vaucluse Property were insufficient to cover the mortgage payments ([81]; and see [9] of the quantification judgment).
24. On 7 May 2012, NAB issued a formal demand and notice pursuant to s 57(2)(b) of the Real Property Act 1900 (NSW) in respect of the sum owing on the NAB facility ([81]).
25. On 28 June 2012, Mr Mao complained to the police about Mr Bao's conduct, making allegations of fraud ([82]).
26. Mr Mao did not contest NAB's enforcement action with respect to the Vaucluse Property; rather, on 20 July 2012, he invited NAB to sell the property ([83]). On 30 August 2012, NAB commenced possession proceedings, which were not defended by Mr Mao ([84]). The primary judge found that Mr Bao stood by while NAB took enforcement action ([231]).
27. In December 2012, NAB obtained judgment against Mr Mao for $3.42 million ([85]). That sum incorporated both money which Mr Mao had borrowed on Mr Bao's behalf for the purchase of the Vaucluse Property and Mr Mao's own unauthorised borrowings.
28. The Vaucluse Property was sold by NAB as mortgagee in possession and, on 5 May 2014, the proceeds of settlement of the sale ($3.26 million) were received by NAB ([86]). On 27 May 2014, NAB closed off the loan account with a shortfall of $338,000. Mr Mao has apparently not been pursued for this amount ([86]).
29. Proceedings were commenced by Mr Mao in respect of the amount outstanding on the claimed ¥11 million loan. In those proceedings, Mr Bao filed a cross-claim (which went through a number of iterations) seeking to recover certain amounts.
30. It is convenient at this point to note the relief claimed by Mr Bao. In the first cross-claim filed by Mr Bao, the claim was simply for "payment" of certain amounts (without reference to whether this was a claim for an account or a claim for equitable compensation). In the Further Amended First Cross-Claim, Mr Bao similarly sought an order that Mr Mao "pay to the cross-claim the following amounts …". However, in this version there were also claims for additional or alternate relief expressed as follows: 7. Additionally or alternatively, order that an account be taken of all monies received and disbursed by the cross-defendant as trustee for the cross-claimant, and of all monies lost by the cross-claimant as a result of the cross-defendant breaching the trust as set out in Order 5(b) above. [Order 5(b) sought a declaration that Mr Mao had breached the trust by failing to take action to prevent NAB from selling the Vaucluse Property] 8. Order that the cross-defendant pay to the cross-claimant the amount, if any, which is found to be due to him on the taking of the account, together with interest on that amount.
31. Thus, the language of account was here employed. Similarly, at [54] of the revised pleading, it was alleged that: 54. The cross-claimant is entitled to an account by the-cross claimant of all money paid by the cross-claimant, or paid on his behalf, to the cross-defendant, or at his direction, pursuant to the Agreed Trust, being the payments in Schedule 3 and the monies referred to in paragraphs 43 to 48 above.
32. The language of ordering that "an account be taken" remained in the Revised Further Amended Statement of Cross-Claim, the relief that had been claimed at [7]-[8] being modified at [9]-[10] as follows: 9. Additionally or alternatively, order that an account be taken of all monies received by the cross-defendant or anyone on his behalf pursuant to the Agreed Trust. as set out in paragraphs 41 and 42 below. including by way of rent for the property as set out in paragraphs 43 and 44 below and by way of purchase monies on sale of the property as set out in paragraph 20 below. and disbursed from those monies by the cross-defendant or anyone from 1 March 2004 until 31 May 2014; 10. Order that the cross-defendant pay to the cross -claimant the amount, if any, which is found to be due to him on the taking of the account. together with interest on that amount.
33. There was no change to [54] of the pleading.
34. The language of "account" was also employed in the submissions made at first instance for Mr Bao (see [15] of the cross-claimant's submissions), there being no reference there to any claim for equitable compensation.
35. That said, on a number of occasions during the course of the hearing before the primary judge, Senior Counsel for Mr Bao accepted that part of his claim was properly described as a claim for equitable compensation. However, it appears that this discussion was in relation to Mr Bao's claim regarding an alleged discrepancy in the payment price of the Vaucluse Property, and not the more general dealings regarding the unauthorised loan draw-downs (see T 33.29-37; T 250.26-251.9; T 277.16-36; T 22.13-16).
36. I simply raise this at this stage given the debate to which I will turn in due course as to the import (or otherwise) of the so-called Brickenden principle to the issues on appeal (see below at [114]ff), in the course of which the issue of causation in relation to claims of equitable compensation is discussed.

Principal judgment

1. As noted above, the nature of the ¥11 million payment by Mr Mao (the subject of Mr Mao's claim) was in dispute between the parties. Mr Mao alleged that: there was an oral agreement for him to lend Mr Bao ¥11 million; that agreement was reached at a meeting between himself and Mr Bao at Mr Bao's house in Melbourne; and the purpose of the loan was to assist with the Harris Park development ([106]). Mr Bao, on the other hand, denied that he borrowed the ¥11 million (or any money) from Mr Mao at that time; and contended that the payment was part of the arrangement which had originally been made for the purchase of the Vaucluse Property (namely, that, if he decided in the future that he did not want the property, Mr Mao would take it over and buy him out) ([114]).
2. The primary judge preferred Mr Mao's evidence to that of Mr Bao on the key factual issues in the case. The primary judge said, in this regard, at [96]-[97] of the principal judgment, that: I was left with the impression that Mr Bao has little real recollection of the relevant events. Although I have not found it possible to decide whether Mr Bao was actually trifling with the Court in the manner in which counsel for Mr Mao suggested, I found the overall effect of his evidence so opaque that I was left with little confidence in the reliability of his evidence…..there were similar, if not so extensive, difficulties with some of the evidence given by Mr Mao and Ms Zhang. Although I have generally preferred their evidence to that of Mr Bao, I have not accepted it on every point, and I have generally treated it with circumspection.
3. As to the loan claim, the primary judge found that the evidence clearly favoured Mr Mao's account over that of Mr Bao and was satisfied that the ¥11 million payment in April 2011 was a loan and not a partial repayment of moneys owed pursuant to the arrangement concerning the Vaucluse Property ([151]). His Honour made no finding as to the purpose of the loan, concluding that the purpose of the borrowing was unclear. His Honour noted that Mr Mao said that Mr Bao sometimes said the money was for the Harris Park development, and sometimes for the Burwood development ([110]). The primary judge concluded that Mr Mao's claim for repayment of the ¥11 million which he paid to Mr Bao in April 2011 (less the $800,000 received in November 2011), together with interest at 2% per month, succeeded ([387]).

Quantification judgment

1. By the time of the further hearing, the parties had agreed that the amount calculated in accordance with the accounting ordered by the primary judge resulted in Mr Mao having received a net benefit of $2,050,084, for which he was liable to account (see [13] of the quantification judgment).
2. The primary judge found that the loan agreement in respect of the ¥11 million payment was properly construed as being in ¥ (rather than Australian dollars) (see [42] of the quantification judgment) and there is no challenge to that finding on appeal. The primary judge also held that interest began to accrue when the loan agreement was made on 11 April 2011, and that the first interest period was therefore only 20 days (see [47] of the quantification judgment); and, again, there is no challenge to that finding on appeal.
3. As to the question of set-off (the sole issue in Mr Mao's appeal), the primary judge noted that Counsel for Mr Mao had contended that the set-off between Mr Bao's liability under the loan and Mr Mao's liability to account to Mr Bao under the mortgage should take place as at the date of judgment (i.e., as would be the case for a statutory set-off) whereas Counsel for Mr Bao had contended that it should take place as at the date on which the Vaucluse Property had been sold (see [48] of the quantification judgment). The significance of the date on which the set-off was to take place lies in the difference between the interest rate applicable under the loan agreement (2% per month) (relevant to Mr Bao's liability for the outstanding loan amount) and the much lower Court interest rate (relevant to Mr Mao's liability in respect of the amounts owing in relation to the funds due in respect of the Vaucluse Property dealings). The primary judge noted that Counsel for Mr Bao had pointed out that Mr Mao would also be benefited by the depreciation of the Australian dollar since May 2014 ([48] of the quantification judgment); and that, in support of his contention, Mr Bao relied on "an equitable right of set-off" (see [49] of the quantification judgment).
4. The primary judge found that the requirements for an equitable set-off were met and, as noted earlier, that the set-off should occur at the time the Vaucluse Property was sold. The primary judge's reasoning was that: 52. It was common ground between the parties that an equitable set-off depends on whether Mr Mao's obligation under the mortgage account impeached his entitlement to claim payment (and interest) under the loan. I was not referred to any authorities specifically in point, and have therefore approached the question as one of principle. 53. As already noted, the arrangement about the Vaucluse mortgage imposed obligations on both parties. Having failed to cover the costs, or give Mr Mao any instructions, Mr Bao could not complain about Mr Mao throwing up his hands and allowing the bank to sell the property. But, once the property was sold, Mr Bao's obligations came to an end. Mr Mao had received Mr Bao's money and was a fiduciary in respect of that money. The amount due to Mr Bao was capable of precise calculation in accordance with the method Mr Mao had already used. 54. In those circumstances, Mr Mao had an obligation immediately upon sale of the property to account to Mr Bao for his share of the proceeds, or at least to apply the moneys to Mr Bao's best advantage. That was an affirmative obligation which did not depend upon a request by Mr Bao. Mr Mao did not comply with it, and appropriated Mr Bao's money to himself. In my view, he cannot be heard to say that the money he appropriated should bear interest at court rates while he maintains a claim for interest on moneys owing to him by Mr Bao at a far higher commercial rate. 55. In my view the requirements of an equitable set-off are met. The set- off (and the currency conversion) should be undertaken as at 5 May 2014.

Grounds of Appeal

1. Mr Mao's Notice of Appeal raised two grounds of appeal: 1. The trial judge erred in finding that the requirements of an equitable set-off were satisfied, as between the parties' respective claims: Judgment [55], [56(1)] 2. The trial judge erred in finding that the set-off between the parties respective claims is to be undertaken at 5 May 2014, and failing to find that the set-off is to be undertaken at the date of judgement [sic] on 12 December 2022 (pursuant to section 21 of the Civil Procedure Act 2005): Judgement [sic] [54], [55], [56(1)]

Grounds of Cross-Appeal

1. Mr Bao's cross-appeal, raised only if it is held that equitable set-off is unavailable, is on the following ground: 1. If, contrary to the trial judge's primary finding, equitable set-off is unavailable, the Court below erred: a. in failing to exercise its discretion to allow an award to the cross-appellant of pre-judgment interest under s 100 of the Civil Procedure Act 2005 (NSW) on the unaccounted funds due to the cross-appellant; and b. failing to award such interest at the same rate as the debt due to the appellant under the appellant's loan agreement with the cross-appellant.

Legal Principles

1. It is convenient at the outset to summarise briefly the applicable principles as to the doctrine of equitable set-off, which were broadly not in issue between the parties. Of the four species of equitable set-off identified by the authors of Meagher, Gummow & Lehane's Equity Doctrines & Remedies (LexisNexis Butterworths, 5th ed, 2015) (Meagher, Gummow & Lehane), that relevant to the present proceeding is described as the "true equitable set-off" (see at 39-050, citing Rawson v Samuel (1841) Cr & Ph 161 (Rawson v Samuel) at 178), namely "the kind which equity recognised wherever 'the party seeking the benefit of it can show some equitable ground for being protected against his adversary's demand'".
2. The classic test for equitable set-off, articulated by Lord Cottenham LC in Rawson v Samuel and endorsed by the High Court of Australia in Hill v Ziymack (1908) 7 CLR 352 at 361-2; [1908] HCA 13 (Hill v Ziymack) is that of impeachment, namely that the cross-demand must "impeach" the initial claim. Keane JA, then sitting in the Court of Appeal in Queensland (with whom McMurdo P and Fraser JA agreed) said in Forsyth v Gibbs [2009] 1 Qd R 403; [2008] QCA 103 (Forsyth) at [10] that: It is essential that there be such a connection between the claim and the cross-claim that the cross-claim can be said to impeach the claim so as to make it unfair for the claim to be allowed without taking account of the cross-claim.
3. This formulation has been broadly adopted across Australia (see, for example, Boensch v Pascoe (2019) 268 CLR 593; [2019] HCA 49 at [9]; Hawes v Dean [2014] NSWCA 380 (Hawes) at [61]; Norman v FEA Plantation Ltd (2011) 195 FCR 97; [2011] FCAFC 99 (Norman) at [143]; Mittiga v Community Corporation 20582 Inc (2012) 114 SASR 557; [2012] SASC 202 at [28]; Chamberlain Early Learning Centre Pty Limited v Precious 1 Pty Limited in its own right and as trustee for The 4 Chamberlain Holdings Family Trust [2017] NSWSC 189 (Chamberlain) at [69]-[70]; Meagher, Gummow & Lehane 39-060 1108-1110).
4. The strictness of the "impeachment" requirement was emphasised in this Court in HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 479 (HP Mercantile) at [136] where Emmett JA (with whom Beazley P, as Her Excellency then was, and Meagher JA agreed) said: For there to be an equitable set-off, the set-off must essentially be bound up with and go to the root of, challenge, call in question, or impeach the title of the claimant. Equitable set-off is available where the party seeking it can show a recognised equitable ground for being, to the relevant extent, protected from its adversary's demand. The mere existence of a cross-claim is not sufficient. There must be some ground for equitable intervention beyond the mere existence of a cross-claim, such that it can be said that the equity of the defendant impeaches the claimant's title to the legal demand being enforced (James v Commonwealth Bank of Australia (1992) 37 FCR 445 at 457-458).

Mr Mao's submissions

1. Mr Mao submits that the primary judge (although having referred to the need to determine the matter on first principles) failed to have regard to the principles which determine the nature and degree of the closeness of connection between competing claims which regulate the finding of unconscionability and the operation of the impeachment test in relation to the doctrine of equitable set-off. Complaint is made that the finding of impeachment was not clearly articulated and was underpinned by general notions of fairness, unconstrained by the orthodox principles of equitable set-off. Mr Mao argues that intuitive unfairness (if that be established) is insufficient to support the finding of impeachment necessary to ground an equitable set-off.
2. In this regard, Mr Mao says that there is no finding of fact which supports any degree of interdependence between the respective claims (Mr Bao's accounting claim arising from Mr Mao's breach of his obligation to account to Mr Bao for the proceeds of sale of the Vaucluse Property on the one hand and the loan claim on the other hand giving rise to Mr Bao's liability under the ¥11 million loan agreement). Mr Mao contends that his failure to account did not bring about or contribute to Mr Bao's liability under the loan agreement, pointing in this regard to the absence of any finding to support a conclusion that Mr Bao was induced to enter the loan agreement by reason of any dealings between the parties relating to the Vaucluse Property (which were the subject of the account order made by the primary judge) or that Mr Mao's failure to account for the proceeds of sale of the Vaucluse Property caused or contributed to Mr Bao's default under the loan agreement.
3. In particular, Mr Mao says that there were no findings (and no basis for any findings) that the failure by Mr Mao to account at the time of the completion of the sale of the Vaucluse Property compromised Mr Bao's financial capacity to discharge his obligations under the loan agreement or that Mr Bao lacked the financial capacity to discharge his obligations under the loan agreement. It is noted that the primary judge referred to Mr Bao's evidence to the effect that he was a person of very substantial means. Mr Mao submits that the only reasonable inference is that Mr Bao failed to discharge his obligations under the loan agreement because he did not consider himself obliged under the loan agreement. Further, Mr Mao says that, even if there were findings to support the conclusion that Mr Mao's failure to account had compromised Mr Bao's financial capacity to discharge his obligations under the loan agreement, there is no basis for a finding that the dealings in relation to the Vaucluse Property were entered into for the purpose, or in contemplation, of facilitating Mr Bao's discharge of his obligations under the loan agreement.

Equitable Set-Off

1. As adverted to above, Mr Bao broadly accepts the articulation of the legal principles as summarised above (though cavilling with the notion that a rigid taxonomy should be employed in determining the sufficiency of connection to satisfy the impeachment test).
2. Mr Bao submits that there was no error in the finding by the primary judge that the requirements for an equitable set-off were made out, emphasising the chronological sequence of events as found by the primary judge, which Mr Bao maintains were in relation to four interrelated matters: the purchase of the Vaucluse Property by Mr Mao as trustee for Mr Bao; the unauthorised borrowing by Mr Mao as trustee; the ¥11 million loan made by Mr Mao to Mr Bao; and the dispute as it developed in relation to these matters. Mr Bao points out that it was only when he issued a subpoena to NAB on 20 April 2018, well after the primary proceedings were commenced, that Mr Bao discovered that Mr Mao had made the unauthorised borrowings which founded the account ultimately ordered (see the affidavit of Mr Bao's solicitor, Carl Ku, affirmed 4 September 2018 at [4]-[5]).
3. Mr Bao accepts that it is not sufficient (for a debt to impeach another) that it be found to be "unconscionable" to permit the enforcement of one without regard being had to the other; and accepts that the notion of unconscionability does not license unconstrained discretion (i.e., that notions of conscience do not "operate at large") (there quoting Wollongong Coal and Active Adult Management). However, Mr Bao argues that the concept of unconscionability (which, as noted above, underpins the availability of equitable set-off) is sufficiently broad to mean that the facts of earlier cases, while instructive, are not determinative, citing Keane JA's observations in Forsyth at [9]-[10]. For this reason, Mr Bao argues that, while it is accurate to say that "if cross-demands arise out of separate transactions, they would not usually be regarded as sufficiently closely connected to justify equitable set-off", a single transaction is not to be regarded as a pre-condition of the establishment of impeachment (referring by way of example in this context to Ralston v South Greta Colliery Ltd (1912) 13 SR (NSW) 6). (Mr Mao does not argue otherwise.)
4. Mr Bao cavils with the proposition by Mr Mao that there is no factual finding that would support any degree of interdependence. Mr Bao argues that the interdependence of the corresponding liabilities, and the consequent impeachment, can be demonstrated in four ways.

Pre-Judgment Interest

1. Further, Mr Bao argues that there is an alternative path of reasoning to reach the same overall conclusion as that reached by the primary judge, namely that it would have been open to the primary judge to exercise the discretion to award pre-judgment interest under s 100 of the Civil Procedure Act in relation to the unaccounted surplus. In this regard, Mr Bao points to his Honour's observation (at [50]-[51] of the quantification judgment): 50. The Court's power to award pre-judgment interest under s 00 of the Civil Procedure Act involves discretion both as to the rate of interest and the date from which it accrues. But counsel for Mr Mao emphasised that Mr Mao was enforcing a contractual entitlement to interest. This falls entirely outside s 100: see s 100(3)(b). 51. Seen in this way, the claim for interest might have attracted further questions. If interest is compensation for the agreed time value of money, could Mr Mao really maintain the claim when he had Mr Bao's money in his possession? And even if some sort of formal appropriation were required, then had Mr Mao failed to mitigate his loss? But these points were not debated, and, having regard to my decision on the equitable set-off point, it is not necessary to go into them.
2. Mr Bao submits that the question posed by the primary judge at [51] of the quantification judgment reinforces the intertwined nature of the obligations which gives rise to equitable set off but also points to this as indicating the course for which he advocates in his cross-appeal (see below at [109]).

Reply submissions

1. In response to Mr Bao's submissions as to the relevant principles (see Mr Bao's submissions dated 13 June 2023 at [37]-[43]), Mr Mao accepts that a single transaction is not to be regarded as a pre-condition of the establishment of impeachment but says that if the countervailing claims arise from different transactions, it is still necessary for underlying operative principles of unconscionability (relating to the interdependence or close connection between the countervailing claims) to be identified (or developed) and satisfied on the facts.
2. Insofar as Mr Bao submits that it is not accurate to state that there are only two broad categories where the necessary inequity will be found so as to give rise to the impeachment of title or that a rigid taxonomy is antithetical to equitable principles, Mr Mao does not contend for a "rigid taxonomy". Mr Mao submits that the specific principles referred to in his submissions at [80]-[87] and the categories of case referred to at [91]-[93], are formulated consistently with the "flexible but principled principles of equity" referred to in his submissions.
3. Mr Mao submits that none of the four contended grounds for interdependence (considered in isolation or collectively) supports the basis for an equitable set-off between Mr Mao's claim in respect of his loan to Mr Bao of ¥11 million (the loan claim) and Mr Bao's claim for account in relation to the proceeds of sale of the Vaucluse Property (the account claim).
4. As to the first ground raised by Mr Bao (that Mr Mao's purpose in borrowing the money from NAB establishes the necessary interconnectedness between the two transactions), Mr Mao submits that this does not generate a proper basis for equitable set-off for two reasons: first, the absence of a positive finding of fact that Mr Mao borrowed money from NAB in order to protect himself against Mr Bao not repaying the loan (the primary judge finding it more likely that Mr Mao had simply drawn down those additional funds for his own convenience); and, second, that the evidence does not support a positive finding on appeal that Mr Mao made the NAB borrowing "in order to protect himself against Mr Bao not paying to him money which he would lend him".
5. Mr Mao submits that his affidavit evidence is ambiguous and consistent with the inference that Mr Mao's purpose in making the NAB borrowing was to provide some protection in relation to Mr Bao's repayment of the NAB Loan (i.e., the mortgage facility in respect of the Vaucluse Property).

Cross-Appeal

1. Mr Mao did not object to the issue as to interest being raised by way of the cross-appeal and leave was granted for the filing of the notice of cross-appeal out of time (AT 2.10-13).
2. On his cross-appeal, Mr Bao argues that if (contrary to his submissions) equitable set-off is not available, the discretion in s 100 of the Civil Procedure Act should be exercised to allow interest on the unaccounted funds due to Mr Bao at the same rate as the debt due to Mr Mao under the ¥11 million loan agreement, noting that the purpose of an award of interest is to do justice between the parties; and that the award of interest must always be approached in a broad and practical way.
3. Mr Bao argues that, having regard to the interwoven financial transactions between the parties, Mr Mao should not be compensated at a higher rate than Mr Bao for being kept out of the use of his money; and that the rate of interest payable by Mr Bao under the loan agreement (2%) represents the true cost to him of being kept out of his money (presumably this is put on the basis that if Mr Mao had properly accounted for the sale proceeds then Mr Bao would have been in a position to discharge the loan). Mr Bao submits that this is a case where the evidence discloses a reason to award interest at a rate other than the usual court rate.
4. Mr Mao argues to the contrary that there is no proper basis for the contended exercise of discretion under s 100 of the Civil Procedure Act; and submits that it is not a proper exercise of that discretion to award interest to Mr Bao with respect the account claim so as to offset directly the interest that accrues in favour of Mr Mao under the ¥11 million loan .
5. Mr Mao submits that such an award is not necessary to "compensate" Mr Bao for Mr Mao's failure to account when the liability to account first accrued; rather that, in both a practical and legal sense, Mr Mao's failure to account did not cause Mr Bao loss commensurate with the contractual interest which accrued on the ¥11 million loan (or any other loss), and that Mr Bao's liability to pay contractual interest under the loan was wholly unaffected by Mr Mao's failure to account. Mr Mao argues that it is not a proper purpose of the award of interest under s 100 simply to set the rate of interest at a level which strikes what might be contended to be an appropriate balance between parties' respective countervailing claims by reference to some idiosyncratic conception of justice and fairness.

Supplementary submissions

1. Before turning to the determination of the issues raised on the appeal and cross-appeal, it is convenient here to note an issue that was raised with Counsel during the hearing of this matter as to the scope for operation to the issues raised by the appeal of the equitable principle considered in cases such as Magnus v Queensland National Bank (1888) 37 Ch D 466 (Magnus); Brickenden v London Loan & Savings [1934] 3 DLR 465 at 469 (Brickenden); Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1 at 15 (Gray); and Murad v Al-Saraj [2005] EWCA Civ 959 (Murad) (to which I will refer as the Brickenden principle).
2. Relevantly, in Brickenden, Lord Thankerton, on behalf of the Privy Council, said (at 469): When a party, holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction, he cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the constituent's action would be solely determined by some other factor, such as the valuation by another party of the property proposed to be mortgaged. Once the Court has determined that the non-disclosed facts were material, speculation as to what course the constituent, on disclosure, would have taken is not relevant.
3. In essence, the issue raised in the course of hearing of the present appeal was as to whether it was open to Mr Mao (as a defaulting trustee who failed properly to account for the sale proceeds of the Vaucluse property in respect of his unauthorised borrowings on the security of that trust property) to speculate as to what would have happened had Mr Mao complied with his duties as trustee and in fact accounted for the surplus from the sale of the Vaucluse Property; and, relatedly, as to who bore the onus of demonstrating what would have happened but for Mr Mao's breach of duty (AT 15.14-27, 16.31-36, 45.32-42).
4. The significance of this goes to the question whether it is open to Mr Mao, as a defaulting trustee, to rely upon the lack of evidence by Mr Bao of what he would have done had he (Mr Mao) made disclosure of the true position (i.e., the unauthorised borrowings) and accounted for the surplus funds in 2014, i.e., to put forward a counterfactual that operates to his benefit; and, if so, which party was to bear the onus of proving such a counterfactual. This arises in the context of Mr Mao's contention that the failure to account did not cause or contribute to Mr Bao's liability under the unrelated ¥11 million loan. Supplementary written submissions were made by both parties on that issue, after judgment was reserved.

Mr Bao's supplementary submissions

1. Mr Bao accepts that the primary judge did not make a positive finding that Mr Mao breached his duties as trustee by making unauthorised drawdowns on a loan which was secured by mortgage over trust property (noting [23] of the quantification judgment) and that there is no appeal in relation to that issue. However, he notes that the primary judge held that Mr Mao was liable to account for the difference between the notional proceeds of the sale of the house in 2014 (which were retained by the mortgagee) and Mr Bao's "share of the loan" (i.e., what the loan balance would have been but for the unauthorised drawdowns less the $200,000 loan repayment) ([276]-[277] of the principal judgment; [10]-[12] of the quantification judgment). As noted earlier, the primary judge held that Mr Mao had an obligation immediately upon sale of the Vaucluse Property to account to Mr Bao for his share of the proceeds, or at least to apply the moneys to Mr Bao's best advantage; and that, instead of complying with that obligation, Mr Mao appropriated Mr Bao's money to himself ([54] of the quantification judgment).
2. As Mr Bao points out, in equity, an order for "account" could refer to three different concepts accounting for administration in common form; accounting for administration on the basis of wilful default; and an account of profits (see Glazier Holdings Pty Ltd v Australian Men's Health Pty Ltd (No 2) [2001] NSWSC 6 (Glazier Holdings) at [36]-[44] (Austin J); Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102; (2014) 98 ACSR 615 (Agricultural Land Management) at [347] (Edelman J)).
3. Mr Bao says that it is unclear whether the account ordered by the primary judge was an account in common form or made on a wilful default basis (noting that his Honour had expressly recognised at [250] of the principal judgment that an account of administration was the primary remedy sought by Mr Bao, rather than an account of profits - see [254]). (I have noted above the various iterations of the relief claimed in the cross-claim.)
4. Mr Bao accepts that the lack of a finding in terms of default against Mr Mao (see [263]-[268], [273]-[280] of the principal judgment) and the fact that the requirement to account for the "sale proceeds" was included among other "less controversial" matters such as rental receipts might suggest an account in common form but he points also to the finding in the quantification judgment at [54] that Mr Mao did not comply with his obligations as fiduciary and had appropriated the money to himself. Mr Bao says that the premise of the account (that the trustee was liable not only for improper disbursements but also for amounts that would have been received upon sale of the property if the unauthorised draw-downs had not occurred) is suggestive of an account on a wilful default basis. Pausing here, the distinction would only be relevant for present purposes to the extent that it had an import on the application or otherwise of the Brickenden principle (and in that regard, the analysis by Edelman J of the mechanism by which, historically, courts of equity gave effect to monetary remedies against custodial beneficiaries in Agricultural Land Management at [333] is of interest). However, I note that Mr Bao says that, in terms of establishing the primary liability to account, it probably does not matter whether the account was ordered in common form or on a wilful default basis (since there is no issue that Mr Mao was required to pay compensation equivalent to the amount he should have paid to Mr Bao in 2014).

Mr Mao's supplementary submissions

1. Mr Mao argues that the cases referred to above (see at [114] above) are not directly applicable to the resolution of the issues on appeal, and should not be applied by analogy. Mr Mao's supplementary submissions provide a helpful overview and historical analysis of equitable doctrines in relation to causation. I have had regard to those submissions but do not propose here to set them out in detail.
2. As a general matter, Mr Mao's contention is that the Brickenden principle relates specifically to proof of causation between breach of equitable duty and gain or loss; and is not relevant to the distinct question of the sufficiency of connection between countervailing claims in the field of equitable set-off.
3. Mr Mao argues that there is no basis for the analogous application of the Brickenden principle to equitable set-off, for the following reasons. First, he argues that causation in relation to equitable remedies of equitable compensation and account relates to the sufficiency of connection between equitable wrong and gain/loss to justify remedy, and that this is a different question to the question in equitable set-off which relates to the sufficiency of connection between countervailing claims to render it unconscionable for a party to assert its claim without accommodating the countervailing claim. Second, Mr Mao argues that the purposes underpinning "lenient" rules of causation in relation to equitable remedies of equitable compensation and account are not significantly salient in relation to determining sufficient of connection in equitable set-off. Third, Mr Mao notes the purposes underpinning the "prohibition upon speculation and the reversal of onus" (as identified by Mr Bao in his submissions), namely: to give effect to the fundamental duty of the trustee to hold the assets of the trust and deal with them in accordance with the terms of the trust; to operate as a deterrent to uphold strict fiduciary obligations; and to reflect that causal counterfactuals can be difficult to establish and it is appropriate that the difficulty is visited upon the defaulting trustee. Mr Mao argues that these purposes are not salient to identifying the sufficiency of connection between countervailing claims to render it unconscionable for a claimant to assert its claim without accommodating the countervailing claim.
4. Mr Mao emphasises that the doctrine of equitable set-off is not confined to accommodating claims for set-off by a constituent beneficiary against its defaulting trustee but applies to all forms of claim and sounds a caution as to the need not to undermine the coherence of the doctrine of equitable set-off by contemplating the adoption of different principles for determining the necessary and sufficient connection between countervailing claims, depending upon the nature of the countervailing claims.

Application of the Brickenden principle

1. First, as to whether it is open to Mr Mao, as a defaulting trustee, to argue that there is no evidence to support findings to the effect that Mr Mao's failure to account to Mr Bao in relation to the proceeds of sale of the Vaucluse Property contributed to Mr Bao's continuing liability to pay interest on the 2011 loan, and/or whether Mr Mao's breach of duty as trustee imposed an onus on Mr Mao to establish what would have happened had there not been a breach of his fiduciary duty (i.e., as to whether the so-called Brickenden principle has a role to play in this appeal), it is helpful to consider briefly the content of the principle and the relevant cases (conveniently summarised in Mr Bao's submissions from which the summary below is largely drawn) in which they have been articulated or considered.
2. It is relevant to note at the outset that there has been much criticism as to the so-called Brickenden principle (first, as to the meaning of the relevant passage - set out at [114] above and, second, doubt as to whether it remains applicable and in what context). This issue has arisen for consideration in more recent cases in the context where consideration is being given to a claim for equitable compensation consequent upon a breach of fiduciary duty (the remedy of equitable compensation having its roots in the 19th century remedy of account as explained by Edelman J in Agricultural Land Management; and see the discussion in Meagher, Gummow & Lehane at [23-475], Professor Conaglen 'Brickenden' in S Degeling and JNE Varuhas (eds), Equitable Compensation and Disgorgement of Profit (Hart Publishing, 2017) 111 (Conaglen) at 111, 140).

Magnus

1. In Magnus, which preceded Brickenden, trust property held by the bank as security for a loan was released on repayment of the debt on the instructions of one of the three trustees, who then absconded with the proceeds of sale of the property. The bank argued that it was not liable to account for the loss because the absconding trustee had such control over the other trustees that he would have defrauded the trust of its property in some other way even if the bank had acted properly (i.e., the loss would have happened in any event) (see at 469-70). The bank's causation argument was rejected. Lord Halsbury LC accepted that the absconding trustee probably would have defrauded the other trustees but said (at 472) that this was irrelevant because, the breach of trust having occurred, "we are not at liberty to speculate whether the same result might not have followed whether [the bank] had been guilty of that default or not". Bowen LJ dismissed the causation argument as an "ocular illusion" on the basis that the "loss occurred as soon as the money which belonged to the trust was diverted into the hands of a person who had no right to represent the trust" (see at 480).

Brickenden

1. In Brickenden, the issue that arose concerned the failure of a solicitor, who acted on both sides of a mortgage transaction, to disclose to the lender that he stood to benefit from the transaction by receiving proceeds out of the proceeds of the loan in his capacity as a prior mortgagee of the same land. As set out in the passage extracted above at [115], it was held that once it was determined that there was a material non-disclosure, speculation as to what would have happened had there been disclosure was not relevant.
2. The authors of Meagher, Gummow & Lehane (5th edn, at [23-040]) treat Brickenden (and also Magnus) as akin to a case for an account in common form, emphasising at [23-485], that the Brickenden case was not one of wilful default, and seeing Lord Thankerton's reasoning as consistent with the proposition that the basis of the compensation awarded was restitution in the Re Dawson (dec'd) (1964) 84 WN (Pt 1) (NSW) 399 sense of being relief to which "no causation was no defence".

Gray

1. In Gray, where a director sought to rely upon a board's affirmation of self-interested transactions without having informed the board of the true extent of those transactions; an argument that the information which the defaulting director should have provided would not have made a difference was rejected, Lord Radcliffe, there saying (at 15): It is said that it would have made no difference if he had told them. They had decided on the basis of settlement that they were going to impose upon him, they did not think that they could get any more out of him, and their main concern for the Company was to recover for it some cash that would keep it running and to achieve an agreement that would regularise its disordered affairs. There may be an element of truth in all this, but in fact it constitutes an irrelevant speculation. If a trustee has placed himself in a position in which his interest conflicts with his duty and has not discharged himself from responsibility to account for the profits that his interest has secured for him, it is neither here nor there to speculate whether, if he had done his duty, he would not have been left in possession of the same amount of profit.

Murad

1. Finally, in Murad, one party in a joint venture relating to a property acquisition (Mr Al-Saraj) who owed fiduciary duties to the other parties (the Murad sisters), fraudulently said that his contribution to the venture would be £500,000 in cash, concealing that his contribution was made by offsetting unenforceable obligations owed to him by the vendor of the property, including a sum of £369,000 which represented commission paid by the vendor to Mr Al-Saraj for introducing the purchasers. The trial judge found that, had Mr Al-Saraj disclosed the true facts, the Murads would still have proceeded with the joint venture but would have insisted upon a greater share of the capital profits for themselves.
2. The majority in the UK Court of Appeal rejected the argument that Mr Al-Saraj should only be stripped of any profits on the resale of the property over and above those to which the Murad sisters would have agreed.
3. Arden LJ, recognising (at [74]) the policy reasons underlying the stringency of the liability to account imposed upon a fiduciary, noted (at [76]) the refusal of courts to investigate hypothetical situations as to what would have happened if the fiduciary had performed his duty (though suggesting that the operation of this stringent rule might be revisited at some time - see at [82]-[83]). Jonathan Parker LJ agreed, referring (at [105]) to Brickenden and (at [106]) to a passage to similar effect in Gwembe Valley Development Co Ltd & Anor v Koshy [2004] BCLC 131 at [145]; identifying the policy reasons behind the inflexible "no speculation" rule as: the perceived difficulty in determining what might have happened but for the fact that the fiduciary had placed himself in a position of conflict (at [107]); and the need for deterrence (at [107]). Jonathan Parker LJ, however, said that in the case of "equitable compensation", the Court may have regard to what would have happened but for the breach (see at [110]).

Re Brogden

1. In addition to the above cases, Mr Bao referred also to Re Brogden, which involved an application for performance of a promise made by the deceased for the transfer after his death of moneys to trustees of a marriage settlement for his daughter and it was argued that any attempt to enforce the promise would not have recovered the full amount. The Court of Appeal held that there was a duty on the part of the trustees to press for payment and to take reasonable steps to enforce the promise (at 547-548) and that "where a trustee does not do that which it is his duty to do, prima facie he is answerable for any loss occasioned thereby" (at 567 per Cotton LJ). Further, it was held that it was for the trustee to prove what would have happened if his duty had been performed as "[i]t is the trustee who is seeking to excuse himself for the consequences of his breach of duty" (at 568 per Cotton LJ; see also at 572-3 per Fry LJ, 574 per Lopes LJ).
2. Mr Bao notes that a similar approach to that adopted in Re Brogden was taken by this Court in Australian Executor Trustees (SA) Ltd v Kerr [2021] NSWCA 5; (2021) 151 ACSR 204 (Australian Executor Trustees) at [98]-[99], in the context of a claim for equitable compensation, the Court (per Gleeson JA, Leeming JA and Emmett AJA agreeing) holding that: The breach of trust committed by AET left the Covenant holders without any security for the performance of the Forest Company's contractual obligations under the trust deed. The trust fund thereby suffered a loss. Prima facie, the trust fund suffered a loss to the value of the property which AET disposed, assessed as at the date of judgment. The primary judge correctly observed that once the plaintiff's onus to prove loss has been discharged, the onus shifts to the defendant to demonstrate that all or part of the loss would have been suffered even if the defendant had not breached the trust … [citations omitted]

Mr Mao's submissions

1. Mr Mao submits that the cases referred to above are not relevant to the appeal and/or are distinguishable.
2. Relevantly, Mr Mao distinguishes Magnus on the basis that there the issue was whether the chain of causation was properly characterised as broken; whereas, in the present case (and he says any other case of equitable set-off), the question is whether there is the requisite connection between countervailing claims, in respect of which the party seeking set-off must bear the ultimate onus. Mr Mao argues that this is not a case where the logical chain (or any element in the chain) of causality or connection between the countervailing claims is unequivocally established; or where he is contending that there are facts and policy considerations which relevantly break that logical chain of causality or connection. Mr Mao complains that Mr Bao is simply speculating as to hypotheses of connection and causality; and seeking to deny Mr Mao the right to deny Mr Bao's speculative hypothesis.
3. Mr Mao argues that Brickenden is not authority for the general principle that a defendant is prohibited from contesting causation by consideration of counterfactuals; rather, that it is authority for the narrower principle that a defaulting trustee is prohibited from contesting causation on the grounds of the counterfactual that the constituent would have given informed consent to conduct in breach of fiduciary duty, had the fiduciary made required disclosures. So circumscribed, Mr Mao argues that the principle has no relevance to this case, noting that, in contesting the sufficiency of connection, he is not propounding a counterfactual that informed consent would have been given to conduct in breach of fiduciary duty had the fiduciary made the required disclosures. Mr Mao says that the issue of informed consent is irrelevant to his denial as to the basis for sufficiency of connection. On that basis, Mr Mao submits that each of Brickenden; Gray and Murad is distinguishable.
4. Mr Mao argues that Re Brogden and Australian Executor Trustees refer to the operation of "onus shift" in certain areas of causation in equity and are also not relevant to the issue of sufficiency of connection for the purposes of equitable set off. Further, Mr Mao argues against the relevance of these authorities on the basis, first, that the cases do not advocate the unqualified reversal of the burden of proof; rather the reversal is conditional upon the claimant discharging the onus to prove loss; and that the notion of onus shift typically reflects presumptions against wrongdoers. As to the first, it is submitted that this principle is not directly applicable to equitable set-off, in which the critical issue is the sufficiency of connection between claims and that, to the extent that the principle of onus shift were sought to be applied by analogy, there would need to be identified some element of "connection" in respect of which the claimant has discharged a burden, following which the onus would shift to the respondent to disprove the connection. Mr Mao submits that, Mr Bao's case on connection involves a speculative hypothesis and that there is thus no basis for an "onus shift". As to the second, Mr Mao submits that the concept is problematic in the field of equitable set-off, where there will often be (as he says is here the case) a contest between wrongdoers.

Conclusion as to applicability of the Brickenden principle in this case

1. In Wollongong Coal Ltd v Gujarat NRE Properties Pty Ltd [2020] NSWSC 254 (at [153]), Rein J, at first instance, pointed to the existence of differing judicial views as to the current status of Brickenden and as to what its status should be. Similarly, there has been much academic discourse on this topic. Writing back in 1994, J D Heydon KC ("Causal Relationships between a Fiduciary's Default and the Principal's Loss" (1994) 110 Law Quarterly Review 328 at 331) observed that if the Brickenden principle exists (the author thus expressing some doubt as to its existence) its operation without reference to issues of causation would support by analogy the recoverability of damages from trustees independent of a causal link. However, Brennan CJ, Gaudron, McHugh and Gummow JJ in Maguire v Makaronis (1997) 188 CLR 449 at 472; [1997] HCA 23 stated that the decision in Brickenden did involve an enquiry into causation (see also Meagher, Gummow & Lehane at [23-490]).
2. The authors of Meagher, Gummow & Lehane have observed (at 23-620) that, although the law in this area is yet to be fully settled, "the decisions and considered dicta of the High Court of Australia are consistent with the view that in Australia there is no special Brickenden doctrine". Certainly, the decisions of the High Court (see below) do not appear to be consistent with a liberal application of the Brickenden principle or doctrine.
3. The issue has arisen in considering claims for equitable compensation, where the concept of causation has been the focus of discussion (as has the distinction between the substitutive and reparative functions of the remedy). This has received no little prominence in a number of cases both here and in the United Kingdom (see Agricultural Land Management and Youyang in this jurisdiction and Target Holdings Ltd v Redferns [1996] 1 AC 421; [1995] UKHL 10 (Target Holdings) and AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 in the United Kingdom). It has also been the subject of academic debate (to some of which I refer below). There appears now to be a divergence between the two jurisdictions, with the latter adopting a more "loss-focused" concept of equitable restitution (as so characterised by Rickett in "Equitable Compensation: the giant stirs" (1996) 112 Law Quarterly Review 27, 29).

Appeal grounds 1 and 2

1. Turning then to the principal question on the appeal (and cross-appeal raising the alternative path of reasoning), as already set out Mr Mao's notice of appeal, filed on 16 March 2023, raised two grounds: first, that the primary judge erred in finding that the requirements of an equitable set-off were satisfied, and, second, that the primary judge erred in finding that the set-off was to be undertaken at 5 May 2014. The result of calculating the set-off as at the date of judgment (December 2022), according to the orders sought in Mr Mao's notice of appeal, is that judgment in the sum of $3.4 million would be entered in favour of Mr Mao.
2. I have summarised above the relevant principles as to equitable set-off. With respect to the primary judge, I am unable to conclude that the requirements for an equitable set-off are here established. That is because I cannot see the necessary interdependence or connection between the liability of Mr Bao arising under the loan agreement (made quite some time after the acquisition of the Vaucluse Property and the unauthorised borrowings themselves) on the one hand and the liability of Mr Mao in respect of the failure to account on the sale of the Vaucluse Property on the other. It is not the fact that the transactions are separate (though they are) that is determinative; rather, it is the absence of a sufficient connection to make it unconscionable in my opinion for Mr Mao to enforce the loan agreement (including an entitlement to interest at the higher than Court interest rate) without also paying interest on the account claim at that higher rate. Insofar as the primary judge was influenced by the intuitive unfairness of the circumstance that Mr Mao had the benefit of the unaccounted for funds while Mr Bao was continuing to accrue a liability in relation to the high rate of interest, such unfairness does not suffice to establish the necessary connection between the respective claims (those claims arising out of separate and distinct transactions both in time and as to their subject matter).
3. The claim by Mr Bao for an account relating to the dealings with the Vaucluse Property is not "bound up with [nor] go[es] to the root of, challenge[s], call[s] in question, or impeach[es] the title of [Mr Mao]" to the loan claim. The position seems to me not unlike Product Development Solutions Australia Pty Ltd v Parametric Technology Corporation [2012] NSWCA 211 at [12]-[14] and Forsyth at [14]-[15]. The mere fact (if it be the case, and there is no evidence of this) that Mr Mao's wrongful conduct (unrelated to the loan agreement) in failing to account to Mr Bao following the sale of the Vaucluse Property in 2014 may have affected Mr Bao's financial capacity to repay a loan due for repayment almost three years earlier, does not constitute the basis for an equitable set-off; nor does the fact that the incurring of higher interest rates following failure to repay the moneys provide that connection (in circumstances where Mr Bao disputed the loan in any event).

Cross-Appeal

1. As to the cross-appeal, I have already concluded that the alternative path of reasoning suffers from the same problems as the equitable set-off claim. Insofar as the argument is made that pre-judgment interest should have been awarded in the exercise of the statutory discretion conferred by s 100 of the Civil Procedure Act this in essence must be a complaint as to the exercise (or non-exercise in the present case) of that discretion by the primary judge (which would be subject to House v The King (1936) 55 CLR 499; [1936] HCA 40 (House v The King) constraints on appellate review).
2. It is well recognised that when a statutory discretionary power is conferred, the power is to be exercised judicially "that is to say not arbitrarily, capriciously or so as to frustrate the legislative intent" (Oshlack v Richmond River Council (1998) 193 CLR 72 at 81; [1998] HCA 11 per Gaudron and Gummow JJ); and that the grounds upon which the discretion is exercisable must be limited to what is relevant to the purpose and subject matter to which the legislature intended the discretion to be exercised.
3. Mr Mao emphasises that the purpose for which interest is awarded is compensatory, namely to compensate a plaintiff for the loss which he or she has suffered by being kept out of his or her money during the relevant period; and that, to fulfil that compensatory function, the purpose of an award of interest is to place the successful party "in the position in which he would have been had the amount of the verdict been paid to him when the cause of action accrued". The amount of interest is not ordered to punish the defendant for having been dilatory in settling the plaintiff's claim.
4. The primary judge, as already noted, did not find it necessary to determine the issues debated on the question of interest under the Civil Procedure Act (see [51] of the quantification judgment) and hence in that sense did not address the exercise of the discretion under s 100 of that Act. However, approaching this on the basis that the primary judge did not ultimately exercise the statutory discretion to make an order for interest at the higher rate from the time of the failure properly to account for the sale proceeds, I do not consider that error in the House v The King sense has been demonstrated. Mr Bao points to no error of principle or misapprehension of facts or law; rather, he relies on the unfairness of the situation where he is liable to pay a contractual rate of interest at a far higher sum than the interest awarded to him for Mr Mao's failure to account in relation to the Vaucluse Property. I am not persuaded that the result is so unreasonable as to bespeak error of a kind that would support appellate review of the decision as to interest. Were it necessary on the cross-appeal to exercise the statutory discretion as to interest, I would come to the conclusion that the order sought by Mr Bao should not be made.

Orders

1. The orders I propose are as follows: 1. Allow the appellant's appeal with costs. 2. Set aside the orders made by the primary judge on 16 December 2022 and in lieu thereof order that judgment be entered for the appellant against the respondent in the sum of $3,401,289.50, comprising: 1. the value of the appellant's claim as at 5 May 2014 ($2,069,020) plus interest on that claim at 24% per annum from 6 May 2014 to 12 December 2022; minus 2. the value of the respondent's claim as at 5 May 2014 ($2,050,084) plus interest on that claim at the pre-judgment interest rate prescribed by the Supreme Court from 6 May 2014 to 12 December 2022. 1. Dismiss the cross-appeal with costs.
2. WHITE JA: I have had the advantage of reading in draft the reasons for judgment of Ward ACJ. Her Honour has fully explained the issues arising in the appeal and the parties' submissions. I have taken a different view on the availability of equitable set-off.
3. The issue is significant. The primary judge entered judgment for Mr Mao for $57,611 with that sum to bear interest at 2% per month from 16 December 2022. Mr Mao contends that the judgment sum should be $3,401,29.50, to bear interest at that rate.
4. It is not obvious why, after judgment, interest should run at the contractual rate, given that Mr Mao's cause of action on the loan would merge in the judgment. But that question was not raised on appeal.
5. The difference between the amount of the judgment obtained ($57,611) and the judgment sought ($3,401,289.50) is attributable to the difference between the contractual rate of interest on the loan and the court rate on Mr Bao's cause of action against Mr Mao and the change in exchange rates.
6. The essential facts can be summarised as follows.
7. On 27 May 2004, Mr Mao purchased the Vaucluse property for $3.8 million (J1 [199]). The purchase was funded partly by mortgage finance obtained by Mr Mao from the National Australia Bank ("NAB") of $2.275 million. As between Mr Mao and Mr Bao, Mr Bao was responsible for repayments of principal and payment of interest. The balance was provided by Mr Bao, apart from $200,000 borrowed from Ms Xiaomei Zhang's mother. Ms Zhang was Mr Mao's former wife (J1 [43] and [44]).
8. It was admitted on the pleadings that Mr Mao agreed to purchase and hold the property in his own name, but on behalf of Mr Bao; that he would use the money advanced by the NAB towards the purchase of the property on the basis of Mr Bao's agreement to make all repayments of the NAB loan and to pay to Mr Mao the balance needed to purchase the property; and that, by reason of those agreements, he held the Vaucluse property on an express trust for Mr Bao. (Cross-claim pars 2, 6, 13; defence to cross-claim pars 2, 6 and 13)

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DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 21 November 2023