(2014) 98 ACSR 615
AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58
Alexander v Perpetual Trustees WA Ltd (2004) 216 CLR 109
[2004] HCA 7
Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1
[2018] HCA 43
Australian Executor Trustees (SA) Ltd v Kerr [2021] NSWCA 5
(2021) 151 ACSR 204
Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345
Source
Original judgment source is linked above.
Catchwords
(2014) 98 ACSR 615
AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58
Alexander v Perpetual Trustees WA Ltd (2004) 216 CLR 109[2004] HCA 7
Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1[2018] HCA 43
Australian Executor Trustees (SA) Ltd v Kerr [2021] NSWCA 5(2021) 151 ACSR 204
Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345[2012] HCA 17
AWA Ltd v Exicon Australia Pty Ltd (1990) 19 NSWLR 705
Beach Petroleum v Kennedy (1999) 48 NSWLR 1(2016) 333 ALR 524
Forsyth v Gibbs [2009] 1 Qd R 403[2008] QCA 103
Gerard Cassegrain & Co Pty Ltd v Cassegrain (2013) 87 NSWLR 284[1908] HCA 13
House v The King (1936) 55 CLR 499[1936] HCA 40
HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 479
James v Commonwealth Bank of Australia (1992) 37 FCR 445[1992] FCA 617
Magnus v Queensland National Bank (1888) 37 Ch D 466
Maguire v Makaronis (1997) 188 CLR 449[2003] EWCA Civ 962
Norman v FEA Plantation Ltd (2011) 195 FCR 97[2011] FCAFC 99
O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262
Oshlack v Richmond River Council (1998) 193 CLR 72[2019] NSWCA 135
Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484
Judgment (26 paragraphs)
[1]
Background
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.
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]).
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]).
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]).
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]).
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).
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).
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]).
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).
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]).
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]).
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]).
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]).
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.
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]).
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).
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.
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]).
From December 2011 to February 2012, Mr Mao paid a total of $54,000 into the offset account to facilitate mortgage repayments ([74]).
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]).
The primary judge noted that by this time the relationship between Mr Mao and Mr Bao had apparently become strained ([67]).
On 23 February 2012, Mr Bao placed a caveat over the Vaucluse Property ([77]).
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).
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]).
On 28 June 2012, Mr Mao complained to the police about Mr Bao's conduct, making allegations of fraud ([82]).
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]).
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.
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]).
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.
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.
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.
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.
There was no change to [54] of the pleading.
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.
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).
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.
[2]
Principal judgment
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]).
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.
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]).
[3]
Quantification judgment
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).
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.
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).
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.
[4]
Grounds of Appeal
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)]
[5]
Grounds of Cross-Appeal
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.
[6]
Legal Principles
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'".
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.
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).
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).
[7]
Mr Mao's submissions
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.
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.
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.
[8]
Equitable Set-Off
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).
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]).
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.)
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.
[9]
Pre-Judgment Interest
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.
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]).
[10]
Reply submissions
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.
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.
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).
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".
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).
[11]
Cross-Appeal
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).
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.
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.
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 .
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.
[12]
Supplementary submissions
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).
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.
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).
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.
[13]
Mr Bao's supplementary submissions
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).
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)).
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.)
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).
[14]
Mr Mao's supplementary submissions
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.
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.
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.
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.
[15]
Application of the Brickenden principle
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.
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).
[16]
Magnus
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).
[17]
Brickenden
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.
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".
[18]
Gray
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.
[19]
Murad
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.
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.
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]).
[20]
Re Brogden
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).
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]
[21]
Mr Mao's submissions
Mr Mao submits that the cases referred to above are not relevant to the appeal and/or are distinguishable.
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.
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.
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.
[22]
Conclusion as to applicability of the Brickenden principle in this case
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]).
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.
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).
[23]
Appeal grounds 1 and 2
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.
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).
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).
[24]
Cross-Appeal
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).
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.
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.
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.
[25]
Orders
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.
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.
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.
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.
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.
The essential facts can be summarised as follows.
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]).
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)
[26]
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Decision last updated: 21 November 2023
[2008] QCA 103
Gerard Cassegrain & Co Pty Ltd v Cassegrain (2013) 87 NSWLR 284; [2013] NSWCA 453
Glazier Holdings Pty Ltd v Australian Men's Health Pty Ltd (No 2) [2001] NSWSC 6
Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1
Gwembe Valley Development Co Ltd & Anor v Koshy [2004] BCLC 131
Hanak v Green [1958] 2 QB 9
Hawes v Dean [2014] NSWCA 380
Hill v Ziymack (1908) 7 CLR 352; [1908] HCA 13
House v The King (1936) 55 CLR 499; [1936] HCA 40
HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 479
James v Commonwealth Bank of Australia (1992) 37 FCR 445; [1992] FCA 617
Magnus v Queensland National Bank (1888) 37 Ch D 466
Maguire v Makaronis (1997) 188 CLR 449; [1997] HCA 23
Mao v Bao (No 2) [2022] NSWSC 1699
Mao v Bao [2021] NSWSC 1096
Mittiga v Community Corporation 20582 Inc (2012) 114 SASR 557; [2012] SASC 202
Miwa Pty Ltd v Siantan Properties Pte Ltd [2011] NSWCA 297
Murad v Al-Saraj [2005] EWCA Civ 959
Muscat v Smith [2003] 1 WLR 2853; [2003] EWCA Civ 962
Norman v FEA Plantation Ltd (2011) 195 FCR 97; [2011] FCAFC 99
O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262
Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11
Popular Homes Ltd v Circuit Developments Ltd [1979] 2 NZLR 642
Product Development Solutions Australia Pty Ltd v Parametric Technology Corporation [2012] NSWCA 211
Ralston v South Greta Colliery Ltd (1912) 13 SR (NSW) 6
Rawson v Samuel (1841) Cr & Ph 161
Re Brogden; Billing v Brogden (1888) 38 Ch D 546
Re Dawson (dec'd) (1964) 84 WN (Pt 1) (NSW) 399
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
Roadshow Entertainment v (ACN 053 006 269) Pty Ltd Receiver & Manager Appointed (1997) 42 NSWLR 462
Short v Crawley (No 30) [2007] NSWSC 1322
Stephen James Rigg v Paul Sheridan [2008] NSWCA 79
Target Holdings Ltd v Redferns [1996] 1 AC 421; [1995] UKHL 10
Thomas v SMP International Pty Ltd (No 4) [2010] NSWSC 984
Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211
Warman International Ltd v Dwyer (1995) 182 CLR 544
Watson v Ebsowrth & Ebsworth (Watson) [2010] VSCA 335
White v Illawarra Mutual Building Society Ltd [2002] NSWCA 164
Wollongong Coal Ltd v Gujarat NRE Properties Pty Ltd [2020] NSWSC 254
Wollongong Coal Ltd v Gujurat NRE India Pty Ltd (2019) 100 NSWLR 432; [2019] NSWCA 135
Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15
Texts Cited: M Conaglen, 'Brickenden' in S Degeling and JNE Varuhas (eds), Equitable Compensation and Disgorgement of Profit (Hart Publishing, 2017) 111
J D Heydon KC, "Causal Relationships between a Fiduciary's Default and the Principal's Loss" (1994) 110 Law Quarterly Review 328
J Glister, 'Breach of fiduciary duty: Brickenden lives on' (2011) 5 Journal of Equity 59, 66-67
J Glister, "Equitable Compensation" in J Glister and P Ridge (eds), Fault Lines in Equity (Hart Publishing, 2012) 143
S Harder, 'Equitable compensation for a fiduciary's non-disclosure and hypothetical courses of events' (2011) 5 Journal of Equity 22
Meagher, Gummow & Lehane's Equity Doctrines & Remedies (LexisNexis Butterworths, 5th ed, 2015)
Rickett, "Equitable Compensation: the giant stirs" (1996) 112 Law Quarterly Review 27
Category: Principal judgment
Parties: Duoxiang Mao (Appellant)
Linchun Bao (Respondent)
Representation: Counsel:
H Stowe (Appellant)
PM Knowles SC and DJ Delany (Respondent)
Solicitors:
JurisBridge Legal (Appellant)
CKSD Lawyers (Respondent)
File Number(s): 2022/387702
Publication restriction: Nil
Decision under appeal Court or tribunal: Supreme Court of New South Wales
Jurisdiction: Equity Division
Citation: [2021] NSWSC 1096
Date of Decision: 31 August 2021
Before: Parker J
File Number(s): 2016/389706
As to issue (i) per Ward ACJ and Mitchelmore JA:
The applicable test for equitable set-off requires that there be such a connection between the respective claims that one impeaches the other, such that it would be unconscionable to allow one party to insist on its legal right without accommodating the other's countervailing right: [55]-[57] (Ward ACJ). The interdependence or connection between the liability arising under the loan agreement and the liability arising under the mortgage was not established: [184] (Ward ACJ), [246] (Mitchelmore JA). Nor was there evidence that Mr Mao's failure to account to Mr Bao either compromised Mr Bao's financial capacity to repay the loan or that Mr Bao would have claimed a set-off in 2014 had Mr Mao complied with his obligation to account upon the sale of the Vaucluse Property: [189] (Ward ACJ), [246] (Mitchelmore JA). Intuitive unfairness alone is insufficient to found an equitable set-off: [184] (Ward ACJ), [246] (Mitchelmore JA).
Hill v Ziymack (1908) 7 CLR 352; [1908] HCA 13; Forsyth v Gibbs [2008] QCA 103; [2009] 1 Qd R 403; Hawes v Dean [2014] NSWCA 380; Wollongong Coal Ltd v Gujarat NRE India Pty Ltd [2019] NSWCA 135 applied.
As to whether the Brickenden principle had application to this case to preclude Mr Mao (in denying the sufficiency of connection between the respective claims) from relying on a counterfactual as to what Mr Bao would have done had Mr Mao not failed to account to Mr Bao on the sale of the Vaucluse Property for the unauthorised borrowings, the Brickenden principle has narrow application (if at all) in Australia and is not applicable whether by extension or analogy to the question of equitable set-off: [172], [174] (Ward ACJ), [246] (Mitchelmore JA). The Brickenden principle did not assist Mr Bao: [177], [182] (Ward ACJ), [246] (Mitchelmore JA).
Brickenden v London Loan & Savings Co [1934] 3 DLR 465; Magnus v Queensland National Bank (1888) 37 Ch D 466; Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1; Murad v Al-Saraj [2005] EWCA Civ 959; Re Brogden; Billing v Brogden (1888) 38 Ch D 546 considered.
As to issue (i) per White JA (dissenting):
The direct connection between the accrual of interest on the moneys advanced by Mr Mao to Mr Bao, and Mr Mao's failure to account for the drawdown on the mortgage over the Vaucluse Property in 2014 was such as to impeach Mr Mao's entitlement to the continued accrual of interest on the loan. Mr Mao's contention that there was no basis to infer that, had he accounted for the proceeds of sale at the time of sale, Mr Bao would have agreed to a set-off was inconsistent with the fact that Mr Mao himself pleaded an equitable set-off, and adduced no evidence that he could otherwise have paid the moneys he owed when the Vaucluse Property was sold. In line with the high standards to which equity holds fiduciaries, it was not open to Mr Mao to speculate as to what would have happened had his breach of fiduciary obligation not occurred: [223]-[244].
Brickenden v London Loan & Savings Co [1934] 3 DLR 465; Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1; Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15, discussed.
Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211; Boardman v Phipps [1967] 2 AC 46; Warman International Ltd v Dwyer (1995) 182 CLR 544; [1995] HCA 18; Murad v Al-Saraj [2005] EWCA Civ 959; Short v Crawley (No 30) [2007] NSWSC 1322; Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17; Gerard Cassegrain & Co Pty Ltd v Cassegrain (2013) 87 NSWLR 284; [2013] NSWCA 453; Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43, cited.
As to issue (ii):
4. Error in a House v The King sense was not demonstrated in respect of the primary judge's decision not to exercise the statutory discretion under s 100 of the Civil Procedure Act 2005 (NSW) to make an order in Mr Bao's favour for interest at the higher rate on the moneys for which Mr Mao was required to account: [195] (Ward ACJ), [246] (Mitchelmore JA).
House v The King (1936) 55 CLR 499; [1936] HCA 40 applied.
As to the purchase of the Vaucluse Property, the primary judge found that there was a trust arrangement, saying at [264] that:
Implicitly, if not expressly, this arrangement conferred rights and obligations on both parties. Mr Bao was obliged to indemnify Mr Mao against his liability to the NAB and the other costs of holding the property. The payment of the remittances reflected that liability. On the other hand, Mr Bao was entitled to require Mr Mao to hand the property over (or sell it on Mr Bao's behalf), thus benefiting from any increase in its value, upon indemnifying Mr Mao against the outstanding amount of the loan and any other resulting costs.
As to Mr Bao's cross-claim, some of the claims made by Mr Bao against Mr Mao concerning the financial dealings in relation to the Vaucluse Property were rejected but, relevantly, it was not contested that some of the drawdowns on the mortgage facility for the Vaucluse Property were for the personal benefit of Mr Mao ([275]). His Honour considered that Mr Mao must prima facie account for the benefit that he received from sale of the Vaucluse Property, in the form of a discharge of Mr Mao's own liabilities to NAB, and that Mr Bao was prima facie entitled to recover from Mr Mao the difference between the net proceeds of sale and the principal amount of Mr Bao's share of the loan ([276]). His Honour found that Mr Mao's recognition of this obligation was implicit in the statement of account which Mr Mao had prepared for Mr Bao in February 2010 ([267]).
The primary judge ultimately concluded that Mr Bao was entitled to an account incorporating: the net proceeds of the Vaucluse Property when it was sold in May 2014; the rent received from the tenant of the Vaucluse Property; and the remittances sent to Mr Mao "but only back to 31 January 2010 (or perhaps 29 December 2010, coupled with an enquiry going back to 31 January 2010)" ([387]). The significance of this date appears to be that this corresponds with the last statement of account provided to Mr Bao by Mr Mao, and thus may have been seen to comprise the appropriate base for any subsequent accounting (as it did not incorporate the additional borrowings or any interest on them to that point). His Honour considered that it would be necessary to proceed with the taking of the account (or account and enquiry) to which he had found Mr Bao was entitled; and that the parties would need to consider what further procedural steps, and what further evidence, would be required to undertake that task ([389]). This then led to the further hearing, which was the subject of the subsequent quantification judgment.
The parties then agreed upon orders providing for judgment in accordance with the reasons set out in the quantification judgment. In light of the set-off of the parties' respective claims at the date of completion of the sale of the Vaucluse Property (on 27 May 2014), and interest on the account balance from that point to the date of judgment, the balance owing in favour of Mr Mao was $57,611 (as opposed to the amount of over $3 million which Mr Mao had claimed) (see [2] of the orders made by Parker J on 16 December 2022).
In Hawes, Barrett JA (Bathurst CJ and McColl JA agreeing) emphasised at [65] that the notion of impeachment is fundamentally underpinned by unconscionability, in the sense that the two claims must be so closely linked that it would be unconscionable to allow one to be enforced without accommodating the other, his Honour saying that:
In all the hypothetical cases to which Emmett JA referred [in HP Mercantile at [137]] two wrongs or defaults are so closely connected that a net position or result ought in equity to prevail between the parties because it would be unconscionable to allow one of them to insist on its legal right without first accommodating the other's countervailing legal right. It is the existence of that unconscionability that causes the first party's claim to be "impeached" (that is, undermined and defeated) by the second party's claim.
That said, it has also been recognised that the notions of conscience or unconscionability that underpin equitable set-off do not operate at large (Active Adult Management Pty Ltd v Milstern Retirement Living Pty Ltd [2017] NSWSC 1238 (Active Adult Management) at [84]) nor is unconscionability of itself sufficient to establish a defence of equitable set-off (see Wollongong Coal Ltd v Gujurat NRE India Pty Ltd (2019) 100 NSWLR 432; [2019] NSWCA 135 (Wollongong Coal) at [113] per Leeming JA, Bathurst CJ and McCallum J agreeing). In Forsyth (in a passage referred to and affirmed in Hawes) Keane JA made clear (at [10]) that "the availability of an equitable set-off does not depend upon an unfettered discretionary assessment of whether it would be "unfair" in a general sense for a plaintiff to insist on payment of the debt owed to it while the cross-claim remains unpaid".
A key feature of many cases (including the present) is that the respective liabilities and entitlements arose from separate transactions from different points in time. It has been said that this feature is one that tends to mitigate against a set-off; and it can be a decisive factor in the set-off enquiry (see Hawes at [66]; [81]). In Hawes, Barrett JA draws attention to "the separateness of the transactions from which the rights arose, both in time and as to subject matter". In Forsyth, the key reason that the cross-claim was held not to impeach the initial claim was that "the transactions which gave rise to the respondent's claims were entirely distinct from the loans in respect of which the appellants sue" (at [13] per Keane JA, McMurdo P and Fraser JA agreeing). Similarly, in Chamberlain at [72], Emmett AJA said:
…if cross-demands arise out of separate transactions, they would not usually be regarded as sufficiently closely connected to justify equitable set-off.
However, the fact that there are separate transactions is not determinative. A cross-claim may give rise to an equitable set-off even if the cross-claim does not arise from the same transaction or same contractual relationship; see for example Norman at [156] (Jacobson, Nicholas and Yates JJ, citing Forbes J in British Anzani (Felixstowe) Ltd v International Management (UK) Ltd [1980] QB 137, 154-155), in the context of a dispute involving a tenancy:
… the tenant's cross-claim may give rise to an equitable set-off even if the cross-claim does not arise from the lease itself, or directly from the relationship of landlord and tenant, provided that the claim for rent and the cross-claim arising from another contract are so closely connected that the principles affecting equitable set-off can be said to apply.
In Forsyth, Keane JA explained the relevance of the distinction between the transactions as being that, where the misconduct that founds the cross-claim was not a feature in inducing the cross-claimant to assume the liability that founded the initial claim, there is not a sufficiently close connection that the cross-claim impeaches the initial claim (see [14]). In Forsyth, the respondent's loan indebtedness (i.e., the respondent's liability under the initial claim) neither arose nor was increased as a result of any misconduct of the appellant. The fact that the misconduct may have in some general way contributed to the cross-claimant's negative financial situation, such that the cross-claimant was unable to make repayments under the loan (leading to the initial claim) was considered to be "clearly an insufficient connection to give rise to a set-off" (Forsyth at [15]). Keane JA said (at [15]):
The point is that there must be a connection between claim and cross-claim beyond the mere fact that the payment of the claim has been rendered more difficult than would have been the case had it not been for the matters the subject of the cross-claim.
It is also relevant (in circumstances where there is here a dispute as to the time at which the set-off arises) to note the substantial (as opposed to procedural) nature of equitable set-off. Campbell JA in Miwa Pty Ltd v Siantan Properties Pte Ltd [2011] NSWCA 297 noted at [53] that an equitable set-off can be asserted "as soon as circumstances subsist which support the equitable set-off, and regardless of whether proceedings have been brought at that time" (cf cases that have attempted to confine equitable set-off to a procedural right such as Muscat v Smith [2003] 1 WLR 2853; [2003] EWCA Civ 962 and Blacksheep Productions Pty Ltd v Waks [2008] NSWSC 488, which have generally been criticised across case law and commentary alike - see AWA Ltd v Exicon Australia Pty Ltd (1990) 19 NSWLR 705 (AWA v Exicon) at 710 (Giles J); Roadshow Entertainment v (ACN 053 006 269) Pty Ltd Receiver & Manager Appointed (1997) 42 NSWLR 462 at 481 (Gleeson CJ, Handley JA and Brownie AJA); Concrete Constructions v Dalma Formwork [1999] NSWCA 16 at [21]-[22] (Sheppard AJA, Mason P and Handley JA agreeing); and Meagher, Gummow & Lehane at [39-060(f)]).
Counsel for Mr Mao identified two broad categories of cases where interdependence satisfying the impeachment test has been satisfied (citing Forsyth and Chamberlain, where it was said that the link between the demands must be such that "the two are, in a sense, interdependent"), those being: first, where the original claimant's own breach of obligation to the counter-claimant brought about or at least contributed to the counter-claimant's liability to the original claimant (citing, inter alia, HP Mercantile), though noting that there must be some additional connection beyond the mere fact that the original claimant's own breach of obligation rendered more difficult the counter-claimant's breach; and second, where the original claimant's breach of obligation is responsible for reducing or denying to the counter-claimant the benefit which was the quid pro quo for satisfying the obligation upon breach of which the original claim is based (citing, inter alia, Hawes and Chamberlain).
Mr Bao maintains that it is necessary to look at all the circumstances of the case, taking into account the guiding principles; and says that a rigid taxonomy cannot be applied to limit the scope of the doctrine, cavilling with the proposition that there are only two broad categories where the necessary inequity will be found so as to give rise to the impeachment of title and emphasising the need to take into account the particular circumstances of the case and that what must be shown is "a recognised equitable ground for being, to the relevant extent, protected from his adversary's demand", the mere existence of cross-claims not being sufficient.
It is not necessary here to attempt a taxonomical categorisation of cases which have been recognised as satisfying the impeachment test (thoughtful as the detailed submissions of Mr Mao in this regard are). It suffices to note that, among the guiding principles that have been identified in the authorities referred to above, are that: the mere existence of a cross-claim is not sufficient (HP Mercantile; Hawes); it is not necessary that the claims arise from the same transaction (Norman) although if cross-demands arise out of separate transactions, they would not usually be regarded as sufficiently closely connected to justify equitable set-off (Chamberlain); it is not necessarily sufficient to show that the cross-claim is in some way related to the transaction which gave rise to the claim, or turns on similar findings of fact (Hanak v Green [1958] 2 QB 9 at 23); mutuality is not necessary but is potentially relevant (Wollongong Coal at [110]); and it is necessary to look at all the circumstances of the case (AWA v Exicom at 709). The notion of a sufficient connection between the claims will ordinarily be satisfied if the claims are interdependent in the sense considered in Forsyth and Chamberlain (such that it would be unconscionable for the original claimant to take the benefit of its claim without taking into account the other party's cross-claim).
With that summary of the legal principles, I turn to the submissions by the respective parties as to Mr Mao's appeal against the finding of equitable set-off in the present case (grounds 1 and 2 of the appeal). Those grounds may conveniently be considered together, ground 1 challenging the finding of equitable set-off, ground 2 challenging the date at which the set-off between the parties' claims was to be undertaken. Ground 2 does not of course arise if ground 1 succeeds.
Mr Mao further contends that there is no basis for a finding that Mr Mao's breach of his duty to account for the proceeds of sale was responsible for reducing or denying to Mr Bao the benefit which was the quid pro quo for satisfying the obligation to repay the amounts due under the loan agreement; and says that, on the findings made by the primary judge, the dealings in relation to the Vaucluse Property (which grounded Mr Mao's obligation to account) and the loan agreement, were entirely unrelated.
Mr Mao places weight on the separateness of the transactions under which the respective liabilities arose, arguing that: the demand by Mr Bao that Mr Mao account in relation to dealings in connection with the Vaucluse Property is distinct from, and unrelated to, Mr Mao's demand under the loan agreement; Mr Bao's claim for account and Mr Mao's claim under the loan agreement lack the requisite "connection" to render it unconscionable for Mr Mao to "insist on his legal right without first accommodating Mr Bao's countervailing legal right" under the doctrine of equitable set-off; and hence that Mr Mao's claim under the loan agreement is not impeachable by Mr Bao's claim for account, and Mr Bao is not entitled to equitable set-off between the parties' respective claims at the time of completion of the sale of the Vaucluse Property.
As to ground 2, Mr Mao points out that the statutory set-off under s 21 of the Civil Procedure Act 2005 (NSW) occurs at the time of judgment; and thus (if equitable set-off is unavailable), for the purpose of determining the statutory set-off, interest accrues on Mr Mao's claim under the ¥11 million loan agreement to the date of judgment at the contractual rate of interest of 2% per month.
First, Mr Bao refers to Mr Mao's unchallenged evidence that he borrowed money from NAB (prima facie breaching his obligations as trustee for Mr Bao) in order to protect himself against Mr Bao not paying to him money which he would lend to him. Mr Bao argues that, although the primary judge doubted that evidence, a finding that Mr Mao borrowed money for his own purposes is not inconsistent with Mr Mao's evidence that he borrowed the funds as security against Mr Bao's later breach of an obligation. Mr Bao submits that this demonstrates the necessary interconnectedness between the two transactions; i.e., that Mr Mao created the liability to account as trustee by engaging in borrowing using as security the Vaucluse Property owned in equity by Mr Bao. It is said that Mr Mao engaged in that borrowing to guard against the very possibility that Mr Bao would not repay to him any moneys which Mr Mao loaned to Mr Bao; and that, in those circumstances, it is unconscionable for Mr Mao to insist on his legal right to be repaid his loan before first accommodating Mr Bao's right to an account in respect of the Vaucluse Property.
Second, Mr Bao points to the temporal connection between the relevant events. Mr Bao argues that Mr Mao's demand for repayment of Mr Bao's loan triggered (in a temporal sense) Mr Bao's failure to continue paying the costs associated with the Vaucluse Property, thereby ultimately triggering the mortgagee sale and Mr Mao's failure to account for the proceeds of that sale. Mr Bao submits that it was, in turn, only the mortgagee sale, and Mr Mao's claim on his loan, that led to the discovery of Mr Mao's unauthorised borrowing and the claim for the account.
Third, Mr Bao submits that it is not necessary for Mr Mao's failure to account to have been the causa sine qua non of Mr Bao's liability under the loan; rather, it is sufficient that the conduct of Mr Mao "at least contributed to the existence" of the liability owed by him (citing Gummow J in James v Commonwealth Bank of Australia (1992) 37 FCR 445; [1992] FCA 617; and noting that Gummow J there observed that impeachment was not to be narrowly understood). In this regard, Mr Bao points to the fact that his relevant liability is not simply to repay principal under the loan agreement but also to repay the very high rates of interest that have accrued.
It is accepted by Mr Bao that there was no finding by the trial judge that the failure by Mr Mao to account at the time of completion of the sale of the Vaucluse Property compromised Mr Bao's financial capacity to discharge his obligations under the loan agreement. Nevertheless, Mr Bao says that the failure to account contributed to the liability for ongoing interest. It is submitted that, had Mr Mao offered to account for the surplus from the sale of the Vaucluse Property, it is almost certain that Mr Mao himself would have asserted a right of set-off (since his evidence was that he drew down the mortgage funds as security for any default by Mr Bao). Conversely, Mr Bao argues that an inference is available that he (Mr Bao) would have agreed to such a proposal since it would be rational for Mr Bao to seek to discharge or reduce the loan given the high rates of interest which were accruing. In this sense, it is submitted that the default of Mr Mao contributed to the liability of Mr Bao because it allowed for the indebtedness of Mr Bao to spiral through the application of the contractual rate of interest.
Fourth (and Mr Bao emphasises this last contention), Mr Bao argues that the equity which impeaches Mr Mao's claim in the present case arises from the failure of Mr Mao to account to him (in relation to the unauthorised borrowings in relation to the Vaucluse Property). Mr Bao says that Mr Mao's submissions treat the case as involving no more than two competing money claims debts; and he submits that this overlooks the fact that Mr Mao was a trustee (or fiduciary agent) (referring to [23] of the quantification judgment) who owed fiduciary duties to him (noting the description of the fiduciary obligation by Payne JA, with whom Gleeson and Leeming JJA agreed, in Coope v LCM Litigation Fund Pty Ltd [2016] NSWCA 37; (2016) 333 ALR 524 at [105]). Mr Bao says that, at least by the time of his failure to account, Mr Mao was in a position of hopeless conflict: that he was, on one hand, a fiduciary whose default left him holding Mr Bao's funds; and, on the other hand, he was profiting from interest accruing on Mr Bao's unpaid debt (and he points out that there was no attempt by Mr Mao to obtain informed consent to the use of the funds).
Mr Bao argues that it is the equity arising from Mr Mao's breach of duty which gives rise to the equitable set-off and that, in light of this interconnection, it would be unfair for Mr Mao to have the benefit of 2% monthly interest on the loan, without taking into account his liability to account to Mr Bao as trustee.
Mr Bao submits that the fact that the primary judge made no findings to the effect that Mr Bao was induced to enter the loan agreement by reason of any dealings between the parties relating to the Vaucluse Property or that the failure to account at the time of completion of the sale of the Vaucluse Property compromised Mr Bao's financial capacity to discharge his obligations under the loan agreement does not mean that equitable set-off is not available by reference to established principle (simply that there is no precise analogy with other cases such as Popular Homes Ltd v Circuit Developments Ltd [1979] 2 NZLR 642).
As to ground 2, Mr Bao points out that this turns on the conclusion as to ground 1, noting that no separate submission is made that (if the equitable set-off was correctly found) equitable set-off ought to have run from a different date.
Mr Mao notes that, in his affidavit affirmed 6 August 2019, he deposed that:
26. In early October 2007, I was offered a further loan of around a million dollars by the NAB … I accepted the loan offered
….
29. I transferred an amount of $800,000 of the loan monies into an account of mine in China by reason of the belief that the Cross-Claimant had failed to repay the $200,000 loan made by Zheng Bao Xia to him
30. I developed that belief by reason of Xiaomei [Ms Zhang] having said to me words to the effect of:
"Look at how difficult it has been for Linchun Bao to pay back $200,000. Just imagine what it would be like if you were to seek repayment of further monies from him. It may well be very difficult. I think you should take precautions to prevent him from defaulting on any monies you lend him"
Mr Mao says that in cross-examination he sought to explain the "process" (of increasing the loan) but was not permitted by the cross-examiner to do so (see T 39.15-17; 25 May 2020); and notes that later (at T 59.21-24; 26 May 2020) Mr Mao said that "the reason I borrowed the money because Mr Bao didn't pay the loan which owed [sic] - which was to my ex-mother-in-law". Mr Mao complains that it was never put to him in cross-examination that at the time of the NAB borrowing he anticipated making future loans to Mr Bao (let alone that he specifically anticipated the specific loan) or that he made the NAB borrowing for the purpose of somehow creating security for future lending generally, let alone specifically as security for the specific loan.
Mr Mao says that considerations of fairness (analogous to rule in Browne v Dunn (1893) 6 R 67 (H.L.)) further undermine a proper basis for a positive finding by this Court that Mr Mao's purpose in making the NAB borrowing was "to protect himself against Mr Bao not paying to him money which he would lend him".
Further, Mr Mao argues that such a purpose makes no commercial sense in circumstances where Mr Mao was himself liable to repay the NAB borrowing; and says that this weighs strongly against construing Mr Mao's ambiguous evidence as supporting the finding that his purpose in making the NAB borrowing was "to protect himself against Mr Bao not paying to him money which he would lend him" or alternatively supports the primary judge's rejection of Mr Mao's explanation as to the purpose of the NAB borrowing.
Mr Mao points out that his Honour (at [222]) said that Mr Mao's explanation for the transactions was difficult to accept, noting that, in increasing the amount being lent, Mr Mao was increasing his exposure to NAB; that it did not make any commercial sense for him to do that simply to raise a fund against the possibility that Mr Bao might later find it difficult to repay the bank debt; and that "[n]or, on the evidence, was there any other liability against which [it] would have made sense to take some form of security". It is noted that, at 18 of the quantification judgment the primary judge said again that Mr Mao's evidence that he made the additional drawdowns in 2007 and 2008 as security against the possibility of Mr Bao being unable to repay some future loan was "difficult to accept", and found that "it was more likely that Mr Mao had simply drawn down those additional funds for his own convenience, so as to use the monies for his own purposes".
Mr Mao maintains that there is no basis for a finding that Mr Mao was contemplating the possibility of making further loans to Mr Bao at the time of the NAB borrowing and that this weighs against the inherent plausibility of the inference that the purpose of the NAB borrowing was to protect himself against Mr Bao in relation to future lending.
Even if (which Mr Mao denies) there was a proper basis for a finding that Mr Mao made the NAB borrowing "to protect himself against Mr Bao not paying to him money which he would lend him", Mr Mao argues that such a finding would not constitute a proper basis for equitable set-off for two alternative reasons: first, that there is no basis for the finding that the loan was even in contemplation at the time of the NAB borrowing (so it is said that there can logically be no interdependence between the loan and the NAB borrowing); second, that the mere fact that the NAB borrowing was "to protect himself against Mr Bao not paying to him money which he would lend him" does not of itself give rise to a significant level of "close connection" or "interdependence" between the relevant transactions.
As to the second ground raised by Mr Bao (the proposition that the factual chronology illustrates a clear temporal connection between the relevant events), Mr Mao maintains that in the absence of some material causal connection the temporal sequence is immaterial to establishing the requisite "interdependence" between the two claims. It is submitted that Mr Bao has conflated merely temporal connection with causal connection in the submission that Mr Mao's demand for repayment of Mr Bao's loan triggered (temporally) Mr Bao's failure to continue paying costs associated with the Vaucluse Property. Mr Mao argues that there is no contended (or available) basis for a finding that entry into (or performance or default or demand or liability under) one of the dealings, materially contributed to entry into (or performance or default or demand or liability under) the other dealing.
As to the third ground (the contention by Mr Bao that there would be a sufficient contribution to Mr Bao's liability to generate equitable set-off if Mr Mao's failure to account "contributed to the liability for ongoing interest" and that "an inference is available that, if Mr Mao had offered to account for the surplus from the sale of the Vaucluse Property", then Mr Bao would have agreed to a set-off of his account claim against the loan), Mr Mao argues that there is no basis for such a finding (noting that there is no finding by the primary judge to that effect and no appeal against the absence of such finding).
Further, Mr Mao argues that Mr Bao's own evidence and the primary judge's findings weigh overwhelmingly against a finding to the effect contended. It is noted that Mr Bao's defence to Mr Mao's ¥11 million loan claim was that the payment was not a loan but a payment on account of an alleged agreement by Mr Mao to buy him out of the Vaucluse Property; alternatively, that, if the payment was a loan, it was a loan to the Parramatta development company and not to him personally (see [16] of the principal judgment); and that Mr Bao's evidence was consistent with that defence (see [113]-[125] of the principal judgment). Mr Mao argues that, in light of Mr Bao's denial of liability under the loan (which he characterises as consistent, emphatic and unconditional), there is no basis for a finding that, if Mr Mao had accounted or offered to account to Mr Bao, Mr Bao would have acknowledged liability under the loan and agreed to a set-off between the account claim and loan.
Mr Mao points to various findings that he argues negative the causal significance of Mr Mao's dealings in relation to the NAB loan, and the causation of loss to Mr Bao. First, that, although the NAB borrowings increased the interest payable under the NAB loan his Honour said that "the important fact is that Mr Bao was not being charged for the additional interest" ([225] of the principal judgment); and that this would have been "obvious" to Mr Bao from the February 2010 account statement ([226] of the principal judgment; 18 of the quantification judgment). (As to this, his Honour must have here meant that this would have been obvious to Mr Bao after he became aware of the unauthorised borrowings themselves because there is nothing in the statement to suggest any such borrowings.) Second, that as Mr Bao was unaware of the additional borrowings (until after the proceedings commenced), it cannot have affected his decision to abandon the Vaucluse Property ([268] of the principal judgment). Third, Mr Mao says that there is no basis for a finding that Mr Mao's failure to account for the proceeds of sale of the Vaucluse Property affected Mr Bao's financial capacity to discharge his part of the NAB loan. Fourth, Mr Mao says that Mr Bao ignored his requests for payment and cannot now complain that in the face of this Mr Mao allowed NAB to sell the property (referring here to [275] of the principal judgment and [26]-[29] of the quantification judgment).
As to the fourth ground (Mr Bao's contention that the relevant equity to impeach Mr Mao's claim arises from Mr Mao's failure to account), Mr Mao argues that this conflates two notions of "the equity of the defendant" and fails to identify any circumstance which supports an equitable set-off. Mr Mao does not contest that the circumstance of the NAB borrowing generates "an equity" in favour of Mr Bao to call on Mr Mao to account. However, he argues that the fact that Mr Bao has "an equity" to call on Mr Mao to account is irrelevant to whether Mr Bao has "an equity" to assert equitable set-off. Mr Mao says that the mere fact that the countervailing claim is equitable in nature is not sufficient to create the "equity" to assert equitable set-off with respect to that countervailing claim; rather, the "equity" to assert equitable set-off arises by reference to established principles relating to the nature and extent of the "connection" and "interdependence" of the competing claims.
Mr Mao argues that the underlying theme of Mr Bao's position is that there is intuitive unfairness in allowing Mr Mao to recover contractually specified interest in relation to the ¥11 million loan, and that the doctrine of equitable set-off should be invoked to preclude that outcome. Mr Mao submits that this is inconsistent with the clearly established principles which circumscribe the doctrine of equitable set-off and which proscribe the invocation of equitable doctrines to achieve idiosyncratic fairness on the facts.
Further or in the alternative, Mr Mao challenges the implicit factual premise of intuitive unfairness. Mr Mao maintains that there is no basis to infer that, if Mr Mao had accounted for the proceeds of sale of the Vaucluse Property at the time of sale, Mr Bao would either have agreed to a set-off in relation to the loan or repaid the loan. It is submitted that to allow Mr Bao to claim equitable set-off would confer a windfall gain on Mr Bao (by relieving Mr Bao of the obligation to pay the contractual interest under the loan).
Mr Mao argues that a number of other considerations material to the application of unconscionability doctrines weigh against the intuitive justice of allowing the equitable set-off, namely: that there is not present the "fraud, mistake, accident, [and] surprise" which frequently underpin the operation of the unconscionability doctrine; that because there is no obvious principle which supports the equitable set-off on the facts beyond the contended intuitive notions of fairness, the finding of equitable set-off undermines certainty in this field of law; that, even if it were assumed that the refusal to find equitable set-off were to cause loss or hardship, those facts alone are insufficient to engage unconscionability (noting also that there is no evidence of hardship); that there is no evidence as to the improvidence or unreasonableness of the contractual terms for interest under the loan but that, even if the terms of interest were assumed to be improvident, the principles of unconscionability do not relieve a plaintiff from the consequences of improvident transactions; and that the application of equitable set-off would effectively sterilise Mr Mao's contractual right to interest under the loan. It is noted that doctrines of unconscionability do "not authorise a court to reshape contractual relations into a form the court thinks more reasonable or fair where subsequent events have rendered one side's situation more favourable". Further, it is said that the sterilisation of Mr Mao's contractual right to interest is inconsistent with presumptive respect for "faithfulness or fidelity to a bargain freely and fairly made", and respect for "allocations of risk" under contractual regimes.
Finally, in view of the divergence between Mr Bao's case and the primary judge's findings in relation to the terms on which Mr Mao advanced the ¥11 million loan, Mr Mao says that the only inference reasonably open on the findings of the primary judge is that Mr Bao's case in the proceedings below was advanced in bad faith. Mr Mao argues that equity's sensitivity to "unclean hands" weighs against Mr Bao's invocation of equitable doctrine to avoid paying the contractually agreed interest rates on the ¥11 million loan. In oral submissions, Counsel for Mr Bao submits that no finding of bad faith can or should be made (AT 46.48-47.12).
Mr Bao argues that Mr Mao's breach of fiduciary duty contributed to the existence of Mr Bao's liability in debt because, if Mr Mao had accounted for the "sale proceeds" as required in 2014, the very large amount of interest that has accrued since then under the separate ¥11millioin loan agreement would not have accrued.
Having regard to the authorities referred to above, Mr Bao notes that, in equity, an analysis of causation depends on the context in which the question arises and, in particular, requires close consideration of the equitable duty in issue (citing Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 (Youyang) at [44] and referring to O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 271).
Mr Bao reiterates his argument that had Mr Mao accounted for the surplus from the sale of the Vaucluse Property in 2014 it is almost certain that Mr Mao would have asserted a right of set-off (which he notes would have been consistent with Mr Mao's defence to the cross-claim, which pleaded that Mr Mao was entitled to set off, in equity, any liability under Mr Bao's cross-claim against Mr Bao's liability in debt). Mr Bao says that an inference is available that he would have acquiesced to such a proposal since it would be rational for him to seek to discharge or reduce the loan given the high rates of interest which were accruing. Further, in the hypothetical scenario, it is said that Mr Bao would have been left with little practical choice (in that, if Mr Bao had refused the proposed set-off, it would be fanciful to think that Mr Mao would have simply handed the money over in circumstances where Mr Bao's debt remained outstanding), his only choice being to accept the position or sue for the return of money. Mr Bao argues that there was, therefore, a prima facie basis to find that, but for Mr Mao's default, interest would not have continued to accrue on the debt after 2014 (except to the extent that the debt had not been offset by the sale proceeds).
Mr Bao argues that the Brickenden principle either precludes Mr Mao from speculating to the contrary or, at the very least, imposes an onus upon Mr Mao to demonstrate what would have happened but for his breach of duty; and therefore Mr Bao says that it is not open for Mr Mao on appeal to submit that the onus was on Mr Bao to adduce hypothetical evidence of what he would have done had Mr Mao made disclosure of the true position in 2014. It is submitted that the demand for such evidence is, in substance, an argument that Mr Mao's failure to account in 2014 did not matter, because the same result would have followed in any event; and that, because Mr Mao is a defaulting fiduciary who had an obligation to account in 2014 upon the sale of the Vaucluse Property, such an argument is either prohibited (citing Magnus) or subject to an onus borne by the defaulting trustee (citing Re Brogden; Billing v Brogden (1888) 38 Ch D 546 (Re Brogden)).
Mr Bao argues that, for similar reasons, the Brickenden principle informs his case on the application of s 100 of the Civil Procedure Act.
Further, Mr Mao points out that, even when the claim for set-off is brought by the constituent beneficiary against its trustee, the trustee entity may not be defending the set-off in its trustee capacity. Mr Mao says that, in the present case, he is defending the claim of set-off in respect of the ¥11 million loan agreement which was entered into in his private capacity (and which is outside the scope of his trustee or fiduciary obligations). Mr Mao argues that there is no policy reason why his defence to set-off in respect of claims in his private and non-trustee capacity should be burdened by equity's censure against the defaulting trustee.
Mr Mao also argues that presumptions against wrongdoers are inherently inapplicable in the context of equitable set-off because the essential dimension of set-off is that there are countervailing claims and hence there will often be two wrongdoers involved (as in this case). Mr Mao submits that there is no good policy reason why (as a matter of general principle in equitable set-off) the party with the burden to establish that connection should be favoured by the development or application of rules which qualify and lessen the burden of proof. Mr Mao submits that, if the party seeking equitable set-off cannot establish the requisite level of necessary and sufficient connection between the countervailing claims to render it unconscionable to enforce a claim without accommodating the countervailing claim, then there is no basis for the set-off.
Finally, as adverted to earlier, Mr Mao argues that the Brickenden principle constitute a qualification to the discharge of the burden of proof of causation and he submits that such qualification should be regarded as an exception to the firmly entrenched general principle that there "is no equitable by-pass of the need to establish causation".
In any event, Mr Mao submits that the cases referred to above in relation to the Brickenden principle in question are not relevant to the finding of set-off on the specific facts of this case. I consider his submissions on those cases in due course.
Responding to the matters raised in Mr Bao's supplementary submissions, Mr Mao agrees with the criticism by Mr Bao as to the uncertainty of the characterisation placed by the primary judge of Mr Bao's claim for an account but submits that this is irrelevant to the operation of set-off because equitable set-off does not depend upon the legal characterisation of the claim but, rather, on the nature and degree of connection between the countervailing claims.
Mr Mao emphasises that: the primary judge did not make a positive finding that Mr Mao breached his duty as trustee by making unauthorised drawdowns (see [23] of the quantification judgment) and did not find that there was any duty of disclosure in relation to the fact of the unauthorised drawdowns. Mr Mao argues that there is no basis for a finding of a duty of disclosure in relation to breach of duty because there was no finding of breach in relation to the drawdowns and, even if there were a finding of breach, there is no positive duty of disclosure in relation to breach. (It should be noted that Mr Mao seeks leave to withdraw submissions or admissions made in oral hearing of the appeal to the contrary effect.) Mr Mao also emphasises that the primary judge found that the relevant breach was the failure to pay to Mr Bao the proceeds of sale less his component of the loan, on completion of the sale of the Vaucluse Property (see [267]; [276]; 387 of the principal judgment; and [12] of the quantification judgment) . Mr Mao submits that any hypothesis of sufficient connection to ground equitable set-off can only be grounded on the obligations found by the primary judge.
Mr Mao challenges the premise of the counterfactual raised by Mr Bao (as to his likely acquisition in a set-off as to the respective amounts in 2014). Mr Mao says that there is no basis for incorporation into the counterfactual of the assumption that Mr Mao would have claimed a set-off because this would be inconsistent with the assumption in the counterfactual that there was compliance with Mr Mao's obligations. Mr Mao argues that, for the purpose of the relevant counterfactual, it is not necessary to speculate as to whether or not Mr Mao would in fact have asserted set-off; and that the counterfactual should proceed on the basis that Mr Mao paid the proceeds of sale in 2014. Further, Mr Mao argues that there is no plausible basis for the contention that Mr Bao would have acquiesced to the set-off (or repaid the loan if Mr Mao had accounted for the proceeds of sale), in view of Mr Bao's emphatic repudiation of the existence of the loan.
As to Mr Bao's alternative submission (that, if Mr Mao had asserted set-off, Mr Bao would have sued for recovery, by reason of which interest would not have continued to accrue), Mr Mao challenges this for the following reasons. First, that, on the correct counterfactual assumptions, Mr Mao would have paid the proceeds of sale, and there would have been no occasion for Mr Bao to sue. Second, that if (contrary to Mr Mao's submissions) it is assumed that Mr Mao would have failed to account and would instead have asserted set-off, there is no basis for the finding that Mr Bao would have sued. Mr Mao says that there is neither direct evidence, nor a basis to infer on the balance of probabilities, that Mr Bao would have done so. Mr Mao argues that it should be found that Mr Bao knew he was exposed to a larger cross-claim in relation to the ¥11 million loan agreement. Mr Mao says that, in those circumstances, there is no basis for finding that Mr Bao would have commenced proceedings, and thereby exposed himself to the inevitable cross-claim.
Further, Mr Mao argues that, even if it were to be found that Mr Bao would have sued, the mere commencement of those hypothetical proceedings would not of itself stop the accrual of interest; rather, accrual of interest would only stop when judgment was entered in those hypothetical proceedings. Mr Mao argues that, on that basis, equitable set-off based exclusively on the cessation of the accrual of interest should therefore only run (if at all) from the projected time of judgment in the hypothetical proceedings. As to this, Mr Mao points to the following timeline: on 5 May 2014, the obligation to account for the proceeds of sale arose when Mr Mao received the proceeds of sale (see [86] of the principal judgment); on 29 December 2016, Mr Mao commenced proceedings; on 16 November 2018, Mr Bao served a cross-claim seeking an account; and on 16 December 2022, final orders were entered. Thus, it is noted that the resolution of the proceedings took six years from the commencement of proceedings by Mr Mao, and four years from the commencement of the cross-claim by Mr Bao. Mr Mao argues that there is no basis for the inference that the hypothetical proceedings commenced by Mr Bao some time after 5 May 2014 (in which Mr Mao says he would of course have pressed a cross-claim) would have been resolved more quickly than the actual proceedings.
Mr Mao argues that, therefore, assuming proceedings would have commenced in December 2016, it is reasonable to assume that judgment would not have been entered (stopping the accrual of interest), until between four to six years after: ie, December 2020 to December 2022. Mr Mao says that, on that basis, equitable set-off should only run from a time between those dates.
Finally, insofar as Mr Bao submits that the principles outlined in his submissions either preclude Mr Mao from speculating on the opposite basis, or at the very least, impose an onus upon him to demonstrate what would have happened but for his breach of duty, Mr Mao again argues that there is no basis for recognising the application, in the field of equitable set-off, of principles prohibiting a respondent from challenging hypothetical counterfactuals propounded by the applicant to establish the requisite "connection"; or the "onus shift"; and that, even if (contrary to Mr Mao's submissions) there were some form of evidentiary, persuasive or legal onus shift, Mr Mao has discharged that onus in relation to all relevant hypotheses (referring to his submissions in chief at [99]-[103] and in reply at [19]-[38]).
The appropriate starting point for the academic debate as to the role of causation in the context of claims for breach of fiduciary duty is the decision of the House of Lords in Target Holdings, where the House of Lords found in favour of a defaulting fiduciary on the basis that, even if there had been no breach, the same loss would have been suffered. The default in that case involved the release by a firm of solicitors of trust funds without authorisation (the solicitors there acting for both the borrower and for the finance company on the transaction in question). In the Court of Appeal, Peter Gibson LJ, with whom Hirst LJ agreed, held that the liability of the trustee was to restore to the trust fund that which had been lost to it; and that the wrongful disbursement of the funds caused an immediate loss, and an immediate duty to restore. Summary judgment was ordered for the amount advanced (less the amount that had been recovered in the interim). The analysis here accords with that outlined subsequently in Agricultural Land Management.
In the House of Lords, Lord Browne-Wilkinson referred to the dissenting judgment of McLachlin J (as her Ladyship then was) in Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534; (1991) 85 DLR (4th) 129 (Canson) (to the effect that, in assessing an award of equitable compensation "it is essential that the losses made good are only those which, on a common sense view of causation, were caused by the breach" at 168); and said that "…equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be said to have been caused by the breach" (see at 438).
The effect of this judgment in confining the application of the Brickenden principle was noted by this Court (Spigelman CJ, Sheller and Stein JJA) in Beach Petroleum v Kennedy (1999) 48 NSWLR 1 at 93; [1999] NSWCA 408 (Beach Petroleum), where it was said that:
Brickenden is not, in our opinion, authority for the general proposition that, in no case involving breach of fiduciary duty, may the Court consider what would have happened if the duty had been performed. The reasoning in Brickenden must now be understood in the light of the House of Lords decision in Target Holdings and the cases which have applied it.
The above passage was cited with approval in Stephen James Rigg v Paul Sheridan [2008] NSWCA 79 at [56] (Handley AJA, with whom the Court agreed) and White v Illawarra Mutual Building Society Ltd [2002] NSWCA 164 (White v Illawarra) at [145] (Hodgson JA). Similar statements have been made in other intermediate appellate courts (see, for example, Watson v Ebsowrth & Ebsworth (Watson) [2010] VSCA 335 at [165]).
The requirement that there be some causal relationship between the breach of equitable duty and the loss for which compensation is sought (which would seem to conflict with the reasoning in Brickenden) was recognised in Short v Crawley (No 30) [2007] NSWSC 1322 (Short v Crawley) at [427] (White J as his Honour then was). More firmly, the applicability of Brickenden was expressly rejected in Thomas v SMP International Pty Ltd (No 4) [2010] NSWSC 984 (Thomas) (per Pembroke J at [75]) (and see Professor Glister, 'Breach of fiduciary duty: Brickenden lives on' (2011) 5 Journal of Equity 59, 66-67).
In Youyang the High Court considered a not dissimilar situation to that in Target Holdings, the respondent solicitors having paid out (in breach of an express trust) certain subscription moneys otherwise than in compliance with a term requiring a bearer certificate of deposit to be lodged which would have provided security for the moneys. The solicitors were held liable to compensate the investor for the total amount of the subscription moneys paid out plus interest. The High Court (Gleeson CJ, McHugh, Gummow, Kirby and Hayne JJ) considered the essence of the complaint to be the misapplication of moneys held on trust ([42]-[43]) and held that loss had been suffered when the money was paid out in breach of trust. Target Holdings was distinguished on the basis that Youyang was not the client of the solicitors in question and that the proposed commercial transaction was not completed. The facts were explicitly distinguished from those in Brickenden and no comment was made as to its correctness. The award made in favour of Youyang was later described by the High Court as restitutionary or restorative (see Alexander v Perpetual Trustees WA Ltd (2004) 216 CLR 109; [2004] HCA 7 at [44]).
At [50] in Youyang, the High Court said that considerations of the scope and purpose of the trust which bound the solicitors "lent force to the application" of the proposition (expressed by Lord Browne-Wilkinson in Target Holdings at 437) that an accrued cause of action for breach did not mean that the quantum of compensation was ultimately fixed as at the date the breach occurred on the basis that "stopping the clock" may lead to compensation for loss which, on the facts as known at trial, had never been suffered. This, combined with the High Court devoting a substantial part of the judgment ([51]-[70]) to a consideration of the series of events subsequent to the trustees' breach, suggests that some causal relationship between breach and loss may be necessary in some cases. Nevertheless, the Court held that the loss of trust moneys when paid out in breach of trust was "the injuria with which equity is concerned, not the [subsequent] failure of the investment transaction" ([69]).
As to academic commentary on the issue of causation and the Brickenden principle, I note the following (without suggesting it to be an exhaustive survey).
The authors of Meagher, Gummow & Lehane state (at [23-495]) that, for consistency with current High Court decisions and statements (particularly Youyang), the Brickenden doctrine should be confined to preventing fiduciaries reducing or avoiding orders for equitable compensation by arguing that the loss would have been caused by a third party's fraud or dishonesty regardless of whether proper disclosure was made (see also [23-445]).
Professor Glister has observed that all jurisdictions have withdrawn from the strictest application of Brickenden (J Glister "Equitable Compensation" in J Glister and P Ridge (eds), Fault Lines in Equity (Hart Publishing, 2012) 143 (Glister 2012), 161), suggesting that it had been abandoned in Australia by reference to Short v Crawley.
Professor Conaglen suggests (at Conaglen 141) that in a fiduciary breach case, there are two counterfactuals that may be considered: first, where there was no conflict, and second, where there was a conflict but disclosure was made and consent was given; and that Brickenden may be read as prohibiting speculation as to the second counterfactual, but not the first, which would allow for the inclusion of a causation requirement in a "but for" sense. Professor Conaglen emphasises (at 142) that a causal analysis is not irrelevant, saying that "the courts still need to determine what would have happened if the fiduciary had not acted with the conflict".
Dr Sirko Harder, an academic at the University of Sussex, advocates for the Brickenden principle to be taken as a rebuttable presumption that the failure to disclose did cause the loss; such that a causal inquiry is still relevant but the onus is on the fiduciary to demonstrate that part or all of the loss would have been suffered regardless of their failure to disclose (S Harder, 'Equitable compensation for a fiduciary's non-disclosure and hypothetical courses of events' (2011) 5 Journal of Equity 22 (Harder) at 30). It is suggested that this has become the general approach in New Zealand and Canada, but that in New Zealand the evidential requirement seems much harder to satisfy (see Conaglen at 134-137; Glister 2012 at 162, 165-167; Harder at 26-28, 30).
The strict standard imposed on fiduciaries (to make good the trust fund without enquiry as to loss beyond the fact of the misapplication of the trust property) derives from the concern of equity "not only to compensate the plaintiff but to enforce the trust which is at its heart" (see Canson per McLachlin J, dissenting, with whom Lamer CJ and L'Heureux-Dubé agreed). The Brickenden principle, to the extent that it still applies, can thus be seen as part of the strict requirement that the trustee be kept to the trust (such that proof of loss is not required for an account by the trustee beyond the fact of the unauthorised disbursement or dissipation of trust funds), whereas for claims for equitable compensation the losses made good (at least on the UK authorities referred to above) will be those which, on a commonsense view of causation, were caused by the breach of fiduciary duty.
The relevance of the above discussion indicates to my mind the need to bear in mind the particular context in which the Brickenden principle is now sought to be invoked by Mr Bao as applicable to the issues in this appeal.
Even leaving aside how strictly the principle articulated in the cases relied on by Mr Bao (particularly Brickenden) should presently be applied in Australia, in my opinion the Brickenden principle should not be extended to the doctrine of equitable set-off where there is a fundamentally different enquiry to be addressed to that which arises when considering a claim for equitable compensation for breach of trust or fiduciary duty (namely the sufficiency of connection between two claims).
That Brickenden stands for a relatively narrow principle is important. I consider that it is not authority for a general principle that a defaulting trustee may not point to counterfactuals as a defence to causation, rather, confined to its facts, Brickenden is authority for the much narrower principle that a defaulting fiduciary, in circumstances where proper disclosure has not been made, is prohibited from contesting causation on the basis that the principal would have gone ahead with the transaction even if disclosure had been made (see White v Illawarra at [144]-[145] per Hodgson JA).
Thus, assuming for the purpose of the present argument that the Brickenden principle remains presently applicable at all, the context in which it is applied should in my opinion be confined to cases where a defaulting trustee is required to account for breach of fiduciary duty such as that comprised by the unauthorised disbursement of trust assets (so as to permit the conclusion that the loss was sustained when the unauthorised disbursement occurs without reference to subsequent events). However, the present question relates not to whether there was a loss when Mr Mao failed to account for the proceeds of sale of the Vaucluse Property (a matter that seems to be accepted insofar as there is no challenge to the liability to account) but, rather, as to whether the claim for that loss has a sufficient connection with the countervailing claim for repayment of the distinct transaction by which the ¥11 million loan was made.
I do not consider that the Brickenden principle, if applicable, precludes Mr Mao from arguing (in support of his contention that the failure to account did not cause or contribute to the loan claim and was not relevantly interdependent with that claim) that there was no evidence to establish the counterfactual posited by Mr Bao (namely that, had Mr Mao accounted for the sale proceeds in 2014, a set-off arrangement would have been agreed at that time and therefore interest would not have continued to accrue under the loan agreement). In other words, I consider that there is force to the argument that the Brickenden principle would apply only to the question of causation of loss for breach of fiduciary duty if that question arises consistently with the reasoning in Youyang and that it is not applicable by analogy to the question whether there is a sufficient connection between the respective claims for the purpose of the doctrine of equitable set-off.
The hypotheses sought to be advanced by Mr Bao (in the context of which he suggests the Brickenden principle is applicable) appear to be: first, that, if disclosure had been made, it is possible that Mr Bao would not have borrowed the money at all; second, that the withdrawals contributed to Mr Mao's ability to make the loan to Mr Bao; and, third, that if the account had been made for the borrowing out of the sale proceeds there would have been a set-off at that time.
I accept that, irrespective of the fact that there was no finding in terms of breach of fiduciary duty in the principal judgment, it is not in dispute that Mr Mao held the Vaucluse Property on trust for Mr Bao (this was admitted on the pleadings); and the primary judge held that this gave rise to a prima facie obligation to account to Mr Bao on the sale of the property ([276] of the principal judgment). His Honour also referred in terms to unauthorised borrowings ([277] of the principal judgment). It can hardly be disputed, therefore, that Mr Mao was a defaulting fiduciary in that he failed to account for the proceeds of sale of the Vaucluse Property (by failing to account for the share of the proceeds to which Mr Bao would have been entitled but for the unauthorised borrowings).
However, what Mr Bao seeks (by embracing the suggested operation of the Brickenden principle) is to preclude Mr Mao from arguing that the evidence does not establish that Mr Mao's failure to account caused or contributed to Mr Bao's failure to repay the debt when addressing the question as to the sufficiency of the connection between the two transactions. To my mind the policy considerations that support the Brickenden principle do not here require that there should be a shift in onus to cast the burden on Mr Mao to negative the proposition that, had he complied with his fiduciary duty, Mr Bao would have repaid the loan debt and not incurred the interest charges from 2014.
Moreover, the evidence that was adduced points clearly to the refusal by Mr Bao to acknowledge that there was a loan in existence at all. Thus, whoever is said properly to have borne an onus on that issue, the evidence does not support a conclusion or necessary inference that, had Mr Mao properly accounted to Mr Bao for his share of the proceeds of sale of the Vaucluse Property (on the assumption that the unauthorised borrowings had not been made), Mr Bao would have repaid the loan debt out of his share of the proceeds or would have acquiesced in a set-off as between those respective claims.
Therefore, I do not consider that the invocation of the Brickenden principle here assists Mr Bao.
Addressing briefly the four matters that Mr Bao relies upon to show interdependence, I am of the following view.
As to the first (the purpose of the borrowing), it is significant that the primary judge did not accept (in the sense that he said he doubted) Mr Mao's evidence that the purpose of the NAB borrowing was in case Mr Bao did not repay moneys lent to him ([222]-[223] of the principal judgment; 18 of the quantification judgment). The primary judge thought it more likely that the purpose of the borrowing was for Mr Mao's personal use and that appears to be borne out by what in fact happened (there seems to be no suggestion that the moneys were not disbursed for Mr Mao's personal benefit other than the repayment of the sum that was the subject of his ex-mother-in-law's loan). Insofar as Mr Mao's affidavit evidence is ambiguous (and I accept there is a level of ambiguity in that evidence) it simply reinforces the primary judge's conclusion that Mr Mao's explanation is not likely to be the correct one. Moreover, even if Mr Mao was motivated to make the drawings against the possibility of future loans to Mr Bao, I still doubt that this would provide the necessary level of connection to support a conclusion of equitable set-off.
As to the second (the temporal connection between the demand for repayment and the cessation of the payments by Mr Bao towards the Vaucluse Property), I do not accept that this is a connection that would make unconscionable the enforcement by Mr Mao of the loan (without taking into account his liability to account under the mortgage). Mr Bao's refusal to pay the loan was referable to his denial that the moneys represented a loan at all.
As to the third (the contention that the failure to account contributed to the loan claim by compromising Mr Bao's financial capacity to repay the loan), there is no evidence of this. As to the fourth (the contention that the equity that arises is generated by the breach of fiduciary duty), Mr Mao does not deny that there is an equity arising that renders him liable to account for the proceeds of sale of the Vaucluse Property. Such an equitable claim clearly arises on the facts which are not here disputed. However, the mere existence of an equitable claim is not sufficient to establish the relevant connection. The fact that higher interest has accrued on the loan claim which would not have accrued had Mr Mao complied with his obligation to account presupposes that there would have been a set-off arrangement reached in 2014; and, not only is there no evidence of Mr Bao's intention in that regard, it is inconsistent with his denial that there was a loan at all.
Accordingly, I am not persuaded that the requirements for an equitable set-off were met. For similar reasons, I do not see the necessary interconnectedness to support a conclusion that the alternative path of reasoning (see at [86] above) should be adopted to arrive at the conclusion that the equitable set-off requirements were met.
Therefore, I consider that ground 1 should be allowed, with the consequence that ground 2 is unnecessary to determine.
I should here add that, since writing these reasons, I have had the opportunity of reading White JA's dissenting reasons. I have no difficulty with the proposition that there would have been a sufficient connection between the respective claims (to give rise to an equitable set-off) had the failure of Mr Mao to account causally contributed to the continuing accrual of the higher rate of interest on the loan (as I had sought to indicate at [189] above). However, while the fact that the loan continued to be outstanding after May 2014 meant that interest continued to accrue on that loan, the evidence was that Mr Bao disputed the very existence of that loan. I remain of the view that the Brickenden principle does not apply to preclude Mr Mao from pointing to the lack of evidence as to what Mr Bao would have done had he (Mr Mao) accounted for the unauthorised borrowings at the time the Vaucluse Property was sold.
Accordingly, I would dismiss the cross-appeal. There is no reason why costs should not follow the event.
From 8 June 2004, Mr Bao, or other persons acting on his behalf, made remittances of $1,162,475 in mortgage finance and holding costs for the property (J1 [46], [157]-[159]).
In October 2007, the loan facility was redrawn by Mr Mao to increase the limit by $950,000 to $3.25 million. By that time, the amount drawn on the loan had been reduced to about $2.205 million. Mr Mao drew down approximately $1.41 million, of which $200,000 was used to repay Ms Xia. After obtaining a further increase of the facility, Mr Mao drew down a further $181,000 in March 2008 (J1 [47]).
Mr Mao did not disclose these additional borrowings to Mr Bao (J1 [233]). Mr Mao provided statements of the loan account to Mr Bao (without disclosing his additional borrowings) which, as at February 2010, showed that the parties were working on a total loan debt at that time of $2.275 million (J1 [221]). Interest payable to the NAB was calculated on that balance (J1 [225]).
In April 2011, Mr Mao paid Mr Bao ¥11 million on terms that it be repaid by 1 August 2011, and that interest would be charged at a rate of 2% per month (J1 [107], [151]).
When he made that loan, Mr Mao had not disclosed to Mr Bao that he had made the additional borrowings on the security of the property of which he subsequently acknowledged Mr Bao to be the beneficial owner. Mr Mao adduced no evidence as to how he used the moneys that had been drawn down from the NAB loan. Nor did he adduce evidence as to the source of the funds used to make the ¥11 million loan to Mr Bao.
Mr Mao commenced proceedings against Mr Bao for recovery of the loan on 29 December 2016. On 4 September 2018, Mr Bao's solicitor made an affidavit in support of his application for leave to file a cross-claim on the basis of bank records obtained from the NAB on subpoena. The subpoena had been issued on 20 April 2018. The solicitor deposed, and the primary judge found, that Mr Bao did not know until the NAB bank records were produced of the drawings that Mr Mao had made from the NAB loan account.
One of the orders sought by Mr Bao in his cross-claim was:
"11. Order that any liability of the cross-claimant to the cross-defendant pursuant to the Statement of Claim in these proceedings be set-off against the cross-defendant's liability to the cross-claimant under this Amended Cross-claim."
In his defence to cross-claim, Mr Mao pleaded:
"53. In further answer to the whole of the Cross-Claim, if the Cross-Defendant is found liable for any relief granted by the Court with respect to the Cross-Claim (which is denied), then he is entitled in Equity and pursuant to s 21 of the Civil Procedure Act 2005 (NSW) to set-off any amounts payable to the Cross-Claimant against the monies adjudged to be due to him in his claim in these proceedings."
Although Mr Bao's cross-claim did not specifically identify whether he relied on an equitable or statutory set-off, Mr Mao's defence to cross-claim expressly pleaded both an equitable and a statutory set-off.
In March 2014, NAB sold the Vaucluse property. On 5 May 2014, the bank received the proceeds of settlement of the sale of $3.26 million and the bank then closed off the loan account. It did not pursue Mr Mao for the shortfall of $338,000 (J1 [86]). Mr Bao's share of the mortgage debt was $2,050,084 (J2 [56(1)]).
The primary judge found that Mr Bao was liable to Mr Mao for the moneys which his Honour found were paid to Mr Bao by Mr Mao by way of loan at an interest rate of 2% per month. His Honour found that the money of account on the loan was Chinese yuan and not Australian dollars. There is no appeal from these findings.
His Honour also held that Mr Bao was entitled to an account from Mr Mao for the difference between the net proceeds of sale of the property and the principal amount of Mr Bao's share of the loan after taking into account the rent which Mr Mao received from a tenant in the property and the remittances he had sent to Mr Mao either from 31 January or 29 December 2010 (in the latter case, coupled with an inquiry going back to 31 January 2010). (J1 [275], [276], [387]).
That finding is also not challenged on appeal.
The possibility of an equitable set-off arising from the date of the loan made by Mr Mao to Mr Bao was not raised at trial, nor on appeal.
The set-off for which Mr Bao contended at trial and on appeal was from the date on which the Vaucluse property had been sold, that is, 5 May 2014. The primary judge observed that it was common ground between the parties that the statutory right of set-off under s 21 of the Civil Procedure Act 2005 (NSW), arose as at the date of judgment. Mr Bao relied upon an equitable set-off (J2 [49]).
The primary judge's grounds for upholding this claim were as follows:
"[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."
Having regard to the way the claim of equitable set-off was advanced at trial, it may be accepted that there was not such a connection between Mr Mao's conduct in borrowing on the security of the Vaucluse property for his own purposes, and Mr Bao's borrowing ¥11 million from Mr Mao, that Mr Bao's claim impeached Mr Mao's title to sue for the loan debt and interest.
On the sale of the Vaucluse property by the NAB in May 2014, Mr Mao was liable to account to Mr Bao for the difference between the purchase price received by the bank, and that portion of the mortgage debt that was Mr Bao's responsibility. That is accepted. Mr Mao's obligation was not merely to provide an account to Mr Bao that disclosed the borrowings he had made on security of the Vaucluse property, but to pay Mr Bao that difference.
I agree with the observation of Ward ACJ (at [179]):
"I accept that, irrespective of the fact that there was no finding in terms of breach of fiduciary duty in the principal judgment, it is not in dispute that Mr Mao held the Vaucluse Property on trust for Mr Bao (this was admitted on the pleadings); and the primary judge held that this gave rise to a prima facie obligation to account to Mr Bao on the sale of the property ([276] of the principal judgment). His Honour also referred in terms to unauthorised borrowings ([277] of the principal judgment). It can hardly be disputed, therefore, that Mr Mao was a defaulting fiduciary in that he failed to account for the proceeds of sale of the Vaucluse Property (by failing to account for the share of the proceeds to which Mr Bao would have been entitled but for the unauthorised borrowings)."
There was a direct connection between Mr Mao's failure to account and the continued accrual of interest at the high rate of 2% per month on the loan. True it is that Mr Bao denied any liability for the loan or accruing interest. But it is evident that Mr Mao stood to profit by the continued accrual of interest at the rate of 2% per month on the loan.
The counter factual to be considered is what would have been the position if, in May 2014, Mr Mao had disclosed his unauthorised borrowing and liability to account for the difference between the price received by the bank ($3.26 million) and that part of the mortgage debt for which Mr Bao was responsible ($2,050,084); a difference of $1,209,916.
Mr Mao submitted that there was no basis to infer that, if he had accounted for the proceeds of sale at the time of sale, Mr Bao would have agreed to a set-off in relation to the loan or repaid the loan. He characterises Mr Bao's claim to an equitable set-off as an attempt to obtain a windfall gain by relieving Mr Bao of the obligation to pay the contractual interest under the loan. I do not accept that characterisation. It assumes that if Mr Mao had performed his duty and accounted to Mr Bao at the time of sale for what he was liable to pay, Mr Mao would not himself have asserted a claim for an equitable set-off. No such assumption should be made. This is so for the following reasons.
First, when the unauthorised borrowing was discovered and a claim for an account made, Mr Mao pleaded equitable set-off.
Secondly, there was no evidence that Mr Mao could have paid the moneys he owed at the time of sale ($1,209,916). If he could not, he would himself have had to assert a right of set-off, as he ultimately did. If Mr Mao could have paid what he owed Mr Bao in May 2014, and would have been prepared to do so rather than claiming a set-off, the onus was on him to lead evidence that would establish those facts. This is partly because they are facts which lie solely within his knowledge (see, eg, Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17 at [258]; Gerard Cassegrain & Co Pty Ltd v Cassegrain (2013) 87 NSWLR 284; [2013] NSWCA 453 at [26]). It is also partly by reason of the policy considerations which underlie equity's treatment of defaulting fiduciaries (below at [36]-[46]).
At the very least, if Mr Mao had disclosed his borrowings and liability to Mr Bao, matters would have been brought to a head in 2014, rather than in 2018.
The profit Mr Mao has derived over that period in the form of accrued interest at 24% per annum rather than at court rates and the profit he has derived by the movement in exchange rates, is partly attributable to Mr Bao's denial of his personal liability for the loan. But it is also partly attributable to the delayed disclosure of Mr Mao's unauthorised borrowings, which, in turn, is wholly due to his breach of fiduciary duty in not disclosing those borrowings and offering to account.
This connection between Mr Mao's breach of duty in not disclosing his borrowings and offering to account, and the profit derived by Mr Mao, is sufficient to impeach Mr Mao's entitlement to the continued accrual of interest at the higher rate. Mr Mao's breach of duty contributed to the existence of Mr Bao's liability to him for interest from May 2014 (James v Commonwealth of Australia (1992) 37 FCR 445 at 459-460 and cases cited).
Mr Mao characterised Mr Bao's submission as dependent upon notions of intuitive justice or fairness unrelated to principle. For these reasons I disagree.
As a matter of policy in holding fiduciaries to high standards of loyalty and in recognition of the difficulties of proof and the speculation involved in a counterfactual, equity has generally refused to countenance speculation as to what would have happened had the breach of duty not occurred. The apotheosis of this position is found in Brickenden v London Loan & Savings Co [1934] 3 DLR 465 at 469 where Lord Thankerton, giving the advice of the Judicial Committee of the Privy Council in a case where equitable compensation was sought by a client from its solicitor, said:
"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 his 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."
In Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15, the High Court ordered a defaulting trustee to make substitutive equitable compensation for the entire value of moneys paid out of a trust fund in breach of trust notwithstanding the fact that, on the counterfactual posited by the defaulting trustee, the beneficiary would have suffered the same pecuniary loss even if there had been no breach of trust (see at [51]-[69]). The prohibition equity imposes on resort to counterfactuals in cases of substitutive equitable compensation, as well as cases of accounts of profits, illustrates the more "absolute nature" of equitable liability for breach of trust and breach of fiduciary obligation (see generally Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211 at 216).
Mr Mao's liability was to restore the value of trust property which had been diminished by his wrongful borrowings. His obligation was to make substitutive equitable compensation.
Ward ACJ has extensively considered the current state of the law in relation to the principles stated in Brickenden v London Loan & Savings in relation to claims against a defaulting fiduciary for reparative compensation for loss suffered as a result of the breach of fiduciary duty. Authority in this country now favours the position that, notwithstanding what was said by Lord Thankerton in Brickenden, it is still necessary for the plaintiff to establish that, but for the breach of fiduciary duty, the losses for which compensation is sought would not have been incurred.
There has been no departure from the principle stated by the Privy Council in Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1 and by the House of Lords in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 that a fiduciary in a position of conflict between interest and duty who has failed to make full disclosure of his interest and obtain the informed assent of his principal, is liable to account for the profits and cannot be heard to say that he or she would have derived the same benefit had the duty been discharged (Short v Crawley (No.30) [2007] NSWSC 1322 at [413]; Murad v Al-Saraj [2005] EWCA Civ 959 at [59(1)], [71], [76]).
Underlying this is the policy of the law in holding fiduciaries to high standards of loyalty. In Regal (Hastings) Ltd v Gulliver, Lord Wright put the matter thus:
"What the Respondents did, it was said, caused no damage to the Appellant, and involved no neglect of the Appellant's interests or similar breach of duty. But I think the answer to this reasoning is that both in law and equity it has been held that if a person in a fiduciary relationship makes a secret profit cut of the relationship, the Court will not enquire whether the other person is damnified or has lost a profit which otherwise he would have got. The fact is in itself a fundamental breach of the fiduciary relationship. Nor can the Court adequately investigate the matter in most cases. The facts are generally difficult to ascertain or are solely in the knowledge of the person who is being charged. They are matters of surmise; they are hypothetical because the enquiry is as to what would have been the position if that party had not acted as he did, or what he might have done if there had not been the temptation to seek his own advantage, if in short interest had not conflicted with duty."
(see also Boardman v Phipps [1967] 2 AC 46 at 110-111).
Where the fiduciary is liable to account for profits derived from a breach of fiduciary duty, the onus lies on the defendant to show, if he can, what profits were not attributable to his wrongful act, but rather to the contribution of his own skill, effort, property, and resources (Warman International Ltd v Dwyer (1995) 182 CLR 544 at 561-562; [1995] HCA 18; Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43 at [13]-[14]).
The profit of 2% interest per month on Mr Mao's loan to Mr Bao was not derived by Mr Mao from his breach of his fiduciary duty in borrowing on the security of the Vaucluse property without the knowledge and consent of Mr Bao. But the failure to account at the time the Vaucluse property was sold contributed to the continued accrual of interest for almost four years until Mr Bao learned the facts during the course of preparation for trial. Not to allow an equitable set-off would permit Mr Mao to profit from his breach of fiduciary duty in not providing that account.
The principles to which I have referred in relation to defaulting fiduciaries, and the policy underlying those principles, have an analogical application to the present facts. On one view, speculation should not be permitted as to what would have happened had disclosure been made. That is, Mr Mao should not be allowed to say that no set-off would have been applied at that time because Mr Bao denied the existence of the loan. Rather, the set-off should be allowed as at the date found by the primary judge so as to strip Mr Mao of the profit he would otherwise derive, being the excess of the interest on the loan for the period whilst he remained in breach of his duty of disclosure over the interest for which he was liable at court rates.
Another view is that, if the counterfactual is to be explored, the onus is on Mr Mao to demonstrate that even on the counterfactual, there would have been no set-off at the time of sale of the property.
On either view, Mr Bao is entitled to an equitable set-off, as found by the primary judge. In any event, even if these principles have no application, for the reasons at [228]-[229] it should be inferred that, had disclosure and an offer to account been made by Mr Mao in 2014, he would have invoked an equitable set-off.
For these reasons I would dismiss the appeal with costs.
MITCHELMORE JA: I agree with the reasons of Ward ACJ and with the orders her Honour proposes.