On 31 August 2021, I handed down my principal judgment in these proceedings: Mao v Bao [2021] NSWSC 1096. That judgment resulted in protracted further proceedings by way of account. A further hearing occurred on issues arising in the account, and on set-off. I delivered my rulings on those issues on 12 December last year: Mao v Bao (No 2) [2022] NSWSC 1699. On 16 December, I entered judgment in accordance with a minute of order agreed by the parties to reflect my decision. This judgment deals with the costs of the proceedings.
The present judgment assumes familiarity with my August 2021 and December 2022 judgments. References to paragraphs in those judgments will be denoted by use of "J1" and "J2" respectively. Abbreviations used in those judgments are also used in this judgment.
The proceedings arose out of commercial dealings between the plaintiff, Mr Mao, and the defendant, Mr Bao. Both are businessmen who originally came from the same city in China. By the time they first met, Mr Mao had already become an Australian resident. Mr Bao wished to explore also becoming an Australian resident. Eventually, members of his family obtained residence here. He himself remains based in China.
Two features of the parties' dealings are relevant for present purposes. First, in 2004, Mr Bao decided to buy a property at Vaucluse in the eastern suburbs of Sydney. It was agreed that the property would be purchased in Mr Mao's name, since Mr Bao, as a non-resident, could not acquire it in his own name.
Mr Bao provided the deposit monies and some other funds to Mr Mao's ex-wife, Ms Zhang (she was a former real estate agent who had been involved in finding the property for Mr Bao). The rest of the purchase was financed with a mortgage loan in Mr Mao's name from the National Australia Bank ("NAB"). After the purchase was completed, Mr Bao made regular payments to Mr Mao to meet the outgoings and financing costs on the property. For a while, Ms Zhang seems to have been responsible for the payment and accounting arrangements. This responsibility was later taken over by Mr Mao. Ms Zhang dropped out of the picture.
The second relevant feature of the parties' dealings was a payment of ¥11 million (about $1.6 million at the then exchange rate), made by Mr Mao to Mr Bao in April 2011. According to Mr Mao, the payment was made by way of short-term loan and carried interest at 2% per month. But Mr Bao did not repay it, despite requests from Mr Mao.
The parties fell out in November 2011. Mr Mao appropriated the sum of approximately $800,000 from another development controlled by Mr Bao, towards repayment of the ¥11 million. For his part, Mr Bao ceased to make financial contributions to the loan repayments and other holding costs on the Vaucluse property. Mr Mao made some loan payments himself but then stopped. Eventually the property was sold by the NAB in the exercise of its power of sale as mortgagee. In May 2014, the NAB applied the net proceeds ($3.26 million) in reduction of the balance of the loan account. The loan was not fully discharged but the NAB does not appear to have taken action to recover the remainder.
Neither party took any action for two years. Then, in December 2016, Mr Mao brought these proceedings. His claim was to recover the outstanding amount under the ¥11 million loan, together with interest.
Mr Bao's initial defence, filed in April 2017, merely put Mr Mao's allegations in issue. The defence was amended in June 2018 when affidavit evidence was filed by Mr Bao. As propounded at trial, Mr Bao's contention was that the ¥11 million payment was not by way of loan but in partial satisfaction of an earlier agreement that Mr Mao would buy Mr Bao out of the Vaucluse property. It was also argued that the loan agreement was with one of Mr Bao's companies, rather than with Mr Bao personally.
In November 2018, Mr Bao made a cross-claim arising out of the Vaucluse property dealings. Documents produced on discovery had revealed that in 2007 and 2008, Mr Mao drew down additional amounts, totalling $1.59 million, on the mortgage loan from NAB. Apparently, he had applied most of these monies for his own benefit. Mr Bao also raised questions about the initial purchase of the property in 2004. Mr Bao had been told that the purchase price was $4.28 million but in fact the vendor had only received $3.8 million. It appeared that the difference had been applied for the benefit of Ms Zhang or for agents involved in the transaction. The cross-claim sought compensation for both of these alleged breaches of trust.
The first hearing took place in May 2020. In submissions following the hearing, Mr Bao sought to amend his case on the cross-claim. The course of events, and my reasoning on the application, is recorded in detail at J1 [20]-[35]. Eventually, I decided to allow the re-opening. I reserved the costs of the application. The further hearing took place in May 2021.
In my August 2021 judgment, I rejected Mr Bao's defence to the loan claim. I found that there was no arrangement between the parties that Mr Mao would take over the Vaucluse property and pay Mr Bao. The real reason for the loan was Mr Bao's financial embarrassment. I also rejected the contention on behalf of Mr Bao that the borrower was his company and not him personally.
On the cross-claim, I found that Mr Mao had provided a statement of account to Mr Bao for the period up to 31 January 2010. The effect of the calculations, although not expressly disclosed to Mr Bao, had been that the interest on the additional monies borrowed under the mortgage were paid by Mr Mao rather than Mr Bao. Mr Bao was not entitled to re-open the account.
But despite undertakings by Mr Mao, there had been no final accounting from 1 February 2010 onwards. I concluded that Mr Bao was entitled to an account, on the same basis as the January 2010 statement, up until May 2014.
As to the claims for breach of trust, I concluded that Mr Bao had no separate entitlement to compensation for the undisclosed borrowings by Mr Mao. The interest on those borrowings, to the extent that they were not used to meet expenses associated with the property, had been allocated to Mr Mao up to January 2010 and would continue to be so allocated for the remaining account to be undertaken up to May 2014. I also rejected the claim going back to 2004 for two reasons. First, I concluded that the monies had gone to Ms Zhang and Mr Mao was not personally responsible for them. Second, the claim was, in any event, statute barred.
Various issues were raised in the accounting process but, in the end, most were resolved by the parties without the Court needing to rule. Eventually, the amount due from Mr Mao to Mr Bao, as at May 2014, was calculated at $2.07 million.
The main issue which needed to be resolved in the December 2022 judgment was a question of set-off. It was agreed that rather than giving judgments in favour of Mr Mao on the claim and in favour of Mr Bao on the cross-claim, the Court would give one single judgment in Australian dollars. The question was when the set-off was to occur, noting that it would require conversion of the outstanding balance of the ¥11 million loan into Australian dollars.
Counsel for Mr Bao submitted that the currency conversion and set-off should occur as at May 2014. But counsel for Mr Mao contended that they should not occur until final judgment was entered. This would give Mr Mao the benefit of the interest rate differential between the agreed interest rate on the ¥11 million loan and the prescribed court interest rate on the May 2014 account balance. It would also give him the benefit of the appreciation of the yuan against the Australian dollar over the period. Conversion and set-off on that basis would result in judgment of more than $2.5 million in Mr Mao's favour.
On this issue I found in favour of Mr Bao. I considered that Mr Mao was required to bring the loan balance to account in May 2014. The result was that the amounts owed by the parties to each other were almost the same. There was a balance of less than $20,000 owing to Mr Mao. The judgment ultimately entered in Mr Mao's favour, which included more than eight years of interest, was only $58,000.
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Costs
It was common ground between the parties that Mr Mao, the successful party on his claim, should receive an order for costs of that claim. The dispute concerned the effect of Mr Bao's partial success on the cross-claim.
Counsel for Mr Mao pointed out that Mr Bao's claim for a full account with respect to the Vaucluse property was a very belated one and that the claim ultimately succeeded only for the period from February 2010 onwards. Counsel submitted that the costs order in favour of Mr Bao on the cross-claim should be limited to the period after leave to claim a full account was granted (September 2020) and thereafter should be limited to fifty percent of Mr Bao's costs.
Counsel for Mr Bao, on the other hand, submitted that there was no sufficient reason to depart from the usual order that Mr Bao receive a full order for his costs of the cross-claim. Counsel pointed out that Mr Bao was unaware of the true purchase price in 2004, and of the later borrowings by Mr Mao. Counsel acknowledged that in my August 2021 judgment, Mr Bao's claim for an account was only partly successful. But counsel submitted that misrepresentation had been established against Ms Zhang in 2004, albeit that Mr Mao had not been made liable for her conduct. Counsel further submitted that the costs incurred since the August 2021 judgment largely related to the account. Counsel submitted that Mr Bao had ultimately been vindicated in a substantial way, having established an obligation on Mr Mao to account for a sum of more than $2 million.
The parties were thus in agreement that there should be an order for costs in favour of Mr Mao on the claim and an order for costs in favour for Mr Bao, at least in part, on the cross-claim. Yet behind this apparent agreement was an issue which neither party debated in the course of their submissions. How were costs that could be seen as jointly attributable to both the claim and the cross-claim to be apportioned between the two claims?
An issue of this type came before the House of Lords in Medway Oil & Storage Co Ltd v Continental Contractors Ltd [1929] AC 88. The proceedings arose out of a commercial dispute about a contract for the supply of kerosene which was never delivered. The plaintiff sued for damages, alleging wrongful repudiation. The defendant counter-claimed for damages for wrongful repudiation on the part of the plaintiff.
The plaintiff's action failed. Additionally, although the defendant succeeded in establishing repudiation by the plaintiff, the defendant's damages claim failed and the cross-action was also dismissed. An order was made at first instance that the plaintiff pay the defendant's costs of the action and the defendant pay the plaintiff's costs of the cross-action. On taxation, the Court of Appeal considered that most of the parties' costs could be seen as costs incurred in both the action and the cross-action. The Court of Appeal made an order that such costs be apportioned between the parties, with the result that the award in favour of the unsuccessful plaintiff was about half of the award in favour of the successful defendant. This order was overturned by the House as too favourable to the plaintiff.
The House acknowledged that an order could have been made at trial providing for such an apportionment. But no such order had been sought. The House held that as a matter of construction of the order made, the defendant was entitled to all of its costs of the proceedings, except for costs which it only incurred because of bringing its unsuccessful cross-action, and the plaintiff was similarly entitled only to its costs solely referable to defending the cross-action.
In the present case, I was not asked to apportion the costs of the proceedings as between the parties. An order of the type made in the Medway case is, in my view, suitable in circumstances where the cross-claim is brought as a response to the claim. That seems to have been the case here.
It may be accepted that Mr Bao was unaware of the borrowing by Mr Mao on the mortgage. Mr Bao did not know how much was owed to him. But Mr Mao had accepted in correspondence that he had an obligation to account, and Mr Bao was well aware that no such account had been provided for the period after January 2010. From that point forward, Mr Bao knew everything he needed to know to bring the claim for an account which ultimately succeeded. On the face of it, he simply decided not to pursue the issue until well after Mr Mao had brought his debt claim.
In these circumstances, I think that, prima facie, for the period up to the delivery of my judgment in August 2021, Mr Mao should receive an order for his costs of his claim and Mr Bao should receive an order for the costs solely referable to the cross-claim. But there must be some qualifications to the order on the cross-claim.
First, Mr Bao will have to pay the costs thrown away by reason of his amendments, to the extent that those amendments resulted in additional costs being incurred by Mr Mao in the cross-claim.
Second, I do not accept the contention on behalf of Mr Bao that he achieved some level of success so far as the claim for an account from 2004 was concerned. I am not sure that I actually went so far as to find that Ms Zhang had misappropriated the monies. But in any event, the claim failed. The fact that it failed because Mr Mao was not legally responsible for Ms Zhang's conduct, and for limitation reasons, does not affect the quality of Mr Mao's success for present purposes. Mr Bao should pay any costs incurred by Mr Mao which were solely referable to defending that claim. The same goes for any other costs solely referable to the claim for an account up to 31 January 2010.
But given these exclusions, and the fact that the order in favour of Mr Bao will only cover costs solely referable to the cross-claim, there should be no further discount on the costs order in favour of Mr Bao on the cross-claim in the way counsel for Mr Mao suggested.
I think that the costs incurred by the parties after I had delivered my August 2021 judgment also require separate consideration. The proceedings changed in their nature after that date. The costs from that point forward were substantially the result of Mr Mao's obligation to account. Those costs were incurred because of the wrongful failure of Mr Mao to account at an earlier point. Mr Mao should pay the costs of quantifying how much was due. Accordingly, there will be an order in favour of Mr Bao that Mr Mao will pay Mr Bao's costs of the proceedings from September 2021 onwards.
Counsel for Mr Mao sought an order providing for set-off between the costs awarded to the parties. I am not sure that such an order is necessary. However, I have made such an order below, noting that it was not opposed.
The parties have enjoyed mixed success on the argument about costs. There will be no order as to the costs of that issue.
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Orders
The orders of the Court are:
1. Order that, for the period up to and including the delivery of judgment on 31 August 2021:
1. the defendant pay the costs thrown away by reason of the amendments to his statement of cross-claim;
2. the plaintiff pay the defendant's costs solely referable to the cross-claim, excluding such of those costs as are solely referable to relief claimed for the period prior to 31 January 2010;
3. the defendant otherwise pay the plaintiff's costs of the proceedings.
1. Order that, for the period from 1 September 2021 onwards:
1. there be no order as to the costs of the argument on costs;
2. the plaintiff otherwise pay the defendant's costs of the proceedings.
1. Order that the costs liabilities of the parties under orders (1) and (2) be set off against each other as at the date of this judgment.
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Decision last updated: 24 March 2023