Xijie Cao v Shumiao Zhu [2020] NSWSC 647 | Case summary

Supreme Court of NSW|2020-05-26|Before: Kunc J, Mr P

Summary

The Court delivered its primary judgment in these proceedings on 30 March 2020: Cao v Zhu [2020] NSWSC 321 (the "Principal Judgment"). This judgment deals with the question of costs. It assumes familiarity, and should be read with, the Principal Judgment. Defined terms in the Principal Judgment have the same meaning in these reasons.
Mr Cao enjoyed complete success, obtaining a judgment for $500,000 with interest and costs against Mr Zhu. The parties are agreed that Mr Zhu should pay Mr Cao's costs of the proceedings on the indemnity basis from the day after a Calderbank offer was made on 18 October 2019 (the "Offer"). Mr Zhu also accepted that he was liable for Mr Cao's costs prior to that date on the ordinary basis. The only issue for the Court to determine was Mr Cao's submissions that there were circumstances warranting an order that Mr Zhu should pay Mr Cao's costs of the proceedings on the indemnity basis up to and including the date of the Offer.
While Mr Zhu clearly failed in his defence of the proceedings, the Court does not accept the submissions put on behalf of Mr Cao that Mr Zhu knew, or ought to have known, that the various defences which he raised were hopeless or that he otherwise engaged in conduct intended to delay and frustrate Mr Cao ultimately obtaining the judgment which he did. An order for indemnity costs is not made to punish an unsuccessful party for defending a case unsuccessfully for what appears, with the benefit of hindsight, to have been untenable reasons.
The result is that Mr Zhu should pay Mr Cao's costs of the proceedings up to and including the date of the Offer on the ordinary basis and thereafter on the indemnity basis.
The parties agreed that the costs argument should be dealt with on the papers. Mr F Santisi of Counsel prepared the submissions in chief and in reply for Mr Cao. Mr P Bolster of Counsel prepared Mr Zhu's submissions.

The facts

These proceedings were commenced by statement of claim filed in the District Court on 11 April 2017.
On 11 May 2017, Mr Zhu filed his defence.
On 16 August 2017, Mr Cao's solicitor wrote to Mr Zhu's solicitor seeking further and better particulars of the defence. That letter also included: "27. As to the balance of the defence it appears to be advancing an agreement different to that in writing and signed by your client and seeks rectification on the basis of a mistake, which defence is not available to your client at all and not in this jurisdiction and nor has it pleaded such by cross claim, in seeking the relief sought namely rectification nor has it pleaded any of the particulars on how the agreement should be rectified. 28. We invite you to amend your pleadings and plead any cross claim and course (sic) the matter to be transferred, should you press what is currently understood from your pleadings. However we remind you of the cost implications that might arise in transferring the matter when we say that there is no basis for pleadings (sic) mistake. Your client well versed in both English and Chinese and executed to documents on in English and one in Chinese that do not advance at all the agreement your client now claims (sic). 29. As such until your pleadings are amended and the further particulars are provided and an application made to transfer the proceedings we will not file any evidence. 30. We therefore invite you amend your pleadings otherwise we will file a motion to strike out the defence as defective and seeking to advance relief not sought in a cross claim and otherwise not available in this jurisdiction and on the documents executed by your client hopeless."
Pausing at this point of the narrative, it is important to note that the letter to which I have just referred did not put Mr Zhu on notice that he was at risk of an application for indemnity costs because his foreshadowed defences were hopeless. Whatever was meant by the warning "However we remind you of the costs implication that might arise in transferring the matter [from the District Court to the Supreme Court] when we say that there is no basis for pleadings (sic) mistake", on no fair reading could those words be said to have put Mr Zhu on notice of the kind of costs argument which is now being made by Mr Cao.
By letter dated 20 September 2017, Mr Zhu's solicitors accepted the proceedings would need to be transferred to the Supreme Court and that they would be filing a cross claim on behalf of their client.
On 27 November 2017, Mr Cao consented to the proceedings being transferred to the Supreme Court.
On 19 October 2018, Mr Zhu filed a notice of motion seeking leave to file his amended defence and to file a cross claim. Those documents were filed on 7 and 12 November 2018 respectively. The matters raised in the amended defence and the cross-claim were ultimately not accepted by the Court in the Principal Judgment.
On 7 December 2018, Mr Cao filed his defence to the cross claim.
On 18 October 2019, Mr Cao's solicitor sent the Offer to Mr Zhu's solicitor. The Offer was rejected. It is now the basis of Mr Zhu's agreement that from immediately after the date of the Offer Mr Cao is entitled to his costs of the proceedings on the indemnity basis.

Mr Cao's submissions

It was submitted for Mr Cao that indemnity costs should run in the period before the Offer from one of these alternative dates: 1. 27 November 2017 (when the proceedings were transferred by consent from the District Court to this Court); or 2. "As from some date" between 27 November 2017 and 19 October 2018 (the latter being the date when Mr Zhu filed his notice of motion seeking leave to file his amended defence and cross claim); or 3. 19 October 2018.
At the heart of Mr Cao's submission was the fact that Mr Zhu had failed in the matters raised in his amended defence and cross claim. The Principal Judgment demonstrated that failure was brought about by Mr Zhu's case being contrary to the contemporaneous documents which the Court preferred to Mr Zhu's testimony, in particular the 5 June Memorandum and the 13 June Deed.
Based upon those matters, it was submitted that: 1. Mr Zhu knew or ought to have known that his defences and cross claim were untenable and hopeless; 2. That in raising the defences and claim for rectification and thereby requiring the transfer of the proceedings to this Court, it should now be inferred that Mr Zhu "wanted to avoid the deal [the transaction the subject of the proceedings] at all costs and wanted to generate as much delay and frustration as possible, in the hope that [Mr Cao] would give up" (Mr Santisi's submissions, 5 May 2020, paragraph 25). I understand this submission to be, in effect, that the defence and cross claim raised by Mr Zhu in this Court were brought for an improper purpose and, as such, constituted an abuse of process. 3. That Mr Zhu knew that the defences which he was advancing were not true.
Finally, it was submitted that any or all of the matters raised in the preceding paragraph satisfied the familiar bases on which indemnity costs should be ordered, namely that the defence and cross claim were known or ought to have been known to be hopeless, that they were an abuse of process because they were designed to generate delay, that the delay was a delinquency of a kind that warranted the making of an indemnity costs order, that the proceedings had been continued in wilful disregard of facts known to Mr Zhu, or that the proceedings had been unduly prolonged by groundless contentions or by allegations that ought not to have been made.

Mr Zhu's submissions

In response to Mr Cao's submissions, it was submitted on behalf of Mr Zhu: 1. The defences relied on, including the proper construction of the contract, an implied term, unconscionability and rectification were not hopeless or untenable. The proceedings required a determination of the proper construction of the documents upon which Mr Cao sued and detailed consideration of the factual circumstances that had given rise to them. If Mr Zhu's defences were as hopeless as was now suggested, it was significant that Mr Cao did not make such a submission in opposition to the transfer application from the District Court to this Court. Instead, Mr Cao had consented to the transfer. 2. There was no basis to find that Mr Zhu had sought to delay matters improperly by raising his various defences which necessitated transfer of the proceedings to this Court. Insofar as it might be suggested that costs had been increased because the matter had been transferred, that was not a reason to order indemnity costs. Mr Cao would be compensated for any additional costs by the usual order for costs on the ordinary basis. 3. To suggest that the defence and cross claim had been brought in circumstances where Mr Zhu knew that they were not true was a serious allegation which should rejected. There was no evidence to suggest, and no findings in the Principal Judgment to support, the proposition that Mr Zhu knew that his case was hopeless or founded on untruths. No such suggestion had ever been put to him in cross examination and there was no proper basis in the evidence to infer such a conclusion.

Consideration

In rejecting Mr Cao's application for indemnity costs before the date of the Offer, a convenient starting point is the fact that in the Principal Judgment there is no finding that Mr Zhu lied - that is to say knowingly gave false evidence to the Court - or that he knew that the various defences he raised were hopeless or bound to fail. Nor is there any evidence before the Court either in this application or in the hearing itself on the basis of which the Court could properly infer this latter proposition.
It will be recalled that the Court concluded (Principal Judgment at paragraph [117]) that neither of the parties was a reliable witness and the Court could not accept their evidence unless it was corroborated by contemporaneous documents or independent witnesses, was inherently likely or against interest. In those circumstances, the Court preferred to make its findings by reference to the contemporaneous documents including the 5 June Memorandum and the 13 June Deed.
Insofar as it is suggested that the various defences relied on by Mr Zhu were hopeless or untenable, that submission is essentially based on hindsight. It is all too easy to say, when a court has rejected an argument, that the argument was obviously hopeless or untenable. In this case, much of Mr Zhu's defence (but not necessarily all - see his arguments as to construction and implication recorded in the Principal Judgment) depended upon his evidence of disputed matters being accepted. The fact that it was not accepted is not, of itself, a sufficient basis upon which the Court should reason backwards to conclude that the claims which relied on his evidence were hopeless or untenable or, even more seriously, that the claims were knowingly brought by him on a false basis.
Nor is there anything in the history of the proceedings, in particular the process of transferring them from the District Court to this Court, which in my view supports the serious finding that the defences and cross claim were brought for the improper purpose of delay. There is nothing in Mr Cao's evidence or of which the Court, in its own experience, might be aware to suggest that the proceedings went through the system any more slowly than a matter of this kind might usually take. In circumstances where the Court is not satisfied that the amended defence and cross claim were hopeless or bound to fail as pleaded and on the evidence adduced by Mr Zhu, I am unable to see any basis on which a finding as serious as collateral or improper purpose can be made. Such a finding would require satisfaction on what is colloquially referred to as the Briginshaw standard. Undoubtedly raising the amended defence and cross claim resulted in further expense for both parties, but I accept Mr Zhu's submission that Mr Cao will be properly compensated for any such additional expense by an order for costs on the ordinary basis. I also accept Mr Zhu's submission that the fact that such additional costs might have been incurred is not in and of itself a proper basis to make an order for indemnity costs.
The Court also rejects the submission that the amended defence and cross claim were advanced in circumstances where they were known by Mr Zhu not to be true. Again, that is a finding which would require satisfaction to the Briginshaw standard. Such a submission depends, in the first instance, upon the Court finding that Mr Zhu lied in his evidence to the Court. No such finding was made in the Principal Judgment. Depending on the case (and this case is not an example), such a finding might, while necessary, not even be sufficient to justify the serious finding that a party defended proceedings on bases known to be untrue.
Finally, there are two additional reasons why, in the exercise of the Court's discretion, Mr Cao's application is rejected.
First, at no point prior to the date of the Offer was Mr Zhu put on notice that he was at risk of an application for indemnity costs on the basis that the matters sought to be raised in his amended defence and cross claim were hopeless and bound to fail. For the reasons given in paragraph [9] above, the Court is not satisfied that the reference to costs in Mr Cao's solicitor's letter of 16 August 2017 was such notice.
Second, in relation to the various alternative dates proposed on behalf of Mr Cao as being the date from which an order for indemnity costs should run (see paragraph [15] above), no logical or principled basis for selecting any of those dates before the motion to file the amended defence and cross claim was brought has been demonstrated. In a different case, that date of filing could be a logical date from which an indemnity costs order should run, but it would depend upon a finding (which the Court has expressly declined to make in this case) that the matters raised in the amended defence and cross claim should have there and then been recognised as hopeless and bound to fail.

Conclusion

Mr Cao's application for indemnity costs before the date of the Offer is refused. The Court's order as to the costs of these proceedings is: 1. Defendant to pay the plaintiff's costs on the ordinary basis up to and including 18 October 2019 and thereafter on the indemnity basis.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 28 May 2020

Xijie Cao v Shumiao Zhu

At a glance

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Judgment (7 paragraphs)

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Cases Cited (1)