Xu v Cao & Du Management Pty Ltd (No 2)

Cases Cited: Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225; [1993] SCA 801
Gray v Richards (No 2) 2014 HCA 47
Xu v Cao & Du Management Pty Ltd [2025] NSWSC 1077

Category: Costs

Parties: Jiaqing Xu (Plaintiff)
Cao & Du Management Pty Ltd (First Defendant)
Howard Hao Ting Cao (Second Defendant)
Xue Yang c/- Sunfield Chambers (Interested Party 1)
Thyge Trafford-Zhao (Interested Party 2)

Representation: Counsel:
A J McInerney SC (Plaintiff)
Dr J R Hudson (Plaintiff)
A Rizk (Defendants)
Solicitors:
Juris Cor Legal (Plaintiff)
Acme Consulting (Defendants)

File Number(s): 2022/78620

Publication restriction: No

ex-tempore JUDGMENT

1. The plaintiff filed a notice of motion on 25 September 2025. One of the orders sought was a variation of the costs order that I made in the primary judgment delivered on 22 September 2025 (Xu v Cao & Du Management Pty Ltd [2025] NSWSC 1077). The rest of the notice of motion was dealt with by consent orders.

2. The plaintiff said he was entitled to indemnity costs for two reasons; firstly, because the loan agreement indemnified the plaintiff for costs (clause 14), and secondly because the first defendant had pleaded fraud against the plaintiff giving rise, because the allegation was baseless, to an entitlement to indemnity costs.

3. The first defendant responded that notwithstanding the provisions of clause 14, the first defendant had been entitled to defend the claim and in fact succeeded in one of the defences, namely that the default interest clause was a penalty. I agree.

4. Although the plaintiff, at the hearing, conceded that the default interest became unconscionable at a certain point, it did not concede, as I found, that the default interest rate amounted to a penalty. In addition, while the plaintiff did not endeavour to justify the more than $70 million that would have been produced by the interest clauses on their terms, the plaintiff did, as its primary submission, submit that the interest calculation should be $28,975,397.26 which, when added to the outstanding loan sum of $6,300,000 would lead to a judgment sum of $35,275,397.26.

5. The judgment sum that I awarded was based on a simple interest calculation of 36% per annum, which after taking into account the $300,000 that had been repaid, led to a judgment sum of $21,984,458.90.

6. The plaintiff’s response to the first defendant’s submissions was that although the first defendant had achieved a degree of success it was not the success that it had aimed for, namely the avoidance of the interest provisions in total. I think this point is factually correct, but I am nevertheless satisfied that the first defendant was justified in challenging the interest provisions.

7. Accordingly, I think that the first defendant was entitled to and did successfully mount an argument to oppose the plaintiff’s primary position. In turn, the use of clause 14 to justify indemnity costs must fail because it depends on the application of the agreement which would include compliance with the default interest provisions.

8. In respect of the fraud point, the first defendant submitted that it had pleaded that the agreement was a sham which did not necessarily amount to an allegation of fraud. I disagree.

9. While there may well be cases where there is a distinction between an allegation of fraud and a sham, this is not one of them. The defence raised by the first defendant was in the clearest terms that the agreement was a sham because it was really an agreement to avoid tax obligations that might have been incurred by Henry and Daniel (using the same names as in the primary judgment). Henry and Danial were said to have acted through Tung Chit Pty Ltd.

10. The actual wording used by the first defendant is that the agreement was “void for illegality” and “not a real, genuine or binding agreement”. I cannot see any distinction here with an allegation of fraud.

11. The allegation is made in the defence to the amended statement of claim filed on 10 June 2022 and continued through to its abandonment during the hearing, when it was accepted that there had been a loan by the plaintiff to the first defendant. This capitulation is indicative of the futility that attended the sham agreement allegation.

12. In the primary judgment, at paragraph 133, I referred to the decision of Sheppard J in Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225; [1993] SCA 801 at [233]:

“Notwithstanding the fact that that is so, it is useful to note some of the circumstances which have been thought to warrant the exercise of the discretion. I instance the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud…”

13. I think this case is a good example of the making of an allegation of fraud which should carry a consequence in costs. As I have said, the allegation was continued into the hearing but never came close to being substantiated.

14. Subject to what I say in the following paragraphs, in my view the claim for indemnity costs is made out on the basis of the improper allegation of a sham agreement, which I think amounted to an allegation of fraudulent conduct on the part of Daniel and Henry through the offices of the plaintiff.

15. A court has a wide discretion in ordering costs in order to achieve a just result. As the High Court said in Gray v Richards (No 2) [2014] HCA 47, at [2]:

“The disposition of costs is within the general discretion of the Court. Ordinarily, that discretion will be exercised so that costs are awarded to the successful party, but other factors may have a significant claim on the discretion of the Court. The disposition which is ultimately to be made in any case where there are competing considerations will reflect a broad evaluative judgment of what justice requires.” (footnotes omitted)

16. I think I should include some acknowledgement of the justification for challenging the interest terms of the agreement as I have set out above. I will therefore exempt one of the seven hearing days from the indemnity costs order. I will nominate the first day of the hearing for this purpose.

17. The only other concession I think should be made is that the indemnity costs order should date from the filing of the defence.

18. I make the following order:

19. Order 2 in the primary judgment is varied so as to read:

20. (2) The first defendant is to pay the plaintiff’s costs of the proceedings.

21. (2A) The costs payable pursuant to Order 2 are to be assessed on an indemnity basis on and from the date of the filing of the defence on 10 June 2022.

22. (2B) The indemnity costs order made in Order (2A) is not applicable to the first day of the hearing, in respect of which costs are to be assessed on an ordinary basis.

**********