The primary judgment
7 The proceedings were heard over 9 days in February and March this year. The respondent alleged that the appellants agreed in 2004 to give personal guarantees with respect to a building contract between the respondent and Ausino Arts Ceramic Development Pty Limited ("Ausino") concerning a development site at 3 Richmond Avenue, Sylvania Waters ("the Sylvania Waters project"). It sought to recover alleged shortfalls in sums owing by Ausino under the building contract. It pleaded causes of action for breach of contract, deceit and fraud, equitable estoppel and misleading and deceptive conduct under s 42, Fair Trading Act 1987 (NSW). It succeeded in all but equitable estoppel, which the primary judge concluded (at [107]) it was unnecessary to determine having regard to his findings in the respondent's favour on the other causes of action.
8 Resolution of the critical factual controversy as to the guarantees turned, as Mr Garnsey of Queens Counsel who appeared for the respondents strongly emphasised, on the credit of the individuals involved: the appellants and Mr Huang, a director and principal of the respondent. The task of credit assessment was, however rendered difficult in this case, as the primary judge acknowledged (at [10]) referring to Goodrich Aerospace Pty Limited v Arsic [2006] NSWCA 187; (2006) 66 NSWLR 186 (at [21]-[22]), by the fact that all the key witnesses were from a different cultural and ethnic background to his. Nevertheless, the effect of his Honour's findings is that he preferred Mr Huang's evidence to the appellants', a conclusion he was assisted in reaching by his examination of the documentary evidence.
9 That documentary evidence revealed that on 12 October 2004, the first appellant, Mr Xu and a Ms Li, a director of Ausino, signed a building contract for the Sylvania Waters Project under which the repondent contended they gave personal guarantees for Ausino's obligations under that document. The primary judge rejected (at [30]) Mr Xu's argument that he had not signed that document as guarantor. That finding was important to his Honour's conclusion in relation to a second building contract to which I now turn.
10 Subsequently Ms Li was removed as a director of Ausino. According to the primary judge (at [36]), it was common ground in the proceedings that Mr Huang and Mr Xu agreed that a further contract should be entered into for the purpose of the Sylvania Waters project following her departure. Mr Huang, Mr Xu and Mr Zhu executed that building contract in November 2004. There was a factual controversy as to whether Mr Huang again insisted on personal guarantees of Ausino's obligations under this contract which the primary judge resolved (at [39], [41]) in the respondent's favour.
11 The critical issue insofar as the second contract was concerned was that neither of the appellants signed as guarantors on the second contract: primary judgment (at [43]). However, the guarantee page was not struck out but was left in with the appellants initialling the bottom of the page. The primary judge found that "[t]his conduct is not consistent with an unwillingness to give personal guarantees": primary judgment (at [45]). His Honour found (at [46]) the appellants "consistently maintained to Mr Huang that personal guarantees formed part of the second contractual arrangement."
12 The respondent's case at trial appears to have been that the conversations between Mr Huang and the appellants prior to entry into the second building contract constituted an agreement by each of the appellants to provide a personal guarantee for their liability under the second building contract: see primary judgment (at [81]). The primary judge found in its favour in this respect, having rejected (at [83]) the appellants' submissions that any such conversations rose no higher than the third category in Masters v Cameron [1954] HCA 72; 91 CLR 353 at 360-362 whereby any agreement was "subject to contract" or "subject to the preparation of a formal contract". His Honour also held (at [85]) that the promises made by the appellants were supported by consideration, that there was an intention to enter into legal relations, that the respondent, through Mr Huang, relied upon the promises of the appellants in entering into the second building contract which he would not have done if personal guarantees had not been promised and that each appellant breached his promise by refusing or failing to give a personal guarantee, or denying that a personal guarantee had been promised.
13 Substantially the same findings grounded his Honour's conclusion (at [90] - [96]) that the respondent had established that the appellants' representations concerning the giving of personal guarantees supported the claim for relief under the Fair Trading Act 1987 and (at [97] - [103]) the action in deceit.
14 The respondent argued at trial that it was entitled to an award of exemplary damages because of the circumstances which ultimately led to Ausino going into liquidation in September 2006. In this respect the primary judge found (at [78]) that in April-May 2006, the directors and investors associated with Ausino took steps to purchase units and shops within the Sylvania Waters project so as to obtain funds to pay out their creditors, Hastings Capital Limited and Hastings Mezzanine Limited, under lending arrangements which included personal guarantees by the appellants, that the steps taken by the appellants involved the acquisition of the sole asset of Ausino by them, family members and associates, with the proceeds of sale of the units and shops being used to discharge indebtedness to their creditors, whilst themselves obtaining the benefit of ownership of the relevant units and shops within the Sylvania Waters project and that the appellants were aware that the inevitable consequence of this course of action was that Ausino would be put into liquidation.
15 The respondent submitted at trial that these actions in circumstances where the appellants had themselves provided personal guarantees to secure the debts, demonstrated contumelious disregard for the rights of the respondent as an unsecured creditor of Ausino: primary judgment (at [130]. The primary judge accepted that submission, holding (at [135] - [136]) that the appellants' actions in April and May 2006, in disposing of the sole asset of Ausino to themselves and other associated with Ausino placed the case in the rare category where an award of exemplary damages was warranted.
Consideration
16 It is common ground that the appellants' evidence reveals that their equity in real property is such as would barely satisfy the judgment sum, let alone their liability for the costs of the trial or, if unsuccessful, the appeal. Indeed Mr Rayment of Queens Counsel who appeared for the appellants with Ms J Baxter accepted that the judgment would bankrupt them if it were not set aside on appeal. Both appellants have deposed that they have a joint liability "in the vicinity of $100,000" to pay for the preparation and hearing of the appeal.
17 Mr Rayment submitted that the critical attack on the primary judgment would be that his Honour's finding that the appellants orally agreed to give personal guarantees of Ausino's obligations under the second building contract was contrary to the principle in Hoyt's Pty Ltd v Spencer [1919] HCA 64; (1919) 27 CLR 133 that a collateral contract cannot be admitted as good in law if it is inconsistent with the main contract, as well as to the parol evidence rule. He also said the appellants would challenge the finding of deceit (and I infer the finding of breach of the Fair Trading Act) on the basis that the primary judge failed to distinguish between a promise to do something which is in writing in the future, and an existing representation of fact.
18 It is not apparent from the primary judgment that any of these points was advanced at trial. However Mr Garnsey did not contend that they could not be advanced on appeal. He submitted that the Hoyt's Pty Ltd v Spencer point did not arise because there were not two inconsistent contracts however did not, as I understood his submissions, contend that point was not fairly arguable. Nor did he contend that the argument concerning the deceit finding was untenable. I should not, in saying this, be understood to saying that Mr Garnsey did not maintain the primary judgment was entirely correct, rather I thought he accepted the practical reality that while an applicant for a stay must show there are serious questions for determination by the appellate court (Kalifair Pty Ltd v Digi-Tech (Australia) Ltd [2002] NSWCA 383; (2002) 55 NSWLR 737 (at [18]) per Handley, Sheller and Ipp JJA), a court considering the application will not engage in a detailed consideration of the merits of the appeal: Whitlam v Australian Securities and Investments Commission [2002] NSWCA 312; (2003) 43 ACSR 73 (at [39]) per Giles JA.
19 I am satisfied that there are serious questions to be determined on appeal and, further that having regard to the appellants' relative impecuniosity, they will be unable to pursue the appeal if a stay is not granted as execution of the judgment will lead to their bankruptcy.
20 The real debate between the parties was as to the terms upon which any stay should be granted and whether security for costs should be ordered.
21 The appellants submit that the respondent's request that any security be paid into Court rather than to itself is a tacit recognition by it that in the event the appeal is successful but a stay is not granted, the appeal may prove abortive as the appellants are likely to be unable to recover the judgment sum: see Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685. They contend that the court can preserve the status quo pending appeal by accepting an undertaking they proffer not, in substance, to dispose of their assets pending appeal, subject to what I might call typical Mareva carve-outs to allow for them paying their ordinary living expenses, their reasonable legal expenses and undertaking dealings and dispositions in the ordinary and proper course of their business affairs, including paying business expenses bona fide and properly incurred. They oppose the application for security for costs and submit that there are no special circumstances to warrant such an application.
22 The respondent submits that the evidence shows that the appellants propose to spend a substantial amount on the appeal (in excess of $100,000), thereby risking depletion of their assets further, when they are, on the face of their evidence, barely able to satisfy the judgment debt. In those circumstances it argues the judgment should be secured by payment (in whole or in such part as the Court may determine) into Court or be otherwise secured (by second mortgages and charges over company assets) as determined by the Court. Those measures, it contends, will protect it from the risk of loss of the benefit of the judgment, which in this case is very real: cf Kalifair (at [28]). It criticises the undertaking the appellants proffer as unsatisfactory because of the lack of security for the judgment debt and what it contends is the unreasonable amount allocated to the legal expenses of the appeal.
23 The estimate of legal expenses is based, Mr Rayment advised, on the prospect that the appeal will last two days. Mr Garnsey contended it would last one. In my view the issues Mr Rayment has identified as critical should not engage the Court in more than a day's consideration having regard to the requirement for the preparation of comprehensive written submissions. I would agree with Mr Garnsey that $100,000 for legal expenses appears excessive.
24 I also accept Mr Garnsey's submission that the proffered undertaking is inadequate in the circumstances. In my view the respondent is entitled to have the judgment secured to some extent, having regard to the real probability that if the appeal fails it will be unable to execute it in full.
25 I am also of the view that the respondent has established that the appellants are unlikely to be able to pay its costs if the appeal fails and that there are special circumstances which would warrant an order for security for costs.
26 The question whether special circumstances exist must be judged on its own merits in each case: Transglobal Capital Pty Ltd v Yolarno Pty Ltd [2004] NSWCA 136; (2004) 60 NSWLR 143 (at [21]). One relevant factor is the appellants' relative impecuniosity: Transglobal Capital (at [36]). However I am also concerned by the primary judge's findings which grounded his award of exemplary damages, that the appellants' actions in April and May 2006, in disposing of the sole asset of Ausino to themselves and other associated with Ausino constituted contumelious disregard for the respondent's rights. While I accept that the appellants propose to challenge the underlying finding of fact, nevertheless it must for present purposes be presumed to be correct. I would be concerned that the appellants should not be able to dissipate their remaining assets at the respondent's potential expense.