Zhao v Suzhou Haishun Investment Management Co Ltd [2020] VSCA 34

1 In October 2014, the respondent company obtained three judgments in a Chinese court against the applicant for amounts totalling RMB 20,672,933 - approximately AUD $4.3 million ('the Chinese judgments**'**). In the Chinese proceedings, the respondent alleged that it lent a total of RMB 20 million to the applicant under three written loan agreements, that no amount had been repaid, and sought judgment for both principal and interest.

2 In April 2015, the respondent commenced a proceeding against the applicant in the trial division of this Court, seeking to enforce the Chinese judgments. The applicant defended the proceeding. She alleged that she had not been served with any of the documents in the Chinese proceedings, that the first she knew of them was when she was served with the originating process, and that her signature to the three loan agreements had been procured by duress.

3 The respondent issued a summary judgment application. The parties filed affidavits in support of their respective positions. Those affidavits were directly inconsistent in critical respects. There was no cross-examination on the hearing of the summary judgment application, and it was not preceded by any discovery by the parties except for the documents exhibited to the affidavits. Notwithstanding this state of affairs, the primary judge proceeded to determine the contested factual issues, including by drawing inferences from contested facts. On this basis, the judge decided that the applicant's defence had no real prospect of success.[1] In reaching that decision, the primary judge proceeded on the basis that a court may refuse to enforce a foreign judgment if the court is satisfied by evidence that the judgment was obtained by duress,[2] or that the foreign judgment was obtained in circumstances where the judgment debtor was not afforded natural justice in the foreign proceedings.[3] In the result, the respondent was successful in its enforcement proceeding, and the Chinese judgments were registered against her by orders made in the trial division.

4 The applicant then sought leave to appeal to this Court. We have read the primary reasons, the notice of appeal, the notice of contention, and the written cases filed by the parties in this Court. Having read those documents, it is clear to us that the applicant had a reasonably arguable case that the primary judge had erred in determining the factual disputes on a conflict of affidavits, including by drawing inferences from disputed facts.

5 Had the applicant been successful in her proposed appeal, the likely result would have been that the summary judgment application be dismissed, with trial directions - including discovery - being made in the usual course.

6 The applicant's written case is dated 17 April 2019, and her written response to the notice of contention is dated 17 June 2019. The respondent's amended written case is dated 11 July 2019. Each written case is signed by counsel. On 1 November 2019, the parties were informed by the Registry that the application for leave to appeal - and the appeal if leave be granted - would be heard on 3 February 2020. On 4 December 2019, the applicant presented her own debtor's petition for bankruptcy.

7 Following the applicant's bankruptcy, the respondent's solicitors served a notice under s 60(3) of the Bankruptcy Act 1966 (Cth) on her trustees in bankruptcy. That notice gave the trustees an opportunity to elect by 10 January 2020 to pursue the application for leave to appeal, failing which the application would be deemed to be abandoned. The trustees did not elect to pursue the application, and so the application was deemed abandoned. On the undertaking of the respondent not to pursue costs orders against the trustees, the application for leave to appeal was dismissed by this Court on 23 January 2020, and the following orders concerning costs were made:

1. Any party seeking to be heard on the issue of costs shall file and serve written submissions on or before 4pm on 10 February 2020.
2. Unless ordered otherwise, the issue of costs shall be determined in chambers and in the absence of parties.
3. Unless extended otherwise, in the event no submissions are filed and/or served on or before the deadline in order 3 above, an order that each party shall bear their own costs shall be entered.

8 The respondent filed written submissions seeking an order that the applicant pay its costs of the application for leave to appeal. The applicant filed submissions in response. The respondent filed short reply submissions, which the Court determined to accept.

9 The parties agree that the general rule to be applied in circumstances such as the present is that stated by McHugh J in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin[4] in the following terms:

...It will be necessary to return in a little more detail to the facts of the case, but it is first necessary to state the principles which govern an application for costs when a party elects not to pursue an action because he or she has achieved the relief sought in the action either by settlement or by extra-curial means.

In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order.

In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. In administrative law matters, for example, it may appear that the defendant has acted unreasonably in exercising or refusing to exercise a power and that the plaintiff had no reasonable alternative but to commence litigation. Thus, for example, in R v Gold Coast City Council; Ex parte Raysun Pty Ltd, the Full Court of the Supreme Court of Queensland gave a prosecutor seeking mandamus the costs of the proceedings up to the date when the respondent council notified the prosecutor that it would give the prosecutor the relief that it sought. The Full Court said that the prosecutor had reasonable ground for complaint in respect of the attitude taken by the respondent in failing to consider the application by the prosecutor for approval of road and drainage plans.

Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. This is perhaps the best explanation of the unreported decision of Pincus J in The South East Queensland Electricity Board v Australian Telecommunications Commission where his Honour ordered the respondent to pay 80 per cent of the applicant's taxed costs even though his Honour found that both parties had acted reasonably in respect of the litigation. But such cases are likely to be rare.

If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases.[5]

10 In Nichols v NFS Agribusiness Pty Ltd,[6] the New South Wales Court of Appeal applied the principles stated in Lai Qin, as explained in later cases,[7] and allowed an appeal against a trial judge's decision to award costs.[8] In the course of reviewing the authorities following Lai Qin, Payne JA (Basten and Meagher JJA agreeing) accepted that, absent any consideration of the merits of the proceeding, costs may be ordered where there is a capitulation by one party - in the sense that it 'effectively surrenders to the other'.[9] In his Honour's view, this approach is consistent with the judgment of McHugh J in Lai Qin.[10] Payne JA referred to the dissenting judgment of Sackville AJA in Muhibbah Engineering (M) BHD v Trust Co Ltd,[11] and to the reference by Sackville AJA in that decision to the following statement by Burchett J in ONE.TEL Ltd v Deputy Commissioner of Taxation:

It is important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the Court's discretion otherwise than by an award of costs to the successful party. It is the latter type of case which more often creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs. [12]

11 In Nichols, Payne JA considered that, in Muhibbah Engineering:

Sackville AJA was explaining that when in Lai Qin McHugh J described a case where the party seeking costs "in effect, has succeeded in obtaining the relief sought in the proceedings", his Honour was referring to a case where one party, after litigating for some time, effectively surrenders to the other.[13]

12 In fact, the quoted words which Payne JA attributes to McHugh J in Lai Qin do not appear in McHugh J's judgment. They are a quote from Sackville AJA's judgment in Muhibbah Engineering.[14] However, the principles stated by McHugh J in Lai Qin were, in his words, intended to 'govern an application for costs when a party elects not to pursue an action because he or she has achieved the relief sought in the action either by settlement or by extra-curial means'.[15] We accept as a general principle that where a party litigates for some time and then acts so as to effectively surrender or capitulate to the other, that will usually be a strong ground to award costs against the party who has surrendered or capitulated. But each case will depend on its own facts.

13 The respondent contends that the applicant should personally be ordered to pay its costs on an indemnity basis; and that such an order will not create a debt provable in the applicant's bankruptcy, but will be a fresh liability.[16] The applicant agrees that any costs order should be made against her personally, but opposes the making of any costs order. She contends that the usual rule expressed in Lai Qin should apply and that the Court should order that there be no order as to costs.

14 The applicant's contentions involved three propositions. First, she contends that she acted reasonably in applying for leave to appeal, because her proposed appeal had real prospects of success. So much may be accepted.

15 Second, the applicant contends that the effect of her bankruptcy was that her application for leave to appeal became futile, for the following reasons:

(1) There was no need for the bankruptcy trustees to elect to prosecute the application for leave to appeal, as they already have the quasi-judicial function of adjudicating which debts are provable debts in the bankrupt estate. In exercising that discretionary function, the bankruptcy trustees will not be bound by the summary decision below, so there was no need to have it set aside. This is because, in certain circumstances, including where judgment has been obtained without a trial on the merits, a bankruptcy trustee may go behind a judgment debt and reject a proof of debt reliant on the judgment, or a bankruptcy court may go behind a judgment on an appeal against acceptance of a proof of debt.[17]

(2) If the appeal had been allowed and the summary judgment set aside, the claim to enforce the foreign judgment would have remained for trial. Following the applicant's bankruptcy, in those circumstances, it would fall for the bankruptcy trustees to determine whether or not to accept the respondent's proof of debt based on the Chinese judgments.

16 It appears that the applicant's contentions about futility are in substance directed to the submission that the applicant acted reasonably in causing her bankruptcy, because her bankruptcy trustees will in any event have to consider whether to accept the respondent's proof of debt based on the Chinese judgments. If so, we do not accept that contention.

17 We accept that the bankruptcy trustees have the power to go behind the Chinese judgments and the summary judgment enforcing them. The existence of a judgment debt will, however, always carry considerable weight in the exercise of the powers of a bankruptcy trustee in determining whether or not to accept a proof of debt based on a judgment.[18] That is especially so where the judgment debt has been confirmed on appeal, even where there has been no trial on the merits. The decision of this Court on the application for leave to appeal, however decided, would have been a highly relevant factor for the applicant's bankruptcy trustees to take into account in considering the respondent's proof of debt based on the Chinese judgments. It follows that the trustees could properly have elected to continue to prosecute the application for leave to appeal. However, they were by no means obliged to do so. It was the conduct of the applicant, in petitioning for bankruptcy, that placed the trustees in the position of having to make that election. The applicant withdrew herself from the proceeding and made no arrangement to have her trustees prosecute it. She thereby facilitated the abandonment of the application.

18 Third, the applicant contends that it was not unreasonable for her to file her own bankruptcy petition in circumstances where she did not have the funds to pursue her application for leave to appeal. We do not accept this contention. The evidence as a whole supports an inference that the applicant, after litigating for some time, took the deliberate decision of presenting her own bankruptcy petition. Although there is a reference in the Report to Creditors prepared by the bankruptcy trustees to a statement by the applicant that 'she was unable to continue to fund the legal costs associated with these legal proceedings', the applicant has not verified this statement by affidavit, as she ought to have done in response to the respondent's affidavit in support of its application for costs which produced that report as an exhibit. Nor is there any evidence from the applicant as to efforts made by her, or on her behalf, to have the bankruptcy trustees pursue the application for leave to appeal or as to how she has been able to fund solicitors and counsel to prepare written submissions on her behalf concerning costs.

19 In all the circumstances, we conclude that this is a case where the applicant has, after litigating her application for leave to appeal and putting the respondent to considerable cost in that regard, made the tactical decision to present her own bankruptcy petition and thus, subject to the right of her bankruptcy trustees to pursue the application for leave to appeal, effectively surrendered.

20 For these reasons, the applicant should pay the respondent's costs of and incidental to the application for leave to appeal. Given our view that the proposed appeal was reasonably arguable, we are not prepared to order that those costs be on an indemnity basis. The position is analogous to the filing of a notice of discontinuance under Supreme Court (General Civil Procedure) Rules 2015 r 25.04, where the usual position is that standard costs are payable (r 63.15). This is not a case where the application was deemed abandoned under r 64.45, where the default position is that indemnity costs are payable.

[1] Suzhou Haishun Investment Management Co Ltd v Yue'e Zhao [2019] VSC 110, [114] ('Primary reasons').

[4] (1997) 186 CLR 622; [1997] HCA 6 ('Lai Qin').

[5] Ibid 624-5 (citations omitted) (emphasis added).

[6] (2018) 97 NSWLR 681; [2018] NSWCA 84 ('Nichols').

[11] [2009] NSWCA 205 ('Muhibbah Engineering').

[12] [2000] FCA 270; (2000) 101 FCR 548, 553 [6]; [2000] FCA 270, [6] (emphasis added), referred to with approval by the Full Federal Court in Chapman v Luminis Pty Ltd [2003] FCAFC 162, [7].

[13] Nichols [2018] NSWCA 84; (2018) 97 NSWLR 681, 690 [38]; [2018] NSWCA 84, [38].

[14] Muhibbah Engineering [2009] NSWCA 205, [52].

[15] Lai Qin [1997] HCA 6; (1997) 186 CLR 622, 624; [1997] HCA 6.

[16] Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52, 75-6 [65]-[67]; [2007] HCA 56, [65]-[67].

[17] Ilhan v Cvitanovic [2009] NSWSC 160; (2009) 73 NSWLR 644, 647-8 [14]-[18]; [2009] NSWSC 160, [14]-[18]. It appears that this position continues to apply where a judgment debt has been confirmed on appeal: Ramsay Health Care Australia Pty Ltd v Compton (2017) 261 CLR 132; [2017] HCA 28 ('Ramsay Health').

[18] Ramsay Health [2017] HCA 28; (2017) 261 CLR 132, 151 [68]; [2017] HCA 28, [68].