Auken Animal Husbandry Pty Ltd v 3rd Solution Investment Pty Ltd
[2022] FCA 294
•29 March 2022
FEDERAL COURT OF AUSTRALIA
Auken Animal Husbandry Pty Ltd v 3rd Solution Investment Pty Ltd [2022] FCA 294
File number: NSD 2412 of 2018 Judgment of: STEWART J Date of judgment: 29 March 2022 Catchwords: CONSUMER LAW – alleged misleading and deceptive conduct resulting in conclusion of improvident agricultural lease – “Belt and Road” and “Going Out” initiatives of the Government of the People’s Republic of China – Chinese state-owned highly resourced agricultural company claiming to be misled by Australian lessor – representation as to prohibition on foreign state-owned entity purchasing agricultural land – representation as to grazing beef cattle carrying capacity of agricultural land in New England region – representation as to rental being a fair market rental– whether alleged representations made – whether alleged representations relied on or causative of any loss – other reasons for improvident lease to have been concluded
LANDLORD AND TENANT – lease terminated for lessee’s failure to pay rent – lessor’s cross-claim for loss of benefit of lease – net present value of the difference between the rent payable under the lease for the term of the lease and the market rent value over the term of the lease
Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Number of paragraphs: 281 Date of revised transcript and last submissions: 1 March 2021 Date of hearing: 12-28 October 2020 Counsel for the Applicant M R Pesman SC and N Furlan Solicitor for the Applicant Baker McKenzie Counsel for the Respondent M Ashurst SC, G Farland and M Keene Solicitor for the Respondent HWL Ebsworth ORDERS
NSD 2412 of 2018 BETWEEN: AUKEN ANIMAL HUSBANDRY PTY LTD (ACN 611 163 690)
Applicant
AND: 3RD SOLUTION INVESTMENT PTY LTD (ACN 610 060 172)
First Respondent
CAREY LEE
Second Respondent
AND BETWEEN: 3RD SOLUTION INVESTMENT PTY LTD (ACN 610 060 172)
Cross-Claimant
AND: AUKEN ANIMAL HUSBANDRY PTY LTD (ACN 611 163 690)
Cross-Respondent
ORDER MADE BY:
STEWART J
DATE OF ORDER:
29 MARCH 2022
THE COURT ORDERS THAT:
1.Within 14 days of these orders, the parties provide by email to the Associate of Stewart J agreed or competing orders for the disposition of the matter including as to costs.
2.In the event of competing orders, the parties also provide short written submissions in support of their respective positions and which identify any outstanding matters to be dealt with.
3.The making of final orders to be dealt with on the papers unless either party seeks an oral hearing, in which event that is to be communicated in the email referred to in order 1.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
STEWART J:
A. BACKGROUND
[1]
A.1 Introduction
[1]
A.2 A note on units of measure and currency
[15]
A.3 Ningxia and Auken
[18]
A.4 3SI and Carey Lee
[36]
A.5 Assessing the witnesses
[46]
A.6 The Kia Ora aggregation
[50]
B. THE COURSE OF EVENTS
[52]
B.1 Mr Lee’s visit to the PRC in March 2015
[54]
B.2 Ningxia’s first investigation visit to Australia in May 2015
[58]
B.3 Ningxia’s second investigation visit to Australia in December 2015
[87]
B.4 The lead-up to Ningxia’s third investigation visit to Australia
[136]
B.5 Ningxia’s third investigation visit to Australia in April 2016
[166]
B.6 Following the third investigation trip
[184]
B.7 Ningxia’s fourth investigation visit to Australia in September 2016
[192]
B.8 The lease and thereafter
[205]
C. A DISPUTE EMERGES
[213]
D. THE PLEADED MISREPRESENTATIONS
[218]
D.1 The one-sided bargain
[218]
D.2 The Ningxia incapacity representation
[222]
D.3 The grazing cattle capacity representations
[231]
D.4 The fair/market rental terms representations
[246]
E. DISPOSITION
[280]
A. BACKGROUND
A.1 Introduction
The applicant, Auken Animal Husbandry Pty Ltd, is an indirectly wholly-owned subsidiary of Ningxia Agricultural Reclamation Group Co Ltd. Ningxia is incorporated in the People’s Republic of China and is indirectly wholly-owned and controlled by the Government of the Ningxia Hui Autonomous Region, an autonomous region in the north-west of the PRC. The Government of the Autonomous Region is in turn controlled by the Chinese Communist Party (CCP).
Pursuant to the well-known “Belt and Road Initiative” of the CCP and the Government of the PRC, in 2015 the Government of the Autonomous Region adopted a policy of “Going Global” or “Going Out” which included facilitating the opening of the economy of the region by, amongst other strategies, encouraging investment by local companies in foreign countries. This was described as “Increasing the efforts of enterprises to go global”. [CB316/2607] Ningxia pursued this strategy, resolving to “make good use of the state and autonomous region’s support for the ‘going global’ policy, and strengthen the acquisition and control of source resources such as Australia’s high-quality farms and pastures.” [CB435/4058]
That strategy is the impetus to Ningxia causing Auken to be incorporated and, on 16 September 2016, to conclude a 30 year lease of approximately 15,000 acres of agricultural land (known as Kia Ora or the Kia Ora aggregation) between Tamworth and Armidale in New South Wales. The lessor, which bought the Kia Ora aggregation in order to lease it to Auken, was 3rd Solution Investment Pty Ltd (3SI), the first respondent. The second respondent, Carey Lee, is a 50% shareholder and one of two directors of 3SI. The other shareholder and director is his father.
Disputes subsequently arose between Auken and 3SI about the lease, and on 15 May 2018 it was terminated by 3SI on account of Auken’s default in making further payments. The disputes are now the subject of this proceeding.
The principal relief sought by Auken is a declaration that the lease is void from inception and an order for the refund of $5,852,412 paid by Auken to 3SI under the lease, plus interest from 19 September 2016, being the date of payment. Auken claims against 3SI and Mr Lee for misleading and deceptive conduct in the form of misrepresentations by Mr Lee in contravention of the applicable consumer law, and against Mr Lee as an accessory to 3SI’s contravention.
Auken pleaded a staggering number and complexity of misrepresentations said to have been made by Mr Lee on his own behalf and on behalf of 3SI. Many of these were ultimately not pressed. The misrepresentations that Auken ultimately pressed against 3SI and Mr Lee that it says caused it to enter into the improvident lease can be summarised as follows:
(1)the Ningxia Incapacity Representation (i.e., that Ningxia or its subsidiary was not legally permitted to acquire agricultural land in Australia);
(2)the Kia Ora Grazing Cattle Representations, being:
(a)the Kia Ora Grazing Cattle Representation (i.e., that the grazing carrying capacity of Kia Ora was 5,000 to 10,000 head of cattle);
(b)the Further Kia Ora Grazing Cattle Representation (i.e., that the carrying capacity of Kia Ora could reach more than 10,000 head of cattle through a variety of operations); and
(3)the Fair Price Representation (i.e., that the rent to be charged by 3SI in the cooperation agreement and the 30 year lease, including with regard to an annual escalation of CPI +3% in the cooperation agreement, was a fair market price).
Auken pleaded a Transaction Urgency Representation (i.e., that entry into the cooperation agreement that preceded the lease and the lease was urgent because of likely price increases or the unavailability of Kia Ora), but it subsequently accepted that that representation is insufficient of itself to found relief. It says that the significance of the urgency representation is that Auken directly acted in accordance with it, which supports the proposition that Ningxia and Auken trusted and were prepared to act on information received from Mr Lee. [T526] Those are matters of evidence that will be dealt with in relation to each of the representations that is relied on. Nothing more need be said about the Transaction Urgency Representation.
Auken pleaded and pressed until during closing submissions a Kia Ora Acquisition Cost Representation (i.e., that the price paid for Kia Ora by 3SI in September 2016 was more than $20 million when in fact it was $10 million). That representation was ultimately not pressed as a basis to found relief on the same basis as the Transaction Urgency Representation. [T501:14-15, T548:33-34] I will deal with it similarly.
Auken also pleaded a 5,000 Acres Price Reduction Statement (i.e., that Mr Lee had succeeded in bargaining down the price for 5,000 acres of Kia Ora which enabled him to offer a lower rental). However, in closing submissions it said that it places no reliance on that representation other than as an example of Mr Lee providing false information to Auken. [ACS421]
Auken also pleaded another misrepresentation, namely that the various terms of the proposed lease were standard for agricultural leases, but by email to the Court on 23 December 2020 it advised that that misrepresentation was not pressed.
Aside from denying the misrepresentations and denying that even if they were made they caused Auken to enter into the lease, the respondents dispute Auken’s entitlement to the sum claimed. They say that the sum of $5,852,412 should be reduced to $5,210,746 to take account of a notional market rent of $385,000 per annum for the 20 month period from the conclusion of the lease on 16 September 2016 to its termination on 15 May 2018. They also say that interest should only commence to run from the date of termination. In response, Auken says that it is entitled to restitution to its position prior to the lease having been entered into, and that since it never utilised the property for any commercial purpose, or gained any benefit from it, no account should be taken of the period that it notionally had possession of the property.
3SI has cross-claimed, seeking damages arising from its loss by reason of the early termination of the lease. It seeks payment of $5,112,284 plus interest at 10% per annum on that sum, being the default rate in the lease, from 15 May 2018, being the termination date. The figure of $5,112,284 is comprised of two amounts. The first amount is $4,976,351, being the net present value at 15 May 2018 of the difference between the rent payable under the lease for the term of the lease and the market rent value over the term of the lease with reference to the evidence of an expert witness. The other is the sum of $135,933, being the net present value at 15 May 2018 of the additional future expenses which may be expected to be incurred during the remainder of the lease.
I understand the parties to accept that if Auken is successful then the cross-claim must be dismissed, and if Auken is unsuccessful then the cross-claim must succeed. However, in case I have misunderstood this, I will give the parties the opportunity to bring in competing orders to resolve the matters in accordance with these reasons, or to identify any remaining matters requiring determination.
I have included references to the court book and to the transcript in these reasons. That is to make future reference easier, but it is not thereby intended to convey that the references are complete or that in any instance that is the only evidence, or the only evidence that I have had regard to, on the point.
A.2 A note on units of measure and currency
The expression of area of agricultural land features prominently in this case. Such area is variously referred to in the proceeding in hectares, acres and mu, a Chinese unit of area. The case was conducted on the basis that:
(1)1 ha = 2.47105 ac
(2)1 ac = approx. 6 mu
(3)Therefore, 1 ha = approx. 15 mu.
The carrying capacity of agricultural land in Australia, also described as the land area required to provide adequate maintenance feed for livestock, is measured in Dry Sheep Equivalents (DSE). A DSE is a 45 kg wether (a castrated ram) or non-lactating, non-pregnant ewe on a maintenance diet. One cow (with a following calf) is equivalent to approximately 15 DSE. [CB19/281]
Also significant in the parties’ discussions and calculations are units of currency. The case was conducted on the basis that at the relevant time A$1 = approx. 5 Chinese yuan (yuan being the basic unit of the renminbi, or RMB).
A.3 Ningxia and Auken
As mentioned, Ningxia is a state-owned enterprise. The documentary record shows that it is controlled and run by a committee of the CCP. According to Mr Longjin Xia, Auken’s principal witness, Ningxia has 14 farms as well as industries, businesses, and construction and transportation enterprises. There are 140,000 residents on Ningxia properties and 12,000 staff working for Ningxia and its farms. [CB16/181[18]] By the end of 2014, the total assets of Ningxia were about RMB 13.5 billion, i.e., approximately AU$2.7 billion. [CB204/2229]
Ningxia holds farmlands in China of 2.38 million mu (about 400,000 acres) and owns about 60,000 head of cattle. [CB16/181[19], CB204/2229] By any measure, Ningxia’s agricultural interests in China are extensive. As would be expected, it has considerable expertise and experience in “grazing beef cattle production”, i.e., beef cattle production on open grazing land. [T264:21 – T265:1]
From early 2015, Ningxia proposed to implement the “Going Out” strategy. The strategy included an item described as the “Sino-Australia cattle and sheep industry”. It was apparently in furtherance of that strategy that there was within Ningxia an Australian Project Preparation Office (APPO) that was established on 17 March 2016. Ningxia incorporated Ningxia Agricultural (Hong Kong) Investment Co Ltd in the Special Administrative Region of Hong Kong with the aim of then incorporating Auken in Australia. That was done in March 2016 with the Hong Kong company as Auken’s sole shareholder. [CB16/182[30-35], CB111/1442]
As will be seen, delegations from Ningxia visited Australia on “investigation trips” on four occasions in 2015 and 2016 which culminated in the disputed lease with 3SI. It is principally on those trips that it is alleged that Mr Lee made the misrepresentations on which Auken relies, although Auken also relies on some written communications from Mr Lee and things said by him during two visits by him to the Autonomous Region and in communications leading up to the conclusion of the lease. The four trips to Australia were in May 2015, December 2015, April 2016 and September 2016.
As mentioned previously, Mr Xia was Auken’s primary witness. Mr Xia worked for Ningxia and its subsidiaries from 1982. His training was as an accountant. From 2004, he has held a number of managerial roles in Ningxia’s Settlement, Finance and Audit departments. In December 2016, he became the Manager-Staff of Ningxia’s Modern Husbandry Department, a specialist department with primary responsibility for dairy, beef and pork farms. Between March 2016 and March 2018 he was also Deputy Director of the APPO and a director of Auken. [CB16/181-182[20, 26-30], CB111/1442]
At the time he gave evidence, Mr Xia was the Operations Director of Ningxia. [T32:13-16]
Mr Xia was part of all four of the Ningxia delegations to Australia.
The Director of the APPO over the relevant period was Mr Hong Wang. Although an outline of the evidence to be given by Hong Wang was served, he was not called to give evidence because he advised Mr Salgo, Auken’s solicitor, shortly before the trial that he was in hospital due to illness and could not be discharged or have further calls or conversations about the matter due to his condition. Hong Wang was also a director of Auken. He signed the relevant contracts, including the lease, with 3SI on behalf of Ningxia. [CB16/183[36], CB111/1442]
The Chairman of the Board of Ningxia whose approval was required before Ningxia could make any contractual commitments with 3SI was Mr Yongzhong Wang. [T177:3-37] Mr Yongzhong Wang did not give evidence although, as will be seen, he was said to have been a witness to several of the alleged misrepresentations by Mr Lee.
Mr Zuoming Li gave evidence for Auken. Mr Li is the General Manager of Helanshan Cattle and Sheep Co Ltd, a subsidiary of Ningxia. In 2016, Mr Li was the Deputy General Manager of Helanshan. He was part of the Ningxia delegation to Australia in April 2016. He explained that his role was to take notes and “also assist with the daily operation”. Mr Li has a university degree in biotechnology. He has worked for Helanshan since 2009. [T238:2 – T239:31]
Mr Duo Yang gave evidence for Auken. Mr Yang is the Deputy General Manager of Ningxia. He has a bachelor’s degree in business and economics. He has worked for Ningxia since 1990, save for 2008 and 2009 when he was the Deputy Magistrate of Yanchi County in the Autonomous Region. In 2015, Mr Yang was appointed chairman of the Supervision Department of Ningxia. That department is responsible for supervising and monitoring investments and major decisions made by Ningxia. He was in that position in 2015 and 2016. [T247:33 – T249:7]
Mr Yang was part of the Ningxia delegation to Australia in December 2015. His role was to facilitate the trip and to report back to the Ningxia board. He was responsible for taking notes in relation to foreign trade. He understood that the purpose of the visit to Australia was to obtain a general idea about Australian cattle farms. [T250:12-24]
Mr Jianning Liu gave evidence for Auken. Mr Liu is a director of Helanshan and the Deputy Director of the APPO. In 2015-2016, he was the General Manager of Helanshan. Mr Liu initially qualified and worked in sugar production. In 2003, he began working for Helanshan. From 2004 he had roles in relation to the export of cattle, including negotiating with foreign customers and monitoring the quality of products and the process of delivery. In his role as General Manager of Helanshan, Mr Liu was in charge of the company’s activities in the beef and lamb markets. At that time, Helanshan bred about 10,000 beef cattle in feedlots and about 3,000 sheep per annum. [T268-270] Mr Liu was also appointed as a Deputy Director of the APPO from March 2016. [CB111/1442]
Mr Xiaobo Ning gave evidence for Auken. Mr Ning manages three dairy farms operated by Ningxia, each farm having between 1,000 and 10,000 head of cattle. He commenced work in 1988 as a dairy cattle vet working for a subsidiary of Ningxia. Mr Ning does not have specific experience in relation to beef cattle. Mr Ning was a member of the December 2015 and May 2016 delegations to Australia. [T279-281]
Mr Xuehua Guo gave evidence for Auken. Mr Guo is a Human Resources Manager employed by Ningxia. Mr Guo has a diploma in corporation management and a degree in business management. He has worked for Ningxia since 1991, initially in relation to phosphate farms and later as a director of the Publicity and Culture Department of Ningxia and secretary and member of the board of directors. Mr Guo was a member of the April 2016 Ningxia delegation to Australia. [T291-293]
Mr Jiqing Zhou also gave evidence for Auken. Mr Zhou is a director of Auken. Mr Zhou has a diploma in animal husbandry and worked initially on a feed processing and dairy farm. He rose to manager of the farm. He was responsible for overseeing production and disease prevention for approximately 1,000 dairy cattle. In 2002, he commenced working for Helanshan in a managerial position where he was ultimately responsible for about 9,000 dairy cattle across several locations. He was a member of the May 2015 Ningxia delegation to Australia. [T303-305]
Auken also read the affidavit of Robert Parrey, a solicitor based in Lismore. Mr Parrey was not required for cross-examination. Mr Parrey acted for the owner of the Kia Ora aggregation, NGD Enterprises Pty Ltd, a company owned by Graham and Dianne Reid, in the sale of the Kia Ora aggregation to 3SI in September 2016, and the attempted sales of the properties over the preceding two years. His evidence concerned the process of conclusion of the sale and confirmed that the price sought and the price paid for the properties was $10 million. [CB15/134-138]
Auken tendered an expert report of Sam Newsome who expressed opinions on, amongst other things, the fair market price for the Kia Ora aggregation in September 2016, a fair market rental for the properties on an annual basis at that time, and the carrying capacity of the properties in respect of grazing cattle. Mr Newsome’s report was admitted subject to a number of objections and he was not required for cross-examination. [CB17/217]
A.4 3SI and Carey Lee
Carey Lee was born in China and qualified and practised there as a medical doctor. After a few years in Singapore for the purpose of learning English, Mr Lee moved to Australia in 1998. He worked as practice manager for a medical practice for a number of years. Following the outbreak of the SARS epidemic in late 2002, Mr Lee returned to China where he worked again as a doctor. He then returned to live in Australia in 2014. It was at that time that he acquired a small farm at Coolongolook in NSW – about halfway between Newcastle and Port Macquarie. [T332-333]
Mr Lee explained that in China if his name were to be written in the Latin alphabet it would normally be “Li”, but that in Australia he changed it to Lee in the belief that it would be more readily understood in that form. Apparently that is the common Anglicised form of the surname Li. He was also referred to by some of the Chinese witnesses as Lee Zeheng, it being explained that Lee is his family name. Mr Lee also explained that in China he would be known by the title Dr, whereas in Australia he does not use the title Dr because he is not a medical doctor in Australia. That nevertheless explains why some of the English translations of Chinese documents refer to him as Dr Li. [T36:29-36, T332:9-24]
Mr Lee explained that he had in mind a business model of purchasing farmland in Australia and leasing it to Chinese interests. In particular, he had in mind the possibility of there being interest from the Autonomous Region because it is a predominantly Muslim area and the staple table protein for Muslims is beef. That is in contrast to non-Muslim areas of China where the main table protein is pork. I infer that it was for that purpose that he incorporated 3SI. [T334:14-27]
Mr Xia accepted that Mr Lee had no experience in grazing beef cattle production other than his small farm at Coolongolook, and that he did not have any experience in feedlot production. Also, Mr Xia accepted that he was never told by Mr Lee that 3SI had ever owned and operated any beef grazing farms. [T230:1-33]
The respondents called Daniel McCulloch as a witness. Mr McCulloch is the Managing Director of McCulloch Agencies which offers services in relation to rural property real estate sales, livestock sales, property management and financial services for livestock. He is an award-winning licensed auctioneer, and a licensed rural property and real estate salesperson. He and his wife also operate their own farming operations running approximately 6,000 sheep and 800 cattle over three properties in north-west New South Wales totalling about 18,400 acres and an additional 20,000 acres of leased land. Mr McCulloch introduced Mr Lee to the Kia Ora aggregation and showed the properties to the Ningxia delegations on each of the four investigation visits. [T466-467]
The respondents also called Grant Campbell as a witness. Mr Campbell was the farm manager of the Kia Ora farms from 2004 until 2016 when they were sold to 3SI. He was present when the Ningxia delegations visited the farms and gave evidence about conversations that took place during the December 2015 and April 2016 visits. [T491-493]
The respondents also tendered a number of expert reports, the authors of which were not required for cross-examination. The experts are the following.
Diane Skapinker is a solicitor and a partner of Ashurst Australia in Sydney. She gave evidence with regard to the reasonable conduct of solicitors in the position of the solicitors advising Auken on the lease of the Kia Ora properties. [CB18/255]
Angus Ross is a certified practising valuer and a director of Herron Todd White in Tamworth. He gave evidence about the Kia Ora aggregation, and in particular the rental market value of the properties in September 2016 based on different assumptions. [CB19/279]
Dr Rodney Ferrier is the Managing Partner of Ferriers, corporate and forensic accountants in Sydney. He has a PhD in accounting from the University of Edinburgh. Dr Ferrier gave evidence in support of the cross-claim with regard to the present value (as at 15 May 2018) of the difference between the rent payable under the lease for the term of the lease and the market rent value over the term of the lease. [CB20/339]
A.5 Assessing the witnesses
All the Ningxia employee witnesses gave evidence in Mandarin through an interpreter. They gave their evidence by way of audio visual link as they were unable to travel to Australia because of travel restrictions related to the COVID-19 pandemic. Although the interpreter was good and no doubt did her best, and I am grateful to her, the evidence was often unclear and difficult to follow or understand. The combination of those factors had the result that I found it very difficult to assess the demeanour of those witnesses in the witness box. Without the benefit of being able to properly assess demeanour, I am left compelled to assess the evidence of the Ningxia employee witnesses principally with reference to the probabilities, internal consistency and consistency with other evidence, especially the documentary record. However, with respect to demeanour it did appear to me that some of their evidence was rehearsed, in particular their frequent and at times unprompted statements that Mr Lee had told them that as a state-owned corporation Ningxia was prohibited from purchasing land in Australia.
As will be examined in greater depth later in relation to what is pleaded as the “Ningxia Incapacity Representation”, in addition to the apparently rehearsed nature of the evidence provided by the Ningxia employee witnesses on this point, that evidence is inconsistent with other evidence, in particular the documentary evidence showing that Ningxia had intentions to, and an understanding that it could, purchase agricultural land in Australia around the same time it decided to lease Kia Ora. The consistency between the Ningxia employee witnesses in relation to this specific point is notable in light of the significant documentary evidence to the contrary, and suggests to me that the evidence of those witnesses was so cross-contaminated, whether consciously or otherwise, that it is unreliable in respect of the contested issues in the case. I therefore approach the evidence of these witnesses with caution. Mr Xia’s evidence is coloured in the same way, and also by my rejection (as will be seen) of his evidence that Mr Lee told him that 3SI bought Kia Ora for more than $20 million.
Mr Lee gave his evidence in English. His English is workable, but not good. I make allowance for that. Like the Ningxia employee witnesses, I must ultimately assess Mr Lee’s evidence with reference to the probabilities, its internal consistency and its consistency with other evidence, especially the documentary record. In that regard, Mr Lee went beyond the outline of his evidence on occasion in ways that suggest he was making the evidence up. Also, as will be seen, Mr Lee was prepared to be dishonest in his dealings with Mr Xia. I therefore approach his evidence with caution.
Mr McCulloch and Mr Campbell were independent witnesses with no interest in the case. They gave their evidence in a straightforward and matter-of-fact way. Except that Mr McCulloch was understandably unsure about what was said, or what occurred, on which of the four visits by Ningxia delegations to Kia Ora, I accept their evidence.
A.6 The Kia Ora aggregation
The Kia Ora aggregation which 3SI bought and then leased to Auken consists of 51 independent lots forming five farms known as Kia Ora, Glencair, Birralee, Banalasta and Burlington. The aggregation has an area of 6,139.26 ha (or approx. 15,170 ac or 91,000 mu). The non-Birralee portion of the aggregation, which, as will be seen, was treated separately in the lease, has an area of approximately 4,453 ha, or 11,000 ac or 66,000 mu. [CB17/224, 19/282 and 309, 361/2853, 389/3310, 3313 and 3328]
The Kia Ora aggregation has improvements consisting of two main homesteads, four cottages, four machinery sheds, three hay sheds, three storage sheds/workshops, seven silos, five sets of cattle yards and four sets of sheep yards. Soils across the aggregation are mainly granite with large areas of heavily timbered support country particularly through the central and northern sections. [CB19/285] There are approximately 285 ha of open arable grazing, 3,000 ha of open and shaded timbered grazing, 430 ha of lighter timbered grazing country and 2,425 ha of native timber with limited grazing value. [CB19/293]
B. THE COURSE OF EVENTS
Auken’s case is that Mr Lee misled it over a period of time – between March 2015 and September 2016 – which conduct ultimately caused it to conclude the lease. The various misrepresentations alleged by Auken and their impact on its decision-making are best understood by breaking that period of time into different phases, as follows:
(1)Mr Lee’s first visit to the PRC and his meeting there with personnel from Ningxia in March 2015;
(2)Ningxia’s first investigation visit to Australia in May 2015;
(3)Ningxia’s second investigation visit to Australia in December 2015;
(4)The lead-up to Ningxia’s third investigation visit to Australia;
(5)Ningxia’s third investigation visit to Australia in April 2016;
(6)Following the third investigation visit;
(7)Ningxia’s fourth investigation visit to Australia in September 2016; and
(8)The lease and thereafter.
It is convenient to deal with each of these periods in turn.
B.1 Mr Lee’s first visit to the PRC in March 2015
Mr Lee visited the Autonomous Region in March 2015 accompanied by a friend, Michael Keough. They visited Yinchuan, the capital of the Autonomous Region, where they were invited to introductory meetings at Ningxia’s offices. There are different recollections, or versions, of what transpired although for the most part the differences are not relevant. Mr Keough does not speak Mandarin, the language of the meetings, so there is no significance in him not having been called as a witness.
Mr Xia said that at the introductory meetings Mr Lee said that he “is doing trustee company and he is doing some investigation about importing the beef cattle”, he has “a trustee company [and] knowledge about the pastoral in Australia”, and he is “doing a kind of the loan business for the pastoral in Australia”. Mr Xia said that on another occasion, Mr Lee told him that from time to time he lent money to farm owners and if they could not repay the money, he would take over the land. [T37:22-27] Mr Xia did not say that Mr Lee presented himself as having any particular agricultural experience or expertise, let alone that he was an expert on cattle nutrition, animal husbandry or pasture or grassland science. [T33:14 – T34:15]
The other possible significance of the introductory meetings is that Mr Lee said that he was asked in the meetings whether Ningxia could buy land rather than lease it, to which Mr Lee responded that Ningxia could buy land with Australian government approval and that he, Mr Lee, could not help in that regard as his company was intent on leasing land to Ningxia. [T335:16 – T337:10] However, Mr Lee’s outline of evidence did not give notice that he would give evidence to that effect, and it was not put to Auken’s witnesses that those conversations had taken place in the introductory meetings. That was despite Mr Lee accepting in cross-examination that at the time that he prepared his outline of evidence he was aware that an important issue in the case was what he had told Ningxia about its ability to buy agricultural land in Australia. [T358:45 – T359:9]
In the circumstances, I am not persuaded that Mr Lee told Ningxia during the introductory meetings in March 2015 that it was able to buy agricultural land in Australia, albeit subject to Australian government approval. Mr Lee explained that he had not mentioned this matter in his outline of evidence because he had not recalled it at that time, but that he remembered it later “after this case becoming more and more serious”. [T359:42 –T360:2] I am not satisfied that Mr Lee’s late recall of the conversation about buying land is sufficiently reliable to form the basis of any positive finding that he advised Ningxia as he said that he did.
B.2 Ningxia’s first investigation visit to Australia in May 2015
The principal outcome of the introductory meetings was that Mr Lee was to organise an investigation trip to be undertaken by Ningxia to Australia. From Ningxia’s perspective, the purpose of the trip was to learn about the beef market and the general situation for cattle grazing in Australia. [T35:24] Mr Lee sent Ningxia an invitation letter on behalf of 3SI, presumably for visa application purposes, in which he referred to “our previous discussions about the lease of an Australian farm”. [CB15/505] Thus, whatever broader objectives Ningxia may have had, it was clear that in respect of any future relationship with 3SI that was likely to be as lessee.
As mentioned, the trip took place in May 2015. The Ningxia delegation consisted of the following people: [CB15/505]
(1)Rongye Mao, Deputy General Manager of Ningxia who was the trip leader; [T34:30]
(2)Mr Xia, Manager of the Finance Department of Ningxia who was the trip organiser; [T36:7]
(3)Mr Zhou, Dairy Manager at Helanshan who described his role on the trip as being to investigate, observe and consider pasture conditions and grazing methods – it will be recalled that Mr Zhou had considerable expertise in animal husbandry; and [T304-305]
(4)Mr Liu, General Manager of Helanshan. [T269:42]
Mr Xia said that both Mr Zhou and Mr Liu’s roles on the trip were “in charge of the industry of the cattle feeding of the beef cattle industry”. [T36:1] I take this to mean that although Mr Zhou’s responsibility at Helanshan was principally in respect of dairy cattle and Mr Liu’s responsibility at Helanshan included sheep, their responsibilities as members of the delegation to Australia were in respect of the beef industry, and in particular the feeding of beef cattle.
The itinerary was developed between Mr Lee and Mr Xia. The Kia Ora aggregation was included because Mr Lee had found it and that it was for sale by searching a real estate website. He envisaged that if Ningxia committed to leasing it then his company would buy it for that purpose. [T365] Aside from Kia Ora, the delegation visited a farm in Victoria owned or operated by Modern Animal Husbandry Co Ltd, a farm in Queensland variously described as being near Gladstone or Townsville which is owned or operated through a company by Yang Fei, and some other farms near Tamworth, Rockhampton and Townsville. The owner of Modern Animal Husbandry Co Ltd, Jiangou Liu, and Yang Fei were previously known to Mr Xia or Ningxia. [T35:30] Modern Animal Husbandry Co Ltd was described in Ningxia’s report of the visit, referred to further below, as a joint-venture of the Ningxia Group. [CB18/537]
Mr Xia said that when visiting some farms at Townsville, the group asked Mr Lee whether “we can buy a farm”. Mr Lee said “no, you cannot because you are a state-owned company”. Mr Xia said, “But Yang Fei bought a farm in Queensland”, to which Mr Lee responded that Yang Fei’s company is a private company so he could buy the farm. Mr Lee also said, “But if, personally, if you want to buy a farm which the value is over $15 million, you also need to get approval.” [T38:1-7]
Mr Liu said that in Tamworth Mr Lee told the delegation that as a state-owned company, Ningxia cannot buy land in Australia; it can only rent land. [T271:46 – T272:9]
Mr Zhou said that during a visit to a farm near Tamworth, Mr Lee said that as a state-owned company Ningxia cannot buy land but can only rent it. [T307:1-3] Mr Zhou recorded notes on his mobile phone during the trip. Those notes do not record anything about buying or not buying land. [CB16/508] They do, however, record the following in relation to a meeting in Tamworth on 22 May 2015:
Carrying capacity of 3-3.5 lamb/acre, normal cattle “1 head/4 acre. After improvement, it could reach 1 head/acre…
The effect of the note is that the carrying capacity was 3,800 “normal cattle” but that it could be increased to 15,000 with improvements. The note does not record the source of that information although Mr Zhou said that it was Mr Lee. [T307:30] There may be some doubt about that because it was not pleaded that Mr Lee made any carrying capacity representation on the May 2015 trip and a capacity of 15,000 head, whether that is understood as base cows or cows with calves, well exceeds anything that is pleaded against Mr Lee. The most likely possibility is that Mr Zhou misunderstood what Mr McCulloch had said (see [72] below) and which Mr Lee interpreted, namely that in a particular part of the Kia Ora aggregation the capacity could reach one head per acre, and not that that could be achieved over the whole area.
Mr Zhou accepted that each member of the delegation was given a brochure about the farm by Mr McCulloch but because it was in English, which he does not understand, he did not keep it. [T311:9-16] Although Mr Zhou said that his role on the trip was to observe the pasture conditions and grazing methods, he did not do a calculation or an assessment of the dry matter per acre (i.e., the nutrition available to grazing cattle) that was available on the farm, being an important integer to any carrying capacity calculation. He said that that was to be calculated “later on”. [T311:20-36]
Mr Lee said that during the delegation’s visit to Tamworth, Mr Mao asked him, “Can we purchase the farm?”. Mr Lee said that he responded: “I am not sure. In my understanding, you can purchase or lease the farm, but you need the Australian government to approve because you are foreign government company.” After that, Mr Lee said that he was not interested in helping them purchase the land because his business model is to buy the land and then lease it out. [T341:15-19, T372:43-46] He said that they could select a farm and he would purchase it and lease it to them. [T373:41]
Mr McCulloch accompanied the delegation on its tour of the Kia Ora aggregation. He met them at their hotel in Tamworth and drove them in his seven-seater Toyota Prado vehicle with Mr Lee acting as interpreter. Mr McCulloch and Mr Lee said that the members of the delegation were all given a copy of an information memorandum. As mentioned, Mr Zhou accepted this, and I find that it occurred. Mr McCulloch said that he went through the main important points about the property, namely its name, size, carrying capacity and the rainfall for the area and Mr Lee interpreted what he said for the delegation. [T470, T309:17-20] He also said that he gave the asking price for the property. [T473:17]
Whether or not what Mr McCulloch stated about carrying capacity was accurately interpreted cannot be established, but it is not disputed that the delegation members were given copies of the memorandum which they then had available to take away with them. Pertinently, the 15 page memorandum included the following statements in addition to considerable detail about the farms: [CB5/402-405]
(1)Listed price: “$10,000,000”
(2)Area: 15,315 acres / 6,197 hectares
(3)Carrying capacity: 1,500 cows and calves “depending on management”.
Given the way in which the listed price was recorded, as reflected above, even someone not able to read or understand English would have been able to understand that figure. I note from the documents written in Chinese hanzi characters which were tendered in evidence, that Arabic numerals are regularly used and, I infer, readily understood.
Mr McCulloch said that during the inspection, which lasted three to four hours, he was asked about the grazing capacity of the farms to which he replied that at that time the farms were carrying “1800 cows and calves” but that in his opinion “the normal carrying capacity in an average year would be only 1500 cows and calves”. He said that at every inspection with every different prospective purchaser he said that that was his opinion. [T471:23-34, T472:32] This evidence was not challenged, although Mr McCulloch could not have known whether what he said was accurately interpreted.
Mr McCulloch said that he also explained that there were approximately 700 acres of fodder crop with the result that, by sewing the crop, that area is taken out of production for four to six months and the carrying capacity is increased for six to eight months, when the fodder is available to be eaten. He said that “on that country, you can run up to a beast an acre”. [T471:35-40] This is an important statement as it is the likely source of the idea that the carrying capacity of the whole aggregation could be increased to 15,000 head (i.e., a beast an acre).
Once the Ningxia delegation returned to China, Mr Zhou drafted a report of the trip which he then circulated to the rest of the team for review. [T308:1-29]
The first section of the report gives background on beef cattle husbandry in Australia. [CB18/530]
In the second section, which is headed “Investigating farms at different areas”, there is a discussion of each of the areas visited by the delegation. In respect of the Tamworth area it was recorded that: [CB18/533]
The carrying capacity is also high – 3 to 3.5 lambs per 25 mu and 1 head of cattle per 25 mu. Through modifying techniques, the carrying capacity can be improved to 1 head per 5 mu. …
Major downsides: Firstly, the leasing cost is relatively high with 115 yuan per mu.
These are the same carrying capacity figures as reflected in Mr Zhou’s note discussed at [64]-[66] above. As explained, they are likely to have been a misunderstanding of what Mr McCulloch had said.
The third section of the report is headed “Advantages and risk analysis of cattle husbandry in rented land”. There is no consideration in this section of Ningxia buying land, and there is no statement to the effect that it cannot buy land. There is, however, a statement that “One cannot rent a land without establishing a shareholding system; there are also certain restrictions on the participants and uncertain factors.” [CB18/534-535]
The fourth section of the report is headed “Suggestion”. There are five subsections as follows: [CB18/535-537]
(1)“Suggestion on performing beef cattle husbandry on a rented land”: The suggestion is made to rent a small farm in order to build up experience because even if the project does not succeed in the end, the loss will be relatively small; it is “preferable to make full use of this platform to learn.”
(2)“Consider purchasing a ranch in Australia”:
Instead of renting, purchasing a ranch in Australia might be a better option. Although purchasing a ranch costs a large amount of investment upfront, long-term operation leads to smaller risk and a larger flexibility. Form a company with a local Australian unit or person via joint-venture. However, this requires a longer investigation and research before making a decision.
Notably, this discussion presupposes that it may be possible for Ningxia to purchase farmland in Australia, whether directly or through a subsidiary. It is inconsistent with Mr Lee’s alleged representation that such a purchase is prohibited by Australian law. It also acknowledges that “longer investigation and research” would be required. That does not suggest that reliance would in any event be placed on a statement by Mr Lee as to the state of the law.
(3)“Suggestions on engaging in business activities with Australia”: The report says that it would be the most profitable to engage in trade with Australia and that the risk is small – “We could actively seek information from relevant companies and do business with them (live cattle or beef products trade).”
(4)“Operating farms in Australia shall be regarded as a project at the national level”: It is recorded that the “opening-up” policy announced by the Chinese government should be adhered to and that the government should show support at the national level for Ningxia to realise the policy through farming operations.
(5)“Other”: Some additional immaterial matters were recorded.
The report records that of the first three “suggestions” in the fourth section of the report, the investigation team considered that the third suggestion – “engaging in business activities with Australia” – was the most feasible. It states that beef farming on rented or purchased land: [CB18/536]
is challenging; problems that may occur include financial problems, compliance with local regulations, policies and many more, which is no better than simply doing business with Australia. It is suggested that further investigation and research to be carried out before the leader of the company makes the final decision.
The first attachment to the report is a detailed analysis table of Australian farm leasing operations, comparing the possible leasing of land in the areas of Townsville, Rockhampton and New England. In respect of each area, the calculations reflect that a profit could be made from the fourth year, with the highest profit being in the New England area in respect of the lease of 200,000 acres at an annual rental of 115 yuan per mu (i.e., $138 per ac). It is not apparent where the figure of 200,000 acres came from, which exceeds the size of the Kia Ora aggregation more than tenfold. [SCB13/315]
It is noteworthy that there was no evidence that Mr Lee had said that a rental of 115 yuan per mu was a fair market rental, yet Ningxia performed profitability calculations based on that figure. The calculations showed profitability within four years. As will be seen, that weighs against Ningxia’s case that had it not been told that the lower rental that it ultimately agreed to (90 yuan per mu or $108 per acre) was a fair market price it would not have agreed to the lease.
On the question of whether Ningxia could, as a matter of Australian law, purchase agricultural land in Australia, Mr Xia said that after the first investigation there was a meeting with Ningxia’s legal department. During that meeting, Mr Xia says that he told the legal department that Mr Lee had told him that Ningxia was not permitted to purchase agricultural land in Australia. [T161:12-23]
The report was presented to a Ningxia general manager office meeting on 26 June 2015. It was minuted that: [CB19/578]
the group itself does not have the ability to engage in direct foreign investment due to the limitation of financial strength, talent reserve, management level, etc.; It is agreed that it is appropriate to start foreign cooperation with foreign trade; investing abroad, forming joint-ventures and engaging in cooperation shall be carried out step-by-step and steadily in accordance with the development stage of the group company and the actual needs of production and operations, and taking into account the current capability of the group company.
On 9 July 2015, there was a meeting of the Ningxia CCP committee at which there was a discussion about “going to Australia for beef cattle husbandry investigation”. The same matters were minuted as had been minuted from the general manager office meeting on 26 June 2015. [CB20/584]
In a report dated 15 July 2015, Ningxia reported to Secretary Jianhua Li of the CCP on the trip to Australia. The report is essentially a summary of the report that was prepared by the delegation and ultimately makes the suggestions that Ningxia should “engage in business activities with Australia first, which has room for profits, less risk factors and higher operability” by seeking partners in Australia and gaining experience so as to further expand the scope of operations gradually. [CB21/588-591]
A Ningxia document titled “Relevant Policies on Investment in Australia” was jointly tendered. It summarises relevant policies with respect to agricultural investment, tax laws and agricultural tariff regulations. Amongst other things, it states that the Foreign Investment Review Board (FIRB) will “strictly verify all investments made by state-owned enterprises of China.” [CB6/426] No statement is made with regard to the purchase of agricultural land being prohibited.
B.3 Ningxia’s second investigation visit to Australia in December 2015
Mr Lee visited the Autonomous Region in October 2015 where he met with Mr Mao and Mr Xia and encouraged Ningxia to “go out” by investing in Australia. [T56:26] Mr Lee was encouraging Ningxia to do business with his company. The visit is not otherwise significant to the resolution of the parties’ dispute.
Plans for a further visit to Australia began to emerge. There was a meeting of the Ningxia CCP committee on 7 November 2015. Mr Xia said that the meeting was to discuss an instruction from Secretary Jianhua Li to have a further trip to Australia. [T57:1-6] As part of establishing the “open cooperation concept of ‘going out’ with greater courage and faster pace”, it was resolved “to organise the persons in charge of the group companies in the dairy and halal beef and mutton industries, legal consultants and the autonomous region’s SASAC and other relevant departments and bureaus for targeted on-site inspections with inspection reports prepared.” [CB22/602-3] (I was told that SASAC is the State Administration Security Commission.) [T566:44]
Prior to the trip, Mr Xia and Mr Lee exchanged a number of WeChat messages. Mr Xia asked Mr Lee a number of questions ranging from details about various farms that the delegation might visit, Mr Lee’s suggestions for a name for a company to be registered, how long it takes to register a company and what the requirements are. A message from Mr Lee to Mr Xia on 9 December 2015 stated: [CB547.5]
Rent is based on today’s Australian dollar and RMB exchange rate, that is: 18 Australian dollar per mu/year, 150,000 mu. 12 Australian dollar per mu/year, 69,000 mu.
Those rentals translate to $108 per acre and $72 per acre per year respectively. It is apparent from their sizes that neither of the farms referred to is the Kia Ora aggregation, but in any event those rentals are markedly different from each other. Auken’s reliance on this WeChat message as supporting the fair market price representation is accordingly misplaced.
The following formed the delegation to Australia for the second trip in December 2015:
(1)Yongzhong Wang, chairman of the board of Ningxia;
(2)Mr Xia, who had attended the May 2015 investigation trip;
(3)Duo Yang, Deputy General Manager of Ningxia;
(4)Mr Liu, who had attended the May 2015 investigation trip; and
(5)Xiaobo Ning. [T57:13-15, T250:36-37, T273:22-24; CB36/676]
The delegation visited Dubbo, Tamworth and Gladstone, in that order, between 19 and 26 December 2015. [T59:42-44, T250:16]
The delegation was met in Tamworth by Mr Lee and Mr McCulloch. Mr Lee did the translating as none of the Ningxia delegates understood or spoke English. [T60:23-26, T61:20-21]
According to Mr Xia, Mr Lee told the delegation that he was at that time lending money to the owner of Kia Ora; Ningxia could not purchase any farm; and, if they wanted to rent the farm he would like to help them. [T60:42-45] According to Mr Xia, when the delegation was shown Kia Ora, Mr Lee said that it currently had 3,600 cattle, being 1,800 cows and 1,800 calves, but that with Ningxia’s skill and ability there would be no problem to have 5,000 to 10,000 grazing cattle, i.e., cows and calves. [T61:5-15, T191:20-22, T192:19-24] Mr Xia was adamant that that was said by Mr Lee during the visit to Kia Ora. [T192:4, 24] Mr Xia said that Mr Lee was asked by Mr Mao (who was not on the December 2015 trip, so Mr Xia must be mistaken on this), “can we buy this farm?”, to which he responded, “no, you can’t, but you can rent for 30 or 50 years which is the same.” [T61:36]
That evening, back at the hotel in Tamworth, the delegation had dinner with Mr Lee at which discussion continued. In particular, Mr Xia said that there was a discussion about possible rental terms during which Mr Lee said that the rent would be $18 per mu (converted the next day to be $109.26 per acre), between two and five years’ rent would be required as a deposit with a greater discount on rent being offered the greater the deposit, and that the rent would increase at CPI+3% per annum. Mr Xia said that Mr Lee also said that these rental terms are all common practice in the Australian market. [T62:1-19, CB45/846]
Mr Xia made rough manuscript notes during the inspection which he then later typed up for the translator. The typed notes were then translated and all three versions became the subject of oral evidence. [T64:24 – T67:44] The notes show that Mr Xia did profit and loss calculations based on 5,000 head of cattle. He said that that was based on Mr Lee having mentioned about 5,000 to 10,000 head, although the notes do not reveal the source of the figure of 5,000. [CB44/726, T66:11-14] The note that was taken on site during the Kia Ora visit does not reflect that figure, but rather reflects 1,800 cattle and 1,800 calves. [CB44/724, T67:22] This tells against Mr Xia’s evidence that Mr Lee had given the figures of 5,000 to 10,000 head during the farm visit. There is also no reason why Mr Xia would rely on figures given by Mr Lee when he knew him not to have relevant expertise, Mr Xia had considerable expertise at his disposal in the delegation and at Ningxia more broadly, and he had the opportunity to ask Mr McCulloch any question that he had about carrying capacity.
Mr Yang gave evidence about the trip. He said that Mr Lee introduced himself to the delegation as having a “trustee company”, and said that he lends money to the owners of farms and if they cannot repay the money he takes over the land and then either rents it out or sells it. [T251:17-35] In cross-examination, Mr Yang agreed that what Mr Lee had said was that sometimes farmers get into trouble with their finances with the bank which then gives an opportunity to purchase the farm cheaply. [T265:9-13] Mr Yang did not say that Mr Lee claimed any expertise in animal husbandry or beef cattle nutrition.
Mr Yang said that Mr Lee said that the carrying capacity of Kia Ora was 5,000 to 10,000 head of cattle. [T252:11, 34] He also said that Mr Lee had said that that is the “current capacity”, and later in response to it being put to him that Mr Lee had said that the current capacity was 1,800 cows with their calves he said “no”, Mr Lee said “can reach 5,000 to 10,000 head” (i.e., not that those figures were the current capacity). [T256:13, T257:35] Mr Yang said that the delegation said to Mr Lee that in order to do business in Australia they definitely needed a farm which could have 5,000 to 10,000 head to which Mr Lee said, “this farm definitely can be reached to 5,000 to 10,000 head”. [T258:24-26] Mr Yang accepted that “in order to reach 10,000 or 15,000 head, definitely need feedlot”. [T258:41-42] Mr Yang clarified that his understanding was that those numbers referred to “basic cows” and therefore did not include calves. [T259:40-43]
Mr Yang said that Mr Lee told the delegation that it was common practice in Australia to escalate rental at CPI +3% per annum. [T254:7-14] He was not challenged on this.
Mr Yang said that Mr Lee told them that as a state-owned company Ningxia cannot buy the farm, it can only rent it. [T252:22-23, T262:9-10] Mr Yang was asked in cross-examination why the suggestion of buying farmland was made in the final report if Ningxia thought that buying such land in Australia was prohibited at law. Mr Yang’s answer was, in essence, that they were told by Ningxia Shang Yen Group, which owns a farm in Queensland, that it was possible to buy a farm “if we participate some shares in a company”. [T262:44 – T263:20]
When asked what Mr Lee said in Tamworth during the trip, Mr Liu said that Mr Lee said that as a state-owned company, Ningxia was not able to purchase land in Australia and that it could only rent. He said he could not recall anything else that Mr Lee had told them. [T275:12-18] When shown the delegation’s trip report where it is stated that the carrying capacity of Kia Ora is between 5,000 and 10,000 head, Mr Liu said that Mr Lee had said that the carrying capacity could be increased to 10,000 head “by using some supplementary feeding”. [T276:13-15]
Mr Ning took notes during the delegation’s December 2015 visit to Australia. His notes were later typed up and then translated to English. He explained that he did not take the notes on site, but rather wrote them up each evening. His notes record that Mr Lee informed the delegation that there were 1,800 base (i.e., breeding) cows on Kia Ora, of which more than 1,000 were pregnant. There were also 1,000 head of sheep. The farm produced 2,000 head of cattle for slaughter each year. [CB43/705, T283:32-45]
Mr Ning said that Mr Lee said that the farm could carry up to 10,000 head, and that it would be possible for them to rent a feedlot. [T284:6-16] The figures of 5,000 and 10,000 head of cattle do not appear in Mr Ning’s notes. There is, however, a calculation based on production of 2,000 head per annum, which is consistent with what Mr Ning said that Mr Lee had said that the current position was. Mr Ning’s notes accordingly suggest that Mr Lee did not say that the farm could carry 10,000 head, or, if he did, that that was not regarded as noteworthy or reliable by Mr Ning. Indeed, Mr Ning said that his understanding was that 10,000 head was not an “accurate” number because at the time the farm only produced 2,000 head per annum but that “we understood that this farm can have more cattle, even can reach 10,000 head”. [T289:6-9]
It was put to Mr Ning that when there was a discussion about the possibility of increasing the capacity of the farm to 10,000 head it was in the context of “using the Chinese method to build a feedlot”. Mr Ning disputed that saying that it was said to be “mainly by grazing, and for the feedlot, just from time to time”. [T288:22-26] He later accepted that there would need to be supplementary feed brought onto the farm and that the mention of 10,000 head was during a discussion about the feedlot. [T290:11-19]
Mr Ning’s notes record that Mr Lee told the delegation the basic terms of a lease that he proposed. The notes also record: “Early stage of engaging Mr. Li: Lawyers, accountants, managers”. [CB43/706]
Mr Ning said that Mr Lee repeated many times that as a state-owned company, Ningxia cannot buy any land in Australia. [T290:1-2]
Mr Lee explained that he and Mr McCulloch met the Ningxia delegation in Tamworth. As on the previous occasion, each member of the delegation was provided with an information memorandum or brochure about Kia Ora that had been prepared by Mr McCulloch. [T342:40-41] The delegation travelled to Kia Ora where they had a conversation with the farm manager, Mr Campbell. Mr Lee said that Mr Campbell was asked about the carrying capacity of the farm for cattle to which Mr Campbell responded that it was 1,800 cows and calves. Mr Lee sought clarification as to whether that meant 1,800 pregnant cows to which Mr McCulloch explained that it meant 1,800 cows and 1,800 calves, being a total of 3,600 head. Mr Lee said that he translated that all for Yongzhong Wang who pointed to members of his delegation saying that they are experts in cattle raising or the cattle industry. [T343:16-22]
In any event, the way in which Auken’s case is put necessitates identifying the 18 independent matters that it relies on. That is done with reference to each of the sub-paragraphs of paragraph 23H of the amended statement of claim.
The first matter (i.e., (a)) relied on is “the expressed familiarity of Carey Lee with farming conditions in Australia”. Extensive references to the evidence are given by Auken to substantiate this, but almost all of them go no further than showing that from time to time Mr Lee gave Ningxia information about farms and farming in Australia. Even on Auken’s evidence, Mr Lee said very little about his own experience of farming or his knowledge of farming conditions in Australia. Nevertheless, it can be accepted that he had some familiarity with farming conditions and put himself forward as a person with whom Ningxia could cooperate for the purpose of learning more about Australian agriculture and leasing a farm in Australia. These matters may be relevant to whether Auken relied on things said by Mr Lee, but they say nothing about whether he made the relevant representations.
The following four matters (i.e., (b)-(e)) are the unfamiliarity of the May 2015 and December 2015 Ningxia delegations to Australia with farming conditions in Australia, the inability of those delegations to speak or read English, and those matters being known to Mr Lee. All of that can be accepted and may be relevant to any issue of reliance, but it goes nowhere in establishing that Mr Lee made any representation, implied or otherwise, as to the rent proposed to be charged by 3SI being a fair or market rental.
The next matter (i.e., (f)) is Mr Lee’s communication of the May 2015 Tamworth Farm Lease Price Statement. That is a reference to the allegation that during the May 2015 investigation visit, Mr Lee told the delegates that the lease costs of farms near Tamworth was about 115 yuan per mu per annum (i.e., $138 per acre per annum). However, the reference to the evidence in support of that allegation does not make it out. It is to Mr Xia’s evidence in chief where he said that Mr Lee told the delegation that the “rental cost” for “another” farm in Tamworth of 200,000 mu (i.e., 33,333 acres) was 115 yuan per mu. It is not apparent what farm that was in reference to, and the statement was not that that was a market rental, but only that that is the rental that Mr Lee would offer. [T39:16-25]
The next matter (i.e., (g)) is Mr Lee’s communication of the Carey Lee Facilitation Statement. That is a reference to the allegation that during the May 2015 investigation Mr Lee told the delegation that he did business by lending money to farm owners who were in debt to a bank and if they were unable to repay him he could take over the farm and sell it. That evidence is contested, but even if it were accepted it is not relevant to whether or not Mr Lee made representations about fair or market rental terms.
Next (i.e., (h)), it is said that Mr Lee told the December 2015 delegation that increasing rental by 3% per annum over the consumer price index was common practice in Australia. Both Mr Xia and Mr Yang gave evidence to this effect (see [95] and [100] above, respectively), and Mr Yang’s evidence on it was not challenged. Mr Lee denied having said it. It is difficult to make a finding, one way or the other, on whether Mr Lee said that CPI +3% was common escalation practice, particularly in circumstances where there is no mention in writing that Mr Lee had said that, and none of the reports that went up to the decision-makers suggest that the term was common or standard practice.
The real difficulty with this aspect, though, is that it cannot be said that if Mr Lee had not said that CPI +3% escalation was common practice, the lease, or a lease on the same terms, would not have been concluded. Noting that the escalation that was ultimately agreed was CPI +1% per annum, it is not established that had Mr Lee not said that CPI +3% per annum was common practice, CPI +1% per annum would not have been agreed.
The next matter (i.e., (i)) is the averment that on 28 December 2015 Mr Lee communicated to Mr Xia that the rental price per acre per year for 15,315 acres, being the area of the Kia Ora farm, was $109.26 plus yearly increases of 3% plus CPI. It can be accepted that Mr Lee made that communication (see [122] above), but that does not assist in establishing that he said that it reflected a market price.
The next matter (i.e., (j)) is the averment that Mr Lee communicated the Early 2016 Price Increase of Kia Ora Statement. That is a reference to the averment that between 1 January 2016 and 18 March 2016 Mr Lee told Mr Xia and/or Hong Wang that the farm owner of the Kia Ora farm had raised the selling price. That is a reference to Mr Xia’s evidence that when he asked Mr Lee why the area had been reduced from 15,000 to 10,000 acres, “Mr Lin” (scil., Lee?) said that the owner only wanted to sell 10,000 acres to him, “and for the reason of the rental price, from $109.26 increased to $126, Mr Lin said because Australia’s market is changing every day, every day is different”. [T94:36-40]
That exchange is a reference to the matters dealt with at [149]-[150] above when Mr Lee presented a draft cooperation agreement with a reduced acreage because he had been advised by Mr McCulloch that 5,000 acres had been sold to someone else. Mr Lee denied that he told Mr Xia that the increase in price was because of what the market was doing; Mr Lee said that that was the price he wanted. [T412:12-17] Once again, there is no basis upon which to prefer Mr Xia’s explanation. But in any event, what Mr Lee is said to have said does not establish any representation that the rental ultimately agreed for the lease, which is the one that matters, was a fair market rental.
The next matter (i.e., (k)) is the allegation that Mr Lee communicated the Early 2016 Rental Increase Statement. That is a reference to the allegation that between 1 January 2016 and 18 March 2016, Mr Lee told Mr Xia and/or Hong Wang that the rental price of the land at the Kia Ora farm had moved from $18 per mu per annum to $20 per mu per annum because of market changes. Those figures translate to $108 per acre per annum to $120 per acre per annum.
The evidence that is referred to is the evidence in chief of Mr Xia where he said that in February 2016, Mr Lee told him that the Australian market was changing rapidly with a different price every day, and that the price increased from $18 to $20 (per mu). [T93:1-3] There is also a reference to the WeChat message sent by Mr Lee on 24 February 2016 quoted at [147(1)] above. It is evident from the WeChat message that Mr Lee told Mr Xia that the Australian agricultural market was changing rapidly in order to exert pressure on Ningxia, and that he told Mr Xia that the rent had been changed from $109.25 per acre per year to $126 per acre per year (being the equivalent of $18-$20 per mu). However, the WeChat message does not imply that the increased rental was fair or market rental, but rather that the increase arose because the available area had been substantially reduced. The implication as to market rental can be said to arise from Mr Xia’s referenced evidence, but I do not accept that evidence. Mr Lee denied saying that the price increase arose because the Australian market is changing every day, and said that he possibly said that that was the price that he wants and he possibly said that the Australian market is changing every day. [T420:19-35] It was not put to him that he said that the price is different every day, which is what Mr Xia said that he had said.
As explained, it is safest to rest my findings on the documents and uncontested evidence. If Mr Lee had said orally that the rent was a market rent then I would expect that to have been said in the WeChat messages as well, but it was not, and I would expect it to have been reflected in one or more reports to the Ningxia decision-makers, and it was not. There is simply no objective and contemporaneous evidence that shows that Mr Xia or the decision-makers to whom he reported had any belief that the rental was a fair market rental. The reference in the feasibility report (referred to at [125] above) to “Leasing standard” in relation to basic terms of the proposed lease does not convey that those terms are common or fair market terms. [CB44.1/762]
The next matter (i.e., (l)) is the allegation that Mr Lee communicated the Further Early 2016 Rental Increase Statement. That is a reference to the allegation that on or about the same day of the receipt of the draft cooperation agreement, Mr Lee stated to Mr Xia that the reason for the increase in rent to $126 per acre was that the market price for farmland in Australia had gone up. The reference given is the same as for matter (j) dealt with above. It therefore adds nothing.
The next matter (i.e., (m)) is the allegation that Mr Lee communicated the Market Volatility Statement. That is a reference to the allegation that between 1 January 2016 and 18 March 2016, Mr Lee told Mr Xia and/or Hong Wang that the market price in Australia for land changed every day, so Ningxia should sign a lease as soon as possible to avoid higher costs. That particular representation was conveyed by Mr Lee to Mr Xia in several We Chat messages that Auken references in its submissions and was also said by Mr Xia to have been conveyed orally to him by Mr Lee. However, the representation that the market price for land changes daily does not carry with it the implication that the rent to be charged by Mr Lee is a fair market rental; it implies only that what he will charge has a relationship to the cost of the land. In an arrangement where Mr Lee was to purchase land in order to lease it to Ningxia, that would appear to be self-evident and does not assist Auken’s case.
However, one of the WeChat exchanges referenced in Auken’s submissions is the series of messages from Mr Lee that are quoted at [153] above. The messages include the statements that “Australian farm rental prices are expected to rise sharply within six months” and that “there will be an increase of 50%-70%”. Those statements, in context, could be said to carry the implication that the rental to be charged by Mr Lee bears some relationship to market rental. However, it is certainly not a clear or unambiguous representation.
The next matter (i.e., (n)) is the allegation that Mr Lee communicated the CPI +3% Australian Practice Statement. That is a reference to the allegation that between 1 January 2016 and 18 March 2016, Mr Lee told Mr Xia and/or Hong Wang that rental increases of 3% over CPI each year was the Australian practice and could not be negotiated. That has already been dealt with in relation to matter (h) above and adds nothing.
The next matter (i.e., (o)) is the allegation that Mr Lee communicated the Further Early 2016 Rental Increase Statement. That allegation is identical to that in matter (l) above and adds nothing.
The next matter (i.e., (p)) is the allegation that Mr Lee communicated the $126 Acre Price Requirement. That is a reference to the averment that on 24 February 2016 Mr Lee stated to Mr Xia that market changes in the New England area had the result that the original rental price of $109.26 per acre per year was adjusted to $126 per acre. That covers the same ground as matter (j) above and adds nothing.
The next matter (i.e., (q)) is the allegation that Mr Lee communicated the February 2016 Agriculture Price Prediction. That is a reference to the averment that on 25 February 2016, Mr Lee stated to Mr Xia that because of the implementation of the China-Australia Free Trade Agreement the market price of animal husbandry and agricultural resources would increase by 200% by or before the end of 2020. That is with reference to the WeChat message quoted at [147(2)] above. Clearly, Mr Lee made that statement but it does not imply that the rental he proposed to charge was a fair or market rental.
The next matter (i.e., (r)) is the allegation that Mr Lee communicated the March 2016 Farm Price Increase Prediction. That is a reference to the allegation that on 14 March 2016 Mr Lee communicated to Mr Xia that the market price for Australian farmers would have a large increase in six months, of around 50%-70%. That is with reference to the WeChat message quoted at [153] above and already discussed at [270] above.
I am ultimately not satisfied that Mr Lee made any implied representation to the effect that the rental that he required under the cooperation agreement and then the lease was a fair or market rental. The highest that the evidence rises is the statements by Mr Lee to Mr Xia on 4 March 2016 (quoted at [153] and discussed at [270] above) to the effect that Australian “farm rental prices” are expected to rise sharply within the next six months and his opinion that there will be an increase of 50%-70%. As discussed, those statements do not give rise to any clear or unambiguous representation that the rental to be charged by Mr Lee would be a fair market rental. In any event, although those statements were made only a short time before the cooperation agreement was concluded on 18 March 2016, the lease was not concluded until more than six months later and the rental in the lease was considerably less than in the cooperation agreement. There is, therefore, no causal nexus established between the representation that was made on 14 March 2016 and the conclusion of the lease on 16 September 2016. The purpose, and result, of this and other statements by Mr Lee to the effect that the market was rising and thus the rent that he proposed to charge might rise, was to put the pressure of time of Ningxia; he was trying to and partially succeeded at speeding Ningxia up. However, it cannot be said that these statements caused the lease to be concluded on terms less favourable than would have been the case had the statements not been made.
What troubles me most about this part of Auken’s case is the question of causation. Even assuming that Mr Lee made an implied representation that the rental in the cooperation agreement and the lease was a fair market rental and that escalation at CPI +3% per annum was common practice, can it be concluded that that representation caused Auken to enter into the lease? There is no evidence that Ningxia/Auken had any interest in whether the rental was a fair market rental; none of the trip reports or other reports and resolutions that went up to the decision-makers say anything about fair market rental or common practice, and no question was ever asked by the Ningxia personnel of Mr Lee or anyone else what a fair market rental was or what a common escalation clause would be.
In addition, there is no evidence of what Mr Xia, or Hong Wang, would have done if Mr Lee had not made the pleaded representations. Mr Xia was asked what would have occurred if he had been told that the rental was not a fair market rental, but that is the wrong question. He should have dealt with what would have occurred if he had not been told that the rental was a fair market rental, which is a different scenario. Although it is not necessary for there to be such evidence, in this case and for the reasons given, I am not satisfied that if the representations had not been made, Ningxia/Auken’s conduct in relation to the conclusion of the lease would have been any different.
In the result, I am not only not satisfied that the pleaded representations were made, but I am also not satisfied that if they were made they were material in causing Auken to conclude the improvident lease.
E. DISPOSITION
In view of my findings, Auken’s proceeding falls to be dismissed.
As mentioned, I understand the parties to accept that in that event the cross-claim should succeed. Against the possibility that I have misunderstood that or there are any issues with the amount to be awarded, or the possibility that other issues remain to be dealt with, I will provide the opportunity for the parties to bring in orders.
I certify that the preceding two hundred and eighty-one (281) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart. Associate:
Dated: 28 March 2022
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