BCEG International (Australia) Pty Ltd v Xiao (No 3)

[2022] NSWSC 1221

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

BCEG International (Australia) Pty Ltd v Xiao (No 3) [2022] NSWSC 1221

Hearing dates:

On the papers

Date of orders:

12 September 2022

Decision date:

12 September 2022

Jurisdiction:

Equity - Commercial List

Before:

Rees J

Decision:

Costs awarded on an indemnity basis from 1 September 2020.

Catchwords:

COSTS – indemnity costs – defendants assert right to privilege against self-incrimination and exposure to civil penalty – defendants put on bare Commercial List Response – defendants abandon claims to privilege two weeks before trial – hearing vacated – defendants put on defences that they could not have believed to be true – defendants serve evidence late – defendants provide discovery late, being 285,000 documents two months before new trial – gratuitous suggestions of professional misconduct by plaintiff's solicitors – defendants conduct proceedings in unnecessarily difficult and protracted fashion – whether defendants’ conduct of proceedings warrants order for indemnity costs – Degmam Pty Ltd (in liq) v Wright (No 2) [1983] 2 NSWLR 354 applied – indemnity costs ordered on grounds of delinquency.

LEGAL PRACTITIONERS – defendants’ written submissions assert element of plaintiff’s case so without merit that defendants will seek a personal costs order against plaintiff’s solicitors if not withdrawn – explanation sought from defendants’ senior counsel.

Legislation Cited:

Civil Procedure Act 2005 (NSW)

Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 (NSW)

Uniform Civil Procedure Rules 2005 (NSW)

Cases Cited:

Barrett Property Group Ltd v Metricon Homes Pty Ltd (No 2) [2007] FCA 1823

BCEG Australia v Xiao [2020] NSWSC 1234

BCEG Australia v Yu Xiao & Ors (No 2) [2020] NSWSC 1403

BCEG International (Australia) Pty Ltd v Xiao (No 2) [2022] NSWSC 1102

BCEG International (Australia) Pty Ltd v Xiao [2021] NSWSC 1027

BCEG International (Australia) Pty Ltd v Xiao [2021] NSWSC 1545

BCEG International (Australia) Pty Ltd v Xiao [2022] NSWSC 972

Berkeley Administration Inc v McClelland [1990] FSR 565

Calderbank v Calderbank [1976] Fam 93; [1975] 3 All ER 333

Chaina v Alvaro Homes Pty Ltd [2008] NSWCA 353

Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225

Degmam Pty Ltd (in liq) v Wright (No 2) [1983] 2 NSWLR 354

Fang v Sun (No 2) [2014] NSWSC 1194

Gate v Sun Alliance Insurance Ltd (1995) 8 ANZ Ins Cas 61-251

Huang v Wei (No 3) [2022] NSWSC 662

In the matter of Indoor Climate Technologies Pty Ltd [2019] NSWSC 356

In the matter of Pacific Springs Pty Ltd [2021] NSWSC 66

Ivory v Telstra Corporation Ltd [2001] QSC 102

Leary v NSW Trustee & Guardian (No 2) [2017] NSWSC 1226

RinRim Pty Ltd v Deutsche Bank AG (Costs) [2016] NSWSC 1510

RinRim Pty Ltd v Deutsche Bank AG [2017] NSWCA 169

Sande v Medsara Pty Ltd (No 2) [2004] NSWSC 262

Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd (2006) 196 FLR 419

Stemson v AMP General Insurance (NZ) Ltd [2007] 1 NZLR 289; [2006] UKPC 30

Thors v Weekes (1989) 92 ALR 131

UBS AG v Tyne (2018) 265 CLR 77; [2018] HCA 45

Vance v Vance (1981) 128 DLR (3d) 109

WSA Online Limited v Arms (No 2) [2006] FCAFC 108

Texts Cited:

Practice Note SC Eq 11

Dal Pont, G E, Law of Costs (4th ed, 2018 LexisNexis)

Category:

Costs

Parties:

BCEG International (Australia) Pty Ltd (Plaintiff)
Yu Xiao (First Defendant)
Yanying Chen (Second Defendant)
Interlink Laboratory Pty Ltd (Third Defendant)
Interlink Wagga Central Pty Ltd (Fourth Defendant)
West Wyalong Marketplace Pty Ltd (Fifth Defendant)

Representation:

Counsel:
Mr DL Williams SC / Mr ND Riordan (Plaintiff)
Mr B Le Plastrier (Defendants)

Solicitors:
Thomson Geer (Plaintiff)
HWL Ebsworth (Defendants)

File Number(s):

2019/310768

Judgment

1. HER HONOUR: This is an application for an order for indemnity costs on the basis of the defendants’ conduct of the proceedings or, alternatively, non-acceptance of a settlement offer. In July 2022, I gave judgment in favour of the plaintiff, BCEG International (Australia) Pty Ltd (BCEG) against its former director, Yu Xiao, wife Yanying Chen and the couple’s three companies, Interlink Laboratory Pty Ltd, Interlink Wagga Central Pty Ltd and West Wyalong Marketplace Pty Ltd: BCEG International (Australia) Pty Ltd v Xiao [2022] NSWSC 972.

2. In August 2022, I varied the orders made, including to add interest and foreign currency calculations: BCEG International (Australia) Pty Ltd v Xiao (No 2) [2022] NSWSC 1102. Judgment was entered against the defendants as follows:

1. judgment was entered against Mr Xiao and Ms Chen in the amount of $17,110,541.23;

2. judgment was entered against Interlink Laboratory in the amount of $6,937,929.17; and

3. judgment was entered against West Wyalong Marketplace in the amount of $3,731,547.75.

3. In the case of Interlink Wagga Central, I ordered the taking of accounts and an account of profits in respect of the Wagga project, declared that any benefits, profits or traceable proceeds derived or received by Interlink Wagga Central in connection with the project are held on constructive trust for BCEG, and ordered Interlink Wagga Central to account to BCEG. That process is underway.

4. The defendants were ordered to pay BCEG’s costs of the proceedings. I made directions for the service of affidavits and submissions in the event that a party sought to vary that order. BCEG now seeks an order for indemnity costs and relied on an affidavit by its solicitor, Jodi Walkom, together with written submissions.

5. The defendants provided written submissions opposing the order sought. The defendants did not serve an affidavit to address the criticisms made by Ms Walkom of the conduct of the proceedings by the defendants and their legal representatives. In particular, Ms Walkom pointed to occasions on which the defendants’ legal representatives made allegations of professional misconduct in respect of the plaintiff’s legal representatives, which it is suggested were without foundation.

FACTS

6. It is necessary, having regard to the defendants’ submissions, to be reminded of the connection between the defendants. Mr Xiao and Ms Chen’s family company is CX & DN Holdings Pty Ltd: they are directors and equal shareholders in this company: BCEG International (Australia) Pty Ltd v Xiao at [29].

7. Mr Xiao and Ms Chen are directors of Interlink Laboratory; CX & DN Holdings is the sole shareholder: at [46]. This company was used to undertake a development in the Gold Coast called the Varsity Lakes project, funded by BCEG via its parent company, BCEG China, and the Export-Import Bank of China (Exim Bank).

8. Mr Xiao and Ms Chen are directors of the fourth defendant, Interlink Wagga Central; CX & DN Holdings is the sole shareholder: at [176]. This company was used to undertake a development in Wagga, partially funded by BCEG. BCEG would not have entertained this project if it had known of Mr Xiao and Ms Chen’s fraudulent actions.

9. Mr Xiao is the sole director of West Wyalong Marketplace; CX & DN Holdings is the sole shareholder: at [37]. Mr Xiao and Ms Chen entirely funded a project undertaken by West Wyalong Marketplace in West Wyalong by diverting funds destined for the Varsity Lakes project.

10. In October 2019, these proceedings were commenced. After obtaining further and better particulars of the Commercial List Statement, Mr Xiao and Ms Chen asserted a right to their privilege against self-incrimination and exposure to civil penalty and, in November 2019, filed a bare Commercial List Response. In January 2020, Ms Walkom wrote to the defendants’ solicitor, suggesting that privileges had been invoked improperly. In February 2020, BCEG filed a motion to strike out the Commercial List Response on the grounds that it did not properly raise or plead the existence and basis for the privileges.

11. On 6 August 2020, BCEG’s motion was heard by Stevenson J. During the hearing, the defendants' senior counsel conceded that the defendants should amend their Commercial List Response. (Stevenson J later ordered the defendants to pay BCEG's costs thrown away by reason of the amendment: BCEG Australia v Xiao [2020] NSWSC 1234.) The defendants also submitted that, in light of their privilege claims, BCEG should conduct its case akin to a civil penalty prosecution, such that BCEG would run its case in chief at trial and at the close of BCEG's case, the defendants would elect whether to file a defence and go into evidence or to make a ‘no case to answer’ submission. It was further submitted that, if the defendants chose to go into evidence, an adjournment would be required to allow the defendants to file and serve an amended Commercial List Response raising defences to all of the allegations against them and to serve any witness statements. At the conclusion of the hearing, Stevenson J directed the defendants to circulate a proposed amended pleading and stood the motion over.

12. On 27 August 2020, his Honour made orders in Chambers, granting leave to the defendants to file an amended pleading, granting leave to BCEG to issue subpoenas, ordering BCEG to serve its evidence by 6 November 2020 and listing the proceedings for directions on 20 November 2020 for orders to refer the proceedings to mediation (the defendants had insisted that BCEG serve its evidence in chief before the parties mediated). The defendants filed an Amended Commercial List Response, maintaining their claim for privileges.

13. On 7 September 2020, in accordance with the grant of leave, BCEG caused the Court to issue subpoenas to the Commonwealth Bank of Australia and Richard Stone of RSM Australia, being the liquidator of Trojjan (BCEG) Pty Ltd and Trojjan Constructions Pty Ltd (companies controlled by Mr Xiao and Ms Chen, being the builders on the Varsity Lakes and Wagga projects). On 10 September 2020, the defendants filed a motion seeking that the subpoenas be set aside.

14. On 13 October 2020, Stevenson J made orders dismissing the defendants’ motion with costs: BCEG Australia v Yu Xiao & Ors (No 2) [2020] NSWSC 1403. The defendants’ primary ground was that the subpoenas were an abuse of process, being an attempt to sidestep Practice Note SC Eq 11. His Honour considered that, as the defendants had chosen not to go into evidence until BCEG had closed its case at trial, if the Practice Note were held to operate so as to prevent BCEG from issuing subpoenas until such time as all evidence in the case had been served, then BCEG would not be able to issue any subpoenas before closing its case at trial: at [10]. The defendants also submitted that the terms of the subpoenas were oppressive. Stevenson J observed that the subpoenaed parties had not raised any objection and, indeed, the bank had already begun producing documents without demur. His Honour was not persuaded that the subpoenas opposed any unfair burden.

15. BCEG proceeded to serve its lay and expert evidence. In November 2020, BCEG served evidence in chief consisting of 13 affidavits, three outlines of evidence, an expert report and a preliminary tender bundle of 380 items. On 30 November 2020, Stevenson J made directions, noting:

The parties agree that, by reason of the first and second defendants’ invocations of the privileges against self-incrimination and exposure to penalties, the plaintiff will proceed to trial … on its case in chief.

The matter was set down for 10 days in respect of BCEG’s case in chief, to commence on 15 November 2021.

16. An unsuccessful mediation was conducted before Mr McDougall QC in February 2021. Various motions were then filed by the parties: BCEG sought to set aside subpoenas and notices to produce issued by the defendants; the defendants sought additional security for costs (BCEG had initially agreed, without admission, to provide $50,000 in security for costs); BCEG sought to amend its pleadings and asset preservation orders.

A settlement offer

17. On 16 July 2021, Ms Walkom sent a without prejudice save as to costs letter to the defendants’ solicitor, suggesting that BCEG was confident that the Court would find in its favour, with damages to exceed $20 million plus costs. In respect of the defendants’ invocation of the privileges against self-incrimination and self-exposure to a civil penalty, Ms Walkom suggested that this was unusual in a private civil action where there were no civil penalty proceedings on foot and no civil or criminal proceedings in prospect. Further:

It is for this reason that we infer that your clients know they have no real defence to the claims advanced by BCEG in this proceeding. Consistently with that awareness, they instead seek to delay the inevitable by invoking the privileges and proposing procedural measures which will considerably increase the costs of the litigation, including by bifurcating the trial.

18. BCEG offered to settle the proceedings for $15 million inclusive of costs and interest. Payment was to be made within 21 days of entering into a deed of settlement, to contain mutual releases, confidentiality obligations and a non-disparagement clause, together with an indemnity from the defendants to BCEG “from any claims or loss, as the case may be, whether present, unascertained, future or contingent, arising from or in any way in connection with, the Varsity Lakes project, the Wagga Mill project or the West Wyalong project”. BCEG was willing to consider payment by instalments, subject to appropriate security and a condition that the defendants execute a consent judgment in BCEG’s favour which could be utilised if there was failure to make payment. The offer was open for 28 days and was said to be made in accordance with the principles in Calderbank v Calderbank [1976] Fam 93; [1975] 3 All ER 333 and would be relied upon in respect of an application for indemnity costs if not accepted.

19. Ms Walkom was not favoured with a response.

Gratuitous suggestions of professional misconduct

20. On 16 July 2021, BCEG served written submissions in respect of the various motions then on foot. In particular, BCEG resisted the defendants’ motion for security for costs by reference to the strength of BCEG's case, based on the evidence and materials served to date. On 21 July 2021, the defendants served their submissions, suggesting that BCEG's case was far from strong. In particular, the defendants submitted in respect to the 'sham subcontracts' claim: (emphasis added)

The claims made as to "sham subcontracts" cannot be maintained and should be withdrawn. If the present contentions are maintained then the 1st and 2nd Defendants reserve their rights against BCEG and its legal representatives. The Defendants shall communicate separately with BCEG and its legal representatives as to this matter.

Despite the defendants' reservation of rights against BCEG's legal representatives and their indication that they would communicate separately with Ms Walkom, she did not receive any further communication on this issue.

21. To assist the reader, the 'sham subcontracts' claim – which was established at trial – was that, when applying to drawdown finance on the Varsity Lakes loan facility, Mr Xiao and Ms Chen justified upcoming construction costs by reference to sham sub-contracts between Trojjan and sub-contractors. The genuine sub-contracts were for fixed prices totalling some $1.7 million but, when altered, totalled some $29.7 million. By these means, some $23 million was advanced by Exim Bank which would not otherwise have been forthcoming.

22. On 22 July 2021, Williams J heard the various motions filed by the parties. There was a degree of consensus on a range of matters, including taking the evidence of some witnesses by audio visual link and preparations for hearing. Her Honour asked the parties to prepare short minutes of order, to be sent to her Chambers that afternoon so that orders could be made in Chambers on agreed matters whilst her Honour reserved remaining matters for further consideration. BCEG’s senior counsel sought an interim asset preservation order whilst her Honour stood reserved, which the defendants’ senior counsel sought to defer until he could obtain some instructions. The transcript then records:

HER HONOUR: What I will invite the parties to do is for the short minutes of order that are to be sent to chambers to include an order along those lines proposed by the plaintiff. If it is by consent, that can be indicated. If it is not by consent, that can be indicated and I will consider that when I am looking at the short minutes of order.

HICKS: Your Honour pleases. …

HER HONOUR: I will reserve all of these matters for further consideration on the papers and stand all of the motions over … I will make short minutes giving effect to that in chambers either later today or tomorrow morning when they are available. …

23. Ms Walkom said that the parties were not able to agree and, on 23 July 2021, Ms Walkom sent an email to Williams J’s associate, copied to the defendants’ solicitors, attaching BCEG’s proposed short minutes of order. Ms Walkom’s cover email stated:

We refer to yesterday's hearing and her Honour's invitation for the parties to submit competing short minutes if agreement could not be reached.

The Plaintiff's proposed form of order is attached.

We understand that the parties are largely in agreement as to final orders, however, the form of the interim notification requirements the subject of the defendants’ proposed undertaking are not the subject of agreement (proposed orders 5 and 6 in the attached).

There appear to be three key differences between the parties’ positions. …

24. The defendants’ solicitors promptly wrote to Ms Walkom, suggesting that the email had been sent without their notice or consent and suggested that the email had been sent in contravention of rule 22.5 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 (NSW), which proscribes a solicitor communicating with the Court unless:

22.5.1   The court has first communicated with the solicitor in such a way as to require the solicitor to respond to the court or

22.5.2   The opponent has consented beforehand to the solicitor communicating with the court in a specific manner notified to the opponent by the solicitor.

25. The defendants’ solicitor sought confirmation by return that BCEG’s solicitor would not communicate with the Court without their consent. This was an odd protest given Williams J’s request that she be provided with short minutes or order in the event that the parties had been unable to agree. Ms Walkom responded accordingly to the defendants’ solicitor on 26 July 2021, noting that the communication with Williams J’s associate was sent at the Court’s invitation. The defendants’ solicitor maintained their position, as did Ms Walkom, in further correspondence.

26. On 16 August 2021, Williams J dismissed the defendants’ motion for security for costs. In short, although BCEG was a wholly owned subsidiary of BCEG China, and thus the defendants had satisfied the jurisdictional threshold for an order for security for costs in rule 42.21(1)(d) of the Uniform Civil Procedure Rules 2005 (NSW), her Honour was satisfied that BCEG had established a strong prima facie case such that the defendants’ prospects of obtaining an order for costs against BCEG were low and, in her Honour’s opinion, did not warrant an order for security: BCEG International (Australia) Pty Ltd v Xiao [2021] NSWSC 1027 at [56]-[57].

27. In addition, her Honour granted leave to BCEG to amend its pleadings and otherwise dealt with the subpoenas, notices to produce and asset preservation orders. BCEG filed its amended pleadings on 23 August 2021. The defendants filed an Amended Commercial List Response, which maintained the claims for privileges against self-incrimination and exposure to penalties.

A change of tack

28. The parties’ solicitors continued to exchange correspondence in preparation for trial, which was due to commence on 15 November 2021. On 20 September 2021, the defendants’ solicitors requested copies of certain documents in BCEG’s preliminary tender bundle. On 12 October 2021, BCEG served a copy of the Court Book. Ms Walkom said that, due to the defendants’ claim for privileges and its forensic decision to put the plaintiff to proof on all issues, the Court Book included a large portion of BCEG’s business records and material produced on subpoena and comprised 585 items over 21,000 pages.

28. The proceedings were then listed for directions before Stevenson J on 3 November 2021. In Court, the defendants filed a motion seeking to vacate the hearing of BCEG’s case in chief. As his Honour described events in BCEG International (Australia) Pty Ltd v Xiao [2021] NSWSC 1545 at [9]-[10]: (emphasis added)

[9]   By Notice of Motion filed in Court on 3 November 2021, the defendants sought the vacation of the 15 November 2021 hearing date by reason of service by the plaintiff of two affidavits. In written submissions in support of that application, Mr Hicks SC, who appears with Mr Le Plastrier for the defendants, submitted that, hitherto, the defendants were confident that the plaintiff had failed to prove a vital element of its case but that the recently served affidavits “fundamentally changed the evidentiary landscape” such that the plaintiff was “now able to advance an arguable case” on a vital aspect of the matter. It was submitted that the defendants could not meet the recently served evidence and that the hearing should be vacated.

[10]   During oral argument before me on 3 November 2021, although only after Mr Hicks had made submissions which occupied over four pages of the transcript, Mr Hicks informed me that the defendants had decided to abandon the claims for privilege (although I was informed during argument on 26 November 2021 that this matter has been mentioned between Counsel on the evening before the application of 3 November 2021).

30. The defendants’ submission might be thought to have been particularly ambitious where Williams J had recently described BCEG’s case as strong. In any event, Stevenson J observed that the defendants’ decision to abandon the claim of privilege meant that the hearing date of 15 November 2021 could not be maintained: at [11]. Further, Stevenson J also observed that the defendants proposed to rely on an Amended Commercial List Response which “for the first time makes a series of significant positive allegations”. His Honour also noted “these are all positive claims that, arguably, the defendants could have hitherto made without jeopardising their claim for privilege”: at [14].

31. The hearing was vacated. Directions were made for the service of an Amended Commercial List Response, lay and expert evidence, the provision of general discovery and allocation of a new trial date on a revised estimate.  The matter was now listed for hearing for three weeks commencing on 4 April 2022, that is, five months after the vacated hearing.

32. On 30 November 2021, Stevenson J ordered the defendants to pay the costs thrown away by the vacation of the hearing: BCEG International (Australia) Pty Ltd v Xiao [2021] NSWSC 1545. The defendants opposed the order on the basis that the hearing could not proceed as they could not meet the further affidavits served by BCEG. However, his Honour observed at [21]:

During argument before me on 26 November 2021, Mr Hicks accepted, in substance, that he could not point to a link between the late service by the plaintiff of the affidavits and the defendants’ decision to abandon the claim for privilege.

It is apparent that Stevenson J did not accept the defendants’ suggestion that their decision to abandon their claims for privileges was referable to affidavits recently served by BCEG.

33. On 3 December 2021, the defendants served an Amended Commercial List Response, which advanced a defence to the following effect:

1. BCEG had an interest in the West Wyalong project, was aware of its interest in the project and the use of funds for that project, was entitled to receive and did receive repayment of all monies provided for the West Wyalong project.

2. In 2008, discussions took place Mr Xiao and a director of BCEG, Qing Yang, during which Mr Yang, on behalf of BCEG, approved the use of the funds intended for the Varsity Lakes project on the West Wyalong project and, further, that the use of the funds for the West Wyalong project would be hidden from Exim Bank until such time as the loan arrangements between BCEG China and the bank were finalised.

3. Paul Piercy was aware of these matters and prepared sham invoices and maintained the books and records of the builder, Trojjan.

That is, BCEG’s other officers and directors were ‘in’ on the fraud.

Scramble to prepare for trial

34. On 21 December 2021, the defendants obtained an expert report from Tony Samuel.  On 22 December 2021, the defendants obtained an affidavit from Tristan Kell.  On 23 December 2021, the defendants obtained affidavits from James Maher and Anthony Smith.  The defendants’ served the affidavits and expert report on 24 December 2021, being the date when the defendants’ lay and expert evidence and verified discovery were to be provided, according to orders made by Stevenson J. 

35. Unsurprisingly, Ms Walkom’s offices were closed between 24 December 2021 and 10 January 2022. In order to progress BCEG’s evidence in reply, Ms Walkom cancelled her holiday and returned to the office on 3 January 2022, having regard to the number of BCEG’s witnesses in China and the fact that some were no longer employed by BCEG or BCEG China. Translators were needed. Time differences with Beijing, China had to be accommodated, as well as the Chinese New Year holiday period from 31 January to 7 February 2022. 

36. On 25 January 2022, the defendants served an affidavit of Mr Xiao.  The affidavit was 32 days’ late and 37 pages long: Mr Xiao described some 20 conversations with a number of individuals over a ten-year period.  Mr Xiao exhibited some 855 pages of material, but no translations of foreign language documents. 

37. On 2 February 2022, the defendants served their discovered documents, numbering approximately 285,320 documents. The discovery was 40 days’ late and was served at a time when BCEG was otherwise occupied in the preparation of its reply evidence.  Due to the number of documents discovered, the delay in the service of discovery as well as the upcoming trial due to commence on 4 April 2022, BCEG had to engage the services of a third-party document management provider, FTI Consulting, to assist with document management.

38. On 4 February 2022, Ms Walkom received correspondence from the defendants' solicitors asserting that BCEG’s claim against West Wyalong Marketplace could not be maintained and that it should be removed as a defendant in the proceedings; in addition “the cognate (and most serious) allegations” made against Mr Xiao and Ms Chen in respect of the West Wyalong project “must be withdrawn”. This bald suggestion was, at least, unaccompanied by the threat that costs orders may be sought against BCEG’s legal representatives.

39. To assist the reader, BCEG’s claim in respect of the West Wyalong project – what was established at trial – was that Mr Xiao and Ms Chen had developed a shopping centre and medical centre in West Wyalong through West Wyalong Marketplace, but funded the cost of construction by diverting some $3.4 million of the Varsity Lakes loan facility. They did so by causing the builder, Trojjan, to render false invoices – ostensibly for the Varsity Lakes project but in fact for the West Wyalong project – which Ms Chen approved and paid using the Varsity Lakes facility. As a consequence, Mr Xiao and Ms Chen were obliged to pay equitable compensation to BCEG, while judgment was entered against West Wyalong Marketplace in the amount of $3,731,547.75.

40. In March 2022, BCEG served its evidence in reply, consisting of five affidavits and an outline of evidence.  BCEG also served four affidavits from foreign language translators, which were required to be engaged to translate a number of documents included in the defendants' discovery and BCEG's evidence in reply. BCEG was also required to engage an interpreter for the purpose of witnessing affidavits by witnesses based in China, and for the purposes of facilitating cross-examination of those witnesses during the final hearing.

41. In March 2022, BCEG also prepared an updated version of the Court Book which interleaved the defendants' evidence, BCEG's evidence in reply, as well as other relevant documents from the defendants' discovery. The final version of the Court Book numbered approximately 23,000 pages and 28 volumes. BCEG engaged the services of a third-party printing company, LitSupport Pty Ltd, to facilitate the printing and copying of the Court Book.

42. As I observed in my primary judgment, BCEG’s legal representatives were still reviewing the defendants’ discovery when the trial began on 4 April 2022: at [307]. The trial ran from 4 to 22 April 2022 and involved six witnesses for BCEG, including five by video-link and four requiring translation. The defendants’ called three witnesses.

SUBMISSIONS

43. BCEG relied on the line of authority that has developed since the decision in Degmam Pty Ltd (in liq) v Wright (No 2) [1983] 2 NSWLR 354, in which indemnity costs orders may be warranted where the plaintiff has been put to the unnecessary expense of meeting unmeritorious defences that are based on deliberate falsehoods and falsified records: at 358; Chaina v Alvaro Homes Pty Ltd [2008] NSWCA 353 at [106]-[113] (per Basten JA, with whom Giles JA and Young CJ in Eq agreed); Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd (2006) 196 FLR 419; [2006] QSC 7 at [13]-[16]; Thors v Weekes (1989) 92 ALR 131 at 151-152; Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 at 230-234; Huang v Wei (No 3) [2022] NSWSC 662 at [17]; Fang v Sun (No 2) [2014] NSWSC 1194 at [17]-[23]; RinRim Pty Ltd v Deutsche Bank AG (Costs) [2016] NSWSC 1510 at [3]-[17] (upheld in RinRim Pty Ltd v Deutsche Bank AG [2017] NSWCA 169). The focus is the impact the delinquency has on the litigation, rather than the wrongdoing itself, bearing in mind the object of an award of costs is compensatory rather than punitive: In the matter of Pacific Springs Pty Ltd [2021] NSWSC 66 at [42].

44. Since Degmam, the Civil Procedure Act 2005 (NSW) was enacted, by which all litigants are subject to a duty to assist the court to further the overriding purpose of facilitating the just, quick and cheap resolution of the real issues in the proceedings and the objects of Division 1 of Part 6 of the Act: section 56. One of the effects of Division 1 of Part 6 is to oblige the courts to remain astute to the protection of litigants and the system of justice itself against abuse of process: UBS AG v Tyne (2018) 265 CLR 77; [2018] HCA 45 at [45] (per Kiefel, Bell and Keane JJ). BCEG submitted that, by analogy, these provisions provide a basis to compensate plaintiff for the waste of costs occasioned by meeting defences known to be false and lacking in substance. Given the defendants' approach to the litigation, including by their invocation of the privileges and their belated withdrawal of them, and by their subsequent reliance on false defences and falsified documents, the defendants' duty to further the overriding purpose had not been met. In the circumstances, BCEG sought an order that its costs of the proceedings be paid on the indemnity basis.

45. In the alternative, BCEG relied on the defendants' unreasonable rejection of its offer to settle. The offer involved significant compromise. BCEG has since been awarded a judgment against the defendants which totals more than $30 million; more than $17 million of that sum was awarded against the first and second defendants alone. BCEG has also been awarded its costs. The defendants must have known that their defence (albeit that it had not yet been articulated in a pleading) would fail. They must have known that they had in fact engaged in the very same misconduct that BCEG alleged against them and that the true position would emerge at trial. Their rejection of the offer was unreasonable. They had had BCEG's evidence since November 2020 and had BCEG's submissions on the security for costs application and asset preservation order application, which set out in detail the nature of its fraud case, and were thus fully apprised of BCEG's case against them. In the circumstances, and in the alternative to its primary position, BCEG sought an order that its costs be paid on the ordinary basis until 13 August 2021 and on the indemnity basis thereafter.

46. The defendants submitted that the delinquency ground had no application where the defendants, in answer to an allegation of fraud, contended that BCEG and its directors were a party to the fraud. Raising the existence of a fraud and failing to make out the fraud as a defence was said to be qualitatively different from the circumstance of a plaintiff alleging fraud. The fact that Mr Xiao acted fraudulently prior to the proceedings was no reason to order indemnity costs; indemnity costs are not intended to operate punitively in relation to pre-litigation conduct. The plaintiff's argument that it was relevant that the privileges were claimed but then withdrawn was said to be misconceived. The privileges were open to be claimed. The privileges were open to be withdrawn. They were withdrawn with leave from Stevenson J and the defendants were ordered to pay the costs of the amendment and the costs occasioned by the vacation of the hearing date. To order indemnity costs based in part of whole on that conduct would punish the defendants because they would, in effect, be paying costs twice - once on the ordinary basis and again, but on the indemnity basis - for the same forensic choice. Such an order was said to be plainly wrong. (So is the submission: an order for indemnity costs would simply change the basis on which BCEG’s costs would be assessed, from party and party to indemnity).

47. As at the settlement offer, the defendants relied on WSA Online Ltd v Arms (No 2) [2006] FCAFC 108, where the Court (Nicholson, Mansfield and Bennett JJ) observed, “An offer that required each respondent to assess its or his or her individual circumstances and prospects of success but which was only capable of being accepted by all respondents was a significant matter”: at [18]. Where issues remain to be dealt with by the trial judge (there, interest) which will impact on the final outcome, it is not possible to determine whether the offer would have led to a more favourable outcome. There were very real differences between the claims made against each of the defendants. The defendants relied on my observation in BCEG (No 2), “Each cause of action against each party must be considered having regard to the principles and evidence relevant to that cause of action alone”: at [16].

48. The defendants submitted that sensible consideration of the settlement offer required each of the defendants "to assess its or his [or her] individual circumstances and prospects of success on the forthcoming hearing": WSA Online Ltd at [18]. Like the offer in WSA Online, this offer was only capable of being accepted by all the defendants. Even if it was in the interests of four out of the five defendants to accept the offer, those four could not do so. This lack of nuance in the settlement offer was said to make it inappropriate to award indemnity costs. The plaintiff could have issued separate settlement offers to each defendant which engaged with their respective bases for liability and “could have avoided the problem it has now created. It chose not to do so, preferring to treat the defendants as though they are simply one, when they are plainly not.” In the case of West Wyalong Marketplace, its liability was far below $15 million; it was not apparent why it was appropriate to award indemnity costs against West Wyalong Marketplace for its part in the proceedings where the disparity between the settlement offer sum and the judgment amount was so great. Finally, Interlink Wagga Central could not identify its final liability until the account is complete; any award of indemnity costs was premature.

CONSIDERATION

49. It is necessary to determine this application “by reference to the conduct of the proceedings, not the conduct that is the subject of the substantive dispute”: In the matter of Indoor Climate Technologies Pty Ltd [2019] NSWSC 356 at [8] (per Black J). Conduct which will ground an order for indemnity costs includes misbehaviour of a serious nature in the course of a proceedings, such as fraud (Gate v Sun Alliance Insurance Ltd (1995) 8 ANZ Ins Cas 61-251 at 75,817-75,818), perjury or contempt (Berkeley Administration Inc v McClelland [1990] FSR 565 at 568-569; Ivory v Telstra Corporation Ltd [2001] QSC 102) and dishonest conduct (Vance v Vance (1981) 128 DLR (3d) 109 at 122). As noted in Dal Pont, Law of Costs (4th ed, 2018) at [16.71], “… where the fabrication of evidence, or other misleading conduct, has a direct correlation with unnecessarily exposing the successful party to the incurrence of costs, an indemnity costs order is appropriate”, citing Barrett Property Group Ltd v Metricon Homes Pty Ltd (No 2) [2007] FCA 1823 at [16] (per Gilmour J); Sande v Medsara Pty Ltd (No 2) [2004] NSWSC 262 at [8]; Stemson v AMP General Insurance (NZ) Ltd [2007] 1 NZLR 289; [2006] UKPC 30 at [28]; Leary v NSW Trustee & Guardian (No 2) [2017] NSWSC 1226.

50. Barrett Property Group Ltd v Metricon Homes Pty Ltd (No 2) is a good example of where such an order may be appropriate. When making an order for indemnity costs in favour of the applicants, Gilmour J noted:

[14]   These illustrate a determined effort on the part of the respondents and their witnesses to establish a defence on one of the central issues in the case which they knew to be false. It was left to the forensic efforts of the applicants’ solicitors and counsel and some belated and limited concessions made by Popple and Bugeja during their oral evidence, which led to these attempts to mislead the Court being exposed.

[15]   The result of this was that very significant costs have been incurred by the applicants both in preparation for and the conduct of the trial which ought never to have been required. Had this not been done then only those issues legitimately before the Court involving both questions of fact and law would have been tried.

[16]   The question then is whether the respondents’ conduct in relation to its defence on the issues of derivation and copying constitutes a sufficient reason to take this case, in that respect, out of the ordinary, so far as concerns the exercise of my discretion on the question of costs. I am persuaded that it does. This is not a case where merely arguments ‘attended by uncertainty’ were before the Court as in Hamod. It is not a case involving witnesses who gave evidence believing it to be true but as to which they were mistaken. It is not a case where judgment depended essentially upon the inherent probabilities of one version of events against another but not involving questions of credit. It is not even a case, such as Walker, where one witness gave fabricated evidence as to part of a case. This matter involved a concerted effort on the part of four key witnesses to present a false defence which has led to the applicants incurring very considerable costs over a long period in meeting and overcoming that defence. …

51. The following matters are relevant to the exercise of the Court’s discretion in this case as to whether to depart from the usual costs order.

52. First, as I noted in my principal judgment, the procedural history of this matter was laborious, taking two and a half years to reach trial, an unusual delay in the Commercial List: at [305]. I would have been much assisted by an affidavit from the defendants’ legal representatives to explain how and why this happened from their perspective. I apprehend that acting on the instructions of Mr Xiao would not have been an easy or seamless process. But in the absence of such evidence, I have formed the view that these proceedings were unnecessarily difficult and protracted as a consequence of the manner in which the defendants conducted their defence, being generally with a view to delaying and disrupting the timely progression of BCEG’s case to trial.

51. The blanket claim to privileges against self-incrimination and exposure to civil penalties appears to have waylaid the proceedings for some eight months until the defendants amended their defence. More importantly for present purposes, the assertion of these privileges had consequences for the plaintiff’s preparation of its case and, likely, the cost of doing so. BCEG had to prepare its case on the basis it would be put to proof on every issue, in circumstances where the business records that were available to it were of dubious reliability: BCEG at [14]-[21]. Mr Xiao and Ms Chen ran BCEG at the time of the fraudulent conduct and maintained the records of the company. There was no detailed defence nor evidence served by the defendants to shed light on what had occurred. BCEG was denied the vast number of documents the defendants had at their disposal, where 285,320 documents were later discovered once the privilege was waived.

52. Having chosen not to go into evidence or provide discovery, the defendants’ opposition to BCEG’s efforts to obtain relevant documentation from third parties by the issue of subpoenas is not easy to understand, save that the defendants appeared concerned to restrict BCEG’s ability to assemble a case in chief.

53. I am concerned at the gratuitous suggestions of professional misconduct made by the defendants’ legal representatives, as described at [21] to [26]; no matter how difficult the task of representing one’s client, one should “play the ball and not the man”. I do not consider, however, that I should let this matter affect my assessment of whether an order for indemnity costs should be made as, by the profession-specific nature of these allegations, I consider it unlikely that these allegations were made on the specific instructions of the defendants. That said, I do require an explanation in respect of the first gratuitous suggestion where it was made in submissions under the name of senior counsel.

54. What can, however, be laid at the feet of the defendants is the late abandonment of the claim for privileges against self-incrimination and exposure to penalties. With Williams J’s recent description of BCEG’s case as “strong” presumably ringing in his ears, the defendants’ senior counsel sought to justify this unexpected change as referrable to affidavits recently served by BCEG, said to have shattered the defendants’ confidence that the plaintiff could not prove a vital part of its case. However, when pressed, the defendants’ senior counsel could not point to a link between the late service of the plaintiff’s affidavits and the decision to abandon the claim for privilege. The other obvious explanation is that the defendants sought to thereby delay the imminent trial.

55. Whatever the reason, it is the effect of this late forensic decision on BCEG which is relevant for the purposes of this exercise. Final preparations for trial were thrown into disarray and led to BCEG incurring significant additional costs, as well as personal sacrifices by Ms Walkom in particular. The defendants proceeded to serve their primary affidavit late, being that of Mr Xiao, followed by a tsunami of late discovery. The burden on BCEG’s legal representatives to meet these challenges would have been great indeed.

56. There may well be a reasonable explanation as to why the defendants did not comply with the Court’s directions in respect of discovery and evidence, but in the absence of an affidavit from the defendants’ legal representatives, the late service of this material is also consistent with an attempt to disadvantage BCEG in gaining mastery of the material, and meeting it, before trial. In particular, I have in mind that, as a consequence of the defendants’ late discovery, BCEG only became aware of additional fraudulent conduct during the course of the trial. As I noted in BCEG at [374]:

… Mr Xiao’s affidavit that provided the first hint of [further] misappropriation of monies … BCEG served affidavits in reply on 22 and 23 March 2022, to which Mr Xiao also replied on 1 April 2022, before the trial began on 4 April 2022. BCEG’s ability to get to the bottom of the matter may have been hampered by the defendants’ discovery of some 280,000 documents on 31 January 2022, which BCEG’s legal representatives were still reviewing when the trial finally began, two and a half years after the commencement of proceedings and after a difficult procedural history: see [305]-[307].

As a consequence, I declined to grant relief in respect of these additional but unpleaded matters, given the seriousness of the conduct involved: BCEG at [366]-[376].

59. Second, turning then to the amended defence, serious allegations of fraud were put forward against Qing Yang, the 'BCEG China Accountant' (Ms Zhang) and Mr Piercy. The defendants alleged that there was an elaborate agreement between Mr Xiao and Mr Yang and others. It is worth bearing in mind at this junction that I found that Mr Xiao and Ms Chen engaged in serious fraud and the agreements described in the defence did not exist. Of course, an indemnity costs is not directed to further punish a fraudster for persisting in defending an allegation of fraud. But the fact that Mr Xiao and Ms Chen’s actions were found to be fraudulent forms a prism through which their actions in defending the proceedings may be viewed. The defendants could not have held any genuine belief in the truth of the positive defence advanced. But, having pleaded such a detailed and false defence, BCEG was put to the cost of dealing with the substantive matters raised in it. It is evident that those costs were considerable.

60. Third, the defendants’ actions were compounded by Mr Xiao’ late but detailed affidavit, purported to give an accurate description of events spanning a ten-year period, including 20 oral conversations said to explain the actions of himself and his wife. In doing so, Mr Xiao put BCEG to the time and cost of having to investigate a wide range of matters in order to, hopefully, prove Mr Xiao to be the liar that I found him to be. BCEG, having had to incur additional costs to meet the challenge posed by the defendants’ amended defence and Mr Xiao’s affidavits have a sound basis, it seems to me, to be indemnified for those costs. The fact that Ms Chen did not put on an affidavit or give evidence at trial may suggest that a more sanguine approach be taken in respect of any costs order made against her. I have borne this in mind.

61. Fourth, Mr Xiao maintained the lie throughout his cross-examination, which was necessarily lengthy. Mr Xiao gave evasive and non-responsive evidence in cross-examination. His evidence, both oral and written, was riddled with inconsistencies. He blamed everything on others, especially Mr Piercy. The explanations he gave for his actions were repeatedly undermined, often by his own documents.

62. The trial was waylaid on day seven, when it became apparent during the course of Mr Xiao’s cross-examination that, during a lunch adjournment, he was executing documents to encumber his assets. Time was taken to deal with this matter by making asset preservation orders. Indeed, the matter was re-listed for a further freezing order on 8 June 2022, whilst judgment was reserved, when it appeared that Mr Xiao had encumbered his assets notwithstanding the order made by consent following BCEG’s urgent application during the hearing.

63. Overall, I consider that the amended defence and Mr Xiao’s detailed affidavit were directed towards misleading the Court as to what had happened. The amended defence and affidavit, together with the defendants’ approach to the proceedings generally, had the result of prolonging the proceedings and the trial unnecessarily, leading to BCEG incurring costs. They amounted to a determined effort on the part of the defendants to establish a defence which Mr Xiao and Ms Chen must have known to be false. Like Barrett Property Group, this was not a case where the parties came before the Court seeking adjudication of honestly held differences in versions of events. Rather, Mr Xiao and Ms Chen maintained a fabricated defence and did so from a position of special advantage where they ran BCEG at the time of these events. I consider their conduct to amount to relevant delinquency or exceptional circumstances warranting an indemnity costs order. This is not a case involving witnesses who gave evidence believing it to be true but as to which they were mistaken. Mr Xiao and Ms Chen were aware of the truth. They were there at the time when these events occurred; they committed the fraud.

64. BCEG has sought that indemnity costs from the commencement of the proceedings. Having regard to the procedural history overall, I consider it appropriate to begin the indemnity costs order from 1 September 2020, being almost a year after the proceedings were commenced. During the first year of the proceedings, the defendants asserted a right to their privilege against self-incrimination and exposure to civil penalty and, after Stevenson J determined BCEG’s motion to strike out the pleading, put on a defence in proper form. Whilst it would certainly be open to make an indemnity costs order from the commencement of the proceedings, I consider that it was not unreasonable for Mr Xiao and Ms Chen to initially assert these privileges, nor for there to have been initial correspondence and interlocutory applications to regularise the pleading. But from this point on, I consider that the assertion of these privileges – later abandoned – and the defendants conduct of the proceedings more broadly, put BCEG to additional expense which proved unwarranted when the reliance on the privileges was abandoned.

65. As to whether an indemnity costs order should be made against Mr Xiao alone, or Mr Xiao and Ms Chen only, or all defendants, I consider it appropriate to make an indemnity costs order from 1 September 2020 against all defendants. Whilst the privilege was only claimed by Mr Xiao and Ms Chen, it had ramifications for BCEG’s claims against their companies as well. The conduct of the proceedings more broadly was conducted on behalf of all the defendants, in respect of which I have already expressed several concerns. For these reasons, I consider it appropriate to make an order for indemnity costs against the defendants from 1 September 2020 on.

66. It is not strictly necessary to consider whether the defendants’ non-acceptance of BCEG’s offer of settlement warrants an indemnity costs order from the date of that letter. It is certainly the case that BCEG did better at trial, even without the claim against Interlink Wagga Central having been finally quantified.

67. As the defendants submitted, the offer of settlement was a global offer where BCEG pursued distinct causes of action against each of the defendants. But where Mr Xiao and Ms Chen were the directors and shareholders of the corporate defendants, they were well-placed to consider the global offer against the claims against themselves personally and their companies in a global manner. The defendants’ submissions in this regard may have had more force if the defendants had responded to the offer of settlement by, for example, requesting a break-down in the settlement offer by reference to individual defendants, or seeking to negotiate at all.

68. A matter not raised by the defendants which gives me pause for thought is that the offer of settlement included an indemnity from the defendants to BCEG “from any claims or loss, as the case may be, whether present, unascertained, future or contingent, arising from or in any way in connection with, the Varsity Lakes project, the Wagga Mill project or the West Wyalong project”. Where each of the Varsity Lakes, Wagga and West Wyalong projects were substantial developments, it may well be that such an indemnity may have required the defendants to outlay further funds such that the offer of $15 million inclusive of costs and interest does not truly reflect the amount which the defendants were being asked to pay to resolve the proceedings, and has the consequence that one cannot readily compare the offer of settlement with the judgments entered against the defendants. From recollection, there was no evidence at trial of any building defect claims in respect of these developments. I do recall, however, that the Wagga project was not completed. Nor did the defendants raise any concerns in this regard in respect of the application for an indemnity costs order. Thus, having regard to the evidence and submissions on this application, I have put this consideration to one side.

69. Looking at the settlement offer, if I had not been minded to make an indemnity costs order on the basis of the defendants’ conduct of the litigation, I would have ordered indemnity costs against the defendants from the date of the offer of settlement. The amount of the offer was reasonable. BCEG did far better at trial, so much so that it is unnecessary to await an account being taken against Interlink Wagga Central. The offer was open for a reasonable period of time. The offer was made at a time in the litigation when BCEG had served its evidence in chief and the parties were arguing about the merits of BCEG’s claim before Williams J. In these circumstances, failure to accept the offer was unreasonable in the circumstances and an order for indemnity costs should follow from the date of the offer.

ORDERS

70. For these reasons, I make the following orders and directions:

1. Vacate Order 13 made on 22 July 2022.

2. Order, pursuant to section 98(1)(c) of the Civil Procedure Act 2005 (NSW), the defendants to pay the plaintiff’s costs of the proceedings:

1. on a party and party basis up to and including 31 August 2020; and

2. on an indemnity basis from 1 September 2020 on.

3. Direct the plaintiff’s solicitors to provide a copy of this judgment to Frank Hicks SC.

4. Direct Frank Hicks SC to provide an affidavit to the Court within 28 days containing whatever explanation he is able to give of the basis on which he considered it appropriate to make the submission at [19] of the written submissions provided to this Court on 21 July 2021.

**********

Amendments

13 September 2022 - Amendment to catchwords

13 September 2022 - Amendment to catchwords

Decision last updated: 13 September 2022