Fei v Hexin Pty Ltd
[2024] VSCA 158
•4 July 2024
| SUPREME COURT OF VICTORIA COURT OF APPEAL |
| S EAPCI 2023 0099 |
| JINFENG FEI | Applicant |
| v | |
| HEXIN PTY LTD | First Respondent |
| AND | |
| L.D.3 PTY LTD | Second Respondent |
| S EAPCI 2023 0109 | |
| HEXIN PTY LTD | First Cross-Applicant |
| and | |
| L.D.3 PTY LTD | Second Cross-Applicant |
| V | |
| JINFENG FEI | Cross-Respondent |
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| JUDGES: | KENNEDY, MACAULAY and LYONS JJA |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 2 May 2024 |
| DATE OF JUDGMENT: | 4 July 2024 |
| MEDIUM NEUTRAL CITATION: | [2024] VSCA 158 |
| JUDGMENT APPEALED FROM: | [2023] VSC 476 (Matthews J) |
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CIVIL PROCEDURE – Application for leave to appeal – Preliminary discovery – Judge ordered preliminary discovery in two categories – Whether substantial injustice to party required to make discovery if orders undisturbed – Whether applicant for preliminary discovery required to identify cause of action said to give rise to right of relief – Whether judge erred in finding applicants for preliminary discovery may be entitled to relief – Whether judge disclosed reasoning to conclusion – No substantial injustice if order for preliminary discovery undisturbed – Applicant for preliminary discovery not required to specify cause of action said to ground right of relief – No error in finding that applicants for preliminary discovery may be entitled to relief –– Judge disclosed path of reasoning – Leave to appeal refused.
CIVIL PROCEDURE – Cross-application for leave to appeal – Preliminary discovery – Judge refused preliminary discovery in one category – Whether substantial injustice to applicant for preliminary discovery unless preliminary discovery ordered – Whether judge erred in finding no relevant contractual relationship upon which right to relief could be founded – No error – Leave to appeal refused.
Supreme Court (General Civil Procedure) Rules 2015, r 32.05.
House v The King (1936) 55 CLR 499; Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377, applied. Schmidt v Won [1998] 3 VR 435; Beston Parks Management Pty Ltd v Sexton [2008] VSC 392; United Energy Limited v Energy Risk Management Pty Ltd [1998] VSC 133; Sandhurst Trustees Limited v Clarke (2015) 321 ALR 1; EBOS Group Pty Ltd v Team Medical Supplies Pty Ltd [No 3] (2012) 199 FCR 533; Optiver Australia Pty Ltd v Tibra Trading Pty Ltd (2008) 169 FCR 435; Alex Fraser Pty Ltd v Minister for Planning [2018] VSC 391; Mercantile Mutual Insurance (Australia) Ltd v Household Financial Services Ltd (Supreme Court of Victoria, Court of Appeal, Winneke P, Hayne JA and Ashley AJA, 22 May 1997), considered.
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| Counsel | ||
| Applicant / Cross‑Respondent: | Mr SD Hay KC with Mr JD McKay | |
| First Respondent / First Cross-Applicant: | Mr JP Moore KC with Mr SJ Prendergast | |
| Second Respondent / Second Cross-Applicant: | Mr JP Moore KC with Mr SJ Prendergast | |
Solicitors | ||
| Applicant / Cross‑Respondent: | Boon Legal | |
| First Respondent / First Cross-Applicant: | Norton Rose Fulbright Australia | |
| Second Respondent / Second Cross-Applicant: | Norton Rose Fulbright Australia | |
TABLE OF CONTENTS
PART A:. INTRODUCTION
(1).... Proposed grounds of appeal
(2).... Proposed grounds of cross-appeal
(3).... Issues arising for decision
PART B:. BACKGROUND AND JUDGE’S FINDINGS
(1).... Chapel Road Project
(a) Salient facts
(b) Judge’s findings
(2).... Magnolia Project
(a) Salient facts
(b) Judge’s findings
(3).... Church Road Project
(a) Salient facts
(b) Judge’s findings
(4).... Minutes of meetings and transfer documents
PART C:. RELEVANT LEGAL PRINCIPLES
(1).... Appeals from interlocutory decisions involving the exercise of a discretion
(2).... Does a right to relief require the identification of a cause of action?
PART D:. CHAPEL ROAD PROJECT AND MAGNOLIA PROJECT
(1).... Is there any substantial injustice to Fei if the judge’s orders are left undisturbed?
(2).... Is there reasonable cause to believe that Shen may be entitled to obtain relief?
(a) Submissions
(b) Consideration
(i) Chapel Road Project
(ii) Magnolia Project
PART E:. CHURCH ROAD PROJECT
(1).... Is there any substantial injustice to Shen if the judge’s order is left undisturbed?
(2).... Did the judge err in finding that Hexin was not party to the development contract?
(a) Submissions
(b) Consideration
PART F:.. CONCLUSION
KENNEDY JA
MACAULAY JA
LYONS JA:
PART A:INTRODUCTION
Jinfeng Fei, the applicant, is a property developer. Hexin Pty Ltd and LD3 Pty Ltd, the respondents, were investors in Fei’s property developments between 2011 and 2017. Xiaohua (Koko) Shen was the director of the two respondent companies. Fei made his own investments through a company, HF Property Development Pty Ltd.
A judge in the trial division ordered Fei to make preliminary discovery of documents (as listed) in respect of two property development projects undertaken with one or other of the respondents.[1] Those property developments were described as the ‘Chapel Road Project’ and the ‘Magnolia Project’.
[1]Hexin Pty Ltd v Fei [2023] VSC 476 (Matthews J) (‘Reasons’).
The judge refused to order that Fei make preliminary discovery in respect of a third project described as the ‘Church Road Project’. Essentially, that was because the judge was not satisfied that either of the two respondents was an investor in that project.
Fei has applied for leave to appeal the judge’s orders in respect of the Chapel Road Project and the Magnolia Project.
Hexin and LD3 have sought leave to cross-appeal against the judge’s refusal to order preliminary discovery in respect of the Church Road Project, including on the basis that the judge erroneously refused to admit certain expert evidence. They have also given notice of their proposed contention to uphold the judge’s order in respect of the Chapel Road Project and Magnolia Project on the basis of the expert evidence that the judge refused to admit.
Preliminary discovery may be ordered pursuant to r 32.05 of the Supreme Court (General Civil Procedure) Rules 2015 (the ‘Rules’). In summary, before an order for preliminary discovery will be made, the court must be satisfied that:
(a)first, there is reasonable cause to believe that the applicant for discovery has or may have the right to obtain relief;
(b)secondly, after making all reasonable inquiries, the applicant does not have sufficient information to enable it to decide whether to commence a proceeding to obtain that relief; and
(c)thirdly, there is reasonable cause to believe the respondent has or is likely to have documents the inspection of which by the applicant would assist the applicant to make that decision.
It was agreed before the judge that the second and third criteria set out above had been satisfied, so that only the first criteria was in issue. That is, the judge had to decide whether there was reasonable cause to believe that the respondents (Hexin and LD3) have or may have a right to obtain relief against the applicant (Fei). As reflected in the orders made, the judge answered this question in the affirmative in respect of the Chapel Road and Magnolia Projects, and in the negative in respect of the Church Road Project.
(1)Proposed grounds of appeal
The applicant (Fei) has proposed two grounds of appeal in relation to the orders made concerning the Chapel Road Project and the Magnolia Project:
(a)First, the judge erred by finding on the evidence before her that there was reasonable cause to believe that the respondents may be entitled to relief.
(b)Secondly, the judge failed to disclose the pathway of reasoning as to how, on the evidence, there was reasonable cause to believe that the respondents may have an entitlement to relief for misrepresentation, whether under s 18 of the Australian Consumer Law (‘ACL’)[2] or in tort or equity, or otherwise.
[2]Competition and Consumer Act 2010 (Cth), sch 2.
As mentioned, the respondents (Hexin and LD3), contend (by notice of contention) that the judge ought to have upheld her findings on the Chapel Road Project and the Magnolia Project by allowing the admission of evidence from KordaMentha (which the judge had refused).
(2)Proposed grounds of cross-appeal
The respondents have also proposed two grounds of appeal in relation to the judge’s refusal to make orders for preliminary discovery concerning the Church Road Project. The grounds are lengthy and are set out in full below, but in substance they contend:
(a)first, that the judge should have found that there was reasonable cause to believe that Hexin may have been a party to the project’s contract and, having so found, also found a reasonable cause to believe that Hexin may be entitled to relief against Fei and/or HF Property; and
(b)secondly, that the judge was wrong to refuse to admit the KordaMentha reports as evidence which, had they been admitted, would have provided a basis for a reasonable cause to believe that the respondents had a right of relief against Fei and/or HF Property.
Because each application for leave to appeal involves a challenge to an interlocutory decision concerning practice and procedure, it was accepted by both the applicant and the respondents that in order to obtain leave to appeal on their respective applications they must demonstrate that, if the relevant orders are left undisturbed, they will suffer a substantial injustice.
(3)Issues arising for decision
Arising from these proposed grounds and contention, the following questions are to be addressed:
Regarding the Chapel Road Project and the Magnolia Project:
(1)Would the applicant suffer a substantial injustice if the orders for preliminary discovery were left undisturbed in relation to the Chapel Road Project and Magnolia Project?
(2)On the evidence, is there reasonable cause to believe that the respondents may be entitled to relief in respect of the Chapel Road Project and Magnolia Project?
(3)Did the judge disclose a pathway of reasoning to her conclusion in respect of the Chapel Road Project and Magnolia Project?
Regarding the Church Road Project:
(1)Would the respondents suffer a substantial injustice unless preliminary discovery was ordered?
(2)Did the judge err in finding that Hexin was not party to the Church Road Project development contract?
(3)If yes, on the evidence (including, if admissible, the KordaMentha reports), is there reasonable cause to believe that the respondents may be entitled to relief in respect of the Church Road Project?
(4)Did the judge err in not admitting the KordaMentha reports into evidence?
PART B:BACKGROUND AND JUDGE’S FINDINGS
On their applications to the judge, the parties presented the facts by way of affidavits. No deponent was cross-examined. The facts so presented were directed to the narration of the commercial relationship between Fei and Shen (and their respective companies); the history of each project; and various transactions associated with each project. The relevant task for the judge was to ascertain whether, arising from the facts of each project, there was reasonable cause to believe that Hexin or LD3 had or may have had a right to obtain relief from Fei.
The judge analysed each project individually, recognizing however that facts which may give rise to a belief about wrongdoing in respect of one project might, logically, influence a belief in respect of another.
Significantly, in approaching her task, the judge commenced with a survey of the legal principles informing her approach to discerning the existence of the reasonable belief described in the first criteria in r 32.05. In summary, after analysing statements made in a number of cases, the judge highlighted these principles:[3]
(a)the question whether there is ‘reasonable cause to believe’ is to be judged objectively;[4]
(b)‘belief’ is to be understood as an inclination toward assenting to a proposition, rather than rejecting it;[5]
(c)the grounds for inducing a belief reasonably may include, for example, surmise or conjecture;[6]
(d)consistently with its purpose, the jurisdictional threshold in relation to granting preliminary discovery is low;[7] and
(e)a ‘right to obtain relief’ is a broader notion than a cause of action — a person seeking discovery does not have to identify a cause of action.[8]
[3]Reasons, [28]–[33].
[4]Pandolfo v Finadri [2018] VSC 211, [20(d)] (Derham AsJ) (‘Pandolfo’).
[5]Alex Fraser Pty Ltd v Minister for Planning [2018] VSC 391, [53] (Riordan J) (‘Alex Fraser’).
[6]Ibid [51]–[52] (Riordan J); Pandolfo [2018] VSC 211 [20(e)] (Derham AsJ).
[7]Alex Fraser [2018] VSC 391, [54] (Riordan J).
[8]Pandolfo [2018] VSC 211, [20(a)–(c)] (Derham AsJ).
As we explain below, in this Court the applicant mounted a challenge to the last of those asserted principles. He submitted that a ‘right to relief’ must be construed as a ‘right of action to obtain relief’. Contrary to some statements made in previously accepted authority, the applicant submitted that the test does require the broad identification of a cause of action. It also requires the examination of how the facts might support a belief that the person applying for preliminary discovery may have such a cause of action with a consequent right to obtain relief.
A finding that there was reasonable cause to believe that the respondents might have a right of relief against Fei was not the end of the judge’s task. As she acknowledged, that finding only satisfied the threshold for the judge to exercise a discretion to grant preliminary discovery. So, the further question was whether to exercise that discretion in the respondents’ favour.[9] With reference to what Riordan J said in Alex Fraser Pty Ltd v Minister for Planning,[10] the judge noted some potential factors that may influence the exercise of the discretion, namely: the inconvenience and cost of providing discovery; whether the person giving discovery will be reimbursed for the cost; the risk of commercial damage caused by giving discovery; whether the privileged nature of the documents will undermine the utility of discovery; the prospect that the discovered documents will provide the information sought; and whether discovery will serve any useful purpose.[11]
[9]Alex Fraser [2018] VSC 391, [54(c)] (Riordan J); Pandolfo [2018] VSC 211, [19], [23] (Derham AsJ); Beston Parks Management Pty Ltd v Sexton [2008] VSC 392, [53] (Hollingworth J) (‘Beston Parks’).
[10][2018] VSC 391, [54(c)] (Riordan J).
[11]Reasons, [147].
In respect of each project, the respondents sought discovery from Fei of a list of documents described in categories. Each list was similar but not identical across the three projects. Each project was a multi-lot residential development. Broadly described, the categories of documents included: sale, purchase and transfer documents; pricing documents; marketing documents; construction contracts; consultancy agreements; accounting and financial records; and certain project-specific documents that were claimed to exhibit particular aspects or sources of alleged wrongdoing for a particular project. Undoubtably, the ambit of the discovery sought in each case is extensive.
What now follows is an account, project by project, of the salient facts of each project and the relevant findings made by the judge leading to her conclusion that there either was or was not reasonable cause to believe that Hexin or LD3 may have a right to obtain relief from Fei. We will mostly refer to the parties as ‘Fei’ and ‘Shen’, using Fei to include HF Property and Shen to include Hexin and LD3 unless it is necessary to specify those companies. We will first discuss the Chapel Road and Magnolia Projects — those being the projects in respect of which the judge upheld Shen’s application for preliminary discovery — and then turn to the Church Road Project, in respect of which the judge refused Shen’s application.
(1)Chapel Road Project
(a)Salient facts
Shen first met Fei in or around February to March 2011. After several meetings they entered into an oral agreement for the development of the Chapel Road Project, which was to be conducted through a company named Stanleyfield Pty Ltd. Stanleyfield was registered on 1 June 2011 and Shen and Fei were each appointed directors.[12]
[12]Ibid [10].
From April 2011 to January 2013, Hexin invested $1,235,712.80 in the Chapel Road Project while Fei (through HF Property) invested $1,286,088. These amounts were said to represent 49 per cent and 51 per cent of the total investment respectively.[13]
[13]These percentages do not precisely correspond to the dollar amounts stated. There may be some explanation for these slight differences, but in any event they are immaterial.
On 25 April 2013, Fei provided Shen with a document showing calculations of the income and costs of the project (the ‘Chapel Road Profit Calculations’).[14] The Chapel Road Profit Calculations consisted of a single-page document which listed the cost of purchasing the land, and costs for construction, interest, government expenses and sales expenses. Total sales revenue was set against total costs, thereby depicting a gross ‘project profit’ figure. Two discounts against profit were deducted from that gross project profit figure — a ‘Lot 9 & 22/profit discount’ of $250,000 and a ‘sales inventory/profit discount’ of $200,000. Applying those discounts resulted in a proposed ‘profit settlement’ of $3,260,687. A further 20 per cent ‘project management cost’ was allowed in favour of HF Property, yielding a final amount of ‘shareholders’ distributable profit’ of $2,608,550.
[14]Reasons, [11].
Hexin was allocated 49 per cent of shareholders’ distributable profit ($1,278,189.41), with the balance of the distributable profit allocated to HF Property (Fei’s company). The same document recorded the respective capital contributions of Hexin and HF Property as described earlier.
At the very foot of the Chapel Road Profit Calculations was a statement in these terms:
I, Jinfeng Fei, will purchase 49% shares of STANLEYFIELD PTY LTD held by HEXIN PTY LTD at AUD$1,278,190 within 3 months upon completion of the project!
On or around 25 May 2015, Stanleyfield paid Hexin $1,278,190 from the Chapel Road Project which Shen characterised as Hexin’s share of the profits.[15] Stanleyfield also returned to Hexin its original investment of $1,235,712.80, although that sum appears to have been reinvested in the Magnolia Project in one form or another.[16]
[15]Ibid [15].
[16]Shen says it was ‘used as part payment of LD3’s investment in the Magnolia Project’ whereas Fei denies LD3’s stake in the Magnolia Project. He says the $1,235,712.80 was recorded as a shareholder loan by Hexin to Stanleyfield. In any event, it appears to have been reckoned as part of Shen’s investment of $5 million in the Magnolia Project.
The judge summarised each of Shen’s and Fei’s characterisation of the project and the significance of the Chapel Road Profit Calculations. According to Shen, under the oral agreement with Fei, Hexin was entitled to 49 per cent of the profits from the Chapel Road Project, corresponding with Hexin’s shareholding in Stanleyfield (which in turn corresponded with its proportionate investment in the project). Shen said that the Chapel Road Profit Calculations presented in April 2013 were represented by Fei to be the final distribution of profits between the parties at the completion of the project.[17]
[17]Reasons, [50].
Fei’s account was somewhat different. He described a sequence of agreements and variations of agreements which, on his account, meant that the actual ‘profit’ ultimately made by the Chapel Road Project was of little consequence to what Hexin agreed to accept, and did accept. He said the Chapel Road Profit Calculations were not intended to reflect the final accounts for the project. Rather, the Chapel Road Profit Calculations were prepared in order to determine, at the time of the calculations, an agreed fixed sum which Hexin would be paid in connection with its investment in the Chapel Road Project.
According to Fei, as relevant background, at the time the Chapel Road Profit Calculations were prepared Shen and Fei were having discussions about the Magnolia Project. Shen did not wish to carry out the Magnolia Project without being assured of a fixed return from the Chapel Road Project. Shen wanted to avoid any risk that the Chapel Road Project would be less profitable than anticipated. For that reason, said Fei, he agreed to buy Hexin’s 49 per cent interest in Stanleyfield for a fixed sum of $1,278,190 in place of Hexin receiving a share of the profits. According to Fei, that accounts for the notation at the foot of the Chapel Road Profit Calculations document extracted at [24] above.[18]
[18]Ibid [51]–[52].
Also according to Fei, later on, the agreement under which he would purchase Hexin’s interest in Stanleyfield was varied when Shen agreed to invest in the Magnolia Project and use Stanleyfield as the corporate vehicle for that project. Fei says, at that time, Shen agreed to invest a sum of $5 million in Stanleyfield for the Magnolia Project. Taking into account that investment, and having regard to the overall cost of the project and Fei’s own investment in it, Hexin’s shareholding in Stanleyfield would reduce to 23 per cent. Under the varied agreement, according to Fei, Stanleyfield would still pay the $1,278,190 for the Chapel Road Project to Hexin. However, this amount would not be paid for the purchase of Hexin’s shares in Stanleyfield, or as profit. Instead it would be paid as an agreed fixed amount for Hexin’s investment in the Chapel Road Project.[19]
[19]Ibid [53].
In addition to the dispute about the character of Hexin’s entitlement to a return on the Chapel Road Project — whether as profit or as a fixed amount — the judge described several matters which Shen alleged cast doubt on the accuracy of the Chapel Road Profit Calculations. They were as follows:
(a)Lots sold at an undervalue:[20]
(i)Shen was concerned that lots 9 and 22 were sold by Stanleyfield to Golden Nest Holdings Pty Ltd below market value, then developed into three townhouses and sold by Golden Nest; and
(ii)KordaMentha reported that lots 16 and 18 may also have been sold below value;
(b)Profit discounts: Shen initially alleged that Fei had explained that the two discounts against profit referred to in the Chapel Road Profit Calculations were required because the Council did not permit the nominated lots to be sold, so they failed to generate any profit. Shen submitted that that explanation requires investigation;[21] and
(c)Council rebate: Shen referred to an additional document prepared for the Chapel Road Project which had been submitted to the bank referring to a ‘Council and Authority Rebate’ for $1.82 million. Shen said this sum had not been included in the Chapel Road Profit Calculations but represented a potential benefit to the developer in the form of a deduction in contributions to Council, or even cash.[22]
[20]Ibid [55]–[56].
[21]Ibid [57]–[60].
[22]Ibid [61]–[63].
The judge noted Fei’s answer to each of these concerns.[23] Fei denied that the sale of lots 9 and 22 to Golden Nest was not at arm’s length or at any undervalue. He explained the profit discounts as follows:
(a)The $250,000 discount was given because the title documents for lots 9 and 22 showed that they were affected by an agreement under s 173 of the Planning and Environment Act 1987, with the result that the lots could not be transferred without the construction of an access road through the lots for garbage trucks, and $250,000 was the agreed estimate of the cost of construction; and
(b)The $200,000 discount was applied as a general discount across the sales inventory. Shen ultimately accepted that explanation.
[23]Ibid [55], [58]–[59], [62].
As for the Council rebate, Fei said that the reimbursement was used to repay construction costs for public works and was an amount required to be paid to the civil contractor, not to Stanleyfield. It did not affect the accounting for profitability of the project between the participants.
(b)Judge’s findings
The judge heard submissions from the parties about the quality and reliability of each side’s evidence regarding the nature of the agreement between Fei and Shen, the accuracy of the figures represented in the Chapel Road Profit Calculations and the explanations for the payments and discounts identified by Shen as being of concern.
The judge then stated her reasons for finding a reasonable cause to believe that Shen might have a right to relief against Fei in relation to the Chapel Road Project:
The Respondent submits that Ms Shen had agreed to a fixed sum amount in lieu of her entitlement to 49% of the actual profits of the Chapel Road Project. Even if this turns out to be the case, then if the estimate upon which that agreement was reached was sufficiently inaccurate or misleading, that may still give rise to a right to relief. Hence, whether there was an agreement to a fixed sum return or the position remained that the First Applicant was to receive 49% of the profits, that does not mean, for the purposes of this application, that there is no reasonable cause to believe in a right to relief in respect of it.
Insofar as the dispute over the accuracy of the Chapel Road Profit Calculations is concerned:
(a)the true situation regarding the Council Rebate cannot be resolved on this application. It is possible that it may affect the accuracy of the Chapel Road Profit Calculations and it is sufficient for these purposes that more information is required; and
(b)while the $200,000 discount originally challenged by Ms Shen appears to have now been explained to her satisfaction, there remains some disagreement as to the $250,000 amount and how that should be treated. Again, there is insufficient material for me to form a concluded view about this and, as the parties recognise, that is not really the object of the exercise. If the Applicants are right about this amount, then that tends towards them having reasonable cause to believe in a right to relief.[24]
[24]Ibid [136]–[137].
Having concluded that there was reasonable cause to believe there might be a right to relief, thereby opening the discretion to make an order for preliminary discovery in respect of this project, the judge turned her attention to whether the discretion ought to be exercised in favour of making the order. She noted that the parties’ arguments on this topic really only raised questions regarding the level of inconvenience and cost to Fei in complying with the order and, possibly, whether any useful purpose would be served by making the order.
The judge noted Fei’s concession that, although the documents sought are extensive and that collating them would be costly and time-consuming, it would ‘not be oppressive for him’ to provide the discovery sought.[25] The judge did not regard the level of inconvenience or cost to be a reason not to exercise the discretion in favour of making the order, nor did she find any other discretionary reason against doing so.[26]
(2)Magnolia Project
(a)Salient facts
[25]Ibid [150].
[26]Ibid [151], [153].
The Magnolia Project appears to have been a substantial, multi-storey residential development with many apartments. The land purchase costs, construction costs and other expenses totalled in the vicinity of $77 million. On this project there were three participants: Fei, Fei’s sister Guanghui Fei (Ms Fei), and Shen. The judge referred to some discrepancies between the parties’ accounts about the genesis and timing of their oral agreement relating to the Magnolia Project.
Despite these discrepancies, the judge concluded that the parties agreed that Shen would reinvest her capital contribution from the Chapel Road Project into the Magnolia Project. LD3 paid further amounts of $2.5 million and $1.25 million in March and May 2014, bringing Shen’s total capital investment in the Magnolia Project to $4,985,712.80.[27] Corresponding with Fei’s account, Shen said that her share of the profit and Ms Fei’s share of the profit were both to be 23 per cent. That figure corresponded with their proportionate shareholding in Stanleyfield, which was to undertake the Magnolia Project. Once again, the parties’ relative shareholding reflected their proportionate capital investments in the project.
[27]Elsewhere it was described as an investment of ‘$5 million’.
The Magnolia Project was nearing completion in February 2015. At that time, as the judge found, Fei and Shen met to discuss the profits from the development. Fei produced a document referred to as the ‘Magnolia Profit Calculations’. That document showed Shen’s profit entitlement to be $3,353,251, to be taken partly as cash and partly by the transfer of an apartment. Arithmetically, Shen’s figure for profit was around 20 per cent of the total realisable profit shown on the document, whereas Ms Fei’s profit as depicted on the same document represented exactly 23 per cent of the total.
Later, the means by which Shen was to be paid her profit share from the Magnolia Project was varied. The variation was recorded in a document signed by the parties on 2 June 2015 (the ‘2 June 2015 agreement’). In effect, Stanleyfield was to transfer eight units in the project to Shen, at cost, in lieu of payment to Shen of her profit share. Because Shen’s profit share fell slightly below the total cost of the units, Shen was to make a ‘top up’ payment of $206,400 (including adjustments).
Fei said that the method of transferring the units to Shen involved a circuitous process. Stanleyfield advanced to Shen an ‘interest’ payment on Shen’s capital investment, equating to Shen’s $3,353,251 profit share, and then Shen (through LD3) used that sum along with the ‘top up’ payment to pay for the eight units. Records appear to show that LD3 gave Stanleyfield a receipt for an ‘interest payment’ of $3,353,251 on 7 December 2016. The settlement of the contracts for the purchase of the eight units occurred on 29 December 2016. In addition, in early 2017 Stanleyfield returned to Shen her original $5 million capital contribution, thus finalising her entitlements in Stanleyfield. Shen ceased to be a director of Stanleyfield on 3 February 2017.[28]
[28]Reasons, [18]–[19].
As with the Chapel Road Project, Shen appeared to dispute that, under the 2 June 2015 agreement, she accepted a fixed entitlement as her return on the Magnolia Project. Whichever way her entitlement was to be characterised, however, in substance, she argued that her agreement to accept that amount was based upon the profit figures which Fei represented to her in the Magnola Profit Calculations, and there was reason to doubt some of those figures.
Shen and Fei gave conflicting accounts for the difference between Shen’s and Ms Fei’s profit share as shown in the Magnolia Profit Calculations. A good deal of evidence concerned that issue. Nevertheless, these disputes were of little consequence. As the judge identified, Shen really only made two project-specific complaints regarding the accuracy of the Magnolia Profit Calculations.[29]
[29]Ibid [72]–[74].
The first of the two project-specific complaints was that four lots in the Magnolia Project were amalgamated and sold to Fei’s wife for $820,000, which was allegedly below market value. A further lot, Lot 1401, was sold to Fei’s wife for $1,680,000 even though its indicative price was $2,450,000.
Secondly, Shen isolated a line item in the costs contained in the Magnolia Profit Calculations — ‘Display Rent $682,200’ — and argued that this represented an excessive rental payment to HF Property for use of a display room (implying that Fei funnelled some money out of the project that would otherwise have been available for profit distribution to other participants).
In relation to the alleged sale of units to Fei’s wife at an undervalue:
(a)Shen argued that it was necessary to understand how the Magnolia Profit Calculations were determined in order to test whether she was misled into accepting the particular amount depicted as her entitlement — further, merely because she agreed to accept the amount did not mean that she had no right to relief; and
(b)Fei claimed that he informed Shen that his wife was purchasing the amalgamated lots in February 2016 and, by that date, Shen had already agreed to take a fixed entitlement of $3,353,251, instead of a 23 per cent profit entitlement, so that the sale price to his wife was irrelevant.
As for the alleged excessive rental payment:
(a)Shen argued that the sum of $680,200 was very high ‘on the face of it’, and that observation alone was sufficient to support a reasonable belief in a right to relief — in addition, there was no evidence of any actual payment to HF Property, leaving open the possibility that the sum of money represented an overstatement of some other cost to the project; and
(b)Fei pointed to the fact that the $680,200 was fully disclosed, never questioned by Shen over several years, and that there was no actual evidence that the payment was excessive.
Additionally, Fei questioned LD3’s standing to seek preliminary discovery in relation to the Magnolia Project because the name of the purchaser on each of the eight contracts made on behalf of Shen to take her profit share in the project was LS3 Pty Ltd (another Shen company).
As well as the two project-specific complaints, the judge also referred to a more general complaint — principally levelled by Shen in relation to the Church Road Project — stemming from an analysis made by KordaMentha of the percentage that sales and marketing costs represented as a proportion of the gross realisation value for each project. Sales and marketing costs were said to be in excess of 7 per cent for the Magnolia Project, 6.4 per cent for the Church Road Project and only 2.5 per cent for the Chapel Road Project.[30] Fei gave an explanation for those differences which Shen criticised as being mere assertion. Shen argued that these differences were further reasons for pursuing further information.
(b)Judge’s findings
[30]Ibid [103]–[106].
The judge explained her reasons for finding there was reasonable cause to believe that LD3 may have a right to relief from Fei, first addressing the LD3/LS3 standing issue and then addressing the more substantive issues. In respect of the LD3/LS3 issue, the judge found that there was a factual dispute about whether the use of ‘LS3’ was a mere typographical error, or a deliberate decision by Shen to direct her entitlements through LS3. The judge considered that the existence of that contest did not preclude there being a reasonable cause to believe in a right to relief.[31]
[31]Ibid [131]–[133].
Turning to the more critical issues, the judge found as follows:
Unlike the Church Road Project, [LD3’s] belief that it may have a right to obtain relief, being damages or compensation arising from a breach of s 18 of the ACL or deceit or misrepresentation based on tort or equity, is reasonable based on the matters referred to in paragraphs 71 to 73 and paragraphs 104 to 106. I accept [Shen’s] submission that it is unclear from the Magnolia Project Profit Calculations as to what extent Mr Fei had disclosed to her the sales value of those lots that were later sold to his wife. Self-evidently, if the Magnolia Profit Calculations does not reflect the true value of the Amalgamated Lots and Lot 1401, then [LD3’s] profit from the Magnolia Project may have been misrepresented. Further, I accept that the rental payment of $680,200 may, on its face, be high. In doing so, I reject [Fei’s] submission that the fact that this amount was disclosed to Ms Shen and she did not take issue with it at the time means that [LD3] does not have a possible right to relief.[32]
[32]Ibid [134].
The judge’s reference to ‘paragraphs 71 to 73’ in the above extract is a reference to her description of the two project-specific complaints raised by Shen concerning the alleged sale of units at an undervalue to Fei’s wife and the alleged excessive rental payment for the display unit. The reference to ‘paragraphs 104 to 106’ is a reference to Shen’s more general complaint concerning the proportion of sales and marketing costs.
As with the Chapel Road Project, the judge then found (for the same reasons) that, the jurisdictional threshold to exercise the discretion having been satisfied, she should exercise the discretion in favour of ordering preliminary discovery.
(3)Church Road Project
(a)Salient facts
It is to be recalled that Hexin is the party claiming a right to relief against Fei in respect of the Church Road Project.
The judge recorded that on or about 10 May 2013, Shen and her husband, Mr Dong Li, met with Fei to discuss the townhouse project known as the Church Road Project. On that date, a contract was signed between Fei, for the one part, and Dong Li, for the other. Its terms provided that Mr Li would contribute $1,756,000 to purchase the right to 30 per cent of the earnings of the project and, upon completion, would receive back his capital contributions together with 30 per cent of the project earnings. Other provisions of the agreement stipulated what HF Property (as Fei’s corporate vehicle) would do — namely, provide detailed project reports, provide information to Mr Li about key milestones in the project, and guarantee to Mr Li investment earnings of not less than 20 per cent.
For his part, in addition to the promise to contribute capital, Mr Li was given the option while the project was in progress to settle his profit share at 20 per cent per annum of his capital contribution, and he was also entitled to obtain independent accounting verification of the project report provided to him by HF Property. There was no mention of Hexin in the agreement.
In her evidence, Shen claimed that Mr Li’s capital contribution was provided by Hexin. On 7 December 2013, Fei provided to Shen a written receipt for having received from her two amounts totalling $1,756,000 for the development of the Church Road Project. Hexin, however, was not mentioned in the receipt.
The judge summarised the controversy concerning the identity of the party that contracted with Fei (or HF Property) to invest in the Church Road Project, as follows:
Ms Shen deposes that although the written agreement named Mr Li as the investor, rather than [Hexin], Mr Li, Ms Shen and Mr Fei agreed before signing the agreement that [Hexin] would be the company investing in the project. She deposes that Mr Li signed the agreement on behalf of [Hexin].
Mr Fei deposes that [Hexin] was neither mentioned in the written agreement nor raised in the discussions during which it was negotiated. He deposes that Mr Li was not a director of [Hexin] and that he had refused to re-sign the agreement with [Hexin] as a party when requested by Ms Shen in or about June 2015.
Ms Shen deposes that [Hexin] paid the investment amount for this Project and that it received the payments after it was completed.
Mr Fei agrees that the investment amount was paid and that [Hexin] received the payments for the Church Road Project when it completed. However, he deposes that he is not aware of the source of the payments and does not admit that the money was paid from an account in the name of [Hexin].[33]
[33]Ibid [64]–[67].
Aside from the issue of Hexin’s standing to sue Fei regarding the Church Road Project, the judge noted other concerns relating to information contained in a document, provided by Fei to Shen in October 2015, which contained calculations as to the income and costs of the project (the ‘Church Road Profit Calculations’). Shen identified two issues arising from the Church Road Profit Calculations, on the basis of which she asserted there was reasonable cause to believe that Hexin may have a right to obtain relief against Fei. The first issue concerned alleged excessive sales and marketing costs. As with the Magnolia Project, Shen pointed to the high percentage which sales and marketing costs represented against the total realisable value of the units. She compared it to the lower percentage for the Chapel Road Project.[34]
[34]Ibid [68]–[69], [102]–[106].
The second issue concerned the alleged sale of units at an undervalue. Based upon alleged comparable sales evidence, Shen argued that at least five units appeared to have been sold at an undervalue. In this regard, Shen sought to rely upon evidence contained in the KordaMentha reports which the judge had ruled inadmissible.[35]
(b)Judge’s findings
[35]Ibid [101].
Having noted the arguments concerning excessive sales and marketing costs, and lots sold at an undervalue, the judge determined the question whether there was reasonable cause to believe that Hexin may have a right to obtain relief against Fei solely by reference to the issue of standing. Her reasoning on this issue was as follows:
It is agreed between the parties that the written contract for the Church Road Project was signed by Mr Li and Mr Fei. So much is apparent on the face of the document. [Fei] has also correctly submitted that Mr Li was not a director of [Hexin]. Indeed, the ASIC records exhibited to the First Shen Affidavit show that Mr Li was a mere shareholder of [Hexin]. Thus, it is not sufficient for [Hexin and LD3] to rely solely on an affidavit by Ms Shen deposing that the parties agreed prior to the signing of the contract that Mr Li was signing on behalf of [Hexin], particularly when his capacity to do so was not obvious and with Mr Fei deposing otherwise. I note that it was open to Mr Li (or [Hexin]) to record in the contract that Mr Li was signing for [Hexin], as Ms Shen seems to have done something like that in other documents, but they did not do so.
Similarly, the fact that [Hexin] provided the capital and received the profits for the Church Road Project is not determinative that Mr Li had signed the contract on behalf of [Hexin]. As benevolent as the test under r 32.05 of the Rules is, more must be provided to overcome well established fundamentals of contract law such that it can be said that there is reasonable cause to believe that [Hexin] has or may have a right to obtain relief against Mr Fei.
As [Hexin and LD3] have not established that they are parties to the contract or have some reasonable basis to seek relief from Mr Fei based on the written contract, it follows that they do not have reasonable cause to believe that they have or may have a right to obtain relief against Mr Fei in regards to their concerns regarding the accuracy of the Church Road Profit Calculations.
The source of the funds for the investment in the Church Road Project or the destination of the payments made after its conclusion do not assist [Hexin and LD3] in relation to the question as to who was a party to the development agreement for this Project, as such matters are not determinative.
It may be true that Ms Shen and Mr Fei were somewhat ‘loose’ when dealing with each other as to what corporate entities they would ultimately contract through. But this is of little assistance to [Hexin and LD3] in circumstances where there is a written contract which clearly identifies the relevant party as Mr Li. In circumstances where the Shen parties, as it were, commenced this action, they could have included Mr Li as an applicant or more satisfactorily explained the basis upon which [Hexin] was the relevant entity to obtain relief.
This being the case, it is unnecessary for me to go further in relation to the Church Road Project.[36]
(4)Minutes of meetings and transfer documents
[36]Ibid [124]–[129].
Besides her contentions about the projects themselves, there was a discrete body of evidence relied on by Shen to support her allegations of wrongdoing on the part of Fei. Conflicting evidence was given by Shen and Fei as to how Shen’s signature came to be on certain company documents relating to Stanleyfield, and on some land transfer documents relating to units in the Magnolia Project.
As for the Stanleyfield documents, they included certain minutes of meetings which were apparently signed by Shen, her letter of resignation as a director of Stanleyfield and a share transfer form conveying Hexin’s shareholdings in Stanleyfield. Shen claimed not to speak or read English and to have only ever communicated with Fei in Chinese. She claimed to have depended upon and trusted Fei when he asked her to sign documents. From Fei’s evidence, there were several explanations as to how Shen’s signature came to be on the contested documents. In respect of some documents, Fei said that Shen signed them herself; and in respect of others (the transfer documents relating to the Magnolia Project), he said that he signed on Shen’s behalf with her express permission.[37]
[37]Ibid [40]–[49], [115]–[117].
In relation to this controversy, the judge drew the following conclusions:
Much was made by [Hexin and LD3] as to whether Ms Shen signed the Company Documents or authorised the Transfer Documents. [Hexin and LD3] relied on Ms Shen’s version of events to explain how it was that Ms Shen came to distrust Mr Fei and to question her dealings with him. On the other hand, [Fei] relied on [his] version of events to contend that the documents and Ms Shen’s signing/authorising them was consistent with the arrangements being as he contended they were.
In my view, such matters are impossible to resolve on an application for preliminary discovery. Nor is it necessary to resolve them at this point. It is sufficient for the purposes of this application that [Hexin and LD3]’s version of events in this regard is arguable, which it is, such that there is reason to believe that [Hexin and LD3] may have a right to relief.[38]
[38]Ibid [138]–[139].
Without expressly saying so, it appears that the judge took into account — as being at least arguable — the contention that Fei had falsely signed as Shen on some documents, or deceptively procured Shen’s signature to others, as a generally relevant matter on the question whether there was cause to believe that Shen had a right to relief against Fei in respect of the Chapel Road and Magnolia projects.
PART C:RELEVANT LEGAL PRINCIPLES
The full terms of r 32.05 of the Rules are as follows:
32.05 Discovery from prospective defendant
Where—
(a)there is reasonable cause to believe that the applicant has or may have the right to obtain relief in the Court from a person whose description the applicant has ascertained;
(b)after making all reasonable inquiries, the applicant has not sufficient information to enable the applicant to decide whether to commence a proceeding in the Court to obtain that relief; and
(c)there is reasonable cause to believe that that person has or is likely to have or has had or is likely to have had in that person's possession any document relating to the question whether the applicant has the right to obtain the relief and that inspection of the document by the applicant would assist the applicant to make the decision—
the Court may order that that person shall make discovery to the applicant of any document of the kind described in paragraph (c).
(1)Appeals from interlocutory decisions involving the exercise of a discretion
Like any civil appeal, in these matters Shen and Fei must, respectively, obtain leave to appeal and such leave will only be granted if there is a real as opposed to fanciful prospect of success.[39] Even where such prospects are shown, the court retains a residual discretion to refuse leave.[40] Factors which bear upon the exercise of the residual discretion include that the matter in question is one of practice and procedure and whether the applicant would suffer any substantial injustice if the decision was left to stand.[41]
[39]Supreme Court Act1986, s 14C.
[40]Molonglo Group (Australia) Pty Ltd v Cahill [2018] VSCA 147, [96] (Maxwell ACJ, Whelan and Kyrou JJA); Cargill Australia Ltd v Viterra Malt Pty Ltd [2018] VSCA 260, [110] (Kyrou and McLeish JJA) (‘Cargill’).
[41]Cargill [2018] VSCA 260, [110]–[113] (Kyrou and McLeish JJA), citing Bodycorp Repairers Pty Ltd v GDG Legal Pty Ltd [2018] VSCA 32, [19] (Ferguson CJ, Whelan and McLeish JJA).
It was not in dispute that a decision to order (or not order) preliminary discovery is one of an interlocutory nature to be determined in the exercise of a discretion. Being an order of a discretionary nature, it was also not in dispute that any appeal against the order must be determined upon principles as laid down in House v The King.[42] That is, it must be shown that the decision was made in error by acting on a wrong principle, or giving weight to extraneous or irrelevant matters, or failing to give weight to relevant considerations or making a mistake as to the facts. In addition, the result may be so unreasonable or plainly unjust that the appellate court may infer that there has been some failure to properly exercise the discretion. Finally, it was common ground that an application for preliminary discovery is a matter of practice and procedure.
[42](1936) 55 CLR 499, 504–5 (Dixon, Evatt and McTiernan JJ); [1936] HCA 40 (‘House’).
It has been held in numerous cases over many years that to succeed in obtaining leave to appeal an interlocutory order made in the exercise of a discretion, the applicant must not only show that the decision may have been made in error in a House sense, but must also show that they would suffer a substantial injustice if the decision was left undisturbed.[43] For policy reasons, this two-fold test is to be applied stringently.
[43]Perry v Smith (1901) 27 VLR 66; Darrel Lea (Vic) Pty Ltd v Union Assurance Society of Australia Ltd (1969) VR 401, 407–410 (Winneke CJ, Pape and Starke JJ); Niemann v Electronic Industries [1978] VR 431, 433 (McInerney J), 437–9, 441 (Murphy J), 444–5 (Gillard J) (‘Niemann’).
In the context of an application for leave to appeal against an order for security for costs, the effect of these authorities was conveniently stated in Livingspring Pty Ltd v Kliger Partners[44] by Maxwell P and Buchanan JA as follows:
[44](2008) 20 VR 377; [2008] VSCA 93 (‘Livingspring’).
As applicant for leave, LS has several hurdles to clear. First, there is a clear legislative policy against interlocutory appeals. In Niemann, the Full Court adopted and applied — as an earlier Full Court had done in Darrell Lea (Vic) Pty Ltd v Union Assurance Society of Australia Ltd — the following statement of principle from the 1901 judgment of the Full Court in Perry v Smith:
Parliament evidently desired to cut down these appeals from interlocutory orders as much as possible, and with that object have made this provision [that there be no appeal from such an order except by leave] … We think that the object which Parliament had should be recognised by this Court in a liberal manner, and not begrudgingly.
In Niemann, Murphy J added:
It is plain, as [the Full Court] said, from the terms of the section that the legislature was expressing an intention in the words used that appeals from interlocutory orders should not be permitted except in special circumstances.
Secondly, the power to order security for costs is discretionary. An appeal from such a decision is subject to the well-known limitations identified by the High Court in House v R. Thirdly, the exercise of this particular discretion does not determine substantive rights, but concerns a matter of practice and procedure. That being so, we are guided (as was the Full Court in Niemann) by what Sir Frederick Jordan said in Re Will of Gilbert:
[I]f a tight rein were not kept upon interference with the orders of Judges of first instance, the result would be disastrous to the proper administration of justice. The disposal of cases could be delayed interminably, and costs heaped up indefinitely, if a litigant with a long purse or a litigious disposition could, at will, in effect transfer all exercises of discretion in interlocutory applications from a Judge in Chambers to a Court of Appeal.
The Full Court drew on these earlier authorities to articulate the two-part test for leave to appeal which has been applied ever since:
We ought to address ourselves to the question whether the order … is attended with sufficient doubt to warrant its being reconsidered on appeal and secondly whether substantial injustice will be caused to the applicant if the order … is allowed to stand.
These are, as Murphy J said in Niemann, stringent requirements. Given that modern litigation takes longer and costs more than those earlier Full Courts could ever have imagined, there is a case for even greater stringency today. Particularly must this be so when — as here — the decision of the trial judge is itself a decision on appeal from a master.
If appellate intervention in interlocutory decision-making is to become truly exceptional, as Parliament intended, the tests to be applied at first instance must be as clear and straightforward as possible, to minimise both the scope for error and the scope for argument about whether error has occurred.[45]
[45]Ibid 379–80 [6]–[9] (Maxwell P and Buchanan JA) (citations omitted).
In summary, there is a clear legislative policy against interlocutory appeals; appeals from discretionary decisions are determined by the principles in House; a tight rein is to be applied to appeals on matters of practice and procedure so that, in addition to demonstrating sufficient doubt concerning the original decision, to obtain leave to appeal the applicant must show that substantial injustice will be caused if the decision is allowed to stand; and these requirements are to be regarded as ‘stringent’. The ‘tight rein’ is mediated through the exercise of the residual discretion to refuse leave even if a real prospect of success in establishing error is demonstrated.
(2)Does a right to relief require the identification of a cause of action?
In relation to the principles for determining applications for preliminary discovery, the parties principally debated the issue, identified earlier, as to whether it was necessary for an applicant to identify with some specificity the cause of action said to give rise to the right to relief.
The starting point for discussion is Schmidt v Won.[46] That case concerned an appeal in 1997 from a refusal to grant ‘pre-action’ (preliminary) discovery pursuant to r 32.05. At that time, there was no statutory requirement to obtain leave to appeal, but a similar requirement existed at common law in relation to an appeal from an interlocutory decision on a matter of practice and procedure.
[46][1998] 3 VR 435 (‘Schmidt’).
The judge at first instance had refused the application, misapplying (so the Court of Appeal held) the legal test in respect of the ‘inappropriate forum’ (which was a point in issue in the case). After finding that the judge had wrongly applied that test and that she should have gone on to consider whether the relief should be granted, Ormiston JA (Charles and Batt JJA agreeing) considered the content of the test prescribed in r 32.05(a). His Honour said:
Whether paragraph (a) of the rule is satisfied depends upon an analysis of the facts. At this stage, of course, it is not necessary to show precisely what cause of action the appellant may have. As stated above, that would make this application otiose. She need only demonstrate facts from which it may reasonably be believed that she “may have” one or more causes of action against the respondents. The right to relief was said, at least on this appeal, to arise from the following actual or inferred facts: …[47]
[47]Ibid 456 (Ormiston JA, Charles JA agreeing at 459, Batt JA agreeing at 460).
His Honour then enumerated the relevant facts. Those facts related to the possible misappropriation by the first respondent of the proceeds of the sale, or some other disposition, of land in South Korea in which the appellant had an interest. Justice Ormiston referred to the first respondent owing ‘a fiduciary duty (or some equivalent obligation in South Korean law)’, or perhaps holding the proceeds on trust. Other facts listed included ‘several alienations’ of estate property ‘at times’, the possibility of a fraudulent disposition of property at another time, and other misleading behaviour. His Honour then continued:
There is much, of course, which is not known at present. It may be conceded that the facts outlined at the beginning of this judgment and summarised above could not in themselves provide a basis for a properly pleaded statement of claim against the respondents. But the question is always whether it is reasonable to believe that the appellant may have a right to relief against them. Not only do the above facts show that the first respondent may well have had the opportunity to misapply the father’s property at some time in the past or was in a position to influence the custodian trustee from time to time, but there are circumstances from which it is not difficult to infer that the respondents have acquired large sums of money from a source they are unwilling to disclose. I am not at present suggesting that there must be a connection, for that would usurp the function of any trial court, but there is sufficient [sic] on the evidentiary material to justify a conclusion that the appellant may have the right to obtain relief in this court. That is the more so because of the way in which the respondents answered the allegations in the affidavits. It is not as if they did not condescend to detail as to a large number of events. That they clearly did but when it came to an explanation for their new-found wealth they merely sought refuge in stating that they were not obliged to inform either the appellant or the court. Apart from the general assertion that they had worked hard and that money was borrowed, nothing more is known of the source of funds for the nursing home, luxury cars and jewellery and it is not so much the borrowing, but the securing and satisfying of the debt and the payment of interest thereon which might have been here explained. This is again an appropriate case for the application of the principles stated in O’Donnell v Reichard [1975] VR 916 at 929 and Jones v Dunkel (1959) 101 CLR 298. Thus I would conclude that there are reasonable grounds for believing that the appellant may have a right to obtain relief in this court.[48]
[48]Ibid 457 (Ormiston JA).
In the present case, Fei highlighted the fourth sentence in the first extract above ([74]), emphasising the statement that it may reasonably be believed that the appellant ‘may have’ one or more causes of action against the respondents. From this beginning, Fei contended that it has been wrong ever since for courts to construe Schmidt as if it stood for the proposition that one did not need to identify a particular cause (or causes) of action. He argued that, properly read, Ormiston JA required a trial judge to consider what the potential causes of action were, and give some basic consideration to such causes of action and whether the elements of those causes of action might ultimately be vindicated at trial.
Shen submitted that Fei’s interpretation of Schmidt has not been adopted in subsequent Victorian cases, nor in the Federal Court. Further, Shen submitted that the words of r 32.05(a) imposed no requirement to identify a reasonable belief in the existence of a ‘cause of action’; rather, that paragraph is purposefully confined to a belief in the possibility (not the actual existence) of a right to obtain relief. Shen submitted that this understanding was revealed in Ormiston JA’s formulation of the test in Schmidt and also in his reasoning to conclude in that case that there was reasonable cause to believe that the appellant had a right to obtain relief from the first respondent.
In Beston Parks Management Pty Ltd v Sexton,[49] Hollingworth J held, citing Schmidt, that it was not necessary to show precisely what cause of action the applicant may have, but merely the facts from which it may reasonably be believed that the applicant may have a right to obtain relief.[50] In United Energy Limited v Energy Risk Management Pty Ltd,[51] Gillard J came to the same conclusion, adding that it would defeat the very object of the rule to require an applicant to show that he or she had a good cause of action.[52] Shen relied upon a similar approach adopted by the Federal Court applying a similar rule to r 32.05, citing Sandhurst Trustees Limited v Clark[53] and GDP Group Pty Ltd v Saye.[54]
[49][2008] VSC 392.
[50]Ibid [53] (Hollingworth J).
[51][1998] VSC 133.
[52]Ibid [32] (Gillard J).
[53](2015) 321 ALR 1, [24] (Dowsett, Davies and Wigney JJ); [2015] FCAFC 21.
[54][2022] FCA 688, [34] (Downes J).
Fei criticised the approach of the Full Federal Court in Sandhurst for misconstruing a passage from the earlier case of EBOS Group Pty Ltd v Team Medical Supplies Pty Ltd [No 3].[55] The Full Court relied upon a passage in EBOS in which Katzmann J had emphasised that the relevant Federal Court rule — r 7.23 of the Federal Court Rules —did not speak in terms of a belief in the existence of a cause of action, but only in the existence of a right to relief. What Fei points out is that Katzmann J went on to say that the expression ‘right to relief’ begs the question, relief for what?[56] Her Honour then referred to a tension between the argument put before her and the approach taken by the Full Federal Court in Optiver Australia Pty Ltd v Tibra Trading Pty Ltd.[57] In Optiver, that court thought that it remained necessary to examine the various elements of the potential cause of action that is sought to be relied upon to determine whether there is a reasonable cause to believe that each of the necessary elements exists.[58]
[55](2012) 199 FCR 533 (‘EBOS’).
[56]Ibid [31] (Katzmann J).
[57](2008) 169 FCR 435; [2008] FCAFC 133.
[58]Ibid [43] (Heerey, Gyles and Middleton JJ).
Reference was also made to the view of Middleton J in Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd,[59] in which his Honour took the same view as later expressed in Optiver.
[59](2007) 164 FCR 450, 461 [44] (first bullet point) (Middleton J); [2007] FCA 1216.
It is necessary to mention that, whilst similar to r 32.05 of the Rules, r 7.23 of the Federal Court Rules is not in precisely the same terms.
In Alex Fraser,[60] Riordan J emphasised the purpose of the jurisdiction to grant preliminary discovery as an interpretive tool for the construction of r 32.05.[61] His Honour found that the purpose was to advance the administration of justice by allowing a prospective plaintiff to make an informed decision on proper material about whether or not to bring a claim. This purpose, he said, was accentuated by the requirement for the certification of a proper basis for filing a civil proceeding under the Civil Procedure Act 2010. His Honour added that the ‘purpose of [r 32.05] is to allow an applicant, who has inadequate proof of any cause of action, to discover whether or not evidence is available that will impact (positively or negatively) on the possible proceeding’.[62] His Honour went on to refer to other discretionary considerations which would permit the court to control any ‘excesses’ in the exercise of the jurisdiction.
[60][2018] VSC 391.
[61]Ibid [54] (Riordan J).
[62]Ibid [54(b)] (Riordan J).
We generally agree with Riordan J’s observations as to purpose. There is good support for his Honour’s view in the observations of the Court of Appeal (Winneke P, Hayne JA and Ashley AJA agreeing) in Mercantile Mutual Insurance (Australia) Ltd v Household Financial Services Ltd.[63]
[63](Supreme Court of Victoria, Court of Appeal, Winneke P, Hayne JA and Ashley AJA, 22 May 1997) 7.
As we will shortly explain, we ultimately conclude that the applicant, Fei, should not be granted leave to appeal, even were he to have a reasonable prospect of success in demonstrating that the judge made an error of a House kind in the exercise of her discretion to grant preliminary discovery in relation to the Chapel Road Project and Magnolia Project. For that reason, it is not strictly necessary for us to reach a conclusion on the point which Fei presses about the test under r 32.05(a). That said, we see no reason to depart from the approach that has been taken by courts in Victoria, as outlined above and neatly stated by Hollingworth J in Beston Parks.[64] We think that a close analysis of the Court of Appeal’s reasoning in Schmidt, and its application of that reasoning, justifies the approach to the rule which has since been taken in this Court.
[64]See above at [78].
PART D:CHAPEL ROAD PROJECT AND MAGNOLIA PROJECT
(1)Is there any substantial injustice to Fei if the judge’s orders are left undisturbed?
We have come to the clear conclusion, for the reasons that follow, that there is no substantial injustice caused to Fei should the judge’s decision to order preliminary discovery in respect of the Chapel Road and Magnolia Projects be allowed to stand.
Fei accepted that the task of making preliminary discovery — whilst costly, time‑consuming and inconvenient — could not be described as oppressive. The documents sought may be voluminous and span a number of years, but it was not suggested that they were particularly difficult to assemble. The judge’s order expressly reserves the costs of the application for preliminary discovery and of complying with the orders themselves. That means that, should the discovery not result in any proceeding being issued, or a proceeding commences and fails, the court retains the discretion to compensate Fei through orders for costs against Shen. There is no suggestion that Shen could not pay such costs, and every reason to believe she could. All parties in this proceeding appear to be very well-resourced financially.
Having regard to the ‘tight rein’ to be applied to applications of this kind, and the lack of any apparent substantial injustice caused to Fei if the judge’s orders for preliminary discovery stand, we consider this to be a case in which leave to appeal should be refused regardless of Fei’s prospects of success in establishing that the judge erred in making such orders.
This conclusion is sufficient to dispose of Fei’s application for leave to appeal. Even so, we will proceed to consider his arguments that he has a reasonable prospect of success for establishing that the judge made an error.
(2)Is there reasonable cause to believe that Shen may be entitled to obtain relief?
(a)Submissions
Fei contended on his application for leave to appeal that there were three generic errors which the judge made in relation to both the Chapel Road Project and the Magnolia Project:
(a)First, the judge failed to carry out the task required by r 32.05 — that is, to identify a potential right to relief and determine whether, on the evidence, there was reasonable cause to believe that the respondents had any entitlement to such relief;
(b)Secondly, having fulfilled that task, the judge failed to disclose a chain of reasoning to that conclusion; and
(c)Thirdly, the judge erroneously stated and applied a rule that the right to relief did not require the identification of a cause of action, and thereby failed to consider the basic elements of any cause or causes of action and how they may be vindicated at trial.
Fei’s submission was put on the basis that the judge’s approach disclosed an error of legal principle so that she failed to carry out the required task (ground 1), and did not disclose a path of reasoning to her conclusion (ground 2). The third ‘generic error’ itemised above was, in large part, the premise for the two proposed grounds of appeal. The two grounds were closely related and were argued together. The close relationship between the two was evident in the oral submissions put on Fei’s behalf, namely that:
..the elements [of a cause of action] do have to be addressed to a certain degree. A degree sufficient to allow the reader to understand how the right to the remedy might be open to the applicant.
Fei submitted that the judge erred in not identifying Shen’s entitlement to relief beyond identifying some potential misrepresentations. Not doing so, Fei argued, the judge failed to analyse how such misrepresentation could conceivably lead to a right to relief.
As for the evidence, in relation to the Chapel Road Project Fei’s submission focused closely on the particular issues said to give rise to the possible cause of inaccuracy in the Chapel Road Profit Calculations (ie, the council rebate and the $250,000 discount), and criticised the lack of any analysis as to how those issues may yield an arguable case for final relief based upon misrepresentation. Fei submitted that the essential evidence and findings in relation to the Chapel Road Project were that:
(a)Hexin invested $1,235,712.80 which was repaid;
(b)Hexin received a further $1,278,190 on 25 May 2015;
(c)the figure of $1,278,190 received in 2015 was a figure derived from the Chapel Road Profit Calculations made on 25 April 2013, prior to the completion of the project;
(d)Shen asked for a fixed sum and, in April 2013, they agreed she would receive the $1,278,190 set out in the Chapel Road Profit Calculations; and
(e)after the project was completed in 2015, Shen did not seek to have profits calculated but accepted the amount which had been agreed in 2013.
Fei argued that Shen had agreed to a fixed return. He maintained that the judge did not deal with that proposition. Instead, the judge found that Hexin may be entitled to more than the fixed return simply because:
(a)the status of a rebate of Council fees (which would lower project costs) was unclear and it may possibly have affected the Chapel Road Profit Calculations; and
(b)the status of a $250,000 discount was also unclear and it may have affected the Calculations.
In relation to the Magnolia Project, Fei argued that the relevant evidence and findings were as follows:
(a)the Magnolia Profit Calculations were made in February 2015 to enable the three participants to convert their project returns into the purchase of apartments at cost price, and Shen was to get eight apartments from her profit entitlement of $3,353,251;
(b)in June 2015 the parties agreed (in writing) that Shen would get $3,353,251 as interest on her investment and would then pay that amount, plus an additional $200,000 (for apartments of superior quality), to buy the eight apartments, after which she would have no further entitlement in the project;
(c)Shen received $3,353,251 as interest, as she acknowledged in a receipt dated 7 December 2016; and
(d)pursuant to the arrangement, Shen paid the $3,553,251 for the eight units, which were transferred to her. She also received back her $5 million investment.
Fei says that the ultimate arrangement made with Shen was that Shen would receive a fixed return, as agreed, rather than a percentage of profit. He maintains that the judge did not deal with his argument that Shen’s evidence could not sustain a case that she may be entitled to more than the fixed returns. Instead, erroneously, the judge relied upon two things to find a reasonable cause to believe that Shen may have a right to relief:
(a)that it was unclear whether Fei disclosed to Shen the value of the apartments which were later sold to Fei’s wife (at an alleged undervalue); and
(b)the rent paid to Fei for the display room ‘may, on its face, be high’.
In relation to both projects, essentially, Shen relied upon the judge’s analysis as being entirely sufficient based upon a proper understanding of the jurisdictional threshold for the exercise of the discretion, as established by the authorities.
(b)Consideration
(i)Chapel Road Project
Even without the judge having articulated what cause of action she may have had in mind as giving rise to Shen’s right to obtain relief, it is not difficult for lawyers to surmise what that might be. One obvious cause of action that springs to mind is a claim for damages for misleading and deceptive conduct in contravention of s 18 of the ACL. It may ultimately be alleged that Fei made a misleading representation of existing fact or as to a future matter.
Further, although the judge did not expressly identify any precise cause of action — nor discuss the elements of such a cause of action — we were informed, upon inquiry of the parties, that argument before the judge did address a possible cause of action arising from breach of s 18. Apparently, Shen foreshadowed a claim in which she alleges reliance on a statement that amounted to being a representation of a future matter for which there was no reasonable basis.[65]
[65]That is, a claim of contravention of s 18 of the ACL, relying also upon s 4.
Viewed against that background, and considering that, in connection with the Magnolia Project, the judge specifically adverted to a possible claim for breach of s 18 of the ACL, or deceit, or misrepresentation based on tort or equity,[66] it is a difficult proposition to maintain that the judge did not give consideration to potential causes of action.
[66]See above at [51].
Contrary to Fei’s submission, the judge did deal with the argument that Shen had agreed to a fixed return. The judge dealt with it by acknowledging the dispute, then accepting (for the sake of argument) that Fei’s position was adopted. For reasons she then gave, the judge found there was still reasonable cause to believe that Shen had a right to obtain relief against Fei.
No error is shown in her Honour’s reasoning. The essential facts that were disputed before the judge involved the possibility that Fei made certain misrepresentations to Shen, that Shen changed her position in reliance on those representations by taking a substituted form of investment return, and that Shen suffered loss based upon the difference between the initial entitlement and the substituted entitlement. These facts, if established, could potentially found a cause of action in tort or under the ACL.
Although not specifically identified as such, each of these elements is discernible in the brief analysis which the judge gave as extracted above.[67] The judge found that the two specific representations complained of ‘may’ affect the accuracy of the Chapel Road Profit Calculations; those calculations were the basis of Shen’s agreement to adopt a fixed interest entitlement (assuming, against her, that is what happened); and the fixed interest entitlement may be different from 49 per cent of the actual project profits.
[67]See above at [34].
Fei’s claim that the judge failed to identify a particular cause of action or consider its basic elements does not make out any arguable error. First, for reasons already given we do not accept that the judge was required to identify a particular cause of action or analyse its basic elements. Secondly, based upon the matters we have mentioned, it is clear enough how the judge reasoned toward a conclusion of cause to believe that Shen may have a right to obtain relief as that test is properly understood. Thirdly, having regard to the benevolent test to be applied, the judge was not required to decide whether the facts as contended would establish a right to obtain relief, merely that there was reasonable cause to believe that they may do so. Fei’s argument strays too far toward a requirement that definitive conclusions be reached.
Considering Fei’s argument through the prism of House, there is no reasonable prospect that he will succeed in establishing that the judge applied the wrong legal principle, considered irrelevant facts or failed to consider relevant facts, or came to a decision which no reasonable judge could come to. For reasons we have identified, we also consider that the judge reached the correct conclusion.
These reasons are sufficient to dispose of the two essential grounds of challenge; namely, that the judge applied the wrong test (and thus failed to perform the required task) and that the judge did not disclose her path of reasoning toward her conclusion. In our view, Fei has not shown that either proposed ground of appeal has a real prospect of success in respect of the Chapel Road Project.
(ii)Magnolia Project
We come to the same conclusion in relation to the Magnolia Project for much the same reasons as just stated in relation to the Chapel Road Project. We will not repeat all of them.
As already mentioned, the judge did specifically advert to possible claims in relation to breach of s 18 of the ACL, or deceit, or misrepresentation based on tort or equity. Clearly, she gave consideration to potential causes of action without necessarily identifying one that she thought would or could succeed. She was not required to do so.
Again, we reject the proposition that the judge failed to deal with Fei’s contention that, because Shen accepted a fixed amount in lieu of a profit share, any subsequent sale of units to Fei’s wife at an undervalue would be incapable of grounding a claim for relief. From her succinct statement of reasons extracted above,[68] it is apparent that the judge considered that there was uncertainty about the extent to which Fei had accurately represented the sale value of units in the Magnolia Project Calculations at the time Shen accepted a fixed return. It is also apparent that the judge accepted that if the projected future profit was misrepresented to Shen at the time she agreed to accept a fixed return, that circumstance may provide a right to obtain relief. In this way, therefore, the judge did deal with Fei’s contention.
[68]See above at [51].
The judge’s concern about the possible inaccuracy of the profit calculations undergirding Shen’s agreement to accept a fixed return was elevated by the possibility that Fei might have taken an uncommercial rate for rental of the display room. Further, overarching the evidence about specific aspects of this transaction, as with the others, was the unresolved question as to whether Fei was dishonest in effecting or procuring Shen’s signature to various transactional documents. Such an allegation, if proven, is apt to affect the credit of Fei and, for that reason, could have a logical impact on the cogency of other allegations of commercial misconduct by Fei toward Shen.
Of course, more evidence would need to be established to prove a misrepresentation, reliance, causation and loss. But at the stage of considering an entitlement to the discovery of documents to investigate the prospect of being able to make out a claim for relief, the test which the judge was applying involved ascertaining whether there was, objectively, reasonable cause for a belief; a belief that may be induced by a degree of surmise or conjecture and which did not need to be directed toward the satisfaction of all the elements of an identified cause of action.
The judge might well have expanded on her reasoning in reaching her conclusion. Had she done so, there may have been less scope for argument on this application.
However, we are very mindful of the fact that the judge had outlined the facts and arguments in some detail before coming to her statement of conclusion, and that inferentially some of her reasoning is bound up in preferring Shen’s arguments, as summarised by her, without full repetition. Additionally, because the very nature of the test to be applied presents a low jurisdictional threshold, is couched in language of belief and possibilities emerging from incomplete facts and need not be harnessed to an analysis of the elements of a cause of action, the demand for detailed reasons is commensurately moderated.
Neither proposed ground of appeal has a real prospect of success in respect of the Magnolia Project.
PART E:CHURCH ROAD PROJECT
Shen’s first proposed ground contends that:
(a)The primary judge erred [...] in dismissing the application by Hexin for preliminary discovery in respect of the Church Road Project on the basis that Hexin had not established that it was a party to the project’s contract.
(b)The primary judge should have:
(i)found that, on the evidence, a belief that Hexin may have been a party to that project’s contract was reasonable;
(ii)gone on to consider if the balance of the evidence was sufficient to establish a reasonable cause to believe that Hexin may be entitled to relief in relation to the Church Road Project against the applicant/cross respondent (Fei), or his company HF Property Development Pty Ltd (HF Property);
(iii)concluded that, on the evidence, there was reasonable cause to believe that Hexin may have a right to relief from Fei or HF Property; and
(iv)made an order pursuant to r 32.05 for preliminary discovery of the documents sought by Hexin in relation to the Church Road Project.
Shen’s second proposed ground contends that:
(a)The primary judge erred in making the Ruling by finding that the issue of the admissibility of the KordaMentha Reports was to be determined by s 79 of the Evidence Act 2008 and on the basis that the application for preliminary discovery was “effectively” a trial.
(b)The primary judge ought to have ruled that the KordaMentha Reports were admissible as proof of the material relied upon by the respondents/cross applicants as a basis upon which they had reasonable cause to believe that they may have a right to relief against Fei and/or HF Property.
(1)Is there any substantial injustice to Shen if the judge’s order is left undisturbed?
The consideration of a substantial injustice to a person denied preliminary discovery is, of its nature, different to a person who is ordered to give preliminary discovery. For a person denied preliminary discovery, the refusal may impact the person’s ability to make a claim whereas an order to give preliminary discovery merely gives rise to an interlocutory obligation.
For this reason we are more readily satisfied in the case of the cross applicant, Hexin, that a substantial injustice would arise should it be denied leave to appeal where there is otherwise sufficient doubt about the correctness of the decision to grant leave to appeal. No real argument was put to the contrary.
We will therefore turn to the proposed grounds of appeal concerning the refusal to order preliminary discovery in relation to the Church Road Project.
(2)Did the judge err in finding that Hexin was not party to the development contract?
The judge did not consider it necessary to engage with the arguments about the facts concerning the Church Road Project to enquire whether there was reasonable cause to believe that Hexin may have a right to obtain relief against Fei. That was because she was not persuaded that there was reasonable cause to believe that Hexin had any relevant contractual relationship with Fei that could give rise to a right to obtain such relief. It was not suggested that Hexin may have a right to obtain relief against Fei independently of being the relevant contracting party on the Church Road Project. So, the necessary precondition for Hexin to have any basis at all for a right to obtain relief was that there was cause to believe it may have been the contracting party.
As rehearsed above, the judge summarised the arguments each way as to why she should or should not find in Hexin’s favour. In substance, Fei pointed to the complete absence of any reference to Hexin on any of the documentation, and to the fact that it was Shen’s husband Mr Li who was named as the contracting party and who signed as such. Shen asserted that there was an oral agreement to the effect that, despite Mr Li being named as the contracting party, Hexin was to be the true investor in the project and, thus, the contracting party.
The judge noted the plain facts that it was Mr Li whose name was on the contract; that he was not a director of Hexin; that whilst it was open to Mr Li to have recorded that he was signing for Hexin, as had been done by Shen on other occasions in relation to other transactions, he did not do so; and that the mere facts that Hexin may have paid the money to be invested, or received some profits, did not establish the capacity in which Mr Li signed under his name on the contract. The judge also considered the ‘benevolent’ character of the test for granting preliminary discovery under r 32.05, but nonetheless was not persuaded on the evidence presented that it had been satisfied.
(a)Submissions
Shen argued before this Court that the judge approached the question whether Hexin was the contracting party as a matter of fact as if it was the trial question, and did not determine whether the evidence supported a belief that was arguable as a real possibility even if it may be ‘highly improbable’.
Fei argued that the judge correctly dismissed Shen’s application. Fei pointed out that Mr Li could have been joined as a party to the application, or could have been called as a witness to verify that he only signed the contract for the Church Road Project as an agent of Hexin. Neither was done, nor was any explanation given as to why Mr Li did not give evidence.
(b)Consideration
We are not persuaded that the judge made any error in exercising her discretion to refuse to order preliminary discovery in respect of the Church Road Project. The decision to refuse preliminary discovery remains a decision in relation to a matter of practice and procedure. As such it is subject to all of the principles and policies referred to above concerning interlocutory, discretionary decisions of that nature. Hexin and LD3, the cross-applicants, were required to show that the judge made an error of a House kind.
We do not accept that the judge departed from her approach to the other projects and, in respect of this one, adopted a ‘trial finding’ approach to the question of whether Hexin might have been a party to the contract. In her reasons extracted above,[69] the judge referred expressly to the benevolent test under r 32.05 and did not consider, on the evidence before her, that the applicants had ‘some reasonable basis to seek relief from Mr Fei based on the written contract’.[70]
[69]See above at [61].
[70]Reasons, [126].
In doing so, the judge did not apply any wrong principle. There is no rule that a judge must accept that there is reasonable cause to believe a person may have a right to relief merely because such a right is a possibility, no matter how improbable it might be. There is some danger in extrapolating from the language of r 32.05, by extension, to beliefs that may be ‘remote possibilities’ and even ‘highly improbable’ as long as they are ‘not fanciful’, as Shen urged us to accept.
The judge considered that Shen had not ‘satisfactorily explained the basis upon which [Hexin] was the relevant entity to obtain relief’.[71] Plainly, she did not accept that the facts as presented left any reasonable room for the conclusion that Hexin was the party to the contract. This conclusion was open to her to make. If it matters, we would reach the same conclusion.
[71]Ibid [128].
Having reached that conclusion, there was no need to consider the debates about Shen’s concerns regarding the accuracy of the Church Road Profit Calculations. It was not an error for the judge not to do so. It also follows that the question whether or not the judge was in error not to admit the KordaMentha reports into evidence for further consideration of Shen’s right to obtain relief against Fei becomes redundant.
We will not grant the respondents leave to appeal against the judge’s refusal to order Fei to give preliminary discovery in relation to the Church Road Project.
PART F:CONCLUSION
For the reasons we have given, we refuse the applicant (Fei) leave to appeal against the orders made by the judge ordering that he give preliminary discovery in relation to the Chapel Road and Magnolia Projects. It is unnecessary to consider the respondents’ notice of contention.
The cross-application for leave to appeal by the respondents (Hexin and LD3) is also refused.
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