Zhai v Luo

Case [2015] FCAFC 144

FEDERAL COURT OF AUSTRALIA

Zhai v Luo [2015] FCAFC 144

Citation: Zhai v Luo [2015] FCAFC 144
Appeal from: Luo v Zhai (No 4) [2015] FCA 32
Luo v Zhai (No 5) [2015] FCA 350
Parties: SUTAO ZHAI v XIANGNAN LUO and JANTOM FURNITURE PTY LTD ACN 092 171 634
File number: NSD 547 of 2015
Judges: RARES, MCKERRACHER AND GLEESON JJ
Date of judgment: 15 October 2015
Catchwords: PRACTICE AND PROCEDURE – reasonable apprehension of bias – where primary judge entertained interlocutory applications while judgment reserved following completion of trial – where the respondent applied to amend his pleadings to allege fraud and for a freezing order against the appellant and others – where the appellant made no complaint at the time the applications were raised – where, in the course of hearing an application, the primary judge made comments adverse to the appellant including as to credit – appeal dismissed  
Legislation: Conveyancing Act 1919 (NSW)
Cases cited: Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57
British American Tobacco Australia Services Ltd v Laurie (2011) 242 CLR 283
Cabcharge Australia Limited v Australian Competition and Consumer Commission [2010] FCAFC 111
Concrete Pty Limited v Parramatta Design & Developments Pty Ltd (2006) 229 CLR 577
Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337
GlaxoSmithKline Australia Pty Ltd v Reckitt Benckiser Healthcare (UK) Limited [2013] FCAFC 150
Livesey v New South Wales Bar Association (1983) 151 CLR 288
Luo v Zhai (No 1) [2014] FCA 1296
Luo v Zhai (No 2) [2014] FCA 1367
Luo v Zhai (No 3) [2015] FCA 5
Luo v Zhai (No 4) [2015] FCA 32
Luo v Zhai (No 5) [2015] FCA 350
The Queen v Commonwealth Conciliation and Arbitration Commission; Ex parte Angliss Group (1969) 122 CLR 546
R v Watson;  Ex parte Armstrong (1976) 136 CLR 248
Vakauta v Kelly (1989) 167 CLR 568
Date of hearing: 12 August 2015
Place: Sydney
Division: GENERAL DIVISION
Category: Catchwords
Number of paragraphs: 41
Counsel for the Appellant: Mr G McGrath SC with Mr A Norrie
Solicitor for the Appellant: Jurisbridge Legal
Counsel for the First Respondent: Mr S Wilmoth
Solicitor for the First Respondent: Australian International Lawyers and Associates
Counsel for the Second Respondent: The Second Respondent did not appear

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

GENERAL DIVISION

NSD 547 of 2015
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN:

SUTAO ZHAI
Applicant
AND:

XIANGNAN LUO
First Respondent

JANTOM FURNITURE PTY LTD ACN 092 171 634
Second Respondent

JUDGES:

RARES, MCKERRACHER AND GLEESON JJ

DATE OF ORDER:

15 OCTOBER 2015

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:

1.The applicant be granted leave to appeal.

2.The appeal be dismissed.

3.The appellant pay the costs of the respondents to be taxed if not agreed.

4.The parties have liberty to apply within seven days for any additional costs orders.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.


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AGLC
Zhai v Luo [2015] FCAFC 144
Case
[2015] FCAFC 144
Decision Date

CaseChat Overview and Summary

In the Federal Court of Australia, the case of Zhai v Luo [2015] FCAFC 123 involves an appeal by Ms Zhai against the decision of the primary judge, Justice Gilmour. The dispute centres on whether the primary judge should have recused himself from the case due to an apprehension of bias. The central issue before the court was whether the primary judge’s handling of interlocutory applications post-trial gave rise to a reasonable apprehension of bias such that he should have disqualified himself from delivering the reserved judgment.

The court considered whether the principles of impartiality and neutrality as established in Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337 were breached. It was noted that the test involves assessing whether a fair-minded lay observer might reasonably apprehend that the judge might not decide the case impartially. Ms Zhai argued that the primary judge's consideration of new allegations of fraud and the granting of a freezing order while the judgment was reserved might have adversely affected his impartiality. However, the court found that Ms Zhai had not raised any objections at the time these applications were heard, and the primary judge's actions were within the scope of his duties to make interim findings necessary for the management of the case. The court held that the primary judge’s conduct did not give rise to a reasonable apprehension of bias.

The appeal was dismissed, and the court ordered that the appellant pay the costs of the respondents. The parties were granted liberty to apply for any additional costs orders within seven days.

Orders

Orders of the court

1. The applicant be granted leave to appeal.

2. The appeal be dismissed.

3. The appellant pay the costs of the respondents to be taxed if not agreed.

4. The parties have liberty to apply within seven days for any additional costs orders.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

For the reasons which follow, the appeal will be dismissed. BACKGROUND The respondent, Mr Xiangnan Luo, brought proceedings against Ms Zhai and a company she controlled, Jantom Furniture Pty Ltd, which is now in liquidation. He claimed a variety of relief in respect of an agreement under which Ms Zhai sold 40% of her shares in Jantom to Mr Luo for $800,000. Mr Luo paid the money, but received neither the shares nor a refund. Ultimately, judgment was given against Ms Zhai (Luo v Zhai (No 5) [2015] FCA 350). The complaint as to the apprehension of bias relates not to the conduct of the trial itself, but to the fact that the primary judge entertained two applications while judgment was reserved following completion of the trial and after delivery of all written submissions in relation to the trial. The first was an application by Mr Luo to amend his statement of claim to allege fraud against Ms Zhai and the second was an application by Mr Luo against Ms Zhai and other persons for a freezing order. The primary judge refused Mr Luo’s ambitious application for leave to amend the statement of claim to claim fraud and to join other parties. His application for a freezing order was allowed in part against Ms Zhai only. The complaint about apprehension of bias relates also to certain remarks made by his Honour in the course of that second application. Counsel for Ms Zhai were unable to inform the Court as to whether the application for his Honour to disqualify himself was a written or oral application and precisely when it was first made. One thing that is clear is that no application of any description was made at the times when his Honour heard, considered and determined the application for leave to amend the statement of claim to claim fraud. The application for his Honour to disqualify himself was made after determination of the pleading argument (in Ms Zhai’s favour) and, at the earliest, during argument on freezing orders. The detail of the timing is not unimportant. THE RECUSAL JUDGMENT In his reasons given on 30 January 2015 (Luo v Zhai (No 4) [2015] FCA 32), his Honour summarised the grounds for recusal put to him by Ms Zhai. He noted that the essential basis for the application was that a fair-minded lay observer might reasonably apprehend that he might not bring an impartial mind to the resolution of the issues which he was required to decide: cf. Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337 at 344 [6]. Ms Zhai had submitted that an observer of that kind might have such an apprehension because of what occurred during Mr Luo’s freezing order application in the context that it was made after the trial had concluded and its purpose was to restrain Ms Zhai and Jantom from dissipating Ms Zhai’s assets to avoid the consequence of any adverse judgment he might enter. The primary judge did not apprehend, and was not clearly told, that the recusal application was also then being put on the basis of his having heard the post-trial pleading amendment application.

Evidence

Evidence Before The Court

Heydon, Kiefel and Bell JJ identified the relevant principles applicable here in British American Tobacco Australia Services Ltd v Laurie (2011) 242 CLR 283 at 331-332 [139]-[140], where they stated: It is fundamental to the administration of justice that the judge be neutral. It is for this reason that the appearance of departure from neutrality is a ground of disqualification (Ebner v Offıcial Trustee in Bankruptcy (2000) 205 CLR 337 at 344-345 [6]-[7] per Gleeson CJ, McHugh, Gummow and Hayne JJ; Forge v Australian Securities and Investments Commission (2006) 228 CLR 45 at 77 [66] per Gummow, Hayne and Crennan JJ). Because the rule is concerned with the appearance of bias, and not the actuality, it is the perception of the hypothetical observer that provides the yardstick. It is the public’s perception of neutrality with which the rule is concerned. In Livesey [v NSW Bar Association (1983) 151 CLR 288] it was recognised that the lay observer might reasonably apprehend that a judge who has found a state of affairs to exist, or who has come to a clear view about the credit of a witness, may not be inclined to depart from that view in a subsequent case. It is a recognition of human nature.Of course judges are equipped by training, experience and their oath or affirmation to decide factual contests solely on the material that is in evidence (Johnson v Johnson (2000) 201 CLR 488 at 493 [12] per Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ). Trial judges are frequently required to make rulings excluding irrelevant and prejudicial material from evidence. Routine rulings of this nature are unlikely to disqualify the judge from further hearing the proceeding. (bold emphasis added) The test involves, first, ascertaining whether there is a real, and not remote, possibility that the judge might not decide a case on its legal and factual merits, and secondly, the articulation of the logical connection between the matter and the feared deviation from the course of deciding the case on its merits, that is, impartially: Ebner 205 CLR at 345 [8] per Gleeson CJ, McHugh, Gummow and Hayne JJ. However, a fair and unprejudiced mind “… is not necessarily a mind which has not given thought to the subject matter or one which, having thought about it, has not formed any views or inclination of mind upon or with respect to it”: The Queen v Commonwealth Conciliation and Arbitration Commission; Ex parte Angliss Group (1969) 122 CLR 546 at 554 per Barwick CJ, McTiernan, Kitto, Taylor, Menzies, Windeyer and Owen JJ. A reasonable apprehension of bias will exist if the fair-minded lay observer might reasonably consider, as a real possibility, that the judge might be so committed to a conclusion already formed that he or she is incapable of altering it, whatever evidence or arguments may be presented: Cabcharge Australia Limited v Australian Competition and Consumer Commission [2010] FCAFC 111 at [25]-[29] per Kenny, Tracey and Middleton JJ. And as their Honours added ([2010] FCAFC 111 at [32]), “disqualification flows from a reasonable apprehension that the judge might not decide the case impartially, rather than that he will decide the case adversely to a party”.

Decision

Reasons for decision

Counsel for Ms Zhai were unable to inform the Court as to whether the application for his Honour to disqualify himself was a written or oral application and precisely when it was first made. One thing that is clear is that no application of any description was made at the times when his Honour heard, considered and determined the application for leave to amend the statement of claim to claim fraud. The application for his Honour to disqualify himself was made after determination of the pleading argument (in Ms Zhai’s favour) and, at the earliest, during argument on freezing orders. The detail of the timing is not unimportant. THE RECUSAL JUDGMENT In his reasons given on 30 January 2015 (Luo v Zhai (No 4) [2015] FCA 32), his Honour summarised the grounds for recusal put to him by Ms Zhai. He noted that the essential basis for the application was that a fair-minded lay observer might reasonably apprehend that he might not bring an impartial mind to the resolution of the issues which he was required to decide: cf. Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337 at 344 [6]. Ms Zhai had submitted that an observer of that kind might have such an apprehension because of what occurred during Mr Luo’s freezing order application in the context that it was made after the trial had concluded and its purpose was to restrain Ms Zhai and Jantom from dissipating Ms Zhai’s assets to avoid the consequence of any adverse judgment he might enter. The primary judge did not apprehend, and was not clearly told, that the recusal application was also then being put on the basis of his having heard the post-trial pleading amendment application. In his Honour’s ex tempore reasons on the freezing order application (Luo v Zhai (No 1) [2014] FCA 1296), the primary judge summarised the issues at trial on which he was reserved. He noted that the evidence at trial was taken on 14 and 15 October 2014 and that the parties had completed filing all their submissions in writing by 26 November 2014. His Honour recounted that, after the taking of the evidence was completed but before all of the written submissions were filed, Mr Luo had applied for freezing orders against Ms Zhai and a number of other persons because Mr Luo had become concerned that she was attempting to render herself “judgment proof” by divesting herself of assets. As his Honour observed subsequently in Luo (No 4) [2014] FCA 32 at [5] that application was not a happy one and had limped from one procedural calamity to the next over three hearing days on 19, 21 and 27 November 2014. Ultimately, on 27 November 2014, he declined to make freezing orders against the third parties that Mr Luo had identified but was persuaded to make them against Ms Zhai and Jantom. In Luo (No 4) [2015] FCA 32, his Honour explained that the reason why the parties had filed written submissions after the evidence at the trial was that there had been insufficient time to hear oral submissions. His Honour discussed the subsequent history when, on 11 December 2014, he declined a further application by Mr Luo for orders against some of the same third parties, one of whom was resident in Bristol, England: Luo v Zhai (No 2) [2014] FCA 1367. Following an urgent contested hearing on 9 January 2015, the primary judge released Mr Luo from his earlier undertaking, given on 27 November 2014, that he would not apply outside Australia for a freezing or similar order without the leave of the Court, so as to allow him to commence the English proceedings: Luo v Zhai (No 3) [2015] FCA 5.

Ratio Decidendi

Legal Principle Established

In essence, Ms Zhai contended that she had established the first step of the two step test, and so, the primary judge should not have continued to entertain the case or to have delivered his reserved judgment. She argued that an informed lay observer might reasonably apprehend that, because his Honour had considered Mr Luo’s new allegations of fraud or ‘judgment proofing’ while judgment was reserved, that consideration might adversely affect his Honour’s deliberations when assessing the separate evidence in the substantive case in preparing his reserved judgment. Ms Zhai also argued that his Honour’s conduct gave rise to a reasonable apprehension of bias because he had embarked on the interlocutory hearing rather than sending it to another judge.CONSIDERATION Ms Zhai’s arguments should be rejected. First, the test in Ebner 205 CLR at 344-345 [6]-[8] did not apply solely to cases in which the judge might have had a financial interest. The High Court propounded a test of general application, as is evident from its subsequent consideration by appellate and other courts, including in the passage we have cited above from Laurie 242 CLR at 311-312 [139]-[14]. Secondly, Ms Zhai made no complaint when the application to plead fraud was first raised, argued and determined. Indeed, no such complaint was open then, as it is not now. It is not appropriate to raise, after the event, a complaint that the primary judge should not have heard an application but should have referred it to another judge: Vakauta v Kelly (1989) 167 CLR 568 at 572 per Brennan, Deane and Gaudron JJ. For the same reasons as their Honours explained, in our opinion the primary judge should have been asked to consider an application for him to refer the matter to another judge before Ms Zhai, without objection, allowed him to embark on the hearing now complained of. It is also significant that Ms Zhai did not ask the primary judge to refer either of the interlocutory applications to another judge to be heard after allegations of fraud were first raised. She took the risk that he would consider those allegations in the interlocutory proceeding and it was some time after the freezing order decision, made on 27 November 2014, that she made the application for recusal. Whether it was made orally or in writing, Ms Zhai has been unable to say (no application is in the appeal book), but it was not made before 18 December 2014, being the date on which she filed written submissions seeking his Honour’s recusal. By that time, his Honour had given reasons for making the freezing order against Ms Zhai. The fact that no such application was made before that time is consistent with a reasonable lay observer, who was properly informed as to the nature of interlocutory proceedings, understanding that the judge could make interlocutory findings of a provisional nature without those findings having any effect on his final conclusions as to credibility of witnesses in the main proceedings. Thirdly, an urgent interlocutory hearing for freezing orders, whether pursued before, during or after a trial, necessarily invites the judge to form and express some view as to whether the applicant for the relief has established, on the interlocutory material, a sufficiently arguable case that there is a risk of dissipation of assets. Ordinarily, any such view will only be an interlocutory one arrived at on the basis of affidavit evidence led on the relevant application. This was not a case like Livesey v New South Wales Bar Association (1983) 151 CLR 288 which held that a fair minded lay observer might reasonably apprehend that the judge might not bring an impartial mind to the resolution of later proceedings in circumstances where the judge had previously found a state of affairs to exist or come to a clear view about a witness’ credit. There had been no such occurrence in this instance. Here, a fair minded lay observer would expect that, after hearing or receiving final submissions at the conclusion of the trial, the judge might well have formed some view on the credit of witnesses whom he had seen give oral evidence. But that cannot be equated to a perception of pre-judgment of the outcome of the trial by the judge. His Honour had not prejudged the trial; he had heard the trial and his task was to decide it on a final basis.