Supreme Court New South Wales Medium Neutral Citation: Xu v Cao & Du Management Pty Ltd [2024] NSWSC 461 Hearing dates: 18 April 2024 Date of orders: 26 April 2024 Decision date: 26 April 2024 Jurisdiction: Common Law Before: Schmidt AJ Decision: (1) The order finally pressed in relation to the Cao notice must be refused; (2) The costs of the Cao motion must be borne by the plaintiffs and cross defendants, as agreed or assessed; and (3) The costs of the Xu motion are to be costs in the cause. Catchwords: CIVIL PROCEDURE – notice to produce the terms of claimed retainers – application to set aside notice to produce the terms of claimed retainers – whether the order pressed in relation to the notice to produce is required under either rr 21 or 34 of the Uniform Civil Procedure Rules 2005 (NSW) – the order is not required – the notice to produce does not identify specific documents – the order pressed must be refused COSTS – a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed – order depends on how parties have acted – plaintiff effectively surrendered to defendant – costs of motion must be borne by plaintiff COSTS – all parties had a measure of success in relation to the motion – costs are to be costs in the cause Legislation Cited: Civil Procedure Act 2005 (NSW), ss 56, 98 Uniform Civil Procedure Rules 2005 (NSW), rr 21.1(2), 21.9(2), 34.2 Cases Cited: Ahn v Toppro Pty Ltd [2016] NSWSC 221 Chandrasekaran v Western Sydney Local Health District [2023] NSWCA 219 Chapman v Luminis Pty Ltd [2003] FCAFC 162 Graphite Energy Pty Ltd v Lloyd Energy Systems Pty Ltd [2014] NSWSC 1326 Mulley v Manifold (1959) 103 CLR 341; [1959] HCA 23 Norris v Kandiah [2007] NSWSC 1296 Patonga Beach Holdings Pty Ltd v Lyon [2009] NSWSC 869 Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622; [1997] HCA 6 Secretary of the Department of Planning, Industry and Environment v Blacktown City Council [2021] NSWCA 145 Category: Procedural rulings Parties: Jaiqing Xu (Plaintiff) Cao & Du Management Pty Ltd (First Defendant) Howard Hao Ting Cao (Second Defendant) Representation: Counsel: J Li (Plaintiff) R Alkadamani (Defendants) Solicitors: CKSD Lawyers (Plaintiff) Independent Legal (Defendants) File Number(s): 2022/78620 Publication restriction: Nil JUDGMENT 1. Mr Xu brought these proceedings in 2022 seeking to recover some $6,600,00 which he claims Cao & Du Management Pty Ltd and Mr Cao, its director and secretary, who guaranteed the loan, owe him under a loan agreement which they had entered in 2016, under which he had advanced $3,300,000 which became repayable in 2018. Only some $300,000 was repaid. With interest continuing to accrue at the specified default rate, it is estimated that by November 2023, over $36 million was owed. 2. This claim is defended by Cao & Du Management and Mr Cao, who claim that the loan agreement was essentially a sham, the parties not intending thereby to create legal relations, with the result that it is neither binding nor enforceable. They claim, further, that the $3.3 million was in reality an investment by others in a joint venture engaged in a property development at Greenacre. 3. Cao & Du Management and Mr Cao pursue a cross claim against Mr Xu and other parties, including his son in law Mr Kai-Ming Wong and Tung Chit Real Estate Investment Australia Pty Ltd, a company with which he and his brother are associated. It is claimed that their involvement in the real investment agreement was arrived at during conversations and WeChat communications in 2016 which Mr Wong and Mr Cao conducted in Mandarin. 4. For convenience I will respectively refer to the parties as the Xu parties and the Cao parties. 5. The purpose of the sham loan agreement is claimed to be to permit capital gains tax on Tung Chit's anticipated gains from its investment in the joint venture to be avoided, Mr Xu, a foreign resident, not being liable to pay income tax. 6. Damages for alleged misleading and deceptive conduct, as well as estoppel, relief under the Contracts Review Act 1980 (NSW), unconscionable conduct and that the loan agreement and guarantee are void for illegality are all pursued on the cross claim. 7. The proceedings have had a difficult procedural history. There were earlier issues about security for costs and they were for a time stayed. No evidence has yet been served to support the claims advanced by the Cao parties, despite earlier orders requiring its service by 31 August 2023. They were extended until 31 October, 12 December and finally 29 February 2024. 8. This judgment deals with motions which the parties filed in January and March 2024, each seeking orders setting aside notices to produce documents for inspection which the other had served. The Cao motion 1. By their 5 March 2024 Notice of Motion, the Cao parties sought orders setting aside Mr Xu's notice to produce, which required the production of various WeChat messages, emails, letters and mobile phones and that an expert be jointly appointed for the purpose of recovering certain WeChat messages. It was supported by affidavits sworn by Mr Seelenmeyer, their solicitor, and Mr Cao. 2. This motion also sought an order that failure to comply with such orders would result in the dismissal of the amended statement of claim and the striking out of the defence to the cross claim. 3. The Cao motion was finally not pressed other than as to costs, the disputed documents, which had been the subject of the extensive affidavit evidence served in support of that motion, having been produced the week before the hearing, despite all the problems explained in the affidavits. 4. Mr Cao's affidavit, for example, gave an extensive account of the problems he had encountered in putting on his evidence, which included retaining the services of a forensic specialist to recover data from his old mobile phone, which no longer works, who was unable to recover them. That explains his pursuit of the motion. 5. Still, the documents having now been produced, only the costs of the Cao motion finally remained in issue. The Xu motion 1. By his 22 January 2024 Notice of Motion, Mr Xu sought to set aside the May 2023 Notice to Produce served on him, which required production for inspection of an engagement agreement and other documents evidencing the terms of his retainer of the lawyers who, on his affidavit evidence, acted for him in respect of the disputed loan. As well as tax invoices and documents recording payment of legal costs he claims he had incurred. This motion was supported by affidavits Mr Xu, Mr Lau and Mr Wong have sworn. 2. At the hearing the Cao parties also served two further notices to produce documents to the Court, which sought to address problems which had been raised by the Xu motion, with the notice earlier served. That they addressed those issues was not accepted. 3. During the course of the hearing, however, after attention was drawn to the documents which had already been produced in response to the original notice, despite which objection was curiously still taken at the hearing to their production, even though they were contained in the court book, the parties arrived at some further agreements. That followed their attention being drawn to their continuing obligations under s 56 of the Civil Procedure Act 2005 (NSW), in respect of the just, quick and cheap resolution of the real issues in the proceedings. 4. First, a copy of a costs agreement which Tung Chit had earlier entered with HWL Ebsworth, who Mr Xu had said in his affidavit were his solicitors, was produced. It was then also agreed that the Xu parties' solicitors would write to HWL Ebsworth to obtain a copy of any engagement agreement or retainer it had entered with either Mr Xu or Tung Chit. 5. This agreement reflected the confused position left by the evidence. 6. Mr Xu had deposed in his affidavit that it was he who had at different times retained both CKSD Lawyers and HWL Ebsworth to send letters of demand in respect of the loan agreement. There is no issue that such letters were sent, but it is proposed to test his evidence in cross examination, it being the Cao case that if it was not him, but Tung Chit for whom these firms had acted, that would support their case that the loan agreement was a sham. 7. Mr Lau, the solicitor now acting for the Xu parties, had said in his affidavit that documents had already been produced in response to the Cao notice. A cost agreement between Mr Xu and CKSD Lawyers had been produced in response to category 1 of the notice. But invoices produced in response to category 4 had been sent by HWL Ebsworth to Tung Chit. 8. Mr Lau had also deposed that Mr Xu did not have in his possession, custody or control a costs agreement or other documents recording the terms of the retainer with HWL Ebsworth, "with such documents likely being in the possession of HWL Ebsworth". In the result he said that Mr Xu had nothing further to produce. 9. This suggested that contrary to Mr Xu's affidavit evidence, he had not retained HWL Ebsworth. But that was not accepted and so the parties finally agreed to the enquiry which is to be made of HWL Ebsworth. 10. It was also then agreed that further orders should be made again requiring the service of the Cao evidence by 6 May 2024. 11. What finally remained to be resolved in respect of the Cao notice was the disputed requirement to produce documents which "record the terms of" the retainers, in addition to the CKSD document which has already been produced and any further documents produced after the enquiry which will be pursued with HWL Ebsworth. Applicable tests 1. Part 21 of the Uniform Civil Procedure Rules 2005 (NSW) deals with discovery and inspection. Rule 21.1(2) provides that "a document or matter is to be taken to be relevant to a fact in issue if it could, or contains material that could, rationally affect the assessment of the probability of the existence of that fact (otherwise than by relating solely to the credibility of a witness), regardless of whether the document or matter would be admissible in evidence". 2. A document relates to a fact in issue if it bears on the probability of that fact: Norris v Kandiah [2007] NSWSC 1296 at [7]. 3. Rule 21.10(a) requires production for inspection of any document or thing that is referred to in any originating process, pleading, affidavit or witness statement filed or served by another party, as well as "any other specific document or thing that is clearly identified in the notice and is relevant to a fact in issue". 4. Rule 21.9(2) provides that "a document or thing is to be taken to be relevant to a fact in issue if it could, or contains material that could, rationally affect the assessment of the probability of the existence of that fact (otherwise than by relating solely to the credibility of a witness), regardless of whether the document or thing would be admissible in evidence". This ultimately depends on what is pleaded and any admissions made: Mulley v Manifold (1959) 103 CLR 341 at 345; [1959] HCA 23. 5. Such a document must be identified with reasonable precision. The Rule does not permit discovery or production of classes of documents or things. It applies to the production of specific, clearly identified documents: Graphite Energy Pty Ltd v Lloyd Energy Systems Pty Ltd [2014] NSWSC 1326 at [37]. Identifying documents by subject matters to which they relate is not permitted under this Rule: Norris at [4]. 6. Production under r 21 will thus be required of documents which have a legitimate forensic purpose, being apparently relevant to facts in issue, including those which are capable of providing a legitimate basis for cross-examination of a witness: Secretary of the Department of Planning, Industry and Environment v Blacktown City Council [2021] NSWCA 145 at [40]. This includes cross-examination on issues of credit: at [61]. 7. Rule 34.1, which deals with production of documents to the Court, permits a notice to require the production of "any specified document or thing". Such a notice may not require discovery but is not limited to documents directly relevant to facts in issue: Ahn v Toppro Pty Ltd [2016] NSWSC 221 at [13]. Thus, it may permit production of documents only relevant to credit. But inspection of such documents depends on the Court's leave: r 34.2. 8. Such a notice must thus also call for specific documents. It cannot call for production of a class of identifiable documents, it must call for specific, identified documents. That is, something that is "cut out" from the universe of documents by some description or specification, with the result that it is identified and "not merely identifiable": Chandrasekaran v Western Sydney Local Health District [2023] NSWCA 219 at [21], quoting Patonga Beach Holdings Pty Ltd v Lyon [2009] NSWSC 869 at [12]-[13] and Norris at [4]. 9. Given what is in issue in the proceedings, the credibility and reliability of the evidence of both Mr Xu and Mr Cao, as well as other of the cross defendants, will plainly be in issue. That the documents sought only went to that issue was disputed. Can the order pressed in relation to the Cao notice, production of documents which "record" the terms of Mr Xu's claimed retainers, be required under either r 21 or r 34? 1. I am satisfied that they cannot. 2. That is because while such documents appear to be relevant to a fact in issue, the claimed sham agreement, what all the notices require to be produced does not identify specific documents. 3. An engagement or retainer agreement may be oral or written. If written it may be comprised of one or more documents. For example, by an exchange of correspondence, or an original agreement later varied by another agreement. Requiring the production of such an agreement identifies the specific documents which have to be produced, whether the agreement is comprised of one or more documents. 4. That is the production which the parties have now reached an agreement about. 5. Calling, in addition, for the production of all documents which may "record" such an agreement is, however, different. That description does not identify any document with sufficient specificity. It rather impermissibly calls for production of a class of document. That is because many documents may "record" such an agreement, whether it be oral or written. 6. The production of all such documents would require an examination of other documents to determine whether or not they record the agreement. That could include correspondence to or from a client or lawyer, an advice, or an invoice, for example. Identification of such documents would thus necessarily involve discovery, which neither Rule permits. 7. As to relevance, it must be noted that Mr Xu defends the claim that the loan agreement on which he relies was a sham, in part by relying on the fact that he retained lawyers to pursue repayment of what was repayable under the loan. It follows that if it was, in fact, not he but Tung Chit who had engaged those lawyers, that will be relevant not only to Mr Xu's credit, but also to what lies in issue between the parties about the Cao claim that the loan agreement was a sham, entered for the benefit of Tung Chit. 8. Who engaged the lawyers referred to in Mr Xu's affidavits is thus not a mere background fact, as he contends. As he submitted, an engagement agreement sets out the business relationship between the law firm and its client. If it was Tung Chit not Mr Xu who was the client, that will not assist Mr Xu's resistance of the cross claim. 9. That is no doubt why the parties reached their agreement about the pursuit and production of the retainer agreements. But while the other documents pursued do appear to be relevant to a fact in issue in the proceedings, their production cannot be required under either Rule. Costs of the Cao Motion 1. The parties undoubtedly went to considerable expense to litigate this motion. Despite which it was resolved by production of the disputed documents shortly before the hearing. 2. There remained a dispute about the costs of this motion, which are within the Court's discretion: s 98 Civil Procedure Act. The usual order under the Rules is that costs follow the event. 3. It is settled that in an appropriate case a court will make an order for costs even when there has been no hearing on the merits of what is in issue and the moving party no longer wishes to proceed, having, in effect, otherwise succeeded in obtaining the relief sought: Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624; [1997] HCA 6. 4. That depends on how the parties have acted. If it appears that both parties have acted reasonably in commencing and defending the proceedings and their conduct continued to be reasonable until the litigation was settled, the Court will make no order as to costs: at 625. It is different when one party, after litigating for some time, effectively surrenders to the other: Chapman v Luminis Pty Ltd [2003] FCAFC 162 at [7]. 5. In this case I am satisfied that it was the Xu parties who surrendered. 6. In his evidence, Mr Seelenmeyer explained the incomplete response they had made to the Cao notice, given the time of various messages and other information which was initially produced. That showed that complete chains of messages between Mr Wong and Mr Cao had not been produced, with resulting communications between the parties' lawyers about this and related problems. This had resulted in a 15 December 2023 order that Mr Wong provide an affidavit explaining why specified documents had not been produced. 7. That order has never been complied with. 8. It appears that it was in February 2024 that it was acknowledged that there were gaps in the communications, despite earlier advice that Mr Wong had provided screen shots of the communications to his lawyers. Still, what had not earlier been produced was still not provided until shortly before the hearing of the motions. 9. Objection had also been taken to the production of a mobile phone. But that also did not have to be pursued, given the final production of all the outstanding messages. That was after the parties had put on their extensive evidence and written submissions. 10. The result was plainly a compromise of the motion, involving a capitulation by the Xu parties by production of the records in issue. Their earlier opposition to the motion was thereby shown to have no basis and the costs which were incurred in the pursuit and resistance of the motion were unnecessary, given the final production of the communications in issue. 11. I am satisfied in all of these circumstances that justice requires that the costs of the Cao motion must be borne by the Xu parties, as agreed or assessed. Costs of the Xu motion 1. I have reached a different conclusion about the costs of the Xu motion. 2. I have explained the agreement which the parties finally reached at the hearing about production of retainers and what remained in issue about the production of the documents which record the retainer which the Cao parties pressed. Mr Xu's case about what remained in issue about that notice succeeded, as I have explained. 3. It follows that all parties have had a measure of success in relation to this motion. In the result I have concluded that the just costs order is that the costs of this motion should be costs in the cause. 4. Had the parties properly complied with the obligations imposed on all of them by s 56, it is apparent that what was agreed only at the hearing should have been resolved earlier and that what was then left to be resolved should not have been pressed, given what had been agreed and what the rules relied on permitted. 5. In the result I am satisfied that neither party is entitled to the usual order and that the just costs order is that costs of this motion must be costs in the cause. Orders 1. For these reasons I order that: 1. The order finally pressed in relation to the Cao notice must be refused; 2. The costs of the Cao motion must be borne by the plaintiffs and cross defendants, as agreed or assessed; and 3. The costs of the Xu motion are to be costs in the cause. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 26 April 2024