Xia v Yu

These proceedings were commenced by Summons on 18 September 2017. The plaintiff, Ms Tao Xia, sought orders that the first defendant, Mr Qing Yu, do all things necessary to give effect to a Heads of Agreement dated 17 July 2017, by which other proceedings commenced in this Court were settled.

The dispute between the parties has now resolved, save for the question of costs and a dispute over the payment of $21,000. The Court made directions for the parties to provide evidence and written submissions on these issues, and noted that they would be dealt with on the papers. (A Cross Claim in the proceedings has already been disposed of, by orders made on 18 May 2018 and 20 July 2018.)

On 22 June 2015 Mr Yu entered into an agreement with the second defendant, SH Homebush Peninsula Pty Ltd (“SH Homebush”), to purchase an off the plan unit known as Lot 299 in a development in Wentworth Point called “Taiga”. On 10 July 2015 Mr Yu entered into an agreement with SH Homebush to purchase Lot 85 in the same development. The date for completion of those contracts was later fixed for 19 September 2017.

On 4 August 2016 Ms Xia commenced proceedings in this Court against Mr Yu (proceedings no. 2016/234648) (“2016 proceedings”). In the 2016 proceedings Ms Xia claimed that Mr Yu held his interest in Lots 85 and 299 on trust for her in a proportion reflecting her contribution to the acquisitions, said to be $136,500.

On 17 July 2017, following a mediation, Ms Xia and Mr Yu entered into an agreement titled “Heads of Agreement” in settlement of the 2016 proceedings. The Heads of Agreement was relevantly in the following terms:

On 25 July 2017, in the 2016 proceedings, the Court entered judgment by consent, noting that Mr Yu held his interest in Lots 85 and 299 on an express bare trust for Ms Xia.

Ms Xia made attempts to put the Heads of Agreement into effect in August 2017. It appears that the mechanism she had in mind to achieve this, so as to minimise liability for stamp duty, was for Mr Yu to enter into deeds of rescission with SH Homebush, and for fresh contracts for the sale of Lots 85 and 299 to be entered into between Ms Xia and SH Homebush. Mr Yu would then give a direction to SH Homebush to apply the deposits to the new contracts.

On 22 August 2017 Mr Yu’s solicitors indicated by email to Ms Xia’s solicitors that Mr Yu consented “to the reassignment of the deposit moneys paid under the two contracts for sale”.

On about 24 August 2017 Ms Xia’s solicitors were informed by the solicitors for SH Homebush that Mr Yu had sold his interests under the original contracts for the sale of Lots 85 and 299 to third parties. Ms Xia’s solicitors attempted to confirm this with the solicitors for Mr Yu, who refused to give an answer to the question.

On 6 September 2017 Ms Xia demanded that Mr Yu confirm that he would execute deeds of rescission for the contracts for sale of Lots 85 and 299.

It appears that on 7 September 2017 Ms Xia’s solicitors again requested information regarding whether Mr Yu had sold his interests in Lots 85 and 299 to third parties. Mr Yu’s solicitors refused to confirm or deny whether this had occurred.

On 8 September 2017 Mr Yu made an offer to Ms Xia in the following terms:

In the email containing the offer, Mr Yu’s solicitors indicated to Ms Xia’s solicitors that the date for completion of the contracts of sale in respect of Lots 85 and 299 between Mr Yu and SH Homebush had been extended to 3 October 2017.

The 8 September 2017 offer was rejected by Ms Xia on 14 September 2017, and a counter-offer was made in the following terms:

The offer was rejected by Mr Yu on 15 September 2017, but his solicitors indicated that he would be willing to agree to the proposal if point (4) was withdrawn. In this email, Mr Yu’s solicitors indicated that they had made an error when they had earlier stated that settlement for the contracts in respect of both Lots 85 and 299 had been extended to 3 October 2017. Instead, only the completion date for the contract in respect of Lot 85 had been extended. The completion date for the contract in respect of Lot 299 remained 19 September 2017.

It appears that on 15 September 2017 the solicitors for Ms Xia again requested information regarding whether Mr Yu had sold his interests in Lots 85 and 299 to third parties. Again, Mr Yu’s solicitors refused to confirm or deny whether this had occurred.

In the meantime, deeds of rescission and fresh contracts for the sale of Lots 85 and 299 to Ms Xia had been prepared by the solicitors for SH Homebush. On 15 September 2017 Ms Xia demanded that Mr Yu, by 10am on 18 September 2017, execute the deeds of rescission, provide an irrevocable direction to SH Homebush that the deposits paid under the original contracts be applied to the new contracts, and pay into Mr Yu’s solicitor’s trust account $21,000, to be released to Ms Xia in accordance with clause 8 of the Heads of Agreement.

Those demands were not met by Mr Yu.

On 18 September 2017, the day before the contract for Lot 299 between Mr Yu and SH Homebush was due to complete, Ms Xia commenced these proceedings in the Duty List, seeking an urgent injunction to restrain Mr Yu and SH Homebush from completing the sale of Lot 299. On that day Mr Yu provided an undertaking to the Court that he would not complete the sale before the next directions hearing on 22 September 2017.

On 22 September 2017 Mr Yu was restrained from disposing of his interests in Lots 85 and 299 until further order. Mr Yu was also directed to notify Ms Xia of the identity of any parties with whom he claimed to have agreed to sell either Lot 85 or Lot 299.

On 25 September 2017 Mr Yu’s solicitors informed Ms Xia’s solicitors that on 4 October 2016 Mr Yu entered into an agreement to sell his interest in Lot 85 to certain third parties, and on 22 January 2017 he entered into an agreement to sell his interest in Lot 299 to another set of third parties.

On 20 October 2017 Ms Xia, Mr Yu and SH Homebush entered into a tripartite deed of rescission. On the same day Ms Xia entered into contracts for the sale of Lots 85 and 299 with SH Homebush. Those contracts have now settled.

It had been agreed between Ms Xia and Mr Yu, by email on 19 October 2017, that following the execution of the tripartite agreement SH Homebush’s costs would be borne equally by Ms Xia and Mr Yu, and would become costs in the cause after the proceedings were discontinued against SH Homebush. The proceedings were discontinued against SH Homebush, with no order as to costs, on 23 October 2017.

On 14 November 2017 Ms Xia’s solicitors sent a letter to Mr Yu’s solicitors containing an offer of settlement, expressed as a Calderbank offer. The offer was as follows:

The offer was not accepted by Mr Yu.

Ms Xia’s position is that Mr Yu should pay her costs and SH Homebush’s costs on an indemnity basis. Ms Xia submits that Mr Yu acted unreasonably by entering into the Heads of Agreement in July 2017 without disclosing that he had by that time sold his interests in Lots 85 and 299 to third parties. Ms Xia submits further that the proceedings could have been avoided entirely if Mr Yu had complied with her demands, and that Mr Yu unreasonably refused the Calderbank offer contained in the letter of 14 November 2017.

Mr Yu’s position is that there should be no order as to costs. He submits that Ms Xia has not achieved an outcome any better than the offer he made to her on 8 September 2017, which was rejected; that there is no event for costs to follow in circumstances where the proceedings have been disposed of without a hearing on the merits; and that he did not unreasonably refuse Ms Xia’s offer of 14 November 2017 because it included the payment of $21,000, a liability which had not yet accrued. Mr Yu also submitted that, in any event, SH Homebush’s costs should be borne equally between Ms Xia and him, because its involvement would in any case have been necessary in performing the terms of the Heads of Agreement.

In my opinion, the appropriate order to make, in the exercise of the Court’s discretion under s 98 of the Civil Procedure Act 2005 (NSW), is that Mr Yu pay Ms Xia’s costs up to 20 October 2017, when the tripartite deed of rescission was entered into and the substantive dispute was resolved. It seems to me that what made these proceedings necessary was Mr Yu’s failure to comply with clause 2 of the Heads of Agreement, which obliged him to assign his interest in Lots 85 and 299 to Ms Xia by 14 August 2017. This situation was likely brought about by Mr Yu’s on-sale of his interests in Lots 85 and 299 to third parties.

I do not think that it was unreasonable for Ms Xia to refuse Mr Yu’s offer of 8 September 2017. The offer came only a little over a week before completion of the contract for Lot 299 was due to take place, and approximately two weeks before completion of the contract for Lot 85 was due to take place. In my opinion, it was reasonable of her to insist on indemnification against any penalty for late completion so long as completion took place within six weeks of the date of execution of a deed of settlement.

Further, the costs order against Mr Yu should be made on an indemnity basis. Mr Yu’s conduct in failing to confirm or deny the existence of the on-sale agreements, perform his obligations under the Heads of Agreement, or offer an undertaking not to complete the sale of either Lot 85 or Lot 299, at any time prior to proceedings being commenced, was unreasonable because it left Ms Xia with effectively no choice but to commence proceedings to protect her rights under the Heads of Agreement. The proceedings would likely have been avoided if Mr Yu had provided Ms Xia with information about the third party purchasers and either performed his obligations under the Heads of Agreement or offered an undertaking not to complete the contracts for sale of Lots 85 and 299.

Ms Xia submits that Mr Yu should pay her $21,000 pursuant to clause 8 of the Heads of Agreement, because Mr Yu is now exempt from stamp duty following rescission of the contracts between him and SH Homebush. This is said to follow from the fact that Mr Yu has not provided any proof that stamp duty is payable or has been paid, as he was required to do under clause 4.

Mr Yu submits that he is not obliged to pay Ms Xia $21,000 pursuant to clause 8 because, under s 50 of the Duties Act 1997 (NSW), stamp duty remains payable on the rescinded contracts between him and SH Homebush until the Chief Commissioner of Revenue is satisfied that the contracts have been cancelled. Mr Yu submits that the appropriate course is to simply make no order in relation to the $21,000 payment, so that the parties can obtain a private ruling from the Office of State Revenue. In his submissions, Mr Yu indicates that he is prepared to pay $21,000 to Ms Xia in accordance with clause 8.

In my opinion, on the proper construction of clause 8 of the Heads of Agreement, the grant of an exemption for Mr Yu’s liability to pay stamp duty is a condition precedent to the obligation to make the payment of $21,000 to Ms Xia. As no such exemption has been obtained, the obligation to pay the $21,000 has not yet arisen. I do not accept that in the absence of Mr Yu providing evidence that stamp duty is payable pursuant to clause 4, no stamp duty is payable. Clause 4 imposes a separate obligation on Mr Yu to provide evidence as to certain matters regarding stamp duty. It does not give rise to the obligation to pay $21,000 under clause 8.

For the above reasons, the Court will order that Mr Yu pays Ms Xia’s costs on an indemnity basis up until 20 October 2017, after which time the parties are to bear their own costs. As SH Homebush’s costs were agreed to be costs in the cause, the Court will also order that for the purposes of the above order, Ms Xia’s costs include any costs of SH Homebush she has paid.

The Court will not make any order regarding the payment of $21,000. However, in circumstances where it is appropriate to bring the proceedings to an end by an order for dismissal, the Court will note that the dismissal does not prevent Ms Xia from later seeking to enforce clause 8 of the Heads of Agreement dated 17 July 2017.