Federal Court of Australia

Zhang v Yan [2021] FCA 905

ORDERS

THE COURT ORDERS THAT:

1.    The respondents’ notice of contention be allowed in part.

2.    The appeal be dismissed.

3.    Within 14 days, the parties are to file and serve written submissions in relation to the costs of the appeal, limited to 3 pages, to be determined on the papers.

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

REASONS FOR JUDGMENT

O’BRYAN J

Introduction

1    This is an appeal from a decision of the Federal Circuit Court of Australia made on 21 October 2019. By that decision, the primary judge dismissed an application for review of a sequestration order made by a registrar of the Federal Circuit Court.

2    The issues in dispute concern a Deed of Settlement entered into between the parties (and others) on or around 3 May 2017 (Deed) to compromise the claims made in proceeding SCI 2015 3944 in the Supreme Court of Victoria (2015 SC proceeding). Under that Deed, the appellant, Mr Zhang, agreed to pay certain amounts to the respondents, Mr Yan and Shanghai Yingyue Investment Group Co Pty Ltd (Yingyue), and the parties agreed to mutual releases in respect of the dispute the subject of the 2015 SC proceeding and the dismissal of the proceeding without any adjudication on the merits. Relevantly for this appeal, pursuant to clause 1.8 of the Deed, the appellant agreed to pay an amount of $1 million to the respondents by 3 May 2018. Under clauses 1.10 to 1.12, the respondents gave the following covenants:

Criminal prosecution

1.10     Within seven days of receipt of the AU$500,000 under clause 1.2, Yan and Yingyue shall submit a request to all relevant Chinese authorities seeking to withdraw any and all criminal complaints against Zhang and Yang Maoqiang (of Shanghai Xie Law Firm) instigated by Yan or Yingyue in China. Yan and Yingyue shall provide a copy of the request to Zhang's solicitors within seven business days of submitting the request.

1.11    If Yan and Yingyue breach their obligation to submit a request to the Chinese authorities in accordance with clause 1.10 of this deed, and the breach continues for a period of seven days following written notice of the breach by Zhang, then Zhang shall be released from his obligation under clause 1.8 to pay the Balance.

1.12    In addition to the obligation set out in clause 1.10, Yan and Yingyue will take any further reasonable steps within their power to support the termination of criminal proceedings arising as a result of the criminal complaints referred to in clause 1.10 against Zhang and Yan Maoqiang.

3    The appellant did not pay the amount of $1 million to the respondents by the due date. On 6 June 2018, the respondents issued a summons in the original Supreme Court proceeding seeking judgment against the appellant for payment of the amount of $1 million plus interest. On 4 December 2018, judgment was entered for the respondents by Kennedy J: Yan v Zhang [2018] VSC 694 (2018 SC proceeding). It will be necessary to return to the conduct of the 2018 proceeding by the parties.

4    On 6 December 2018, the respondents served a bankruptcy notice on the appellant based on the judgment debt from the 2018 SC proceeding.

5    On 6 June 2019, the respondents filed a creditor’s petition in the Federal Circuit Court seeking a sequestration order against the estate of the appellant under s 43 of the Bankruptcy Act 1966 (Cth) (Act).

6    On 8 August 2019, a registrar made a sequestration order against the estate of the appellant.

7    On 29 August 2019, the appellant applied for a review of the registrar’s decision to make a sequestration order. On that review, the appellant raised for the first time a contention that clauses 1.10 to 1.12 of the Deed were unenforceable as a matter of public policy because they were a covenant to stifle a prosecution (in China). The appellant argued that, as a consequence, either the whole of the Deed, or at least clause 1.8, was unenforceable. The appellant also contended, for the first time, that the Deed was unenforceable because it was entered into by him as a result of duress constituted by the criminal complaint that had been filed against him in China by the respondents.

8    On 21 October 2019, the primary judge delivered judgment and made orders dismissing the application for review of the sequestration order made on 8 August 201: Yan v Zhang [2019] FCCA 2990 (which will be designated as the primary judgment or PJ).

9    In making her decision, the primary judge exercised her discretion to “go behind” the judgment in the 2018 SC proceeding in order to be satisfied that the debt relied upon by the respondents (as petitioning creditors) was truly owing (PJ [10] and [36]-[37]). Her Honour concluded that:

(a)    clauses 1.10 to 1.12 of the Deed were unenforceable because they would stifle a prosecution (PJ [40] and [51]);

(b)    however, clauses 1.10 to 1.12 were severable and clause 1.8 remained enforceable (PJ [51]);

(c)    the Deed was not unenforceable for reasons of duress (PJ [41]);

(d)    accordingly, the appellant owed the respondents the amount of the judgment debt (PJ [64]); and

(e)    the appellant was not solvent and there was no other reason for which he should not be made bankrupt (PJ [64]).

10    The appellant appeals from the primary judge’s orders on two principal grounds:

(a)    first, the appellant contends that her Honour erred in concluding that clauses 1.10 to 1.12 of the Deed were severable and in failing to find that the Deed is, in its entirety, or alternatively as to clause 1.8, void and unenforceable for illegality and as being contrary to public policy;

(b)    second, the appellant contends that her Honour erred in failing to find that clause 1.8 of the Deed is unenforceable on the grounds of duress.

11    The respondents filed a notice of contention by which they contend that the primary judgment should be affirmed on the following grounds:

(a)    first, the primary judge erred in exercising the discretion to go behind the judgment because there were not sufficient or substantial reasons, or exceptional circumstances, to enliven the discretion and the issues now raised by the appellant to go behind the judgment were not raised in good faith;

(b)    second, the primary judge erred in concluding that clauses 1.10 to 1.12 of the Deed were unenforceable because they would stifle a prosecution because:

(i)    those clauses merely compelled the respondents to submit a request to Chinese authorities to seek to withdraw a criminal complaint and to take only reasonable steps within their power to support the termination of those criminal prosecutions;

(ii)    there was no evidence as to the relevant criminal procedure in China or what steps the Chinese authorities had taken, or were likely to take, in response to any request submitted by the respondents;

(iii)    the evidence of the appellant was to the effect that the criminal complaint against him had not been withdrawn and therefore no prosecution had, in fact, been stifled;

(iv)    those clauses did not operate to stifle any relevant public authority in the prosecution of a criminal complaint such as to warrant rendering those clauses unenforceable in accordance with principle; and

(c)    third, the primary judge ought to have found that the question whether clauses 1.10 to 1.12 were enforceable, and/or whether those clauses could be severed, were hypothetical questions and therefore not justiciable in circumstances where the respondents' obligations pursuant to 1.10 had been performed and were wholly executed, so that no question of the operation of clause 1.11 arose.

12    Thus, between the notice of appeal and the notice of contention, all of the principal issues determined by the primary judge are raised on this appeal. Accordingly, the following five issues arise for determination:

(a)    First issue: whether the primary judge erred in exercising her discretion to go behind the judgment (giving rise to the debt).

(b)    Second issue: whether the primary judge erred in concluding that clauses 1.10 to 1.12 of the Deed were unenforceable because they would stifle a prosecution.

(c)    Third issue: whether the primary judge ought to have found that the question whether clauses 1.10 to 1.12 of the Deed were unenforceable did not need to be determined in circumstances where the obligations under those clauses had been performed and no application had been made to enforce those clauses.

(d)    Fourth issue: whether the primary judge erred in concluding that clauses 1.10 to 1.12 of the Deed were severable such that the remainder of the Deed (and particularly clause 1.8) was enforceable.

(e)    Fifth issue: whether the primary judge erred in failing to find that clause 1.8 of the Deed is unenforceable on the grounds of duress.

13    For the reasons that follow, I find no error in the primary judge’s conclusions with respect to the first, third and fifth issues. Respectfully, I find that the primary judge erred in respect of the second issue and that her Honour ought to have found that clauses 1.10 to 1.12 of the Deed were not unenforceable as being contrary to public policy. That conclusion renders the fourth issue moot. Nevertheless, if I were to be wrong in respect of the second issue, I would have found that her Honour erred in respect of the fourth issue and ought to have found that clauses 1.10 to 1.12 of the Deed were not severable from clause 1.8.

14    As a result of those findings, the appeal must be dismissed.

New evidence on the appeal

15    At the hearing of the appeal, the appellant sought to read two affidavits.

16    The first was an affidavit of Associate Professor Andrew Godwin sworn 10 September 2020. Mr Goodwin is an Associate Professor in the Melbourne Law School at The University of Melbourne. His positions are the Director of the Transactional Law Group, Director of Studies in Banking and Finance Law and Associate Director (Asian Commercial Law) in the Asian Law Centre. He holds honours degrees in Arts and Law, a master’s degree in Law and a Doctor of Philosophy degree from the University of Melbourne. He has been involved in legal practice in Australia and other countries for over 20 years, 10 of which were spent in Shanghai in the Peoples’ Republic of China, where he was a partner and chief representative of the international law firm Linklaters. The affidavit exhibited a report from Mr Goodwin expressing his opinion on the following questions:

(a)    Does any of the matters within clauses 1.10 to 1.12 of the deed of settlement dated 3 May 2017 provide for something that might constitute the commission of a criminal offence in the People’s Republic of China?

(b)    Does any of the matters within clauses 1.10 to 1.12 of the deed of settlement dated 3 May 2017 provide for something that might be considered contrary to public policy in People’s Republic of China and would it be void or unenforceable as a result?

(c)    In Australia, a contract to stifle a public criminal prosecution is void and unenforceable as being contrary to public policy: Kerridge v Simmonds (1906) 4 CLR 253; Public Service Employees Credit Union v Campion (1984) 75 FLR 131. Is there a similar prohibition on stifling a criminal prosecution in the People’s Republic of China?

17    Senior Counsel for the appellant submitted that the evidence was adduced to counter a submission by the respondents on this appeal that there was no evidence before the primary judge concerning Chinese law. The appellant submitted that no such submission had been advanced before the primary judge and, if it had been advanced, the appellant would have adduced evidence. As the matter was raised for the first time on appeal, the appellant sought to meet the point by the expert evidence. The evidence was also said to correct a misquotation of certain provisions of the Chinese Criminal Code by the primary judge.

18    Counsel for the respondents objected to the affidavit on three bases. First, it had been filed and served only two working days before the hearing (which had been listed for some time), which gave the respondents an inadequate opportunity to consider and respond to the evidence. Second, no application had been made under s 27 of the Federal Court of Australia Act 1976 (Cth) (FCA Act) for the Court to receive the evidence on the appeal, and the appellant had failed to demonstrate that reasonable diligence had been exercised to procure the evidence for the trial and that, if the evidence had been available at the trial and had been adduced, a different result would have been produced: Orr v Holmes (1948) 76 CLR 632 at 635, 640; Florance v Andrew (1985) 58 ALR 377 (Florance); Arnotts Ltd v Trade Practices Commission (1990) 24 FCR 313. Third, the evidence was inadmissible to prove the content of Chinese criminal law because there was no evidence that Assoc Prof Goodwin was a qualified Chinese lawyer or had practised or was experienced in Chinese criminal law.

19    At the hearing of the appeal, I ruled the affidavit inadmissible on the first and second bases advanced by the respondents. The filing of the affidavit only two working days prior to the hearing was procedurally unfair to the respondents. Further, no proper application had been made by the appellant under s 27 of the FCA Act and, accordingly, I was not satisfied that I should exercise the discretion to allow the new evidence.

20    The second affidavit sought to be read by the appellant was his own affidavit sworn 11 September 2020. By that affidavit, the appellant gave evidence about his current financial position with the object of showing that, excluding the judgment debt (the subject of the appeal), the appellant was able to pay his debts and was not insolvent. Senior Counsel for the appellant submitted that, if the appeal were allowed, the evidence would be relevant to the orders to be made by the Court and the question whether the Court should set aside the sequestration order.

21    Counsel for the respondents submitted that the appropriate time to consider the affidavit is after the Court had determined the appeal, and the parties would then have an opportunity to address the Court on the orders that should be made, including on the basis of the appellant’s most recent affidavit (and any further evidence as to solvency at that time). The respondents also sought a ruling under s 136 of the Evidence Act 1995 (Cth) that paragraph 21 of the affidavit, by which the appellant expressed an opinion as to his ability to pay his debts, be limited to evidence of his belief only.

22    At the hearing of the appeal, I allowed the affidavit to be read on the issue of the orders to be made if the appeal were allowed and subject to the s 136 ruling sought by the respondents. I informed the parties that, if the appeal were upheld, they would be afforded a further opportunity to address the Court on the orders to be made and, if appropriate, adduce further evidence in relation to the orders.

Factual Background

23    The following background facts were not in dispute on the appeal. Certain of the facts were the subject of findings in the 2018 SC proceeding (which will be designated as SC) and others were the subject of findings in the primary judgment.

The 2015 SC proceeding

24    The first respondent, Mr Yan, is the director and legal representative of the second respondent, Yingyue (SC [7]). The appellant, Mr Zhang, is the director of the companies Ausen International Pty Ltd (Ausen) and Shanghai Jie'En Furniture Co Ltd (SC [8]).

25    In the 2015 SC proceeding, Mr Yan and Yingyue (as plaintiffs) alleged that Mr Zhang (as defendant) was personally liable to pay them approximately Chinese RMB25 million pursuant to two personal guarantees executed in October 2012 and May 2013 respectively, and a number of oral loan agreements made between December 2012 and March 2013 (SC [14]). Mr Zhang denied the allegations. In that proceeding, Mr Yan and Yingyue also applied for, and obtained, freezing orders in the course of the proceeding against the assets of Mr Zhang, Ausen and Mr Zhang's wife, Ms Xiao Qun Huang (SC [15]).

26    On 3 May 2017, the parties attended a court ordered mediation. At the mediation, the parties reached an agreement to compromise the 2015 SC proceeding which was recorded in the Deed. In the hearing before the primary judge, evidence was adduced as to the sequence of offers of settlement that were made at the mediation to determine whether clauses 1.10 to 1.12 of the Deed were first proffered by the respondents or were first sought by the applicant. As discussed below, I do not consider that that evidence is legally relevant to the proper construction of the Deed, including the question of severance, but the evidence is admissible on the issue of duress.

Deed of Settlement

27    The Deed was entered into on 3 May 2017 between Mr Yan and Yingyue (as plaintiffs in the 2015 SC proceeding), Mr Zhang (as defendant in the 2015 SC proceeding) and Ausen and Ms Huang (who were subject to freezing orders made in the 2015 SC proceeding). The allegations made in the 2015 SC proceeding are defined as the “Claims” and Mr Zhang’s denial of the Claims is defined as the “Dispute”. The recitals to the Deed stated that “[i]n order to avoid the costs and expenses associated with litigation, the parties have agreed to settle the disputes between them without any admission of liability on and subject to the terms and conditions of this deed of settlement”.

28    Section 1 of the Deed is titled “Settlement obligations” and consists of twelve clauses as follows:

(a)    Clause 1.1 provided that:

The parties undertake the obligations set out in clause 1 of this deed in full and final settlement of the Dispute.

(b)    Clause 1.2 provided that:

Zhang and Ausen hereby irrevocably direct and authorise the immediate payment of the single sum of AU$500,000 in cleared funds, out of the funds held in the trust account of Gadens, Zhang and Ausen's solicitors, pursuant to the Freezing Orders, unconditionally to Yan and Yingyue.

(c)    Clauses 1.3 to 1.7 required Mr Zhang to sell a residential property located in Melbourne and to pay the balance of the sale proceeds after deducting selling costs, the mortgage loan and all outgoings on the property.

(d)    Clause 1.8 provided that:

Zhang agrees to pay Yan and Yingyue the sum of AU$1 million (Balance) in cleared funds transferred to the trust account of SBA Law, the solicitors for Yan and Yingyue, by 3 May 2018.

(e)    Clause 1.9 required the parties to submit consent orders in a form attached to the Deed. Amongst other things, the consent orders provided for the discharge of the extant freezing orders against Ms Huang and Ausen, the discharge of all previous unexecuted costs orders and the dismissal of the proceeding without any adjudication on the merits.

(f)    Clauses 1.10 to 1.12 are set out earlier and concern “criminal complaints” made by Mr Yan and Yingyue against Mr Zhang (and Yang Maoqiang) in China.

29    Mr Zhang complied with the obligations in clauses 1.2 (payment of $500,000) and 1.3 to 1.7 (payment of the balance of the sale proceeds). As discussed below, Mr Zhang did not comply with the obligation in clause 1.8.

30    Section 2 of the Deed is titled “Release” and contains five clauses as follows:

2.1    Upon receipt of the AU$500,000 under clause 1.2, Yan and Yingyue release and forever discharge Zhang, Ausen and Huang from and against all actions, claims, suits, demands, causes of action, damages, liabilities and costs of whatever nature and howsoever arising which they (or any of them) now have or at any time in the future may have, or but for the execution of this Deed, could or might have against them, in relation to the Dispute and the Proceeding, or any subject matter incidental to or connected with the Dispute and the Proceeding, other than obligations under this Deed.

2.2    On execution of this deed, Zhang, Ausen and Huang release and forever discharge Yan and Yingyue from and against all actions, claims, suits, demands, causes of action, damages, liabilities and costs of whatever nature and howsoever arising which they (or any of them) now have or at any time in the future may have, or but for the execution of this Deed, could or might have against them, in relation to the Dispute, the Freezing Orders and the Proceeding, or any subject matter incidental to or connected with the Dispute, the Freezing Orders and the Proceeding other than obligations under this Deed.

2.3    The releases in clauses 2.1 and 2.2 shall act as a bar to any proceedings relating to or arising from the matters released.

2.4    Yan and Yingyue will take all reasonable steps requested by Zhang (at Zhang's cost provided that before any such costs are incurred by Yan and Yingyue, they are approved in writing by Zhang) to ensure that the releases in clause 2.1 are effective as a matter of Chinese law and in the People's Republic of China.

2.5    Yan and Yingyue will not object to this deed being produced to a Chinese Court in the event that any person or company or other legal entity should bring a proceeding against Zhang in relation to any matter the subject of or incidental to the Claims or the Dispute.

31    Although there is a slight difference in wording between clause 2.1 and 2.2 (in that the former has effect upon the payment of $500,000 and the latter has immediate effect), nothing turns on that distinction. The mutual releases are part of the bargain struck between the parties to settle the 2015 SC proceeding. Clauses 2.4 and 2.5 seek to ensure that the release given to Mr Zhang in clause 2.1 is operative in China. Mr Zhang did not contend that those clauses were in furtherance of, or connected with, the obligations in clauses 1.10 to 1.12, and no reliance was placed on those clauses on the appeal.

32    Section 3 of the Deed is titled “Default”. Relevantly:

(a)    Clause 3.1 provided as follows:

If Zhang is in default of his obligations under clause 1.8 of this Deed, Yan and Yingyue will be entitled to immediately reinstate the Proceeding and enter judgment against Zhang for the whole of the Balance, plus the costs and expenses of entering judgment on an indemnity basis, plus interest calculated in accordance with clause 3.4 and 3.5 of this Deed but less any amounts already paid by Zhang in respect of the Balance (Judgment Sum).

(b)    Clauses 3.4 and 3.5 required the payment of interest on any unpaid amount in accordance with the relevant penalty interest rate as fixed from time to time under the Penalty Interest Rates Act 1983 (Vic).

33    Section 9 of the Deed is titled “Severability. Clause 9.1 provided as follows:

Any provision of this Deed which is unenforceable or partly unenforceable is, where possible, to be severed to the extent necessary to make this Deed enforceable, unless this would materially alter the intended effect of this Deed.

The 2018 SC proceeding

34    On 6 June 2018, the respondents applied to the Supreme Court by summons for judgment against Mr Zhang for the balance alleged owing pursuant to the Deed, which comprised the amount of $1 million payable under clause 1.8 together with interest payable under clauses 3.4 and 3.5.

35    Prior to the hearing of the summons, the parties agreed a list of three issues to be determined which are reproduced at SC [4]. The first and primary issue was whether the respondents had breached their obligation under clause 1.10 of the Deed to submit a request to all relevant Chinese authorities to withdraw the criminal complaint made against Mr Zhang (SC [3] and [4]). The two other issues concerned the legal efficacy of default notices under the Deed given by the respondents which are not relevant to the present proceeding. The list of issues did not contain any contention that clauses 1.10 to 1.12 were void or unenforceable as being contrary to public policy, thereby rendering clause 1.8 (and the entirety of the Deed) unenforceable, nor any contention that the Deed was entered into as a result of duress.

36    At the hearing of the summons on 13 November 2018, both parties were represented by counsel. The transcript of the hearing records that the parties confirmed to Justice Kennedy that the only issues for determination were the issues in the list. Justice Kennedy asked both parties to confirm that no issue concerning the enforceability of the deed was raised and counsel for both parties confirmed that to be correct.

37    Justice Kennedy found that Mr Zhang had not proved that the respondents had failed to comply with their obligation under clause 1.10 of the Deed, and that Mr Zhang was therefore liable to pay the amount of $1 million due under clause 1.8 plus interest (SC [107]-[109]).

38    The “criminal complaint”, the subject of clauses 1.10 to 1.12, was the subject of evidence and findings in the 2018 SC proceeding (see SC [9] and [10]). That evidence, consisting of two documents translated into English, was also adduced in the Federal Circuit Court proceeding by Mr Zhang (by his affidavit dated 1 August 2019).

39    The first document is titled “Criminal Reporting Materials of the Joint Contract Defraud Case of Shanghai Jie'En Furnishings Co, Heng Zhang, Maoqiang Yang” (Criminal Conduct Complaint). The document is dated 17 September 2013 and is addressed to the “Economic Crime Detachment of Shanghai Security Office Chang Ning District Branch”. The document identifies the informants as Mr Yan and Yingyue and the subjects of the complaint (referred to as “suspects”) as (1) Shanghai Jie'En Furnishings Co (the legal representative of which is said to be Mr Zhang), (2) Mr Zhang and (3) Maoqiang Yang (who is said to work at Shanghai Xingye Law firm). The subject of the Criminal Conduct Complaint is as follows (errors in original, emphasis in original):

Facts and Reasoning of the Suspicion of the Crime:

On the 2nd of May 2013, the informant and suspect 1 entered into the <Shanghai Sales of Real Estate Contract> where the Informant agreed to buy an office located in Suite 1908/1160 Yan An West Road from suspect 1, in light of the principle of voluntariness, fairness and good faith. The area of structure of the office is 422.66 square metres. The agreed price is CNY Nine Million.

After the contract had signed, suspect 1, 2 (the legal representative of suspect 1) and 3 (the advocate of suspect 1 and 2) informed the informant that the property subject to the contract have existing mortgage, and the mortgagee had already filed a proceeding to the court requesting for an auction. He suggested that to guarantee the sales of the said property, the informant should paid cash immediately so that they can procure the release of the property from preservation order of the court.

The informant said: "I would prefer if I make a remittance directly to the court. After the court handed over the money to the mortgagee, suspect 1 then transfers the house to me immediately." However, suspect 1, 2 and 3 colluded with each other and told the informant: "If you remit the money to the law firm account of suspect 3, he can use his social connection as a legal practitioner to settle the debt with the debtor and remove the property preservation order with the price lower than Nine million. After that, suspect 1 will transfer the property to you immediately."

The good and honest informant believed in what the suspect 1, 2 and 3 said and accepted the advice. On 2nd May 2012, the informant and suspect 1 entered into the first appendix of the original agreement and one supplemented agreement (other than the appendix). The informant remitted CNY Nine Million upfront to the account of Shanghai Xingye Law Firm nominated by suspect 1 and 2 for the purpose of purchasing the said property. The agreements stipulated that the money remitted to the account from the informant should solely be used in repayment of the said debts and the removal of the property preservation order. In the meantime, the agreement also provided a remedy of CNY Three Million for any breach. Suspect 2 beared unlimited joint liabilities under the agreement as a guarantor.

However, to the informant's surprise, the said property was not transferred according to the agreement by 16th July 2013. At that time, the informant found suspect 1, 2 and 3 and sought for agreement performance. Suspect 1, 2 and 3 realised they cannot hide anymore. Eventually they confessed to the informant that the money had never been used for the repayment but inappropriately used for other purposes.

Few days later, the suspect 2 absconded to Australia to avoid criminal investigation for other cases by economic crime detachment of Shanghai Police Song Jiang Branch. By then the informant finally realised that the suspect 1, 2 and 3 never intended to sell the property but to defraud by contract.

The informant considered: the suspect 1, 2 and 3 had conspiracy to defraud large amount of by money using false information to induce informant entered into sales of property agreement. This conduct constituted contract defrauds crime in section 244 <People’s Republic of China Crimes Act>.

In conclusion, to protect the legitimate rights of the company from illegal infringement, and to maintain the integrity of the fair market, I request the economic crime detachment, for the sake of justice, please file this case and further investigate to figure out the criminal liability of the three suspects!

40    The second document is titled “Shanghai Public Security Office Pudong Branch - Case Filing Notification” and is dated 2 January 2014 (Filing Notification). The document appears to be addressed to “Yinghua Cui” and states as follows:

On 2013.10.28 you (reported/accused/complained) to our branch about The Contract Defraud by Heng Zhang and Maoqiang Yang at Shanghai New Pudong District, after the investigation of our branch, we considered it satisfied the criterion of criminal case filing. According to Section 110 of <People's Republic of China Criminal Procedure Act>, the case has been filed.

Hereby notified.

Case number: A3101150203002013110010

Operator Unit: Second vice squad of the First Interpol Detachment, Economic Crime Investigation, Shanghai Public Security Office Pudong Branch

41    Justice Kennedy noted a disconformity between the first and second documents: the Criminal Conduct Complaint was addressed to the Economic Crime Detachment of Shanghai Security Office Chang Ning District Branch, whereas the Filing Notification was recorded by the Shanghai Public Security Office Pudong Branch. Her Honour observed that Changning and Pudong are different districts (SC [12]). However, her Honour recorded that it was common ground in the proceeding before her that the complaint was the only complaint in existence. I take judicial notice of the fact that Changning and Pudong are both districts of Shanghai. There are other disconformities between the documents including that:

(a)    the Criminal Conduct Complaint is dated 17 September 2013 but the Filing Notification refers to a complaint made on 28 October 2013;

(b)    the Criminal Conduct Complaint lists three suspects (Yingyue and Messrs Zhang and Yang) whereas the Filing Notification refers to only two (Messrs Zhang and Yang).

42    Despite those matters, the respondents did not deny in the 2018 SC proceeding, in the Federal Circuit Court proceeding or on appeal that they had made a complaint in China of criminal conduct against Mr Zhang.

First Issue: Going behind the judgment

Reasons of the primary judge

43    The primary judge reasoned as follows (at PJ [9] and [10]):

9.     The issue in the present proceeding is one that was not resolved by Kennedy J, namely, whether the deed was enforceable insofar as it required the payment of $1,000,000. That turned on whether the deed was unenforceable for reasons of duress or because it stifled a prosecution.

10.     In circumstances where the issue now sought to be ventilated was not dealt with by the court which gave the judgment on which the bankruptcy notice was based, there is scope to go behind the judgment. It is well established that a court exercising bankruptcy jurisdiction may go behind a judgment and assess for itself whether, in truth and reality, there is a debt. In my view, this is a case in which it is appropriate to go behind the judgment.

44    Later in the reasons, her Honour addressed the respondents’ argument that it was not open to the appellant to raise the issue of the enforceability of the Deed in circumstances where the Deed had been the subject of a Supreme Court proceeding, in which the appellant chose not to raise the issue of enforceability, and where the respondents had performed their side of the bargain, in that they had asked the Chinese authorities to withdraw the prosecution. Referring to Ramsay Health Care Australia Pty Ltd v Compton (2017) 261 CLR 132 (Ramsay) at [54] per Kiefel CJ, Keane and Nettle JJ, her Honour concluded that (at [36]):

It does not seem to me that there can be any form of estoppel in the present proceeding. While, in general, people are required to bring their whole case in any given litigation and cannot be heard to raise other points in subsequent litigation between the same parties about the same subject matter, there is an exception in bankruptcy matters where the court goes behind the judgment to see whether there is in truth and reality a debt which founds the bankruptcy notice.

45    As to the circumstance that the respondents had already performed their obligations under clauses 1.10 and 1.12 of the Deed, her Honour concluded as follows (at [38]-[39]):

38.     It is true that the applicants have performed their side of the bargain. The applicants were required to ask the Chinese authorities to withdraw the criminal complaints, and, following that, the debtor was required to give the applicants $1,000,000. Kennedy J found in the Supreme Court proceeding that the applicants had fulfilled their side of the bargain. That finding was not effectively challenged in the present proceeding.

39.     In fact, the debtor has had the benefit of the agreement to stifle the prosecution, but does not wish to pay the price of that agreement. His conduct may be regarded as underhand, but that would not make an unenforceable contract enforceable.

The respondents’ submissions

46    The respondents submitted that where, as in the present case, the proof under s 52(1)(c) of the Act is sought to be adduced by reference to a judgment debt, the judgment is usually taken to be determinative evidence of the debt. That does not prevent a court from ‘going behind’ the judgment to ascertain if ‘in truth and in reality’ the debt is owing by the debtor in a sequestration application. However, “the Bankruptcy Court does not examine every judgment debt” (Petrie v Redmond [1943] St R Qd 71 at 76 per Latham CJ) and it has long been the law that a Bankruptcy Court will not go behind a judgment “as a matter of course but only if appropriate circumstances were shown to exist” (Wren v Mahony (1972) 126 CLR 212 at 224-225 per Barwick CJ) (Wren). Referring to Ramsay, the respondents submitted that:

(a)    Kiefel CJ, Keane and Nettle JJ (at [37]-[38]) accepted the position that a Bankruptcy Court should go behind a judgment where “sufficient reason is shown for questioning whether behind the judgment there is in truth and reality a debt due to the petitioning creditor”.

(b)    Edelman J (at [108]-[109]) also referred to the need for Bankruptcy Courts to be “extremely cautious” before going behind primary judgments.

(c)    It will also be relevant to deciding whether to go behind the judgment if there is a lack of good faith on the part of the debtor in seeking to question the primary judgment (per Kiefel CJ, Keane and Nettle JJ at [51], [71]).

47    The respondents also relied on the following statement of the Full Federal Court in Doggett v Commonwealth Bank of Australia [2019] FCAFC 19 (Doggett) in respect of the High Court’s reasoning in Ramsay (at [34]):

… the High Court’s reasoning is not a warrant for the automatic re-litigation of propositions not advanced in the principal proceedings. A merely colourable point that may have been taken in prior litigation but was not will not, in our opinion, suffice to put in issue whether there “is in truth or reality” a debt upon which a person’s sequestration has been sought.

48    The respondents acknowledged that the decision by the primary judge to go behind the judgment is discretionary and a challenge to that decision invokes the principles stated in House v The King (1936) 55 CLR 499 at 504-505. The respondents submitted that the primary judge erred in exercising the discretion to go behind the judgment at PJ [10]. They argued that, contrary to the finding of the primary judge, the issue sought to be raised by the appellant in the bankruptcy proceeding (the enforceability of the Deed) was addressed in the 2018 SC proceeding, as Justice Kennedy raised the issue at the hearing and the appellant disavowed any reliance on the point. Further, the respondents submitted that the primary judge failed to take into account the fact that the appellant had made a deliberate forensic choice not to raise the issue of the enforceability of the Deed in the 2018 SC proceeding and that raising the issue in the bankruptcy proceeding demonstrated lack of good faith.

The appellant’s submissions

49    The appellant argued that the facts and circumstances in this case were analogous to those in Ramsay: both parties were represented by counsel in the 2018 SC proceeding; the issue sought to be raised by the appellant in the bankruptcy proceeding could have been agitated and determined in the 2018 SC proceeding, but it was not and no appeal was taken from that decision. Conversely, the facts in Doggett were not analogous: the debtors conceded in that case that they were seeking to agitate in the bankruptcy proceeding a duress claim that had been raised before the court that gave judgment against them on the same evidence (at [47] - [49]). Similarly, in Commonwealth Bank of Australia v Jeans [2005] FCA 978, Hely J concluded that the issue raised by the debtor was not raised in good faith because the matters on which the debtor sought to rely upon as enlivening the power of the Bankruptcy Court were the same matters upon which the debtor had unsuccessfully relied before the court that gave judgment in support of an application to withdraw admissions (at [19]).

Consideration of the first issue

50    In the 2018 SC proceeding, the appellant defended the summons for judgment upon breach of clause 1.8 on the basis that the respondents failed to comply with their obligation in clause 1.10. In so doing, the appellant relied upon clauses 1.10 to 1.12 of the Deed and the appellant’s defence was based upon the validity and enforceability of those clauses. Indeed, that position was expressly affirmed by counsel for the appellant at the hearing before Justice Kennedy. The appellant’s defence based on a breach of clause 1.10 by the respondents failed.

51    In the subsequent bankruptcy proceeding before the primary judge, the appellant advanced a new defence, that clauses 1.10 to 1.12 were void or unenforceable as being contrary to public policy thereby rendering the Deed, or at least clause 1.8, unenforceable. That defence was inconsistent with the defence raised in the 2018 SC proceeding, which had been based on the enforceability of those clauses. Further, in the 2018 SC proceeding, the appellant made a positive election not to raise that defence after enquiry by Justice Kennedy.

52    The question raised in this appeal is whether, in the circumstances so presented, the primary judge erred in the exercise of her discretion to allow the appellant to go behind the judgment resulting from the 2018 SC proceeding.

53    The High Court majority (Kiefel CJ, Keane and Nettle JJ) in Ramsay affirmed the following principles:

(a)    First, by reason of s 52 of the Act, a Bankruptcy Court must be satisfied with the proof of “the fact that the debt … on which the petitioning creditor relies is … still owing”, if the court’s power to make a sequestration order is to be enlivened (at [39]).

(b)    Second, a Bankruptcy Court is not obligated to treat a judgment as satisfactory proof of the petitioning creditor’s debt. A Bankruptcy Court exercising jurisdiction under s 52 of the Act may, in some circumstances, “go behind” a judgment in order to be satisfied that the debt relied upon by the petitioning creditor is truly owing. The Bankruptcy Court may take this course in order to satisfy itself that there is an extant petitioning creditor’s debt as a necessary foundation for the making of a sequestration order (at [1]).

(c)    Third, the circumstances in which a Bankruptcy Court may go behind a judgment are not limited to cases involving default judgments or cases involving fraud, collusion or miscarriage of justice (at [39], [43]). A Bankruptcy Court may go behind a judgment, notwithstanding that the judgment was obtained after a contested hearing (at [44]).

(d)    Fourth, scrutiny by a Bankruptcy Court of the debt propounded by a judgment creditor seeking a sequestration order does not involve an attempt to impeach the judgment; nor is a Bankruptcy Court concerned to prevent the judgment creditor from invoking the ordinary processes of execution available under the general law. Rather, a Bankruptcy Court is concerned only with the question whether the debt on which the application for a sequestration order is based is truly a basis for the making of the order (at [54]).

(e)    Fifth, the scrutiny required by s 52 of the Act as to whether there is, in truth and reality, a debt owing to the petitioning creditor serves to protect the interests of third parties, particularly other creditors of the debtor; their interest in being paid their debts in full should not be prejudiced by the making of a sequestration order in reliance on a judgment debt which does not reflect the true indebtedness of the debtor to the petitioning creditor (at [55]).

(f)    Sixth, the principle that a party is bound by the conduct of their case at trial is not a sufficient reason for a Bankruptcy Court not to look behind a judgment. That is because a Bankruptcy Court is concerned, not to discipline litigants or to protect finality in the administration of justice as between parties to litigation, but to protect the interests of third parties who were not participants in the litigation which led to the judgment in question (at [67]).

54    As Barwick CJ (with whom Windeyer and Owen JJ agreed) stated in Wren at 224, a Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor’s debt. However, where reason is shown for questioning whether in truth and reality there is a debt due to the petitioning creditor, the Bankruptcy Court can no longer accept the judgment as such satisfactory proof. That is not to suggest that a debtor is entitled simply to re-litigate the judgment upon which the debt is founded: Doggett at [34]. Sufficient reason must be shown to question the debt. As Lockhart J (with whom Fisher J agreed) stated in Simon v Vincent J O’Gorman Pty Ltd [1979] FCA 75; 41 FLR 95 at 111 (in a passage cited with apparent approval by the majority in Ramsay at [48]):

The courts are reluctant to exercise this jurisdiction where the judgment was entered after a full investigation of the issues at a trial where both parties appeared and had ample opportunity to put their case to the court.

55    Contrary to the respondents’ submission, the majority in Ramsay did not propound as a test for going behind the judgment whether there is a lack of good faith on the part of the debtor in seeking to question the primary judgment. Read in context, the references to good faith (at [51] and [71]) concern the question whether the evidence adduced or argument advanced to challenge the existence of the debt has substance.

56    Applying the foregoing principles, it was open to the primary judge to go behind the judgment in the present case and no error has been shown in the exercise of her Honour’s discretion. The defence to the existence of the debt raised by the appellant in the Federal Circuit Court is an argument of real substance that had not been determined in the 2018 SC proceeding. It can be accepted that the decision not to raise the defence in the 2018 SC proceeding was a deliberate forensic choice by the appellant (or those representing him). It can also be accepted that the defence now sought to be raised is directly inconsistent with the defence raised in the 2018 SC proceeding. However, neither matter is a barrier to the defence being raised in a bankruptcy proceeding. As the majority in Ramsay explained, any failure by the appellant to present his best case in the 2018 SC proceeding should not enure to the disadvantage of persons who were not parties to that proceeding (at [71]).

57    For those reasons, I reject the first ground of the notice of contention.

Second issue: are clauses 1.10 to 1.12 of the Deed of Settlement unenforceable?

Reasons of the primary judge

58    The primary judge referred to a number of authorities that discuss the principle that a promise that stifles a prosecution is unenforceable as a matter of public policy, including Kerridge v Simmonds (1906) 4 CLR 253 (Kerridge), Public Service Employees Credit Union Co-operative Ltd v Campion (1984) 56 ACTR 39; 75 FLR 131 (Campion) and Louis Vuitton Malletier SA v Design Elegance Pty Ltd (2006) 149 FCR 494 (Louis Vuitton). Her Honour noted the distinction, considered by the High Court in Kerridge, between offences that are of public concern and offences that can be regarded as being of private concern. The High Court concluded that it was permissible to compromise a claim for private injury resulting from an act which amounts to an indictable offence provided that the offence is not a matter of public concern. In Kerridge, the offence was a slander and the High Court concluded that it was not contrary to public policy for the injured party to compromise the claim against the offending party. In Campion, the Supreme Court of the Australian Capital Territory found that the offending conduct, sought to be compromised, would constitute larceny and an agreement not to be involved in a prosecution was unenforceable as contrary to public policy.

59    The primary judge concluded that the allegations set out in the Criminal Conduct Complaint (made in China) could only be regarded as criminal in nature and that, if the conduct had occurred in Australia, it would have been indictable, being akin to the offence of larceny (PJ [26] and [27]). As such, her Honour concluded that the offence was a matter of public concern (PJ [28]).

60    The primary judge rejected the respondents’ argument that clauses 1.10 to 1.12 did not involve the stifling of a prosecution because the relevant promise was only to withdraw the Criminal Conduct Complaint. Her Honour concluded that there was no relevant distinction between a promise to stifle and a withdrawal from a prosecution (PJ [29]-[32]) and the promises by the respondents to withdraw the Criminal Conduct Complaint (cl 1.10) and take any further reasonable steps within their power to support the termination of criminal proceedings (cl 1.12) are sufficient to bring the promises within the rule regarding the stifling of prosecutions (PJ [34]).

61    The primary judge concluded that clauses 1.10, 1.11 and 1.12 of the Deed are unenforceable because they would stifle a prosecution (PJ [40]).

Respondents’ submissions

62    The respondents submitted that the primary judge’s conclusions involved the following errors.

63    First, the respondents submitted that no relevant ‘public policy’ (and no relevant ‘administration of justice’) was adversely affected by clauses 1.10 to 1.12 of the Deed. The respondents argued that the only relevant public policy is the public policy of Australia, not the ‘public policy’ of foreign jurisdictions or communities (in this case, China). The respondents argued that the conduct the subject of the Criminal Conduct Complaint did not occur in Australia and there was no suggestion in the evidence that there existed a possibility that the appellant could potentially face charges for criminal offences in Australia in relation to that conduct. Nor was there any suggestion that the Deed could operate to stifle any such potential action if taken in this jurisdiction.

64    Second, the respondents submitted that the primary judge misapplied Kerridge. The respondents argued that the question posed by Kerridge is not whether the relevant offence was of a public or a private nature. Rather, Kerridge stands for the proposition that conduct may give rise to both public and private action and the private rights stemming from the conduct can always be compromised. The principle only applies if the agreement involves, for reward, not prosecuting a matter purely of public concern.

65    Third, the respondents submitted that the primary judge ought to have found that, on their proper construction, clauses 1.10 to 1.12 did not purport to stifle a prosecution. The respondents argued that:

(a)    The obligation in clause 1.10 was for the respondents to “submit a request…seeking to withdraw [complaints]”. The clause did not impose an obligation to withdraw a complaint, nor did it purport to impose obligations that would have had a substantial adverse effect on the administration of justice (such as concealing evidence).

(b)    Clause 1.12 only required the respondents to “take any further reasonable steps within their power to support the termination of criminal proceedings…”. The obligation was limited to doing what was reasonable in relation to the prosecution. Concealing evidence, or improperly refusing a Chinese authority’s requirement to give evidence, would not be a reasonable step within the respondents’ power.

66    Fourth, the respondents submitted that, even if consideration of foreign justice systems could be said to be relevant, there was no evidence before the primary judge as to what effect, if any, clauses 1.10 to 1.12 of the Deed might have on stifling a prosecution adversely to the administration of justice in China. The respondents argued that there was no evidence of what status complaints, such as the one submitted by the second respondent, have in the Chinese criminal justice system. There was no evidence as to the relevant powers, policies and practices of the relevant Chinese authorities. Further, there was no evidence as to the status of any prosecution in China or if, in fact, any prosecution had resulted from the Criminal Conduct Complaint having been made.

Appellant’s submissions

67    In response to the respondents’ first submission, that clauses 1.10 to 1.12 of the Deed did not adversely affect the public policy of Australia, the appellant submitted that a contract entered into in Australia that provides for the commission of a criminal offence in a friendly foreign country is illegal or against Australian public policy because it would be contrary to Australia’s obligations of international comity and Australia’s notions of public morality (referring to Foster v Driscoll [1929] 1 KB 470 (Foster v Driscoll), which was applied in Regazzoni v KC Sethia [1956] 1 All ER 229 (Regazzoni) and Fullerton Nominees Pty Ltd v Darmago [2000] WASCA 4 (Fullerton Nominees)). Further, the appellant submitted that an agreement to stifle a public criminal prosecution in a friendly foreign country is also unenforceable, even if the agreement is not illegal in the foreign country, referring to Kaufman v Gerson [1904] 1 KB 591 (Kaufman).

68    In response to the respondents’ second submission, that the primary judge misapplied Kerridge, the appellant submitted that the primary judge correctly applied the law. All three justices in Kerridge were of the view that the then indictable offence of unlawful oral defamation was a matter of private and not public concern and, accordingly, their Honours found the agreement did not offend public policy. In contrast, the agreement in Campion was held to be unenforceable because it had the effect of stifling a prosecution for an offence of larceny which is a wrong committed against the public. So, too, in Louis Vuitton, Merkel J discussed the dual private and public interest character of contempt proceedings for failing to comply with a court order, rendering an agreement to compromise or settle such a contempt claim problematic (at [33]). In the present case, the appellant submitted that the primary judge was correct to conclude that the subject of the Criminal Conduct Complaint was akin to the offence of larceny and was therefore of a public concern.

69    In response to the respondents’ third submission, that on their proper construction clauses 1.10 to 1.12 did not purport to stifle a prosecution, the appellant submitted that the primary judge was correct to conclude that promises to “submit a request to all relevant Chinese authorities” seeking to withdraw a criminal complaint (clause 1.10) and “take any further reasonable steps within their power to support the termination of criminal proceedings” (under clause 1.12) plainly constitute the stifling of a prosecution and have a tendency adversely to affect the administration of justice (referring to A v Hayden (No 2) (1984) 156 CLR 532 (A v Hayden) per Mason J at 556-557 and per Wilson and Dawson JJ at 571- 572).

70    In response to the respondents’ fourth submission, that there was no evidence before the primary judge as to what effect, if any, clauses 1.10 to 1.12 of the Deed might have on stifling a prosecution adversely to the administration of justice in China, the appellant submitted that the argument was not advanced before the primary judge and, if it had been advanced, it could have been met by adducing expert evidence concerning Chinese law. Accordingly, the appellant would suffer prejudice if the respondents were permitted to make these new arguments on appeal. The appellant further submitted that, in any event, the primary judge did not require such evidence to make the findings that were made. It was not in dispute that the respondents had made criminal complaints against the appellant in China, and the appellant’s evidence that the complaints concerned serious criminal offences and were still on foot was unchallenged. The effect of clauses 1.10 to 1.12 of the Deed was to oblige the respondents to request withdrawal of the criminal complaints and to do everything reasonable within their power to support termination of the criminal proceedings. The appellant submitted that that was sufficient to enliven the public policy issues referred to above, whether or not it contravened Chinese criminal law.

Consideration of the second issue

71    The question that is raised for determination is whether the primary judge erred in concluding that clauses 1.10 to 1.12 of the Deed were unenforceable as being contrary to public policy.

72    It is a rule of common law that promises that are contrary to public policy will be unenforceable and may be void. The test of public policy that is applied by the common law was explained by Isaacs J in Wilkinson v Osborne (1915) 21 CLR 89 (Wilkinson v Osborne) in the following terms (at 97):

In my opinion the " public policy " which a Court is entitled to apply as a test of validity to a contract is in relation to some definite and governing principle which the community as a whole has already adopted either formally by law or tacitly by its general course of corporate life, and which the Courts of the country can therefore recognize and enforce. The Court is not a legislator: it cannot initiate the principle; it can only state or formulate it if it already exists.

The rule of law as to contracts against public policy is constant - namely, that every bargain contrary to such a social governing principle is regarded as prejudicial to the State, or, in other words, contrary to "public policy" or, as it is sometimes called, "policy of the law'' and the State by its tribunals refuses to enforce it.

73    After referring with approval to the statement of the Privy Council in Evanturel v Evanturel (1874) LR 6 PC 1 (at 29) that the determination of what is contrary to public policy necessarily varies over time with the principles which for the time being guide public opinion, his Honour continued observing (at 97-98):

But the point to bear in mind is that the principle which is to be the standard of legality must at the time be one which is of general recognition in the community as one essential to its corporate welfare. Some are not the subject of actual law - such as sexual morality and the promotion of marriage. Others are recognized as fundamental principles of the common law - as the protection of the public revenue, the administration of justice, the freedom and inherent duty of the Legislature and Executive. Others, again, arise by Statute directly or indirectly, for whatever a Statute enacts is beyond all question, to that extent, the policy of the country. Whatever tends to defeat an enactment is necessarily against public policy.

74    In Wilkinson v Osborne, the High Court concluded that a promise by a land holder to pay a sum of money to two members of the NSW State Parliament as consideration for urging the Government, of which they formed part, to approve a purchase of the land, was contrary to public policy and void, and therefore could not be relied on in a bankruptcy proceeding.

75    A recognised category of promise that is contrary to public policy is a promise to stifle a prosecution. The applicable principles were considered by the High Court in Kerridge in the context of a promise by Kerridge to pay a sum of money to Simmonds in consideration of Simmonds withdrawing a criminal action against Kerridge for defamation. The defamatory statements had been made during a quarrel associated with the breakdown of their relationship and the agreement contained a number of other promises associated with their separation. Each of the High Court justices (Griffith CJ, Barton J and Higgins J) concluded that the agreement was lawful and valid. After surveying the authorities, Griffith CJ concluded (at 258 and 260) that the common law rule is that an agreement is invalid if it is founded on the consideration of stifling a prosecution for an offence of a public nature; it is lawful, though, for a person to compromise a criminal offence in so far as it concerns a claim for private injury. In respect of the agreement before the Court, Griffith CJ concluded (at 260):

For these reasons I am of opinion that it is not unlawful for a person defamed, or who has sustained purely personal injury, to withdraw a prosecution already instituted for such an offence, or to agree not to institute such a prosecution. Where a person is entitled to recover pecuniary damages, the suggestion that there is a social duty incumbent upon him to prosecute is untenable. The law allows him either to prosecute or to sue for damages, and I can see nothing to prevent him from agreeing to receive an indemnity for the personal injury he has sustained, leaving the representatives of the public to prosecute if they think fit. If, as in some cases, he is the only person entitled to institute the prosecution, then a fortiori it is a matter of private, and not of public, concern.

76    A number of cases establish that an agreement to withdraw or not pursue a criminal prosecution for theft is void, the offence being of a public nature. In Kerridge, Barton J referred with approval to Jones v Merionethshire Permanent Benefit Building Society [1892] 1 Ch 173 (Jones). In that case, the secretary of a building society had made default in accounting for money paid to him, and was threatened with a prosecution for embezzlement. He applied for assistance from the plaintiffs (his relatives) and they gave a written undertaking to the society to make good the greater part of the debt due from the secretary, giving two promissory notes and some title deeds as collateral security. The society brought an action on the promissory notes. The Court of Appeal found that it was an implied term of the agreement between the plaintiffs and the society that there would be no prosecution of the secretary. The Court concluded that the agreement was founded on illegal consideration and void and, as a result, the society could not recover on the promissory notes. Bowen LJ discussed the competing public interests in the case. In respect of the duty to prosecute (excluding cases which only concern the personal interest of the injured party such as assaults not of an aggravated character or slanders or libels), his Honour observed (at 183):

The duty to prosecute, or not to prosecute, is a social and not a legal duty, which depends on the circumstances of each case. It cannot be said that it is a moral duty to prosecute in all cases. The matter depends on considerations, which vary according to each case. But the person who has to act is bound morally to be influenced by no indirect motive. He is morally bound to bring a fair and honest mind to the consideration and to exercise his decision from a sense of duty to himself and others.

What is it that the law requires about the exercise of this moral duty? It is that it shall not be made a matter of private bargain. … It may be made the matter of private bargain in two ways: first of all, if forbearance to prosecute is promised on condition of the receipt of a particular sum of money or a particular security; secondly, if the forbearance is given in consideration of money or security actually received. The second class of cases is a class in which there is a private bargain, because the security or the money is taken upon the terms that it shall be retained if the forbearance is given.

77    On the other hand, his Honour recognised that an agreement to make reparation of stolen monies is a social good, observing (at 185):

It is impossible, therefore, to say that reparation is a thing which ought not to be made, as it is also impossible to say it is a matter which is not likely to affect the mind, and, to a certain extent, reasonably to affect the mind, of a person who has been wronged. I agree with what Mr. Reid said, that the law certainly is not anxious to discourage reparation.

78    His Honour concluded, however, that while it is lawful for reparation for theft to be made, the person wronged by the theft may not make an agreement that would stifle a subsequent prosecution (at 185), stating:

He must make no bargain about that. If reparation takes the form of a bargain then, to my mind, the bargain is one which the Court will not enforce.

79    The same principle was applied by the ACT Supreme Court in Campion. In that case, the defendant’s son was a member of the Credit Union and, on 14 occasions, used his debit card to withdraw monies from a malfunctioning automatic teller machine owned by the Credit Union, overdrawing his account. The Credit Union informed the defendant’s son that unless restitution was made the matter would be given in to the hands of the police. The son requested his father (the defendant) to guarantee the indebtedness. The Court found that, in the course of discussions between the Credit Union and the defendant, the Credit Union gave an undertaking that, if the defendant guaranteed the repayment of the amounts withdrawn by the son, it would not to refer the matter to the police. After referring to Kerridge and Jones (and a number of other authorities), Kelly J concluded that the guarantee was void for illegality as an agreement to stifle prosecution for an indictable public offence. His Honour stated (at 139-140):

Subject to their proof the facts alleged against the defendant's son would, in my opinion, constitute a larceny. He is said to have taken away money belonging to the plaintiff with the intent of converting it to his own use and making it permanently his own property without the consent of the plaintiff. The elements necessary to establish the crime of larceny are therefore present. Croton v. The Queen (1967) 117 C.L.R. 326 at 328 per Barwick C.J.

The misappropriation alleged against the defendant's son was a wrong committed against the public and may not therefore be the subject of an agreement to stifle a prosecution in respect of it.

80    I note for completeness that Kelly J also made reference to s 44 of the Crimes Act 1914 (Cth) which made it an offence for a person to ask for, receive or obtain, or agree or attempt to receive or obtain, any property or benefit of any kind upon any agreement or understanding that the person will compound or conceal any indictable offence against the law of the Commonwealth or a Territory, or will abstain from, discontinue, or delay any prosecution for any such offence, or will withhold any evidence of such an offence. The respondents sought to place some reliance on that provision, suggesting that it was that provision, rather than the common law, that rendered the agreement illegal and unenforceable. I reject that submission. It is clear from the judgment that Kelly J applied the common law rule.

81    The decision of Sterling J in Lound v Grimwade (1888) 39 Ch D 605 shows that the common law rule applies even if the interference in a prosecution is reasonably slight or indirect. In that case, Lound had introduced Hiscock to Cameron, through whom Hiscock lost various sums of money through the alleged fraud of Cameron. On the complaint of Hiscock, criminal proceedings were commenced against Cameron and he was committed to stand trial for fraud. Lound entered into a bond (secured by a mortgage) in favour of Hiscock to secure payment of £3,000 on condition that Lound “[was] to be free and clear from any legal proceedings or other consequences for having introduced” Hiscock to Cameron. Sterling J continued (at 611-612):

Upon the whole evidence I have arrived at the following conclusions:-

1. The "legal proceedings" mentioned in the bond were meant to include, and did include, criminal proceedings.

2. By the "other consequences" mentioned in the bond were meant the public mention at the trial, or in the newspapers, or otherwise, of the [Lound’s] name in connection with the criminal proceedings against Cameron.

3.The consideration for the bond and mortgage included promises on the part of Hiscock that no criminal proceedings should be commenced against [Lound], and that the pending criminal proceedings against Cameron should be conducted in such a way that either [Lound's] name should not be mentioned, or that if it was mentioned [Lound] should be exonerated from all blame in connection with the transactions.

4. Criminal proceedings against [Lound] were not seriously contemplated by Hiscock nor apprehended by [Lound].

5. The bond and mortgage were not executed under pressure of threats of criminal proceedings by Hiscock, nor under the influence of any undue pressure on his part, but were executed by [Lound] under the advice of Addison, mainly to avoid his name being publicly connected with the fraudulent dealings of Cameron and the criminal proceedings against him, but also to prevent the failure of pending negotiations for a loan from [Lound's] father, which might have fallen through if [Lound's] name had been mixed up with the pending proceedings.

Under these circumstances I am of opinion that the consideration was partly illegal. It included, as I think, not only a stipulation that no criminal proceedings should be begun against [Lound]; but also stipulations as to the conduct of the pending criminal proceedings against Cameron, by which the course and result of those proceedings might have been affected. Now in Egerton v. Earl Brownlow [4 HLC 1, 163] Lord Lyndhurst says: "It is admitted, that any contract or engagement having a tendency, however slight, to affect the administration of justice, is illegal and void." And he accepts that as an accurate statement of the law, though he doubtless applies it to a state of circumstances widely different from those which occur in the present case. Upon this principle it has been repeatedly held that agreements tending to affect the course of legal proceedings are illegal, even although those proceedings may not be strictly criminal in their nature. …

82    The common law rule was also considered by the High Court in A v Hayden. That case concerned the possible commission of criminal offences in connection with a security training exercise arranged by the Australian Secret Intelligence Service (ASIS) at the Sheraton Hotel in Melbourne. The facts of the case were colourfully described by Mason J as having “the appearance of a law school moot based on an episode taken from the adventures of Maxwell Smart” (at 550). The plaintiffs, relevantly being members of ASIS, sought to restrain the Commonwealth from disclosing their identities to Victoria Police (to investigate the possible commission of criminal offences) on the ground (amongst others) that their contracts of employment with the Commonwealth stipulated for the identity of each, and of any act done in the course of training or work for ASIS, to be confidential. Mason, Wilson, Deane and Dawson JJ concluded that the Court will not lend its aid to the enforcement of a contractual obligation of confidentiality undertaken by the Commonwealth, the effect of which would be to obstruct the administration of the criminal law, because to do so would be contrary to public policy. Mason J observed (at 553, citations omitted):

…if the promise is void or unenforceable, it is not because it is inconsistent with the duty imposed on the Commonwealth by law but because the promise seeks to impose an obligation which is at variance with a fundamental head of public policy – the public interest in the enforcement of the criminal law and in the administration of justice. That there is a powerful public interest in the enforcement of the criminal law as an important element in the administration of justice does not admit of debate. Indeed, its importance has been such that the common law has regarded as illegal "any contract or engagement having a tendency, however slight, to affect the administration of justice" to use the words of Lord Lyndhurst in Egerton v. Brownlow (Earl).

83    After referring to a number of examples in the cases of agreements that may interfere with the administration of justice, Mason J continued (at 554-555, citations omitted):

The final example is an agreement to compromise legal proceedings for an offence of a public nature which is illegal: Keir v. Leeman; Windhill Local Board of Health v. Vint. In Windhill, Cotton L.J. said:

" ... the Court will not allow as legal any agreement which has the effect of withdrawing from the ordinary course of justice a prosecution when it is for an act which is an injury to the public. It would be the case of persons taking into their own hands the determining what ought to be done; and that ought not to be taken into the hands of any individuals, ... but ought to be left to the due administration of the law ... "

These remarks are of special significance because they show that the underlying thrust of the common law principle was directed as much against the detriment which would be caused to the administration of justice if agreements of the kind in question were to be enforced as against the evil of making knowledge of the commission of the crime a source of profit to the individual.

So much at least was recognized by Slesser L.J. in Howard v. Odhams Press Ltd when, in relation to the agreement under consideration in that case, he observed that it would have the effect of restricting the opportunity which the defendants and others might otherwise possess to assist the authorities in the investigation and prosecution of the alleged crime and went on to refer to the judgment of Stirling J. in Lound v. Grimwade, where his Lordship, after quoting the observations of Lord Lyndhurst in Egerton said:

"Upon this principle it has been repeatedly held that agreements tending to affect the course of legal proceedings are illegal, even although those proceedings may not be strictly criminal in their nature."

The assumption, unstated but unquestionably well founded, which lies behind the observations of Cotton L.J. in Windhill as applied and expounded by Slesser L.J. is that the effective enforcement of the criminal law and the administration of justice, which are central elements in a well ordered democratic society, depend for their efficacy on the unrestricted freedom of each and every citizen to assist and co-operate with the authorities in the investigation and prosecution of criminal offences. There is therefore a powerful public interest in promoting and preserving the citizen's freedom to assist and co-operate with the authorities in the investigation and prosecution of crime.

84    Deane J stated the applicable principle in the following terms (at 595-596):

The relevant proposition of law was shortly stated at the commencement of this judgment. It is that the courts of this country will not lend their aid to enforce a promise not to disclose information where the circumstances are such that enforcement or insistence upon observance of the promise would obstruct the due administration of the criminal law of Australia, whether Commonwealth or State. The rationale of that proposition is that, apart from the exceptional case (such as that of a professional legal adviser) where the overall administration of the law itself requires that confidentiality be maintained, it would be contrary to public policy for the courts to enforce a right on the part of one person to insist that another fail or refuse to disclose relevant information to assist those entrusted with the ordinary administration of the criminal law in the proper investigation and prosecution of criminal activity: the enforcement by the courts of such a private right to insist that another fail or refuse to disclose relevant information would involve the courts in the obstruction of the due administration of the criminal law which is a mainstay both of the rule of law which they exist to serve and of the very existence of effective private rights. For the purposes of that proposition, the investigation of actual or reasonably apprehended criminal activity by a regular law enforcement agency of the Commonwealth or of a State is part of the administration of the criminal law. Whether enforcement or observance of a term of a particular promise of confidentiality would obstruct that administration is a question which must be determined in the context of the circumstances of the particular case.

85    Whether a promise that impedes the administration of justice is to be characterised as void or merely unenforceable depends on the nature of the promise. In A v Hayden, Mason J explained (at 557, citations omitted) that:

Sometimes it is said that a contract to which the principle applies is void; at other times it is said that the contract is unenforceable or, as Lord Tenterden C.J. expressed it in Wetherell v. Jones, that the court will not lend its aid to the enforcement of the contract. The true position, as I see it, is that some contracts are void whereas others are valid, though the court will decline to enforce the particular provision in a valid contract in particular circumstances when enforcement of that provision would have an adverse effect on the administration of justice. Thus, a simple agreement not to disclose the existence of a serious criminal offence, which has been, or is about to be, committed in consideration of the payment of a sum of money may well be void because it is illegal. However, it will be otherwise with a contract which is in all respects lawful but nevertheless contains a provision which, if enforced according to its terms, will result in an interference with the administration of justice. Take a contract which contains a minor or subsidiary provision which, though not directed to non-disclosure of criminal offences, imposes an obligation of confidentiality in sweeping terms. If those terms are not susceptible of being read down, the court will refuse to lend its aid to the enforcement of the provision if enforcement would result in the non-disclosure of a criminal offence adversely affecting the administration of justice. In such a case the contract is not void; nor is it unenforceable in the sense in which that term is customarily used in the law of contracts. The case is one in which the court refuses a remedy on the ground of public policy.

86    So too, Deane J observed (at 596, citations omitted):

In stating the relevant proposition in terms of unenforceability by the courts, I have avoided the question whether a general contractual promise which, properly construed, requires the maintenance of confidentiality notwithstanding that the administration of the criminal law will be obstructed thereby is wholly or partially "illegal", "void" or "invalid". That question raises problems of terminology and substance, including the nature and effect of any distinctions between "illegal", "void", "invalid" and "unenforceable" (cf. Brooks v. Burns Philp Trustee Co. Ltd; Buckley v. Tutty) and the identification of the precise principles governing the residual enforceability (if any) of such a general contractual promise to the extent that the maintenance of confidentiality would not adversely affect the due administration of the criminal law. At one end of the scale is the case where the direct and immediate operation of the contractual promise to preserve confidentiality is to obstruct the due investigation of crime by concealing information about criminal activity and where it would seem clear enough that the promise itself is tainted with illegality and is void. At the other end of the scale is the case where a general promise of confidentiality is innocently given and where it is only in remote and unforeseen circumstances that an adverse effect upon the due administration of the criminal law would result from its observance: in such a case, there is much to be said for the view that the result is superseding unenforceability merely to the extent that observance of the promise would have such an adverse effect.

87    Extrinsic evidence is admissible to prove that a contractual promise is illegal or contrary to public policy: see Pao On v Lau Yiu Long [1980] AC 614 at 631; Electric Acceptance Pty Ltd v Doug Thorley Caravans (Aust) Pty Ltd [1981] VR 799 (Electric Acceptance) at 808 per Brooking J. The evidence in the proceeding demonstrated that clauses 1.10 to 1.12 of the Deed were directed at the Criminal Conduct Complaint filed by the respondents against the appellant (in China). The primary judge correctly described the complaint as an allegation of larceny, which is an offence of a public character. The Filing Notification affords evidence that the “Second vice squad of the First Interpol Detachment, Economic Crime Investigation, Shanghai Public Security Office Pudong Branch” had investigated the complaint, considered that it satisfied the criterion of a criminal case filing and gave notice that the case had been filed. By clause 1.10, the respondents promised to submit a request to the relevant authorities seeking to withdraw the complaint. By clause 1.12, the respondents promised to take any further reasonable steps within their power to support the termination of criminal proceedings. The promises involve actions that would interfere with the due prosecution of the criminal complaint. On the basis of the authorities referred to above, if clauses 1.10 to 1.12 of the Deed concerned criminal complaints made in Australia, in my view the clauses would have been void as contrary to public policy, constituting promises to stifle a prosecution of a public nature.

88    I do not accept the respondents’ submission that Kerridge stands for the proposition that conduct may give rise to both public and private action and the private rights stemming from the conduct can always be compromised. In my view, Kerridge and the authorities referred to in Kerridge distinguish between claims involving contraventions of the criminal law that involve only private injury, such as libel, and those that are of a public nature. The common law does not permit claims of the latter kind to be compromised for consideration. In my view, the Criminal Conduct Complaint was of the latter kind.

89    I also do not accept the respondents’ submissions that, on their proper construction, clauses 1.10 to 1.12 did not purport to stifle a prosecution. Contrary to the respondents’ submission, there is no material difference between promising to submit a request seeking to withdraw the complaint and promising to withdraw the complaint. Further, while the obligation in clause 1.12 requiring the respondents to take “further reasonable steps within their power to support the termination of criminal proceeding” is a broadly defined obligation, the required actions are nevertheless directed to the termination of criminal proceedings and offend the common law rule.

90    The more difficult question is whether clauses 1.10 to 1.12 are contrary to public policy in circumstances where they are directed to a criminal prosecution in China. The respondents referred to the statement by Prof Carter in his textbook Contract Law in Australia (Lexis Nexis, 7th ed, 2018) (at 25-19) that: “The relevant public policy is, of course, the public policy of Australia (or perhaps more accurately that of the jurisdiction in which the dispute is adjudicated)”. I consider that statement to be axiomatic. As McHugh JA observed in A-G (UK) v Heinemann Publishers Australia Pty Ltd (1987) 10 NSWLR 86 as a justice of the NSW Court of Appeal (at 196-197) (a decision that was affirmed by the High Court in A-G (UK) v Heinemann Publishers Australia Pty Ltd [No 2] (1988) 165 CLR 30 (the Spycatcher case)):

The courts of Australia are part of the machinery of the government of Australia. With the legislature and the executive, they share the burden of exercising the public power of the nation. Decisions by the courts of this country that particular acts or publications are or are not in the public interest of other countries would constitute a fertile source of embarrassment for the relations of Australia with those countries. …

The courts, being part of the machinery of government in this country, are required to determine issues concerning the public interest of this country when they arise for judicial determination.

91    In certain circumstances, however, the public policy of Australia may extend to promises that are to be performed in another “friendly” country.

92    As noted above, the appellant submitted that a contract entered into in Australia that provides for the commission of a criminal offence in a friendly foreign country is illegal or against Australian public policy because it would be contrary to Australia’s obligations of international comity and Australia’s notions of public morality. Nygh’s Conflict of Laws in Australia (10th edition) states (at [18.46]) that “It is contrary to Australian public policy to enforce an agreement the performance of which would, to the knowledge of each of the parties to the agreement, involve of necessity the breach of the law of another country on its territory”.

93    In Foster v Driscoll, a majority of the Court of Appeal (Lawrence and Sankey LJJ) considered the enforceability of agreements, made in the United Kingdom, to arrange for a cargo of whisky to be loaded on a ship in Edinburgh or Glasgow and shipped across the Atlantic and sold in the United States in breach of the laws of that country. Lawrence LJ stated the applicable principle as follows (at 510):

On principle however I am clearly of opinion that a partnership formed for the main purpose of deriving profit from the commission of a criminal offence in a foreign and friendly country is illegal, even although the parties have not succeeded in carrying out their enterprise, and no such criminal offence has in fact been committed; and none the less so because the parties may have contemplated that if they could not successfully arrange to commit the offence themselves they would instigate or aid and abet some other person to commit it. The ground upon which I rest my judgment that such a partnership is illegal is that its recognition by our Courts would furnish a just cause for complaint by the United States Government against our Government (of which the partners are subjects), and would be contrary to our obligation of international comity as now understood and recognized, and therefore would offend against our notions of public morality.

94    Similarly, Sankey LJ concluded (at 521-522) that:

To sum up, in my view an English contract should and will be held invalid on account of illegality if the real object and intention of the parties necessitates them joining in an endeavour to perform in a foreign and friendly country some act which is illegal by the law of such country notwithstanding the fact that there may be, in a certain event, alternative modes or places of performing which permit the contract to be performed legally.

95    As submitted by the appellant, Foster v Driscoll was applied in Regazzoni in respect of an agreement for the supply of jute sourced from India for delivery to South Africa in contravention of an Indian law prohibiting the supply of goods to South Africa and by the West Australian Court of Appeal in Fullerton Nominees in respect of an agreement by which an Australia company agreed to pay its representative agent in Indonesia (who was an Australian citizen) sums of money for the purpose of making illegal payments to Indonesian Government officials to procure a business licence.

96    The above cases can be distinguished from the present case in an important respect. As submitted by the respondents, no evidence was adduced by the appellant before the primary judge to prove that the promises in clauses 1.10 to 1.12 of the Deed, or their performance, are or would be illegal in China. Although the appellant submitted that if that issue were raised before the primary judge it could have been met with evidence, in my view the burden lay on the appellant, who sought to prove that clauses 1.10 to 1.12 were void, to establish all necessary factual findings for that conclusion (relevantly, the illegality of the promises under Chinese law). The appellant did not seek to rely on a presumption that Chinese law is the same as Australian law. In any event, the presumption is not always applicable. In Damberg v Damberg (2001) 52 NSWLR 492, Heydon JA (with whom Spigelman CJ and Sheller JA agreed) surveyed the authorities in Australia and England in which courts declined to apply the presumption, ultimately concluding that German law in relation to the avoidance or evasion of capital gains tax should not be assumed to be the same as Australian law. His Honour referred to the reasoning of Hunt J in BP Exploration Co (Libya) Ltd v Hunt [1980] 1 NSWLR 496 at 503 to the effect that the application of the presumption is intended to operate against, not in favour of, the party whose obligation it is to prove the foreign law, so that they are deprived of the benefit of a right or exemption given by that foreign law if they do not establish that foreign law in the proper way. The cases of Florance and Norris v Woods (1926) 26 SR (NSW) 234 support the proposition that a party who wishes to establish that a contract is unlawful under foreign law must prove the foreign law in the usual way. Applying those principles, I do not consider that any presumption should be applied in the present case. It follows, in my view, that the appellant has not established that the promises or their performance would be illegal in China, and therefore cannot succeed on that basis.

97    The further question that then arises is: in circumstances where the promises in clauses 1.10 to 1.12 would be regarded as being contrary to Australian public policy if they concerned a criminal complaint or proceeding in Australia, are they contrary to Australian public policy, on a principle of international comity, or a principle of public morality, when they concern a criminal complaint or proceeding in China? In respect of that question, the respondents placed reliance on various statements of the High Court in the Spycatcher case, to the effect that a claim is not maintainable in an Australian court which is to vindicate the governmental interests of a foreign state. However, the question raised by the present case does not involve the principles stated in the Spycatcher case. The appellant’s defence of the creditor’s petition does not seek to protect or vindicate the interests of the Chinese government. Rather, the defence raises the question whether clauses 1.10 to 1.12 of the Deed are unenforceable in Australian courts as being contrary to Australian public policy.

98    The appellant relied on the decision of the Court of Appeal in Kaufman. The case concerned an agreement made in France between persons domiciled in France. The plaintiff, Kaufman, paid monies to Gerson for business purposes, but Gerson misappropriated the monies. The misappropriation was criminal in France and Kaufman threatened a criminal prosecution. The defendant, Gerson’s wife, under the influence of Kaufman’s threats and to protect the reputation of her children and herself, agreed that she would within a period of three years pay to Kaufman the amount misappropriated by her husband in consideration of Kaufman forbearing to prosecute her husband. According to the uncontradicted evidence of an expert in French law, such an agreement was not invalid by the law of France, either on the ground that it was an agreement for the compromise of a criminal charge, or on the ground that it was obtained by duress or undue influence. The Court of Appeal concluded that an English Court would not enforce a contract so procured. The basis for that conclusion was not, however, a principle of international comity, by which English Courts would not enforce a promise that was detrimental to the administration of justice in a friendly foreign country. Rather, each of the justices of the Court of Appeal applied a principle of private international law that a contract will not be enforced in England where the contract was obtained in a manner which the law deems contrary to morality (by reason of duress), regardless of whether the contract is enforceable in the country in which it was made: at 598 per Collins MR; 599 per Romer LJ; and 600 per Matthew LJ. Although in the present case the appellant argued that clauses 1.10 to 1.12 of the Deed were procured by duress, for the reasons given below I reject that argument. Accordingly, the principles applied in Kaufman have limited application to the present case.

99    On many occasions, the courts have cautioned that "public policy is a very unruly horse, and when once you get astride it you never know where it will carry you": see for example Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432 (Brooks) at 451 per Windeyer J (in dissent); Fitzgerald v FJ Leonhardt Pty Ltd (1997) 189 CLR 215 at 232, 248 per Kirby J. The cases show that the answer to the question raised in this case is fact specific and depends upon the nature of the obligation sought to be enforced and the public policy in issue. For example, in Saxby v Fulton (1909) 2 KB 208, the Court of Appeal concluded that money lent in a foreign country for the purposes of being used by the borrower for lawful gambling in that country could be recovered in an action in England, notwithstanding that the gambling transactions could not be enforced in England as being illegal. Buckley LJ observed (at 228) that “…a betting or gaming contract in a country where betting or gaming is recognized by the law cannot be said to be contrary to essential principles of morality or justice” (see also Kennedy LJ agreeing at 232). Similarly, in Addison v Brown [1954] All ER 213, Streatfeild J concluded that a deed, which was entered into between a husband and wife intending to divorce and which provided for the payment of maintenance and that the deed would be binding in any divorce proceedings in California (thereby purporting to exclude the jurisdiction of the courts of that state), was enforceable in England notwithstanding that, if it had purported to oust the jurisdiction of the English Courts, it would have been unenforceable as contrary to public policy. In respect of the above cases, the learned authors of Nygh’s Conflict of Laws in Australia express the following opinion (at [18.42]:

Clearly the approach taken in Saxby v Fulton is to be preferred in most cases. If a foreign agreement does not affect any interest of the forum, as spatially defined, there is no reason why an agreement should not be enforced. In that case public policy only comes into play if the agreement seeks to do something in the forum that is contrary to public policy.

100    In Lemenda Trading Co Ltd v African Middle East Petroleum Co Ltd [1988] QB 448, the plaintiff company sought to recover from the defendant company commission for using its influence in assisting to procure the renewal of a contract between the defendant and the Qatar General Petroleum Co. It was conceded that the agreement was governed by English law. Phillips J found (at 454) that the agreement between the parties involved a transaction which was contrary to public policy in Qatar and, as a consequence, the agreement was void under the law of Qatar and unenforceable in Qatar. His Honour also found (at 458) that, had the agreement related to the procurement of a contract from a British Government department or state-owned authority, it would have been unenforceable by reason of English public policy. The question to be determined was whether an English court should enforce the contract in those circumstances. In respect of that question, Phillips J observed (at 459):

…Some heads of public policy are based on universal principles of morality.

"Where a contract is void on the ground of immorality, or is contrary to such positive law as would prohibit the making of such a contract at all, then the contract would be void all over the world, and no civilised country would be called on to enforce it"; per Lord Halsbury L.C. in In re Missouri Steamship Co. (1889) 42 Ch.D. 321, 336."

Where a contract infringes such a rule of public policy the English court will not enforce it, whatever the proper law of the contract and wherever the place of performance. Other principles of public policy may be based on considerations which are purely domestic. In such a case there would seem no good reason why they should be a bar to the enforcement of a contract to be performed abroad.

101    Phillips J ultimately concluded that the court would not enforce the contract on the basis of international comity because the contract was contrary to public policy in both England and Qatar. His Honour reasoned (at 461) that:

The principles underlying the public policy in the present case are essentially principles of morality of general application. The practice of exacting payment for the use of personal influence, particularly when the person to be influenced is likely to be unaware of the pecuniary motive involved, is unattractive whatever the context. Yet it is questionable whether the moral principles involved are so weighty as to lead an English court to refuse to enforce an agreement regardless of the country of performance and regardless of the attitude of that country to such a practice. The later English decisions were influenced, at least in part, by the effect of the practice in question upon good government in England. It is at this stage that, in my judgment, it becomes relevant to consider the law of Qatar. The significant fact in Kaufman v. Gerson was that the contractual adventure was not contrary to French law and the contract was valid and enforceable in France. In the present case Qatar, the country in which the agreement was to be performed and with which, in my view, the agreement had the closest connection, has the same public policy as that which prevails in England. Because of that policy, the courts of Qatar would not enforce the agreement.

In my judgment, the English courts should not enforce an English law contract which falls to be performed abroad where: (i) it relates to an adventure which is contrary to a head of English public policy which is founded on general principles of morality, and (ii) the same public policy applies to the country of performance so that the agreement would not be enforceable under the law of that country.

In such a situation international comity combines with English domestic public policy to militate against enforcement.

102    The above authorities show that the question whether clauses 1.10 to 1.12 are unenforceable as being contrary to Australian public policy (because they have the effect of stifling a criminal prosecution in China) depends on whether the obligations in those clauses are contrary to principles of morality or justice that are recognised in Australia as being of universal application. It must be accepted, as stated by Mason J in A v Hayden, that it does not admit of debate that there is a powerful public interest in the enforcement of the criminal law as an important element in the administration of justice. However, as cases such as Kerridge show, the question whether, and to what extent, an Australian court will enforce a promise to compromise or withdraw a criminal complaint or prosecution involves an evaluation of the nature of the criminal complaint. A promise will be enforceable in so far as it concerns a criminal complaint of a private nature. The fact that Australia’s common law on this topic is not absolute and admits of exceptions demonstrates that the principle cannot be regarded as having universal application in foreign countries. It is possible that, in China, clauses 1.10 to 1.12 of the Deed are entirely unexceptional obligations and would be enforceable. For the reasons given earlier, this is not a case in which a presumption that Chinese law is the same as Australian law should be applied.

103    As Isaacs J observed in Wilkinson v Osborne (in the passages cited earlier), the public policy which a court is entitled to apply as a test of validity to a contractual promise is in relation to some definite and governing principle which the community as a whole has already adopted either formally by law or tacitly by its general course of corporate life, and the principle must be one which is of general recognition in the community as one essential to its corporate welfare. The Australian community is taken to have adopted a principle that contracts to stifle a prosecution in Australia should not be enforced (unless the prosecution relates to a wholly private concern). However, in my view principles of international comity and principles of public morality do not require a conclusion that a contract to stifle a prosecution in China should not be enforced in the absence of evidence that such a contract would be illegal or unenforceable as contrary to public policy in China.

104    Respectfully, therefore, I disagree with the conclusion of the primary judge that clauses 1.10 to 1.12 of the Deed are contrary to Australian public policy as having the effect of stifling a criminal prosecution in China and are therefore unenforceable.

Third issue: is the enforceability of clauses 1.10 to 1.12 relevant?

105    Given my conclusion on the second issue, it is not strictly necessary to consider the third issue. As the matter may go further, however, I will resolve the third issue on the assumption that my conclusion on the second issue is wrong.

Reasons of the primary judge

106    The primary judge noted that, in the 2018 SC Proceeding, Justice Kennedy found that the respondents had fulfilled their obligations under clauses 1.10 of the Deed and that that finding “was not effectively challenged in the present proceeding” (at PJ [38], [49]). The primary judge inferred that the respondents had not taken any steps under clause 1.12, although her Honour described that clause as relatively insignificant in comparison to clause 1.10 (PJ [50]). Nevertheless, the primary judge concluded that whether or not the obligation in clauses 1.10 to 1.12 had been performed did not alter the analysis of whether the clauses were unenforceable as being contrary to public policy (at [39]-[40]). The primary judge’s reasons proceeded on the basis that it remained necessary to determine whether the unenforceability of clauses 1.10 to 1.12 rendered clause 1.8 unenforceable or whether clauses 1.10 to 1.12 were severable.

Respondents’ submissions

107    The respondents submitted that the question of the enforceability of clauses 1.10 to 1.12 is only relevant in a proceeding to enforce those clauses. In that respect, the respondents placed reliance on the statement of Mason J in A v Hayden that it is the effect of the enforcement of the contract on the administration of justice that is all important (at 557), and the statement of Isaacs J in Wilkinson v Osborne that courts refuse to give effect to and enforce a bargain that is contrary to public policy (at 97 and 98).

108    The respondents argued that they had not sought to enforce clauses 1.10 to 1.12 of the Deed when obtaining relief in the 2018 SC Proceeding. The respondents enforced clause 1.8 of the Deed. The respondents argued that the primary judge should have found that, even if clauses 1.10 to 1.12 were unenforceable as being contrary to public policy, the unenforceability of those clauses was not relevant to determining whether there was an obligation to pay $1 million under clause 1.8, because the respondents did not seek to rely upon clauses 1.10 to 1.12 in support of the judgment debt. The respondents further argued that the primary judge should have found that, in any event, the question was hypothetical, and therefore not justiciable, as the obligations under clause 1.10 had been performed to the benefit of the appellant (as found by the primary judge).

Appellant’s submissions

109    The appellant submitted that the enforceability of clauses 1.10 to 1.12 of the Deed is relevant to the enforceability of the other provisions of the Deed, particularly clause 1.8. Accordingly, the primary judge adopted the correct approach by considering, first, whether clauses 1.10 to 1.12 were unenforceable as contrary to public policy and, second, whether those clauses were severable or rendered the entire Deed, and particularly clause 1.8, unenforceable. The question of severance is addressed as the fourth issue below.

Consideration of the third issue

110    In my view, the respondents’ submission is based on a misunderstanding of the statements of Isaacs J in Wilkinson v Osborne at 97-98 and Mason J in A v Hayden at 557.

111    In Wilkinson v Osborne, Isaacs J explained that the result of finding that a promise is contrary to public policy is that the Court refuses to give effect to the “bargain”. It is implicit in his Honour’s statement that the entire bargain would not be enforced, not merely the offending promise. The case concerned a simple bargain to pay members of Parliament for political influence or support and therefore the entire bargain was struck down. His Honour did not need to address the circumstances in which a promise that is illegal or contrary to public policy may be severed so as to leave the remaining promises enforceable.

112    In A v Hayden, Mason J explained that the assessment of whether a promise has a tendency to affect adversely the administration of justice depends not on the purpose or motives of the parties but on the effect of the enforcement of the contract (in other words, the promise carried into effect). The case concerned the enforceability of an obligation of confidentiality, which obligation was said to be contrary to public policy as obstructing the course of justice. Accordingly, no question arose in that case as to the enforceability of other provisions of an agreement which were not themselves illegal or contrary to public policy.

113    The respondents’ argument is contrary to numerous authorities that address the question whether an illegal or unenforceable promise will render other related promises unenforceable or whether the illegal or unenforceable promise is severable. As explained by Jordan CJ in McFarlane v Daniel (1938) 38 SR (NSW) 337 (McFarlane) (at 344-345):

If the promises on one side are all illegal, it is obvious that the promises cannot themselves be enforced, and obvious also that the promises by the other party which are based on a wholly illegal consideration cannot be enforced. If the promises on one side are all void, they are obviously unenforceable themselves, and the promises on the other side are obviously unsupported by any consideration.

When, however, the promises made by one of the parties are some of them illegal, or void, and some of them valid, the questions arise whether the valid are severable from the invalid, and if so whether they are enforceable.

114    The authorities concerning the enforceability of promises that are related to, but separate from, an illegal or unenforceable promise are considered in the context of the fourth issue below. It follows that I reject the respondents’ contention that the unenforceability of clauses 1.10 to 1.12 of the Deed is only relevant in a proceeding to enforce those clauses.

Fourth issue: are clauses 1.10 to 1.12 severable?

115    Again, given my conclusion on the second issue, it is not strictly necessary to consider the fourth issue. I will nevertheless resolve the fourth issue on the assumption that my conclusion on the second issue is wrong.

Reasons of the primary judge

116    The primary judge observed that the parties had addressed the question of severance of the terms of the Deed in clause 9.1 which provided that any provision of the Deed which is unenforceable is, where possible, to be severed to the extent necessary to make the Deed enforceable, unless this would materially alter the intended effect of the Deed (PJ [43]). Giving effect to that provision, her Honour reasoned that, whether clauses 1.10 to 1.12 can be severed depends on whether the severance would materially alter the intended effect of the Deed (PJ [45]).

117    The primary judge concluded that clauses 1.10 to 1.12 are severable (PJ [51]). In reaching that conclusion, her Honour relied on the following considerations:

(a)    The intended effect of the deed was that the appellant would pay the respondents $500,000, plus the proceeds of sale of the St Kilda Road property plus $1,000,000 in exchange for a release from the claims in the Supreme Court proceeding, although the payment of $1,000,000 would not be required if the applicants failed to send the Chinese authorities a request to withdraw the prosecution by a certain date (PJ [45]).

(b)    The requirement for the payments of the $500,000, the proceeds of the St Kilda Road property and the $1,000,000 were expressed as separate obligations in the Deed, each under a separate heading and the unenforceable clauses were under an entirely separate heading, namely, criminal prosecution (PJ [46]).

(c)    The evidence concerning the course of negotiations at mediation indicated that the proposal for the appellant to pay those sums preceded any suggestion of a promise to withdraw the criminal prosecution (PJ [47]). The evidence of the negotiations demonstrated that the requirement to pay the $1,000,000 was not simply for the withdrawal of the prosecution, but was part of the demand that the respondents made to settle the claim for amounts owing and prior to the request by the appellant for the respondents to withdraw the criminal prosecution (PJ [48]).

(d)    As the respondents had complied with clause 1.10 and sent the request to the Chinese authorities, severing clauses 1.10 to 1.12 of the Deed would not now materially alter the intended effect of the deed. Her Honour said (at PJ [49]):

Severing those clauses would mean that, as originally intended, the debtor would be required to pay the applicants $1,000,000 by 3 May 2018, in circumstances where the applicants have in fact complied with their unenforceable but intended obligation to ask the Chinese authorities to withdraw the prosecution.

(e)    Although the respondents “presumably” had not complied with clause 1.12, the severance of that clause would not materially alter the intended effect of the Deed. Clause 1.12 was a relatively insignificant clause, as demonstrated by the fact that, unlike clause 1.10, there was no consequence for non-compliance expressed in the Deed (at PJ [50]).

Appellant’s submissions

118    The appellant submitted that the test for severance of an unenforceable promise is not relevantly different if the promise is given by deed or by contract. Unless the illegality of a promise is so heinous as to infect the instrument as a whole, the test for severance of an unenforceable promise depends on whether the relevant promises by the parties are independent or dependent covenants (referring to Brooks at 438 per Kitto J, 442-443 per Taylor J and 480-482 per Owen J; Howard F Hudson Pty Limited v Ronayne (1972) 126 CLR 449 (Howard) at 463-464 per Walsh J. Whether an invalid and unenforceable term of a contract is severable depends on “the intention of the parties as disclosed by the contract into which they have entered” and whether “B’s undertaking was a material and inseverable part of the consideration for A’s promises” (referring to Whitlock v Brew (1968) 118 CLR 445 (Whitlock v Brew) at 461, 462 per Taylor, Menzies and Owen JJ) or whether the two covenants “were intended to be the obverse and reverse of the one coin, to operate reciprocally or not at all” (quoting Brooks at 438 per Kitto J). The appellant also relied on the following statement of principle by Jordan CJ in McFarlane (at 345, citations omitted):

When valid promises supported by legal consideration are associated with, but separate in form from, invalid promises, the test of whether they are severable is whether they are in substance so connected with the others as to form an indivisible whole which cannot be taken to pieces without altering its nature. If the elimination of the invalid promises changes the extent only but not the kind of contract, the valid promises are severable. If the substantial promises were all illegal or void, merely ancillary promises would be inseverable.

119    The appellant submitted that that statement had been adopted by the High Court in Thomas Brown and Sons Limited v Fazal Deen (1962) 108 CLR 391 at 411, Humphries v Proprietors “Surfers Palms North” Group Titles Plan 1955 (1994) 179 CLR 597 at 618-619 and SST Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516 (SST Consulting) at [48]. The intention of the parties is to be determined objectively by reference to the terms of the instrument and the surrounding circumstances known to the parties (the genesis and context of the transaction) in accordance with the principles stated in Whitlock v Brew and Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 (Codelfa).

120    The appellant referred to Electric Acceptance in support of the proposition that the nature and extent of the illegality affects the question of severance: illegality of a heinous character infects the instrument as a whole whereas promises that are less reprehensible may be severable (at 812-819, per Brooking J).

121    The appellant submitted that clause 9.1 of the Deed reflected the general law position save that, if the illegality was of such a heinous character that it infected the instrument as a whole, the entire instrument would be unenforceable and a severance clause such as clause 9.1 would have no application.

122    The appellant submitted that the illegality of clauses 1.10 to 1.12 of the Deed was of a sufficiently heinous character to infect the Deed as a whole, and that the Court should refuse to sever parts of the Deed and find it was entirely void and unenforceable. In the alternative, the appellant submitted that it was plain from the wording of the relevant clauses of the Deed that the promises to pay money (in clauses 1.2 and 1.8) and the illegal promises to stifle a criminal prosecution in China (in clauses 1.10 to 1.12) “are in substance so connected with the others as to form an indivisible whole which cannot be taken to pieces without altering its nature” (citing McFarlane at 345 and Electric Acceptance at 821). In that regard, the appellant submitted that:

(a)    The respondents’ promise in clause 1.10 to “submit a request to all relevant Chinese authorities seeking to withdraw any and all criminal complaints” is directly referable to, and expressed to be contingent upon, “receipt of the AU$500,000 under clause 1.2”;

(b)    By clause 1.11, the appellant is “released from his obligation under clause 1.8 to pay the balance” if the respondents “breach their obligation to submit a request to the Chinese authorities in accordance with clause 1.10”.

(c)    The obligation to “take any further reasonable steps … to support the termination of criminal proceedings” in clause 1.12 is supplementary to the obligation in clause 1.10, which is in turn dependent upon the obligation to pay money under clause 1.2.

123    The appellant argued that the severance of the invalid promises would change the nature of the Deed because the appellant would be held to his promises to pay money without being able to enforce one of the main things he received in return, namely the discontinuance of the criminal complaint against him. As a consequence, the appellant argued that clause 1.8 was unenforceable.

Respondents’ submissions

124    In response to the appellant’s submission that the illegality of clauses 1.10 to 1.12 of the Deed is of a sufficiently heinous character to infect the Deed as a whole, the respondents submitted that the appellant misconstrued the clauses. The clauses did not involve the respondents ‘withdrawing’ a prosecution or ‘discontinuing’ a criminal proceeding; they merely required the respondents to withdraw their complaint.

125    In response to the appellant’s alternative submission that the promises to pay money (in clauses 1.2 and 1.8) and the promises in clauses 1.10 to 1.12 are so interconnected as to form an indivisible whole, the respondents submitted that the terms of the Deed show that the promises were independent. In that regard, the respondents submitted:

(a)    Clause 1.8 of the Deed was not “subject to” any other clause. The obligation contained within it was not dependent on the satisfaction of any condition, or requiring any action, relating to the Criminal Conduct Complaint.

(b)    Clauses 1.10 to 1.12 were under a separate heading “Criminal Prosecution”.

(c)    Clause 1.10 imposed an obligation on the respondents to, inter alia, “submit a request to all relevant Chinese authorities seeking to withdraw any and all criminal complaints against [the appellant]…”.

(d)    Clause 1.11 was the only clause which referred to the appellant’s obligation in clause 1.8. It provided the appellant with an ability to be released from his obligation under clause 1.8 in certain circumstances. It did not operate as a precondition to the obligation in clause 1.8 arising in the first place.

126    The respondents also relied on clause 9.1 of the Deed, submitting that it evinced an intention of the parties in favour of severance (unless severance would materially alter the intended effect of the Deed).

Consideration of the fourth issue

127    The question to be determined is whether clause 1.8 would be an enforceable promise notwithstanding a finding that clauses 1.10 to 1.12 are unenforceable as a matter of public policy.

128    As submitted by the appellant, a promise that involves illegality of a heinous character will render the entire instrument unenforceable. In McFarlane, Jordan CJ illustrated the point by saying that: “It can hardly be imagined that a Court would enforce a promise, however inherently valid and however severable, if contained in a contract one of the terms of which provided for assassination” (at 346). So too in Niemann v Smedley [1973] VR 769 (Niemann), the Full Court of the Victorian Supreme Court said (at 778, citations omitted):

An illegal term, as distinct from one merely void [for uncertainty], may raise different considerations for if it is of a kind involving a serious element of moral turpitude or is obviously inimical to the interest of the community so as to offend almost any concept of public policy it will so infect the rest of the contract that the courts will refuse to give any recognition at all to the contract, e.g. a promise to commit a burglary or to defraud the revenue or one contra bonos mores. But such class of cases apart, where the illegality has no such taint, the other terms will stand if the illegal portion can be severed.

129    In Carney v Herbert [1985] AC 301 (Carney), after referring to the above statements in McFarlane and Niemann with approval, the Privy Council expressed the applicable principle as follows (at 311):

There are therefore two matters to be considered where a contract contains an illegal term, first, whether as a matter of construction the lawful part of the contract can be severed from the unlawful part, thus enabling the plaintiff to sue on a promise unaffected by any illegality; secondly, whether, despite severability, there is a bar to enforceability arising out of the nature of the illegality.

130    Contrary to the appellant’s submission, in my view clauses 1.10 to 1.12 of the Deed are not of a character that would render the entire Deed unenforceable. The clauses do not involve criminal or dishonest conduct of a reprehensible and morally repugnant kind.

131    It is therefore necessary to consider whether clauses 1.10 to 1.12 are severable, leaving the remaining provisions of the Deed enforceable. Questions of severability are often difficult and statements of the test to be applied may not be satisfactory in every case: see Kitto J in Brooks at 438, referred to with approval by the Privy Council in Carney at 309 and the High Court majority in SST Consulting at [42]. To some extent, each case depends upon its own circumstances.

132    In the context of an unenforceable promise within a deed or contract, a central (but not exclusive) test for severance as stated in the cases is the intention of the parties with respect to the independence or interdependence of the unenforceable promise with the remaining promises in the instrument: McFarlane at 345 per Jordan CJ ; Whitlock v Brew at 461 per Taylor, Menzies and Owen JJ; Brooks at 438 per Kitto J, 442-443 per Taylor J and 479-482 per Owen J; Howard at 463-464 per Walsh J. As expressed by Jordan CJ in McFarlane (at 345), when valid promises supported by legal consideration are associated with, but separate in form from, invalid promises, the test of whether they are severable is whether they are in substance so connected with the others as to form an indivisible whole which cannot be taken to pieces without altering its nature. Similarly, in Brooks, Kitto J concluded (at 438) that the “intended reciprocity of obligation between promises is sufficiently clear to necessitate an inference that the legal validity of each promise is a condition of the operation of the other”.

133    The intention of the parties is to be ascertained objectively by reference to the terms of the instrument: Whitlock v Brew at 461 per Taylor, Menzies and Owen JJ; Brooks at 442 per Taylor J. In accordance with the usual principles governing statutory construction, evidence as to the actual intention of the parties is irrelevant, but evidence of surrounding circumstances (known to both parties) is admissible to assist in the interpretation of a contract if the language is ambiguous or susceptible of more than one meaning, but is not admissible to contradict the language of the contract when it has a plain meaning: Codelfa at 352–3 per Mason J. It is also permissible in contractual construction to have regard to evidence of the genesis, context and purpose of the agreement: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 462; Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 at [40].

134    The parties’ intention may be stated in a clause that addresses the consequences of a provision being illegal or otherwise unenforceable: Brooks at 442-443 per Taylor J and 479-482 per Owen J; Birstar Pty Ltd v The Proprietors “Ocean Breeze” Building Units Plan No 4745 [1997] 1 Qd R 117 at 132 per Pincus JA (with whom Thomas J agreed). In the absence of a clear statement of the parties’ intention in the instrument, the intention is to be ascertained from an examination of the manner in which the relevant promises have been expressed and the content or subject matter of the promises.

135    In the present case, the parties expressed their intention with respect to severance in cl 9.1 which stated that unenforceable provisions in the Deed are to be severed to the extent necessary to make the Deed enforceable, unless this would materially alter the intended effect of the Deed. It can be seen that cl 9.1 is similar in effect to the common law test for severance explained above.

136    It is therefore necessary to consider the subject of the relevant promises in the Deed and the manner in which they are structured. To understand the clauses in context, reference must also be made to the timing of the obligations in clauses 1.2 and 1.8. The following aspects of the promises can be noted:

(a)    Clause 1.2 required the appellant to pay the sum of $500,000 to the respondents immediately upon the execution of the Deed, that is, on 3 May 2017.

(b)    Clause 1.8 required the appellant to pay the sum of $1 million to the respondents on 3 May 2018, being one year later.

(c)    Clause 1.10 required the respondents, within seven days of receiving the payment under clause 1.2, to submit a request to all relevant Chinese authorities seeking to withdraw any and all criminal complaints against, relevantly, the appellant.

(d)    Clause 1.11 stipulated that, if the respondents breached the obligation imposed by clause 1.10, and the breach continued for a period of seven days following written notice of the breach by the appellant, then the appellant would be released from his obligation under clause 1.8 to pay $1 million to the respondents.

(e)    Clause 1.12 required the respondents to take any further reasonable steps within their power to support the termination of criminal proceedings arising as a result of the criminal complaints referred to in clause 1.10. The obligation imposed by the clause is, on its terms, supplementary to the obligation imposed by clause 1.10 and has an ongoing operation (in that it is not limited to any particular time period).

137    Contrary to the submission of the respondents, the promise in clause 1.8 was expressly dependent on performance of the promise in clause 1.10. The respondents’ submission that clause 1.8 of the Deed was not expressed to be “subject to” any other clause is of no consequence. The question whether one obligation is dependent or contingent upon the performance of another is one of substance, not of form: Marshall v NM Financial Management Ltd [1997] 1 WLR 1527 at 1532–3 per Millett LJ (with whom the other members of the English Court of Appeal agreed). Clause 1.11 stipulated that, if the respondents failed to perform the obligation imposed by clause 1.10 then the appellant would be released from the obligation under clause 1.8 to pay $1 million to the respondents. The sequence for performance of the obligations in the Deed were such that the respondents were obligated to perform the promise in clause 1.10 before performing the obligation in clause 1.8. The conditionality of the obligation in clause 1.8 could not be clearer - the promise to pay in clause 1.8 was conditional on the performance of the obligation in clause 1.10. In my view, it follows that the promises were interdependent and clause 1.10 could not be severed without materially altering the intended effect of the Deed: see Brooks at 438 per Kitto J.

138    The primary judge correctly stated the test for severance: whether severance would materially alter the intended effect of the deed. However, in my view the primary judge erred in the application of that test in a number of respects.

139    First, her Honour observed (at [46]) that the obligations to make payments of $500,000 and $1,000,000 were expressed as separate obligations in the deed, each under a separate heading, and the unenforceable clauses were under an entirely separate heading, namely, criminal prosecution. Respectfully, that observation relates to the form of expression of the obligations. Substantively, by the operation of clause 1.11, the obligation in clause 1.8 was expressly conditional on the performance of the obligation in clause 1.10.

140    Second, her Honour (at [48]) referred to the evidence of the sequence of offers made during the mediation (that culminated in the execution of the Deed) and concluded that the notes of the offers demonstrated that the requirement to pay the $1,000,000 was not simply for the withdrawal of the prosecution. Rather, the respondents had demanded payment of that sum (indeed a greater sum) in settlement of the claims made in the 2015 SC proceeding, and prior to the appellant’s request for the promise to withdraw the complaint to the Chinese authorities. Her Honour considered that that sequence of events demonstrated that, “in the negotiation of the deed, clauses 1.10, 1.11 and 1.12 were not so integral to the requirement to pay the $1,000,000 that they cannot be severed, especially where, as a matter of fact, the [respondents] have fulfilled what might be regarded as their side of the bargain, even though it was unenforceable”. Respectfully, the reasoning contains two errors. First, the evidence of the course of negotiations between the parties is not legally relevant to the assessment of the parties’ intentions, as those intentions must be ascertained objectively from the terms of the Deed. Whatever the course of the negotiations, the parties recorded their final agreement in the Deed which made clause 1.8 expressly conditional on the performance of clause 1.10. Second, the fact that clause 1.10 had been performed is not relevant to the enforceability of clause 1.8. That question turns simply on whether the obligations are so interconnected that the unenforceability of the one renders the other unenforceable.

141    Third, her Honour (at [49]) further reasoned that as the respondents had performed clause 1.10, severing clauses 1.10 to 1.12 “would not now, in the real world, materially alter the intended effect of the deed”. In that regard, her Honour (at [50]) expressed the presumption that the respondents had not performed clause 1.12, but her Honour considered that clause 1.12 was relatively insignificant and that severance of that clause would not materially alter the intended effect of the Deed. Again, respectfully, the reasoning proceeds on an erroneous assumption that the test for severance depends on whether the offending promise has been performed. The parties did not refer me to any authority that would support such a conclusion. Rather, the test for severance depends upon the degree of connection between the relevant promises as made.

142    For those reasons, I consider that the primary judge erred in concluding that clauses 1.10 to 1.12 were severable, leaving clause 1.8 enforceable. In my view, those clauses are not severable and, if clauses 1.10 to 1.12 were unenforceable as contrary to public policy, clause 1.8 would also be unenforceable.

Fifth issue: is clause 1.8 unenforceable on the grounds of duress?

Reasons of the primary judge

143    The primary judge concluded that the Deed was not unenforceable for reasons of duress for three principal reasons (at PJ [41]-[42]). First, the appellant was legally represented at the mediation when the Deed was entered into by senior counsel, junior counsel and a solicitor. Second, although various pressures are applied in negotiating settlements of legal proceedings, including threatening to walk away if an offer is not accepted on the same day, those types of pressures do not amount to duress. Third, while the appellant may have felt under a lot of pressure because of the outstanding criminal proceeding in China, that pressure did not force him to enter into the Deed. The matter being settled (the claim by the respondents for monies owing) was entirely separate from the Chinese criminal proceedings and it was the appellant who chose to introduce the question of the Chinese criminal proceedings into the negotiations for the Deed.

Appellant’s submissions

144    The appellant submitted that duress will invalidate an instrument if it is a cause of entering into the instrument and the onus is on the party seeking to enforce the instrument to negative the duress as a cause of the instrument being made, relying on Barton v Armstrong [1976] AC 104 (Barton) at 121.

145    The appellant submitted that, in the present case, the primary judge’s conclusion on the issue of duress involved three errors.

146    First, there is no authority (or logic) to support the proposition that being legally represented means that one was not acting under duress and the primary judge was wrong to take that factor into account as obviating duress.

147    Second, the pressure of the criminal prosecution is different in kind to the pressures associated with negotiating settlements of legal proceedings involving a civil claim, including threatening to walk away if an offer is not accepted on the same day, and the primary judge erred in conflating the two.

148    Third, it is not determinative that it was the appellant who raised the subject of the criminal prosecution at the mediation and the primary judge was wrong to take that factor into account as obviating duress.

Respondents’ submissions

149    The respondents submitted that no error had been shown in the primary judge’s reasoning. Further, the authorities dealing with cases where clauses or contracts may be voidable for duress (in the context of criminal prosecutions) concern circumstances where a proponent of the impugned clause or agreement had threatened a prosecution, implicitly or explicitly, in order to obtain the impugned agreement (referring to Kaufman, cited in Campion at 139; Jones at 183, quoted in Kerridge at 261 per Barton J; Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 (Crescendo Management) at 46). The respondents submitted that that was not the case here.

150    The respondents submitted that the fact that the appellant was legally represented was relevant, as the degree to which a ‘victim’ protests, challenges or baulks at entering into the impugned agreement is material (albeit not conclusive) (referring to Mason v New South Wales (1959) 102 CLR 108 at 142 per Windeyer J).

151    The respondents further submitted that it was also highly significant that it was the appellant who introduced the “question of Chinese criminal proceedings” into the negotiation of the settlement contained in the Deed. The respondents argued that it would be an extraordinary result if a court permitted a person to avoid obligations under contract on the basis of asserted duress arising from an element of negotiation introduced by the person who later seeks to avoid the obligation altogether.

Consideration of the fifth issue

152    In my view, no error has been demonstrated in the primary judge’s conclusion that the Deed was not vitiated by duress and the evidence supports her Honour’s conclusion.

153    In Crescendo Management, McHugh JA (with whom Samuels and Mahoney JJA agreed) explained (at 45-46) that:

In my opinion the overbearing of the will theory of duress should be rejected. A person who is the subject of duress usually knows only too well what he is doing. But he chooses to submit to the demand or pressure rather than take an alternative course of action. The proper approach in my opinion is to ask whether any applied pressure induced the victim to enter into the contract and then ask whether that pressure went beyond what the law is prepared to countenance as legitimate? Pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct. But the categories are not closed. Even overwhelming pressure, not amounting to unconscionable or unlawful conduct, however, will not necessarily constitute economic duress.

…

It is unnecessary, however, for the victim to prove that the illegitimate pressure was the sole reason for him entering into the contract. It is sufficient that the illegitimate pressure was one of the reasons for the person entering into the agreement. Once the evidence establishes that the pressure exerted on the victim was illegitimate, the onus lies on the person applying the pressure to show that it made no contribution to the victim entering into the agreement: Barton v Armstrong (at 633; 120) per Lord Cross.

154    The categories of illegitimate pressure that may form the basis of duress at law include threats to the person and economic duress. Threats to the person include actual or threatened violence, as in Barton, as well as actual and threatened deprivation of liberty which is illegal (see Smith v Monteith (1844) 13 M & W 427; 153 ER 178).

155    There is no doubt that the 2015 SC Proceeding was commenced against the background of a commercial dispute in China which became the subject of the Criminal Conduct Complaint. The appellant’s affidavits of 1 August 2019 outlined that background. In respect of the Criminal Conduct Complaint, the appellant said (affidavit of 1 August 2019 at [5]):

I believe that the second [respondent] made this complaint against me in order to stop me entering China and then bringing the entire Chinese business dispute proceeding into Australia to avoid jurisdiction issue. I deny that there is any basis for a criminal case against me and say that I am innocent of any charge of criminal behaviour. I believe that the second [respondent] sought to turn a civil business dispute in China into a criminal case. Since then, I haven't entered into China and it caused serious impact to my business there.

156    In respect of the 2015 SC Proceeding, the appellant said (affidavit of 1 August 2019 at [6]):

In the Supreme Court proceeding, the [respondents] claimed that I was liable to pay them money for personal guarantees executed in China and certain loan agreements allegedly made between us in China in 2012 and 2013. I denied the claims and defended the Supreme Court proceeding.

157    However, the evidence falls well short of establishing that the appellant agreed to clause 1.8 of the Deed by reason of illegitimate pressure applied by the respondents.

158    As noted by the primary judge (at PJ [21]), by his affidavit of 4 October 2019 the appellant gave evidence that:

… during the course of the mediation, I was told that … if I paid the [respondents] the additional sum of AU$1,000,000, then the second [respondent] would withdraw a criminal complaint it had made against me in China on 17 September 2013. The criminal complaint had nothing to do with the SC Proceeding.

and:

I agreed to pay the [respondents] the additional sum of AU$1,000,000 to withdraw the criminal complaint against me as provided for by the Deed of Settlement because I was concerned about the criminal complaint and police proceedings in China, and the possibility of my being arrested an imprisoned there, and urgently needed (and still need) to enter China in order to sell the mall …

159    Her Honour (at PJ [23]) did not accept that evidence because it was contradicted by contemporaneous notes of the conduct of the mediation prepared by the solicitor for the respondents (which were partially reproduced at PJ [22]). The notes demonstrated that, during the course of negotiations, the respondents had sought a payment by way of settlement of the 2015 SC Proceeding which exceeded the payments ultimately agreed in the Deed and had not mentioned the Criminal Conduct Complaint. Contrary to the appellant’s evidence, it was the appellant who, in the course of negotiations, increased his counter offer on terms that included the withdrawal of the Criminal Conduct Complaint.

160    The evidence shows that the appellant agreed to pay all sums under the Deed in order to settle the 2015 SC Proceeding. It was the claims made in the 2015 SC Proceeding which were the cause of the mediation between the parties and resulted in the Deed being entered into. There was nothing illegitimate about those claims. No illegitimate pressure was applied by the respondents to coerce the appellant to enter into the Deed. The respondents did not threaten to institute or prosecute the Criminal Conduct Complaint, or offer to withdraw it, on payment of a sum of money. The Criminal Conduct Complaint preceded the 2015 SC Proceeding and had no direct relevance to the proceeding. The respondents did not seek to use the Criminal Conduct Complaint as leverage in the mediation negotiations. To the contrary, it was the appellant that brought the Criminal Conduct Complaint into the negotiations. The appellant offered an increase in the settlement sum on terms that included the respondents agreeing to withdraw the Criminal Conduct Complaint. It is apparent and understandable that the appellant perceived that the withdrawal of the Criminal Conduct Complaint was beneficial to him. That is why he sought the promise. Further, as he stated in his affidavit of 1 August 2019 (at [7]), he ultimately refused to pay the amount due under clause 1.8 because he did not believe that the respondents had fulfilled their promise to withdraw the Criminal Conduct Complaint.

161    In the circumstances, the primary judge was correct to conclude that there was no proper basis to declare the deed unenforceable for reasons of duress.

Conclusion and orders

162    In conclusion, I uphold the respondents’ contention that the primary judge erred in concluding that clauses 1.10 to 1.12 of the Deed were unenforceable because they would stifle a prosecution. I otherwise dismiss the respondents’ contentions that:

(a)    the primary judge erred in exercising the discretion to go behind the judgment in the 2018 SC proceeding; and

(b)    the primary judge ought to have found that the question whether clauses 1.10 to 1.12 were enforceable, and/or whether those clauses could be severed, were hypothetical questions and therefore not justiciable.

163    In relation to the appellant’s grounds of appeal, the conclusion that clauses 1.10 to 1.12 of the Deed were lawful and enforceable obligations renders moot the appellant’s ground of appeal that the primary judge erred in finding that those clauses were severable. I dismiss the appellant’s ground of appeal that the primary judge erred in failing to find that clause 1.8 was unenforceable on the grounds of duress.

164    It follows from the above that the appeal is to be dismissed. Although the respondents have overall success on the appeal, I will afford the parties an opportunity to file short written submissions on the costs of the appeal, which I will determine on the papers.

Associate:

Dated:    5 August 2021