Parties Dispute Interest Payable in Loan Agreement

Fan v Yao [2022] VCC 509 (29 April 2022)

The parties are in dispute over the terms of a loan agreement.  The first defendant acknowledged that part of the principal sum advanced by the plaintiff remains owing.  The Court in determining whether interest is payable, assessed the law of the forum to be applied or Chinese law applicable. 

Facts:

The plaintiff (“Fan”) seeks to recover monies he advanced to the first defendant (“Yao”) in November 2010, together with interest.  Fan claims Yao agreed to pay him interest until such time as the debt was repaid.  Fan also sued Yao’s former wife (“Zhi”), the second defendant for the same amounts.  At the commencement of the trial, Counsel for Fan informed the Court that Zhi was no longer a party and that his client was not seeking judgment against her.

Yao has made various admissions that he owes Fan some money but disputes the quantum payable.  He also denied there was any agreement to charge interest.  The parties met socially for the first time in around August 2010 in China.  Yao told Fan that he was very experienced in real estate development.

On or about 1 November 2010, Fan agreed to lend the sum of RMB Yuan 1,300,000 (AUD 273,609) to Yao on a short-term basis (“the loan agreement”).  Yao asked Fan to assist him as he needed funds to proceed with one of his real estate projects.  The loan agreement was oral.  Whilst the parties agree on the sum that was advanced, they are in dispute about the terms of the loan agreement. 

Fan’s pleaded case is that the loan comprised the sum of RMB 1,300,000 as principal, together with an agreed sum of RMB 300,000 (AUD 63,141) for interest, being a total of RMB 1,600,000.  The principal and the agreed interest sum were due to be repaid in full by 31 December 2010 (“the due date”).   Yao pleads there was no discussion of any date by which the principal was to be repaid or for the charging of any interest.  During November 2010, Fan paid sums totalling RMB 1,300,000 by way of electronic funds transfers into a Chinese bank account held in Yao’s name. Yao admits he received these funds but he did not repay the monies on the due date.

Since then, the parties entered into variations of the loan agreement.  Fan alleges the loan agreement was first varied during telephone discussions on 5 January 2011 (“first varied loan agreement”).  Fan claims it was agreed that the principal would be repaid within a reasonable period of time or on demand.  Fan further claims the defendants agreed to pay interest on the principal owing by way of monthly instalments of RMB 30,000 (AUD 6,314) until the principal was repaid in full.  Yao denies having any such discussions. 

Fan alleges there was a second variation to the loan agreement made during a meeting at Liuzhou City on 20 December 2011 (“the second varied loan agreement”).  The principal of RMB 1,000,000 was still owing together with interest of RMB 450,000 (AUD 106,635.07).  Fan claims Yao orally agreed that the defendants would pay a revised principal of RMB 1,000,000 and revised interest of RMB 300,000, and that the defendants would continue to pay the monthly instalments of interest due until the revised principal was repaid in full.  Payments by the defendants were from then on to be paid into a bank account held in the name of Fan’s daughter with the St George Bank.  Thereafter, Yao made some payments into Fan’s daughter’s bank account between May 2012 and 17 January 2017 which totalled AUD 25,400.

Yao admits that the second varied loan agreement contained a term by which he would repay a revised principal in the sum of RMB 1,010,000, although he claims this figure did not take into account any principal repayments prior to 5 January 2011 and between 5 January 2011 and 13 July 2011.  The Defence however did not identify those repayments.  Yao also admits in paragraph 14(a) of his Defence that the second varied loan agreement contained a term that he would pay interest in the sum of RMB 300,000 but says there were no discussions in relation to any ongoing interest payments.  Yao accepted in evidence that he had not made any further repayments since 17 January 2017.  He also admitted that he owed Fan the sum of RMB 393,000 based on his calculations of the debt owed.

Fan deposed that the second IOU which was signed by Yao when the parties met in Melbourne in July 2013, represented a calculation of the amount of monthly interest owing from December 2011 to July 2013.  Fan’s evidence was that this sum was agreed to by Yao as being owing, in addition to the principal of RMB 1,000,000 and fixed interest of RMB 300,000.  He avers that the parties acknowledged there was a debt due and payable of RMB 1.3 million as of 20 December 2011, and that RMB 30,000 was to be payable per month until such time as the sum of RMB 1.3 million was repaid in full.  Yao was unable to provide any documentary evidence of additional payments which he claimed to have made.

Issue:

Whether or not interest was payable under the loan agreement. 

Applicable law:

County Court Act 1958 s 36 - provides that the court shall have power to hear and determine every proceeding in respect of which jurisdiction is conferred upon it by this or any other Act, notwithstanding that part of the cause of action arose outside Victoria, provided that a material part of the cause of action arose within Victoria, and shall have power to hear and determine every such proceeding notwithstanding that the whole cause of action arose outside Victoria, provided that the defendant or accused resided within Victoria at the time of the service of the originating process upon such defendant or accused.

Bonython v Commonwealth of Australia [1951] AC 201 - provides that where there is no express choice or inferred choice of law, then the court should look for the system of law with which the transaction has its closest and most real connection.

Weatherbeeta Ltd v Hammersmith Nominees Pty Ltd (No 2) [2019] VSC 713 - relied upon in holding that should Fan wish to enforce these amounts in AUD, then a calculation will need to be made to convert them from RMB into AUD when final orders are made.

Analysis:

It was put in cross-examination to Yao that his evidence that no interest was payable was untrue and inconsistent with the first IOU that he signed and fingerprinted on 20 December 2011.  The first IOU stipulated that he owed 300,000 RMB specifically for “interest”.  Yao’s evidence about this was that it was in respect of interest payable by him to Fan for other unrelated transactions.  However, he did not provide any details of what these transactions were and why the figure claimed for interest was referable to these alleged transactions.  There was no allegation that the defendant lacked capacity or was unable to appreciate what he signed on 20 December 2011 or more importantly, that Fan was aware that Yao was labouring under any incapacity.

There can be little doubt that the loan agreement was made in China given the evidence led and the breach occurred when Yao failed to pay the monies due to Fan in China.  That being so, the cause of action arose outside Victoria but as the defendant resided in Victoria at the time of the service of the writ, the court has power to hear the proceeding under the second limb of s36 of the County Court Act.  There is no express term or indeed any evidence that the parties turned their minds as to the law which would govern the loan agreement.  Dr Hawes provided expert evidence regarding the application of Chinese law relating to the capping of interest payable for commercial contracts at a maximum of 24 percent.

Conclusion:

The Court considered that the applicable law relating to the loan agreement is Chinese law, given the contract was negotiated and formed in China.  The Court found that the loan agreement was subject to Chinese law restrictions and that Fan is prevented from charging more than the maximum cap.  Fan has succeeded in his debt claim. Judgment is entered against Yao in the amount of RMB 1,000,000 being the principal debt, together with amounts for interest fixed in the sums of RMB 2,344,413 and RMB 300,000 respectively.  Should Fan wish to enforce these amounts in AUD, then a calculation will need to be made to convert them from RMB into AUD when final orders are made.  Fan is entitled to recover his costs of the proceeding on a standard basis unless the parties bring to my attention any reason why the usual rule that costs should follow the event should not apply.