DISTRICT COURT OF QUEENSLAND

CITATION:	Zheng v Chen [2024] QDC 139	
PARTIES:	NIANMIN ZHENG
(Plaintiff)	
	v	
	CHENG CHEN
(Defendant)	
FILE NO/S:	BD2864/19	
DIVISION:	Civil	
DELIVERED ON:	30 August 2024 	
DELIVERED AT:	Brisbane 	
HEARING DATE:	20 – 23 May 2024 (additional written submissions, 30 May 2024)	
JUDGE:	Barlow KC, DCJ	
ORDERS:	Judgment for the plaintiff in the sum of $977,600.39, including interest of $627,600.39.
	
CATCHWORDS:	CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH – OTHER MATTERS – whether an alleged misrepresentation induced the defendant into the contract – whether the misrepresentation was made – whether the misrepresentation was relied upon

CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – INTERPRETATION OF MISCELLANEOUS CONTRACTS AND OTHER MATTERS – what interest rate or rates the plaintiff is entitled to under a loan agreement– whether variations to the loan agreement operate retrospectively – whether different rates of interest apply after the repayment date – whether the interest rate reverts back to a lower rate where there are inconsistent clauses after variations to the loan agreement

CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – PENALTIES AND LIQUIDATED DAMAGES – GENERAL PRINCIPLES – whether default rate of interest in a loan agreement is unenforceable as a penalty– whether the interest rate alone is indicative of a penalty 

Andrews v Australia & New Zealand Banking Group Ltd (2012) 247 CLR 205, considered
Aquamore Credit Equity Pty Ltd v Hung [2021] NSWSC 1681, considered
Beil v Mansell (No 2) [2006] 2 Qd R 499, cited
Bellas v Powers [2023] NSWSC 1198, cited 
Gipps v Gipps [1978] NSWLR 454, cited
Gould v Vaggelas (1985) 157 CLR 215, cited
Lordsvale Finance Plc v Bank of Zambia [1996] QB 753, cited
Paciocco v Australia & New Zealand Banking Group Ltd (2016) 258 CLR 525, considered
QNI Resources Pty Ltd v North Queensland Pipeline No 1 Pty Ltd (2022) 11 QR 686, cited
	
COUNSEL:	J Hastie for the plaintiff
B O’Donnell KC for the defendant 	
SOLICITORS:	Madina Lawyers for the plaintiff 
Cornwalls for the defendant	
Contents
Summary
The events
Misrepresentation
What are the base interest rates?
The terms of the agreement & the issues raised
Retrospective variation?
Interest rate after the repayment date
Does clause 5(3) impose a penalty?
The defendant’s submissions
The plaintiff’s submissions
Consideration
Conclusions

Summary
[1]	In 2016, Mr Zheng and Mr Chen were friends.  Mr Zheng lived predominantly in China, although he had some property investments in Australia.  Mr Chen lived mostly in Australia.  Since they met in 2014, Mr Chen occasionally assisted Mr Zheng with the payment of bills for a property on the Gold Coast owned by Mr Zheng and with other private matters arising in Australia.
[2]	In April 2016, Mr Chen introduced Mr Zheng to a Mr Flint.  He was the director of a property development company – Mondo Grove Pty Ltd – that was intending to develop land in Oxenford into a residential estate of 14 town houses.  Mr Flint told them that he was seeking an investor to put $750,000 into the development in order to complete the financial needs to commence construction.  He said there would be a 40% return within one year.
[3]	Mr Zheng decided to invest, by lending $750,000 to Mondo Grove.  After some discussion with Mr Chen, in essence they decided that Mr Zheng would lend $400,000 to Mondo Grove (at an interest rate of 40%) and would provide $350,000 to Mr Chen, who would then lend that sum to Mondo Grove (also at an interest rate of 40%).  Mr Chen would then supervise the project on behalf of the two lenders.  Mr Chen, at Mr Zheng’s request, incorporated a company, Magicworld International Pty Ltd, of which Mr Chen was the sole director and secretary.  Mr Zheng provided $750,000 to Magicworld, which was then provided to Mondo Grove in two tranches of $400,000 and $350,000.  
[4]	The respective parties entered into a number of loan agreements in June 2016 broadly reflecting these arrangements.  Mr Zheng and Mondo Grove made a loan agreement for $400,000 (with interest at 40%), with Mr Flint as guarantor.  Mr Chen arranged for his mother (a Chinese resident) to make a loan agreement for $350,000 with Mondo Grove and Mr Flint, in similar terms to the Zheng to Mondo Grove agreement.  Mr Zheng and Mr Chen made a loan agreement which provided that Mr Zheng lent Mr Chen $350,000 with interest at 20%.  Mr Zheng contends that he lent the money to Mr Chen at an interest rate of 20%, so that Mr Chen could profit from his own loan to Mondo Grove.  Each agreement provided that the principal and interest were payable one year from the date on which the principal was paid to Mondo Grove.
[5]	Mondo Grove did not repay the loans on the due dates.  Mr Zheng and Mr Chen agreed to extend the due date of each loan to 27 November 2017 and the parties varied the original loan agreements as a consequence.  Mondo Grove did not repay the loans by that date.  Mr Zheng and Mondo Grove ultimately reached agreement for the payment of an agreed sum for the $400,000 loan.  Neither Mondo Grove nor Mr Flint repaid any amount to Mr Chen or his mother.  
[6]	Mr Zheng now sues Mr Chen for the amount he contends is owing under the loan agreement between them.  Mr Chen pleaded four defences to the claim.  First, that the agreement was a sham.  Secondly, if it is not found to be a sham, he entered into it in reliance on misrepresentations by Mr Zheng as to the reasons why Mr Zheng wanted there to be such a document, which implied that the agreement would not be enforced by Mr Zheng against Mr Chen.  Thirdly, if the court finds that Mr Chen is liable under the agreement, some of the amount alleged to be due by way of interest is an unenforceable penalty.  Fourthly, the claim for the balance of the interest is greater than the amount due on a proper construction of the agreement.
[7]	At the conclusion of the trial, Mr O’Donnell KC, appearing for Mr Chen, abandoned the assertion that the loan agreement was a sham because, although Mr Chen considered that it would never be enforced because he was signing it, essentially, merely to give the appearance to Mr Flint that the loan was being made in his name even though the lender was in fact Mr Zheng, it was clear on the evidence that Mr Zheng had a different view.  As a document will be sham only if all parties to it subjectively intended that it not have any legal effect, Mr O’Donnell conceded that Mr Chen could not maintain this ground of defence.
[8]	For the reasons discussed below, my conclusions on the remaining issues are that:
(a)	Mr Zheng did not make the misrepresentation alleged by Mr Chen, who did not make the loan agreement in reliance on any misrepresentation by Mr Zheng;
(b)	the interest component alleged to be a penalty is an unenforceable penalty;
(c)	simple interest is payable on the principal of $350,000 at 30% per annum from inception until the extended repayment date of 27 November 2017 and thereafter at 20% per annum.
[9]	Consequently, I find that Mr Chen owes Mr Zheng the principal sum of $350,000, plus interest, as at the date of judgment, in the sum of $627,600.39.  I give judgment for that sum, plus costs (subject to any submissions the parties wish to make about costs).
The events
[10]	The history of the events is largely undisputed.  I shall set out relevant parts of that history, indicating where there is a dispute and in those cases making findings as to the relevant facts. 
[11]	In or before April 2016, Mr Flint told Mr Chen that he had bought a property in Oxenford and was looking for investors to provide funds to develop it into residential lots on which townhouses were to be built for sale.  Mr Chen said he was not prepared to invest at that stage but he would see if any of his contacts were interested.
[12]	In April 2016, Mr Chen told Mr Zheng that he knew someone who was developing land in Oxenford and was seeking funding.  I do not accept Mr Zheng’s evidence that, on that occasion, Mr Chen told him that the investment sought was a loan of $750,000 at 40% interest, as that conflicts with the type of investment that Mr Flint was then seeking and there is no evidence that Mr Flint gave Mr Chen any details of the proposed investment before he met both Mr Chen and Mr Zheng.
[13]	Mr Chen took Mr Zheng to the site and then they met Mr Flint on 15 April 2016.  He told them that he was seeking investment of $750,000 for a return of 40% within 12 months.  Mr Flint followed up that meeting on 17 April 2016 by sending both Mr Chen and Mr Zheng an information memorandum offering investment by subscription to units in a unit trust of which Mondo Grove was the trustee.  A total of 1,000 units at $750 each were on offer.  The author projected a 40% internal rate of return on the investment.
[14]	On 22 April 2016, Mr Zheng sent an email to Mr Flint, saying:
… I decide to invest on this project because you promised to give me fixed 40% of the amount I invest as return, it is too attractive!  The question is in what way I give you the money and make sure both this money and profit could come back to me safely!  We will get the answer next week.
[15]	Mr Zheng engaged a solicitor in Queensland (Ms Li) to advise him on the proposed investment.  She advised him that an investment in a unit trust was highly risky.  On 4 May 2016, Mr Zheng told Mr Flint that he would invest by way of a loan rather than a unit trust.  He instructed Ms Li to prepare a loan agreement.
[16]	In the meantime, he asked Mr Chen to incorporate a company in Australia that would channel the funds and to open a bank account in the company’s name.  Mr Chen was to be the sole director and secretary and an associate of Mr Zheng, Fu Li (someone unknown to Mr Chen), was to be the sole shareholder.  Mr Chen incorporated Magicworld on 27 April 2016 and, at about the same time, opened a bank account for the company.  Mr Zheng transferred $750,000 to that account on 11 May 2016.
[17]	Mr Zheng later had a conversation with Ms Li, in which she advised him that she was concerned that he may have insufficient security for the loan, as Mr Flint did not have any valuable assets in his name.  
[18]	On 16 and 17 May 2016, Mr Zheng and Mr Chen exchanged a number of WeChat messages about the proposed investment, starting with Mr Zheng informing Mr Chen of Ms Li’s concern.  He said that Mr Chen would have to supervise Mr Flint not to use the money for other purposes.  Mr Chen responded that he would monitor the project and Mr Zheng should tell Mr Flint that it was a requirement that Mr Chen monitor the entire project.  Mr Zheng agreed.
[19]	They then discussed the risks involved in an investment in the project.  Mr Zheng noted that Ms Li had never encountered a loan without a mortgage, to which Mr Chen responded that he would get involved throughout the project, including sales, and that Mr Flint had agreed that he should supervise it.  In response, Mr Zheng said:
We are not afraid of risk while bravely marching forward.
[20]	Mr Chen replied:
I have always believed that risks are better controlled rather than avoided.  There are risks every day.  If you stand still, you will never achieve anything.  You need to do your best to control the risks before you can move forward.  We need this confidence.
[21]	On 17 May, Mr Chen sent Mr Zheng a long message in which, most relevantly, he said:
… Simply put, you lend money to Nick’s operating company.  Nick provides a personal guarantee …  If anything goes wrong, you hold him accountable, which is the worst scenario.  When I was evaluating the project, I found that this project only had 14 townhouses, which was too small.  In my opinion, there is no risk in the scale of the project.  In anything, there could be sales risk, which could be controlled.  Therefore, it is perfectly okay for you to ask me to guarantee it, or to bear some of the risk.  Because this project is too small and easy for me.  As for the loan process, take the land by short-term loan, which can generally reach 40-50%.  We cover the other half, while using our own money for permit.  …  our own funds only contribute 30-35% … So our risk is far less than that of the bank.  …  I know the process, and I've evaluated the location and scale of the project. If it's 41 townhouses, we need to be much more cautious. But it's 14 townhouses at pacific pines. I really have nothing to worry about. The only worry is the sale, and that's why I suggested that we intervene in sale throughout the process to help him sell, not to make money, but to control the project. That's why I had the confidence to help him finance and introduce you to the project. That's why I didn't think about making money from it or anything from the beginning. I just tried my best to supervise the project progress and to make sure there is no delay, after all, considering the project location, price and scale, there is no need to worry about the scale of risk.  …  as long as Nick has signed a personal guarantee, I don't think he will screw up the project or go bankrupt himself in order to avoid losing a few hundred thousand dollars. So this probability is almost zero. That is why the project is worth investing. After all, this is a small project and small investment.
[22]	Mr Zheng responded to that message by saying he would call later and, after that WeChat exchange, Mr Zheng and Mr Chen had a telephone or WeChat voice call discussion.  They have different recollections of exactly what each said, which is not surprising given the delay between the conversation and their evidence.  In my view the essence of each account is similar.  
[23]	In his first affidavit, Mr Zheng said (at [26]) that he told Mr Chen, in this conversation, that he really wanted Mr Chen to be involved in and to monitor the project.  He proposed that he lend $400,000 to Mr Flint and he would lend the other $350,000 to Mr Chen at a lower interest of 20%.  He said:
This way you can lend it to Nick and earn a margin as if it was a finder’s fee.  If you also become a lender, you will have a legitimate interest to monitor the project on behalf of either of us.
[24]	In cross-examination, Mr Zheng disagreed that he suggested splitting the $750,000 into two parcels in order to give Mr Flint the appearance that Mr Chen was a direct investor in the project so that he could monitor it.  He said that, without Mr Chen becoming personally involved in the project, he did not have confidence in it.  He referred to Mr Chen’s offer to guarantee the project and said that that was a risk for Mr Chen so he suggested that Mr Chen take responsibility only for part of the loan to Mondo Grove, therefore earning remuneration for his involvement.  Mr Zheng denied, both then and in his second affidavit responding to that of Mr Chen, that he referred to Mr Chen’s share of the interest as a finder’s fee or a referral fee (as Mr Chen said in his affidavit).  Mr Zheng also denied that the only reason for Mr Chen to be seen to lend money to Mondo Grove was to give him the appearance of having a direct investment so that he could monitor the project.
[25]	In his affidavit, Mr Chen said (at [69]) about this conversation, that Mr Zheng “said words to the effect of:”
I want to proceed with the investment with Nick, but I want you to make sure that it goes as planned.  I want to proceed by separating the $750,000 into $400,000 in my name and $350,000 in your name.  You will keep half of the 40% interest paid by Nick as a referral fee.  I don’t expect you to work for free and I want you to do a good job keeping your eye on the investment.
[26]	Mr Chen also said he told Mr Zheng that, as his Australian tax rate on earnings was 30% and his mother’s Chinese tax rate was 10%, he would lend the money to Mondo Grove through his mother.  
[27]	Mr Zheng responded to that paragraph of Mr Chen’s affidavit in paragraph 13 of his second affidavit, in which he said:
I would not have suggested any referral fee. If I had intended to pay the defendant a commission or a referral fee, I would have signed an (sic) referral or brokerage type of agreement with him or appointed him to act as a project manager on my behalf with remuneration. At the time I did want the defendant to gain from this deal as he helped me a lot with it, but it was always on the basis that his interests would be aligned with mine and he would financially gain only through the margin on the interest paid to him.
[28]	He also denied being told about tax rates or that Mr Chen’s mother would be the lender.  He said he did not find out that Mr Chen’s mother had a loan agreement with Mondo Grove until much later.
[29]	On 20 May, Mr Chen told Mr Zheng that Mr Flint was asking about the progress with the lawyers.  Mr Zheng said he would follow up Ms Li.  A short time later, he said that Ms Li had emphasised the lack of repayment ability.  About 40 minutes later Mr Chen said, “I’ll tell Nick that you invest $400k and I invest $350k, so that I can legitimately monitor the project,” to which Mr Zheng responded, “Okay.”
[30]	Ms Li then prepared the loan agreement between Mr Zheng and Mondo Grove, which was signed by Mr Flint on 29 May and by Mr Zheng on 1 June 2016.  Mr Zheng then told Mr Chen to send $400,000 from Magicworld’s account to Mondo Grove, which Mr Chen did on 3 June 2016.
[31]	In the meantime, on 26 May Mr Chen asked Mr Zheng if Ms Li could send Mr Chen a blank loan agreement so that Mr Chen could prepare a similar one for his portion of the funds.  I infer that that was done as, on 7 June 2016, Mr Chen’s mother and Mondo Grove made a loan agreement in substantially the same terms as that between Mr Zheng and Mondo Grove.
[32]	On 2 June 2016, Ms Li sent Mr Chen a draft loan agreement between Mr Zheng and Mr Chen for the sum of $350,000.  On 4 June, Mr Zheng and Mr Chen exchanged these WeChat messages:
Mr Zheng:  Did you send your agreement to lawyer LI?
Mr Chen: Not yet.  I’ll print it out.
Mr Zheng:  Okay.  I’ve told her that you don’t hire a lawyer.  You can send it to her after you sign it.
Mr Chen:  Okay.  I’ll send it to her.
[33]	Mr Chen sent the agreement, signed by him, to Ms Li on 5 June and Mr Zheng sent to her a version signed by him on 6 June 2016.
[34]	Mr Chen’s mother and Mondo Grove (with Mr Flint as guarantor) made their own loan agreement on 7 June 2016 and, on 8 June, after discussing the release of the funds with Mr Zheng, Mr Chen transferred $350,000 from the Magicworld account to the Mondo Grove account.  Mr Zheng said that he approved Mr Chen transferring that sum from the Magicworld account to Mr Chen’s account, while Mr Chen said that the approval was to transfer it direct to Mondo Grove.  I prefer Mr Chen’s evidence as, even if Mr Zheng was lending the money to Mr Chen, it was for the purpose of Mr Chen lending it to Mondo Grove and there was no need for it to go to Mondo Grove via a Chen account.
[35]	Mondo Grove provided a receipt for that sum on the same day, acknowledging receipt of the funds from Mr Chen’s mother.
[36]	On 13 June, Mr Zheng and Mr Chen exchanged the following WeChat messages:
Mr Zheng:	Please send the receipt to lawyer LI for the 300k loaned to you.
Mr Chen:	Got it.  I’ve received the email.
Do you need my receipt?
Or Nick’s receipt”
Mr Zheng:  Yours.  I’ve received Nick’s.
Mr Chen:  So I’ll write one?
Mr Zheng:  Yes, 350k.
Mr Chen: Ok.
[37]	Mr Chen prepared a receipt dated 14 June 2016 and sent it to Ms Li on 16 June 2016.  The receipt is headed “Receipt of loan”, names Mr Zheng as lender and Mr Chen as borrower and provides:
The Borrower (Cheng Chen) hereby acknowledges receipt of the sum of $350,000 (Three Hundred Fifty Thousands Australian dollars) from the Lender (Nianmin Zheng).
[38]	The terms of each of the loan agreements (from Zheng to Mondo Grove, from Mr Chen’s mother to Mondo Grove and from Zheng to Chen) are materially identical, other than the loan amounts and the absence of a guarantee in the Zheng to Chen agreement.  Each provided that the loan was for one year from the date on which the loan funds were transferred to the borrower and interest was payable at the nominated rate while the loan was outstanding.  Both principal and interest were payable on the repayment date.
[39]	Before the due dates for repayment of the loans, Mr Flint told Mr Chen that there were delays in the project due to the insolvency of the builder and slow sales.  The profitability of the project was likely to decline and Mr Flint originally sought a reduction in the interest rate under the two loans to Mondo Grove.  Ultimately, he sought an extension of time to repay the loans, to 25 November 2017.
[40]	Mr Zheng agreed to the extension granted, but added conditions to that agreement.  Those conditions were first outlined by Mr Chen in an email to Mr Flint on 19 June 2017.  In that email, among other things Mr Chen said:
Mr Charles Zheng has agreed your request of Loan Extension into 25th Nov, 2017.
The loan agreement between Charles and myself need to be renewed/issued again, and all parties need to sign to activated.
[41]	Mr Zheng, on Mr Chen’s referral, engaged new solicitors to prepare a deed of variation of the loan agreement between Mr Zheng, Mondo Grove and Mr Flint.  Mr Flint sent a deed of variation, signed by him, to Mr Zheng on 16 August and Mr Zheng returned it, signed by him, to Mr Flint, with a copy to Mr Chen, on 18 August 2017.  On the same day, Mr Zheng sent Mr Chen a WeChat message, saying:
The supplementary agreement has been sent to nick.  For the 35 from your side, please use this template to sign it and send it to my email.
[42]	On 22 August 2017, Mr Zheng and Mr Chen signed a deed of variation of the loan agreement between them, which was in substantially identical terms to the Zheng-Mondo Grove deed (apart from not including a $100,000 establishment fee and imposing a different interest rate).  On the same day, Mr Chen, on behalf of his mother, signed a deed of variation of the Peimei Chen to Mondo Grove loan agreement, again in almost identical terms to the Zheng to Mondo Grove deed.
[43]	Mondo Grove did not repay the loans on the due date.  There is little evidence about what happened from then, other than that Mr Zheng’s solicitors placed caveats over properties owned by Mondo Grove, the caveats were later withdrawn and, in February 2018, Mr Zheng, Mondo Grove and Mr Flint reached a settlement agreement that, in essence, provided that Mondo Grove and Mr Flint would pay Mr Zheng $638,000 by 10 May 2018, secured by a mortgage over real estate.  I do not know whether Mondo Grove did pay the agreed sum to Mr Zheng.
[44]	In April 2018, Mr Zheng and Mr Chen exchanged WeChat messages about the $350,000 loan agreement.  Mr Zheng asked Mr Chen to provide “a loan extension for the 350K I gave you,” otherwise “a lawsuit will ensue.”  Mr Chen did not respond directly, but rather appears to have been addressing further negotiations with Mr Flint.  Ultimately, each said he would engage a lawyer.  Mr Zheng’s lawyers finally made a demand for repayment by a letter dated 9 January 2019.  
[45]	As an aside, so far as I am aware, Mr Chen’s mother has not sued Mr Flint to recover the amount due to her under the Chen to Mondo Grove loan agreement.  If she has not, then she may well be statute barred now from doing so, unless the loan agreement is properly considered to be a deed.  Obviously I need not take this further.
Misrepresentation
[46]	As expressed by Mr O’Donnell KC in his address, in summary Mr Chen’s defence is that Mr Zheng induced Mr Chen to sign the loan agreement under misrepresentations as to Mr Zhen’s real purpose in putting it forward.  That is, Mr Zheng communicated to Mr Chen two reasons why he was asking that $350,000 be lent to Mr Flint’s company in the name of Mr Chen.  One was to enable Mr Chen, as he put it, legitimately to monitor the development project.  The other was to produce for Mr Chen a fee, referred to by Mr Zheng as a finder’s fee, equal to 20 per cent of the $350,000.  Mr Chen’s case is that neither was Mr Zheng’s true reason.  His true reason was that he wanted to reduce his own risk by having Mr Chen legally bound to repay that amount plus interest, whether or not Mondo Grove repaid that sum to Mr Chen.  He did not communicate that true reason to Mr Chen, who was thereby induced to enter into the loan agreement under a misapprehension as to the reasons for doing so.
[47]	Mr O’Donnell submitted that both Mr Zheng’s and Mr Chen’s evidence about this conversation, in their affidavits, is broadly consistent with Mr Chen’s defence.  Mr Zheng suggested splitting the loan into two tranches, so that Mr Chen could legitimately supervise the development and he would earn a finder’s fee from the interest differential.  To the extent that Mr Zheng retracted that evidence in his second affidavit and in the course of his cross-examination, the court should reject that retraction.  He submits that the WeChat messages referred to at [29] above are consistent with Mr Chen’s version of this conversation.
[48]	Mr Zheng said, in his oral evidence, that the reasons he suggested splitting the loan were to reduce his risk, to reward Mr Chen for his efforts and to give Mr Chen a legitimate basis for supervising the project.  At first, he said that, although he might not have used the exact words about reducing his risk, he expressed it clearly.  But, in subsequent evidence, he said he did not give that reason for splitting the loan.  It is helpful to set out Mr Zheng’s evidence, expressed in the following exchange with Mr O’Donnell:
MR O’DONNELL:   And if you could ask Mr Zheng, in answering my next question, if he could concentrate on what he communicated to Mr Chen.  And my question is when he proposed to Mr Chen the splitting of the 750,000 investment into the 400 and the 350,000, he did not communicate to Mr Chen that Mr Zheng’s reason of the 350,000 loan to Mr Chen was to reduce Mr Zheng’s risk?
INTERPRETER:   I told him the reason, but I didn’t say it was to reduce my risk.
MR O’DONNELL:   The reasons you communicated were twofold, I suggest.  One was to enable Mr Chen to legitimately monitor the project?
INTERPRETER:   No.
MR O’DONNELL:   And secondly, that Mr Chen could thereby receive some remuneration for his efforts both in introducing you to the project and for monitoring the project on your behalf?
INTERPRETER:   This is part of the reason.
MR O’DONNELL:   That he communicated to Mr Chen?
INTERPRETER:   It wasn’t mentioned during the conversation about splitting the amount to 400K and to three – 350K.
MR O’DONNELL:   Your previous answer was this was part of the reason?
INTERPRETER:   The main reason is he wanted to participate in the project and to make it more successful, so he offered to provide personal guarantee, and that means there’ll be a guarantee for the 750K, an – but it was too risky, so it was split into two parts.  He had – had no money, so I lent him – to lend him 350K.  So in this way, he could get some remuneration for his effort and also the re – and he can reduce his risk from 750K to 350K.
MR O’DONNELL:   Your – that answer might’ve been Mr Zheng’s private thinking.
INTERPRETER:   No.
MR O’DONNELL:   But he – just a minute.  But he did not communicate that to Mr Chen.
INTERPRETER:   I said to him on the phone that the – it is the risk is too high in relation to the – the guarantee for 750K.  But I didn’t say that it was split into 450 – 400K and 350K due to the reason that I wanted to reduce my risk.
[49]	The conversation in which Mr Zheng suggested splitting the loan into two occurred, either on 17 May, given Mr Zheng’s WeChat message (after receiving Mr Chen’s long message discussing risks) that he would call later, or between the WeChat message on 20 May 2016 in which Mr Zheng referred to the lack of repayment ability and the subsequent message from Mr Chen.  Both Mr Chen’s message on 17 May and Mr Zheng’s message on 20 May concerned risk and could have engendered this proposal.  In the end, it does not matter.
[50]	It is immaterial, in my view, whether or not Mr Chen mentioned lending his portion through his mother.  Mr Zheng said that, if he had known that, he would not have agreed, but I think that unlikely, as he was protected, in any event, by his agreement with Mr Chen.  On the other hand, there was no real need for Mr Chen to tell Mr Zheng how he proposed to reduce the tax on the expected profit.  I do not find it necessary to determine whether or not they discussed this, but I think it unlikely that Mr Chen’s mother was mentioned, as he did not talk to her about being the lender until some two weeks later.
[51]	The differences in the parties’ recollections as to exactly what was said in this conversation are also immaterial.  Mr Chen was an experienced businessman (with a Master of Business Administration and experience with substantial property developments on the Gold Coast).  He was alert to the risks involved in the project and to Mr Zheng’s lawyer’s concerns about the extent of the risk to Mr Zheng.  Mr Chen was prepared to take on some of the risk himself, even to the extent of offering his own guarantee.  Mr Zheng’s response was to suggest splitting the loan into two: a reasonable suggestion in the circumstances that would result in neither of them taking on the full risk of the project.  Mr Chen clearly wanted to reduce Mr Zheng’s concerns about risk.  It would have been obvious to him that Mr Zheng’s suggestion had all three benefits:  sharing the risk, giving Mr Chen the opportunity to make a profit and giving him a legitimate reason to supervise the project.
[52]	The Zheng to Chen loan agreement was the result of the parties’ individual assessments of the risks of lending to Mondo Grove for this development.  Mr Zheng, having reviewed the information memorandum, having had initial discussions with Mr Chen about Mr Flint and the development and having obtained legal advice, was prepared to invest the amount of $750,000 sought by Mr Flint.  His legal advice was initially that he should not invest in units, as proposed by Mr Flint, but by way a loan (thus giving him a higher priority for the recovery of funds invested than he would have as a unit holder).  But he obtained further legal advice (apparently expressed strongly to him) that a loan was also risky given that Mr Flint, as guarantor, had no valuable assets.  That advice clearly affected his confidence in making the proposed investment.
[53]	Mr Chen clearly had a very favourable view of Mr Flint and of this particular development.  He considered it to have a very low risk of failure: so much so that he had offered to guarantee the loan to Mr Zheng, or to bear some of the risk.  His view, as expressed to Mr Zheng, was that the project and the investment were small and the risk very low.  Additionally, he considered there to be almost no risk that Mr Flint would not pay on his guarantee if it became necessary to call on him.  Such risks as existed were offset by the very favourable interest rates to be earned by both him and Mr Zheng, and the short-term basis of the loans.  He believed that risks are better controlled than avoided and he could control the risks in this case by closely monitoring the development and, if necessary, assisting with sales.  
[54]	Also, according to Mr Chen, he told his mother, “I am going to lend money to a property developer.”  He clearly knew that this was the arrangement and that, in order for him to have the money to lend, he would be borrowing the funds from Mr Zheng at a more favourable interest rate than he would charge the developer.
[55]	Mr Chen was clearly prepared to accept some of the risk of investment.  When Mr Zheng proposed that the loan be split into two and that Mr Chen keep half of the interest paid by Mondo Grove as a finder’s fee, he was obviously keen to proceed.  When Ms Li prepared the Zheng to Mondo Grove loan agreement, he was keen to adapt it for his agreement with Mondo Grove (although with his mother as the lender).  After using the funds that Mr Zheng had deposited in Magicworld’s account to pay his tranche to Mondo Grove, Mr Chen prepared and provided a receipt for those funds, naming himself as borrower and Mr Zheng as lender.  
[56]	Consequently, I do not accept that Mr Zheng made any misrepresentation to Mr Chen. Nor do I accept that Mr Chen was induced to enter into the loan agreement with Mr Zheng in the absence of any realisation that Mr Zheng was thereby reducing his risk, nor in the ‘belief’ that Mr Zheng would not enforce the agreement if circumstances required.  
[57]	Mr O’Donnell submitted that, even if I should come to the view that Mr Chen appreciated that he was entering into a binding loan agreement with Mr Zheng, I should still find that he was misled by Mr Zheng as to the importance of that agreement, particularly as to the extent of the risk that Mr Zheng might ultimately rely upon it and demand that Mr Chen repay him.  He was still induced by that misleading conduct into making the agreement.  In this respect, Mr O’Donnell referred me to Gipps v Gipps in which the wife, in reaching a property settlement with her husband, did not believe or rely the husband’s statement of the value of his assets, but she was not aware of the true extent of the undervalue the husband was asserting.
[58]	In the course of the reasons of Hutley JA (with whom the other members of the Court agreed), his Honour said:
… it is only if the knowledge is such as to destroy the effect of the misrepresentations as inducements. Only if knowledge is of the falsity of representations, and that knowledge is accepted as true so that the false belief is wholly dissipated does knowledge defeat misrepresentation. The true legal position is, in my opinion, stated by Burt J, as he then was, in Sinclair v. Preston:  “I might say in passing that I do not agree, that if a person to whom a misrepresentation of fact inducing in character has been made subsequently but before agreement finds out that the statement is not wholly true, that it must follow that he was not induced by such statement to enter into the agreement. The question whether a person has been induced by a statement made to him to enter into an agreement is, in my opinion, a single issue of fact. No doubt pre- contractual knowledge that the statement made is not wholly true has a very direct bearing upon the resolution of this question of fact but it does not of itself necessarily provide the answer. To say that it does is to formulate a different question.”
To state that a person is induced by a statement is to affirm a causal relation which is a question of fact, not of law. That being so, it is impossible to apply to any situation a rule which produces a final result. The trial judge or jury have to answer the question: Did the misrepresentation cause the representee to enter into the contract, it being understood that the representation, as was stated in Australian Steel and Mining Corporation Pty. Ltd. v. Corben, was one among the factors which induced the contract.
[59]	Mr O’Donnell submitted that Mr Zheng was downplaying the significance of the proposed loan to Mr Chen by referring to two reasons for it, but not suggesting that he would ever enforce it.  Mr Chen’s evidence, on which Mr O’Donnell relied, was that, if Mr Zheng had told him that he was proposing that Mr Chen take a loan from Mr Zheng and on-lend it to Mondo Grove in order to reduce Mr Zheng’s risk in making the investment, he would not have proceeded with it.  He had no attachment to the project and was not going to wear the risk for $350,000.
[60]	Mr O’Donnell referred to a number of other matters that, he submitted, supported the proposition that Mr Chen was misled into making the loan agreement.  First, that he had no reason to take on the risk when his true role was simply helping Mr Zheng proceed with an investment that he had already decided to make by his company lending Mr Flint’s company the full amount of $750,000.
[61]	Secondly, from Mr Chen’s viewpoint, the transactions giving rise to the split loans looked artificial, as they did not reflect the true fact that no money passed into Mr Chen’s hands, but it all went from Mr Zheng to Magicworld and then to Mondo Grove, as Mr Zheng contemplated when he first told Mr Flint that he proposed to invest by “a loan agreement between two company and you give personal guarantee.”  
[62]	Thirdly, Mr Chen considered the loan agreement (as well as the receipt) simply to be a record that the money paid by Magicworld (a company then controlled by Mr Chen) had originated from Mr Zheng.
[63]	Fourthly, Mr Zheng appeared to encourage Mr Chen not to involve a lawyer in reviewing and advising Mr Chen on the loan agreement, which was consistent with inducing him to believe that there was no risk to him in signing the agreement.
[64]	Mr O’Donnell submitted that Mr Zheng’s representations to Mr Chen need not be the sole inducement for Mr Chen to enter into the loan agreement.  A misrepresentation is sufficient so long as it plays some part, even if only a minor part, in contributing to the formation of the contract.  The question of fact to answer on all the evidence is whether the misrepresentation alone, with, or notwithstanding other things that accompanied it, was a real inducement, or one of the real inducements to the [induced person] to do whatever caused his loss.
[65]	I do not, with respect, accept Mr Chen’s evidence described at [59] above.  Mr Chen seemed to me to be attempting to downplay his involvement in the transaction, since it has failed.  For the reasons I have discussed at [51] to [55] above, I consider that Mr Chen went into the transaction with his eyes open and fully understanding that he was taking on some of the risk in lending money for the project: a project that he considered to have minimal risk that was reduced even further by the almost zero probability that Mr Flint would not repay the loan if Mondo Grove itself could not.  Mr Chen may not have considered the possibility that Mr Zheng might enforce the loan agreement against him, but that was because he was confident that he and Mr Zheng would be repaid by Mondo Grove or, if necessary, Mr Flint.  He was not persuaded to that view by any conduct of Mr Zheng.
[66]	These conclusions necessarily mean that I reject these submissions and I find that Mr Chen was not induced by any misrepresentation by Mr Zheng to make the loan agreement.
[67]	It follows that Mr Chen is bound by the loan agreement and is liable to Mr Zheng for the amount due under it.  I shall therefore proceed now to consider the contractual issues raised in Mr Chen’s defence in order to determine that amount.  Logically, this requires that I first consider what interest rates applied to the principal and then whether the default interest rate introduced by the variation agreement is a penalty.
What are the base interest rates?
The terms of the agreement & the issues raised
[68]	To understand the context of the construction issues, it is necessary to set out the relevant terms of the loan agreement and the variation agreement.
[69]	By clause 4 of the loan agreement, the borrow agreed to repay the loan on or before the first anniversary of the drawdown.  Clause 5 provides:
(1)	The parties agree that as a condition of the Lender entering into this unsecured personal loan agreement with the Borrower, the Borrower will pay interest at the annual interest rate of 20% (twenty percent) of the total Loan amount if the loan is repaid by the Borrower and received by the Lender [at] his/her nominated bank account on or before the Repayment Date. To avoid any doubts, the total repayment amount including the loan and agreed interest should be $420,000.00 (Four hundred twenty thousand dollars only) when the loan is due on the first year anniversary date.
(2)	the Borrower agrees that if the Borrower fails to repay the Loan and ensure the Loan is received by the Lender on or before the Repayment Date, the Lender will be entitled to continuously charge the interest at the annual interest rate of 20%, and any costs and damages the Lender may suffer in connection with this Loan.
[70]	The variation agreement amended clause 5(1) to read:
(1)	The parties agree that as a condition of the Lender entering into this unsecured personal loan agreement with the Borrower, the Borrower will pay interest at the annual interest rate of 30% (thirty percent) of the total Loan amount.
[71]	The variation agreement also introduced clause 5(3):
(3)	For the purposes of Clause 5(2) where any sum, or part of any sum, payable by the Borrower under this Agreement is not paid to the Lender the Principal Payment on or before the Repayment Date, in addition to Clause 5(2) the Lender is entitled to charge additional default interest on the Principal Payment. The accrued default interest:
a.	must be paid by the Borrower to the Lender on demand by the Lender;
b.	will be calculated at the Default Interest Rate for which the outstanding amount is overdue;
c.	will accrue on and from the due date for payment of the outstanding amount up to but excluding the date of payment; and
will be computed on a daily basis for actual days elapsed and will be compounded on the last day of each month.
[72]	Clause 1.1 of the variation agreement defines “Default Interest Rate” as 15%.  Recital B defines “Principal Payment” as the amount of $350,000 “plus annual interest rate of forty (sic) percent (30%).”
[73]	Apart from the question of whether the default interest rate and clause 5(3) impose an unenforceable penalty, two issues concerning the interest payable under the loan agreement as varied arose during the trial:
(a)	first, whether the change in the interest rate from 20% to 30% effected by the variation to clause 5(1) was retrospective to the original date of the loan (as Mr Zheng contends) or only applied from the date of the variation (as Mr Chen now contends); and 
(b)	secondly, whether the interest rate reverted to 20% after the varied repayment date of 27 November 2017.
Retrospective variation?
[74]	As to the first issue, Mr Hastie submitted that the variation agreement entirely replaced the original clause 5(1).  It did not say, as it could have, that the replacement clause, or the interest rate imposed by it, operated only prospectively from the date of the variation.  It continued to refer to the obligation to pay interest (at 30%) as being a condition of entry into the agreement.  In the absence of any express machinery to determine when the 30% rate took effect, and where the interest was only payable in one lump sum on the repayment date (rather than having already been paid periodically during the period of the loan to the date of variation), it must have been intended to apply from the inception of the loan agreement.  This is supported by the reference to the rate of 30% in recital B.
[75]	Mr O’Donnell submitted that nothing in the variation agreement purports to apply the changes retrospectively and therefore it ought not be construed as operating in that manner.  In the absence of an express term providing for the date at which the replacement operated, the court should construe it as operating from the date on which the variation agreement was made.
[76]	In my view, the effect of the variation was to vary the loan agreement with effect from its inception.  The variation effected a changed interest rate, presumably to reflect the apparently greater risk of the loan given that it was already in default.  It did not require any additional payments to top up periodic payments of interest that had already been made, as the interest was not due to be paid until the repayment date.  This view is also supported, as Mr Hastie submitted, by the definition of Principal Payment in recital B as the amount of $350,000 plus annual interest at 30%: that being the mount on which default interest was to accrue under the new clause 5(3).
[77]	I therefore find that, as result of the variation agreement, Mr Chen became liable to pay Mr Zheng, on the amended repayment date, the loan sum plus interest on that sum at 30% per annum from the inception of the loan to the repayment date.
Interest rate after the repayment date
[78]	As to the second issue, Mr Hastie submitted that the amendment to clause 5(1), replacing the original, had the effect that the interest rate imposed under that clause, which was originally limited to the period up to the repayment date, now applies more generally and continuously while the loan is outstanding.  In effect, it renders clause 5(2) redundant because clause 5(1) now covers the field.  He acknowledged that clause 5(3) refers to clause 5(2) as if it continues to operate after the repayment date, but submitted that it would be a commercially unlikely scenario that the parties would agree to increase the interest rate to 30% and then contemplate it dropping back to 20% upon the repayment date passing.
[79]	Mr O’Donnell submitted that clause 5(2), which imposes a rate of 20% after the repayment date, was unamended by the variation agreement.  Far from clause 5(1) purporting to operate both retrospectively and prospectively (including after the repayment date) and thus to render clause 5(2) redundant, to the extent that there is an overlap or clash between those clauses, the latter is more specific and therefore should prevail.  Therefore, clause 5(1) does not operate past the repayment date, but rather, clause 5(2) does.  This construction is supported by the new clause 5(3) (which purports to impose the default rate of interest if the principal sum is not paid by the repayment date).  It commences with the words, “For the purposes of Clause 5(2)” and goes on to provide that, “in addition to Clause 5(2) the Lender is entitled to charge additional default interest on the Principal Payment.”  It therefore affirms clause 5(2) as stating the relevant interest rate after the repayment date, to which clause 5(3) purports to add default interest.  
[80]	On this issue, I prefer Mr O’Donnell’s construction.  The court should attempt to give effect to each clause of the agreement, including after its variation.  The parties clearly intended that clause 5(2) continue in operation notwithstanding the change to clause 5(1).  While it may be unusual to revert to a lower interest rate on default, in this case it is not surprising because the parties intended that, not only would that interest rate apply to the outstanding loan amount, but in addition the default interest rate would apply to the entire amount (both the loan amount and the interest) outstanding as at the repayment date.  Whether or not the default interest clause is void or unenforceable as a penalty, the parties’ intention as to the ongoing operation of clause 5(2) is clear.
[81]	Therefore, I find that interest (apart from default interest) accrued on the loan amount of $350,000:
(a)	from inception of the loan (8 June 2016) to the amended repayment date of 27 November 2017 – at 30% simple per annum; and
(b)	from the day after the amended repayment date (28 November 2017) and continuing to judgment – at 20% simple per annum.
Does clause 5(3) impose a penalty?
The defendant’s submissions
[82]	Mr O’Donnell submits that the default interest rate introduced by the variation agreement is a penalty and consequently unenforceable, for a number of reasons.
[83]	First, he submitted, it only applies if Mr Chen defaulted in payment of the principal sum and interest under clause 5(1) by the repayment date.  It is a classic collateral stipulation that applies only upon non-performance of the primary obligations.  
[84]	Secondly, it effects a substantial increase in the interest rate payable on the principal.  It amounts to an increase of 75% over the standard 20% interest rate (or of 50% over the pre-default standard interest rate of 30% introduced by the variation agreement) and it compounds monthly, whereas the standard rate was simple interest.  It also accrues on the “Principal Payment”:  that is, cumulatively on top of both the loan amount and the interest charged up to the repayment date, not just on the original loan amount.  This further compounds the punitive effect of the clause.
[85]	Thirdly, Mr Zheng’s commercial interest in this loan was to recover the principal and to earn 20% interest, rising to 30% by the variation.  At the time of both the initial agreement and the variation agreement, those rates were considered acceptable levels of return for the risk of the transaction.  The default interest rate is above and beyond what is necessary to provide for his commercial interest in the transaction.
[86]	Fourthly, clause 8 of the loan agreement provides that the borrower indemnifies the lender against all costs, losses, etc, paid or incurred by the lender of or incidental to any breach of, or default under, the agreement by the borrower.  That clause protects Mr Zheng against any actual losses he might incur as a result of Mr Chen’s default, in addition to the standard interest, so there is no legitimate commercial interest in securing a default interest rate.
[87]	Mr O’Donnell went on to refer to a number of examples of cases where a default interest rate had or had not been held to be a penalty.  He pointed out that the credit risk of a borrower in default was higher than the risk of a non-defaulting borrower.  The higher risk justifies a higher interest rate, provided that the increase is commercially justifiable.  However, if there is an exceptionally large increase, it may be possible to deduce that its dominant function is in terrorem the borrower.  An increase from 16% to 25% per annum has been held to be a penalty in the absence of any evidence from the lender proving some foreseeable exceptional loss on default.  An increase from 2.5% per month to 5% per month, under an agreement that also contained an indemnity similar to clause 8 of the agreement in case, was also held to be a penalty: importantly, as a matter of construction of the contract in the absence of any evidence justifying it by reference to the extent of any increase in risk or losses arising from the default.  A “standard rate” of 9.75%, discounted to 1.75% for timely payment, in a contract with a similar indemnity clause to clause 8, was also recently held to be a penalty.
[88]	Finally, Mr O’Donnell submitted that, while the onus of showing that a clause is a penalty lies on the person who is sued on it, the terms of the contract itself may enable the court to infer that it is a penalty.  Such an inference can be drawn here, because the default rate is much higher than the standard rate and cannot be justified, especially given the existence of clause 8.  If such an inference arises from the terms of a contract, then the onus shifts to the plaintiff to demonstrate, by evidence, that there was proper commercial justification for the default rate.  The absence of such evidence may have the effect that the inference operates unchallenged, resulting in a conclusion that it is a penalty.  Here, there was no such evidence from Mr Zheng.
The plaintiff’s submissions
[89]	Mr Hastie submitted that the defendant in a case such as this always bears the onus, which is significant and not lightly discharged, of establishing that a default interest clause is a penalty.  Here, Mr Zheng’s commercial interest was in being paid the principal and interest on the due date.  When the default rate was inserted by the variation agreement, Mr Chen was already in default of his principal obligation, so the commercial risk then faced by Mr Zheng was higher than it had been under the original loan agreement.  The question is whether the default rate is so wholly disproportionate to the protection of Mr Zheng’s commercial interest in the light of that increased risk.
[90]	Mr Hastie submitted that the onus was on Mr Chen, in the circumstances, to call evidence relevant to that risk, such as the rates of finance open to Mr Zheng.  In the absence of such evidence, Mr Chen relies solely on the default rate itself as giving rise to the inference that it is a penalty.  He submitted that the increase of 15% (even when compounding) was not so great, in comparison to the standard rate of 30% (simple interest) up to the repayment date, as to give rise to such an inference.  The disparity is substantially lower than cases in which the courts were prepared to draw the inference solely from the contracts.  He sought to distinguish Beil v Mansell because in that case there appears to have been evidence of relevant commercial lending rates for similar loans.
[91]	Mr Hastie also pointed out that interest on the principal was not payable monthly, or at some other intervals, during the term of the loan, but as a lump sum on the repayment date after only a short loan period.  Thus there was an increased risk to Mr Zheng in not receiving any payment, whether of principal or interest.  This risk added to justification of the default rate of interest, especially where the borrower was already in default.
Consideration
[92]	The effect of clauses 5(2) and 5(3), as varied, is that, upon default in repayment of the principal and simple interest at 30% up to the repayment date, Mr Chen became liable thereafter to pay simple interest at 20% pa on the loan amount (of $350,000), plus 15% compounding on the combination of the loan amount and interest on it up to the repayment date.  Even if it were only on the principal, the effect of compounding is substantial.  As I put to Mr Hastie in submissions, even if the default rate applied only to the loan amount, in only the first year it would increase the total amount of interest payable by about 50% (assuming a base interest rate of 30% pa), with further increases in each subsequent year.  As I have found that the base interest rate after the repayment date is 20% pa, the increase in the first year (on the loan amount only) would be about 75%.  Furthermore, as the default interest rate applies to the Principal Payment (that is, $350,000 plus 30% interest due on the repayment date: a total of $504,604.43), not just the loan amount, that effect is even higher.
[93]	Despite Mr Hastie’s submission that the disparity is not sufficient on its own to give rise to an inference that the default rate is penal, I have come to the opposite conclusion.  The differential and its practical ramifications as interest accrues after default give rise to a clear inference that that rate is penal and was intended to operate in terrorem.  I find that, of its own nature, it is a penalty.
[94]	The additional rate of 15% pa, compounding monthly, is therefore unenforceable.
Conclusions
[95]	The result is that judgment should be entered for Mr Zheng for $350,000 plus interest at the rates specified at [81] above.  On my calculation, the interest to 27 November 2017 amounts to $154,604.43 and the interest from 28 November 20172018 to the judgment date is $472,995.96.  On my calculation, the interest to 27 November 2017 amounts to $154,604.43 and the interest from 28 November 2017 to the judgment date is $472,995.96.  I give judgment accordingly.
[96]	Subject to any submissions to the contrary, Mr Chen should be ordered to pay Mr Zheng’s costs of the proceeding.  However, I shall hear from the parties on the question of costs, including any reserved costs.