Armstrong Strategic Management and Marketing Pty Limited v Expense Reduction Analysts Group Pty Ltd

Supreme Court of NSW|2016-10-20|Before: Ball J

pense Reduction Analysts Australasia Pty Ltd (ACN 095 591 665) (Third Defendant) Stuart Roy Michael (Fourth Defendant) Ronald Clucas (Fifth Defendant) Charles Frederick Marfleet (Sixth Defendant) ERAGICS Limited (Seventh Defendant) Expense Reduction Analysts International Limited (Eighth Defendant) Keith John Chapman (Ninth Defendant) Anthony Frederick Dormer (Tenth Defendant) Representation: Counsel: K Armstrong (Third Plaintiff in person - Leave granted to appear on behalf of First & Second Plaintiffs) EAJ Hyde with C Mitchell (Defendants)

Introduction

On 22 July 2016, I delivered judgment in this matter (Armstrong Strategic Management and Marketing Pty Limited v Expense Reduction Analysts Group Pty Ltd (No 9) [2016] NSWSC 1005) (the principal judgment) in which I dismissed the proceedings and indicated that I would hear the parties in relation to costs if costs could not be agreed.
By a notice of motion filed on 23 September 2016 and amended, with leave, on 20 October 2016, the defendants seek an order that the plaintiffs pay the defendants' costs of the proceedings. They seek orders that some of those costs be paid on an indemnity basis. They also seek an order under s 98(4)(c) of the Civil Procedure Act 2005 (NSW) (the CP Act) that the defendants' costs in the proceedings be assessed on a gross sum basis and fixed in the amount of $6,481,994.94, or such other amount as the court may determine.
This judgment is concerned with the orders sought in the motion as amended. It is also concerned with an application by the plaintiffs for the partial release of security held in respect of the defendants' costs to enable the plaintiffs to pay a costs order already made in the defendants' favour.
Before dealing with these matters, it is necessary to say something about the proceedings generally and about the defendants' motion seeking costs.

The proceedings

The proceedings were commenced on 5 May 2010 in the District Court. They were transferred to the Commercial List in the Supreme Court on 9 March 2011.
There are three plaintiffs - Mr Armstrong and two companies, Armstrong Strategic Management and Marketing Pty Ltd (ASMM) and Armstrong Consulting Pty Ltd, which are associated with Mr Armstrong and through which he carries on his business activities.
There are 10 defendants. The five corporate defendants - Expense Reduction Analysts Group Pty Ltd (the first defendant) (ERAG), ERA Insurance Services Pty Ltd (the second defendant) (ERAIS), Expense Reduction Analysts Australasia Pty Ltd (the third defendant) (ERAA), ERAGICS Limited (the seventh defendant) (ERAGICS) and Expense Reduction Analysts International Limited (the eighth defendant) (ERAIL) - are, or were, all members of a group of companies that carried on a franchise business under the name "Expense Reduction Analysts". ERAG, ERAIS and ERAA are Australian corporations. ERAGICS and ERAIL are registered in the United Kingdom. The five individual defendants were directors of one or more of the corporate defendants. Three of them, Mr Clucas (the fifth defendant), Mr Marfleet (the sixth defendant) and Mr Chapman (the ninth defendant), are resident in the United Kingdom.
The details of the plaintiffs' claims are set out in the principal judgment. It is not necessary to repeat them here. Suffice it to say that as finally pleaded and particularised, the plaintiffs made a large number of allegations against the defendants which, in some respects at least, were unnecessarily complex and which required an extensive factual investigation into the relationship between the parties over a number of years.
As part of that factual investigation, the plaintiffs served affidavits from six lay witnesses, including extensive affidavits from Mr Armstrong. The defendants served affidavits from 19 lay witnesses, including extensive affidavits from Mr Clucas and Mr Marfleet and affidavits from a number of other witnesses who lived overseas. There was also extensive discovery. The court book consisted of 32 lever arch folders of documents (referred to as "Part B"). The plaintiffs originally sought to tender a further 23 lever arch folders of documents (referred to as "Part C"), although ultimately only a small number of those documents were tendered.
The plaintiffs also served expert evidence from Mr John Temple-Cole, a forensic accountant, and an expert report from Mr Joe Willis, an accountant, whose report was rejected. The defendants served expert evidence from Mr Cully-Gower, a forensic accountant. On the basis of the reports prepared by Mr Temple-Cole, the plaintiffs ultimately claimed damages of approximately $17 million together with interest.
The final hearing lasted for 27 days between 2 March 2016 and 31 May 2016. The plaintiffs' closing submissions were 187 pages and the defendants' closing submissions were 362 pages.
Prior to February 2014, the individual defendants were represented by Mr Stephen Klotz, who was a partner of Norton Rose at that time. ERAG and ERAA were represented by Ms Justeen Dormer of Kreston Dormers. ERAIS, ERAGICS and ERAIL, which had been placed into administration in 2010 or 2011, were not represented prior to February 2014. Between February 2014 and March 2014, all of the defendants, other than Mr Dormer, appointed Mr Harold Werksman of Holding Redlich as their solicitor. Mr Dormer changed his solicitor from Mr Klotz to Ms Sally Scott of Hall & Wilcox.
In January 2016, Mr Werksman moved from Holding Redlich to Thomson Geer. He remained the solicitor on the record for all the defendants other than Mr Dormer. On 12 February 2016, Mr Dormer also changed his solicitor on the record from Ms Scott to Mr Werksman. On 9 August 2016, all the defendants changed their solicitor on the record from Mr Werksman to Mr Klotz, who by that stage was a partner of Hall & Wilcox.
There were a large number of interlocutory disputes in the proceedings. It is not necessary to refer to them all, but they included the following: 1. in June 2011 the individual defendants sought orders striking out parts of the plaintiffs' Amended Commercial List Statement. That application was determined in a judgment delivered by me on 8 July 2011 (Armstrong Strategic Management and Marketing Pty Limited v Expense Reduction Analysts Group Pty Ltd [2011] NSWSC 704) and was partially successful; 2. in the course of giving discovery, the individual defendants inadvertently disclosed a small number of privileged documents to the plaintiffs. The plaintiffs refused to return those documents, claiming that the privilege had been waived. On 23 December 2011, the individual defendants filed a notice of motion seeking orders restraining the plaintiffs from making any further use of those documents and delivery up of them (the privilege motion). On 26 April 2012, Bergin CJ in Eq granted, in part, the relief sought by the individual defendants (Armstrong Strategic Management and Marketing Pty Limited v Expense Reduction Analysts Group Pty Ltd [2012] NSWSC 393). The plaintiffs appealed that decision and, on 18 December 2012, the Court of Appeal allowed the appeal (Armstrong Strategic Management and Marketing Pty Ltd v Expense Reduction Analysts Group Pty Ltd; Expense Reduction Analysts Group Pty Limited v Armstrong Strategic Management and Marketing Pty Limited [2012] NSWCA 430; 295 ALR 348). On 7 July 2013, special leave to appeal to the High Court was granted and, on 6 November 2013, the High Court reversed the decision of the Court of Appeal and ordered that the plaintiffs pay the defendants' costs of the motion and the appeals (Expense Reduction Analysts Group Pty Ltd v Armstrong Strategic Management and Marketing Pty Limited (2013) 250 CLR 303; [2013] HCA 46); 3. in 2011, the plaintiffs and the individual defendants entered into an agreement by which the plaintiffs agreed to provide security for the individual defendants' costs. Up until 30 November 2012, the plaintiffs provided $600,000 pursuant to that agreement. However, from that time, they refused to provide additional security in accordance with the agreement. On 19 December 2012, the individual defendants filed a notice of motion seeking orders for specific performance of that agreement or, alternatively, an order for security (the first security motion). That motion was heard by Stevenson J who, on 1 May 2013, refused to make an order for specific performance, but ordered that the plaintiffs provide further security in the sum of $100,000.00 for the individual defendants' costs (Armstrong Strategic Management and Marketing Pty Ltd v Expense Reduction Analysts Group Pty Ltd [2013] NSWSC 457). On 14 May 2013, Stevenson J ordered that the plaintiffs pay the individual defendants' costs of the motion and ordered that those costs be paid forthwith (Armstrong Strategic Management and Marketing Pty Ltd v Expense Reduction Analysts Group Pty Ltd [2013] NSWSC 584); 4. by two notices of motion filed on 19 December 2014, the first to ninth defendants and the tenth defendant sought orders that the judgment of Stevenson J in relation to security be set aside on the basis that the plaintiffs had not been frank with the court in relation to their financial positions. The defendants also sought an order for additional security (the second security motions). On 28 May 2015, after a 3 day hearing, I dismissed those applications on the basis that an order for additional security would have the effect of stultifying the proceedings (Armstrong Strategic Management and Marketing Pty Ltd v Expense Reduction Analysts Group Pty Ltd (No 7) [2015] NSWSC 623). I ordered that the defendants' costs of the motions be their costs in the cause; 5. on 23 May 2014, the individual defendants filed a notice of motion seeking an order that the plaintiffs pay the individual defendants the sum of $130,000.00 in respect of the first security motion. Their total costs of that motion were $189,842.93 (exclusive of GST). On 18 June 2014, Hammerschlag J gave judgment on that application in favour of the individual defendants in the sum of $120,000.00 and stayed that judgment to give the plaintiffs time to file additional evidence in support of an application to extend the stay. Hammerschlag J also ordered the plaintiffs to pay the costs of the individual defendants of the application, which were provisionally assessed at $5,000.00 and ordered that the proceedings be stayed if those costs were not paid by 4 July 2014. Ultimately, on 11 August 2014, following a failed application by the plaintiffs to extend the stay, the costs were paid and the stay was not continued; 6. on 11 August 2014, the defendants filed a notice of motion seeking orders that the proceedings be stayed until the plaintiffs paid the costs of the privilege motion. On 15 August 2014, Stevenson J ordered that the proceedings be stayed pending the plaintiffs either paying the High Court costs or obtaining a stay of the operation of the order made by the High Court, and further ordered that the plaintiffs pay the defendants' costs of the stay motion.
In accordance with the agreement between the parties and the orders of the court, the plaintiffs have provided the following security in respect of the individual defendants' costs: 1. $400,000 in the form of a bank guarantee; 2. $200,000 held in a controlled monies account by Bridges Lawyers (the Sydney agent of the plaintiffs' solicitor) pursuant to an undertaking given by Dominic Stephen Calabria dated 11 September 2014; 3. $100,000 held in court following the order of Stevenson J on the first security motion.
The plaintiffs have paid the following costs: 1. $188,105.75 in respect of the individual defendants' costs of the proceeding in the High Court; 2. $120,000.00 in respect of the costs of the first security motion; 3. $5,000.00 ordered to be paid by Hammerschlag J.
In addition, on 30 July 2014, the individual defendants' costs of the privilege motion in the Supreme Court and Court of Appeal were assessed at $175,946.46. That amount has not been paid and the defendants have served two statutory demands both dated 22 August 2016 in respect of that amount. The plaintiffs made an application to set aside those statutory demands, which was dismissed by Randall AsJ on 15 November 2016.
One other application is relevant to the question of costs. On 11 January 2016, the defendants issued a subpoena to Marketing Eye Pty Limited. On 16 February 2016, I ordered that Marketing Eye pay the first to ninth defendants' costs from 19 January 2016 until 16 February 2016 on an indemnity basis in relation to that subpoena. Marketing Eye has paid those costs.

The motion for costs

Originally, in support of their motion for costs filed on 23 September 2016, the defendants relied on an affidavit sworn on 19 December 2014 by Ms Sylvia Fernandez, a partner of Holding Redlich, and an affidavit sworn on 19 December 2014 by Mr Michael John Dudman, an expert costs consultant, together with affidavits from Mr Klotz affirmed on 22 September 2016 and 18 October 2016 and a supplementary report of Mr Dudman dated 21 September 2016 (which was annexed to an affidavit sworn on that date). Both Ms Fernandez's affidavit and Mr Dudman's affidavit sworn on 19 December 2014 were prepared for the purposes of the second security motions.
Ms Fernandez's affidavit gave evidence of what had happened in the proceedings up until the time the affidavit was sworn and also evidence of the costs that had been incurred by the first to ninth defendants up until that time. According to Ms Fernandez's evidence, those costs were as follows: Norton Rose's solicitors fees to 15 January 2014 (excl of GST) $1,811,943.93 Norton Rose's disbursements to 15 January 2014 (excl of GST) $509,159.83 Holding Redlich's solicitor fees from February 2014 to 19 December 2014 (excl of GST) $1,117,671.50 Holding Redlich's disbursements from February 2014 to 19 December 2014 $545,248.36 Total: $3,984,023.62

Ms Fernandez gave evidence that that total included the costs associated with the privilege motion and the Court of Appeal proceeding, which totalled $259,966.55 (exclusive of GST), but did not include the costs of the High Court proceeding. Ms Fernandez also gave evidence that the total included an amount of $189,842.93 in respect of the individual defendants' costs of the security motion (exclusive of GST). She deducted that amount from the total to arrive at a figure for the first to ninth defendants' total unpaid costs and disbursements. However, it appears that Ms Fernandez was incorrect when she said that the total included the $189,842.93 and that that amount should not have been deducted.
In his first affidavit, Mr Dudman took Ms Fernandez's total figure (less the $189,842.93) and made adjustments to that figure to express an opinion on the recoverable party/party costs. His opinion concerning the amount of costs that were recoverable on a party/party basis are summarised in the following table: 55% of $1,622,101.00 (being the total solicitors fees incurred to date as charged by Norton Rose) $892,155.55 65% of $1,117,671.50 (being the total solicitors fees incurred to date by Holding Redlich) $726,486.48 90% of $1,054,408.19 (being the total disbursements incurred to date) $948,967.37 Less $5,000.00 (being a portion of the costs incurred in relation to the costs motion) -$5,000.00 Total costs recoverable on a party/party basis (exclusive of GST) $2,562,609.40

As I have said, Mr Klotz affirmed two affidavits in support of the original notice of motion seeking costs. The affidavit affirmed on 22 September 2016 repeated some of the material in Ms Fernandez's affidavit and provided some additional information concerning the proceedings since Ms Fernandez had filed her affidavit. In addition, Mr Klotz exhibited what was intended to be all of the invoices covered by the defendants' claim for costs together with a spreadsheet summarising those invoices. The invoices included in the exhibit did not include the original invoices issued by Norton Rose. Instead, they included invoices reissued by Norton Rose on 23 March 2016 in respect of work they had billed previously. The reissued invoices made adjustments because the three individual defendants who were resident in the United Kingdom were not liable for GST but the original invoices had not taken account of that fact.
In fact, although Mr Klotz did not appreciate it at the time he affirmed his affidavit, Norton Rose, when reissuing their invoices, had created two sets of invoices. One set related to 40 percent of the costs and included GST. Those invoices related to work done for the individual defendants who were resident in Australia. Mr Klotz included those invoices in the exhibit to his affidavit affirmed on 22 September 2016. The second set of invoices was for 60 percent of the costs and excluded GST. Those invoices related to work done for the three individual defendants who were resident in the United Kingdom. Those invoices were not included in the exhibit to Mr Klotz's affidavit.
Mr Klotz provided all the invoices exhibited to his affidavit to Mr Dudman. On the basis of those invoices, Mr Dudman concluded that, in addition to the costs that were the subject of his first affidavit, the defendants had incurred the following costs: Hall & Wilcox costs $748,676.31 Hall & Wilcox disbursements $85,114.35 Thomson Geer costs $1,271,832.00 Thomson Geer disbursements $1,338,569.00 Holding Redlich costs $1,064,628.00 Holding Redlich disbursements $837,147.00

The total of those amounts is $5,345,966.66. Mr Dudman then expressed an opinion on the proportion of those costs and disbursements he thought could be recovered on a party/party basis.

Mr Dudman's conclusion in relation to solicitor fees was summarised in the following table: Firm Costs Reduction % Reduction Amount Hall & Wilcox (in the period to 11 February 2016) $748,676 25.6% $192,027 Thomson Geer $1,271,832 32.0% $407,275 Holding Redlich $1,064,628 29.2% $311,374 Total $3,085,136 $910,676

Mr Dudman's conclusion in relation to disbursements was summarised in the following table: Disbursement Costs Reduction % Reduction Amount Counsel Fees $1,298,295 12.5% $162,287 Expert Fees $424,009 20.0% $84,802 Other $459,440 3.0% $13,783 Total $2,181,744 $260,872

Combining the conclusions of his two reports, Mr Dudman expressed the opinion that the defendants' total recoverable costs on a party/party basis were $6,657,941.40. The amount claimed in the defendants' notice of motion is that amount less $175,946.46 (that is, $6,481,994.94). The defendants say that the deduction was made to avoid any suggestion of double dipping.
Mr Klotz affirmed a second affidavit on 18 October 2016 in support of the notice of motion. In that affidavit, Mr Klotz gave evidence that all of the costs of Hall & Wilcox and Thomson Geer for reading and familiarising themselves with the matter were paid by Norton Rose, not the defendants and formed no part of the defendants' claim. He also gave evidence that all of the invoices issued by Norton Rose, Hall & Wilcox, Holding Redlich and Thomson Geer have been paid except for the amount of $410,524.86, which he later corrected to $355,840.00. The unpaid invoices included four invoices of Thomson Geer totalling $246,908.56 that had not been included in the exhibit to Mr Klotz's affidavit affirmed on 22 September 2016.
At the hearing of the matter on 20 October 2016, Mr Armstrong represented himself and sought leave to represent the corporate plaintiffs, which I gave. At that hearing, Mr Armstrong commenced cross-examination of Mr Dudman. That cross‑examination was cut short because notice that Mr Dudman was required for cross‑examination had not been given and Mr Dudman had to return to Melbourne. The matter was stood over until 5 December 2016 to allow Mr Armstrong to complete his cross‑examination. Mr Armstrong also indicated that he wished to cross‑examine Mr Klotz and Ms Fernandez on their affidavits.
On 28 November 2016 and 30 November 2016, Mr Klotz affirmed two additional affidavits in support of the motion.
The affidavit affirmed on 28 November 2016 sought to deal with some issues which had been raised in Mr Armstrong's cross‑examination of Mr Dudman. In that affidavit, Mr Klotz stated that the defendants no longer relied on the invoices that were reissued by Norton Rose. He said that that was because those invoices contained an obvious error. The error was said to have been that, instead of reducing the GST component of the invoices issued to the individual defendants by 60 percent, the total of each invoice was reduced by 60 percent. On that basis, Mr Klotz said in his affidavit that the defendants no longer relied on the reissued invoices. Instead, they relied on the original invoices, which included the full amount for GST. He exhibited those invoices to his affidavit. That, however, did not affect the amount claimed by the defendants because all of the costs claimed by the defendants exclude GST.
Mr Klotz also exhibited a spreadsheet to his affidavit that contained a colour-coded summary of each invoice that had been annexed or exhibited to his affidavits. The spreadsheet indicated whether the invoice was pursued, not pursued or pursued in part, and, in the case of the last category, gave a brief explanation of why the invoice was only pursued in part. The spreadsheet indicated among other things that the defendants did not make a claim in respect of work undertaken by Hall & Wilcox and Thomson Geer for reading in and familiarising themselves with the matter or for the costs incurred by the first to ninth defendants in dealing with the subpoena issued to Marketing Eye Pty Ltd for the period 19 January 2016 to 11 February 2016.
Following a conversation with the general counsel of Norton Rose Fulbright (as Norton Rose had become), Mr Klotz realised the mistake he had made, which he corrected in his affidavit sworn on 30 November 2016. In that affidavit, Mr Klotz stated that the defendants no longer relied on the invoices exhibited to his affidavit affirmed on 28 November 2016 (apart from one). Instead, they relied on the reissued invoices that were included in the exhibit to his affidavit sworn on 22 September 2016, together with the second set of invoices that were reissued which related to 60 percent of the work done for the individual defendants and did not include any amount for GST. He exhibited that second set of invoices to his affidavit. He also exhibited a revised version of the spreadsheet indicating which invoices were pursued in whole or in part. That spreadsheet indicates that the total of the invoices in respect of which a claim for costs is made is $9,401,826.94. It indicates that the total legal costs billed to the defendants (excluding GST) is $12,300,297.98.
Mr Armstrong objected to Mr Klotz's affidavits affirmed on 28 and 30 November 2016 on the basis that they had been served late. I admitted the affidavits over that objection. Mr Armstrong then sought an adjournment to enable him to give further consideration to those affidavits. One thing Mr Armstrong said he wanted to do was compare the invoices line by line to see whether the reissued invoices really were 60 percent of the original invoices. I refused that adjournment. In doing so, I accepted the submissions of Mr Hyde, who appeared for the defendants, that the new affidavits added little to the evidence already given by the defendants. Essentially, they claimed that as part of any gross sum assessment, the court should take into account some additional invoices that had been omitted from Mr Klotz's previous evidence. Those additional invoices related to work covered by invoices already in evidence but included that proportion of the amount charged for that work that was not the subject of GST. Having regard to the nature of a gross sum assessment, a detailed analysis of each invoice would not be relevant.
When I refused the plaintiffs' application for an adjournment, Mr Armstrong made an application that I should disqualify myself from hearing the application further on the basis that it was obvious "by your statements to date that you have come to this hearing with a concluded view, and you have got no intention to determining the matter with a fair and open mind without bias or without prejudice". I refused that application. Mr Armstrong then indicated that he was not prepared to continue the cross-examination of Mr Dudman or cross-examine Mr Klotz or Ms Fernandez before a judge who he did not consider had a fair and open mind. In those circumstances, I invited Mr Hyde to make submissions on the defendants' motion; and Mr Armstrong made no further submissions on the defendants' application. He had, however, provided the court previously with written submissions on why a gross sum costs order should not be made.

Should the court make a gross sum costs order?

Section 98 of the CP Act gives the court a broad discretion to order the payment of costs. That discretion includes a discretion under s 98(4)(c) to make an order at any time before costs are referred to assessment "to the effect that the party to whom costs are to be paid is to be entitled to … a specified gross sum instead of assessed costs".
The principles relating to the circumstances in which the Court will make a gross sum costs order are not in dispute. Those principles were set out by Beazley JA (with whom Giles and Whealy JJA agreed) in Hamod v State of New South Wales [2011] NSWCA 375 at [813]ff and were most recently summarised by the Court of Appeal in Kostov v Zhang (No 2) [2016] NSWCA 279 at [19]ff. The following principles are relevant to the current application: 1. the discretion conferred by s98(4)(c) is not confined and may be exercised wherever the circumstances warrants its exercise, having regard to the scope and purpose of the provision; 2. the exercise of the power conferred by s 98(4)(c) is particularly appropriate where the costs have been incurred in lengthy or complex cases and it is desirable to avoid the expense, delay and aggravation likely to be involved in a contested costs assessment. This may arise either from the likely length and complexity of the assessment process or from the likelihood that the additional costs of formal assessment would disadvantage the successful party because of the likely inability of the unsuccessful party to discharge the costs liability in any event; 3. the power may also be exercised where a party's conduct has unnecessarily contributed to the costs of the proceedings, especially where the costs incurred have been disproportionate to the result of the proceedings; 4. the power should only be exercised where the court considers that it can do so fairly between the parties and where an appropriate sum can be determined on the available evidence; 5. the costs order should be based on an informed assessment of the actual costs having regard to the information before the court. This may involve an impressionistic discount of the costs actually incurred or estimated, in order to take into account the contingencies that would be relevant in any formal costs assessment; 6. the costs need not be meticulously assessed on a line by line basis. Rather, a broad brush approach is appropriate.
In my opinion, this is an appropriate case in which to make a gross sum costs order. The proceedings were complicated and, to some extent unnecessarily so. The plaintiffs bear much of the responsibility for that. The assessment of costs is likely to be time consuming and expensive. Mr Dudman estimates that the costs of an assessment will be $360,000 and that an assessment, excluding any review, will take 46 weeks. Those estimates appear to be reasonable. Mr Dudman's estimate of costs does not include any costs that might be incurred by the plaintiffs. On any view, the costs on assessment will be very substantial. It is plain from the evidence filed in relation to the second security motion and what I said in my judgment in relation to that motion, that the plaintiffs will not be able to pay any costs judgment.
Mr Armstrong initially sought to persuade the court that the evidence before it could not be relied on as providing a reasonable basis for assessing a gross sum. I do not accept that submission. Before the court are all the invoices in respect of which the defendants seek to recover costs. The unchallenged evidence of Mr Klotz is that the defendants have paid all but a small proportion of those invoices. Each invoice sets out who did the work, that person's hourly rate and the time they spent and gives a breakdown of the work covered by the invoice. Where appropriate, the claims for disbursements are supported by relevant invoices, such as counsel fee memoranda. There are some inconsistencies and duplications in some of the invoices, but those inconsistencies and duplications are minor in the scheme of things, and the defendants have sought to take account of those matters in the amount which they claim. Some of the duplications that Mr Armstrong sought to identify in cross-examination can be explained as duplicate copies of bills that were split across different invoices. Mr Klotz's unchallenged evidence is that none of the invoices in respect of which the defendants seek to recover costs covers work that has already been the subject of assessment. I accept that evidence.
The principle source of confusion in relation to the invoices relied on by the defendants arose from the treatment of GST. However, that confusion was explained in Mr Klotz's affidavit affirmed on 30 November 2016; and, in any event, as Mr Hyde submitted, the defendants have never sought to claim amounts which include GST.
The defendants have filed expert evidence from Mr Dudman setting out the discounts that he would expect to be made on assessment and the reasons for those discounts. The court is not, of course, bound to accept that evidence. However, Mr Dudman's evidence provides a useful guide as to the types of discount that may be appropriate. Consequently, I am satisfied that the court does have sufficient material to determine an appropriate sum that is fair between the parties.

Indemnity costs

As I have said, the notice of motion seeks costs on an indemnity basis. That order is sought as an alternative to a gross sum costs order. Mr Hyde also submitted that the question whether some or all of the costs should be awarded on an indemnity basis would inform the court's approach to fixing a gross sum if it was otherwise prepared to make a gross sum costs order.
The defendants put their claim for an order for indemnity costs on two bases.
First, they rely on the principle that an order for indemnity costs may be appropriate where the particular circumstances of the case involve some "relevant delinquency on the part of the unsuccessful party" (to use the words of Gaudron and Gummow JJ in Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11 at [44]), such as where a party makes deliberately false allegations and by prolixity and prevarication grossly prolongs the litigation: see Degmam Pty Ltd (in liq) v Wright (No 2) [1983] 2 NSWLR 354; referred to with approval in Harrison & Anor v Schipp; Cameron & Anor v Schipp [2001] NSWCA 13 at [133] per Giles JA (with whom Handley and Fitzgerald JJA agreed).
Also relevant to the application of these principles is s 56 of the CP Act. That section relevantly places on all parties a duty to assist the court to further the overriding purpose of the Act and rules of court, which is stated in s 56(1) to be "to facilitate the just, quick and cheap resolution of the real issues in the proceedings". The court may take into account any failure to comply with that obligation in exercising a discretion with respect to costs: s 56(5).
In my opinion, the plaintiffs conduct was not such as to justify an indemnity costs order in this case. The plaintiffs took every possible point in the proceedings and, in doing so, made the case unnecessarily complicated and expensive. However, the case was hard fought on both sides and I do not think that the plaintiffs' conduct fell so far short of what was required of them that it would be appropriate to make an order for indemnity costs because of the way in which the case was conducted. In reaching that conclusion I have taken into account the fact that, despite the complexity of the case advanced by the plaintiffs and the problems with it, the plaintiffs at trial sought to advance that case efficiently. Moreover, one of the matters that I have taken into account in deciding that this is an appropriate case in which to make a gross sum costs order is the fact that the plaintiffs unnecessarily contributed to the costs of the proceedings. In my opinion, no further allowance should be made for that fact.
The second basis on which the defendants submit that this is an appropriate case in which to make an order for indemnity costs is in accordance with the principles stated in Calderbank v Calderbank [1975] 3 All ER 333. Applying those principles, the court will have regard to two matters in exercising its discretion to make a more favourable costs order than normal in favour of a party who does better than an offer of compromise. The first is whether the offer was a genuine offer of compromise. The second is whether it was unreasonable for the offeree not to accept it: Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 per Basten JA at [8] (with whom McColl and Campbell JJA agreed); Tati v Stonewall Hotel Pty Ltd (No 2) [2012] NSWCA 124 at [10] per Bathurst CJ (with whom Allsop P and Beazley JA agreed).
In determining whether it was unreasonable for the offeree not to accept the offer, it will be relevant for the Court to consider, among other things, the stage of the proceedings at which the offer was received, the time allowed to the offeree to consider the offer, the extent of the compromise offered, the offeree's prospects of success assessed as at the date of the offer, the clarity with which the terms of the offer were expressed and whether the offer foreshadowed an application for indemnity costs in the event that it was rejected: see Miwa at [12] per Basten JA. The offer must also be capable of acceptance by the offeree: Grbavac v Hart [1996] VSC 37; [1997] 1 VR 154 at 164 per Hayne JA. It is the offeror who bears the onus of proving that the offeree acted unreasonably in rejecting the offer: Miwa at [16] per Basten JA; Vieira v O'Shea (No 2) [2012] NSWCA 121 per Basten and Meagher JJA and Handley AJA at [10].
In this case, the defendants rely on two offers.
The first offer was made on 2 October 2012 on behalf of the individual defendants and was an offer to settle all claims against those defendants for the sum of $250,000 inclusive of legal costs. It was a term of the offer that: Each party will do all things and sign all documents the other party reasonably requires in order to give effect to the settlement agreement that results from acceptance of this offer including, for the avoidance of any doubt an appropriate deed of release concerning any claims made in the proceedings and those struck out by Ball J in Armstrong Strategic Management and Marketing Pty Limited & Ors v Expense Reduction Analysts Group Pty Ltd & Ors [2011] NSWSC 704.
The second offer was made on 27 May 2014 on behalf of all defendants following settlement discussions. It was for an amount of $1.35 million and contained the following terms: (a) the parties enter into a satisfactory deed of release that contains the following conditions precedent: (i) satisfactory advice from UK and US counsel on the enforceability of the deed is received; and (ii) judicial approval of the settlement in the UK is granted; (b) the plaintiffs agree to assist in the gaining of the advice and judicial approvals; (c) the plaintiffs agree to give full releases of all claims in all jurisdictions worldwide including as against other ERA entities and directors which are not the subject of the present proceedings; (d) the plaintiffs agree to give a covenant not to assist third parties in any litigation or claim against the ERA entities or directors; (e) the plaintiffs' obligations under the deed be secured by way of mortgage or personal guarantee, and, in the event of a breach of the deed by the plaintiffs, any instalments already paid will be repayable and enforceable against any security that is given; (f) existing costs orders are vacated; and (g) the security for costs monies are released to the plaintiffs. The offer was expressed to be open until 4.00pm on 30 May 2014.
On 30 May 2014, the plaintiffs rejected the defendants' offer and made a counter offer of $1.85 million. The plaintiffs indicated that they were prepared to accept most of the conditions proposed by the defendants, although they proposed a different condition in relation to securing the plaintiffs obligations under the proposed deed.
I am not satisfied that it was unreasonable for the plaintiffs to reject the two offers.
There are three difficulties with the first offer. First, it was a costs inclusive offer and it is not clear that the offer was for an amount that did more than cover the plaintiffs' legal costs at that time. The defendants have not established that it was so obvious at that time that the plaintiffs' claims against the individual defendants would fail completely so as to make it unreasonable for the plaintiffs to reject an offer that may have done no more than compensate them for the legal costs they had incurred to date.
Second, the offer was only made on behalf of the individual defendants. That fact made it difficult to assess the offer because there was no basis for the plaintiffs to determine what the individual defendants' costs were, and so no basis for determining the value of the offer. In addition, acceptance of the offer would have left the plaintiffs in a difficult position. The claims against the individual defendants were largely derivative. They depended on the claims against the corporate defendants succeeding. If the plaintiffs had accepted the offer, they would either still have had to proceed with substantially the same case against the corporate defendants or they would have had to discontinue the proceedings against the corporate defendants and incurred a liability to pay their costs. Either alternative was unpalatable.
Third, in my opinion, the offer was not capable of acceptance. It still required negotiation of the terms of the proposed deed of release. In particular, it required negotiation of the scope of the release that would be given. Although it might be anticipated that it was likely that agreement could be reached on that issue, there was no certainty that that would happen.
As to the second offer, one difficulty with the offer is that it is not clear from its terms whether the offer is a costs inclusive or a costs exclusive offer, although the parties appear to have proceeded on the basis that it was a costs inclusive offer. Assuming that it was a costs inclusive offer, I am prepared to accept that it was a genuine offer of compromise. The plaintiffs made a counter offer of $1.85 million apparently also on a costs inclusive basis. Measured against that counter offer, the offer appears to involve a genuine compromise. I am also prepared to accept that it was not unreasonable to leave the offer open for only three days, since the plaintiffs had no difficulty in responding to the offer and making a counter offer in that time.
However, in my opinion, there is still a problem with the offer in that, like the earlier offer, it contemplated agreement on a satisfactory deed of release, the terms of which were not fully spelt out and which went beyond a compromise of the actual proceedings. Again, it might be assumed that if the parties could agree on the amount of the settlement, they were likely to reach agreement on the other terms. However, that agreement was not certain. It is apparent from the plaintiffs' response to the offer that not all the proposed terms - particularly in relation to security - were acceptable to them. It was not unreasonable for the plaintiffs to reject the offer for that reason.

The amount of a gross sum order

I have concluded that an appropriate amount for a gross sum costs order is $5.75 million.
In my opinion, a reasonable starting point is the opinion expressed by Mr Dudman that the costs that the defendants are likely to recover on assessment on a party/party basis is $6,657,941.40. That figure is based on invoices totalling $9,140,147.35 (that is, $3,984,023.62 less $189,842.93 plus $5,345,966.66). It is noteworthy that the total of the invoices in respect of which the defendants claim costs is now $9,401,826.94.
In reaching the conclusion he did, Mr Dudman expressed the view that the hourly rates charged by the solicitors who worked on the matter were within the range of what would be allowed on assessment. It is not necessary to set out all those rates. By way of example, in September 2012 Norton Rose charged $180 per hour for a paralegal, $220 per hour for a graduate lawyer, $380 an hour for a solicitor, $450 per hour for a special counsel and $525 per hour for Mr Klotz. In December 2014, Holding Redlich charged a rate of $220 for a graduate lawyer, $240 per hour for qualified solicitors, $425 for a senior associate, $450 per hour for Ms Fernandez and $525 per hour for Mr Werksman. I accept Mr Dudman's evidence that the rates charged were reasonable.
In his first affidavit, Mr Dudman, in discounting the amounts actually billed, took account of his general experience that it is not unusual for 70-75 percent of solicitor/client costs incurred in a matter to be recovered on a party/party basis where a matter has been run efficiently. He observed that Holding Redlich had charged little for "internal conferencing" and that its bills provided substantial detail in relation to the work that was done. It is on that basis that he arrived at a discount of 35 percent. Mr Dudman applied a larger discount in the case of Norton Rose's bills because they provided less detail of the work that was actually done. He applied some discount to the disbursements charged by Norton Rose and Holding Redlich on the basis that some reduction to those could be expected on assessment.
In the report attached to his second affidavit, Mr Dudman adopted a similar approach, although he identified some types of cost which he did not think would be recovered on assessment, such as costs where more than one fee earner attended to similar or identical tasks, costs where the work appears to have taken an excessive amount of time and costs that would only be recovered on a solicitor/client basis, such as reporting to the client. He made discounts for each of these matters and added an additional discount of between 5 percent and 10 percent for other matters, such as the absence of details in the invoices, some evidence of abusing the six minute unit and some attendances not being clearly related to the proceedings.
In my opinion, it is not useful to investigate the various deductions made by Mr Dudman in any detail. The overall impression I have from the evidence filed and the hearing is that it was necessary for the defendants to do a very large amount of work to resist the plaintiffs' claim. Bearing in mind the complexity of the matter, they appear to have carried out the work with a reasonable degree of efficiency. In those circumstances, the deductions made by Mr Dudman seem appropriate to take account of the various matters he refers to. In addition, having regard to the total amount billed to the defendants and the total amount in respect of which the defendants seek a gross sum costs order, I am reasonably satisfied that the defendants are not seeking to recover in respect of amounts that are already the subject of costs orders or which arise because of the changes in representation.
In my opinion, it is appropriate to make deductions to take account of three other matters.
First, as I have said, the defendants have not paid an amount of $355,840.00. There is no evidence of why that is the case. In the absence of that evidence, it seems to me that some deduction should be made to take account of the possibility that that amount will not be paid.
Second, there is no evidence which explains why Mr Dormer was separately represented until 11 February 2016. In the absence of an explanation, I think that there should be a further reduction in the amount claimed in respect of his separate representation. On the other hand, I accept that, had Mr Dormer been represented by Holding Redlich, they would have incurred some additional costs in, for example, preparing evidence from him and giving discovery.
Third, Mr Dudman has sought to estimate the amount that would be recovered on assessment. Although the amount that is likely to be recovered on assessment is very relevant to an award of costs on a gross sum basis, the award of costs on a gross sum basis is not necessarily meant to achieve the same result as an assessment. Rather, the object of an award on a gross sum basis is to arrive at a fair result as between the plaintiffs and the defendants. In seeking to do that, courts often discount the amount that is awarded, recognising that a gross sum order is of considerable benefit to the party seeking costs and that that provides a reason for adopting a conservative approach in reaching a figure that is fair.
There are two other considerations I have taken into account in reaching the figure I have. First, the actual costs in respect of which the defendants seek to recover costs on a gross sum basis are greater than the costs considered by Mr Dudman, which makes the award somewhat more conservative than a mere comparison of it to the figure derived by Mr Dudman would suggest. Second, the approach that the court takes is necessarily broad brush. The award should not be for an amount that suggests otherwise.

Other matters

Mr Armstrong submitted that the court should apportion any award of costs in favour of the defendants between the plaintiffs and that he personally should only bear a small proportion of the costs because the claim was essentially brought by the corporate plaintiffs. I do not accept that submission.
The general principle is that where the court orders that costs be paid by two or more persons, the costs liability is joint and several: see G E Dal Pont, Law of Costs, LexisNexis, 3rd ed, 2013 at [11.2]. In my opinion, there is no reason to depart from that general principle in this case. The claim was brought by all the plaintiffs in one proceeding. The Amended Commercial List Statement identified a number of causes of action and generally claimed that "the plaintiffs" suffered loss and damage as a consequence of the various breaches of duty that were identified. In those circumstances, it is not possible to separate out which claims were brought by which plaintiffs. Moreover, the factual substratum of the different claims was the same or overlapped. Consequently, it is not possible to say that particular work was done by the defendants in relation to particular claims. It follows that the plaintiffs should be jointly and severally liable for the defendants' costs.
The defendants seek an order that the plaintiffs pay their costs of the amended motion. The defendants have been partially but not wholly successful in relation to that motion. The costs of the motion are likely to be small in the scheme of the case. If the defendants are to have the benefit of a gross sum costs order, it seems to me that that order should finally dispose of the question of costs so that no party is put to the further expense or trouble of having costs assessed. For those reasons, I have concluded that there should be no order for costs in relation to the amended motion.

Should there be a partial release of the security?

As I have said, the plaintiffs have provided security in respect of the individual defendants costs in three forms. They provided a bank guarantee and an undertaking for $600,000 in accordance with an agreement reached between the parties. They paid an amount of $100,000 into court in accordance with an order of the court.
The payment into court is governed by Uniform Civil Procedure Rule 2005 (NSW) (UCPR) r 55.11, which provides: (1) Funds that have been paid into court may only be paid out of court pursuant to the directions of the Supreme Court. (2) An application for such directions is to be made by filing a notice of motion in the proceedings in which the funds were paid into court.
Under the terms of the Bank Guarantee, the guarantee continues until one of the following events occurs: The Bank receives written notification from the Defendants that this Guarantee is no longer required The return of this Guarantee to the Bank Payment to the Defendants by the Bank of the Maximum Amount or such lesser sum as may be required by the Defendants The arrival of the expiry date namely the 1st September 2022
Under the terms of the undertaking given by Mr Calabria, Mr Calabria undertakes to the court relevantly that he will not withdraw the amount held by way of security "without first obtaining the written consent of the Individual Defendants or unless the Court expressly authorises the withdrawal of [the security] (or any part of it)".
It is apparent that any application for the payment out of the $100,000 should be made by way of notice of motion. There is a question whether the court has any power to order a release of the bank guarantee. That guarantee was provided in accordance with an agreement between the parties. It makes no provision for its release by order of the court. On the other hand, it appears that the court would be entitled to authorise a withdrawal of the money held by Mr Calabria. However, in my opinion, there are two difficulties with Mr Armstrong's application for a partial release of the security.
First, the security operates as security for the payment of all of the individual defendants' costs, not simply payment of costs which, if paid from the security, would exhaust it. On any view, the individual defendants' costs are likely to be substantially more than the security that has been provided and are likely to be substantially more than the security that has been provided even after payment of the costs that are the subject of the statutory demands. Moreover, a security holder is not obliged to call on the security before making a demand for payment of the secured debt: Accordent Pty Ltd v RMBL Investments Ltd [2009] SASC 248; 259 ALR 375 at [47]-[48] per Doyle CJ (with whom Bleby and Kelly JJ agreed). Similarly, a debtor who has provided security cannot insist that the security holder look to the security rather than the debtor for payment of the debt. There is no reason why those principles should not apply equally where the security takes the form of security for costs. Applying those principles, the individual defendants are entitled to demand payment of the costs judgments in their favour and there is no reason why they should be required instead to seek to have recourse to the security that has been provided. The court should not interfere with that right, particularly in circumstances where it appears that the security is insufficient to cover costs which are not the subject of the demand.
Second, the general principle is that the court should not make an order for the payment of money out of court unless all the persons with an interest in the funds have been given an opportunity to be heard. As Slattery J said in Commonwealth Bank of Australia v Estate of the Late Mahmoud Slieman [2010] NSWSC 661 at [10]: [I]t is necessary for an applicant to identify the other potential claimants to the fund in court and to prove that those persons were notified of its claim. Those persons may consent to the claim. Alternatively, the applicant may prove that those persons either do not have valid claims against the fund or that their claims do not have priority over the applicant's claim. It is difficult to see why the same principle should not apply to funds held by way of security.
In the present case, the plaintiffs have not sought to identify those who may have an interest in the security and have not given notice to those persons of their application. Besides the defendants, Thomson Geer claim to have an interest in the security given by the plaintiffs pursuant to an unpaid solicitors lien. It would not be appropriate to make the order sought by the plaintiffs unless they were given notice of the application and an opportunity to be heard on it.

Orders

The orders of the court are: 1. In addition to the costs which have been paid by the plaintiffs or which have been assessed as payable by the plaintiffs to the defendants, the plaintiffs pay the defendants a gross sum of $5.75 million in respect of the defendants' costs of the proceedings.
I will hear the parties on what consequential orders I should make at a time to be fixed.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 01 February 2017

Uniform Civil Procedure Rule 2005(NSW)

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