Australian Mud Company Pty Ltd v Coretell Pty Ltd

1. Order 1 made on 29 April 2016 and order 5 made on 23 March 2016 be varied or otherwise set aside, and in lieu thereof the respondents pay the applicants' costs fixed in the amount of $3,170,000.
2. The respondents pay the applicants' costs of and incidental to the interlocutory application dated 29 September 2017 fixed in the amount of $33,000. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

MCKERRACHER J: 1 In this proceeding I made an order on 20 November 2017 for lump sum costs at $3.17m notwithstanding the process of taxation of costs had advanced to the point of a deputy district registrar having issued an estimate at some $3.55m. These were my reasons for doing so. 2 Over 18 months ago in Australian Mud Company Pty Ltd v Coretell Pty Ltd (No 5) [2016] FCA 444 (primary costs judgment), I ordered the respondents (jointly referred to in the singular as Coretell) to pay the costs in this proceeding of the applicants' (jointly referred to in the singular as AMC), as agreed or assessed (order 5, 23 March 2016), with the costs to be paid on an indemnity basis in respect of Coretell's prior use and secret use allegations. These latter issues were by no means incidental aspects of this litigation, particularly in Australian Mud Company Pty Ltd v Coretell Pty Ltd (No 4) [2015] FCA 1372 (the primary proceeding). 3 AMC contends Coretell has refused to pay any of AMC's costs other than at the eleventh hour following service of a statutory demand for Coretell's failure to pay the lump sum costs ordered against it on its failed appeal to the Full Court. AMC says Coretell has taken many steps, unsuccessfully, to avoid its obligation to do so: an application to stay the costs orders; an appeal to the Full Court; and an application for special leave to appeal to the High Court. 4 In the course of pursuing Coretell, AMC had a Bill of Costs prepared by a costs expert who has given evidence in this application. The Bill was contained in 3 lever arch files. A condensed copy is in evidence in this application. The registrar issued an estimate in the amount of $3,550,890 which represented about 77.3% of the original Bill of about $4.6m (the registrar's estimate). Coretell filed a notice of objection on 20 July 2017. 5 Significantly, in my view, Coretell has not identified any specific basis for objecting to the assessed amount despite having the detailed Bill since October 2016. AMC argues that Coretell's lack of bona fides may be further gauged by: (a) its flat rejection of a 'once and for all' offer by AMC to accept payment of $2,840,712 in full satisfaction of AMC's costs, which represented a 20% discount on the registrar's estimate; and (b) its disposal of assets (real property) to its controller Mr Kleyn's sons. AMC says this is in apparent breach of freezing orders in place, with the evident intent of placing assets beyond the reach of AMC. One of those properties remains the place of business for Mr Kleyn and the group of companies he controls, selling, amongst other things, the ORIshot tools the subject of infringement findings in the primary proceeding. I make no finding about this assertion in the absence of sufficient evidence. 6 However, it is not unfair for AMC to identify indicia that Mr Kleyn has sought to avoid his financial obligations and those of the companies within his group: (a) I have previously found in the primary proceeding that he arranged his corporate affairs to avoid financial exposure to unsuccessful litigation; and (b) AMC only recovered its costs (pursuant to a lump sum costs order) of Coretell's unsuccessful appeal to the Full Court after issuing a statutory demand to Kleyn Investments Pty Ltd. 7 The uncontested and unchallenged evidence from AMC's costs expert is that in the event that AMC is required to pursue Coretell through the taxation process, it will take until late 2018 to finalise matters, at a further cost of $240,000. In the meantime, interest on the estimated amount of costs continues to run at $729.33 per day or $266,316 per annum while AMC remains out of pocket to the tune of what must be comfortably over $2m on any view of the matter. 8 AMC further argues Coretell appears to have insufficient funds to meet the estimated amount of costs. I found in the primary costs judgment that Coretell is a 'man of straw' (at [40]). In the primary proceeding I found that the second respondent, Mincrest Holdings Pty Ltd, was stripped of assets prior to litigation (at [393]). The fourth respondent, Kleyn Investments Pty Ltd, does not have any real property interests. It may be appropriate to take into account, and I do, the financial capacity of the party liable to pay costs where the successful party is already likely to be out of pocket in respect of costs and taxation of them would add an additional irrecoverable cost: Royal v El Ali (No 3) [2016] FCA 1573 (at [11]). 9 In addition to Coretell's doubtful inability to pay the estimated amount of costs, it has further costs liabilities to AMC in relation to its failed application for special leave to the High Court and its unsuccessful damages case against AMC. These liabilities give little confidence as to Coretell's financial position in the context of this costs claim. 10 In these circumstances, and considering the introduction (since this process commenced) of a new costs regime as discussed below, AMC seeks to vary the Court's costs order so as to require Coretell's payment of costs in a fixed sum. 11 AMC relies upon the affidavits of its solicitor and its costs expert and the content of the Bill. There is no evidence in opposition to the material relied upon by AMC. 12 Coretell opposes an order for lump sum costs but accepts that the Court has the power to make such an order at this point. It contends that in the exercise of its discretion the Court should not do so. Further it submits that the manner in which AMC has progressed with the recovery of costs means that it has already committed to proceeding with taxation. It submits that the sum of costs payable could not be logically, fairly or reasonably quantified without undertaking a more detailed review of the costs incurred by way of taxation. 13 Coretell notes that the purpose of gross sum assessment is to avoid the expense, delay and aggravation involved in protracted litigation arising from taxation: Seven Network Ltd v News Ltd [2007] FCA 2059 (at [25]). A lump sum approach is invariably quicker and cheaper than a full taxation, however, more justification is required than a time/cost differential: ACN 074 971 109 (as trustee for the Argo Unit Trust) v National Mutual Life Association of Australasia Ltd [2013] VSC 137 (at [19]). Therefore, an order for a specified sum to be paid does not envisage that any process similar to that involved in taxation taking place: Leary v Leary [1987] 1 All ER 261 (at 265). Accordingly, Coretell submits that lump sum costs orders should be sought and ordered at a time prior to the commencement of taxation, at a time when the parties have not already gone to the expense of drawing a bill of costs. 14 Coretell submits that the costly preparation of the Bill, the mischief which fixed costs are meant to address, has already taken place and the costs incurred. Accordingly, it is argued that the process already undertaken by AMC would tend to frustrate the purpose of awarding a lump sum costs order because of the expense and delay already incurred. Coretell says it is contrary to reason to initiate new proceedings relating to costs that will incur additional expense and time. Process dictates, Coretell argues, that the rule in r 40.12 of the Federal Court Rules 2011 (Cth) prevail so that the taxation process that has commenced may continue. 15 Coretell stresses that before exercising the power to fix lump sum costs, the Court must be satisfied that the approach used to estimate the costs is logical, fair and reasonable: Beach Petroleum NL and Anor v Johnson and Ors (1995) FCR 119 (at [16]). The assessment of a lump sum costs order contemplates 'a much broader brush than would be applied on taxation': Sony Entertainment (Australia) Limited v Smith (2005) 215 ALR 788 (at [197]). The final sum is only determined by the Court 'broadly having regard to the information': Beach Petroleum (at [22]). The power should not be exercised where the Court is not satisfied that it can do so fairly between the parties: WM Wrigley JR Company v Cadbury Schweppes Proprietary Limited [2006] FCA 1186 (at [9]). Taxation is suitable where the costs incurred are proportionate to the amount of costs recoverable: Julien v Secretary, Department of Employment and Workplace Relations (No 2) [2009] FCA 1259 (at [12]); ACN 074 971 109 (at [14]). Care needs to be taken when producing a lump sum assessment to ensure that the procedure is not so short and lacking in detail as to risk an unfair or wrong outcome: Thomas v Powercor Australia Limited (No 9) [2012] VSC 207 (at [15]). 16 The 'comparatively small' cost of proceeding to taxation at this point in time whilst the majority of the work has already been undertaken is proportionate to the amount of costs recoverable by AMC, Coretell argues. Therefore, the parties should proceed to taxation to ensure a fair and reasonable result is achieved. 17 Coretell points out that as the costs potentially recoverable by AMC are significant, any percentage increase to the costs awarded through a lump sum will result in an immense increase in cost. So a 10% discretionary sway in a determination could result in a differentiating amount of approximately $462,000. Accordingly, Coretell says it should be afforded the opportunity to ensure that the quantum of liability is assessed with the rigour and precision that taxation affords. 18 It was argued for Coretell that it would be wrong to assume that the Bill had been comprehensively taxed by the registrar as that was not the purport of r 40.20 of the Rules, but equally counsel accepted that this regular work of the registrar would be carried out very conscientiously. 19 The main point made orally was that until this application, Coretell was entitled to pursue a 'statutory right' to participate in a confidential conference in response to the estimate. It was too late for AMC to 'change horses' well after mid-stream. As to this, Coretell accepted that it is a question of which of the 'statutory rights' should prevail in the circumstances as AMC also have such a right to seek a lump sum order. I should add that there is no doubt that AMC followed the correct and relevant process of lodging the Bill at the outset, but subsequently the Costs Practice Note has made a number of matters clear as to the court's current preferred approach where possible. 20 In the alternative, if the Court exercises its discretion to order fixed costs, then Coretell submits that lump sum costs orders should be made for the sum fixed at 50% of the Bill at $2,314,076. There was no objection to or denial of the point made by AMC that Coretell's own costs of the proceeding as respondent had exceeded $3m. CONSIDERATION There is no doubt that a lump sum costs order can be made once a taxation process is underway: s 43(3)(a) of the Federal Court of Australia Act 1976 (Cth); r 40.02(b) and (c) of the Rules; the Costs Practice Note (GPN-COSTS) (at [3] and [4]); Strategic Financial and Project Services Pty Ltd v Bank of China [2012] FCA 1263 (at [11]-[16]) per Robertson J; and particularly Hudson v Sigalla [2016] FCA 1204 (at [55]) per Katzmann J. 21 Rule 40.02 of the Rules provides: 40.02 Other order for costs A party or a person who is entitled to costs may apply to the Court for an order that costs: (a) awarded in their favour be paid other than as between party and party; or (b) be awarded in a lump sum, instead of, or in addition to, any taxed costs; or (c) be determined otherwise than by taxation. 22 In Hudson v Sigalla, Katzmann J, hearing an appeal from the Federal Circuit Court relating to a lump sum costs order made in analogous circumstances, considered the line of authorities under r 40.02, and its predecessor (O 62 r 4), where payments of costs in lump sums had been made in the place of earlier orders which contemplated that the costs would be taxed in the usual way (at [51]-[57]); citing Beach Petroleum; Salfinger v Niugini Mining (Aust) Pty Ltd (No 5) [2008] FCA 1119; Dunstan v Seymour [2006] FCA 917; and Short v Crawley (No 45) [2013] NSWSC 1541. Having considered the authorities under the previous rule, Katzmann J observed (at [55]): Order 62 r 4(3) stated that an order under subr (2) could be made at any time, "whether or not an order that costs be paid to a person has previously been made or entered". The current Rules do not contain a provision in these terms. Rule 40.02 is silent as to whether it applies where a previous order has been made or entered. But there is no reason to think that this silence signifies an intention to limit the Court's existing powers. (emphasis added). 23 Her Honour went on to cite with approval Short v Crawley, in which White J said (at [33]): [A] gross sum costs order is a supplemental order that makes more specific provision for the implementation of the earlier costs order by providing an alternative mode of enforcing it, that does not alter the substantive relief given by the previous costs order, and falls within the narrow class of exceptions to the principle that when proceedings have been disposed of by a final order they are at an end... 24 Further, the Costs Practice Note states that it is now the Court's preference, wherever it is practicable and appropriate to do so, to make a lump-sum costs order in order to finalise the costs issue and 'to avoid, where possible, the making of costs orders that lead to potentially expensive and lengthy taxation of costs hearings'. The Court will take into account the expense, time and delay involved in a taxation of costs, bearing in mind s 37M of the Act and the objective of facilitating the just resolution of disputes as quickly, inexpensively and efficiently as possible: Royal v El Ali (at [10]); Coretell Pty Ltd v Australian Mud Company (No 2) [2017] FCAFC 122 (at [9]). 25 Many of the pertinent considerations were canvassed by the Full Court in Paciocco v Australia and New Zealand Banking Group Limited (No 2) [2017] FCAFC 146 where the Court (Allsop CJ, Besanko and Middleton JJ) noted (at [13]) the general discretion under s 43 of the Federal Court Act and that by s 43(3), the Court may, among other things: (a) make an award of costs at any stage in a proceeding, whether before, during or after any hearing or trial; ... (d) award a party costs in a specified sum; ... 26 The Full Court continued (at [16]) to note that on 25 October 2016 the Chief Justice issued the Central Practice Note: National Court Framework and Case Management (CPN-1) (Central Practice Note) and the Costs Practice Note. The Central Practice Note states that the determination of the quantum of costs of a successful party (in a proceeding) should not be delayed and, to this end, the Court will, where appropriate, facilitate the making of lump sum costs orders. The Costs Practice Note provides that the Court's preference, wherever it is practicable and appropriate to do so, is to make a lump sum costs order so as to finalise costs and avoid potentially expensive and lengthy taxation hearings. It makes clear that the Court should now proceed on the basis that taxation 'should be the exception' and confined to matters which are unable to be determined otherwise: Costs Practice Note (at [3.3]). The guiding principles are to reduce delay and cost when quantifying costs: Costs Practice Note (at [3.1]). The Costs Practice Note provides for the Court to make use of sophisticated costs orders and procedures, and to take such steps as it considers necessary to ensure that it has the requisite level of detail to make a costs determination that is fair, logical and reasonable and to avoid orders that lead to potentially expensive and lengthy taxation hearings: Costs Practice Note (at [3.3]). 27 In Paciocco, the Court implicitly approved Hudson v Sigalla saying: We emphasise that in making a lump sum award of costs, the Court in undertaking the task of assessing costs is not precluded from undertaking a close inquiry of costs relating to a particular issue or category of costs, should the Court consider it appropriate to do so: see e.g. Hudson v Sigalla (No 2) [2017] FCA 339 at [30] ('Sigalla'). The Court is able to adopt its own procedures in inquiring into costs, is able to be flexible in how it conducts that inquiry, including by the obtaining of suitable assistance whether by referee's report or other reporting, and is able to acquire the level of detail needed to make a determination that is fair, logical and reasonable. 28 The Court also noted (at [19]) that whilst the Costs Practice Note now suggests that most cases should have a lump sum costs order approach applied unless there is some characteristic that would make it unsuitable, a lump sum costs order is not mandated in all instances. In all cases it is a matter for the Court to exercise the discretion given to the Court by the Federal Court Act and the Rules as appropriate: see Hudson v Sigalla (at [18]-[19]). There is no particular characteristic that a case must possess for it to be suitable for the making of a lump sum costs order. Particular circumstances that may make a lump sum order especially appropriate include: (a) where in a large and complex commercial matter it would save the time, trouble, expense and aggravation of a taxation; (b) where a taxation would require the parties to consume additional time and incur additional expenditure prolonging already protracted litigation; and (c) generally to avoid an ongoing, counter-productive dispute as to costs, in the interests of achieving finality. 29 It was apparent in Paciocco that a taxation of ANZ's costs would be inefficient and costly and there would be significant time and costs savings achieved by adoption of a lump sum award of costs. The Full Court rejected the argument that a lump sum assessment would not be fair and noted that the Costs Practice Note made clear that, in making a lump sum award, the Court is not precluded from adopting appropriate steps and procedures which may include undertaking a close inquiry of costs relating to a particular issue or category of costs. 30 The Court concluded that the various costs orders made in favour of the ANZ should be awarded in a lump sum noting that while a judge of the Court can hear and determine a lump sum costs award, the determination of the lump sum quantum could also be referred to a registrar pursuant to s 35A(1)(h) of the Federal Court Act, and r 3.01(1)(b) of the Rules, read with item 221 of Schedule 2. Alternatively, a registrar may provide assistance with the lump sum hearing: Costs Practice Note (at [4.9]). If necessary a separate issue could be referred to a referee by a judge pursuant to s 54A of the Federal Court Act and r 8.6 of the Rules. These will be matters that can be considered by the parties and the judge in determining the appropriate approach to the hearing of the costs dispute. 31 In the present matter of course, a registrar has already closely examined the very detailed Bill over a considerable period of time and come to a preliminary position. 32 Conspicuously, there was no evidence at all in opposition to the detailed evidence of AMC's expert and Coretell has had the benefit of the line by line Bill since October 2016. Despite this, Coretell has still not descended to any evidence or particularity on the detailed evidence of the AMC expert as to the content of the Bill, the future possible costs, the costs of this opposed application and her general opinion, based on substantial experience, that the chances of recovering on a taxation the amount of the estimate were good. 33 AMC's offer of a further 20% reduction on the 77% estimate was reasonable and pragmatic. While the inference that Coretell thought it could do better on taxation is reasonably open, the inference more readily to be drawn is that even more delay in rejecting the offer would ultimately serve its purpose better. 34 AMC also note that lump sum costs orders recently made by this Court are typically in excess of 65% of total costs: Royal v El Ali (67.6% of the amount of $654,834); Equititrust Ltd (In Liq) v Equititrust Ltd (In Liq)(No 2) [2016] FCA 252 (70% of the amount of $201,572.43); Tamaya Resources Limited (in liq) v Claymore Capital Pty Ltd (No 2) [2015] FCA 637 (more than 76% of the amount of $516,328.35); Health Services Union v Jackson (No 5) [2015] FCA 1467 (65% of the amount of $713,001); and Seafolly Pty Ltd v Madden (No 6) [2015] FCA 1369 (70% of the amount of $761,601.10, where 85% of that amount had previously been ordered to be paid). While a detailed examination of the kind that would be appropriate in a taxation or formal costs assessment is not required when determining lump sum costs (see Bitek Pty Ltd v IConnect Pty Ltd (2012) 290 ALR 288 (at [23]); see also Ginos Engineers Pty Ltd v Autodesk Australia Pty Ltd (2008) 249 ALR 371 per Finn J (at [23])), on the hearing of this application regard was had to: (a) the fact that the litigation was both comprehensive and complex, with both sides incurring substantial costs. Coretell's former solicitors have already advised the Court, in related proceedings, that Coretell's costs in this proceeding exceeded $3,000,000; (b) AMC's Bill of Costs filed on 13 October 2016 ran to 1,017 pages and claimed the amount of $4,628,153.45; and (c) the Registrar's estimate of AMC's likely recoverable costs amounts to $3,550,890 (i.e. 77% of its Bill of Costs). 35 I consider it would be open to fix lump sum costs at a figure which accords with the registrar's estimate given the unchallenged evidence of AMC's costs expert. As against that, I indicated to senior counsel for AMC in argument that I considered there should be some further allowance for the fact that through no fault of AMC, Coretell has not, despite ample opportunity, actually challenged in any admissible way any specific items either in the Bill or in the ample evidence of AMC's costs expert and that the opportunity to do so may reveal a need for even further reduction. As against that mere potentiality, it must be said that the whole process of doing so would just add considerable further cost, delay and uncertainty to the process through no fault of AMC which has followed the correct process throughout. 36 The fact that an experienced registrar has, over many months, examined the Bill to produce an estimate amounting to 77.3% of the Bill is a good starting point. I propose to discount this estimate further by a little under 5% to 68.5% as the price so to speak for finality and certainty. As it happens, this will produce a figure 2 to 3% above 2/3 of the actual Bill. This is a reasonable figure in my view given that part of the Bill was to be paid on an indemnity basis. I would apply a broadly similar discount to the costs sought on this disputed and initially complex costs application ($45,000). The latter sum was also explained by the costs expert and unopposed. The discount would reduce that figure to $33,000. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.