Banksia Securities Ltd v Insurance House Pty Ltd

2 On 31 March 2020, I ordered that the SPR's costs be costs in the special purpose receivership of Banksia, leaving two remaining matters that I have determined on the papers, with the benefit of submissions from affected parties:

(a) the costs of AFPL's unsuccessful Commission Application; and

(b) the extent to which Bolitho is entitled to payment by Banksia for his costs of the third party claim, pursuant to paragraph 1 of the orders made by Lyons J on 2 September 2019.

3 AFPL accepted that it ought to pay the SPR and the Contradictor's costs of the Commission Application. It resisted an order that it pay those costs on an indemnity basis.

4 The Contradictor asserted on a number of grounds that AFPL pay its costs of and incidental to the Commission Application on an indemnity basis. The SPR adopted the Contradictor's submissions.

5 First, the Contradictor contended that the Commission Application was untenable, founded on an unreasonable construction of the funding agreement between AFPL and class members, and it was probable that AFPL well understood that to be so. Properly advised AFPL ought to have been able to readily identify it had no real prospect of succeeding on that construction. Second, any argument that it had funded part of the third party claim was false, and made in circumstances where, as AFPL well knew, Bolitho's costs in that claim were indemnified by Banksia. Third, AFPL had assumed little or no risk in the third party claim, and that its claim for financial reward in connection with the settlement was essentially a 'spotter's fee'. Fourth, AFPL effectively conceded that it had serious difficulties with its claim, submitting that it was only entitled to a 'relatively modest' commission, in light of the fact that it had not funded the third party claim. So it made an open offer prior to the hearing to compromise its claim, asserted to be worth $687,500, for $350,000. The offer did not attract any interest and ought to have emphasised to AFPL that the appropriate alternative would have been to abandon its claim. Finally, its open offer was nothing more than a bargaining chip that attempted to attract an unmeritorious spotter's fee pitched at the costs that were to be expended on the application, and was made without any reference to the likely prospects of success of the application.

6 AFPL contended, on four grounds, that it did not commence or persist with an application that it knew had no chance of success, and while its contentions were not accepted by the court, it had mounted a bona fide argument.

7 First, other parties merely asserting opposing contentions did not demonstrate a want of any chance of success and could not impute that knowledge to AFPL. AFPL submitted that the SPR had, on several occasions, either expressly acknowledged AFPL's entitlement to a funding commission, or had otherwise indicated that it would not oppose one being paid, including in a letter from the SPR's solicitors to Bolitho's solicitors dated 26 July 2019, and in written submissions filed prior to the hearing of the application, in which the SPR had indicated that it would not oppose the Commission Application on the question of entitlement, but took issue with the amount sought.

8 Second, AFPL contended that the SPR could not now seek its costs on an indemnity basis when it had previously conceded that AFPL was entitled to a funding commission, albeit not in the amount sought. AFPL was entitled to, and did, proceed with the Commission Application on the basis that the SPR did not consider that it was hopeless or doomed to fail. It asserted that the SPR's support for a payment is inconsistent with a submission that AFPL had knowledge that its case was untenable.

9 AFPL also submitted that the SPR's opposition to the quantum of commission sought could be distinguished from its support for a payment of some amount. AFPL observed that although the SPR had opposed the application on quantum grounds, it had submitted that the court could order a lesser amount if it determined that some form of payment was appropriate.

10 Third, AFPL's offer to compromise the Commission Application was not an admission that it had a hopeless case. It was illogical to suggest that a party who offers to compromise a claim invites the inference that it knew its claim was untenable. That was particularly so when the SPR had acknowledged that AFPL was entitled to 'something' and a negotiation was then attempted.

11 Fourth, the second and third reasons undermine the Contradictor's contention that AFPL was 'warned by all parties' that its claim was untenable. The SPR's acknowledgements undermined the Contradictor's core contention that AFPL was 'delinquent' and that indemnity costs were warranted.

12 The SPR raised two further matters. First, although the SPR had initially acknowledged that AFPL might be entitled to a payment, that acknowledgement ought not bear on the question of the basis for assessment of costs. The SPR never supported AFPL's application in the sum sought or on the basis of the reasoning advanced. The SPR could not be described as having encouraged the application. Primarily they were reacting to an extravagant demand out of all proportion to any risk assumed. It ought to have been apparent by the time of Lyons J's orders in respect of Bolitho's costs that there was no basis for a sizeable funding commission. The argument about costs ought not be framed by reference to whether the SPR had supported any kind of payment for AFPL, but by reference to the merit of the application that was pressed.

13 Further any support the SPR may have intimated for some form of commission payment could not affect the Contradictor's application for indemnity costs. There would be no practical reason why the cost orders in favour of the SPR or the Contradictor ought differ, given that the costs of both are ultimately met from funds collected for the benefit of debenture holders.

14 Second, it would be redundant to fashion a form of order requiring the costs to be payable forthwith. The proceeding is now at an end, and any taxation and payment of costs on that application would not await the determination of the remitter.

15 The principles relating to indemnity costs are well understood. For present purposes:

(a) Costs are to be assessed on a standard basis unless the circumstances of the case justify a departure from the usual course.

(b) The making of an indemnity costs order is in the unlimited discretion of the court, with such discretion to be exercised judicially and not unreasonably.[2]

(c) The court may order indemnity costs where the circumstances warrant departing from the usual rule that costs be payable on a standard basis, including conduct that bears a 'sufficient or unusual feature' or some 'relevant delinquency'.[3]

(d) The court may order indemnity costs in cases where a party, properly advised, knew or should have known that it had no chance of success and has persisted with its claim.[4]

16 The observations of the Court of Appeal in Macedon Ranges Shire Council v Thompson are pertinent:

Costs may be ordered whenever it appears that an action has been commenced in circumstances where the applicant properly advised should have known it had no chance of success. When a litigant presses on where on proper consideration their case should have been seen to be hopeless, the discretion to make a special costs order may be enlivened. French J (as he then was) in J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers Western Australia & Anor considered that the discretion to award such costs would be enlivened when a party persisted, for whatever reason, in what should on proper consideration have been seen to be a hopeless case, and alluding to the presumption referred to by Woodward J in Fountain Selected Meats said that it was an unnecessary condition of the power to award such costs that a collateral purpose or some species of fraud be established. But where the litigant did not recognise that its case was without merit a court may be disinclined to make a special costs order. The Court must measure the litigant's conduct against the facts then known or which ought to have been known, the inquiries that the litigant ought reasonably to have made and the legal advice which the litigant ought reasonably to have obtained.[5]

17 I am satisfied that AFPL, at least, ought to have known that its application had no prospect of success. The basis for the Commission Application lay in an asserted construction of the funding agreement that plainly lacked any merit. AFPL was advised by competent solicitors and counsel. I characterised the interpretation that AFPL urged me to accept as untenable.[6] Not only did the claim fall at the construction hurdle, AFPL conceded that it had not performed any obligations under the agreement, in respect of the claim against IH, that would have entitled it to commission had the agreement been construed as it asserted. Either reason was sufficient to defeat the claim.

18 As the authorities make clear, actual knowledge of the want of prospects of success is not necessary for an indemnity costs order. This was an application where the litigant pressed on when, on proper assessment of its case, it should have been seen as hopeless. It is not necessary to make any finding that the application was being used as a bargaining chip, leveraged off the SPR's concession of an entitlement to 'something', to conclude that assessment of costs on an indemnity basis is appropriate in the present circumstances. That said, the submission of a collateral purpose divorced from the merits of the argument was not without merit.

19 The SPR's concession was a step in a negotiation, not an answer to a claim for assessment of costs on an indemnity basis. AFPL was not entitled to rely on the SPR's representation as a proper assessment of the likelihood of success of the Commission Application. The obligation to ensure that there was a tenable claim being advanced rested with AFPL. Here, there were in plain sight two distinct reasons why the claim would fail.

20 Measuring AFPL's conduct against the known facts, the inquiries that AFPL ought reasonably to have made and the legal advice which AFPL ought reasonably to have obtained, I am satisfied that the circumstances of this application warrant the exercise of the court's discretion to order that costs sought by the Contradictor and the SPR be assessed on an indemnity basis.

21 As to the timing of such payment, the SPR was correct to submit that any costs order made in relation to the Commission Application may be assessed and paid immediately, as r 63.03(2) provides.[7] An order under r 63.20.1 is not appropriate. The proceeding is at an end, save for the remitted issues. This is not one of them.

Pursuant to s 33ZF of the Supreme Court Act 1986 (Vic), and subject to any further order of the Court, if [Banksia] is found liable to [Bolitho] in respect of any contravention alleged by [Bolitho], or the matter resolves without proceeding to judgment, [Banksia] is to pay [Bolitho] and Australian Funding Partners Ltd's reasonable costs of and incidental to the trial of the claims by [Bolitho] against the [Banksia], and the claims by [Banksia] against [IH] (even if [Banksia's] claims against [IH] fail) up to a capped amount of $225,000 (inclusive of GST).

23 Pursuant to the Order, Bolitho sought payment by Banksia of approximately $100,000.

(a) the Order extends only to the payment of Bolitho's costs to prepare and participate in any trial of the third party claim, and not to any costs associated with the approval of the settlement of that claim; and

(b) a number of 'concerns' have been identified in Bolitho's particulars of costs.

25 Dealing with the latter issue first, an affidavit of the SPR's instructing solicitors indicates that the concerns identified relate to potential overlap with the issues in the remitter and costs incurred that are of an administrative nature.[8] The SPR considers that this issue should be referred to the Costs Court for determination. Bolitho does not oppose this course.

26 This issue is most appropriately dealt with by the Costs Court, which is better placed to determine the extent to which the Order applies to the costs claimed by Bolitho. Any party is entitled to make an application to the Costs Court, by summons, for a costs order to be taxed.[9] If the SPR and Bolitho are unable to agree on an amount to be paid, the SPR is entitled to make such an application.

27 That leaves for determination the extent to which the Order applies to payment of Bolitho's costs incurred in the approval of the settlement.

(a) the rationale for the Order being made was to allow Bolitho to participate in the trial of the third party claim, following AFPL's confirmation that it was unwilling to continue to fund his legal costs. As it was necessary for Bolitho to establish his principal claim against Banksia before the third party claim could be engaged, the SPR did not oppose the Order;

(b) by its terms and purpose, the Order only extends to payment of Bolitho's reasonable legal costs in continuing to prepare and participate in a trial of the third party claim, and any costs associated with the approval application are not costs incidental to the trial of the claims by Mr Bolitho against Banksia, or by Banksia against IH; and

(c) Bolitho's position of the approval application was supportive of AFPL in significant respects, even though the application had no prospect of success, and it would not be fair or appropriate for debenture holders to be burdened with payment those costs. Rather, it should be AFPL who pays these costs.

(a) the application for approval of the settlement is an essential aspect of Banksia's claim against IH, and accordingly Bolitho is entitled to have his reasonable costs in participating in the application paid under the Order;

(b) the SPR's present position is at odds with a previous indication of the scope of the Order. On 8 October 2019, it wrote to Bolitho's solicitor seeking the quantum of costs incurred to date, together with an estimate of costs likely to be incurred up to approval of the settlement, so it was able to establish Banksia's liability to Bolitho under the Order;

(c) at no stage has it been suggested by any party, including the SPR, that Bolitho's participation in the approval application was unnecessary, or that he would not be entitled to the benefit of the Order for the costs incurred in that application;

(d) the work of Bolitho's legal team was unrelated to providing any support to AFPL, but was rather procedural and necessary;

(e) Bolitho complied with the various orders making directions for the approval application and the Commission Application, including the preparation of submissions on both applications;

(f) Bolitho's position on the applications was independent of AFPL, and represented his independent views as a debenture holder; and

(g) if the issue of costs requires determination by the Costs Court, judicial direction should be given as to whether the Order includes Bolitho's costs:

(i) of the approval application; and

(ii) incurred prior to the date it was made, including work done in the period of June to August 2019.

30 I am satisfied that the Order includes Bolitho's reasonable costs of the approval application.

31 First, a compromise of a claim in a proceeding requiring approval of the court is necessarily an application in that proceeding, or an application incidental to that proceeding. The costs of the approval application were costs of and incidental to the trial of Banksia's claims against IH, and were within the scope of the Order.

32 Second, while Bolitho's participation in the approval application was not necessary, the SPR's originating process was served on him. Directions were given that Bolitho file and serve submissions, without any suggestion by any party, including the SPR, that Bolitho's participation in application for approval was unnecessary.

33 That said, Bolitho's costs in respect of the approval application were not likely to have been reasonably incurred. His participation and his submissions added nothing, because he had no relevant interest in the approval of the compromise of the proceeding. So much is clear from AFPL's refusal to fund his continued involvement, the fact that the cost of his continued involvement was indemnified by the SPR's, and his failure to identify any relevant issue on which the court needed to hear from him. I gained no assistance from those submissions.

34 The Order does not permit recovery from the SPR of any of Bolitho's costs that were incurred, whether directly or indirectly, in respect of AFPL's commission entitlement. Costs incurred by Bolitho on this issue cannot be a cost of and incidental to the trial of the third party claim. The unchallenged submission of the SPR is that the only reason the Order was made was due to AFPL's unwillingness to continue funding Bolitho's participation in that claim, when that participation was necessary to establish the third party claim.

35 There was evidence that Bolitho's solicitor was seeking payment of costs under the Order that were incurred in relation to AFPL's commission claim, as distinct from the trial of the third party claim or the approval of the compromise. Those costs do not fall within the ambit of the Order and are not payable by Banksia.

36 Finally, as to the judicial direction sought, any costs of the approval application must be reasonably incurred and reasonable in amount, and the time period in which the costs that are recoverable by the Order were incurred was not limited to a specific temporal period. The SPR has not made a submission to the contrary. A claim for costs incurred prior to the date of the Order may not be inappropriate.

37 I will order that AFPL shall pay the Contradictor and the SPR's costs of and incidental to its summonses dated 26 September 2019 and 24 January 2020, to be assessed on an indemnity basis.

[1] Banksia Securities Ltd v Insurance House Pty Ltd (Settlement Approval) [2020] VSC 123 (Reasons).

[2] Bass Coast Shire Council v King [1997] 2 VR 5, 29.

[3] Colgate-Palmolive Co v Cussons Pty Ltd [1993] FCA 536; (1993) 46 FCR 225, 233; Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72, 89 [44].

[4] Murdaca v Maisano [2004] VSCA 123, [40], citing Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Ltd (1988) 81 ALR 397; Macedon Ranges Shire Council v Thompson [2009] VSCA 209 (Macedon), [15].

[5] Macedon [15] (citations omitted).

[7] Supreme Court (General Civil Procedure) Rules 2015 (Rules).

[8] The affidavit of David Charles Newman dated 3 April 2020 was provided to my chambers on an unsworn basis, with a written assurance that it would be sworn and filed in the form provided at the earliest opportunity, when the present circumstances caused by the COVID-19 pandemic abate and would be able to occur.