Baulderstone Hornibrook Engineering (No 2) v Gordian Runoff Limited

facts

1. The facts in relation to the debt owed by Invigor to Raus Capital are set out in Invigor No 1 and I have adopted the defined terms contained in that judgment. In respect of costs, Raus Capital sent a letter of demand on 22 February 2019 calling for payment of $500,000 due under the Loan Agreement plus interest within seven days and reserved its rights to recover the monies.
2. On 4 March 2019, Invigor replied without prejudice save as to costs in a letter said to have been sent with the awareness and approval of Marcel Equity. It will be recalled that Invigor and Marcel Equity share a common director, Gary Cohen. Marcel Equity offered to pay Raus Capital $500,000 plus interest by lending the sum to Invigor if Raus Capital transferred 125 million ordinary shares in Invigor to Invigor, Marcel Equity or its nominee. It will be recalled from Invigor No 1 that the 125 million ordinary shares were apparently obtained by Invigor, Marcel Equity and Karoo using share transfers annexed to two back-to-back Convertible Note Sale Agreements in a manner not envisaged by those agreements and then, somewhat belatedly, putting the shares in the name of Raus Capital: Invigor No 1 at [11]-[23]. Invigor's letter continued: The terms of the Loan to Invigor by Raus are as follows: 1. All monies owning [sic] pursuant to the Loan be paid by 31 May 2019. 2. Interest is to be 10% p.a. paid monthly in arrears; 3. Any outstanding interest accrued from 1 February 2019 will be paid; and 4. Invigor will issue 25 million unlisted options issued at $0.004 valid for 12 months to Raus or its nominee within fourteen (14) days of acceptance of this Agreement. Upon Invigor agreeing to the terms of this Loan, Marcel is deemed to have satisfied all of its obligations pursuant to the Convertible Note Sale Agreement dated 14 December 2018 and both parties mutually release one another from said agreement. Further, each party is mutually released from the Loan and Convertible Note Agreement dated 22 June 2017. Invigor thus proposed that Raus Capital give the 125 million ordinary shares to Invigor or Marcel Equity and extend a loan to Invigor to repay monies outstanding under the Loan Agreement for a further four months secured by 25 million unlisted options issued by Invigor at $0.004. That is, it was suggested that Raus Capital hand over the only 'security' which it had for the repayment of the loan and agree to give Invigor further time to pay it.
3. On 18 March 2019, Raus Capital issued a statutory demand which is the subject of Invigor No 1. On 15 April 2019, Raus Capital wrote at length to Invigor in response to a suggestion by Invigor that there was a genuine dispute suggesting: Quite simply, there is no genuine dispute as your client's position is misconceived both at law and fact. Raus Capital explained in detail why the provisions of the Convertible Note Sale Agreement with Marcel Equity provided no support for the suggestion that there was a genuine dispute. Raus Capital noted that subsequent correspondence indicated that, "when one considers the basic principles of contract law", Invigor's assertion "is without basis whatsoever". In the event that Invigor filed its foreshadowed application to set aside the statutory demand, Raus Capital reserved its right to rely on its open letter in relation to the question of costs on an indemnity basis.
4. On 23 April 2019, Invigor filed its Originating Process with an affidavit in support of Mr Cohen. On 5 July 2019, Raus Capital wrote without prejudice save as to costs noting that Invigor had indicated it would be putting forward an offer to resolve the matter, but none had been received. The matter had, by then, been allocated a hearing date and Raus Capital advised that unless Invigor paid its debt in full by 24 July 2019, Raus Capital would be pressing ahead with its final preparation for the hearing and would incur further significant costs in doing so. Accordingly, Raus Capital pressed Invigor to resolve the matter amicably before 24 July 2019.
5. On 10 July 2019, Invigor made a without prejudice offer: 1. Marcel Equity will purchase the 125m shares in IVO from Raus for $500,000 together with O/s interest that has accrued. 2. Raus will subscribe for $500,000 (with interest) in a convertible note in IVO. 3. The term of the Convertible Note will be that it is repayable at the option of Raus on September 2019, it will carry interest at 15% and it will be convertible at the holder's option at 0.4c. This had the effect, if accepted, of placing Raus Capital in the position it had been before the Loan Agreement came to maturity but giving Invigor a further year to pay than that provided under the Loan Agreement and having diluted Invigor's share capital in the interim.
6. Unsurprisingly, this offer was rejected. On 17 July 2019 Raus Capital sent an email without prejudice save as to costs noting it considered that Invigor's application was doomed to fail at the hearing on 6 August 2019 but offering to resolve the matter on the basis of: 1. being paid $500,000 in cleared funds by 2 August 2019 or, 2. being paid $500,000 by 30 August 2019 together with interest and entry into a Deed of Settlement in which Invigor acknowledged the $500,000 was a debt due and payable, consented to judgment being entered against it should it be in default of payment and mutual releases. In the first offer, Raus Capital offered to forego its costs and interest. In the second, Raus Capital offered to forego its costs but not interest as Invigor would have more time to pay the monies due under the Loan Agreement. Raus Capital reserved its right to tender its email in support of an application for indemnity costs.
7. On 25 July 2019, Invigor, in an email marked without prejudice save as to costs, rejected Raus Capital's offer suggesting that the statutory demand would be set aside "because the Court takes a dim view of any party who attempts to abuse this process". Invigor offered to settle the proceedings on the following basis: 1. Invigor to provide a guarantee to Raus that Marcel Equity will pay Raus the lump sum of $500,000 in cleared funds on or before 30 September 2019 (Settlement Sum); 2. Invigor to provide a guarantee to Raus that Marcel Equity will pay to Raus all outstanding interest on the $500,000 in accordance with the Loan and Convertible Note Agreement- up to and including the date of payment of the $500,000; 3. Marcel Equity agrees to enter into a Deed of Settlement with Invigor and Raus containing, inter alia: a. Marcel Equity's acknowledgment that the $500,000 is a debt due and payable to Raus; b. Marcel Equity consenting to judgment being entered against it should it be in default of payment of the Settlement Sum within 14 days of the due date; c. Raus transfer the 125 million IVO shares held in escrow to the nominee of Marcel Equity within seven (7) days of the payment of the Settlement Sum; d. Mutual releases between Marcel Equity, Invigor and Raus; e. Undertaking by Raus to withdraw from any actions or complaints against Invigor with respect to the disputed amount; and f. That all settlement terms are to be confidential and not disclosed. Whilst we do not act for Marcel Equity, we understand that it would be willing to enter into such an arrangement. The proposed settlement of the dispute was becoming more elusive and odd. Invigor submited that this was "no proper offer at all" as Invigor did not offer to pay anything to Raus Capital; further, the suggested guarantee by Invigor was hollow as it had not paid the $500,000 owed under the Loan Agreement and Marcel Equity had not paid the $500,000 under the Convertible Note Sale Agreement. Nor was the offer made on behalf of Marcel Equity and therefore was not capable of acceptance by Raus Capital even if it had been inclined to do so.
8. On 29 July 2019, Raus Capital requested details of the form of guarantee proffered by Invigor. On 1 August 2019, rather than provide details of the guarantee, Invigor put a revised offer: 1. Raus agrees to transfer the 125,000,000 Invigor shares to Marcel Equity or its nominee upon payment by Marcel Equity of $500,000 together with accrued interest (at the agreed rate) in cleared funds on or before 30 November 2019; 2. In the event of a default by Marcel Equity, Raus is to use reasonable endeavours to mitigate the loss by selling the 125,000,000 Invigor shares currently held in its name (in a commercial and orderly manner, or more specifically, not in one transaction, unless the price achieved is greater than $0,004 per share) and Invigor will indemnify Raus against any loss associated with said disposal (being the $500,000 plus interest less funds received from the disposal). 3. Mutual releases between Marcel Equity, Invigor and Raus, 4. Marcel Equity agrees to enter into a Deed of Settlement with Invigor and Raus reflecting these terms. Whilst we do not act for Marcel Equity, we understand that it would be willing to enter into such an arrangement. There was now no guarantee from Invigor. The money was now to come from Marcel Equity but not before 30 November 2019 and the agreement anticipated the default of Marcel Equity. Invigor was proving to be a moving target, and one which was moving further away. Raus Capital replied without prejudice save as to costs, firmly rejecting the offer, noting: Further, we note your numerous comments that your client has been negotiating in good faith. However, and as you are aware, as soon as we queried the form of the guarantee and how it could be enforced, the offer was withdrawn by your client and replaced with an offer by a party that your firm does not act for (but you 'understand that the other party would be willing to enter into such an agreement'). Your client offered nothing more than a conditional guarantee and has not offered any genuine compromise.
9. The hearing took place on 6 August 2019 and judgment was given on 7 August 2019 in Raus Capital's favour, in which each of the factual and legal contentions propounded by Raus Capital were successful.

submissions

1. No submissions were filed by Invigor.
2. In respect of an order for indemnity costs for the whole proceedings, Raus Capital submitted that a party that commences or maintains proceedings without prospects of success is liable to pay the costs of the other party on the indemnity basis: Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401; [1998] FCA 202. In this case, Raus Capital warned Invigor of the fundamental difficulties with its claims and that it would seek indemnity costs before proceedings were commenced. Given the dearth of evidence in support of the central planks of Invigor's claims, especially in relation to the extension of the Maturity Date under the Loan Agreement to 14 December 2018, the knowledge of Raus Capital and the absence of any evidence of reliance on the alleged promise or detriment flowing from such reliance, Invigor's contentions were always doomed to fail. In those circumstances, the Court would order Raus Capital to pay all of Invigor's costs on the indemnity basis. I agree with each of the underlying propositions put in support of this submission.
3. In respect of its alternative argument that indemnity costs should be payable from 2 August 2019, Raus Capital relied on Miwa Pty Ltd v Siantan Properties Pty Ltd (No 2) [2011] NSWCA 344, where Basten JA (with whom McColl and Campbell JJA agreed) said, at [8]: The approach frequently adopted in this jurisdiction has been to ask two questions, namely whether - (a) there was a genuine offer of compromise, and (b) it was unreasonable for the offeree not to accept it.
4. Prior to the commencement of the proceeding, Raus Capital responded in detail to Invigor's contentions, which responses were consistent with the findings ultimately made in Invigor (No 1), and foreshadowed an application for its costs to be paid on the indemnity basis if proceedings were commenced. Accordingly, Invigor was at all times aware of the case Raus Capital put against it and was aware of the potential costs consequences. On 17 July 2019, Raus Capital made genuine offers to resolve the proceeding commercially. The failure to accept the offer was unreasonable, especially given the dearth of evidence to support Invigor's contentions, which would have been glaringly obvious 4 days prior to the hearing. Accordingly, the Court would order that the costs up to and including 2 August be paid on the ordinary basis and, thereafter, on the indemnity basis. Again, I agree with each of the underlying propositions put in support of this submission.
5. In respect of costs in a specified sum, Raus Capital submitted that the power to make lump sum costs orders derives from section 98(4) of the Civil Procedure Act 2005 (NSW) and the principles upon which the Court's discretion is to be exercised are set out in Hamod v State of New South Wales [2011] NSWCA 375 at [816]-[817]; Idoport Pty Limited v National Australia Bank Limited [2007] NSWSC 23 at [9]; and In the matter of GTH Equipment Pty Ltd [2017] NSWSC 1816 at [9] ff. Based on those principles and that the purpose of the power to make lump sum costs orders is the "avoidance of expense, delay and aggravation involved in protracted litigation arising out of taxation" (see Idoport at [9]), the costs of assessment are likely to be disproportionate to the costs amounts in question, given that this was a relatively straightforward proceeding concerning the existence of a genuine dispute as to a debt claimed in the statutory demand. There is little room to dispute the costs that have been incurred in the proceedings and an appropriate discount has been applied by Raus Capital's solicitor in his affidavit in support of the costs order sought. Finally, there is a serious question as to Invigor's capacity to satisfy a costs order, especially given the matters set out in the affidavit of Gary Cohen affirmed on 13 August 2019 in support of the application for a staying, that is, the absence of any explanation as to whether the debt under the PFG Finance Agreement has been repaid: see Invigor (No 2) at [5]-[6]. In these circumstances, Raus Capital submitted that a lump sum costs order is appropriate and desirable. I agree with each of these propositions.

CONSIDERATION

1. In considering Raus Capital's application, I note the comments of Allsop P, with whom Beazley and Campbell JJA agreed, in Baulderstone Hornibrook Engineering (No 2) v Gordian Runoff Limited [2009] NSWCA 12 at [5]: Three things need be borne in mind in a judgment such as this on costs: the desirability of avoiding unnecessary recitation of cases (abounding as they are in this area); the desirability of not restating, in different terms, approaches to the broad discretion that have been well settled; and the desirability of dealing with the arguments without over-elaboration, if this is possible.
2. In respect of indemnity costs, section 98(1)(c) of the Civil Procedure Act provides: Courts powers as to costs (1) Subject to rules of court and to this or any other Act: … (c) the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis.
3. In In the matter of Indoor Climate Technologies Pty Ltd [2019] NSWSC 356, Black J recently summarised the applicable principles relating to the making of indemnity costs orders at [8]: The principles on which an order for indemnity costs may be made are also well established. Section 98(1)(c) of the Civil Procedure Act 2005 (NSW) permits the Court to order costs on an ordinary or indemnity basis. Rule 42.2 of the Uniform Civil Procedure Rules 2005 (NSW) provides that, unless the Court otherwise orders or the rules otherwise provide, costs payable are to be assessed on an ordinary basis. Rule 42.5 of the Uniform Civil Procedure Rules deals with an order for costs on an indemnity basis. Costs are awarded on the ordinary basis unless there are exceptional circumstances: Leichhardt Municipal Council v Green [2004] NSWCA 341. An order for indemnity costs is not made to punish an unsuccessful party for persisting with a case that fails, but to compensate a successful party fully for costs incurred, when the Court takes the view that it was unreasonable for the other party to have subjected the successful party to the expenditure of costs: Hamod v New South Wales [2002] FCAFC 97; (2002) 188 ALR 659 at [20]. Whether an indemnity costs order should be made depends, at least in part, on whether there was a relevant delinquency on the part of the unsuccessful party: Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 7) [2008] NSWSC 199; (2008) 65 ACSR 324 at [24]; Cabport Pty Ltd v Marinchek (No 2) [2013] NSWCA 131 at [6]. That is to be determined by reference to the conduct of the proceedings, not the conduct that is the subject of the substantive dispute.
4. In particular, an order that costs be paid on an indemnity basis may be made if a party has persevered with a hopeless or futile case: Baulderstone Hornibrook at [4].
5. Section 98(4)(c) of the Civil Procedure Act provides: Courts powers as to costs (4) In particular, at any time before costs are referred for assessment, the court may make an order to the effect that the party to whom costs are to be paid is to be entitled to: … (c) a specified gross sum instead of assessed costs …
6. As Giles JA noted in Harrison v Schipp (2002) 54 NSWLR 738; [2002] NSWCA 213 at [21]: The power … of [section 98(4)] is not confined, and may be exercised whenever the circumstances warrant its exercise. It may appropriately be exercised where the assessment of costs would be protracted and expensive, and in particular if it appears that the party obliged to pay the costs would not be able to meet a liability of the order likely to result from the assessment …
7. It is a relevant consideration "whether the financial capacity of the party liable to pay costs is such that the additional burden of taxation will import a significant burden on the party in whose favour costs are ordered without real prospects of recovering those costs": Dunstan v Human Rights and Equal Opportunity Commission (No 3) [2006] FCA 916 at [24], citing Hadid v Lenfest Communications Inc [2000] FCA 628; Sparnon v Apand Pty Ltd [1998] FCA 164; Sony Entertainment (Australia) Ltd v Smith (2005) 215 ALR 788; [2005] FCA 228.
8. Correspondence from Invigor canvassed in Invigor No 1, Invigor No 2 and this judgment points to an inability to repay its loan from Raus Capital. Invigor's failure to make any submissions in respect of the application for these costs orders is another matter which supports the inference that Invigor cannot or will not pay Raus Capital. Invigor's inability to pay any costs order made against it favours the award of a lump sum costs order thereby reducing wasted time and expense on any costs process which may have no useful purpose. For these reasons, I consider that this is an appropriate case to specify a gross sum.
9. In Idoport Pty Ltd v National Australia Bank Ltd [2007] NSWSC 23, Einstein J summarised the principles which inform the exercise of the discretion to specify a gross sum, at [9]: ii. the touchstone requires that the Court be confident that the approach taken to estimate costs is logical, fair and reasonable: Beach Petroleum at [16]; iii. the fairness parameter includes the Court having sufficient confidence in arriving at an appropriate sum on the materials available: Harrison v Schipp (2002) 54 NSWLR 738, per Giles JA at [22] …; iv. a gross sum assessment, by its very nature, does not envisage that a process similar to that involved in a traditional taxation or assessment of costs should take place: Harrison v Schipp at [22]; v. the gross sum "can only be fixed broadly having regard to the information before the Court": Beach Petroleum at 124; [In Hadid v Lenfest Communications Inc [2000] FCA 628 at [35] it was said that the evidence enabled fixing a gross sum "only if I apply a much broader brush than would be applied on taxation, but that … is what the rule contemplates".] vi. nevertheless the power to award a gross sum must be exercised judicially, and after giving the parties an adequate opportunity to make submissions on the matter: Leary v Leary [1987] 1 WLR 72 at 76, and Beach Petroleum NL v Johnson (No 2) (1995) 57 FCR 119 at 120; vii. In terms of the necessity for the approach taken to be logical, fair and reasonable, Von Doussa J in Beach Petroleum NL & Anor v Johnson & Ors (No 2) (1995) 57 FCR 119, put the matter as follows, at [16]: On the one hand the Court must be astute to prevent prejudice to the respondents by overestimating the costs, and on the other hand must be astute not to cause an injustice to the successful party by an arbitrary "fail safe" discount on the cost estimates submitted to the Court: Leary v Leary at 265 …
10. His Honour's summary has been cited with approval in the Court of Appeal: Hamod v New South Wales per Beazley JA, with whom Giles and Whealy JJA agreed, at [793]. Her Honour continued, at [816]: … the factors that merit particular consideration include: the relative responsibility of the parties for the costs incurred … the degree of any disproportion between the issue litigated and the costs claimed; the complexity of proceedings in relation to their cost; and the capacity of the unsuccessful party to satisfy any costs liability …
11. And at [820] (citations omitted): The costs ordered should be based on an informed assessment of the actual costs having regard to the information before the court (for example, by relying on costs estimates or bills). The approach taken to estimate the costs to be ordered must be logical, fair and reasonable. 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.
12. Further, as Ball J explained in Baychek v Baychek [2010] NSWSC 987 at [11]: Implicit in this principle is that the gross sum bear a reasonable relationship to the actual costs of the party making the application, and to the costs that that party might reasonably be expected to recover on assessment. That means, among other things, that there must be a reasonable evidentiary basis for the order the court makes. That evidentiary basis is normally provided by the costs applicant in the form of an affidavit setting out the actual costs incurred and how they were calculated. Often, the evidence also includes evidence of the amount that is likely to be recovered on assessment.
13. I consider it appropriate to order indemnity costs for the whole proceedings in this case. Invigor's application to set aside the statutory demand was audacious and without proper basis. The application was devoid of merit and brought in circumstances where Invigor appeared to be simply 'playing for time'. Invigor's reference in correspondence to "abuse of process", apparently without irony, was also audacious in the circumstances. Further, Invigor has led Raus Capital 'a merry dance' in its attempts to resolve the proceedings on a commercial basis, thereby causing Raus Capital to waste time and money considering and responding to nebulous offers.
14. Raus Capital's legal costs including counsel's fees are $38,643.15 excluding GST, that is $42,507. Having regard to the fact that I consider it appropriate to award Raus Capital its costs on an indemnity basis for the whole of the proceedings, I consider it appropriate to fix Raus Capital's costs in a gross sum of $40,000 including GST.

orders

1. For these reasons I make the following orders: 1. Vacate Order 2 made on 7 August 2019. 2. Order the plaintiff to pay the defendant's costs of the proceedings on an indemnity basis. 3. Pursuant to section 98(4)(c) of the Civil Procedure Act 2005 (NSW) order that the defendant is entitled to $40,000 for its legal costs referred to in Order 2.

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: 11 September 2019