Calico Global Pty Ltd (in liquidation) v Calico LLC

23 Shortly after Global had filed its evidence-in-chief, Ms Seet made an affidavit on 30 May 2017 in support of Calico LLC's security for costs application that ultimately the parties resolved by consent. She estimated that as at that time, Calico LLC had incurred legal costs and disbursements of about $150,000, and she had anticipated that it would incur further costs of about $205,000 on a solicitor-client basis, a total of $355,000. She estimated that, based on a recovery on taxation of between 60 and 70 per cent, were the costs to be taxed, Calico LLC would be entitled to recover between $213,000 and $248,500. Accordingly, Calico LLC had sought the lower figure in its security application filed on 30 May 2017. The relevant principles 24 The principles on which the Court awards costs against a third party are well established. In Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 193, Mason CJ and Deane J stated the following principle that applies: where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made. (emphasis added) 25 Earlier in their reasons, Mason CJ and Deane J also said (174 CLR at 190-191): The appellants contend that the availability of an order for security for costs where the plaintiff is suing on behalf or for the benefit of another is a strong reason for denying the existence of a jurisdiction to order costs against a non-party. Indeed, it has been said that the practice of making such an order for security for costs and of staying the proceedings until it is given is the appropriate remedy [Ram Coomar Coondoo (1876), 2 App. Cas., at p. 211]. No doubt it is an appropriate remedy in many cases but there are limitations attaching to the availability of security for costs. These limitations are such that security for costs is not a remedy in all cases in which justice calls for an order for the award of costs against a non-party. Security cannot be ordered against a defendant or a plaintiff who is an individual and who resides in the jurisdiction. The amount awarded as security is no more than an estimate of the future costs and it is not reasonable to expect a defendant to make further applications to the court at every stage when it appears that costs are escalating so as to render the amount of security previously awarded insufficient. And the availability of the remedy is scarcely a reason for denying the existence of jurisdiction to make an order for costs against the "real party" at the end of the trial of an action. The availability of an order for security for costs at an earlier stage of the litigation would, in many situations, be a strong argument for refusing to exercise a discretion to order costs against a non-party, but discretion must be distinguished from jurisdiction. (emphasis added) 26 Gaudron J agreed with the Chief Justice and Deane J (see at 205). Dawson J came to the same conclusion saying "[t]he circumstances in which it would be appropriate to award costs to a non-party would necessarily be confined, but that is a question of discretion, but not jurisdiction." He said that the discretion to award costs ought be exercised judicially by bringing the person sought to be made liable before the court (174 CLR at 203). 27 Since the High Court's decision, there have been many applications of the principle it identified in a variety of contexts. It is not in dispute that this Court has the power to make such an order, the issue here being confined to whether the discretion ought be exercised. Relevantly, in Kebaro Pty Ltd v Saunders [2003] FCAFC 5 at [103] and [111], Beaumont, Sundberg and Hely JJ discussed the principles that they derived from the authorities then to date. They concluded that, among other matters, a non-party costs order was exceptional relief, although there were some categories of factual situations that fell within the discretion, including the situation which Mason CJ and Deane J described in Knight 174 CLR at 192-193. They said that while a costs order against a non-party was "extraordinary", the categories of case were not closed, and they discussed the principles by which those categories could be identified. After discussing Knight 174 CLR at 191-192, their Honours said (Kebaro [2003] FCAFC 5 at [111]): It is true that, in considering whether the costs power was confined to the parties on the record, their Honours pointed to a line of cases where it had been held that the jurisdiction could extend to "the real parties". But, as has been said, when their Honours' reasons are read as a whole, they clearly did not intend to confine the power only to the case of the receiver, who may fairly be characterised as the real party. When the whole course of authority is reviewed, it may be seen that it can be appropriate to exercise the power against a person who may be characterised as no more than a real party to the litigation in "critical" and "important" respects, albeit not the only such party. Callinan J so held in Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation (2001) 179 ALR 406]. We propose to follow this reasoning, which is consistent also with the Full Court's decision in Gore [(t/as Clayton Utz) v Justice Corporation Pty Ltd (2002) 119 FCR 429]. (emphasis in original) 28 Other courts have followed the Full Court's decision in Kebaro [2003] FCAFC 5: see e.g. Gdanski v Palms Court Management Pty Ltd [2017] VSCA 348 at [69] per Maxwell P, McLeish JA and Keogh AJA. In Band2Content t/a as Franchise Works v Dalby [2019] NSWCA 16, Simpson AJA, dealt with an argument about the effect of an offer of compromise on the liability of a person, who was a director of a corporate litigant, to a third party costs order. Her Honour said that care needed to be taken in the case where a corporate litigant was a single-director of a small company, or where the majority of the shares were held by one or two individuals. Of course, in those cases, it is a practical necessity that the, or a, director or shareholder has a personal, and often financial, interest in the outcome, and will be actively involved in the pursuit of litigation, sometimes being required to provide funding to enable the litigation to be maintained. Her Honour said that none of those facts, alone or in any combination, necessarily was sufficient to warrant the making of an order: Dalby [2019] NSWCA 16 at [16]. She held (Dalby [2019] NSWCA 16 at [84]-[85]: I do not consider the conduct of the appellant companies, or of Adam Dalby, attracts the description "unreasonable or improper". Nor do I consider that conduct must satisfy the description before it can be taken into account on an application such as the present. It is conduct that has had the result of increasing costs, in circumstances where the parties bearing the primary obligation for payment of the costs, will be unlikely to be in a position to meet the costs. It is a factor in the overall consideration of what is in the interests of justice. Final considerations Mr Dalby invoked the caution expressed by Basten JA in FPM [Constructions v Council of the City of Blue Mountains [2005] NSWCA 340] concerning the need to maintain the integrity of the corporate veil. That is undoubtedly a significant consideration. However, in my opinion, the corporate veil ought not give licence to a director of a company to conduct litigation on behalf of the company in such a way as to cause unnecessary expense to the opponents, without recourse to the person responsible for the conduct. In this case Adam Dalby did, in my opinion, commence and conduct the appeal proceeding in such a way as to benefit himself (through the Dalby Family Trust and the Adam Dalby Family Trust) and the appellant companies, and to defeat the rights of Brand2. Several other of the FPM criteria are made out, as I have set out above, and support that conclusion. (emphasis added) The third parties' submissions 29 In their arguments, senior counsel who appears for all three of the third parties sought to distinguish the respective positions of Mr Leach, on the one hand, from that of Kevin and Jack Owens on the other. Mr Leach argued that he should not be treated in the same way as both Kevin Owens and Jack Owens could be treated, having regard to my adverse credit findings against each of them. This was because Mr Leach had not given evidence, and there was no evidence that he was aware that the evidence that Kevin and Jack Owens came to give would be open to the criticisms I made in my reasons for judgment. Mr Leach argued, correctly, that Calico LLC had not identified in its written submissions any basis in its evidence on which Mr Leach had, or could have had, that knowledge, until its senior counsel made oral submissions in reply that might have suggested such a basis, so as to suggest a reason for him not to have had the confidence to fund Global's appeal in this Court. 30 In my opinion, it would not be right, as senior counsel for Mr Leach correctly contended, to allow this issue to be raised, in effect, during the course of oral argument, where it involved a serious and potentially very damaging attack on the integrity of Mr Leach, whose integrity was not in issue during the hearing of the appeal. The finding that I made that any evidence he could have given would not have assisted Global's case is a far cry from a finding that he knew that any of the evidence that Kevin or Jack Owens gave, or was to give, was false or was given in bad faith. 31 Mr Leach also argued that there was no evidence of the current substantive position in the United States opposition proceeding. He relied on what Simpson AJA said in Dalby [2019] NSWCA 16. Mr Leach contended that merely because he was a director of a company, Global, that had failed in its litigation was not a sufficient basis upon which to make an order that he personally be liable to pay the costs of the proceeding or any part of it. Mr Leach also argued that the evidence did not support any finding of improper conduct on his part and accordingly that was another reason not to make the order sought. Mr Leach contended that the funding arrangements that he had entered into with Kevin Owens and Global did no more than give him a commercial interest that, as a matter of reality, enabled him to have control of a 60 per cent shareholding in the company and therefore he was entitled to no greater proportional benefit from the conduct of the litigation than the other shareholders in respect of their shares. 32 Mr Leach also argued that the fact that he had provided the agreed security for costs that Calico LLC had sought was not a basis to support the exercise of the discretion to make a further order now that he pay the costs personally. 33 In putting the case for Kevin and Jack Owens, senior counsel argued that it was important to have regard to the criteria identified in Kebaro [2003] FCAFC 5 at [103] and [111]. They contended that, in substance, on the findings that I made and, indeed, on Calico LLCs argument, they were not the, or a, "real party" and that Mr Leach was. They argued that the correct approach was to inquire whether each of Kevin Owens and Jack Owens could be properly described as being a "real party" in critical and important respects. In that regard, they argued that my findings militated against such a conclusion because Mr Leach had control of Global, the conduct of the appeal, and any negotiations concerned with the 184 mark. They argued that the mere fact that they had been found to have given false or dishonest evidence was not a sufficient basis to find there was a liability or to be "converted into real parties". 34 All three of the third parties argued that Global had provided security for costs and therefore there should not be a third party costs order against them. They also contended that they had had no warning at any time before judgment that Calico LLC would apply for a costs order to be made against any of them personally. They submitted that there was no finding of misconduct, bad faith or improper motive against them as non-party directors. 35 Last, the third parties argued that any issue about quantification of costs should be referred to the Registrar on the basis that each of the two experts had given evidence that had not been challenged in cross-examination about different approaches and quantifications of the costs that a lump sum costs order might entail. They argued that those estimations were very different from the cost estimations that Ms Seet had given at the time of applying for security costs when she understood that the trial would last three days, rather than, as occurred, four days. Consideration 36 In my opinion, this is an appropriate case in which to make a non-party costs order against each of the third parties. I reject the third parties' argument that Calico LLC's failure to, first, pursue a further application for security for the costs or, secondly, give prior notice of the possibility of making the present application ought count against making such an order. I have taken into account the fact that it was possible for Calico LLC to make a further application for security of costs and to have given notice of any intention to apply for a third-party costs order. I have also had regard to the fact that none of the third parties filed any evidence that he would have acted any differently or that the making of the present application has caused any prejudice to his position, despite the lack of notice or the lack of any further application for security for costs. 37 Mason CJ and Deane J said in Knight at 174 CLR 190-191 that the amount of security awarded is no more than an estimate of future costs. It was not reasonable to expect Calico LLC to make further applications to the Court at every stage when it appeared the costs were escalating, particularly in the context where, in late July 2017, Global had come out of liquidation and the trial, which was to start in October 2017, was relatively close to the time at which the parties had agreed to the figure of $150,000. There was a commercial urgency, particularly for Calico LLC, to be able to conduct its business using its wordmark and under its corporate name if, as it contended successfully, the 184 mark ought be removed from class 44 in the Register of Trademarks. As Mason CJ and Deane J said: (Knight 174 CLR at 191) The availability of an order for security for costs at an earlier stage of the litigation would, in many situations, be a strong argument for refusing to exercise a discretion to order costs against a non-party, but discretion must be distinguished from jurisdiction. 38 This case falls within the class of case that their Honours identified as engaging the principle warranting a third party costs order. Here the party to the litigation, Global, is insolvent and a corporate equivalent of a "man of straw", each of the third parties as its directors and shareholders played an active part in the conduct of the litigation and each had an interest in its subject matter. As Mason CJ and Deane J said (Knight 174 CLR at 193) "[w]here the circumstances of a case fall within that category an order for costs should be made against the non-party if the interests of justice require that it be made." 39 Here, each of the third parties as shareholders of Global had a substantial interest in the outcome of litigation. Moreover, Mr Leach funded the litigation in order that he could pursue his commercial interests in being able to attempt negotiations with Calico LLC, and its other shareholders or corporators, including Google, so as to seek what, presumably he must have seen as a significant commercial opportunity. Mr Leach also provided security for Calico LLC's costs in the appeal. He suffers no relevant prejudice from having to now pay the costs of the failed appeal. He funded a corporate vehicle with no assets or capacity to satisfy any liability for costs through which he sought to exploit whatever rights that Global may have had to the wordmark 'Calico' and from which he still seeks to benefit in the United States opposition proceedings. Mr Leach funded this litigation brought by an impecunious company, in circumstances where its litigious opponent was exposed to significant expense in defending and ultimately vindicating its position: cf: Dalby [2019] NSWCA 16 at [84] -[85]; see too Ipex ITG Pty Ltd (in liq) (recs apptd) v Victoria [2014] VSCA 315 at [49]-[51] per Neave, Santamaria and Kyrou JJA. 40 As I found, both Kevin Owens and Jack Owens gave evidence that was calculated to put forward a false case. Without their evidence, the proceeding would not have occupied the length of time or involved the same level of expense, and, indeed, may well have not occurred at all. They stood to benefit from the ultimate result if it went in Global's favour because that result enabled Mr Leach to use the negotiating power that Kevin Owens conferred upon him through the funding arrangements, that each of the third parties approved. Neither Kevin Owens nor Jack Owens suffers any prejudice from Calico LLC bringing the interlocutory application. 41 For these reasons, I am satisfied that is in the interests of justice that each of the third parties pay the costs of Calico LLC on a party-party basis for which Global is also liable. Each of the third parties caused Global to prosecute this proceeding to judgment knowing that it was never going to be in a position to pay costs were it, as occurred, to have lost the litigation. Should there be lump sum costs orders? 42 That brings me to determining what, if anything, I should do about quantifying the costs. It is impossible to be particularly precise in a case like the present. Judges are not taxing officers. The purpose of a lump sum costs order is to avoid the necessity of taxing officers or judges being placed in the position of examining the minutiae of a bill of costs, itself necessarily prepared at considerable expense, in a case such as the present where, even on Mr Dudman's estimates, Calico LLC has incurred at least $600,000 of reasonable party-party costs. 43 Mr Dudman supported his reduction of about $23,500 to senior counsel's fees by reducing the hourly rate from $850 per hour to $740 per hour. He then applied a further reduction of 15 per cent to account for time spent on those tasks that, he surmised, were likely to be considered excessive, upon taxation. 44 Mr Taylor disagreed with those reductions on the basis that it was unlikely that there would be significant further reductions for the excessive time senior counsel spent on tasks, other than the allowance he had made of five per cent. He based this view on the experience of senior counsel for Calico LLC in intellectual property litigation and considered that it was unlikely that such a reduction would be made. 45 I accept Mr Taylor's observation. Ordinarily, in taxations, or issues arising out of them, with which I have had familiarity, amounts charged by counsel that appear reasonable on their face are treated as a disbursement that is substantially allowed in full. Mr Dudman's criticism of senior counsel's fees does not appear to have been based on any substantive identification that any work undertaken was excessive, unreasonable or otherwise unwarranted. Rather, his reduction in the hourly rate was based simply on his assessment that a taxing officer would not treat the hourly rate as a disbursement. I reject that criticism. This was specialised litigation in which the parties' commercial interests are significant. It involved the need to engage senior counsel of particular skills. I am not persuaded any discount should be made to senior counsel's hourly rate. However, Mr Taylor had opined, but Mr Dudman regarded as inadequate, that it was appropriate to make an overall reduction of five per cent for counsel's fees. 46 Doing the best I can, it seems to me that the better course is to make a broad-brush estimate of the amount of the discount that a taxing officer would make, which the experts disputed. I am of opinion that an appropriate amount to allow overall for counsel's fees is $225,000. 47 Secondly, the experts were at issue as to the recoverable costs for Calico LLC's solicitors' professional charges. 48 In the conduct of the trial Calico LLC's solicitors needed to investigate a significant number of assertions deployed by Global in support of its case of bona fide use of the 184 mark and otherwise its validity so as to remain registered in class 44. To my observation, at the trial, that investigation required a considerable degree of meticulous attention to a variety of detailed factual areas. Calico LLC's solicitors had, and were able, to collect a significant wide amount of relevant evidence, both in Australia and in the United States, to establish its case that the 184 mark ought be removed from class 44. Ms Seet made her estimate on 30 May 2017 based on the position as she understood it immediately after Global had filed its evidence in chief. However, I think that it can be inferred that she had not been able to review in detail the amount of work that she would need to undertake in order to deal with, what turned out to be, substantial new issues raised by Global in the filed evidence in chief. Those new issues differed from what had been in issue in the opposition proceedings before the delegate. 49 As with the argument about counsel's fees, the solicitors for Calico LLC practice in a specialised area, as do those who have appeared for Global throughout the proceeding. The hearing time expanded from what was originally set down from three to four days, the last day of which involved me sitting for a further two hours to enable the case then to conclude at the end of final addresses. The submissions for those addresses were detailed. 50 While specialist litigation does involve the need, sometimes, for specialist practitioners to perform considerable work, the instructing solicitor must evaluate the question of division of labour and the engagement of different people to do different tasks. Such an evaluation must be based on the best interests of the client not only in the outcome of litigation but also in achieving that as quickly, inexpensively, and efficiently as possible as s 37N of the Federal Court of Australia Act 1976 (Cth) requires. Of course, sometimes a client will insist or expect that a particular practitioner personally attend to its work, but that is the client's choice, the result of which should not be visited on the client's forensic opponent in an extra costs burden. 51 Mr Dudman criticised one of the employed solicitor's hourly rate on the basis that she had only six years' experience and was charging what he understood would be a rate applicable to those with 10 years of experience. He would have reduced her hourly rate to $450 from $490 to $530. However, as Mr Taylor pointed out, the solicitor concerned was held in a high professional regard and subsequently became a senior associate in the intellectual property group of a United Kingdom firm. She had been described in a 2016 publication as a "rising star in intellectual property". That publication rates the performance of legal practitioners on criteria that are not apparent in evidence before me. In my opinion, a reduction of about $20,000 in the total particular hourly charges for that solicitor, which Mr Dudman proposed, is not warranted on an individual basis nor in a broad-brush assessment. However, the total of the fees charged in respect of that solicitor is a matter that I will take into account in my overall assessment of what the recoverable amount should be for solicitors' fees. 52 Mr Dudman also proposed reducing Ms Seet's hourly rates from between $800 and $825 per hour to $580 per hour. That would result in an overall saving of $100,000 in respect of her fees. He pointed out that the scale of fees in the Federal Court Rules 2011 (Cth) provided an amount of $580 per hour until 2 May 2019 and $650 thereafter. 53 Ms Seet's total fees on a solicitor-client basis amounted to $394,000. In my opinion, it would have been appropriate to allocate a considerable amount of the work for which she charged those fees to junior counsel who could have advised and assisted in the preparation of evidence with similar expertise but at a substantially lower hourly rate. Without criticising Ms Seet's abilities or integrity, in a four day intellectual property case the total fees she charged seem to me to be very substantial. 54 Doing the best I can, again, on a broad-brush basis, in my opinion, I will allow a total of $425,000 for Calico LLC's solicitors' professional fees and $20,000 for other disbursements. That results in a total figure of $670,000 for Calico LLC's lump sum costs. However it is necessary to deduct the amount of the $150,000 security that has already been released to Calico LLC. Accordingly I will order Global and the third parties to pay the costs of the trial fixed at $520,000. 55 The evidence in relation to the current interlocutory application is that Mr Taylor's cost consultant fees were about $10,000, which formed part of the disbursements totalling $46,700, and the solicitors' fees were $46,000. 56 The present application required a degree of detail to establish the liability of the third parties. However, overall, it seems to me that an interlocutory application of this kind, that ought to have taken half a day's hearing, could not warrant a party-party costs order of $90,000. Litigation would be impossible to conduct if this kind of expenditure was involved in relatively mundane tasks such as this. Importantly, what the present application involved did not require any particular specialty other than the familiarity of counsel and solicitors with the history of the proceedings. 57 In all the circumstances, I am of opinion that the third parties should pay the costs of the present application fixed at $60,000. I certify that the preceding fifty-seven (57) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.