On 3 May 2017, the Court issued judgment in the substantive matter (Cam & Bear Pty Ltd v McGoldrick [2016] NSWSC 1894 [the "judgment on liability"]) and provided the parties with liberty to apply for any special or different order as to costs. By application of 9 May 2017, the plaintiff applies for such a different or special order. On 10 May 2017, the defendant also sought that the Court exercise the reservation by making an order of a different kind as to costs. This judgment deals with each such application. The issue has been determined on the papers.
The plaintiff's application is by way of submission (as the previous order of the Court required) filed 9 May 2017. The defendant's application, likewise, involves submissions filed 10 May 2017. Each of the applications are the subject of submissions in reply filed 15 May 2017 and 16 May 2017 respectively. The defendant relies upon an Affidavit of Hamish Esplin of 9 May 2017, which is formal in nature, in that it recites the timing of the service of expert reports and encloses an offer to resolve the proceedings, without prejudice save as to costs, said to amount to a Calderbank offer (Calderbank v Calderbank [1975] 3 All ER 333).
The terms of the letter propose that the plaintiff resolve the proceedings on the following basis (in full and final settlement of the proceedings):
"1. All claims in the proceedings are dismissed.
2. Within seven days of acceptance of this offer the Defendant will pay $10,000 to the Plaintiff.
3. The parties (and beneficiaries of the Fund) sign a mutual deed of release in the usual form.
This offer is open for acceptance for 28 days from the date of this letter."
The letter of offer was sent on 22 January 2015 and expressly makes reference to the principles in Calderbank, supra.
Relying upon the foregoing correspondence, the defendant seeks to have the Court vary its order as to costs by requiring the plaintiff to pay the defendant's costs on the ordinary basis up to and including 19 February 2015 and thereafter on an indemnity basis. The plaintiff's application is that the Court's order as to costs should be varied to provide that each party should pay its own costs or, alternatively, that the plaintiff should pay such proportion of the defendant's costs as the Court thinks fit.
The basis for the plaintiff's variation is, essentially, the issues on which the defendant failed to succeed as compared to the one issue upon which it did succeed and which occasioned the result that judgment on liability issued for the defendant.
[3]
Principles
The Civil Procedure Act 2005 ("the Act") grants the Court a broad discretion as to the awarding of costs in any proceeding. Section 98 of the Act provides that, subject to the rules of Court and any other statute, costs are in the discretion of the Court; the Court has full discretion to determine by whom, to whom and to what extent costs are to be paid; and, cost may be awarded on the ordinary basis or on an indemnity basis.
The ordinary rule is, and the prima facie position must be, that costs follow the event: Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11. The discretion to award costs must be exercised judicially and is subject to the rules prescribed.
The Uniform Civil Procedure Rules 2005 ("UCPR"), by operation of UCPR r 42.1, provides that cost shall follow the event, unless it appears to the Court that some other order should be made. That discretion is, itself, subject to the other provisions in UCPR pt 42.
Ordinarily, where a party succeeds in proceedings, the Court ought not to apportion costs on the basis of the issues won or lost by the successful and/or unsuccessful party to those proceedings. A party that is successful is ordinarily entitled to their costs (on the appropriate basis) for the entirety of the proceedings.
Ultimately, costs are compensatory not punitive. As a consequence, costs are not awarded either to reward or to punish one of the parties, but to compensate the successful party for the expense of having either to enforce its rights or to defend its conduct.
Nevertheless, as earlier stated, in an appropriate case, the successful party, who raises unnecessary issues or raises issues unreasonably, may be denied, by that conduct, their right to the compensation for litigating those issues.
In relation to the defendant's claim for indemnity costs, quite separate principles apply. The award of costs on an indemnity basis is one of the incentives, on a commercial basis, for the settlement of justiciable controversies. The UCPR and the Act, together with the principles that apply to them, seek, at their most fundamental level, to encourage parties to resolve differences on a commercial basis or on a reasonable basis, if those terms be different.
The UCPR provide a mechanism for the issuing of an offer to resolve proceedings. That mechanism has not been adopted by the defendant. Instead, the defendant has chosen to rely upon the principles in Calderbank, supra.
The Calderbank offer differs from an offer under UCPR r 20.26 not only in relation to form but also in relation to content. Most importantly, the offer by the defendant is an "all-in" offer, inclusive of costs.
The offer was that the defendant pay $10,000 and the claims in the proceedings be dismissed. It required a mutual deed of release "in the usual form".
On one view, the offer is an offer in principle, which would be subject to the signing of a Deed of Release, including the execution of such Deed of Release by the beneficiaries of the fund, who are not parties to the proceedings.
Next, the offer of $10,000 was made at a time when all of the lay and expert evidence had been compiled, except the affidavit in reply by Dr Bear and the Joint Report compiled at the direction of the Court. The $10,000 would have been an insignificant part of the costs at that point incurred.
Moreover, as earlier stated, it required that the proceedings be dismissed. In other words, the Calderbank offer was an offer that the parties walk away with a relatively insignificant amount of costs being paid to the plaintiff and the plaintiff foregoing any other cause of action that may be available.
In the context of the proceedings and the point at which the parties had arrived at the time that the correspondence occurred, the letter of offer was not "a real and genuine compromise". In The Anderson Group Pty Ltd v Tynan Motors Pty Ltd (No 2) (2006) 67 NSWLR 706; [2006] NSWCA 120, Basten JA (with whom Santow JA and Young CJ in Eq agreed) said:
"[8] It is well established that an offer which does not involve the real and genuine element of compromise, will not be taken into account in relation to costs, either under the general law principles established by Calderbank v Calderbank, or under rules of Court." (references omitted)
Essentially, the defendant's offer was an offer that the parties walk away from the litigation. It is true, in circumstances where the defendant was ultimately successful in the litigation, such an offer was better than the judgment on liability, but only marginally. The difference between the offer made and the judgment on liability relates only to the Court's ultimate conclusion on the question of costs. The offer from the defendant involved judgment against the plaintiff.
[4]
Consideration
The proceedings were conducted on liability. No evidence was adduced nor submissions made on the issue of quantum of damage.
Essentially, the evidence adduced in the proceedings involve the contention that the defendant, an auditor, owed a duty of care to the plaintiff and the conduct of the defendant was in breach of that duty of care. Each of the experts were concerned with that issue.
Each of the lay statements of evidence were concerned with the foregoing issues. The causation aspect involved an insignificant issue, in the context of the manner in which the proceedings were conducted, and the evidence in relation to it was, at best, cursory and passing.
In its submissions, the plaintiff submits that the defendant succeeded only on the basis that the Court "was not satisfied that his negligence was a necessary condition to the occurrence of harm that may have been caused". In so doing, the defendant relies upon the judgment on liability at [214].
However, [214] is a statement of further conclusions and the conclusions in the judgment on liability, as a whole, should also include those statements at [212] which make clear that the conclusion was "that the misdescription in the financial statements was not the cause, nor a contributing factor to the losses incurred". This finding relates not only to the requirements of s 5D of the Civil Liability Act 2002, but also to causation in the common law sense of the term. Nevertheless, that overstatement by the plaintiff does not detract from the submissions otherwise filed.
With the exception of about 10 minutes of evidence, these proceedings have been consumed by a submission on the part of the defendant that was unsuccessful, namely, that there was no duty of care by the defendant to the plaintiff and, if there were a duty of care, it had not been breached. The fundamental issue on the question of causation, in part, relates to the lack of arms' length relationships between the manager of the Fund, the entity into which funds were invested and the auditor.
Were there to have been an arms' length relationship, and the facts otherwise remained the same, a different outcome on causation may well have occurred. In that hypothetical scenario, the auditor, rather than altering the definition of "Cash" or requiring the manager (Databank) to alter the accounts, would have brought to the attention of the Trustee, the plaintiff, Cam & Bear, the misdescription in the accounts.
Although, it is possible, given the findings of the Court that such a qualification communicated to Cam & Bear would result in no action, it is also possible that the independent accountant, which Dr Bear utilised for his personal accounts, could have explained such an issue and its effect.
More relevantly, from the perspective of what is an appropriate costs order, the defendant could easily have admitted a duty of care and its breach and allowed the proceedings to have been conducted solely on the question of causation. The proceedings on that basis would have been, at worst, significantly less expensive and significantly more efficient and would have more easily and readily resolved justly the true issues between the parties.
In other words, if the Court were not to make an exceptional order, in the particular circumstances of this case, it would be encouraging inefficiency, the unreasonable incurring of costs and the parties to this litigation arguing about matters that, ultimately, concerned issues on which the plaintiff could reasonably and appropriately expect to succeed (and did succeed).
The conclusions of the Court on liability involve the auditor in gross negligence, if not misconduct. Those conclusions involve the auditor in dealing solely with the recipient of funds (or the principal thereof) who is the same person as the manager of the funds, rather than the person to whom a duty was owed, being the plaintiff. It also involved the defendant in misrepresenting the nature of the funds and not qualifying the reports by reason of the inability of the recipient of the funds to meet calls, if made, and the inappropriate classification of the monies held as "cash".
As made clear in the judgment on liability, current liabilities were greater than current assets in the entity that held the funds (and other funds) and liabilities were greater than assets. In the circumstances of a call on the funds held, it would be most unlikely, if not impossible, for the entity holding the funds to have met that call.
The conduct of the auditor amounted, as earlier stated, to a breach of the duty of care and negligence, if not misconduct. Further, the conduct, including the inappropriate relationship with the management company and fund recipient subverts the legislative purpose in having Self-Managed Funds audited. That misconduct was the major issue litigated in the proceedings.
In those circumstances, I consider the litigation sufficiently exceptional that the Court should not adhere to the ordinary rule that costs should follow the event. Further, given the insignificance of the issue upon which the defendant was ultimately successful, it seems inappropriate to apportion costs as to the issues in the proceedings.
One other point is necessary. If LSL Holdings operated a bank account (which it did not) and the amounts described as "cash" were held in that bank account, on LSL Holdings' being rendered bankrupt, the call by the Trustee or the Fund would have had no greater chance of success nor better outcome than was the case in the absence of the operation of a bank account. The damage was, as made clear in the judgment on liability, caused by the conduct of LSL Holdings, Mr Tony Lewis and Databank (if they be different).
Nevertheless, in the quite exceptional circumstances of this case, including the misleading and deceptive statements issued by the defendant in the audit reports, it is inappropriate for the defendant to be compensated for the litigation, particularly when the defendant was "complicit", with the others, in the manner in which this Fund was conducted and represented, in that the defendant failed to qualify the accounts in accordance with his duty to do so.
In these proceedings, the Court makes the following further orders:
1. Vacate Order 2 of the Orders issued on 3 May 2017;
2. In lieu thereof, the Court orders:
1. Each party shall bear its or his own costs.
[5]
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Decision last updated: 19 June 2017