Camm v Linke Nominees Pty Ltd

REASONS FOR JUDGMENT 1 The dispute which is the subject of the present proceeding has a long and involved history. The applicants are the trustees ("the trustees") of the second bankrupt estate of Mr Gary Camm. They have been seeking to have certain real estate on the Sunshine Coast declared to form part of Mr Camm's estate for the benefit of the creditors. 2 The property was purchased by Mr Camm on 13 May 1988. On 26 October 1995, at a time at which some of Mr Camm's creditors were seeking a sequestration order against him, he entered into a contract of sale with Linke Nominees Pty Ltd ("Linke Nominees") pursuant to which he sold the property to Linke Nominees. He had mortgaged the land to the Commonwealth Bank for about $500,000. The contract entered into between Mr Camm and Linke Nominees was a conventional executory contract for the sale of land. It provided for the payment of a deposit of $1,000 by Linke Nominees with the balance of the purchase price of $400,000 payable on completion of the contract on 23 November 1995. The terms of the contract included a number of special conditions. Amongst them was a requirement that Mr Camm cause two writs to be removed from the title reference prior to the completion date. If the writs were not removed Linke Nominees could terminate the contract. Another special condition required that the consent of the Commonwealth Bank be obtained to Mr Camm entering into the contract and discharging the mortgage owed to it even though the money owing to the Bank by Mr Camm exceeded the purchase price provided for in the contract. Either party could terminate the contract if the Bank did not satisfy the requirements of the special condition. 3 On 29 November 1995, a sequestration order was made against Mr Camm. Mr Trevor Shmierer was appointed as trustee of Mr Camm's first bankrupt estate. On that day - 29 November 1995 - Mr Schmierer wrote to Mr Camm's solicitors advising that he consented to the sale of the land proceeding at settlement on the following day. The sale went ahead. 4 Mr Schmierer was subsequently to report to creditors in the first bankruptcy that the property had been "realised by the Bank" and that the Bank had taken almost all of the proceeds of the sale. The land was sold for $400,000 of which sum the Commonwealth Bank received almost $393,000. The Bank became an unsecured creditor for a little over $119,000. 5 An instrument of transfer was prepared. It was signed by Mr Camm on 24 November 1995 and by Linke Nominees' solicitor on 30 November 1995. It was lodged in the Queensland Land Registry on 14 February 1996 and registered on 22 February 1996. 6 Mr Camm was discharged from his first bankruptcy on 27 February 1999. 7 Mr Camm was made bankrupt a second time by a sequestration order made on 19 November 2003. The present applicants are the trustees of Mr Camm's second bankrupt estate. 8 Notwithstanding the sale of the land to Linke Nominees in 1995, Mr Camm continued to reside there until 2007. The company had earlier sought to evict Mr Camm. Mr Camm resisted this attempt. In the course of so doing he swore an affidavit in which he deposed that, at the time of the sale, there was a side agreement between him and Linke Nominees under which, in addition to the nominated purchase price, he was to receive $150,000 from the company and he was granted an option to repurchase the land at a later date. The alleged side agreement had not been disclosed to Mr Schmierer. The trustees have also suggested that the property was deliberately undervalued at the time of sale and that Mr Camm retained an equitable interest in the property to the extent of the under value. 9 In the course of administering Mr Camm's second bankrupt estate, the trustees caused examinations to be conducted pursuant to s 81 of the Bankruptcy Act 1966 (Cth). One of those examined was Mr Robert Linke who was a director of Linke Nominees. The examination of Mr Linke took place on 15 May 2007. 10 Following discussions between the parties, a deed of settlement was signed on the following day. The parties were the trustees, Linke Nominees and Mr Linke. Mr Linke signed the deed on his own behalf and purportedly also on behalf of Linke Nominees. The deed provided for Linke Nominees to pay to the trustees a sum equal to 50% of the value of the property as determined by a registered valuer. Five hundred thousand dollars was to be paid by bank cheque by 23 May 2007 and the balance by 16 May 2008. 11 The $500,000 was not paid by 23 May 2007. On 28 May 2007, the trustees filed a claim against Linke Nominees in the Supreme Court of Queensland. The claim sought payment of the $500,000. The trustees succeeded at trial in obtaining an order against Mr Linke. They failed in their claim against Linke Nominees because the other directors of the company (Mr Linke's sons) contended that they had not agreed to the terms of the settlement deed. 12 Mr Linke appealed to the Full Court of the Supreme Court against the trial judge's orders. The appeal was allowed. In the course of his judgment Muir JA (with whom Cullinane and Douglas JJ agreed) said that: "Here, the [trustees'] actual loss resulting from their inability to pursue a contractual claim against [Linke Nominees] is not $500,000. The [trustees] are left with their remedies against [Linke Nominees] under s 120 or s 121 of the Bankruptcy Act 1966 (Cth). Those remedies, which would have been lost had [Linke Nominees] been bound by the Deed, are plainly valuable: the appellant considered that [Linke Nominees] would be prepared to pay in excess of $500,000 in order to ensure that they were never exercised. The quantification of their value requires an evaluation of the respondents' prospects of success in the proceedings referred to in recitals L and M of the Deed and the quantification of monetary benefit to [the trustees] of succeeding in obtaining title to the land. If successful in proceedings against [Linke Nominees] and the appellant, [the trustees] would obtain title to the land but may have to account to [Linke Nominees] for the $400,000 it paid to [Mr Camm]." See McIntosh v Linke Nominees Pty Ltd [2008] QCA 275 at [17]. 13 As a result of these observations the trustees commenced the present proceeding in the Federal Magistrates Court. The proceeding was transferred to this Court on 16 November 2009. 14 An unsuccessful attempt was made to avoid the expense of a trial. The parties jointly submitted that two questions should be decided separately from and before all other questions in the proceeding. That attempt was not successful: see The Trustees of the Property of Gary Stirling Camm v Linke Nominees Pty Ltd (2010) 190 FCR 193. 15 The issues in dispute were then referred to mediation by a Registrar of the Court. That mediation was conducted on 19 October 2011. It was unsuccessful. 16 The trial of the proceeding commenced in Melbourne on 8 October 2012 and continued in Brisbane from 15 October to 1 November 2012. 17 On 29 October 2012, Mr Schmierer gave evidence. Under cross-examination he said that, following an approach from Linke Nominees' solicitor, he had, on 23 November 2009, entered in to a call option deed. The parties to the deed were Mr Schmierer and Mr Linke. The deed gave to Mr Linke the option to purchase the disputed property from Mr Schmierer. 18 The call option was open for three years. It expired on 23 November 2012. The option was not exercised. 19 As a result of these developments the trustees have applied for orders granting them leave to discontinue the proceeding on terms that Linke Nominees and its solicitor pay the trustees' costs of the proceeding on an indemnity basis, or, in the alternative, on a party-party basis. The trustees also seek orders that Linke Nominees and its solicitor pay their costs of and incidental to the application. Their first application was made on 5 December 2012. The application was amended by subsequent applications filed on 20 December 2012 and 24 January 2013. 20 Counsel for the trustees advised the Court that the trustees would discontinue the proceeding if leave were to be granted conditional upon either or both of Linke Nominees or its solicitor being ordered to pay the trustees' costs between 5 February 2010 and 29 October 2012. Otherwise they would not press their application for leave. 21 Linke Nominees' solicitor, Mr Jon Broadley, was separately represented by counsel. His firm nonetheless remained solicitor on the record for Linke Nominees and he prepared an affidavit which was sworn by Mr Robert Linke in opposition to any cost order being made against Linke Nominees.

THE EVIDENCE 22 The trustees relied on the evidence of three witness: Mr John Park, one of the trustees; Mr John Shanahan, a fellow employee of Mr Park in the firm of FTI Consulting who was himself a registered trustee in bankruptcy and had day to day oversight of the administration of Mr Camm's estate; and Mr John Maitland, the solicitor acting for the trustees. 23 In his affidavit, Mr Park expressed a series of concerns about the implications of the option deed, and the possibility that the option might be exercised, for the successful prosecution of the trustees' case. These concerns were outlined in an affidavit sworn by him: "8. Knowledge of the Deed's existence at an early stage of the proceeding herein would have alerted me to the fact that, if we were successful in the present proceeding and if the option given by that Deed were exercised, we would not be able to enjoy the fruits of any judgment in our favour unless and until we had obtained orders setting aside the Deed. If the proceeding were to continue we would need to obtain a declaration as to the validity and enforceability of the Deed in the present proceeding or, subsequent to judgment in the present proceeding, to issue fresh proceedings against Mr. Linke (and possibly Mr. Schmierer) seeking to set aside the Deed. 9. That knowledge would have required us to re-assess the prospects of success in the present proceeding weighed against the potential costs likely to be incurred by the estate of Gary Stirling Camm, and the costs which might, if the proceeding were unsuccessful, be awarded against the estate and to decide whether to continue with the present proceeding and, if we did decide to continue with the proceeding what steps should be taken in relation to the Deed." 24 While Mr Park was certain that "knowledge of the existence of the Deed would have affected our conduct of the proceeding" he was not in a position to say, with hindsight, how the trustees might have acted upon becoming aware of the existence of the deed. 25 Under cross-examination Mr Park accepted that, once the deed had lapsed without the option being exercised, all of his concerns about the potential impact of the exercise by Mr Linke of the option, on the trustees' interests, had dissipated. 26 Mr Shanahan also accepted that, if the deed had lapsed without the exercise of the option and had not been renewed, his concerns about the future impact of the exercise of the option on the trustees' interests would no longer exist. He did not, however, know, at the time at which instructions were given for the present application to be made, whether or not the option had been exercised before the deed had lapsed or whether the deed had lapsed or been renewed. 27 Mr Shanahan emphasised that, had he been aware of the deed and what he understood to be its potential implications for the trustees' successful prosecution of the proceeding, he may well have been more disposed to a commercial resolution prior to trial. 28 Mr Maitland said that he (and, through him, the trustees) had first become aware of the existence of the option deed when it was produced in Court during Mr Schmierer's evidence on 29 October 2012. He subsequently examined the deed. Having done so he came to the conclusion that, were the call provided for in the deed to be exercised, this would deprive the trustees of the rights which they asserted under s 121 of the Act. He placed particular emphasis on the provisions of Clauses 9.1 and 15.1 of the agreement annexed to the deed. He considered that Clause 9.1. covered the relief sought in the current proceeding and that Clause 15.1 opened the possibility of an extension of the period within which the option might be exercised. 29 Mr Maitland expressed the view that, had the trustees been aware of the existence of the option deed, it was likely that they would have conducted the litigation differently and would, more readily, have considered a commercial settlement. He considered that the trustees were entitled to "redress" for costs thrown away during the relevant period. Mr Maitland said that he had accepted instructions from the trustees on a contingency ("no win - no fee") basis and that the trustees had not paid anything to Linke Nominees by way of costs ordered in relation to the earlier proceedings in the Queensland Supreme Court and Court of Appeal. 30 Linke Nominees relied on the evidence of Mr Robert Linke who had, at relevant times until 23 November 2012, been a director of the company. Mr Linke said that he had entered into the call option deed on the advice of his lawyers for the purposes of protecting Linke Nominees against the prospect of the trustees being able to obtain title to the property at Noosa. He had had no dealings with Mr Schmierer but instructed Mr Broadley to negotiate the deed to protect Linke Nominees' legal position. He considered the deed to be "the most appropriate mechanism to prevent the [trustees] from acquiring [Mr Schmierer's] rights." He had been advised that the option could be exercised to Linke Nominees' advantage if the preliminary point relating to the operation of s 59 of the Act were to be resolved against the company. He had a general understanding that the company's position was that the trustees did not have power under ss 58 or 59 of the Act to pursue the principal application. Any relevant rights were vested in Mr Schmierer as first trustee. If, however, the Court were to take the view that the trustees were entitled to pursue their principal claim under s 59, the deed might assist the trustees taking legal title to the property. He did not understand the legal basis for this position. 31 Mr Broadley said that he had drafted the deed and related agreement on the advice of counsel. He had done so to protect Linke Nominees' interests. He saw it as guarding against the possibility that the trustees were unsuccessful in asserting rights under s 121 of the Act. 32 Mr Broadley acknowledged that he had not advised Linke Nominees that it was obliged to make discovery of the deed and it had not done so. 33 The Court had directed that Linke Nominees give discovery on or before 14 June 2011. Mr Broadley was conscious that, about the middle of 2011, the Federal Court Rules relating to discovery had changed but he said that he had considered both the former Order 15 Rule 2 and the present Rule 20.14 and was adamant that neither rule required production of the deed because it was, in his opinion, on no view relevant having regard to the parties' pleaded cases. 34 He was, at the time that Linke Nominees provided discovery, aware of the substance of the provisions of ss 37M and 37N of the Federal Court of Australia Act 1976 (Cth) ("the FCA Act"). Mr Broadley could not recall, however, whether he had had regard to the specific provisions of the sections when advising Linke Nominees about its discovery obligations.

THE LEGISLATION 35 Sections 37M and 37N of the FCA Act came into operation on 1 January 2010: see s 2 of the Access to Justice (Civil Litigation Reforms) Amendment Act 2009 (Cth). Relevantly, they provide: "37M The overarching purpose of civil practice and procedure provisions (1) The overarching purpose of the civil practice and procedure provisions is to facilitate the just resolution of disputes: (a) according to law; and (b) as quickly, inexpensively and efficiently as possible. (2) Without limiting the generality of subsection (1), the overarching purpose includes the following objectives: (a) the just determination of all proceedings before the Court; (b) the efficient use of the judicial and administrative resources available for the purposes of the Court; (c) the efficient disposal of the Court's overall caseload; (d) the disposal of all proceedings in a timely manner; (e) the resolution of disputes at a cost that is proportionate to the importance and complexity of the matters in dispute. … (4) The civil practice and procedure provisions are the following, so far as they apply in relation to civil proceedings: (a) the Rules of Court made under this Act; (b) any other provision made by or under this Act or any other Act with respect to the practice and procedure of the Court. 37N Parties to act consistently with the overarching purpose (1) The parties to a civil proceeding before the Court must conduct the proceeding (including negotiations for settlement of the dispute to which the proceeding relates) in a way that is consistent with the overarching purpose. (2) A party's lawyer must, in the conduct of a civil proceeding before the Court (including negotiations for settlement) on the party's behalf: (a) take account of the duty imposed on the party by subsection (1); and (b) assist the party to comply with the duty. (3) The Court or a Judge may, for the purpose of enabling a party to comply with the duty imposed by subsection (1), require the party's lawyer to give the party an estimate of: (a) the likely duration of the proceeding or part of the proceeding; and (b) the likely amount of costs that the party will have to pay in connection with the proceeding or part of the proceeding, including: (i) the costs that the lawyer will charge to the party; and (ii) any other costs that the party will have to pay in the event that the party is unsuccessful in the proceeding or part of the proceeding. (4) In exercising the discretion to award costs in a civil proceeding, the Court or a Judge must take account of any failure to comply with the duty imposed by subsection (1) or (2). (5) If the Court or a Judge orders a lawyer to bear costs personally because of a failure to comply with the duty imposed by subsection (2), the lawyer must not recover the costs from his or her client. 36 Prior to 1 August 2011 Order 15 Rule 2 of the Federal Court Rules relevantly provided that: "Discovery on notice (1) A party required to give discovery must do so within the time specified in the notice of discovery (not being less than 14 days after service of the notice of discovery on the party), or within such time as the Court or a Judge directs. (2) Unless the Court or a Judge orders otherwise, a party must give discovery by serving: (a) a list of documents required to be disclosed; and (b) an affidavit verifying the list. (3) Without limiting rule 3 or 7, the documents required to be disclosed are any of the following documents of which the party giving discovery is, after a reasonable search, aware at the time discovery is given: (a) documents on which the party relies; and (b) documents that adversely affect the party's own case; and (c) documents that adversely affect another party's case; and (d) documents that support another party's case. (4) However, a document is not required to be disclosed if the party giving discovery reasonably believes that the document is already in the possession, custody or control of the party to whom discovery is given. (5) … (6) …" 37 Since 1 August 2011 Rule 20.14(1) and (2) has provided that: "(1) If the Court orders a party to give standard discovery, the party must give discovery of documents: (a) that are directly relevant to the issues raised by the pleadings or in the affidavits; and (b) of which, after a reasonable search, the party is aware; and (c) that are, or have been, in the party's control. (2) For paragraph (1)(a), the documents must meet at least one of the following criteria: (a) the documents are those on which the party intends to rely; (b) the documents adversely affect the party's own case; (c) the documents support another party's case; (d) the documents adversely affect another party's case." 38 Although the language of the present and former Rules differ, they do not impose substantially different obligations on a party who is required to give discovery under them. It had been contemplated in some cases that Order 15 Rule 2 could extend to documents which might put a party on a train of inquiry which may turn up evidence which is of assistance to its case (the Peruvian Guano test): see, for example, Reading Entertainment Australia Pty Ltd v Birch Carroll & Coyle Ltd [2002] FCAFC 109 at [70] (Beaumont J). The weight of authority, however, supports the proposition that Rule 2 displaced this requirement: see the authorities collected in Citrus Queensland Pty Ltd v Sun State Orchards Pty Ltd (No 2) (2006) 155 FCR 1 at 19-23 (Collier J).

CONSIDERATION 39 Conflicting submissions were made as to the purpose and effect of the put option deed. The trustees considered that the deed was designed to deprive them of the fruits of any forensic victory they may obtain in the principal proceeding. If it were found that the property vested in the first trustee and Mr Linke exercised his option under the deed, he would have the right to purchase the property. The trustees' apprehension was fuelled by some evidence given by the first trustee at trial. 40 In the course of his evidence on 29 October 2012 in the principal proceeding, Mr Schmierer disclosed the existence of the deed. It was produced. Having examined it overnight, senior counsel for the trustees asked Mr Schmierer, on the following day, about his understanding of the meaning and effect of the deed and the attached agreement. The following exchange occurred: "COUNSEL: … It's your understanding, is it not, that if a chose in action in respect of the sale in '95 by Camm to Linke of the Noosaville property were, in fact, a chose in action in the first estate and, therefore, only available to the first trustee, being you? ANSWER: Mm. COUNSEL: Then that document, the option, to which we're referring would give Linke upon payment of $10,000 the ability to defeat that proceeding? ANSWER: That appears to be the case." 41 Mr Schmierer also gave evidence that he had recently had a discussion with Mr Broadley in which the possibility of extending the period within which the option might be exercised had been raised by Mr Broadley. 42 Counsel for Linke Nominees contended that the trustees' apprehension was without foundation. If they succeeded in persuading the Court that the property vested in them, they would have the power, under s 121 of the Act, to have the transfer of the property from Mr Camm to Linke Nominees avoided. The deed could in no way undermine any rights which they would then have to exercise control over the property for the benefit of Mr Camm's creditors. If the trustees were unsuccessful the property would be held to have vested in the first trustee and it would be for the first trustee to exercise control over the property. 43 Counsel for Mr Broadley, supported by counsel for Linke Nominees, submitted that, even though the deed had been intended to advantage Mr Linke in the event that the contract of sale of the property were avoided and the property vested in the first trustee, the deed was incapable, as a matter of law, of achieving its objective. This was because the rights vested in trustees pursuant to s 121 of the Act were statutory rights which could not be transferred to other parties. 44 It is not necessary that I resolve these competing contentions in order to determine the present application. 45 The Federal Court Rules provide that a moving party may seek leave to discontinue a proceeding at any time: see Rule 26.12(2)(c). If the application is successful, unless the Court otherwise orders, a consequence of such discontinuance is that the party concerned must pay the respondents' costs: see Rule 26.12(7). The trustees do not wish to submit to any such order and advised the Court that they would not press their application unless any leave to discontinue was accompanied by an order that the respondent and/or its solicitor be ordered to pay the costs incurred by them in the period between 5 February 2010 when the preliminary questions were stated and 29 October 2012 when Mr Schmierer gave his evidence and the trustees became aware, for the first time, of the existence of the deed. 46 The trustees' application for leave to discontinue the proceeding was made on 5 December 2012. At that time the trustees were uncertain as to whether or not Mr Linke had exercised a right to extend the period of operation of the deed and within which he might exercise the option to purchase the first trustees' rights. 47 By the time the hearing took place it was common ground that the deed had ceased to have effect on 23 November 2012 and had not been revived. The option had not been exercised during the life of the deed. Although the deed might have had the potential to prejudice the trustees' interests, it did not, in the event, do so. Whatever may have been the position prior to 23 November 2012 there could, thereafter, be no concern, on the part of the trustees, that they would, in some way, be deprived of the fruits of any victory which they may enjoy in the principal proceeding. So much was acknowledged by Mr Park. 48 The difficulty which now confronts the trustees is that they are unable to point to any prejudice to them which was caused by the non-disclosure of the existence of the deed while it was operative. Nor can they point to any future prejudice likely to be occasioned by such non-disclosure. Furthermore, the trustees were (understandably) unable to identify any material impact the disclosure of the deed had had upon their conduct of the proceeding. 49 Whilst the categories of case in which indemnity costs might be ordered are not closed, it is necessary for there to be "some special or unusual feature in the case to justify the court exercising its discretion" to order costs on this basis: Preston v Preston [1981] 3 WLR 619 at 637. Normally, indemnity costs will not be ordered unless some harm has been inflicted on the applicant and it can be demonstrated that that harm has flowed from some deliberate and unwarranted decision or action of the party against whom the award is sought: cf Australian Transport Insurance Pty Ltd v Graeme Phillips Road Transport Insurance Pty Ltd (1986) 10 FCR 177 at 178. 50 Costs orders, much less indemnity costs orders, are rarely made against practitioners. A serious dereliction of duty on the part of the practitioner must be established: White Industries (Qld) Pty Ltd v Flower and Hart (a firm) (1998) 156 ALR 169 at 230-1. Even if such a dereliction of duty occurs it is to be borne in mind that "[t]he primary object of the jurisdiction is to reimburse to a party to proceedings costs which that party has incurred because of the default of the practitioner, that is to say it is a jurisdiction which is compensatory rather than punitive or disciplinary": see White Industries at 229 (emphasis added). As already noted, the trustees have been unable to point to any losses incurred by them as a result of the non-disclosure of the deed. 51 Special and unusual circumstances must also be demonstrated before an award of party-party costs would be made before the hearing of the proceeding in which they are sought has concluded. Such an order is normally made in favour of the successful party. Circumstances such as those relied on in support of the present application may have a bearing on the question of whether a departure from this norm is justified but that judgment cannot be formed until the outcome of the proceeding is known. 52 These general law principles have been modified by the introduction of ss 37M and 37N of the FCA Act. As Gray J observed in Modra v Victoria (Department of Education and Early Childhood Development and Department of Human Services) (2012) 205 FCR 445 at 455, "the impact of those sections on the obligations of legal practitioners practising in this Court is significant." The same may be said about their impact on the obligations of litigants. 53 By s 37N(1) a party is required to conduct a proceeding, including settlement negotiations, in a way that is consistent with the overarching purpose identified in s 37M. By s 37N(2) the party's lawyer must take into account the overarching duty imposed by subsection (1) and assist his or her client to comply with that duty. A failure of either the party or the practitioner to comply with these obligations may have costs consequences: see s 37N(4). 54 When read together ss 37M and 37N provide for the making of costs orders against a party or a party's legal practitioner even where the obligations imposed by 37N have not led another party to incur loss or damage. One element of the overarching purpose is "the efficient use of the judicial and administrative resources available for the purposes of the Court." Another is "the efficient disposal of the Court's overall caseload." Conduct on the part of a litigant or a practitioner which impacts adversely on the pursuit of these purposes may be taken into account when costs are awarded. 55 It may, therefore, be that, once the issues in dispute between the parties are determined, the trustees, whether or not they are successful, will be able to renew their submissions in the context of argument relating to the costs of the proceeding. Any such arguments will require consideration having regard to a range of matters including the outcome of the proceeding, the conduct of the respondent, its solicitor and the trustees and the potentially conflicting objectives which are included within the concept of the "overarching purpose" identified in s 37M of the Act. 56 The trustees may choose to discontinue the proceeding at any time provided that they are prepared to pay Linke Nominees' costs. Their application for leave to discontinue is, however, qualified by its related application that Linke Nominees and/or its solicitor pay their costs on an indemnity or party-party basis. For the reasons I have given I consider that it would be premature to rule on these costs applications. 57 In the circumstances the trustees' application must be dismissed. 58 The determination of the costs of the application should await the outcome of the proceeding. Costs will be reserved. 59 On 1 November 2012, the hearing of the principal proceeding was adjourned to 11 February 2013. It was estimated that a further eight days were required to complete the evidence and hear submissions. When the discontinuance application was made these dates were vacated. I will give directions for the re-listing of the principal proceeding. I certify that the preceding fifty-nine (59) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tracey.