Chen & Ors v Chan & Ors [2009] VSCA 233

PRACTICE AND PROCEDURE - Mareva injunction - Undertaking as to damages - Third appellant wholly successful on appeal - Trial judgment should not have been entered - Basis for Mareva injunction removed - Third appellant's claim for damages caused by grant of injunction - Whether claim can be entertained by appeal court.

For the Appellants (David Weiping Chen and Renmin Lu)

1 On 19 December 2008, we published our reasons in the appeals by David Weiping Chen ('DWC'), Renmin Lu Chen ('RLC') and Lujia Chen ('LC').[1]

2 On 13 March 2009, submissions were made by the parties as to appropriate orders as to costs. The making of orders as to costs is complicated by the diversity of the matters raised on appeal and the mixed success enjoyed by the parties on appeal.

3 The trial transcript and the reasons of the trial judge demonstrate that it was the counterclaim, rather than the claim brought by the Chans and Eastworld International (Australia) Pty Ltd ('EWA') (the respondents to the appeals), which was the primary focus of the trial. LC was not a party to the counterclaim. As we noted in our reasons, success on the part of DWC and RLC on the counterclaim (which asserted the existence of three separate agreements) would have defeated the claim of the respondents, as well as giving DWC and RLC a half interest in the Toorak property.[2]

4 But the counterclaim failed. And, on the appeal, DWC and RLC abandoned their attack on the findings of the trial judge in respect of their counterclaim.[3] A substantial part of the appeal was occupied by arguments on behalf of DWC and RLC that the trial judge erred in making a finding of misappropriation against them. It was contended on their behalf that the judge should have conducted a detailed examination of expenditure records and other pieces of evidence which were produced on the appeal.

5 This part of the appeal failed. The court concluded that it was not open to DWC and RLC to advance on appeal a different case from that which had been conducted on their behalf at trial.[4] That being so, there was simply no basis for impugning the judge's findings that there had been misappropriation by DWC and RLC.[5]

6 Their appeal succeeded, however, in relation to the next step in the trial process, which involved the assessment by the Master of the moneys owing to the respondents by DWC and RLC. We concluded that this part of the trial had not been carried out in accordance with law. We directed that a new trial on this issue be undertaken by a judge of the Trial Division.[6]

7 DWC and RLC separately appealed against findings of contempt made against them by a judge of this Court.[7] That appeal also failed.

8 LC, the daughter of DWC and RLC, was wholly successful in her appeal against the findings of the trial judge. At trial, she had been represented jointly with her parents; and when the appeals were first lodged in this Court, she was a joint appellant with them. The grounds of appeal did not distinguish between their respective roles.

9 Then, on 5 October 2007, LC filed an amended notice of appeal on her own behalf, which addressed specifically the findings made against her and what was said to be a lack of evidence to support those findings. This case was fully articulated in an outline of submissions filed on 17 December 2007. We upheld LC's appeal on the basis that the respondents had wholly failed to make out a case against her.[8]

10 The contentions of the parties raise a number of questions relevant to costs orders on appeal. The principles relevant to these questions can be summarised as follows:

(1) The general rule is that costs should follow the event. Absent disqualifying conduct, the successful party should recover its costs even where it has not succeeded on all heads of claim.[9]

(2) The Rules of Court[10] permit significant flexibility in determining questions of costs. In particular, the Court is entitled to examine the realities of the case and will attempt to do 'substantial justice' as between the parties on matters of costs.[11]

(3) Where there is a multiplicity of issues and mixed success has been enjoyed by the parties,[12] a Court may take a pragmatic approach in framing the order for costs, taking into consideration the success (or lack of success) of the parties on an issues basis. Generally, if such an order is made, it is reflected in the successful party being awarded a proportion of its costs but not the full amount.[13]

(4) A Court may, when fixing costs in a claim where there has been mixed success, take into account complications which it considers will arise in the taxation of costs, as part of its consideration of the overall interests of justice.

(5) Where a Court determines to make an order apportioning costs, then it does so primarily as 'a matter of impression and evaluation,'[14] rather than with arithmetical precision, having considered the importance of the matters upon which the parties have been successful or unsuccessful, the time occupied and the ambit of the submissions made, as well as any other relevant matter.

(6) Where a number of parties have had the same representation, there is a 'rule of thumb'[15] as to the apportionment of costs, namely that, where some of those parties have been successful and others have not, each successful party is only entitled to his or her proportion of the costs incurred on behalf of all, plus the costs, if any, incurred exclusively on his or her behalf. The primary issue for determination in such a case is that of fairness as between the parties, having regard to the manner in which the trial, or appeal, has been conducted.

(7) Usually, an order for costs will be made on a party/party basis.[16] But an order for costs on a solicitor/client or indemnity basis may be made where special or unusual circumstances have been demonstrated,[17] for example, by establishing misconduct in the proceeding, that the proceeding was brought for an ulterior purpose, or that it was patently unreasonable to institute, or maintain, the proceeding. Special circumstances may also include the making of an allegation of fraud which is not proved.[18]

Costs of the trial and the appeal against the trial judge's findings

11 DWC and RLC failed in their attack on the findings of misappropriation made by the trial judge. Voluminous material filed prior to the appeal related to the counterclaim. As noted earlier, that part of the appeal was abandoned at the commencement of the hearing. The Court rejected the appeal submissions of DWC and RLC, which sought to advance a case which had not been run at trial and in respect of which the judge could not have been expected to make findings. In short, the respondents were successful on all the issues relating to the proceeding before the trial judge.

12 Counsel for DWC and RLC contend nevertheless that the question of the costs of both the trial and the appeal should be reserved to the trial judge who will hear the question of the amounts owing to the respondents. As the findings of the trial judge against DWC and RLC have not been disturbed, and will be unaffected by the outcome of the quantum hearing, we see no reason to depart from the usual rule. Subject to what appears in paragraphs [22]-[24] below, the respondents' costs of the trial, and of the appeal against the trial judge's findings, should be paid by DWC and RLC.

13 On 21 December 2007, DWC and RLC sought and obtained a stay of execution pending the hearing and determination of the appeal. This application became necessary because the respondents had on 20 December served bankruptcy notices on DWC and RLC. The stay was extended on 23 January 2008. On both occasions costs were reserved.

14 The respondents submitted that DWC and RLC should be ordered to pay their costs of the stay application, including the costs of both days. We disagree. As appears from the reasons given by Maxwell P and Dodds-Streeton JA on the stay application,[19] it was the action of the respondents in taking enforcement action which justified the granting of the stay. The respondents must bear their own costs of that application.

15 Otherwise the order for payment of the respondents' costs of the appeal will include reserved costs.

16 The respondents submitted that their costs of the trial and of the appeal should be paid on an indemnity basis. In both instances, they rely on a settlement offer which they served on 18 December 2004, after they had obtained a mandatory injunction requiring the appellants to vacate the Kooyong Road property. The offer was to release the Chens from all claims and costs, on condition that they in turn abandon their claims for an interest in the property and for amounts said to be outstanding in respect of expenses.

17 The principles set out in Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2)[20] do not need to be recited here. Whether the rejection of an offer is unreasonable will often depend as much upon the circumstances surrounding the offer at the time it was made as upon the terms of the offer and the end result. Critical in this case, in our view, is the position of each of the parties as set out in the pleadings at the time of the offer.

18 The offer was made approximately 10 months prior to the commencement of the trial. At that stage, the pleadings were relatively basic.[21] The statement of claim contained no allegations of misappropriation or fraud. Three months after the offer was made, however, an amended statement of claim was filed,[22] which significantly changed the thrust of the respondents' claims against DWC and RLC. Several specific transactions were identified in the new pleading, and a plethora of diverse causes of action were alleged against DWC and RLC - claims based upon Barnes v Addy;[23] breach of agreement; money had and received; wrongful misappropriation; breach of trust; constructive trust; breach of fiduciary duty; unjust enrichment; and a remedy in tracing.

19 In view of the reconfiguration of the respondents' claim subsequent to the offer, and the manner in which the trial then proceeded, we do not consider that the rejection of the offer by DWC and RLC should result in an order for indemnity costs.

20 As to the appeal, the rejection of an offer made before trial could have no bearing on the costs of an appeal. There is more force, however, in the respondents' submission that an order for indemnity costs of the appeal is warranted by the late abandonment by DWC and RLC of their challenge to the judge's rejection of the counterclaim, and their attempt to advance on appeal a case which had not been run at trial.

21 But it must be borne in mind that DWC and RLC were unrepresented from the conclusion of the trial until the period leading up to the hearing of the appeal, when members of the Victorian Bar took on their representation pro bono.[24] Doubtless it was on the advice of their new counsel that DWC and RLC abandoned their challenge to the judge's rejection of the counterclaim.[25] They wished to contend, nevertheless, that a different case had been raised on the evidence before the judge, which should have been held to be an answer to the misappropriation claims against them. Although it failed on appeal, that contention was not so obviously hopeless as to warrant an order for indemnity costs.

Costs of the hearing before the Master and the appeal against his findings

22 At the hearing before the Master, DWC and RLC appeared for themselves. If they had been successful, they would have been entitled to an order confined to their out of pocket expenses. On the other hand, the respondents were represented by counsel. As they were successful, they obtained orders from the Master that DWC and RLC pay their costs of that part of the proceeding. Those orders have now been set aside, as have the consequential orders made by the trial judge. In our view, the appropriate course is to order that each party should bear their own costs of the hearing before the Master.

23 As to the costs of the appeal against the Master's findings, DWC and RLC have enjoyed success. Although this aspect of the appeal occupied only a small amount of time on the hearing and accounted for only a limited amount of the appeal book material and the written submissions, the setting aside of the trial judge's orders for payment of large sums of money was of real significance to all parties. Where there had been a judgment debt, there is now only a finding of liability.

24 As we noted in our reasons,[26] the respondents conceded in argument on the appeal that the Master's findings could not stand because he had not made an independent judgment on questions of credibility. That defect was apparent on the face of the Master's reasons, and had been clearly identified in advance in the appellants' written submissions. These matters should be reflected in a downward adjustment of the costs order in favour of the respondents on the appeal. (Since the respondents are not being ordered to pay costs in respect of this - or any other - part of the appeal, there is no occasion for the Court to consider their application for a certificate under s 4(1) of the Appeal Costs Act 1998 (Vic)).

Costs of the contempt proceedings and the appeal against the judge's orders

25 Finally, there is the matter of the costs associated with the orders made in the contempt proceedings. DWC and RLC failed in the appeal.[27] The orders for costs made by the trial judge remain intact. As counsel for DWC and RLC properly conceded, they must pay the respondents' costs of this issue on the appeal.

26 The respondents contend that these costs, too, should be paid on an indemnity basis. We do not agree. The appeal against the contempt findings faced obvious difficulties but we do not consider that it was manifestly hopeless.

27 DWC and RLC should pay the respondents' costs of the trial and the appeal, and their costs of the contempt proceedings, subject to an appropriate allowance in respect of the appeal against the Master's findings. The costs of the appeal will include reserved costs (other than the costs reserved on 21 December 2007 and 23 January 2008).

28 This is an appeal in which it is appropriate to make one order for costs based upon the degree of success variously enjoyed by the parties. The task of the judicial officer who carries out the taxing of the appeal costs will be exceedingly difficult unless such an order is made. It is clear that the respondents have enjoyed a greater level of success than DWC and RLC, notwithstanding that a further trial of the quantum of the moneys outstanding remains.

29 In accordance with the principles to which we have already referred, we would order that DWC and RLC pay 70 per cent of the costs of the respondents on the appeal, including reserved costs. We would make the following orders:

(a) DWC and RLC pay the respondents' costs of the trial before Gillard J.

(b) The order for costs made by Kaye J on 8 March 2007 is confirmed.

(c) Each party bear its own costs of the hearing before Master Efthim.

(d) DWC and RLC pay 70 per cent of the costs of the respondents on the appeal, including reserved costs (other than the costs reserved on 21 December 2007 and on 23 January 2008).

30 LC has succeeded in her appeal against the findings of the trial judge. It is argued on her behalf that the costs of the trial and of the appeal should be awarded in her favour, insofar as those costs may be said to be referable to the case against her or to her appeal. She contended that those costs should be paid on a solicitor/client basis.

31 At the trial, LC was jointly represented with her parents by the same solicitors and counsel. Whilst there was evidence as to transfers of money into LC's account by her parents, no attempt was made at the trial to differentiate the claims against her from the claims against her parents. As a result, as can be seen from our reasons, LC's precise role in the events was not sufficiently evaluated.[28]

32 We reject, however, the contention advanced for LC on the appeal that the respondents had no honest belief in the truth of the allegations made against her. Indeed, there were aspects of her conduct in operating the joint account that might reasonably have been called into question. In the event, the plaintiffs did not plead, or establish by evidence, any sufficient case against her. Nor has it been shown that the case pursued against LC was either baseless or bound to fail. Significantly, no such submission was made by her counsel at any stage of the trial. Rather, as we pointed out, the precise nature of her role was overlooked by both sides, the focus being on the conduct of the Chans and her parents.

33 The written submission filed on behalf of LC on the question of costs contended that those advising the respondents should have known that the claim against her was without foundation. Following debate at the hearing, however, a supplementary submission was filed on behalf of LC, which stated as follows:

It is, of course, assumed that in making and persisting with the knowing receipt claims against Ms Chen the respondents' legal advisers have at all times acted properly on their instructions. The application is against those who gave the instructions - not against those who carried them out.

34 That concession having been made, the application for indemnity costs must fail. Where as here the viability of the claim in question is a matter for evaluation by legal advisers, indemnity costs will only be warranted if the claim

has been commenced or continued in circumstances where the [plaintiff], properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law.[29]

35 In these circumstances, any order for costs in favour of LC should be on a party/party basis.

36 It remains to consider the ambit of the order for costs, given the manner in which LC was represented at trial. The rule of thumb referred to earlier[30] should be applied, with some modification. Given the way the case was run, it would not be appropriate to order that LC be paid a proportion of the costs incurred in the defence of all three Chens. Rather, we think it appropriate to order that, insofar as any costs can be identified as attributable to her defence as distinct from that of her parents, she should recover those costs. We have in mind such things as the instructions given by her and the drawing and settling of her witness statement. There may be other costs directly related to her individual defence in the proceeding which are not covered by costs common to her parents. She should have those costs.

37 In relation to LC's appeal, the position is quite different. Her notice of appeal in October 2007 alerted the respondents to the fact that she was attacking the findings made against her individually, particularly the findings of misappropriation. The outline of submissions filed on 15 December 2007 made this unambiguously clear.

38 The respondents were thus on notice, months before the appeals were to be heard, that the findings of misappropriation against LC would be subjected to the closest scrutiny. Although the word 'fraud' was not used in the pleadings, the case which succeeded against LC at trial was that she was a party to the fraudulent misappropriation by her parents.

39 In our view, a review by the respondents' advisers of the trial judge's findings, and of the lack of evidence against LC, should readily have disclosed that the case against LC as run at trial was fundamentally flawed and that her appeal would inevitably succeed.[31] Yet the respondents sought to uphold the findings of misappropriation against LC on the appeal, when the factual substratum was manifestly hopeless. They did so, moreover, by reference to transactions which formed no part of the pleaded case against LC.[32] This is conduct which warrants an award of solicitor/client costs.

40 In our view, LC is entitled to her costs of the appeal on a party/party basis up until 31 December 2007 and thereafter on a solicitor/client basis. From that point onwards, the respondents must be taken to have run the risk that, if LC was successful on her appeal, they would be liable to pay her costs on a solicitor/client basis.

41 In summary, the following orders should be made in relation to LC:

(1) The respondents pay any costs referable to Lujia Chen, not being costs referable to the cases of David Chen and Renmin Lu Chen, of the trial before Gillard J. Such costs to be paid on a party/party basis.

(2) The respondents pay Lujia Chen's costs of the appeal (including reserved costs) on a party/party basis up until 30 December 2007 and thereafter on a solicitor/client basis.

LC's claim for damages consequent upon the Mareva injunction

42 As described in our appeal reasons,[33] the trial judge in November 2005 granted a Mareva injunction on the application of the respondents (the successful plaintiffs), restraining the three members of the Chen family from disposing of their assets. The order was subject to the usual exceptions permitting expenditure on living expenses and legal expenses. The respondents gave the usual undertaking as to damages.

43 It follows from our conclusions on LC's appeal that judgment should never have been entered against her. In that event, of course, there could have been no basis for a Mareva injunction against her.

44 Contempt proceedings were subsequently instituted against LC, as well as against her parents. Multiple contempt charges against DWC and RLC were upheld, but the charges against LC were dismissed.

45 Following her success on the appeal, LC filed an affidavit in which she stated that she wished, on the hearing of argument as to costs, to press a claim for damages consequent upon the grant of the Mareva injunction against her. She stated that she had been advised by her solicitor and counsel that this claim in damages was 'a course to be dealt with in the Supreme Court at a later time.' She said, however, that:

I cannot afford to wait for another time to have the Supreme Court to hear my claim. I believe my claim in damages is reasonable, and I have always understood that costs and damages are to be dealt with in conjunction. The [costs] hearing ... is the last opportunity I have to claim my rights. I have no choice but to do this on my own and to provide to the Court my Outline of Damages and Costs.

In an attached 'Outline of Damages and Costs', LC identified a number of adverse consequences which she said flowed from the grant of the injunction against her. She claims, for example, that she could not continue work as a landscape architect because her accounts were frozen; and could not pay for daily expenditures such as rent, and 'had to borrow money to survive.'

46 On the costs hearing, senior counsel for LC confirmed that she and her instructing solicitor were of the view that LC's claim for damages consequent upon the Mareva injunction had to be pursued in a separate proceeding in the Trial Division, and could not be litigated in the Court of Appeal. With respect, this view is entirely correct.

47 Given the drawn-out nature of these proceedings, and the very great emotional distress which has obviously been occasioned to LC, her wish to have this related matter of damages disposed of without further delay is entirely understandable. But it is simply not possible for such a claim to be litigated, in the first instance, in the Court of Appeal. If the damages claim is to be prosecuted, a trial of fact must take place. LC will have to give evidence, and be subjected to cross-examination, and will have to call such other evidence as she relies on to establish both the relevant loss and the requisite connection with the granting of the Mareva injunction.

48 Sadly, this damages claim has all the makings of another bitterly-contested factual dispute between these parties. Repeatedly in the course of the preparation and presentation of the appeal, the Court urged the parties to try and arrive at a compromise position, in order to end the trauma of this litigation. That did not occur. The prospect of further disputation, and in particular of LC being further distracted from pursuing her legal career, prompts us to reiterate the hope that - however unlikely it may be - some resolution can even now be achieved, without further litigation.

[1] Chen v Chan [2008] VSCA 280.

[9] Ritter v Godfrey [1920] 2 KB 47; Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72, 97-8 (McHugh J); 124 (Kirby J).

[10] Supreme Court (General Civil Procedure) Rules 2005 (Vic) r 63.04 at first instance and r 64.24 on appeal.

[11] Spotless Group Limited v Premier Building and Consulting Pty Ltd and Northern Suburban Properties Pty Ltd ('Spotless') [2008] VSCA 115, [14].

[12] McFadzean v Construction Mining and Energy Union [2007] VSCA 289; (2007) 20 VR 250 ('McFadzean') [157]-[158].

[13] Spotless [15]; Hughes v Western Australian Cricket Association Inc (1986) 8 ATPR 40-748, 48, 136; Pricom Pty Ltd v Sgarioto (Unreported, Supreme Court of Victoria, Eames J, 24 April 1995), McFadzean [2007] VSCA 289, [152].

[14] Major Engineering Pty Ltd v Helios Electroheat Pty Ltd (No 2) [2006] VSCA 114, [5].

[15] Currabubula Holdings Pty Ltd and Paola Holdings Pty Ltd v State Bank of New South Wales [2000] NSWSC 232, [90]. For a comprehensive analysis of the development of the 'rule of thumb', see [91]-[104]. See also Ellingsen v Det Skandinaviske Compani [1919] 2 KB 567, 569.

[16] PCRZ Investments Pty Ltd v National Golf Holdings Ltd [2002] VSCA 24, [34].

[17] Spencer v Dowling [1996] VSC 51; [1997] 2 VR 127; Bass Coast Shire Council v King [1997] 2 VR 5, 29.

[18] Australian Transport Insurance Pty Ltd v Graeme Phillips Road Transport Insurance Pty Ltd [1986] FCA 85; (1986) 10 FCR 177. See also Re Talk Finance and Insurance Services Ltd [1994] 1 Qd R 558 and Niml Ltd v Man Financial Australia Ltd (No. 2) [2004] VSC 510.

[19] Chen v Chan (Unreported, Victorian Court of Appeal, Maxwell P and Dodds-Streeton JA, 21 December 2007).

[20] [2005] VSCA 298; (2005) 13 VR 435, [23]-[25].

[21] Statement of claim dated 2 September 2003.

[22] Pursuant to an order of Master Kings, 9 March 2005.

[23] (1874) LR 9 Ch App 244.

[24] See Macedon Ranges Shire Council v Thompson [2009] VSCA 209, [15]-[18].

[26] Chen v Chan [2008] VSCA 280, [75].

[29] Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd [1988] FCA 202; (1988) 81 ALR 397, 401 (emphasis added); approved in Colgate-Palmolive Company v Cussons Pty Ltd [1993] FCA 536; (1993) 46 FCR 225, 230-3.

[31] Chen v Chan [2008] VSCA 280, [63]-[67].