DUKE GROUP LTD (IN LIQ) v PILMER & ORS No. SCGRG-92-1874 Judgment No. S6699 [1998] SASC 6699

All of the defendants oppose the claim for costs on a solicitor and client basis and there is opposition to any award of costs on some issues by some of the defendants. Also, some of the defendants seek costs on some issues against the plaintiff and the Nelson Wheeler defendants seek costs against the defendants Harold Abbott, Quilty, Singleton, Lee-Steere and Somes (together referred to as the "director defendants").

A brief summary of the outcome of the litigation is that the judgment was entered for the plaintiff for $93,863,796.81, including interest against all the defendants except Lavis, Gay and Taylor. The action against them was dismissed. The plaintiff succeeded against the first defendants for breach of contract and in negligence but failed to establish breach of fiduciary duty on their part, it being decided that in view of the nature of the relationship between the plaintiff and the first defendants, they were not fiduciaries. The plaintiff succeeded against the fifth defendants by reason of partnership law, it having been established that the first defendants and the fifth defendants were partners in a national firm known as Nelson Wheeler. In these reasons I shall refer to the first defendants and the fifth defendants together as the Nelson Wheeler defendants. The plaintiff also succeeded against each of the director defendants on the basis of breach of fiduciary and statutory duty. The Nelson Wheeler defendants succeeded against the director defendants in third party proceedings obtaining contribution from them.

Before considering the contentions of the parties as to the orders for costs which should be made, it is appropriate to mention the principles to be applied.

Section 40 of the Supreme Court Act 1935 and r101.01 of the Supreme Court Rules 1987 provides that the costs to be awarded to any party are in the discretion of the Court. The discretion must, of course, be exercised judicially: Cretazzo v Lombardi (1975) 13 SASR 4 per Bray CJ at p11. In that case Bray CJ said that "the general discretion is absolute and unfettered, except that it must be exercised judicially, not arbitrarily or capriciously, and that it cannot be exercised on grounds unconnected with the litigation". Also, it must be accepted that the discretion is to be exercised against the background that usually costs will follow the event. However, a successful party may be deprived of all or some of his or her costs and an unsuccessful party may be entitled to all or some of his or her costs. The scope of the discretion and the principles to be applied were discussed by the Court of Appeal in In re Elgindata Ltd (No 2) [1993] 1 All ER 232, Nourse LJ said at p237:

"In part they depend upon established practice or implication from the rules. The principles are these. (1) Costs are in the discretion of the court. (2) They should follow the event, except when it appears to the court that in the circumstances of the case some other order should be made. (3) The general rule does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, but where that has caused a significant increase in the length or cost of the proceedings he may be deprived of the whole or a part of his costs. (4) Where the successful party raises issues or makes allegations improperly or unreasonably, the court may not only deprive him of his costs but order him to pay the whole or a part of the unsuccessful party's costs. Of these principles the first, second and fourth are expressly recognised or provided for by rr 2(4), 3(3) and 10 respectively. The third depends on well-established practice. Moreover, the fourth implies that a successful party who neither improperly nor unreasonably raises issues or makes allegations on which he fails ought not to be ordered to pay any part of the unsuccessful party's costs."

Whilst the scope of the discretion certainly admits of different approaches being taken with respect to different issues within the litigation, it is as well to keep in mind the note of caution sounded by Jacobs J in Cretazzo v Lombardi. Having acknowledged that acts may be awarded against a successful plaintiff on particular issues, he said at p16:

"Having said that, I would wish to sound a note of cautious disapproval of applications, which are being made with increasing frequency, to apportion costs according only to the success or failure of one party or the other on the various issues of fact or law, which arise in the course of a trial. It is true that in the case of Foster v Farquhar [1893] 1 QB 564, which is often relied upon, a successful plaintiff, acting throughout in good faith, was deprived of his costs and ordered to pay the defendant's costs on certain issues. But there are two things to notice about that case. In the first place, it was a jury trial, and the relevant rule (Order LXV, rule 1) under which the general discretion was conferred carried a proviso, that 'where any action ..... is tried by a jury, the costs shall follow the event unless the judge ..... shall for good cause otherwise order'. The general discretion of the Court was not being invoked. Secondly, the plaintiff claimed damages for breach of contract under four distinct heads, in total some three hundred and ninety-four pounds, but his verdict was for only twelve guineas, being less than half the claim under one head of damage. The three severable heads of damage, in respect of which the defendant was awarded costs, did not flow from the defendant's breach, and in respect of those severable items the claim was misconceived. But trials occur daily in which the party, who in the end is wholly or substantially successful, nevertheless fails along the way on particular issues of fact or law. The ultimate ends of justice may not be served if a party is dissuaded by the risk of costs from canvassing all issues, however doubtful, which might be material to the decision of the case. There are, of course, many factors affecting the exercise of the discretion as to costs in each case, including in particular, the severability of the issues, and no two cases are alike. I wish merely to lend no encouragement to any suggestion that a party against whom the judgment goes ought nevertheless to anticipate a favourable exercise of the judicial discretion as to costs in respect of issues upon which he may have succeeded, based merely on his success in those particular issues."

As Toohey J observed in Hughes v West Australian Cricket Association (Inc) (1986) ATPR 40,748 at p48,136, there is no difficulty in stating the principles. Their application to the facts of a particular case is not always easy. In the present case the matter is further complicated by the multiplicity of defendants and the different issues raised in the cases involving some of them.

The plaintiff did not succeed on all issues raised by it in the proceedings. As may be seen from the reasons for judgment on liability and damages, the plaintiff failed on the claim for breach of fiduciary duty against the first defendants. It did not establish relevance of the Hong Kong partnership of Nelson Wheeler per se in the context of liability of particular defendants, it did not succeed with respect to the major part of its claim for damages for loss of use of money or in the method of assessment of damages in some respects. It is contended that a good deal of time was occupied at the trial with respect to some of those matters and that the plaintiff should be deprived of its costs and be ordered to pay the costs of other parties on those issues.

I reject those contentions. The claim against the first defendants for damages for breach of fiduciary duty was, in my view, nothing more than the product of a legal argument upon evidence also adduced for other purposes. That evidence may be described as the evidence of associations. A vast amount of evidence was adduced by the plaintiff at the trial to prove associations between Kia Ora, Western United and senior management of both companies, including the defendant Harold Abbott on the one hand and members of the firm Nelson Wheeler Perth on the other hand directly and through others. That evidence and its purpose has been discussed in the reasons for judgment on liability and damages. It is contended by the first defendants that the plaintiff amended the Statement of Claim to allege the associations as a basis for the claim for damages for breach of fiduciary duty having come to appreciate that the claim for damages for breach of contract and in negligence should not succeed because the first defendants did not owe a duty of care in negligence to the plaintiff and any damages flowing from breach of contract must be modest. I reject that submission. The plaintiff succeeded on the duty of care issue and the evidence of the associations was relevant to other issues including the issue of competence in preparing the Nelson Wheeler report as is discussed in the reasons for judgment on liability and damages.

The other issues upon which the plaintiff was not successful did not involve a considerable body of evidence discreet to those issues which resulted in a significant increase in the length or cost of the proceedings.

The existence of the Hong Kong partnership was proved by the plaintiff. In itself it did not attach liability to the partners of that firm by reason of partnership law which was a contention of the plaintiff but the existence of the partnership and evidence about it was relevant to the associations which have been mentioned and whether the defendants Stokes and Munachen were members of the firm Nelson Wheeler Perth at relevant times.

The plaintiff did not succeed in the major part of its claim for damages for loss of money based upon the Hungerfords v Walker principle. It succeeded only with respect to a limited period of time. Little additional evidence was adduced with respect to this claim other than was necessary for the primary claim for damages.

The issues concerning these matters were not raised improperly or unreasonably and there is no reason to deprive the plaintiff of its costs or to order that it pay the costs of any of the defendants on any of these issues in view of the principles which have been mentioned.

The contentions based upon the success in the action by the Queensland defendants is considered shortly.

The next question is what costs should be awarded against each defendant. The plaintiff should not have all of its costs against each of the defendants. The plaintiff's costs of its case against the Nelson Wheeler defendants should be ordered to be paid by them with the exception of the Queensland defendants who are considered later. Its costs of its case against each of the director defendants should be paid by them. It will be necessary for the taxing Master to differentiate between some of the defendants with respect to some items and issues. For example, the director defendants should not bear the plaintiff's costs on the issues of the composition of the partnership of Nelson Wheeler Perth or on the national partnership issue. It is unlikely that any of them incurred costs with respect to these issues. The Nelson Wheeler defendants should not bear any of the plaintiff's costs incurred in the case against any of the director defendants which were not also incurred in the case against them. In the event that any uncertainty arises during the taxation process, I am prepared to give directions to the taxing Master and I shall give liberty to the parties to apply for that purpose.

It follows that I reject the claims of various defendants against the plaintiff for costs on issues upon which the plaintiff did not succeed. Application of the principles which I have mentioned does not justify such a course. There is, in the circumstances, no reason to depart from the usual course of costs following the event except (as has been mentioned) that the defendants should not bear costs incurred by the plaintiff in the case against other defendants. There are no circumstances here present which dictate some other approach.

Upon what basis should the costs be awarded? Usually costs are awarded on a party and party basis. The discretion to award costs on a solicitor and client basis is unfettered but it must also be exercised judicially. In Colgate-Palmolive Co & Anor v Cussons Pty Ltd [1993] FCA 536; (1993) 118 ALR 248, Sheppard J had occasion to consider the principles relating to an award of solicitor and client costs, referred to by him as indemnity costs. After reviewing authorities he said at pp256-257:

"It seems to me that the following principles or guidelines can be distilled out of the authorities to which I have referred:

1. The problem arises in adversary litigation, ie litigation as between parties at arm's length. Different considerations apply where parties may be found to be entitled to the payment of their costs out of a fund or assets being administered by or under the control of a trustee, liquidator, receiver or person in a like position, eg a government agency or statutory authority.

2. The ordinary rule is that, where the court orders the costs of one party to litigation to be paid by another party, the order is for payment of those costs on the party and party basis. In this court [the Federal Court of Australia] the provisions of O 62, rr12 and 19, and the Second Schedule to the rules will apply to the taxation. In many cases the result will be that the amount recovered by the successful party under the Order will fall short of (in many cases well short of) a complete indemnity.

3. This has been the settled practice for centuries in England. It is practice which is entrenched in Australia. Either legislation (perhaps in the form of an amendment to rules of court) or a decision of an intermediate Court of Appeal or of the High Court would be required to alter it. No doubt any consideration of whether there should be any change in the practice would require the resolution of the competing considerations mentioned by Devlin LJ in Berry v British Transport Commission and Handley JA in Cachia v Hanes on the one hand and by Rogers J in Qantas on the other. The relevant passages from the respective judgments have been earlier referred to.

4. In consequence of the settled practice which exists, the court ought not usually make an order for the payment of costs on some basis other than the party and party basis. The circumstances of the case must be such as to warrant the court in departing from the usual course. That has been the view of all judges dealing with applications for payment of costs on the indemnity or some other basis whether here or in England. The tests have been variously put. The Court of Appeal in Andrews v Barnes (39 Ch D at 141) said the court had a general and discretionary power to award costs as between solicitor and client 'as and when the justice of the case might so require'. Woodward J in Fountain Selected Meats appears to have adopted what was said by Brandon LJ (as he was) in Preston v Preston ([1982] 1 All ER at 58) namely, there should be some special or unusual feature in the case to justify the court in departing from the ordinary practice. Most judges dealing with the problem have resolved the particular case before them by dealing with the circumstances of that case and finding in it the presence or absence of factors which would be capable, if they existed, of warranting a departure from the usual role. But as French J said (at 8) in Tetijo: 'the categories in which the discretion may be exercised are not closed'. Davies J expressed (at 6) similar views in Ragata.

5. Notwithstanding the fact that that is so, it is useful to note some of the circumstances which have been thought to warrant the exercise of the discretion. I instance the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud (both referred to by Woodward J in Fountain and also by Gummow J in Thors v Weekes [1989] FCA 540; (1989) 92 ALR 131 at 152; evidence of particular misconduct that causes loss of time to the court and to other parties (French J in Tetijo); the fact that the proceedings were commenced or continued for some ulterior motive (Davies J in Ragata) or in wilful disregard of known facts or clearly established law (Woodward J in Fountain and French J in J-Corp); the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions (Davies J in Ragata); an imprudent refusal of an offer to compromise (eg Messiter v Hutchinson (1987) 10 NSWLR 525; Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724 (Court of Appeal); Crisp v Kent (SC(NSW)(CA), 27 Sept 1993, unreported) and an award of costs on an indemnity basis against a contemnor (eg Megarry V-C in EMI Records). Other categories of cases are to be found in the reports. Yet others to arise in the future will have different features about them which may justify an order for costs on the indemnity basis. The question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis.

6. It remains to say that the existence of particular facts and circumstances capable of warranting the making of an order for payment of costs, for instance, on the indemnity basis, does not mean that judges are necessarily obliged to exercise their discretion to make such an order. The costs are always in the discretion of the trial judge. Provided that discretion is exercised having regard to the applicable principles and the particular circumstances of the instant case its exercise will not be found to have miscarried unless it appears that the order which has been made involves a manifest error or injustice."

The reference by Sheppard J in the paragraph 3 to the competing considerations mentioned by Devlin LJ in Berry v British Transport Commission [1962] 1 QB 306 at p323, Handley JA in Cachia v Hanes (1991) 23 NSWLR 304 at p318 and Rogers J in Qantas Airways Ltd v Dillingham Corporation (SC(NSW) 14th May 1987, unreported) may be summarised briefly. Both Devlin LJ and Handley JA acknowledged the likely substantial difference between party and party costs recovered by a successful litigant and solicitor and client costs actually incurred. Devlin LJ considered that the law, for reasons which it considers to be in the public interest, requires a litigant to "exercise a greater austerity than it exacts in the ordinary way, and which it will not relax unless the litigant can show some additional ground for reimbursement over and above the bare fact that he had been successful". Handley JA expressed the position as follows at p318:

"..... Litigation is already very expensive. The limited indemnity provided to a successful represented litigant for expense incurred and time lost reflects a compromise between the interests of successful and unsuccessful litigants. It is also an important spur to settlement. The rule that a litigant in person can only recover out of pocket expenses also represents a compromise between the interests of successful and unsuccessful litigants. In my opinion if the existing law is to be changed this must be done either by the High Court or by Parliament."

Rogers J expressed the view that there is a great deal to be said for the proposition that the successful party should always be fully indemnified for cost. He questioned how justice could be done if the successful party was left substantially out of pocket. However, he was not purporting to state any principle of law when making those observations.

I respectfully accept that Sheppard J has accurately and conveniently summarised the principles to be applied. The Full Court took the same view in State Government Insurance Commission v Lane & Anor (1997) 68 SASR 257 at p263.

The plaintiff contends that there are several reasons which justify costs being awarded on a solicitor and client basis against the first and fifth defendants.

The first matter relates to the composition of the partnership Nelson Wheeler Perth. As is mentioned in the reasons for judgment on liability and damages, the first defendants initially admitted that the defendants Stokes and Munachen were members of that firm and made that admission in their Defence and amended Defence. After the plaintiff obtained leave to amend the Statement of Claim to allege breach of the contract of retainer because of lack of independence of Nelson Wheeler Perth from Kia Ora and Western United, the application to withdraw the admission was made and it was asserted that Stokes and Munachen were not partners. The issue was tried and occupied a substantial part of the trial. I concluded that upon all of the evidence only one conclusion was open and that is that the two men were members of the firm at relevant times. In my view, the evidence was overwhelming and the first defendants were aware of the true position. There was no merit in the assertion that they were not partners and the groundless persistence in that allegation unduly prolonged the trial which amounts to a special and unusual feature of the case and justifies an award of costs on a solicitor and client basis on that issue.

The next matter is the failure by the Nelson Wheeler defendants to make adequate discovery. In my earlier reasons I said that they had not done so in some important respects in the context of the composition of Nelson Wheeler Perth and whether there was in fact a national partnership of Nelson Wheeler. In the course of submissions in support of the application for solicitor and client costs, the plaintiff particularised some instances of inadequate, or lack of, discovery in other respects. Upon consideration of this application, the deficiencies in discovery must not be given undue importance in the context of the conduct of the trial. This is unusual litigation. The discovery process was immense. There are many defendants. In practical terms the obligation to make discovery was cast largely upon legal advisers. In some instances it appears that documents were not discovered when it was obvious that they were relevant to facts in issue. In other instances, relevance was not so obvious. As factual issues developed, the continuing obligation of discovery was not always discharged. However, it could not be suggested that the Nelson Wheeler defendants had unlimited resources. Whilst it may be accepted that inconvenience was caused to the plaintiff by inadequacy and lack of discovery, I do not think the trial was prolonged for that reason and there was no injustice. These matters are not a basis for an award of solicitor and client costs.

When the case for the first defendants and the fifth defendants was opened and at times subsequently their counsel intimated that the defendants Pilmer, Munachen, Langford, Wenham and Simmons would give evidence. They could have given evidence on important matters in issue. They did not give evidence and their absence from the witness box was not explained. As may be seen from my earlier reasons, regard was had to their absence in the fact finding exercise.

It is claimed that the plaintiff was put to considerable trouble and was disadvantaged because these men did not give evidence. It is said that there was effort and expense wasted in preparing for cross-examination. In some respects, peripheral witnesses had to be cross-examined more extensively and in other respects witnesses were not cross-examined and documents were not proved because it was anticipated that the absent parties would be called. The plaintiff contends that the conduct of the first defendants and the fifth defendants in not calling these defendants is oppressive, an abuse of the process of the court and an exploitation of adversarial tactics which should "only come at a price" which is that the plaintiff should not be out of pocket as would be the case if only party and party costs are awarded.

I reject this argument. The Nelson Wheeler defendants were at liberty to conduct their cases as they saw fit. To open witnesses and not call them usually has a consequence adverse to the party concerned in the fact finding exercise and such was the case here. The additional work occasioned by the failure to call these defendants to the plaintiff's legal advisers, such as it was, and as may be compensated by an order for costs, will be compensated by such party and party costs as are allowable. I see no reason to order solicitor and client costs for this reason.

The next matter is the Nelson Wheeler defendants not conceding incompetence on the part of Nelson Wheeler Perth in the preparation of the Nelson Wheeler report which is the subject of the proceedings. I must say that the allegation of incompetence was indefensible and obviously so which must have been known to the first defendants once the action was commenced and the proceedings were served. As I observed in my earlier reasons, a very long time was occupied at the trial on the issue of competence. It was not merely a matter of putting the plaintiff to proof. Positive evidence was led in the defence case in an attempt to justify the report. I think the plaintiff should have its costs on this issue on a solicitor and client basis. I do not know why the first defendants took the stance which they did and if the purpose was for tactical reasons, but their conduct in this respect did prolong the trial unreasonably.

During the course of the trial, the first defendants and some of the fifth defendants applied to withdraw certain admissions. Apart from the admissions made by the first defendants as to the composition of the firm Nelson Wheeler Perth already discussed, they applied to withdraw their admissions that Nelson Wheeler Perth owed a duty of care to Kia Ora. As mentioned in my earlier reasons, I resolved that issue on the merits in favour of the plaintiff, regardless of the admission and refused the application. That application does not afford any basis for costs to be awarded on a solicitor and client basis.

Some of the fifth defendants, Lavis, Gay, Taylor, Ashby, Atkins, Huntley and Vine applied to withdraw certain admissions. Those applications and the significance of the admissions are discussed in reasons for judgment on liability and damages. The fact of a national partnership and the composition of it was decided on the merits. None of those applications afford any basis for costs to be awarded on a solicitor and client basis. Indeed, so far as Lavis, Gay and Taylor are concerned, their application was granted and they succeeded in their defence of the action. The admissions sought to be withdrawn by the others were of limited significance and consideration of the application did not increase the length of the trial or complicate issues significantly.

The next matter is the plaintiff's contention that the Nelson Wheeler defendants pursued arguments and defences which had little prospect of success. Undoubtedly parties in those circumstances may be ordered to pay costs on a solicitor and client basis: Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd & Ors [1988] FCA 202; (1988) 81 ALR 397, Sheahan v Northern Australia Land and Agency Co Ltd & Ors (Full Court, 18th December 1995 unreported) and Yates Property Corp Pty Ltd v Boland (No 2) [1997] FCA 760; (1997) 147 ALR 685.

It is true that all the defendants, except Harold Abbott, defended claims and allegations and pursued issues unsuccessfully. I have already made observations about the issue of incompetence in the preparation of the Nelson Wheeler report. In addition the plaintiff contends that by reason of the associations if properly advised, the Nelson Wheeler defendants would have understood that there was no chance of succeeding in their denial of lack of independence. I do not agree. Most of the alleged associations did not involve many of the first defendants. Their true nature had to be assessed upon the evidence. Lack of independence was said by the plaintiff to be a separate and distinct ground of breach of the contract of retainer. The Nelson Wheeler defendants sought to confine the evidence by making various admissions but the plaintiff adduced evidence about certain admitted facts to give colour to them. I do not think the Nelson Wheeler defendants conducted their case on the issue of associations improperly or unreasonably in any manner.

Also, I do not think the director defendants conducted their cases in a manner which should attract solicitor and client costs.

The last ground which the plaintiff says justifies an award of costs on a solicitor and client basis is imprudent or unreasonable refusal of an offer to compromise the plaintiff's claim. The plaintiff did not at any time lodge with the Registrar of the Court and serve on the defendants a notice offering to accept a stated amount, or a judgment for a stated amount, together with costs in satisfaction of its claim pursuant to the procedure laid down in r41 of the Supreme Court Rules 1987. Under that Rule if a plaintiff files and serves such a notice and the opposing party does not accept the offer, the Court must order that party to pay the whole of the plaintiff's costs of the action to be taxed as between solicitor and client if the relief recovered by the plaintiff is equal or greater than that contained in the plaintiff's offer, unless the Court thinks it is proper to order otherwise.

There is no evidence at present as to any offer in settlement made by the plaintiff or any of the defendants or of any offer made by any of the defendants. It is a matter of record in these proceedings that pursuant to orders of the court the plaintiff and the Nelson Wheeler defendants participated in mediation processes both before and during the trial with Court appointed mediators in an attempt to settle the plaintiff's claim. What transpired during those processes has, and may, not be disclosed to the Court.

As I understood the position, the plaintiff seeks to adduce evidence as to settlement offers outside the mediation process with a view to making good a ground for an award of costs on a solicitor and client basis. That evidence is of without prejudice negotiations between the plaintiff and the first defendants and possibly all of the Nelson Wheeler defendants. Those defendants oppose the reception of any such evidence on the ground that any such communications between the parties were made on a without prejudice basis and are the subject of privilege from disclosure which has not been waived by them. Whilst the plaintiff acknowledges that the privilege attaches to those communications, it contends that after judgment the Court should have regard to them on the question of costs. When this matter came on for hearing, Mr Gray QC, for the plaintiff, attempted to place information before me as to those communications. I declined to received the evidence of the communications at that stage and heard the argument of the plaintiff and the defendants. I intimated that if I thought the evidence should be admitted, I would receive it and hear further argument. Having heard and considered the argument, I decline to receive the evidence for the reasons which I now give.

This issue arises not in the context of whether the plaintiff should have its costs, but only in the context of whether those costs should be awarded on a solicitor and client basis, and of the plaintiff not having adopted the procedure set out in r41. There was no apparent reason why the plaintiff could not have filed and served an offer under that Rule. Also, the issue arises in the context of a claim for damages which, if successful, would result in judgment for a sum of money. This is not a case involving relief in some complicated form which would necessarily involve difficulty in making offers to compromise in plainly acceptable terms, such as may be the case where an injunction with intricate terms is sought.

Without being aware of the evidence, I am prepared, for present purposes, to assume that the without prejudice communications between the plaintiff and the Nelson Wheeler defendants involved the making of offers to settle the plaintiff's claim and that such offers were made by both the plaintiff and the Nelson Wheeler defendants and were rejected or not accepted by the other. Also, I assume that the offers to settle were for less than the judgment sum. It is to be expected that the issue would not now arise unless these assumptions are correct.

My attention has been drawn to cases where without prejudice communications regarding settlement of claims have been received by the Court upon consideration of the question of costs. It appears that in England that the public policy considerations that led to without prejudice negotiations being protected from disclosure to the Court (see Walker v Wilsher (1889) 23 QBD 335 and Tomlin v Standard Telephones and Cables Ltd (1969) 3 All ER 201 at pp205-206) has now been modified so as to permit disclosure of offers made without prejudice in some circumstances upon consideration of costs: see Calderbank v Calderbank [1975] 3 All ER 333 and Cutts v Head & Anor [1983] EWCA Civ 8; [1984] 1 All ER 597. In the last mentioned case Oliver LJ expressed the view that the public policy consideration should not prevail in all circumstances. He said at pp605-606:

"That the rule rests, at least in part, on public policy is clear from many authorities, and the convenient starting point of the inquiry is the nature of the underlying policy. It is that parties should be encouraged so far as possible to settle their disputes without resort to litigation and should not be discouraged by the knowledge that anything that is said in the course of such negotiations (and that includes, of course, as much the failure to reply to an offer as an actual reply) may be used to their prejudice in the course of the proceedings. They should, as it was expressed by Clauson J in Scott Paper Co v Drayton Paper Works Ltd (1927) 44 RPC 151 at 157, be encouraged freely and frankly to put their cards on the table. If, however, the protection against disclosure rested solely on a public policy to encourage out-of-court settlement of disputes, Walker v Wilsher is not readily intelligible, for, although the court, and in particular Bowen LJ, seem to have been prepared to assume that an inability to refer to the correspondence on a question of costs, after judgment, would encourage settlement, it is difficult to see, if one thinks about it practically, how that could do so. As a practical matter, a consciousness of a risk as to costs if reasonable offers are refused can only encourage settlement, whilst, on the other hand, it is hard to imagine anything more calculated to encourage obstinancy and unreasonableness than the comfortable knowledge that a litigant can refuse with impunity whatever may be offered to him even if it is as much as or more than everything to which he is entitled in the action. The public policy justification, in truth, essentially rests on the desirability of preventing statements or offers made in the course of negotiations for settlement being brought before the court of trial as admissions on the question of liability.

It was expressed thus by Romilly MR in Jones v Foxall [1852] EngR 407; (1852) 15 Beav 388 at 396[1852] EngR 407; , 51 ER 588 at 591):

"..... I find that the offers were, in fact, made without prejudice to the rights of the parties; and I shall, as far as I am able, in all cases, endeavour to repress a practice which, when I was first acquainted with the profession, was never ventured upon, but which, according to my experience in this place, has become common of late - namely, that of attempting to convert offers of compromise into admissions of acts prejudicial to the person making them. If this were permitted, the effect would be that no attempt to compromise a dispute could ever be made."

Once, however, the trial of the issues in the action is at an end and the matter of costs comes to be argued, this can have no further application for there are no further issues of fact to be determined on which admissions could be relevant.

Whatever may have been the position in 1889, it is, I think, clear that there can now no longer be said to be any reason in public policy why, where offers have been made and refused of everything which could be obtained by the proceedings, that fact should not be brought to the court's attention in the argument as to costs."

The plaintiff also referred to the decision of Lindgren J in MGICA (1992) Ltd v Kenny & Good Pty Ltd & Anor (No 4) [1996] FCA 862; (1996) 140 ALR 707. In that case the applicant sought damages in an action in the Federal Court and made an offer of settlement of $2.2m plus costs by way of what is known as a Calderbank letter (see Calderbank v Calderbank op cit). Such a letter includes an offer in settlement but reserves "the right" to bring the letter to the attention of the Court should the offer not be accepted or is simply expressed as "without prejudice" except as to costs. The applicant's offer was not accepted and upon trial of the action it obtained judgment for a little in excess of $3m. In MGICA (No 2) the applicant did not adopt the procedure laid down in the Federal Court Rules for making offers of compromise which are similar in effect to r41. Lindgren J considered the offers in settlement prior to trial. He considered the Australian cases in which indemnity costs had been considered and declined in the circumstances to order costs on a solicitor and client basis.

It is unnecessary for present purposes to review those cases. I accept the observation of Lindgren J in MGICA at p710:

"It is important, however, to appreciate that the mere making of an offer by a 'Calderbank letter' and its non-acceptance followed by a result more favourable to the offeror (less favourable to the offeree) than that represented by the offer will not automatically lead to the making of an order for payment of costs on an indemnity basis: WCW Pty Ltd v Charthill Ltd (Fed C of A, Olney J, 7 July 1992 unreported); John S Hayes & Associates Pty Ltd v Kimberly-Clark Australia Pty Ltd (1994) 52 FCR 201 (Hill J) (John S Hayes) at 2046."

"Notwithstanding the policy of encouraging settlement of litigation, it should not be assumed that the mere writing of a 'Calderbank letter' generates the same presumptive entitlement to indemnity costs that is provided for in O 23."

In the present case, I do not know if the offers were made by the parties in the form of Calderbank letters. If they were not, the case for disclosure of them may not be so strong.

This is an unusual case. The amount of damages claimed by the plaintiff as disclosed in its opening was enormous, in excess of $200m, including interest. There were substantial issues to be tried. The outcome was not obvious. Very important issues arose on both liability and damages. Issues such as reliance, causation, foreseeability of loss and measure of loss, to mention but a few, raised important questions for decision. If the plaintiff failed on some of these issues, the Nelson Wheeler defendants would have escaped liability. If the plaintiff failed on others, the amount of damages would have been considerably less than that awarded. As may be seen from the reasons for judgment, there were other issues admitting of reasonable arguments in favour of the Nelson Wheeler defendants which, if successful, could have drastically reduced the plaintiff's claim. Indeed, those defendants succeeded in some respects.

It is to be expected that in a case of this nature, given the unusual circumstances, that offers to settle would be unlikely to achieve a compromise. This is not a case where issues of liability and damages would be resolved on familiar grounds. This is not the type of case where diligent consideration of the issues by a party would lead to an accurate assessment of the likely outcome of the case. Even if the Nelson Wheeler defendants made an offer or offers in settlement far below the judgment sum based upon their assessment of the prospects of success, such an offer could hardly be characterised as imprudent or unreasonable given the complexity and multiplicity of the issues in the case.

Given these unusual circumstances, the making or rejecting of offers could not justify departure from the usual course of costs being awarded on a party and party basis. Consequently I have not found it necessary to embark upon consideration of the circumstances in which pre-judgment privileged communications should be considered by the Court upon consideration of the basis of costs to be awarded.

Also there is another matter. The plaintiff did not avail itself of the procedure under r41. No doubt for what were considered good reasons, it did not choose to define its position by making an offer in that manner which could be accepted and if not, would necessarily attract solicitor and client costs. That is a matter which, in my view, is relevant in the exercise of the discretion. The Rules of Court provide a procedure to achieve the result which the plaintiff now seeks and which the plaintiff did not utilise. That is a matter of considerable importance in the exercise of the discretion to award costs on other than a party and party basis.

Given all of these matters I do not think there is any basis to award solicitor and client costs whatever the nature and terms of without prejudice offers in settlement and I decline to receive the evidence.

In my view, the plaintiff is not entitled to solicitor and client costs against any of the Nelson Wheeler defendants except on the issues of the composition of the partnership of Nelson Wheeler Perth and incompetence in the preparation of the Nelson Wheeler report.

The plaintiff seeks costs against the Queensland defendants even though they were successful in the action. The power to award costs against a successful party is well established.

The basis of the application of the plaintiff may be summarised as follows. The admission made by them that they were members of the national body, found by me to be a partnership at relevant times, was made without their instructions and the plaintiff should not be required to bear the costs of the consequences of that admission. It is difficult to see how this matter could form the basis for an order for costs against them. They always denied any basis of liability. They denied that there was a national partnership of Nelson Wheeler. True it is that they admitted membership of the national body at relevant times through the medium of their pleading but the fact of the matter is that the admission on their behalf was made mistakenly. Once they sought to withdraw the admission and disclosed the factual basis for their denial of membership of the national body at relevant times, the plaintiff opposed that application and maintained the contrary to the last.

The Queensland defendants seek an order for costs against the plaintiff. They say they were successful in the action and should have their costs in full. They were represented by the same solicitor and counsel as the other Nelson Wheeler defendants until well into the trial when they made their application. Presumably because of a possible conflict of interest, their legal representatives then ceased to act for them and they were separately represented. That possible conflict arose because of the initial admission having been made without instructions. The plaintiff should not have to bear the cost of that separate representation.

These defendants did not succeed in their denial of the existence of a national partnership. They were undoubtedly members of it but not later than 1st June 1987. A search of the registration of the business name in Queensland would suggest that they were members of the national partnership after that date and at relevant times and affords an explanation as to why they were sued. Their presence at the trial did not cause additional expense in counsel fees until the separate representation. Obviously there would have been some additional solicitor's fees and costs by reason of their having been sued but I expect that the amount of these costs is relatively small. Each of them gave evidence at the trial but I do not think the plaintiff should bear those costs. They had to give evidence in support of their application to withdraw the admission and their evidence supported the case of the other fifth defendants that there was not a national partnership.

I think the just result is that the plaintiff should not have an order for costs against the Queensland defendants and they, in turn, should not have an order for costs against the plaintiff.

The plaintiff also seeks costs against the director defendants, except Quilty, on a solicitor and client basis. I found that each of them were in breach of fiduciary and statutory duties to Kia Ora. Harold Abbott, Lee-Steere and Somes, by reason of their breach of duty, profited substantially by reason of the takeover at the expense of Kia Ora. Harold Abbott clearly acted fraudulently. Singleton did not profit from the takeover. His breach of fiduciary duty and statutory duty in the circumstances amounted to acting dishonestly and not bona fide in the interests of Kia Ora in the sense explained in my earlier reasons. The breach of fiduciary duty and statutory duty by Lee-Steere and Somes has been categorised in the same way and in addition they made improper use of their positions as directors to gain an advantage for themselves.

The plaintiff contends that an award of indemnity costs would prevent those defendants against who fraud has been found from leaving Kia Ora to bear the difference between full indemnity costs and party and party costs. It is submitted that the decision of Branson J in Yates Property Corporation Pty Ltd v Boland (No 2) [1997] FCA 760; (1997) 147 ALR 685 is authority in support of that contention. My reading of Her Honour's reasons for her decision does not reveal that support. The finding of fraud against the director defendants in its context does not dictate that costs should be awarded against them on a solicitor and client basis. The case against them was for breach of fiduciary duty and statutory duty and it was established. In consequence the plaintiff obtained appropriate relief in the form of damages. There is nothing about the case against them which justifies departing from the normal order. In my view they should pay the plaintiff's costs of the case against them on a party and party basis.

I now turn to the claim of the Nelson Wheeler defendants against the director defendants in the third party proceedings. The Nelson Wheeler defendants seek their costs of those proceedings. As may be seen from the orders relating to apportionment of responsibility and contribution, they were successful in those proceedings. There is no reason why they should be denied those costs and the order should be made accordingly.

(1) That the Nelson Wheeler defendants, with the exception of the Queensland defendants, shall pay the plaintiff's costs of the action against them to be taxed on a party and party basis save and except with respect to the issues of the composition of the partnership of Nelson Wheeler Perth at relevant times and the competence of that firm in the preparation of the Nelson Wheeler report which are to be taxed on a solicitor and client basis.

(2) That in respect of the proceedings against the Queensland defendants, there be no order as to costs in favour of the plaintiff or those defendants.

(3) That the defendants Harold Abbott, Singleton, Lee-Steere and Somes pay the plaintiff's costs of the action against them to be taxed on a party and party basis.

(4) That the director defendants, including the defendant Quilty, pay the costs of the Nelson Wheeler defendants of the third party proceedings to be taxed on a third party basis.

(5) Liberty to all parties to speak to the minutes of these orders.

(6) Liberty to all parties to apply on seven days' notice in writing for directions to the taxing Master.