Factory 5 Pty Ltd v State of Victoria

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 1222 of 2006

BETWEEN: FACTORY 5 PTY LTD (IN LIQUIDATION) (ACN 112 313 238)

MADELINE T MOULIS PTY LTD (TRADING AS MTM RETAIL MARKETING) (ACN 069 069 889)

JUDGE: BROMBERG J DATE: 6 April 2011 PLACE: MELBOURNE

introduction 1 On 11 November 2010, I dismissed the applicant's application. My reasons for judgment were published on that day: Factory 5 Pty Ltd v State of Victoria [2010] FCA 1229. Those reasons for judgment did not deal with the issue of costs and the parties were directed to file and serve submissions as to costs and the matter was listed for further hearing. As a result of the first respondent's initial application for a costs order to be made against the litigation funder of the applicant (a matter to which I shall return) there has been some delay in the determination of the application for costs. In the end, the first respondent advised that it wished to reserve liberty to apply at a later time for costs against the litigation funder. On that basis, the parties agreed that I should determine the question of costs sought by the first respondent against the applicant and its liquidators on the written submissions filed and without the need for a further hearing. 2 Following the approach that I adopted in my earlier reasons for judgment, I will refer to the applicant as "F5" and to the first respondent as "M2006". 3 For the reasons that follow I have determined that F5 should pay the costs of M2006 on a party-party basis.

should costs follow the event 4 Paragraphs [1]-[18] of my earlier reasons for judgment set out by way of introduction the nature of the proceeding, the claims made in the proceeding and the way in which I resolved each of the issues in contest. For the purposes of dealing with the question of costs, it is sufficient for me to observe that whilst by its Further Amended Statement of Claim, F5 made a number of claims against M2006 (including for breach of the Trade Practices Act 1974 (Cth), collateral warranties and estoppels), F5 only pressed its contractual claim at trial. Claims brought by F5 against the second and third respondents were dismissed by consent in the course of the trial. 5 F5's contractual claim was that; firstly, by reason of the breach of what (in my earlier reasons) I called the "concessionaire as manufacturer clause"; and secondly, M2006's repudiation of the contract, F5 suffered loss and damage. 6 In relation to that claim, the Court had to determine a number of issues. Principally, those issues were as follows: (a) Had the parties made a concluded and binding agreement? (b) What were the terms of the concessionaire as manufacturer clause? (c) Was the concessionaire as manufacturer clause breached by M2006? (d) If a contract was made, was it repudiated by F5 and validly terminated by M2006? (e) If a contract was made, was the contract repudiated by M2006 and validly terminated by F5? 7 Although F5 succeeded in persuading me that a concluded and binding agreement had been made by the parties, it failed in its claim that it was entitled to damages. F5's case based on breach of contract, was reliant on F5 succeeding on the construction of the concessionaire as manufacturer clause for which it contended. F5 failed on that construction issue and therefore I rejected its case of breach of contract. F5 also failed in its claim for damages based upon the repudiation of the contract by M2006. It failed in that respect because of my findings that: firstly, it was not ready and willing to perform the contract; and secondly, because it had not accepted the repudiation by M2006. F5 was thus not entitled to claim damages. I also found that, in the circumstances, the contract between F5 and M2006 had been abandoned by mutual consensus. 8 F5 failed in its claim for damages and its application was dismissed. F5 was wholly unsuccessful in respect of the claims that it made. 9 Despite that, F5 argues that the usual order, that the successful parties should be awarded its costs, should not be made. It contends that should be so because F5 was successful on what it characterises as the 'principal issues', namely, whether a contract was concluded and whether M2006 had repudiated that contract. F5 contends that it should be awarded its costs of dealing with these principal issues or, in the alternative, that the costs awarded to M2006 should not extend to the costs of defending these issues. 10 Further, F5 contends that M2006 failed to have the Court accept the interpretation of the concessionaire as manufacturer clause for which it contended. F5 further says that M2006 did not plead that the contract was abandoned and that issue was first raised in M2006's closing submissions. F5 contends in relation to those two matters (which it calls the 'subsidiary issues') that any costs awarded to M2006 should be reduced by an appropriate percentage. 11 M2006 contends that the circumstances of the proceeding do not justify departure from the usual order. It says that the applicant has not shown any special circumstances of the kind that will justify departure from the usual order that costs follow the event. 12 Section 43(2) of the Federal Court of Australia Act 1976 (Cth) ("the Federal Court Act") confers upon the Court a wide discretion in relation to costs. That discretion must be exercised judicially. 13 In Cadbury Schweppes Pty Ltd v Darrell Lea Chocolate Shops Pty Ltd (No 3) [2007] FCAFC 119, Black CJ, Emmett and Middleton JJ said at [11]: The usual practice is that costs follow the event and that the Court will order the recovery of costs by the successful party on a party-party basis but success or failure on separate issues may lead the court to engage in a process of apportionment: see Dodds Family Investments Pty Ltd (formerly Solar Tint Pty Ltd) v Lane Industries Pty Ltd (1993) 26 IPR 261. 14 In Dodds Family Investments Pty Ltd (formerly Solar Tint Pty Ltd) v Lane Industries Pty Ltd (1993) 26 IPR 261 at 271-272, Gummow, French and Hill JJ said in relation to the general discretion conferred by s 43(2) of the Federal Court Act that: Considerations relevant to the exercise of that discretion were enunciated by Toohey J in Hughes v Western Australian Cricket Association (Inc) (1986) 8 ATPR 40-748 at 48,136: 1. Ordinarily, costs follow the event and a successful litigant receives his costs in the absence of special circumstances justifying some other order … 2. Where a litigant has succeeded only upon a portion of his claim, the circumstances may make it reasonable that he bear the expense of litigating that portion upon which it has failed … 3. A successful party who has failed on certain issues may not only be deprived of the costs of those issues but may be ordered as well to pay the other party's costs of them. In this sense, ``issue'' does not mean a precise issue in the technical pleading sense but any disputed question of fact or of law … The propositions enunciated in that case are subject to the further consideration that justice may not be served if parties are dissuaded by the risk of costs from canvassing all issues which might be material to the decision in the case: Cretazzo v Lombardi (1975) 13 SASR 4 at 12. In Trade Practices Commission v Nicholas Enterprises Pty Ltd (No 3) (1979) 42 FLR 213; 28 ALR 201, Fisher J regarded the discretion to apportion costs as one to be exercised only in the most exceptional circumstances. Nevertheless he accepted that where a considerable part of the trial is taken up in determining issues upon which a party fails, it is a proper exercise of the discretion to reduce the costs allowed to that party. Generally speaking, and notwithstanding the considerations referred to by Toohey J and the other authorities mentioned above, the demands of the community for greater economy and efficiency in the conduct of litigation may properly be reflected in a qualification of the presumption that a successful party is entitled to all its costs. In Commissioner of Australian Federal Police v Razzi (No 2) (1991) 101 ALR 425 at 430, Wilcox J, after referring to the importance of the general principle enunciated by Toohey J, said: But I do not think that courts should be reluctant to recognise the existence of exceptional cases. In these days of extensive court delays and high legal costs the courts should use all proper means to encourage parties to consider carefully what matters they will put in issue in their litigation. If parties come to realise that they will not necessarily recover the whole of their costs, even though they have unsuccessfully raised a discrete issue, they are likely better to consider whether the raising of that issue is a justifiable course to take. Where there is a mixed outcome in proceedings, the question of apportionment is very much a matter of discretion for the trial judge. Mathematical precision is illusory and the exercise of the discretion will often depend upon matters of impression and evaluation. 15 In my view, the circumstances raised by F5 do not justify departure from the usual rule that a successful party is entitled to all of its costs. What F5 has identified as the 'principal issues' were each issues which raised an element of the contractual cause of action that ultimately F5 failed upon. This was not a case in which a successful party succeeded on some of its claims but failed on others. M2006 was wholly successful in having the Court dismiss the contractual claim made by F5. Whether there was a concluded contract and whether that contract had been repudiated by M2006 were two of the necessary elements that F5 needed to succeed on in order to succeed in its claim for damages. There were other elements in that cause of action upon which it failed. There was nothing unreasonable or unjustifiable in M2006 contesting the fact that those two particular elements of the cause of action were not made out. Each of the issues was material to the decision in the case. Each was an essential element in the cause of action which F5 had to establish. 16 F5 has failed to point to any special circumstances that would warrant departure from the rule that ordinarily costs follows the event. 17 As to the reliance by F5 on what it called the 'subsidiary issues', I am not persuaded that either of those issues warrants a departure from the usual order as to costs. It is correct that the Court ultimately adopted a construction of the concessionaire as manufacturer clause that neither party had contended for. The construction adopted was closer to that contended for by M2006 than it was to that contended for by F5. However, I need place no reliance on that fact. F5's contention is that there should be some discounting of the costs awarded to M2006 simply because M2006's construction of the clause was not accepted. That contention is without merit. Whilst the construction that M2006 contended for was not adopted, what was crucial to the outcome of the case was the fact that the construction for which F5 contended was successfully resisted by M2006. The failure by F5 to persuade the Court to adopt its construction was crucial to F5's failure to make out a breach of the contract and thus its claim for damages flowing from the breach. That failure was also important to my conclusion that F5 was not ready, willing and able to perform the contract and was thus disentitled to seek damages flowing from the repudiation by M2006. 18 The issue as to whether or not the contract had been abandoned by F5 and M2006 occupied a very small part of the conduct of the proceeding. In the absence of a finding that the contract was abandoned, the outcome of the case would have been no different. F5 failed on its claim for damages flowing from the breach of contract because it failed to establish a breach. It failed on its claim for damages flowing from the repudiation by M2006 because it failed to establish that it was ready, willing and able to perform the contract and thus entitled to claim damages. 19 For those reasons, the suggestion in F5's submission that M2006's success in the proceeding is based on an issue that it had not pleaded is misconceived. Further and in any event, even if it be the case that abandonment of the contract had not been pleaded, that issue was clearly "in the ring": Nescor Industries Group Pty Ltd v MIBA Pty Ltd (1997) 150 ALR 633 at 640, 647 and 650 and Ward Group Pty Ltd v Brodi and Stone Plc [2005] FCA 471 at [64].

is m2006 entitled to indemnity costs? 20 M2006 claims that it is entitled to indemnity costs from the date upon which it made an offer of compromise. That offer was made on 12 June 2008 and was rejected. Both parties accept that in claiming indemnity costs a party must show that the rejection of the offer of compromise was "imprudent or unreasonable": Review 2 Pty Ltd v Redberry Enterprise Pty Ltd (No 2) [2008] FCA 1805 at [23] and the cases cited therein. As Kenny J said in that decision at [24]: The question is, therefore, whether or not it can be said that the applicants acted imprudently or unreasonably in rejecting Redberry's offer of compromise in relation to the applicants' claim. Plainly enough, even in the present circumstances, the mere refusal of an offer of compromise is not sufficient to satisfy this test: see John S Hayes & Associates Pty Ltd v Kimberly-Clark Australia Pty Ltd (1994) 52 FCR 201 at 206 per Hill J and Dukemaster [2003] FCAFC 1 at [7]. Although the refusal of the offer is a factor to take into account, it is not determinative on the question of indemnity costs. As Sackville J said in Seven Network 244 ALR 374 at [65], "the court is required to consider whether the rejection of the offer of compromise was unreasonable by considering, among any other relevant circumstances, the strengths and weaknesses of the applicants' case, looking at the claim prospectively at the time the offer was made" (emphasis original). 21 In my view, F5's rejection of the offer of compromise was neither imprudent nor unreasonable. I agree with F5's contention that the basis upon which M2006 contends that the rejection was imprudent or unreasonable, is misconceived. 22 Firstly, M2006 contends that the rejection should be regarded as imprudent or unreasonable because the Court should infer that, had the applicant accepted the offer of compromise, the amount which would have been paid under the offer would have gone a long way to paying outstanding legal costs and expenses and satisfying the claims of the creditors in F5's liquidation. Even if the Court was able to so infer, this is not a consideration which is material to the question of whether F5 acted imprudently or unreasonably in rejecting the offer of compromise. Whether or not an offeree acted imprudently or unreasonably is to be assessed objectively and without regard to the financial position or other personal circumstances of that person. The relevant question is not whether by reference to the personal circumstances of the party rejecting the offer, that rejection was imprudent or unreasonable. 23 Secondly, M2006 contends that F5 had a completely unrealistic view of the likely damages that may be awarded in the proceeding. It contends that the offer represented a reasonable assessment of the applicant's likely recovery. On that basis, M2006 says that it was commercially imprudent and unreasonable for F5 to have rejected the offer and instead to have pursued the proceeding to trial, spending in the order of $1.5m in the process. 24 The relevant inquiry is not whether F5's decision to proceed to trial, and invest in legal expenses in pursuing a commercial return, was commercially imprudent and unreasonable. 25 Thirdly, although F5 has contended that there were a number of obstacles to the applicant's success in the proceeding and that success was far from assured, M2006 has not pointed to any weakness in F5's case, looking at that case prospectively at the time the offer was made. It is relevant to acknowledge, that M2006 did accompany its offer of compromise with a statement of reasons as to why M2006 believed that F5 would fail. In that respect, the legal obstacles identified by M2006 were not the obstacles upon which F5 ultimately failed. I think there is force in F5's contention that M2006 cannot now raise, with the benefit of hindsight, a number of unidentified obstacles to success, when in making its offer M2006 was itself unable to identify the obstacles upon which F5 ultimately failed. As Sundberg and Emmett JJ said in Dukemaster Pty Ltd v Bluehive Pty Ltd [2003] FCAFC 1 at [8]: Whatever the position may be with an offer made under Order 23, a Calderbank offer, or any offer of compromise outside the regime in Order 23, is unlikely to serve its purpose of attracting an indemnity award of costs if the rejecting applicant fails to recover more than what is offered, unless the offer is a reasonable one and contains a statement of the reasons the offeror maintains that the application will fail.

orders against the liquidator 26 There is no dispute before me that the court has power to impose a costs order on a non-party. The issue in contest is whether the circumstances of the case warrant that any adverse costs order made against F5 should be payable jointly and severally by F5 and its liquidators - Andrew Hugh Jenner Wily and David Anthony Hurst ("the liquidators"). 27 M2006 contends that the circumstances of this case falls within the category identified in Knight v FP Special Assets Limited (1992) 174 CLR 178, where Mason CJ and Dean J (at 192-193) relevantly said: For our part, we consider it appropriate to recognize a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made. 28 M2006 contends that the four elements referred to in Knight are all satisfied. F5 was insolvent; the liquidators played an active part in the conduct of litigation; they had an interest in the subject of the litigation; and the interests of justice require that a costs order be made against them. 29 F5 contests that submission and in particular emphasises that there is no basis to contend that the liquidators had an interest in the subject of the litigation. The basis upon which that element is said to be made out is the fact that the meeting of the creditors of F5 held on 24 March 2006, passed the following resolution: "To approve and uplift of the Liquidator's fees at a rate of 25% in the event of successful recoveries being made by the Liquidator." 30 By an affidavit made by the solicitor for M2006 evidence was given that the only recovery pursued by the liquidators in the course of the liquidation of F5 was the claim in this proceeding. 31 I accept that two of the four factors identified by Mason CJ and Dean J in Knight are satisfied. F5 is insolvent; and by reason of their duties and responsibilities under the Corporations Act 2001 (Cth), the liquidators of F5 have actively participated in the conduct of the litigation. However, I am not satisfied that the liquidators had an interest in the subject of the litigation. An arrangement for a costs up-lift does not constitute an interest in the subject of the litigation of the kind that I consider Mason CJ and Dean J had in mind. An interest in a costs agreement or arrangement is not an interest in the subject matter of the litigation that the costs agreement relates to, for the same reason that a bonus payable to an employee referable to the success of the employer's business does not confer upon the employee a financial interest in the business. 32 However, as a Full Court held in Gore (t/as Clayton Utz) v Justice Corporation Pty Ltd (2002) 189 ALR 712 at [62], the passage in Knight is not to be regarded as laying down principles, each of which must be present before a stranger to the litigation could be made liable for costs. 33 In the later Full Court decision of Kebaro Pty Ltd v Saunders [2003] FCAFC 5 Beaumont, Sundberg and Hely JJ reviewed the authorities including Gore and concluded at [103] that the authorities established the following propositions: A non-party costs order is exceptional relief, although some categories of factual situations are now recognised as within the discretion, for example, the situation described by Mason CJ and Deane J in Knight at 192-193. The width of the jurisdiction is illustrated by a recent English decision that there can be circumstances in which it would be appropriate to order costs in favour of a non-party against a party (see Individual Homes v Macbreams Investments, 23 October 2002, High Court of Justice Chancery Division at 8). Whilst such an order is extraordinary, the categories of case are not closed, although in order to warrant its exercise, a sufficiently close connection, or as Gobbo J expressed it, a "real and direct and ... material" connection with the principal litigation, must be demonstrated; in the words of Callinan J, the non-party can fairly be liable if adjudged by its conduct, to be a real party to the litigation, even if not the real party. 34 In my view, M2006 has failed to establish a sufficiently close connection between the liquidators and the litigation. I do not regard the liquidators as being 'real parties' to the litigation. In particular I consider that the requisite connection is absent because I do not think that it can be said that the liquidators were acting in their own interests rather than the interest of the creditors and shareholders of F5. I am fortified in that view by reference to a number of English authorities in which the position of liquidators has been directly considered. 35 In Metalloy Supplies Ltd (in liq) v MA (UK) Limited (1997) 1 All ER 418 at 422-423, Waller LJ considered Knight and distinguished the position of receivers from that of liquidators, including by reference to the public interest in liquidators being able to perform their duties. His Lordship was concerned that the public interest in relation to liquidators demanded that they should not be exposed to personal liability for costs simply where they act for insolvent companies. He concluded that the necessary caution in all cases where an attempt was being made to render a non-party liable for costs, is greater in the case of a liquidator having regard to the public policy considerations. Millet LJ considered that where a liquidator brings a proceeding in the name of the company, the company is the real plaintiff and the liquidator is not (at 425). Metalloy is referred to by Heerey J in Handberg v Chacmol Holdings Pty Ltd (No 2) [2005] FCA 680 at [16], although that case did not directly deal with the position of a liquidator. 36 Metalloy was also considered by the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2005] 4 All ER 195. In that decision, the Privy Council considered Knight, Gore and Kebaro amongst many other authorities. Their Lordships regarded Kebaro as a most helpful authority. They concluded at [29] in the following terms: In the light of these authorities their Lordships would hold that, generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails. As explained in the cases, however, that is not to say that orders will invariably be made in such cases, particularly, say, where the non-party is himself a director or liquidator who can realistically be regarded as acting rather in the interests of the company (and more especially its shareholders and creditors) than in his own interests.

tHE LITIGATION FUNDER 37 There is evidence before me of a litigation funding agreement and M2006 contends that International Litigation Partners Pty Ltd ("the litigation funder") funded the litigation brought by F5. As I have earlier indicated, M2006 has not at this juncture sought a costs order against the litigation funder but seeks only to reserve liberty to apply at a later time for a costs order against the litigation funder. 38 I have noted that reservation. There is nothing further I need to do in relation to it.

disposition 39 For the reasons outlined, I will not make a costs order against the liquidators. I will make an order that F5 pay the costs of M2006. I will order that those costs be paid on a party-party basis. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Bromberg.