The application for indemnity costs
4 The applicants sought an order that the respondents pay 90% of their costs as agreed or taxed on an indemnity basis and their disbursements as agreed or taxed. This formulation is at odds with their application for a lump sum costs order, which was filed later, and, in the light of that application should be read as if the phrase "as agreed or taxed" was not included.
5 The Court's power to award costs derives from s 43 of the Federal Court of Australia Act 1976 (Cth). The Court is given a broad discretion, limited only by the need to act judicially and by the obligations imposed by Pt VB of the Act. One of those obligations is contained in s 37M(3), which relevantly provides that the Court must exercise any power conferred on it by the civil practice and procedure provisions of the Act and the Rules of Court made under the Act in the way that best promotes their overarching purpose. That purpose is described in s 37M(1). It is to facilitate the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible. Section 37N relevantly provides:
(1) The parties to a civil proceeding before the Court must conduct the proceeding … in a way that is consistent with the overarching purpose.
(2) A party's lawyer must, in the conduct of a civil proceeding before the Court … on the party's behalf:
(a) take account of the duty imposed on the party by subsection (1); and
(b) assist the party to comply with the duty.
…
(3) In exercising the discretion to award costs in a civil proceeding, the Court or a Judge must take account of any failure to comply with the duty imposed by subsection (1) or (2).
…
6 Ordinarily, costs are payable on a party and party basis. The ordinary principle is reflected in r 40.01 of the Federal Court Rules 2011 (Cth). Rarely, however, if at all, do costs awarded on this basis indemnify a party for all costs incurred. Nevertheless, and in spite of the breadth of the Court's jurisdiction, an order for indemnity costs will not be made unless the case has some "special or unusual feature" which would justify a departure from the ordinary course: see, for example, Cirillo v Consolidated Press Property Ltd (formerly known as Citicorp Australia Ltd) (No 2) [2007] FCA 179 at [3] (Finn J).
7 An indemnity costs order is intended to be compensatory, not punitive. As Gray J observed in Hamod v New South Wales (2002) 188 FCR 659 at [20] (Carr and Goldberg JJ agreeing):
Indemnity costs are not designed to punish a party for persisting with a case that turns out to fail. They are not awarded as a means of deterring litigants from putting forward arguments that might be attended by uncertainty. Rather, they serve the purpose of compensating a party fully for costs incurred, as a normal costs order could not be expected to do, when the court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs.
See also Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited (No 2) [2017] FCAFC 116 at [3]-[5] (Jagot, Yates and Murphy JJ).
8 Little is to be gained by referring to authorities in which such orders have been made or refused. Each case turns on its own facts. The categories are not rigid: Ragata Developments Pty Ltd v Westpac Banking Corporation (1993) 217 ALR 175 at 177. Nor are they closed: Tetijo Holdings Pty Ltd v Keeprite Australia Pty Ltd (unreported, Federal Court of Australia, French J, 3 May 1991). Besides, the applicants accepted that they had a "high threshold" to overcome.
9 In their submissions, the respondents stressed the exceptional nature of such an order and emphasised that it is insufficient that the unsuccessful party's case is found to be unmeritorious. So much may be accepted. But that is not the basis of the application. The basis of the application is that, by defending from the outset "the key factual issues in the case", the respondents' conduct was unreasonable and put the applicants to substantial unnecessary and unreasonable expense.
10 The background to the application, as set out in the applicants' submissions, is as follows.
11 In their pleadings, the applicants alleged that each of the Ethicon devices could cause a number of complications about which the respondents should have warned, but failed to do so, either adequately or at all. These allegations underpinned the applicants' case with respect to all the causes of action.
12 In their defence, the respondents merely asserted that "all surgical procedures present risks" but otherwise denied the applicants' allegations. By their pleading the respondents put in issue the following matters: that the various devices could cause any of the pleaded complications, that those complications were significant or material so as to warrant a warning, that they knew or should have known of them, and that, to the extent that they provided any warnings about them, they were inadequate.
13 Consequently, the applicants were put to the trouble and expense of adducing evidence to establish these matters. They submitted that the causation issue "raised the issue of the nature and significance of the foreign body reaction [to the implantation of the devices] and its potential to cause the complications" and was also critical to the allegations about the inadequacy of the warnings and one aspect of the misleading conduct case. The evidence they contended that was led on these matters was evidence from:
(1) five medical specialists - three urogynaecologists (Assistant Professor Margolis, Professor Korda, and Dr Agur); and two urologists (Professors Blaivas and Chughtai) - as to their own experience of complications with the Ethicon devices and of studies and papers dealing with those complications, their clinical significance; and their likely relationship to the devices;
(2) three epidemiologists, Professors Gordon, Hu and Krulewitch, as to the significance or otherwise of published papers and the likely connection between the Ethicon devices and the complications;
(3) Professor Klinge, a general surgeon and biomaterials researcher, two pathologists, Professors Klosterhalfen and Iakovlev, and two biomechanical engineers, Mr Dunn and Mr Guelcher; and
(4) four regulatory specialists, Dr Beech, Dr Allman, Dr Pence and Ms Holland, who undertook extensive reviews of the respondents' documents;
14 The reference to Dr Beech must be a mistake since his evidence did not touch on the complications. All of the other aforementioned witnesses were required for cross-examination. Most of them lived overseas.
15 The applicants pointed to the numerous documents they tendered to demonstrate the respondents' awareness of the complications and their clinical significance, and the causal connection between the Ethicon devices and the complications. Many, if not most, of these documents had been in the respondents' possession and were apparently made available to the applicants as part of a discovery process. The applicants also pointed to the numerous editions of the instructions for use for the various Ethicon devices and the respondents' marketing material, which minimised the nature and extent of the complications. Ethicon's own documents disclosed that several Ethicon employees were concerned about the inadequacy or misleading nature of some of the information disseminated by the respondents.
16 With respect to the respondents' denial that the Ethicon devices could cause the pleaded complications, I remarked in the principal judgment (at [188]):
The basis for the respondents' denial was obscure. It did not emerge in evidence and early in the cross-examination of [its first witness], it quickly became clear that the denial was unsustainable.
17 The respondents' first witness was Dr Piet Hinoul. At the time of the trial he was the Vice-President, Medical Affairs, for Ethicon Inc. He was the only witness from any of the respondents to give evidence. His affidavit was 363 pages long. No relevant admissions were made in the affidavit. At the beginning of his cross-examination, however, he conceded that, from the time each of the devices was first supplied anywhere in the world, Ethicon knew of its potential to cause each of the pleaded complications. It follows that the respondents' denials were baseless. In the principal judgment (at [192]), I observed that Dr Hinoul's concessions were consistent with the contents of Ethicon's internal documents, a matter that I considered made the respondents' pleading all the more puzzling.
18 The applicants submitted that the order they seek was also supported by the following matters.
19 First, the respondents' decision to deny the potential for the Ethicon devices to cause the pleaded complications was all the more remarkable considering that for years Professor Klosterhalfen had provided expert advice to the respondents about the relationship between the foreign body reaction generated by implantation of the devices and the potential for adverse outcomes.
20 Second, the respondents filed an affidavit from JJM's Director of Regulatory Affairs, Rebecca Gaudin, but, without explanation, chose not to read it.
21 Third, having put in issue the clinical significance of the pleaded complications and the causal connection between the pleaded complications and the Ethicon devices, the respondents did not call an epidemiologist and "incorrectly asserted the irrelevance of the [epidemiological] evidence". Further, some of their own expert witnesses made significant concessions about the inadequacy of the studies on which the respondents relied, concessions, the applicants submitted, the respondents must have realised were inevitable.
22 The respondents opposed the application for the following reasons.
23 First, they argued, it could not be said that their position was hopeless. Dr Hinoul's concessions that the respondents were aware of the risk of the pleaded complications and the concession in final argument that each of the pleaded complications could be clinically significant did not necessarily mean that the Ethicon devices were defective within the meaning of the TPA and the ACL, that they were negligent, or that they had engaged in misleading or deceptive conduct. Much more was required.
24 Further, the fact that the pleaded complications could arise and that the respondents were aware of them did not obviate the necessity for the applicants to adduce evidence that the complications were severe if and when they occurred. Whether that required preparing evidence from eight pelvic surgeons and calling evidence from five, however, is open to question.
25 Second, the respondents argued that the concession that the respondents were aware of the risks did not mean that the applicants did not have to prove that the information they provided was insufficient. That required expert evidence. The concessions did not and could not determine the real questions before the Court.
26 Third, they argued that the epidemiological evidence adduced by the applicants related to the quality and reliability of studies on the safety and efficacy of various methods of treating stress urinary incontinence and pelvic organ prolapse. That evidence "is unaffected by the concession that there was a risk of the pleaded complications".
27 Fourth, the respondents argued that "the thrust and ultimate use by the Court of the regulatory evidence adduced by the applicants concerned whether regulatory approval ought to have been obtained in the first instance", the subject on which the concessions were not determinative.
28 Fifth, they argued that, although Dr Hinoul's concessions rendered it unnecessary for the applicants to establish the precise mechanism by which the pleaded complications could occur, it was still necessary to demonstrate that the pleaded complications could be caused by the Ethicon devices.
29 I do not understand this last point. It was the substance of Dr Hinoul's concessions. It is true, as the respondents submitted, that the applicants failed to establish all their allegations. They did not prove that oxidative degradation of the mesh used in the Ethicon devices was clinically significant or that the foreign body reaction itself was an injury. In the scheme of things, however, these failings are unimportant.
30 With respect to the respondents' third point, I accept that more likely than not the epidemiological evidence adduced by the applicants would have been proffered irrespective of whether the respondents admitted the substance of what they belatedly conceded. I also accept their fourth point. Further, more likely than not, the applicants' expert regulatory evidence would have been adduced in any event since it went directly to two of the applicants' negligence claims concerning the deficiencies in the pre- and post-marketing evaluations of the devices and informed the determination of whether the devices were defective for the purposes of the consumer protection claims.
31 As for the first two points, it is true that the respondents' concessions, without more, were not determinative of any of the causes of action. Nevertheless, they demonstrated that the respondents were unjustified in responding as they did in their defence to the applicants' allegations about the pleaded complications. In the absence of any evidence from the respondents to account for it, their conduct was also unjustifiable.
32 As Dr Hinoul's oral evidence demonstrated, the respondents' position on the pleaded complications was indeed hopeless. As a result of their decision, the applicants were put to unnecessary expense. Given that the number of the Ethicon devices with which the case was concerned and the two decades it spanned, I do not doubt that the expense was considerable. A good part of Dr Pence's evidence, for example, was directed to what Ethicon knew about the pleaded complications at various points in time. The tasks she was required to undertake to deal with the matters upon which her opinion was sought included trawling through the voluminous Ethicon files to determine what adverse events were known to Ethicon at the relevant times.
33 Having regard to the information contained in their own documents, discussed in detail in the principal judgment, and to the concessions made by Dr Hinoul during cross-examination, the respondents' behaved unreasonably in denying the applicants' allegations concerning the potential for the Ethicon devices to cause the pleaded complications and in putting their knowledge of those matters in issue.
34 In Unioil International Pty Ltd v Deloitte Touche Tohmatsu (1997) 18 WAR 190 at 193 Ipp J said:
It has long been the practice, for tactical reasons, for lawyers to draft pleadings in such a form as to put the opposing party to proof of allegations, and even to deny allegations, notwithstanding that their factual instructions might not justify such failures to admit or denials. In my view, the circumstances under which litigation is conducted have changed to such a degree that this practice should no longer be tolerated …
Traditionally, lawyers owe a duty of honesty and candour to the court. It is the general duty of lawyers not to mislead the court by stating facts which are untrue, or mislead the judge as to the true facts, or conceal from the court facts which ought to be drawn to the judge's attention, or knowingly permit a client to deceive the court: see Ronde! v Worsley [ 1969] 1 AC 191 at 227. A trend towards a stringent duty of disclosure has become discernible: Vernon v Bosley (No 2) [1997] I All ER 614. Further, in modern times, there is an overriding duty on lawyers to assist in the prompt and economical disposal of litigation: see Giannarelli v Wraith (1988) 165 CLR 543 at 556; Ashmore v Corporation of Lloyds [1992] I WLR 446 at 453; [1992] 2 All ER 486 at 491-492. In my view, the traditional requirement of honesty and candour on the part of lawyers and the modern duty to reduce unnecessary issues and costs, are inimical to the practice of denying or putting parties to the proof of facts which, according to the instructions in the lawyers' possession, should be admitted.
Pleadings perform an important function, apart from defining and crystallising the issues. They should be a mechanism for the purpose of arriving at the true issues in dispute …
In summary, in my opinion, the creation of false issues by tactical denials or failures to admit contained in pleadings is a ground for making special costs orders.
35 These remarks were made 23 years ago and more than a decade before Pt VB was inserted into the FCA Act.
36 Here, the respondents' denials created false issues, such that it is appropriate to make a special costs order. I accept the applicants' argument that the respondents made a forensic decision to deny key elements of the applicants' case when there was no reasonable basis for doing so. No other conclusion is reasonably open. As the applicants submitted, as a result of the respondents' denials, the case was not conducted as a dispute about the legal consequences of admittedly significant risks associated with the respondents' products. The respondents elected to put the applicants to proof about the risk profile of the devices despite the fact that they knew the applicants' allegations were soundly based. The respondents' decision to do so caused the applicants to incur unnecessary costs. It also unduly prolonged the trial. It was inconsistent with their obligations under s 37N of the FCA Act.
37 If the Court were minded to make an order for indemnity costs, the respondents submitted that the order the applicants seek should not be made. They argued:
It will be plain from these submissions and the conduct of the trial that orders requiring the Respondents to pay 90% of the Applicants costs and all of the Applicants' disbursements (which would necessarily include those experts that were not called) would be excessive and disproportionate. No basis has been advanced for the 90% figure. Responsibility for at least part of the costs incurred by the Applicants lie with the Applicants and, in particular, their convoluted pleading and forensic decisions not to call certain experts. This is all the more so given the substantive amendments to the group member definition, the change of representative applicants, and the amendments to the pleadings throughout these proceedings. This was recognised by the orders made by Griffiths J (5 June 2013) and Murphy J (6 April 2016) that the Applicants pay the Respondents' costs thrown away by reason of amendments to the pleadings and the substitution of Mrs Davis as a representative applicant. It was also recognised by the orders made after the oral hearing, such as the orders made on 9 April 2018 for the Applicants to pay 85% of the respondents' costs associated with the Applicants' application to file the Fifth Further Amended Statement of Claim and the Fifth Further Amended Originating Application (see order 5).
38 The respondents' complaints about the costs to which they were unnecessarily put by reason of the amendments made by the applicants have already been addressed by the costs orders to which they referred in their submissions. As the applicants submitted, there is nothing to suggest that those orders were inadequate to compensate them for the costs thrown away by reason of the amendments.
39 The respondents pointed out that, initially, the applicants indicated that, excluding experts whose evidence was solely related to the applicants, they would rely on expert evidence from eight pelvic surgeons, four biomaterials experts, three pathologists, four regulatory experts, and four epidemiologists/biostatisticians, yet ultimately they elected not to call evidence from three of the pelvic surgeons and two biomaterials experts. The respondents submitted that, since the choice not to call them was made before the respondents' concessions were made, the costs incurred in connection with those experts could not be sheeted home to the respondents.
40 I have not read the reports of those experts. I have no material upon which I can determine whether it was reasonable or unreasonable to obtain opinions from them. It was open to the respondents to apply for an order under r 40.06 disallowing these costs and, indeed, other costs about which they complain, but they did not take that course. In these circumstances, I am not disposed to deny the applicants those costs.
41 I am not persuaded, however, that the order the applicants seek is warranted. The applicants adduced no evidence to support the 90% figure and, as the respondents submitted, did not advance any basis for it. It seems to me that the lion's share of the applicants' costs would have been incurred in any event. I accept the applicants' argument that it is no answer to their claim (that the respondents acted unreasonably in putting the pleaded complications in issue) that the applicants should have proven their case using fewer experts. I also accept the applicants' point that no one expert in any one discipline could have been expected to address all the issues within his or her expertise. As the respondents acknowledged, the proceeding was complex, involving, as they put it in their submissions, a large number of documents and the resolution of complex scientific and legal issues.
42 But this is a distraction, too. In substance the application is based solely on the respondents' decision to put in issue two questions: the nature and significance of the pleaded complications and the potential for the Ethicon devices to cause those complications. Only in those respects did the applicants contend that the respondents' conduct was unreasonable. While these questions were relevant and critically important to all the causes of action, the concessions did not dispose of the numerous other issues the respondents raised, not even on the question of the sufficiency of the warnings. If I were to make the order the applicants seek, I would be punishing the respondents, not compensating the applicants.
43 While I accept that a proportion of the applicants' costs should be paid on an indemnity basis, I am unable to determine that proportion should be. It is not a satisfactory answer, it seems to me, to dismiss the application on that basis for that would amount to a windfall for the respondents. In the circumstances, if the applicants can establish by evidence what costs were incurred by reason of the respondents' unreasonable conduct, I will give them leave to do so, if they seek it - provided that they do so by the end of this week and that the evidence is filed and served within four weeks thereafter. I will therefore reserve the question of what proportion of the applicants' costs should be paid on an indemnity basis.