InterTAN Inc v DSE

REASONS FOR JUDGMENT THE COURT: 1 The general rule that applies in civil litigation is that costs follow the event and that the costs of the successful party should be taxed on a party and party basis. This rule is so well entrenched that some (but not all) courts have suggested that nothing short of a change in the relevant statute or rules of court would permit a departure from the rule: Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151, 157-158 per Cooper and Merkel JJ; NMFM Property Pty Ltd v Citibank Ltd (No. 2) (2001) 109 FCR 77, 95 per Lindgren J. This is so notwithstanding that it is now notorious that the gap between costs taxed on a party and party basis and the costs actually payable by the successful party is often so great that sometimes the successful party will only recover in the order of one half of the incurred costs: Australian Competition and Consumer Commission v Oceania Commercial Pty Ltd [2004] FCAFC 174 at [198] per Heerey, Sundberg and Dowsett JJ. 2 As with most general rules there are exceptions to deal with special cases. The judge, Allsop J, thought that this was an exceptional case. He ordered that the successful party, the applicant at trial, should have most of its costs of the proceeding taxed on an indemnity basis: see DSE (Holdings) Pty Limited v InterTan Inc [2004] FCA 1251. If this order is allowed to stand, the costs that the appellants will be required to pay (for they were the losing parties) will be considerable indeed. This was a complex commercial dispute which resulted in a 12 day trial. In a sense it was a one sided dispute. The judge said (at [30]) that if "honest commercial common sense" had any part to play in the relations between the parties it was clear that the respondent would have succeeded at trial on at least one of its pleaded causes of action. He also said that the appellants were less than reasonably frank in their conduct of the case, and should be required to pay for having engaged in what he described (at [37]) as "trench warfare". He meant, we think, that the appellants dug in for a protracted dispute which they were prepared to fight to the end without regard to the course of the battle. 3 This appeal is confined to the costs order. The appellants do not challenge the principal finding made against them: that for one reason or another it was inevitable that they would lose the suit. In this Court a litigant is entitled to bring an appeal solely against a costs order without first obtaining leave. This entitlement does not exist in most superior courts and for good reason. To deal properly with an indemnity costs order will ordinarily require the appellate court to have a detailed understanding of the issues in the case as well as an appreciation of the way in which the case had been conducted at trial, perhaps even on a day to day basis. An appellate court is not usually in a position where it will have that knowledge or the means to obtain it. 4 Be that as it may, we can, as it turns out, dispose of this appeal in short compass. First we begin with the facts. The respondent, DSE (Holdings) Pty Limited, is a wholly owned subsidiary of Woolworths Limited. It owns and operates the Dick Smith Electronics stores. InterTan Australia Limited (ITAL), all of the issued shares in which were owned by the appellants, respectively a United States and a Canadian corporation, had operated a competing business under the name Tandy Electronics. In 2000 the shares in ITAL and a related but defunct company Technotron Sales Corp Pty Ltd (TSC), were offered for sale. Woolworths (on behalf of DSE) entered into negotiations to purchase the shares. It acted through its merchant banker, UBS Warburg, and the appellants through their banker, Salomon Smith Barney. During the course of the negotiations UBS was given a set of consolidated accounts for ITAL and TSC. In reliance upon those accounts DSE entered into an agreement to purchase the shares in ITAL for a price that was subject to adjustment. The nature of that adjustment will became clear later in these reasons. For present purposes it is sufficient to note that being consolidated accounts they contained no entries recording debts owed by ITAL to TSC. That is the nature of consolidated accounts. In fact, however, ITAL was indebted to TSC in an amount of $4,041,479. 5 DSE decided to acquire the Tandy business by purchasing only the shares in ITAL, presumably because it had no need for TSC. At this point the consolidated accounts assumed significance. If DSE were to purchase the shares in both ITAL and TSC, the existence of the debt from one company to the other would be of no economic significance. On the other hand, the debt assumed immediate importance once DSE decided to purchase only the shares in ITAL, leaving those in TSC with their existing owners. That decision having been made, subject to any adjustment, the purchase price was in effect increased by the amount of the debt. 6 When DSE agreed to purchase the shares in ITAL for the price of $115 million it did not appreciate that ITAL was indebted to TSC. If it had known of the debt, it may have offered to purchase the shares for less than the price ultimately agreed. DSE's mistake was not common to the appellants. Mr Gingerich, the chief financial officer of the InterTan group with responsibility for overseeing the sale of ITAL, was aware of the debt. He was also aware (or at least suspected) that DSE did not know of the debt. Mr Gingerich kept his counsel. He did not say anything because he believed it likely that DSE would try to bargain down the purchase price and the debt would provide him with a $4m buffer. The judge described this as showing "a degree of unconscionability": DSE (Holdings) Pty Ltd v InterTan Inc [2004] FCA 1159 at [309]. 7 We have previously mentioned that the purchase price was subject to adjustment. The sale contract provided that the price would be adjusted if there were a difference in value between ITAL's net assets as disclosed in the "December Accounts" (as defined) and as shown in the "Completion Accounts" (as defined). It turned out that there were no accounts that precisely satisfied the definition of "December Accounts". DSE believed, and Mr Gingerich knew that it believed, that the consolidated accounts were the December Accounts. If the consolidated accounts were the December Accounts there was a difference between the net assets of ITAL as shown in those accounts and as shown in the Completion Accounts. The difference was the debt due to TSC. This difference would have produced an adjustment in the purchase price of $3.6m in favour of DSE. 8 When DSE discovered the existence of the debt and the possibility that, at least according to the appellants, there were no December Accounts, DSE instituted this action. It sought an adjustment of the purchase price on the basis that the consolidated accounts were the December Accounts. In the alternative it sued for misleading conduct, contending that by providing it with the consolidated accounts the appellants had represented that no debt was due to TSC. There was also a claim for rectification of what was alleged to be a common mistake, namely that the parties believed that the consolidated accounts were the December Accounts for the purposes of their contract. 9 It was at this point that the trench warfare (to retain the judge's metaphor) began in earnest. In their defence the appellants denied each material allegation made against them. That is to say, they dug in for a protracted battle, perhaps without proper regard to the merits of DSE's claim, but certainly without regard to "honest commercial common sense". It must be assumed that the appellants' solicitors were instructed to deny everything that the respondent had alleged in its statement of claim. It is possible that those instructions came from Mr Gingerich (who had by then retired from his position within the organisation, but whose knowledge of the facts remained with it as a matter of law). If so, Mr Gingerich was less than candid with the solicitors, at least to that point. If the instructions were given by some other officer, the basis upon which they were given is not clear. Whatever be the source of those instructions, the appellants were responsible for their implementation. 10 The difficulties in the appellants' case must have become evident when Mr Gingerich gave evidence. In what is likely to have been a dramatic cross-examination, Mr Gingerich conceded to the judge that he always knew that DSE had mistakenly believed there was no debt due to TSC. He candidly acknowledged, in all likelihood to everyone's surprise, that he had intended to take advantage of that mistake. At the end of that cross-examination the respondent could be forgiven for thinking that the battle was over. That was not, however, how events turned out. The appellants took the case to judgment. Perhaps it was too late in the day to give up. Most of the costs had been incurred and however slight the prospects of success, the appellants would incur few additional costs by continuing with the case. It was too much for the judge, however, who decided in those circumstances to impose on the appellants a special costs order. 11 A review of the authorities shows that there are various categories of cases in which solicitor and client or indemnity costs can be awarded. They include cases where the bringing of an application is "high-handed": Australian Guarantee Corporation Ltd v De Jager [1984] VR 483, 502; where an application has "no chance of success": Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1998) 81 ALR 397, 401 or is "hopeless": J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers, Western Australian Branch (No 2) (1993) 46 IR 301, 303; where an application is "unnecessary": Ragata Developments Pty Ltd v Westpac Banking Corporation (unreported, Federal Court, 5 March 1993); where an application is brought and prosecuted "not for the bona fide purpose of protecting and enforcing a legal right, but to achieve an ulterior or extraneous purpose": Ragata Developments Pty Ltd v Westpac Banking Corporation (unreported, Federal Court, 5 March 1993); where an application is commenced in wilful disregard of known facts or contrary to well established law: Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397, 401; where there has been "some relevant delinquency on the part of the unsuccessful party": Oshlack v Richmond River Council (1998) 193 CLR 72, 89; where the justice of the case warrants such an order: Andrews v Barnes (1887) 39 Ch D 133, 141; and where there are some special or unusual features in a case to justify the court the exercising its discretion in this way: Preston v Preston [1982] Fam 17, 39. 12 When one has regard to the appellants' dealing with DSE as well as the manner in which they conducted the litigation it is clear that the special costs order was warranted. First it is the lack of "honest commercial common sense" which caused them to defend this action. Second, being fixed with the knowledge of Mr Gingerich, they ran a hopeless defence. Why then is there an appeal from the judge's order? Is it simply a continuation of the battle begun below? On one view it is just that. But that would not be conceded by the appellants. They have seized upon two comments made by the judge in an attempt to demonstrate that he based his costs order on a mistaken view of the facts. First they say that the judge wrongly acted on the proposition that Mr Gingerich should have acknowledged the full facts in his first affidavit. The appellants say that this was a mistake because the facts that came out during Mr Gingerich's cross-examination were not determinative of or relevant to the case as originally pleaded. They contend that his evidence was only relevant to the plea for rectification based on unilateral mistake that was introduced by amendment on the first day of trial. Second, they say that the judge was wrong in his view that, had Mr Gingerich's evidence been disclosed earlier in the proceeding, as according to the judge it should have been, "this would have been an entirely different case, in conduct, in preparation and in hearing": DSE (Holdings) Pty Limited v InterTAN Inc [2004] FCA 1251 at [25]. Indeed, the judge thought that in that event the case would have lasted three days or probably even less. 13 We are in no doubt that the appellants' interpretation of the judge's comments, made while giving ex tempore reasons, misunderstands what the judge had in mind. The judge was plainly right to say, as he did, that Mr Gingerich's evidence went to the heart of the case. In particular, the evidence was of direct relevance to DSE's original claims in misrepresentation and estoppel. If the true facts had been known, the appellants' solicitors would not have filed a defence in which each allegation relating to those causes of action was denied. The best they could have done was to put DSE to its proof by the legitimate and well-recognised method of non-admission, and even then they would have been at risk of a special costs order. 14 It is unnecessary to consider whether the judge was correct in his view that Mr Gingerich's evidence should have been made available early on. As to the judge's observation that had there been an early disclosure of the facts the case would have taken a different course, nothing that was put on the appeal to show this to have been in error. 15 The appeal will be dismissed with costs. It was not suggested that the appellants should pay those costs on an indemnity basis, so the taxation will be on the usual basis. I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Full Court.