By a notice of motion filed on 17 February 2016, the plaintiff, Mr James, sought leave to bring and prosecute in the name of a number of companies now in liquidation and which were formerly controlled by him derivative proceedings against the defendants. The first defendant (the Bank) lent in excess of $14 million to a number of the companies controlled by Mr James. Following defaults by the companies, the Bank appointed the second defendants (the Receivers) as receivers and managers of the companies to whom the Bank had lent money. The loans made by the Bank were guaranteed by Mr James.
The claims that Mr James sought to bring on behalf of the companies are complicated, but in essence two principal allegations were sought to be made. The first was that the value of wine owned by the companies at the time the Receivers were appointed was far greater than the amount the Receivers have realised, from which it may be inferred that the Receivers sold wine for which they have not accounted or sold the wine belonging to the companies at a gross undervalue. Second, it is alleged that the Receivers were guilty of trespass and conversion by taking control of assets that did not belong to any of the companies to which they had been appointed Receivers. As a consequence, Mr James sought to allege that the companies to whom the assets did belong were unable to continue to trade as a result of which they are alleged to have suffered substantial losses.
The allegations that Mr James sought to bring are serious and as might be expected the Receivers put on extensive evidence to refute them.
The motion was listed for 4 days commencing on 14 June 2016. On the first day, Mr James applied for an adjournment on the basis that he had not had sufficient time to examine a large number of electronic records in the control of the Receivers relating to the operations of the relevant companies. At that time, I granted an adjournment until 16 June 2016 to give Mr James an opportunity to put on additional evidence going to the question of what information he believed was obtainable from the electronic records from the companies and what would be required to extract that information.
On the evening of 15 June 2016, my Associate was informed that Mr James no longer pressed his motion. As a result, on 16 June 2016, I made an order dismissing the motion. The only outstanding question concerns costs.
The defendants make an application for a gross sum costs order under s 98(4) of the Civil Procedure Act 2005 (NSW). In support of that application they rely on an affidavit sworn on 15 June 2016 by Mr Kucharski, who is a senior associate employed by the solicitor for the defendants and who had day-to-day conduct of the matter on behalf of the defendants.
Mr Kucharski gives evidence that the defendants' total costs up to and including 14 June 2016 of opposing Mr James' motion are $338,599.70 (excluding GST) comprising:
1. $229,572.70 in solicitors' professional fees;
2. $7,752 in disbursements;
3. $101,275 in counsels' professional fees.
Included in Mr Kucharski's affidavit was the following table giving a breakdown of the amount of solicitors' professional fees:
Personnel Time Rate (excl GST) Cost
Kim Reid, Partner 35.3 $682 per hour $24,074.60
Przemek Kucharski, Senior Associate 205.6 $571 per hour $117,397.60
Jonathon New, Lawyer 167.8 $327 per hour $54,870.60
Kane Kersaitis, Lawyer 8.7 $267 per hour $2,322.90
Johanna Deutsch, Graduate 108 $267 per hour $28,836.00
Other Various Various $2,071.00
Total $229,572.70
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Mr Kucharski also gave evidence that the daily rate charged by senior counsel was $12,000 and the daily rate charged by junior counsel was $5,500. However, there was no breakdown given of the figure of $101,275; and, in particular, it is not apparent what proportion of that amount related to fees charged by senior counsel and what proportion related to fees charged by junior counsel. Nor was any explanation given of the nature of the disbursements that were claimed.
On the basis that on assessment the defendants were likely to recover 100 percent of counsel fees and two-thirds of actually incurred solicitors' professional fees and disbursements, the defendants claim a gross sum costs order in the sum of $259,491 (excluding GST).
The principles relating to the circumstances in which the court will make a gross sum costs order are not in dispute. They were summarised by Beazley JA (with whom Giles and Whealy JJA agreed) in Hamod v State of New South Wales [2011] NSWCA 375 at [813]ff. It is not necessary to repeat all that her Honour said there. The following principles are relevant to the current application:
the discretion conferred by s 98(4) is not confined and may be exercised whenever the circumstances warrant its exercise, having regard to the scope and purpose of the provision;
the exercise of the power conferred by s 98(4) is particularly appropriate where the costs have been incurred in lengthy or complex cases and it is desirable to avoid the expense, delay and aggravation likely to be involved in a contested costs assessment. This may arise either from the likely length and complexity of the assessment process or from the likelihood that the additional costs of formal assessment would disadvantage the successful party because of the likely inability of the unsuccessful party to discharge the costs liability in any event;
the power may also be exercised where a party's conduct has unnecessarily contributed to the costs of the proceedings, especially where the costs incurred have been disproportionate to the result of the proceedings;
the costs order should be based on an informed assessment of the actual costs having regard to the information before the court. This may involve an impressionistic discount of the costs actually incurred or estimated, in order to take into account the contingencies that would be relevant in any form of costs assessment.
In my opinion, two matters point strongly in favour of making a gross sum costs order in this case.
First, it seems plain that Mr James will not be able to discharge the costs liability in any event. On the other hand, having regard to Mr James's conduct in this case, it is to be expected that he will contest any assessment. In my opinion, it is not reasonable to put the defendants to the additional costs of having their costs assessed when the likelihood is that they will not recover those costs or the costs of assessment.
Mr Sexton SC, who appeared for Mr James, took issue with the proposition that Mr James would not be in a position to pay any costs order. He submitted that the defendants had not established that that was likely to be the case. I do not accept that submission. A debt of $11,751,606.73 remains due and payable by Mr James to the Bank. Mr James was unable to provide a meaningful indemnity in respect of the costs of the companies on whose behalf he sought to bring the derivative actions. In my opinion, it may be inferred from those matters that Mr James is unlikely to meet any costs order against him.
Second, in my opinion, Mr James has unnecessarily contributed to the costs of the proceedings. The notice of motion raised two substantive issues. One is whether there was a solid foundation for the claims that Mr James sought to bring. The other was whether Mr James could provide a meaningful indemnity in respect of the relevant companies' costs. It must have been obvious from the start that Mr James was unlikely to satisfy the second of these requirements. Nonetheless, he persisted with the application until 15 June 2016. That was in circumstances where a similar application that Mr James had brought on behalf of other companies failed before Black J for the same reason: see In the matter of Sundara Pty Ltd [2015] NSWSC 1694.
Mr Sexton submitted that in those circumstances it was unnecessary for the defendants to incur the costs they did in relation to the question whether the proposed claim had a solid foundation. I do not accept that submission. The allegations against the defendants were serious ones. They were entitled to lead evidence on the application designed to show that those allegations did not have a serious foundation. Necessarily, that involved the Receivers giving detailed evidence of what happened during the course of the receivership. It is to be expected that that would require a substantial amount of work and would incur substantial costs. Mr James put the defendants in a position where they had to undertake that work unnecessarily.
Mr Sexton submitted that the defendants have led insufficient evidence from which the court could reasonably assess a gross sum costs order. They led no evidence from a costs consultant and led no evidence concerning what work was actually done by the defendants' legal advisers. Moreover, this was not a case where the Judge who is asked to fix a gross sum had an intimate knowledge of the case. Having regard to what happened in the case, little judicial time was spent on it.
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Decision last updated: 23 June 2016
The question is whether the evidence before the court is sufficient to enable the court to arrive at a rational and reasonable assessment of the defendants' costs which does justice to both parties. What information is necessary to enable the court to undertake that task depends on the particular case. Also relevant will be the amount involved and the need to ensure that the costs of the evidence relevant to the assessment of a gross sum are proportionate to the amount claimed. In some cases, if the evidence in relation to a particular category of cost is inadequate, it may be more appropriate to adopt a discount that reflects that fact rather than to refuse to make a gross sum costs order at all.
In the present case, having regard to the costs claimed, in my opinion, it was reasonable for the defendants to rely on evidence from their solicitors rather than evidence from an independent costs consultant.
I also think that Mr Kucharski gives sufficient information to permit the court to make a reasonable assessment of the amount that should be allowed in respect of solicitors' professional fees.
It is apparent that the solicitors charged an hourly rate for the work that they did. The hourly rates are identified in the table given by Mr Kucharski. Mr Hardman, a costs consultant engaged by Mr James, gives evidence that the hourly rates that would be allowed on a party/party assessment would be less that those actually charged. His evidence is that an amount of $500 per hour would be recoverable on assessment for Mr Reid, $400 per hour for Mr Kucharski and $300 per hour for junior solicitors. However, the approach taken by Mr Kucharski is to take the total amount charged and discount that amount by one third to arrive at an estimate of costs that would be recovered on assessment. That is a common approach, and does not seem to me to be unreasonable in this case.
Mr Sexton points out that the work done by each solicitor is not identified. But in the context of this case, that information seems to me to be of limited utility. It is not for the court to go through each item of cost to determine whether work was duplicated. Rather, the question is one of impression.
It is apparent from the table included in Mr Kucharski's affidavit that the bulk of the work was done by Mr Kucharski, a more junior lawyer and a law graduate, with some supervision by a partner. Having regard to the extent of the evidence filed and the fact that the defendants took the responsibility of preparing court books, it does not strike me as unreasonable that two lawyers and a law graduate would be involved in the day-to-day preparation of the case for hearing. I would only make two adjustments to the professional solicitors' costs claimed by defendants. First, it is apparent from the table that some limited work was done by other lawyers, law graduates or paralegals, some of whom are not identified. Without an explanation of why it was necessary for those persons to be involved, I would not allow anything in respect of those costs.
Second, particularly having regard to the evidence given by Mr Hardman, I think that it would be more appropriate to apply a 40 percent discount to the actual costs claimed by the defendants.
The defendants are said to have incurred disbursements totalling $7,752. However, those disbursements are not identified and consequently there is no rational basis on which it is possible to determine whether they are reasonable or not or what discount should be applied to them. For that reason, I would make no allowance for disbursements in calculating a gross sum.
That leaves counsel fees. According to Mr Kucharski, it is likely that the defendants would recover 100 percent of counsel fees on assessment. On the other hand, according to Mr Hardman senior counsel fees would be recoverable on a party/party assessment at the rate of $8,000 to $9,000 per day and junior counsel at the rate of $4,000 to $5,000 per day. There was no challenge to Mr Hardman's evidence. In my opinion, his experience in relation to the assessment of costs is likely to be more extensive than that of Mr Kucharski's. For that reason, I prefer his evidence.
Mr Kucharski does not identify how much time was spent by senior counsel and how much time was spent by junior counsel on the matter. That makes it difficult to assess the reasonableness of the amounts in respect of counsel fees and makes it impossible to discount counsel's fees having regard to Mr Hardman's evidence. However, I accept Mr Kucharski's evidence that the work done by counsel is normally allowed in full on assessment. There is no reason to think that a different approach would follow in this case. Consequently, I do not think that the failure to provide a breakdown of the time spent by senior and junior counsel is fatal to an assessment of costs on a gross sum basis. That still leaves the difficulty of adjusting the amount that the defendants should be permitted to recover in respect of counsel fees having regard to the likely rates that would be applied to determine the amount of counsel fees that would be recovered on assessment. However, if the amount claimed in respect of counsel fees is reduced to $75,000 that seems to me to cater more than adequately for the reduction that is likely to occur on assessment.
Mr Sexton points out that some of the work done in relation to the motion may still be relevant to the direct claim that Mr James seeks to bring. However, it is not easy to see what that work is and it seems to me that the amount involved is likely to be small. As Mr Jackman SC, who appeared for the defendants, pointed out, the defendants only claim costs for the period up to and including 14 June 2016, so some discount is already built into the amount claimed. I have indicated that further discounts should be applied to the actual costs incurred to arrive at a gross sum figure. In my opinion, no further discount should be applied to take account of the matter raised by Mr Sexton.
It follows from what I have said that an appropriate gross sum figure is $210,000 comprising $135,000 in respect of solicitor fees and $75,000 in respect of counsel fees.
The order of the court is that the first plaintiff pay the defendants the sum of $210,000 in respect of the defendants' costs of the motion filed on 17 February 2016.