Kenquist Nominees Pty Limited v Campbell

Introduction 1 There are two interlocutory applications before the Court seeking additional security for costs - one by the first to third respondents (the director respondents), and one by the fourth respondent. 2 The claims in the principal proceeding are summarised in Kenquist Nominees Pty Limited v Campbell (No 2) [2016] FCA 911 at [3]-[15]. The nature of the claims need not be repeated here.

The director respondents 3 On 19 August 2016, the Court made orders that the applicant provide security for the director respondents' costs of the proceeding up to and including the first day of the trial, in the form of a Deed of Indemnity executed by AmTrust Europe Limited for an amount up to $843,181.00. The orders included security for the director respondents' costs of enforcing the Deed. The orders were made by consent. They were made without prejudice to the right of the director respondents to seek the provision of further/additional security for their costs. 4 The director respondents now seek additional security in the amount of $1,505,646.70. This comprises "top up" security in relation to costs incurred up to the first day of the trial, and security for the costs of the trial itself. 5 The application for additional security is supported by two affidavits made by Abigail Ruth McGregor, a partner of Norton Rose Fulbright (NRF), who are the solicitors for the director respondents. Ms McGregor has the care and control of the proceeding for the director respondents. In her affidavits, Ms McGregor has focused on the unexpected size of discovery as the reason why the "top up" security is sought, although it is clear from a schedule attached to a letter dated 16 May 2017 from NRF to the applicant's solicitors, Corrs Chambers Westgarth (CCW), that the "top up" applies to other categories of costs, including those categorised as "Preliminary steps" and "Preparation of defence" (the schedule). 6 The applicant has not challenged the evidence given by Ms McGregor's affidavits or adduced any evidence itself in respect of the present application. In submissions, it said that the "one substantial issue" between the parties is whether the director respondents have delayed in seeking the "top up" security in light of the negotiated arrangements that led to the orders made on 19 August 2016. 7 The applicant submits that the Court should only award security for the increased estimates of prospective costs and that the director respondents should not be allowed increased security for past costs because of their delay in bringing their present application. The applicant also submits that the estimate of prospective costs should be reduced by $82,550.00 which is claimed as estimated travel costs for interviews with overseas witnesses. The applicant does not dispute Ms McGregor's quantification of the amount for which additional security is sought. It only challenges the allowability of the additional security for past costs and for the travel costs to which I have referred. 8 I am not persuaded that "top up" security should be provided in respect of the categories "Preliminary steps" and "Preparation of defence" in the schedule (an additional amount of $92,748.00). The reason for the additional amount of security sought in this regard is not discussed in Ms McGregor's affidavits. The schedule bears a notation that the additional amount is attributable to an increased number of documents provided by the director respondents which required, amongst other things, more time for review and consideration by NRF than had been anticipated, with flow-on consequences for other preliminary steps, such as preparing a chronology and updating counsel's brief, apart from preparing the director respondents' defence itself. 9 I note, however, that the director respondents' defence was filed on 8 July 2016, more than one month before agreement was reached in respect of the orders made on 19 August 2016. The additional amount of security claimed for these items is significant. In the absence of any explanation to the contrary, I infer that the director respondents must have known well prior to 19 August 2016 that their actual costs for "Preliminary steps" and "Preparation of defence" were significantly greater than the initially estimated costs for work in these categories. Indeed, in an affidavit made on 20 May 2016, Ms McGregor stated that a number of preliminary steps had already been undertaken. These included: review of the statement of claim and amended statement of claim; discussions with the director respondents to take instructions; analysis of minutes of various meetings, ASX announcements and other documents; preliminary steps in preparing a draft defence; and briefing senior and junior counsel. 10 The only relevant future step identified in Ms McGregor's affidavit relating to preliminary matters was completion of the preparation of the defence. Given the knowledge they must have had of their actual costs at the time the orders were made on 19 August 2016, the director respondents should have addressed the additional costs relating to "Preliminary steps" and "Preparation of defence" at that time if they wished to persist in making a claim for security in respect of them. I do not think it is appropriate that the director respondents should now be permitted to revisit their costs with respect to these categories with a view to obtaining the benefit of additional security when their actual costs must have been known, but not provided for, at the time that they consented to the orders on 19 August 2016. 11 I think, however, that the other categories of the "top up" security - particularly costs in relation to discovery - stand in a different position, not least because, at the time that the orders were made on 19 August 2016, the director respondents had made clear that they could only provide forward-looking estimates which could well vary for reasons beyond their present knowledge or control. It was in these circumstances that the orders made on 19 August 2016 were expressed to be without prejudice to the director respondents' right to approach the Court for further/additional security for their costs. 12 Orders for standard discovery were made on 28 September 2016, with discovery to be given by 14 December 2016. The applicant submits that the director respondents "waited a year from the start of the discovery process before filing this application". This submission is not a complete statement of the relevant facts and circumstances. Ms McGregor's affidavits go into considerable detail as to how the task of discovery came to exceed the initial estimates made by the director respondents of the work required, and how the director respondents' claim for "top up" security was advanced in this regard. 13 On 14 December 2016, NRF first notified CCW of the director respondents' claim for "top up" security in relation to discovery. By that date, the director respondents had given discovery of four tranches of documents. More tranches were to follow. 14 NRF explained the reason for the "top up" claim: Our initial estimate of costs to be incurred in defending this proceeding, provided at exhibit 'AM19' in the affidavit of Abigail McGregor dated 20 May [2016], was based on a series of assumptions. Our client sought security in the sum of $1,200,000 in respect of anticipated solicitor client costs of $2,000,047.50. This is approximately 60% of the estimated actual costs. At that time, our estimate of the costs our clients would incur in association with discovery was expressly based on the following assumptions: • that there would be no more than 10,000 documents to be reviewed by us to complete our clients' discovery. We have now established that our clients have approximately 100,000 documents that need to be reviewed for relevance and privilege. Most of these documents have been provided by QRx pursuant to our clients' Deeds of Indemnity, Access and Insurance. • that the applicant and other respondents would produce for inspection approximately 20,000 documents between them. Morgans have already produced over 10,000 documents and W+K have indicated in recent correspondence that their client will be providing them with an additional 158,000 documents for review. Spark Helmore have indicated that they anticipate producing approximately 4,500 documents should privilege be waived by QRx. Given this updated information in relation to the scale of discovery, our original estimates regarding discovery costs needs to be updated. Our clients had previously estimated that the costs associated with discovery would be approximately $195,465 ($180,665 for NRF fees and $14,800 for Counsel fees). Given the increase in documents, we now estimate that the costs associated with discovery will be approximately $750,798.50 ($735,810.50 for NRF fees and $14,988 for Counsel fees). This estimate is based upon 30% of Morgans' additional 158,000 documents needing to be reviewed. It also assumes that we need to review no more than 5,000 documents from Dibbs Barker. It also assumes that the applicant has substantially concluded its discovery and does not further call upon its subpoena served on QRx. Should these assumptions be incorrect, we will need to revisit security for costs again On the basis of this new information, our clients seek further security for costs in relation to discovery from your client in the amount of $333,200 being 60% of our estimate of the additional fees and disbursements to be incurred as a result of the increase in the scale of discovery. 15 The evidence indicates that, certainly by the time the orders were made on 19 August 2016, the director respondents were aware that QRx Pharma Ltd (QRx) had, potentially, a large number of documents that might become discoverable by the director respondents (the QRx documents). However, the QRx documents were treated as a distinct category of documents that were separate from the documents that Ms McGregor believed the director respondents would need to discover (being the assumed number of documents on which Ms McGregor's costs estimates were based). The fact that Ms McGregor was treating the QRx documents as a separate category of documents, which did not form part of her then cost estimates, was made apparent in her affidavit of 17 June 2016 that had been filed in support of the director respondents' initial application for security for costs. In that affidavit, Ms McGregor stated that she was considering how the number of those documents could be reduced by further word searches, altering date ranges or using other search techniques. It is apparent that, in that affidavit, Ms McGregor was indicating that the director respondents' claim for security for costs did not include the costs of discovery in respect of the QRx documents and that her then estimate of the costs of discovery may need to be revisited depending on the outcome of her continuing inquiries with respect to the QRx documents. I am satisfied that, at that time, the increased burden of discovery in the proceeding, as it came to be known in December 2016, was not appreciated by the director respondents. 16 CCW did not reply to the 14 December 2016 letter. On 9 January 2017, NRF wrote again, seeking a response to the claim made on 14 December 2016. Once again, CCW did not reply. 17 On 30 March 2017, NRF wrote again to CCW. The letter contained further revisions to the estimates made in relation to the costs of the discovery process. In that letter, NRF said: In our 14 December 2016 letter we advised that the costs associated with discovery were expected to increase by $555,333.50 to approximately $750,798.50 (comprised of $735,810.50 for NRF fees and $14,988 for Counsel fees). Accordingly, our client sought additional security for costs in the amount of $333,200 being 60% of the additional NRF and Counsel fees associated with discovery. We have recently reviewed the work required in order to prepare this matter for hearing and there are a number of significant changes to the assumptions we have previously made, particularly in relation to discovery and evidence preparation which are set out below. 18 It is not necessary for me to descend to the detail of the changes in the assumptions. I note, however, that the changes appear to be responsive to developments after the 14 December 2016 letter. The 30 March 2017 letter also referred to the flow on effects produced by the more extensive discovery process to other estimated costs. Further, the letter made a claim for security in relation to the costs of the trial itself. The letter concluded by stating that if a response was not received by 4.00 pm on 6 April 2017, the director respondents had instructed NRF to file an application for further security for costs, without delay. 19 On 6 April 2017, CCW responded to the 30 March 2017 letter - in effect seeking additional time to provide a substantive response. 20 By 10 April 2017, no response had been given. At a case management hearing that day, the director respondents sought an order that the applicant respond to the letter of 30 March 2017 by 14 April 2017. An order to that effect was resisted on the basis that the applicant wanted a longer time to respond. An order was made that a response be given by 1 May 2017. 21 On 2 May 2017, CCW wrote to NRF stating that "our client remains open to commercial negotiations about the provision of further security". The letter sought further information, including an explanation of "why the impact of the number of relevant documents was not raised earlier". 22 On 16 May 2017, NRF responded. However, not having heard further from CCW in the immediate future, NRF wrote again on 29 May 2017, seeking a response by 4.00 pm on 2 June 2017, and noting that NRF had been corresponding with CCW in relation to increased security since December 2016. 23 On 1 June 2017, CCW responded. CCW requested that NRF desist from seeking the director respondents' instructions to make an application for further security until such time as CCW was in a position to respond to the 16 May 2017 letter. However, by 29 June 2017 no further response had been made. 24 On 29 June 2017, the Court made orders by consent, including an order that the applicant respond to the 16 May 2017 letter by 4.00 pm on 14 July 2017. This marked the second occasion on which an order had been made requiring the applicant to respond to correspondence from the director respondents on the question of additional security for their costs. 25 Notwithstanding the order that had been made on 29 June 2017, the applicant did not provide a substantive response by 14 July 2017. NRF wrote again on 16 August 2017. On 24 August 2017, CCW responded by stating that they were awaiting instructions from the applicant. CCW said that it would provide a response in advance of the next case management hearing. 26 On 4 September 2017, NRF wrote to CCW again, stating: We refer to our various letters and emails with your firm in relation to our clients' request for increased security for costs, commencing by way of our letter dated 14 December 2016. Our clients have provided your client with detailed information regarding the request for increased security for costs in our correspondence dated 30 March 2017, 21 April 2017 and 16 May 2017. In your correspondence dated 2 May 2017, you indicated that your clients were open to commercial negotiations regarding about the provision of further security, yet to date you have not responded to our request in any meaningful way. Our clients have provided your client with ample opportunity to liaise with the funder of its claim and provide instructions regarding our clients' request. On 1 June 2017, our clients communicated a willingness to permit your client some time to respond to our 16 May 2017 letter, given that your client's evidence was due to be filed shortly. A further court ordered date for the filing of your client's evidence has just passed and your client still has not responded to our client's request for further security. We note that by email on 24 August, Ms Oreb advised that you are still waiting instructions from your client in relation to our clients' request for further security. It is difficult to understand why you are still in the process of obtaining instructions regarding our clients' request given the many months that have elapsed since our clients' request for further security. Could you please provide a response to our request by close of business, Wednesday, 6 September 2017. If we do not receive a meaningful response from you by this date, our clients will have no other option but to file an application for further security in light of this continued, unexplained, delay. 27 On 5 September 2017, CCW responded, stating that they were still awaiting further instructions from the applicant. Apart from the applicant's submissions in the present application, that has remained the state of affairs between the applicant and the director respondents. 28 It can be seen, therefore, that any delay in the filing of the director respondents' interlocutory application seeking additional security for their costs arises substantially from the failure of the applicant to engage meaningfully with the director respondents on the question of additional security from 14 December 2016, when the director respondents first made their claim for that security. 29 I am not persuaded that the director respondents have themselves delayed in seeking additional security. Further, the orders made on 19 August 2016 expressly reserved the director respondents' position with respect to seeking further or additional security. I do not understand that reservation to be with respect only to categories of cost not covered by the initial order to provide security. Further in this connection, the director respondents have always made clear that the forward-looking estimates given at that time, particularly with respect to discovery, may change because of the assumptions made. Although those assumptions have not held good due to changed circumstances, I do not think that it could be said, for example, that they were not genuine or realistic assumptions at the time they were made. Indeed, the applicant does not suggest that they were not genuine or realistic. 30 As delay is the "one substantial issue" raised by the applicant as to why the "top up" security should not be given, I am satisfied that, subject to the matters discussed at [8]-[10] above, and subject to resolution of the question concerning travelling costs next discussed, additional security should be provided in the amount sought which, I note, is a discounted amount. 31 The disputed disbursement for travelling costs is simply identified in the schedule as: "Estimated costs for US witnesses interviews - $82,550". There is no further explanation of this item in Ms McGregor's affidavits or in the schedule itself. I do not know whether the item is for travel to the United States to interview witnesses or for travel by witnesses from the United States to Australia for the purpose of being interviewed. Either way, there is no explanation as to why travel is necessary, especially when witnesses can be interviewed in various convenient and appropriate ways which do not involve physical attendance in the one location. Further, there is no explanation as to how this significant amount has been estimated. 32 Objection having been taken, and no satisfactory explanation having been provided, I am not disposed to order that the additional security cover this item for this amount. 33 In the result, I am persuaded that additional security for the respondent directors' costs should be provided by the applicant in the sum of $1,330,348 covering costs up to and including the trial.

The fourth respondent 34 On 17 August 2016, the Court made orders that the applicant provide security for the fourth respondent's costs of the proceeding up to and including the first day of the trial, in the form of a Deed Poll executed by AmTrust Europe Ltd for an amount up to $375,000. The orders included provision of security for the fourth respondent's costs of enforcing the Deed. The orders were made by consent. They were made without prejudice to the fourth respondent's right to seek further or additional security for its costs. 35 The fourth respondent now seeks additional security in the amount of $739,921.18. This comprises "top up" security in relation to costs incurred in the discovery process and in the preparation of its lay evidence. 36 The application for additional security is supported by an affidavit made by Andrew Stewart Moore and an affidavit made by Ahrani Thulasi Ranjitkumar. Mr Moore is the solicitor on the record for the fourth respondent. Ms Ranjitkumar is a solicitor with daily conduct of the proceeding on behalf of the fourth respondent. The applicant has not challenged the evidence given by the fourth respondent or adduced any evidence itself in respect of the fourth respondent's application. As with the director respondents' application for additional security, the applicant said that the "one substantial issue" between itself and the fourth respondent is whether the fourth respondent delayed in seeking the "top up" security in light of the negotiated arrangements that led to the orders made on 17 August 2016. 37 In his affidavit, Mr Moore explained that the fourth respondent's originally estimated costs have increased as a result of an unanticipated number of documents that the fourth respondent has been required to review as part of its discovery; unanticipated complications and disputes with regard to privileged documents; and the manner and extent of production of documents by other parties, as well as the nature of the documents produced by third parties. 38 On 14 September 2017, the fourth respondent's solicitors Wotten + Kearney Lawyers (WK) wrote to CCW, seeking additional security. The letter enclosed revised estimates of the fourth respondent's likely costs for finalising discovery and preparing its lay evidence. WK explained: 8. The assumptions made when formulating the original estimate of our client's defence costs have been skewed by: Discovery 8.1 The ongoing issues raised by your client in respect of the adequacy of… our client's discovery, including the complaints now articulated in support of your client's current application. 8.2 The volume of our client's documents that responds to the search parameters adopted in respect of discovery as well as the associated costs of running analytic tools over those documents. Our client's desire to reasonably confine these parameters was resisted by the Applicant and the first to third Respondents, with the effect that a larger universe of documents than had been envisaged by our client was required to be reviewed. We were provided with 510.66GB of documents from our client that originally responded to the search parameters that were ultimately agreed to, which was far more data/documents than originally anticipated. The cost of processing these documents (including metadata extraction, document IDs and de-duplication) currently sits at $107,722.50 plus GST. We also used the Textual Near Duplicate Identification application within the Relativity Analytics tool for the purpose of streamlining the review. The use of such application was not originally anticipated. The cost of using that tool was $11,500 excluding GST. The volume of data provided also had a consequential effect of increasing our estimated legal costs of reviewing the documents. 8.3 The manner of production of documents by other parties, which has caused documents to be produced out of chronological order. As such, our client has incurred extra costs in creating a search to place documents in chronological order on its online platform and updating the search to integrate new documents as they are discovered by the parties in subsequent tranches. 8.4 Your client's outstanding application which may result in the production of further documents over which privilege is currently claimed. This will result in our client having to incur further costs in hosting those documents and reviewing same. 8.5 The need for our client to review the various materials produced under subpoena at the request of your client, including the 8 × 40 minute audio records produced by Orient Capital. 8.6 The unanticipated complications that have arisen with regard to the issue of privileged documents, including: (a) the difficulty faced in obtaining instructions from QRx Pharma Limited (QRx) in respect of the claims for privilege it asserts over Morgans' documents; (b) the insistence by your client that we provide details of the basis for the privilege claim beyond the ordinary requirements of the Federal Court Rules 2011 (Cth) - including that we provide details of the privilege claimed by a third party, QRx. (c) the effect of your client's current application, which may cause our client to have to re-verify its list of documents. 8.7 Our client's disbursements have also significantly increased due to the cost of hosting the documents produced by all parties. At current, our client expects its costs of hosting the documents discovered by all parties as well as its own documents that respond to its search parameters to sit at $42,165 plus GST a month plus an average of $3,008 per month in associated consultancy fees. These costs are significantly higher than anticipated because of the necessity to continue to host our client's documents that have been scanned by the analytic tools but not discovered, until the pleadings have closed - in light of your client's recent indication that it intends to seek to further amend its claim. Evidence 8.8 The volume of documents that has been discovered has a direct impact on the preparation of our client's lay evidence. In respect of its lay evidence, the number of discovered documents that will need to be reviewed and put to each witness has significantly increased. This has a flow-on effect in respect of the time and cost that will be expended by our client in meeting with its witnesses and preparing statements. 39 In his affidavit, Mr Moore has given evidence of: the request made by the applicant and the director respondents that the fourth respondent significantly expand the search parameters it had originally intended to use to retrieve documents in response to its discovery obligations, even though standard discovery had been ordered; the unexpected number of documents that responded to the search parameters; the disputes between the parties concerning the manner in which claims for privilege had been made (as to which, see Kenquist Nominees Pty Limited v Campbell (No 3) [2017] FCA 1230); the difficulties the fourth respondent experienced in obtaining advice from QRx as to whether it intended to claim privilege over certain documents in the fourth respondent's possession; the unexpected costs incurred in reviewing documents produced by the parties and others (including the need to reorganise these documents in chronological order); the unexpected costs incurred in reviewing documents comprising correspondence between QRx and the US Food and Drug Administration, as supplied by the applicant; the unexpected costs of hosting documents; and the impact of the number of discovered documents on the time required to prepare lay evidence. 40 The applicant pointed to the fact that the fourth respondent first requested "top up" security on 14 September 2017. It submitted that the fourth respondent should have commenced its application for additional security over a year ago and that "(t)he past costs of discovery should be excluded from the uplift awarded". 41 I am not persuaded that the fourth respondent should be precluded from seeking "top up" security in relation to its past costs for discovery. Like the director respondents, it provided its initial estimates on the basis of certain assumptions which have not held good, for the reasons explained in Mr Moore's affidavit. In an affidavit filed in respect of the fourth respondent's initial application for security, Mr Moore said: The costs associated with discovery are particularly difficult to estimate at this early stage because, whilst it is clear that a large amount of documentation will be discovered, we do not yet know the full extent of that discovery and in particular the amount of electronic data that will need to be processed, reviewed and hosted... 42 This statement plainly indicates the tentative basis on which the costs for discovery were initially estimated by the fourth respondent. The express reservation in the orders made on 17 August 2016 of the right of the fourth respondent to seek further/additional security for its costs must be seen in the light of this statement. As with the director respondents, I do not understand the reservation to be with respect only to categories of cost not covered by the initial order to provide security. Moreover, the size and scope of the discovery task has been a fluid issue for the parties from late 2016 to the present time. I do not think it could have been a matter of surprise for the applicant that, in September this year, it was faced with an application by the fourth respondent for increased security for costs in relation to discovery, especially given the express reservation made in the orders of 17 August 2016. 43 Given, once again, that the only substantial objection raised by the applicant is delay, I am not persuaded that, in all circumstances, the fourth respondent should be precluded from obtaining "top up" security in relation to its costs of discovery, and in relation to its prospective costs of preparing its lay evidence. As no objection has been raised with respect to Mr Moore's quantification of the additional costs, and as the amount of the additional security now sought is a discounted amount based on the previous agreement between the applicant and the fourth respondent, I propose to order additional security in that amount.

Disposition 44 Orders will be made accordingly. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.

SCHEDULE OF PARTIES NSD 1364 of 2015 Respondents Second Respondent: MICHAEL QUINN Third Respondent: JOHN HOLADAY Fourth Respondent: MORGANS CORPORATE LIMITED (ACN 010 539 607) Fifth Respondent: DIBBS BARKER