Lewis, in the matter of Damilock Pty Ltd (in Liquidation) ACN 008 083 985 v A.E. Smith & Son Pty Ltd ACN 004 274 793

The contentions 13 The plaintiffs' contention as to the basis upon which it should recover costs of the action is twofold. First, they say that they are entitled to costs on an indemnity basis in accordance with O 23 rr 11(3) and (4) of the Federal Court Rules, the offer of 9 May 2008 not having been accepted, and the plaintiffs having succeeded in the claim by the consent judgment referred to in excess of the amount of that offer. Secondly, they contend that, by reason of the extensive exchange of offers (which were without prejudice at all material times), they made a number of offers to the defendant to compromise the claim, all of which the defendant refused by making lesser counter-offers, all of which were less than the amount which the plaintiffs have ultimately recovered by judgment. Hence, in the general exercise of its discretion the Court should make an order for indemnity costs of the proceedings from 9 May 2008 and on a party and party basis up to that time. 14 The defendant's oral submission was first that there should be no order for costs of the proceeding at all because there has been no hearing on the merits. It is, the defendant says, simply a case where a commercial resolution of the dispute between the parties has been arrived at and so the Court should not make any order for costs. Alternatively, they contend that the costs order should be simply on a party and party basis. 15 One contention identified on the defendant's behalf, that O 23 r 11(4) was not activated because less than the 14 days notice required by O 23 r 5(3) had been given, was not pursued. The contention is plainly wrong, and properly not pursued. The offer was made on 9 May 2008. The 14 day period specified by O 23 r 5(3) expired on 23 May 2008, and that is the date specified in the notice. 16 The defendant fell back on the proposition that the Court, in the exercise of its discretion, should not make an order for indemnity costs because proper reasons existed for it not to do so. Those reasons were in essence that the Court should encourage negotiated settlement of claims, and to impose an order for indemnity costs in circumstances where there had been a prolonged period of negotiation between the initial offer and the ultimate resolution would not be in accordance with that policy. It would not give effect to the objective of encouraging parties to reach a commercial resolution of their dispute. It was also put that the defendant had throughout adopted a reasonable attitude to the claim against it. It had promptly filed a defence, and had taken a "neutral attitude" on insolvency simply by not admitting that issue in its defence, and it had for an extensive period of time engaged in negotiations with the plaintiffs in an endeavour to resolve the dispute informally. It had up to a certain point no clear foundation for understanding why the plaintiffs alleged that Damilock was insolvent from 26 December 2006, and until the statement of claim no clear basis for identifying why the plaintiffs contended that the defendant's "good faith" defence was not available to the defendant. Hence, it was said, the defendant acted not unreasonably given the commercial assessment of risk, to have put the matters in issue as it did in its defence, and then to dispute the amount of the costs which the plaintiffs now seek. 17 Finally, the defendant contended that there should be no order for costs against it in respect of "the insolvency trial" because of the attitude which it adopted in relation to that proceeding, and alternatively that it should be ordered to pay only 25 per cent of those costs and only up to the date of the commencement of the hearing, that being the date from which it indicated simply that it would abide the result of that hearing.

Consideration 18 The contention of the defendant that there should be no order for costs should be rejected. The cases relied on by the defendant do not enhance its position in the present circumstances. 19 L & A Maglio Pty Ltd v Commissioner of Taxation [2007] FCA 1365 concerned taxation appeals by several taxpayers against appellable objection decisions. The appeals were compromised and were discontinued by consent, but the respondent sought costs of the appeals. Those costs were ordered in the respondent's favour, having regard to the appellants' conduct of the appeal over a lengthy period: see at [32]. The other decision referred to by counsel for the defendant is equally evidently inapplicable. Cirillo v Consolidated Press Property Pty Ltd (No 2) [2007] FCA 179 concerned the award of costs after the applicant's claim had been summarily dismissed. Costs were awarded on a solicitor and client basis against the applicant, having regard to the way the proceedings were conducted. In neither case was there the overlap of the application of O 23 of the Federal Court Rules. 20 The relevant principles about the discretion to award costs under s 43 of the Federal Court of Australia Act 1976 (Cth) where a matter has not proceeded to determination on the substantive issue were discussed by Goldberg J in Yates Property Corporation Pty Ltd v Boland (2000) 179 ALR 664 at [4]-[5]. However, this case does not concern those circumstances. Here the plaintiff's claim has not been compromised. It has been acknowledged. The full amount of the claim is the amount of the judgment. It was acknowledged only just prior to the commencement of the hearing. Had there been no offer under O 23 of the Federal Court Rules, the plaintiffs in the normal course would have been entitled to their costs of the action on the normal basis. That, in substance, is what the defendant's offer of 16 January 2009 recognised. It was no doubt aware of the potential implications of the offer made under O 23 of the Federal Court Rules. It sought to confine the costs to party and party costs. But its proposal was not accepted. The parties could not agree as to an order for costs. The defendant nevertheless consented to judgment for the amount of the claim. 21 In my view, there is no proper reason to depart from the normal application of O 23 r 11(4). The offer of 9 May 2008 was in compliance with O 23. It specified a period of time within which a response could be made in accordance with O 23 r 5(3). At that time, the plaintiffs' claim was for a considerably larger sum, and in any event the offer was to accept a significantly lesser sum than the claim for the disputed payment of $20,071.27. Ultimately, the plaintiffs have succeeded in recovering by the consent judgment an amount in excess of that offer. 22 In Port Kembla Coal Terminal Ltd v Braverus Maritime Inc (No 2) (2004)212 ALR 281 Hely J said at 284 [17]-[18]: Once an offer is made, and a judgment no less favourable obtained, a rebuttable presumption in favour of indemnity costs is created. It then becomes incumbent on the defendant to show reason why the presumption should not crystallise. … Even if an unsuccessful litigant acted reasonably in rejecting an offer of compromise based on its asserted defences, the authorities establish this of itself is not a sufficient reason to displace the presumptive or prima face operation of the Rules. 23 There is no real reason why, in the present circumstances, O 23 r 11(4) should not be applied. That rule is intended to encourage prompt and realistic resolution of disputes by adding the sanction of indemnity costs where one party is prepared to compromise its claim on terms which ultimately are less favourable than the eventual outcome, but the other party is not. The defendant in this matter elected to try and secure a lesser settlement than the amount of the offer. It was entitled to do so, but at the risk ultimately of O 23 r 11(4) being enlivened. The subsequent negotiations were all in the shadow of that risk. Its attempt to negotiate a lesser settlement proved fruitless. Indeed, although the plaintiffs later made a settlement offer at a lesser sum than the filed offer, that too was rejected. And whenever, thereafter, the plaintiffs put a further settlement offer (the amount increased as the costs were incurred), the defendant responded by a counter-offer somewhat less than the plaintiffs' offer. Whilst the Court encourages the settlement of claims, there is nothing to indicate the plaintiffs' offers were unreasonable. After all, the defendant at any time - as it ultimately did - could have admitted the claim and submitted to taxation of indemnity costs from the date of the offer if it thought the plaintiffs' offers with costs included were excessive. Instead, it simply responded to every offer by a lesser counter-offer. The "commercial assessment" of risk, the phrase used by the defendant's counsel to describe its approach, is not sought to be justified beyond that approach. Then it simply tried to negotiate to secure a costs order which averted the application of O 23 r 11(4). Such a course of negotiations provides no proper reason to depart from the application of O 23 r 11(4). There were two main elements to the plaintiffs' claim: whether Damilock was insolvent at material times, and (because the subject payment by Damilock to the defendant was not really in issue) whether the defendant could make out the "good faith" defence. There may be cases where, in the particular circumstances, a defendant may have such limited access to information that there is thereby proper reason to defer the operation of the indemnity costs order under O 23 r 11(4) until the defendant has had a fair opportunity to consider the claim. I do not need to determine if such cases may occur. This is not such a claim. The plaintiffs by letter of 30 January 2008 gave the defendant notice in general terms of the basis upon which they said that Damilock was insolvent from December 2006. As it happened, at the trial to determine the date when Damilock became insolvent during the six months prior to the relation-back day, it was not contended that Damilock was solvent beyond about mid March 2007. That is the date before the subject payment in any event. The plaintiffs in that letter also pointed out the circumstances in which, they claimed, the defendant's receipt of $20,071.27 on 27 April 2007 was not received in circumstances which might enliven the defence in s 588FG of the Act. The defendant, in any event, was best placed to assess that issue. 24 I am satisfied that it is appropriate to apply the presumption as to costs which O 23 r 11(4) indicates. I accordingly order that the defendant pay the plaintiffs' costs of the proceeding up to 9 May 2007 on a party and party basis, and thereafter on an indemnity basis. The plaintiffs accept that their costs can only be allowed from the point where they decided to make the claim against the defendant upon which they have succeeded, and as are incidental to its pursuance. 25 The costs of the "insolvency trial" present a practical issue for the taxing officer. The costs of that trial have not yet been awarded against any of the defendants who participated. The present defendant, by its defence of 2 July 2008, put insolvency in issue. It was served with an extensive notice to admit facts by the plaintiffs addressing that issue. At a directions hearing on 22 July 2008, it was given until 8 August 2008 to acknowledge that Damilock was insolvent at 27 April 2007 (when it received the payment in issue), and otherwise was directed to prepare and file its evidence on the issue. It did not then admit insolvency as at that date. The trial of that issue (involving the defendant and three other companies against whom like claims had been made and who had put in issue the question of Damilock's insolvency) was listed for hearing to commence on 23 September 2008. As noted above, only shortly before that date, the defendant indicated it would not participate in the hearing of that issue and would abide by its result. It did not then admit insolvency. 26 The plaintiffs accept that they should ultimately recover only one set of costs against those companies who put insolvency in issue. In the circumstances outlined, the defendant apparently participated in the trial of that issue up to, in effect, the commencement of the hearing. I think that would therefore include all the plaintiffs' proper preparatory work and the fee of brief of counsel. As the plaintiffs are prepared, apparently, to seek several orders for costs in relation to that trial, I indicate to the taxing officer that, in my view, the costs order I propose to make against the defendant should include 25% of the plaintiffs' costs on that issue up to that point. Thereafter, as I have not had the opportunity of hearing the other companies who participated in that hearing, I do not propose to give an indication of how the costs of that hearing should be separately allocated between those companies (assuming for the present time there is a costs order made against each of them). Their respective participation in the hearing of that issue was difficult. The fact that the defendant was, from 23 September 2008, prepared to abide the event does not necessarily mean that the plaintiffs did not incur further costs in this action after that date. That is a matter for the taxing officer to determine.

Order 27 The defendant should pay to the plaintiffs their costs of the action, on a party and party basis to 9 May 2008 and thereafter on an indemnity basis. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.

Associate: Dated: 3 February 2009 Counsel for the Plaintiff: Mr S Doyle and Mr B Renfrey

Counsel for the Defendant: Mr GA Stevens and Mr J Graham