Lines MacFarlane & Marshall Pty Ltd v Fletcher Constructions Australia Limited [2000] VSC 568 | Case summary

Supreme Court of Victoria|2000-11-08|Before: Nathan J

This matter has returned to me so that the issues of interest and costs can be decided. I am indebted to both counsel for their extensive written submissions, together with the exhibited material, displaying, amongst other things, tables of interest rates and their variation according to methods of calculation. The plaintiff makes a claim for interest pursuant to section 60(1) of the Supreme Court Act (1986). The proposition it relies upon is that almost as of right, unless good cause be shown to the contrary, it is entitled to a claim for interest on the moneys it has successfully recovered in its action for moneys due. I have been greatly assisted by the judgment of Tadgell J in David Leahey (Australia) Pty Ltd v McPherson's Ltd [1991] VicRp 77; [1991] 2 VR 367. Mr Martin for the defendant has submitted that the plaintiff is not entitled to interest at all or, if so, then it is only entitled to a very limited amount because of its breach of Rule 26.05 of the Supreme Court Rules. That is, the disclosure of offers of compromise prior to the matter of interest being finally despatched. He submits that if I were to award the full amount of interest, this would result in there being no sanction for a breach of the rules. He does concede that I have a general discretion in the matter and I am satisfied that the preponderance of authority, indeed the overwhelming nature of the authority, provides that I am invested with a wide-ranging discretion as to the issue of costs.

Firstly, I will deal with the entitlement to interest and the question of whether the defendant has shown that good cause exists as to why interest should not be granted at all, or, if so granted, that it should be in reduced sum. I must look at the breach of Rule 26.05 by the plaintiff in the entire context of this case.

I have already observed in the judgment that the case was extensively argued with thousands of pages of documentation and comprised many days of hearing. I have also already indicated that I considered the lapse, to use a more neutral term, on the plaintiff's part in revealing the offers of compromise to be absolutely de minimis in the context of this trial. It matters not that I cannot recall what the actual offers were at the time. In fact, so comprehensive has the plaintiff's success been in this case, especially when confronted with a counterclaim more than 20 times that of its original claim in size, that it would be churlish to suggest that a judge would not have been cognisant of the fact that various offers of compromise would have been made along the way. Accordingly, I consider the lapse on the plaintiff's part in relation to Rule 26.05 to be insignificant and to in no way to impugn upon its entitlement to interest. I consider that good cause has not been shown by the defendant as to why interest should not be awarded or, in fact, reduced. I now turn to the issues of quantum, the applicable interest rate and the appropriate time frame (i.e from when and until when to award interest) appropriate overdraft rates calculated at 11.78 per cent. The defendant suggests that rates to be earned on invested sums might be a more appropriate measure. These vary between 6 and 6.2 per cent. Tables relating to lending rates at the time and Reserve Bank interest schedules have been provided to me. I am aware of the statement of principle put forward by Justice Tadgell in the Leahey case. Although that case turned upon the application of the penalty interest rate, which is not pursued here, the salient principles apply. He said at page 384:

"One should be concerned to consider not so much what the plaintiff would have been likely to have earned with the money that the defendant, unwarrantedly as it has turned out, has withheld. The question is rather what the plaintiff would have been likely to have been obliged to pay in order to have had had the money."

I am aware of the fact that the plaintiff maintained an overdraft at or close to its limit for most of its trading life. However, I am also aware that the use of overdraft funds can produce favourable tax advantages for a plaintiff or for any business. The deductibility of overdraft funds as a business expense would mean that the application of an overdraft interest rate would be unduly favourable to the plaintiff because it would, by windfall, receive a rate possibly free of any of the costs incurred in earning income. On the other hand, I consider the rate to be earned on invested funds to be wholly inappropriate because the plaintiff did not invest its money.

I have a discretion to exercise as to what would be a just interest rate in the circumstances, that is, one which would provide the plaintiff with its entitlement, but at the same time not penalise the defendant for failing to have paid earlier.

In the circumstances I am satisfied that a rate of 10 per cent is the appropriate rate to award to the plaintiff in this instance. I shall order that the plaintiff be entitled to interest at the rate of 10 per cent as from the date of its first demand, which, if I recall, was 16 October 1997. I will hear counsel as to a terminal date - as to whether it should be today's date or the date upon which the awarded sum was repaid.

In the interim, I have been able to come to a decision and I will now pronounce judgment. I have an application before me by the plaintiff for an order for costs upon what is known as an indemnity basis. The order sought reads:

"The Defendant pay the costs of the Plaintiff of and incidental to the proceedings including all reserved costs, such costs to be taxed on the basis that the costs include all costs except insofar as they are of an unreasonable amount or were unreasonably incurred so that, subject to those exceptions, the Plaintiff is completely indemnified by the Defendant for its costs."

I have had the advantage of having been provided with written submissions by both the plaintiff and the defendant and of having heard them in preliminary argument on this matter on two previous occasions. I now have further submissions from both the plaintiff and the defendant, which were delivered in time for me to contemplate them and give them some consideration. In addition, I have had oral argument before me this day.

The plaintiff seeks indemnity costs, as opposed to solicitor and client costs, and says that it is entitled to them under the terms of Rule 63 of the Supreme Court Rules. Rule 63 provides the court with a discretion to award costs upon what is called an indemnity basis. The subject matter of costs of this order has been examined by a number of judicial authorities. I refer to Colgate-Palmolive Co v Cussons Pty Ltd [1993] FCA 536; (1993) 46 FCR 225 and to National Australia Bank Ltd v Petit-Breuilh and Ors (unreported, 18 October 1999), which was recently decided in this court by Justice Balmford. In arriving at my decision, I have been guided by the decision of Justice Gillard in MT Associates Pty Ltd v Aqua-Max Pty Ltd and Anor, (unreported 3 May 2000).

The authorities justify the granting of costs upon an indemnity basis by using a number of judicial epithets. They range from the following high-handed action or a high-handed presumption on the part of the defendant; the defendant allowing itself the luxury of raising defences which are ultimately found to be valueless; the making of allegations in the nature of fraud which are not carried forward (in the terms of Justice Sheppard in Colgate-Palmolive, cited above); misconduct of a particular kind having consumed the time of the court unnecessarily; the presence of an ulterior motive on the part of one or other of the parties; the raising of allegations which were never made out; and, the most significant being, the use of undue obfuscation and promulgation of a case based upon assertions which prove to be groundless.

Now it is trite to observe that a party is not exposed to indemnity costs merely because it loses a case. I must look at the particular circumstances surrounding the conduct of the parties. I have had the opportunity of doing so. My judgment, with respect, reflects the following basic factual proposition: whilst still engaged in designing work for the Metropolitan Mens Prison, Mr Marshall came to the view that LMM had not been paid in the terms of the contract and issued proceedings sounding in debt for the recovery of unpaid fees.

That claim was ultimately met with a counterclaim twenty times the size of the amount of the original debt claimed and of a complex and prolix nature which simply astounded the court. It is correct to say that this case was largely fought upon the counterclaim, which finally amounted to approximately $4.5 million. In my view, the plaintiff was obliged, rather than entitled, to meet the counterclaim head on. Thereby it was obliged to dissect it, analyse it and prepare defences in respect of it. Accordingly, its case was compounded and extended beyond that which could possibly have been contemplated insofar as the original action in debt is concerned.

I am informed from the Bar table that the plaintiff's costs stand in the region of $3 million. I am entitled to assume that the defendant's costs are of similar order and very probably more. Furthermore, the court costs involved, which will not be recovered from either of the parties, but borne by the community, will themselves be in excess of $1 million. If the time expended both by myself and Mr Justice Byrne, various judicial officers, the Taxing Master and court staff is considered and the entire judicial infrastructure is appropriately costed, it can be seen that this case has consumed approximately $8 million in legal expenses in respect of a claim which was successful for less than $200,000. The court is entitled to examine how this state of affairs arose. I shall return to that matter in a moment after reciting the grounds upon which indemnity costs are sought.

The plaintiff advances its claim for indemnity costs upon numerous grounds. Firstly, the plaintiff submits that the defendant unduly prolonged the case by preparing and advancing groundless contentions. I interpolate that it is necessary for me to examine whether or not the defendant's contentions were in fact groundless.

Secondly, the plaintiff contends that the defendant raised pleadings and defences, as well as advanced legal contentions, which were baseless, without merit and led to the prosecuting of a counterclaim which, itself, was vacuous.

Thirdly, it is contended that FCA failed to admit the facts in Mr Marshall's "Notice to Admit" of 12 November 1999 and that those facts were subsequently proven in court.

Fourthly, it is submitted, and this is a very serious matter, that FCA, in the course of proceedings, warned off (a rather pusillanimous way of saying intimidated) potential witnesses who were likely to have been helpful to LMM's case.

Fifthly, it is said that FCA raised allegations in its pleadings which were persisted with and which had the potential to seriously injure the reputation of the plaintiff's principal witness, Mr Garry Marshall, such allegations being without foundation.

Sixthly, it is said that the defendant unreasonably refused to accept the plaintiff's written offers to settle the proceedings - the so-called Calderbank letters.

I turn now to an examination of the defendant's counterclaim. This claim rested very largely upon the evidence of an expert, Mr Codd. Mr Codd was retained by the defendant to provide expert evidence. I refer to my judgment. It is unfortunate to say that I regarded Mr Codd's evidence as seriously impugned and he to have been advocative in a cause - a sad departure from the duties and responsibilities of an expert witness. Mr Codd prepared schedules of alleged defects in the plaintiff's work. The word "schedule" is rinsed of meaning when applied to these volumes (Schedules 1 and 2 of Mr Codd's report). I have already observed in the judgment that these reports were defective in matters of competence and that he assessed the ultimate state of completion of LMM's work on a quantitative rather than a qualitative basis.

In my view, reliance upon Mr Codd has led the defendant into advancing a case, prolix in its nature, and obfuscatory in its character. A reasonable assessment of the Codd evidence would have, in my view, revealed the above. Therefore, can it be said that the reliance upon Mr Codd has led to an unnecessary prolongation of the case and to the advancing of groundless contentions? In my view, it has. The plaintiff is successful in making out this ground in its claim for indemnity costs.

I have observed in the judgment that Mr Codd's assessment as to the state of completeness of the plaintiff's drawings could not be sustained, in view of the plaintiff's other evidence. Therefore, because the defendant persisted with Mr Codd, relied upon him and advanced the minutia of his claim against the plaintiff, Mr Marshall was obliged to meet every one of his contentions, substantive and inconsequential as they ranged. Accordingly, the plaintiff was obliged to expend many tens of thousands of dollars which, in my view, justice compels it not to bear.

I turn now to the second ground. That is, the reliance upon pleadings and defences which were baseless. Much of what I have already said in relation to Mr Codd also relates to this ground. I am aware that the pleadings in this matter changed substantially and that they were changed by the defendant itself, most significantly in 1999. I refer to the orders of Justice Byrne. The change in direction of the pleadings compelled the plaintiff, yet again, to incur expenses some three years after the litigation had commenced, in order to meet a substantially new claim of an exhausting character. None of those defences were successful before me. I considered them to be lacking in merit. Accordingly, the plaintiff is successful in its second ground for seeking costs upon an indemnity basis.

The third ground concerned the matter of a notice to admit. Mr Martin, with his customary tenacity and one might say persuasiveness, suggested that the notice to admit was ambiguous in its terms and, furthermore, that it amounted to a request by the plaintiff that the defendant abandon its case. I think there is much in that contention. Accordingly, I find that this ground is not made out by the plaintiff and I will not base any subsequent orders upon it.

The fourth matter related to the so-called intimidation of witnesses on the part of the defendant. I have before me the relevant documentation sent by the defendant to witnesses who might have been called by the plaintiff. I shall truncate it here. The first relevant document is a letter from the plaintiff to Connell Wagner of 8 April 1997. I shall cite the relevant excerpt:

"We have received a counterclaim from Fletchers alleging negligence on our behalf. Items that Connell Wagner listed below we would like your comments on."

Then follows a series of items. Now, I interpolate. The letter addressed to a subcontractor from LMM was quite plain on its face. There was no attempt by subterfuge or enticement to ascertain whether Connell Wagner would be favourable or unfavourable. Furthermore, it was in respect of the counterclaim made by FCA, namely, that LMM had been negligent. LMM, in the face of that allegation, was entitled to seek evidence in rebuttal from as far and as widely as possible. What then happened was this: Connell Wagner prepared a response to the letter and forwarded it to FCA for endorsement, information, or approval.

The draft letter from Connell Wagner does not contain any equivocation. It concludes:

"Connell Wagner reviewed sketches for mechanical plant enclosures. No final drawings were ever reviewed. Enclosures were to be similar to designs based on previously designed prisons."

FCA then wrote to Connell Wagner on 18 April 1997, noting the contents of Connell Wagner's letter and said in conclusion:

"Fletcher at this point is not prepared to provide consent to you to disclose any of the details regarding the services or the works to any third party including LMM."

This refusal to endorse or give consent was justified on the basis of a confidentiality provision in the consultant agreement between Connell Wagner and FCA.

The matter did not relate to anything of a confidential nature in the contractual terms between Connell Wagner and FCA. Rather, it concerned the performance of a party, which was outside the scope of that agreement. Although the confidentiality clause is very widely phrased as if to capture all subcontractors, in my view, it could not, as a matter of public policy, extend to attempting to prevent a subcontractor giving evidence for another subcontractor in respect of a building project.

I must confess that I have not exhaustively examined this matter of public policy. However, it must be that the freedom of expression of a witness should not be curtailed, especially in respect of a matter which does not affect the financial welfare or otherwise, of the proposed witness and could potentially distort the evidence available to a court, so that it may adjudicate upon matters of fact.

Therefore, I consider Connell Wagner's decision to desist from sending its draft reply to LMM to be unfortunate lack of spine. However, I find the conduct of FCA, in seeking to pressure (to put it at its lowest) its subcontractor (Connell Wagner) to comply with its wishes in respect of litigation to which it was a party and the subcontractor was not, to be an extremely unfortunate example of the exercise of market power and influence. Accordingly, I find that the fourth ground upon which indemnity costs are sought is made out. The conduct of the defendant during the course of these proceedings, in warning off or intimidating potential witnesses who are likely to have been helpful to LMM, is a matter that I am entitled to take into account in deciding whether or not indemnity costs should be awarded.

The fifth matter concerned the making of allegations which ought not to have been made and which were said to have been seriously harmful to Mr Marshall. That is, it was submitted that the pleadings contained reference to the fact that Mr Marshall had designed points in the prison cells from which prisoners had hanged themselves. Mr Marshall's evidence was that he did not design those hanging points.

The nature of the pleading is very serious indeed. It is nothing short of an allegation that Mr Marshall assisted in suicide or made suicide possible. That he, by his own conduct, was responsible or partly so for the taking of human life. Thus stated, it is plain to see that allegations of this kind should not be lightly made. However, if made, then they should be made out and, if withdrawn, then the appropriate contrition should be registered. None of that happened.

The fact is that Mr Marshall does not appear to have been materially harmed, or at least financially so, by the making of the allegation in that it did not receive any publicity in the various coronial inquiries. However, to the public mind, it is known that he was the architect of the prison and it is known that five prisoners killed themselves in a prison designed by him, which the defendant says he designed negligently. The seriousness of the allegation remains in the air and although it was not pursued at trial, it was made and, for a time, persisted with. It is far more serious than an allegation of fraud.

I should put on record now that the points from which those unfortunate prisoners hanged themselves are not features of Mr Marshall's design and he should not bear responsibility for them. It is said that the shower screens would not have had to be cut down if LMM had properly designed them in the first place. Be that as it may, I consider the allegation to be one of an extraordinarily hurtful kind, which was not validated at trial, thereby providing a ground upon which the plaintiff is entitled to costs upon an indemnity basis.

I understand that Mr Marshall was not a litigant in person and that it was his company which was retained to provide the architectural services. However, it would be foolish not to recognise that he was both the operative and alter ego of that company and that he was regarded, by almost everyone involved in the litigation, as an individual rather than just the representative of a company. Therefore, the embarrassment, hurt and oppressive nature of the allegations raised, although visited upon him, was also visited upon the company, one as to the other. Accordingly, the entitlement to indemnity costs upon that basis is sustained.

The sixth ground relates to the defendant's failure to accept the plaintiff's reasonable offers in writing to settle the proceedings. I am satisfied that this ground is not made out. I consider that the offers of settlement must be assessed in the context of the pleadings as they stood when the offers were made and not at the time of the ultimate dispatch of the case. That which is reasonable on Thursday may be perfectly unreasonable on Friday if there has been a change in circumstance. It must be borne in mind that an offer of settlement has a limited life-span. It is open generally for 14 days and, accordingly, the reasonableness of accepting or rejecting such an offer must be examined within that 14 day period and not in light of the ultimate result of the case.

I now turn to the separate and distinct matter of Dr Baigent's evidence relating to the windows. I refer to my judgment. Dr Baigent was taken on board by the defendant shortly before the trial commenced. This meant that the plaintiff was required to embark upon a search of a difficult and technical kind for contra expert evidence, which led to mounting costs. Dr Baigent's evidence was not accepted by the court and I refer to my reasons.

This trial involved pleadings and factual contentions which were without grounds. Accordingly, I am entitled to take into account the time at which they were raised as well as their nature in deciding whether or not they were without substance and, thereby, give rise to a possible entitlement to indemnity costs.

In this case, the pleadings sustained a number of permutations and amendments. Since its commencement, there has been strict judicial control of the case under the hand of Justice Byrne. Accordingly, in deciding the issue of costs, I must consider whether or not I should sever the various periods for which the case has been under judicial supervision or in the lists, or to regard it as a global matter. I am satisfied that no useful purpose would be served by attempting to sever the periods since the issue of the proceedings and that the costs involved up until today, subject to the various claims I will hear later, are best considered globally.

It follows from what I have just said that, in exercising my discretion, I must examine in my mind whether or not costs should be awarded upon an indemnity basis or upon any other basis. I am cognisant of the substantive rule which commences from the proposition that an unsuccessful party pays costs upon a so-called party and party basis and that there must be circumstances beyond the usual which would warrant the granting of a more extensive order. I am aware of the judgment of Sir Robert Megarry in EMI Records Ltd v Ian Cameron Wallace Ltd [1983] Ch. 59 which examines these bases and permutations of the law, but that case is almost 20 years old. There have been developments in the commercial law since, to which the judgments previously cited above make reference.

I am of the view that where a plaintiff, who has sought to recover moneys due under a professional contract, is required to defend a counterclaim alleging negligence, incompetence and incompleteness on its part, which has resulted in the incurrence of millions of dollars in costs, in circumstances where none of the claims or grounds raised by the defendant have been established at trial, and indeed where some proved to be vacuous, the plaintiff cannot have its victory liquidated by a costs order which does not address the real costs burden.

Considering the reasons and conclusions already enunciated by me, I am satisfied that, in the exercise of my discretion, I should order that the defendant pay the plaintiff's costs upon an indemnity basis in the terms of the draft order.

I shall refine this order once I have heard argument concerning any outstanding matters of reserved costs and submissions pertaining to any other cost applications the parties wish to make.

Lines MacFarlane & Marshall Pty Ltd v Fletcher Constructions Australia Limited

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Judgment (51 paragraphs)

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