Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service

Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service - [2010] NSWSC 1139 - NSWSC 2010 case summary — Zoe

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00/34949 Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service (No 3) JUDGMENT 1 His Honour: On 23 July 2008 I delivered reasons for the order that the fifth amended statement of claim be dismissed. On 7 July 2009 I delivered reasons for the determination of the various claims under the cross-claim. 2 These reasons relate to the determination of the outstanding question of costs of the whole proceedings, including the cross-claim. 3 By its further amended notice of motion filed 2 February 2010 Area Health sought costs orders against Macquarie, principally that costs be paid on an indemnity basis. Additional orders were sought that non-parties, Dr T R Wenkart and/or Macquarie Health Corporation (MHC), should also be liable for costs payable by Macquarie. 4 Area Health contended that the court's discretion should be exercised to reflect its contractual rights under the 96 agreements to indemnification for costs. Further, and in the alternative, it contended that Macquarie's conduct at trial in maintaining the allegations concerning the promotion of the Sydney University Private Hospital (SUPH) and misrepresentations as to collocation and redevelopment was so unreasonable as to justify an order for indemnity costs. Alternatively, indemnity costs orders were sought in respect of the amended statements of claim and related applications, compliance with notices to produce and subpoenae issued by Macquarie, and in respect of issues abandoned by Macquarie. 5 Macquarie accepted that it should be ordered to pay Area Health's costs of the proceedings, including the cross-claim, on the ordinary basis, together with interest thereon at the prevailing rates. Otherwise, the costs claims were disputed. Indemnity under the 96 agreements 6 Area Health's primary claim was for a discretionary order for indemnity costs, as pleaded in par 44 further amended defence to the third further amended statement of claim. It relied on the following contractual provisions (the provisions):

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(F) Co-ownership deed: cl 15.2: "15.2 Each Co-Owner indemnifies the other Co-Owners against any liability or loss arising from, and any reasonable costs, charges and expenses incurred in connection with: (a) the payment, omission to make payment or delay in making payment of an amount under this deed by the indemnifying Co-Owner, or (b) an Event of Default where the indemnifying Co-Owner is the Defaulting Co-Owner". Under cl 18.6 the indemnity survives termination. 7 I have found that each of the 96 agreements were inextricably interrelated (par 646). I have also held (par 599) that Area Health had lawfully terminated the construction deed, the car park lease, hospital lease and car park sub-lease, and was lawfully entitled to re-enter on 17 March 2000 pursuant to the exercise of the contractual right to terminate under each of cl 7.3 of the construction deed, cl 16.3 of the car park lease, and cl 17.3 of the hospital lease. Submissions on the 96 agreements 8 The following is a non-exhaustive summary of what I understood to be the essential arguments of the parties. 9 Area Health put that the order for indemnity costs was justified on the ground that under the 96 agreements it was entitled to such costs, and in the exercise of its discretion the court should give effect to that entitlement. Reliance was placed on the principle in Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2) [1993] Ch 171 in which it was held (p 194) that ordinarily the court's discretion as to costs should be exercised so as to reflect the contractual right. It was submitted that in the circumstances of this case there was no reason why the court should not exercise its discretion in the ordinary way, and make an order for costs which fully reflected Area Health's entitlement under the agreements. 10 It was emphasised that the court's task is to interpret, and to give effect to, the relevant provisions rather than to embark on an analysis of costs rules operative when the agreements were made. It was submitted that as the agreements were interdependent, it was necessary to consider them together, and as a whole. In the circumstances preference is to be given to a construction which supplies a congruent operation to the various components of the whole. It was put that the relevant provisions overlapped. The indemnity under cl 7.8 construction deed, cl 16.8 car park lease, cl 17.8 hospital lease, and cl 15.2 co-ownership deed was confined to "any reasonable cost incurred". A similar limitation of reasonableness was contained in cl 17.1 car park lease and cl 18.1 hospital lease. 11 It was submitted that these provisions were expressed in clear and unambiguous terms, and upon their proper construction evidenced Macquarie's agreement to fully indemnify Area Health for its reasonable costs of the proceedings and, accordingly, the court's order should give effect to that entitlement. It was put that, taken in context as a category of "reasonable costs" the phrase "… legal costs and expenses on a solicitor and own client basis …" where appearing in cl 17.1 car park lease and cl 18.1 of the hospital lease indicates the common intention that such costs and expenses were to be assessed on the most generous basis which, under the Act and rules, is the indemnity basis. Reference was made to EMI Records Ltd v Ian Cameron Wallace Ltd [1983] Ch 59 where Megarry V-C said (p 65) that often orders for costs on an indemnity basis had been more or less equated with orders for costs as between solicitor and own client, and also to Bouras v Grandelis [2005] NSWCA 463; (2005) 65 NSWLR 214 (pars 18, 19) where Giles JA made an observation to the same effect. 12 Macquarie objected that the claim referable to the provisions had not been pleaded in the cross-claim, and had not been raised until pleaded in the further amended defence to the third further amended statement of claim. It was put that as it was a claim based on contract it should have been included in the cross-claim to avoid surprise. It was submitted that, in the circumstances, if the order sought was to be made, it should not operate prior to the date it was pleaded, being the 58th day of the trial. The submissions did not suggest that failure to plead earlier had any bearing on, or prejudiced in any way, Macquarie's conduct of its case. 13 Macquarie submitted that under the provisions Area Health was not entitled to recover costs equivalent to costs which would be recoverable under an indemnity costs order and, accordingly, such an order should not be made with regard to them. It submitted that under the provisions the onus was on Area Health to show that the costs claimed were reasonably incurred, whereas under an indemnity costs order all costs claimed were recoverable unless Macquarie proved they were unreasonable. Thus it was put that an effect of an order would be to reverse the onus of proof on the issue of reasonableness, thereby affording Area Health a benefit outside the provisions. Accordingly, it would be an inappropriate exercise of discretion to make an order which effectively relieved Area Health of that onus, and also imposed an onus upon Macquarie to demonstrate unreasonableness, a result more favourable to Area Health than the contract provided. 14 Furthermore, it was put that as the provisions limited costs to "reasonable costs" the appropriate order was for costs on the ordinary basis. The argument was that, under s 3 of the Civil Procedure Act 2005, the ordinary basis for assessment of legal costs ordered to be paid means the basis of assessing costs under s 364(1) and (2) Legal Profession Act 2004. Under s 364(1) the costs assessor is required to consider whether it was reasonable to carry out the work to which the costs relate; whether the work was carried out in a reasonable manner; and what is a fair and reasonable amount of costs for the work concerned. Thus the primary consideration when assessing costs on the ordinary basis is whether they are reasonable costs, a requirement equivalent to that provided under the agreements. 15 In support, attention was drawn to the contrasting provisions for assessment of costs on an indemnity basis. Under s 364(4) Legal Profession Act 2004, where costs are to be assessed on an indemnity basis, the costs assessor must assess on that basis, having regard to any relevant rules and regulations. The relevant rule is UCPR r 42.5(b) which requires that all costs (other than those that appear to have been unreasonably incurred or appear to be of an unreasonable amount) are to be allowed. 16 It was argued that, for the purposes of assessment there was a difference in onus i.e. where there is an order for costs on the ordinary basis, the onus is on the receiving party to show costs have been reasonably incurred; where there is an order for indemnity costs, the onus is on the paying party to show costs have been unreasonably incurred (Bouras par 119; Kumagai Australia Finance v Avarton Ltd (Supreme Court of New South Wales, Bryson J, 7 June 1991, unreported). 17 Macquarie's next challenge was on the ground that the provisions were not uniform, and their terms were not plain and unambiguous. The submission was that each clause had its own sphere of operation, was not in identical terms to the others, and the extent or application of each differed from the others. It was put that analysis demonstrated that none supported the imposition of the global order sought by Area Health. The analysis was as follows:

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(a) the Tenant indemnifies the Landlord against any liability or loss arising and any reasonable cost incurred (whether before or after termination of this deed) in connection with the Tenant's breach of this deed and the termination of this deed including the Landlord's loss of the benefit of the Tenant performing its obligations under this deed from the date of that termination until the Terminating Date; and (b) the Landlord must take reasonable steps to mitigate its loss." 20 Macquarie accepted that these provisions indemnify Area Health in respect of reasonable costs incurred in connection with the tenant's breach and termination of each lease or deed. It accepted, correctly, that the words used are of wide import and meaning, and extend to Area Health's costs in defending Macquarie's claim that the agreements were wrongfully terminated. 21 The language of the provisions is plain and unambiguous. The word "indemnifies" implies making payment for the loss suffered or costs incurred, which is to say the whole loss or costs. However, in this case the extent of the amount payable for costs under the indemnity is expressly limited to "… any reasonable costs" incurred in connection with breach and/or termination. Thus the amount recoverable under this indemnity is limited to any reasonable costs, that is to say, quantification of liability is to be undertaken with regard to the reasonableness of the costs claimed. It follows, in my opinion, as a matter of construction, that costs which are unreasonably incurred are not recoverable. 22 Area Health relies on the principle in Gomba (p 194) that where there is a contractual right to costs, the discretion should ordinarily be exercised so as to reflect that contractual right. Nevertheless, it is to be kept in mind that a court is not bound to give effect to any extra curial contract as to costs when exercising its discretion to award costs, and the order for costs continues to be at the discretion of the court (Abigroup Ltd v Sandtara Pty Ltd [2002] NSWCA 45, par 9; Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87, par 14). 23 The preliminary question is whether an order for indemnity costs would reflect, or correspond with, the contractual right. Its determination requires consideration of relevant statutory provisions which are:

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Legal Profession Act 2004: "364 Assessment of costs - costs ordered by court or tribunal (1) In conducting an assessment of legal costs payable as a result of an order made by a court or tribunal, the costs assessor must consider: (a) whether or not it was reasonable to carry out the work to which the costs relate, and (b) whether or not the work was carried out in a reasonable manner, and (c) what is a fair and reasonable amount of costs for the work concerned. (2) In considering what is a fair and reasonable amount of legal costs, a costs assessor may have regard to any or all of the following matters: (a) the skill, labour and responsibility displayed on the part of the Australian legal practitioner or Australian-registered foreign lawyer responsible for the matter, (b) the complexity, novelty or difficulty of the matter, (c) the quality of the work done and whether the level of expertise was appropriate to the nature of the work done, (d) the place where and circumstances in which the legal services were provided, (e) the time within which the work was required to be done, (f) the outcome of the matter. (3) An assessment must be made in accordance with the operation of the rules of the relevant court or tribunal that made the order for costs and any relevant regulations. (4) If a court or a tribunal has ordered that costs are to be assessed on an indemnity basis, the costs assessor must assess the costs on that basis, having regard to any relevant rules of the court or tribunal and relevant regulations." 24 The process of assessment of legal costs payable as a result of a court order is governed by s 364 Legal Profession Act 2004. Under s 364(1) the costs assessor must consider whether or not the work was reasonable, and what is a fair and reasonable amount for the work concerned. In considering what is a fair and reasonable amount of costs in either case, the assessor may have regard to any or all of the matters specified in s 364(2). An assessment must be made in accordance with relevant rules and regulations (s 364(3)). These provisions govern the assessment of costs payable on either an ordinary basis or on an indemnity basis. 25 Additional provisions apply to the assessment of costs on an indemnity basis. The combined effect of s 364(4) and r 42.5(b) is that the assessor is to allow all costs other than those that appear to have been unreasonably incurred or to be of an unreasonable amount. 26 In Gomba (p 189) it was said "… Taxation is no more than a quantification machinery by means of which the recoverable amount of costs, disbursements, and expenses, etc is ascertained". Thus, where an order is made, quantification of the amount recoverable is undertaken by a costs assessor in accordance with the relevant statutory requirements. The yardstick imposed upon the assessor is reasonableness; safeguards as to reasonableness are entrenched in the legislation. 27 The assessment process on an indemnity basis under r 42.5(b) envisages objection by the paying party to an item claimed on the basis that it is unreasonable and, whether or not objection is taken, the assessor must consider whether the item is reasonable. The rule ensures that the amount recoverable from the paying party will not include unreasonable costs. 28 In my opinion, the analysis shows that the amount recoverable from the paying party under an order for indemnity costs will probably be substantially the same as the amount recoverable under the indemnity provision, cl 7.8 construction deed. Accordingly, I hold that an order for indemnity costs would reflect, or correspond with, Area Health's entitlement to indemnity under cl 7.8 construction deed, cl 16.8 car park lease and cl 17.8 hospital lease. 29 Regard to the other provisions (cl 18.1 hospital lease, cl 17.1 car park lease and cl 15.2 co-ownership deed) reinforce this conclusion. As the 96 agreements are interrelated and interdependent, these provisions should be given a commercially sensible and realistic interpretation, which supplies a congruent operation to the various components of each agreement taken as a whole. Their language too, is plain, unambiguous, and of wide import. Each applies in the circumstances of this case to provide a contractual entitlement to Area Health for all its reasonable litigation costs consequential upon, or in connection with, Macquarie's defaults which led to the termination of the 96 agreements. In my opinion, upon their proper construction, these provisions provide Area Health rights of recovery of extent similar to the indemnity under cl 7.8 construction deed and the similar provisions. 30 At the end of the day it must be recognised that these provisions evidence Macquarie's agreement to pay Area Health any reasonable costs and expenses incurred, leaving it open to Macquarie to demonstrate that an item claimed was unreasonable and not payable. 31 The contract requires quantification with regard to the reasonableness of the costs claimed. An order for indemnity costs requires quantification with regard to considerations of reasonableness under s 364(1) and (2) Legal Profession Act 2004 and the mandate under r 42.5(b) to disallow costs which appear to be unreasonable. The reality is that the extent of Macquarie's liability would be the same under the contract as it would be if an order was made. 32 Macquarie argued that there was no sufficient correspondence between Area Health's entitlement under cl 7.8 (and/or under the other contractual provisions) and an order for indemnity costs to justify the making of such an order. It was put that the effect of an order would be to reverse the onus of proof that the costs claimed were reasonable because under r 42.5(b) the onus was on Macquarie to identify costs which were unreasonably incurred, whereas under cl 7.8 the onus was on Area Health to prove that the costs claimed were reasonably incurred. 33 For the proposition that the rules for assessment under an order for indemnity costs imposed an onus of proof upon the paying party, support was sought from the observations of Bryson J in Kumagai which were considered by Santow JA in Bouras (par 119). 34 The provision which attracted Bryson J's attention was SCR Pt 52, r 28A which was in the following terms: "On a taxation on the indemnity basis, all costs shall be allowed except insofar as they are of an unreasonable amount or have been unreasonably incurred and any doubts which the taxing officer may have as to whether the costs were reasonably incurred or were reasonable in amount shall be resolved in favour of the receiving party."

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about which his Honour said (p 7): "By contrast there is the reverse presumption in r28A which directs that all costs should be allowed except insofar as they are of an unreasonable amount or have been unreasonably incurred and makes a strange departure from the ordinary approach to the decision of claims for money by providing that any doubt which the taxation officer may have as to whether the costs were reasonably incurred or were reasonable in amount should be resolved in favour of the party to whom the costs are to be paid." 35 In Bouras, Santow JA said (par 119): "As Bryson J pointed out in Kumagai (above), the distinction contemplated by the NSW, Victorian and South Australian Supreme Court Rules is essentially one of onus. Where there is an order for solicitor and client costs, the onus is on the receiving party to show that the costs have been reasonably incurred. Where there is an order for indemnity costs, the onus is on the paying party to show the costs have been unreasonably incurred; see also Alpine Shire Council v MHSC Transportation Services Pty Ltd (No 2) [2002] VSC 58. I note, however, that Megarry VC rejected this approach in EMI Records at 989: 'I do not think that it would be right to express this difference in terms of the burden of proof being shifted from the winner to the loser, though no doubt in many matters much of the argument during the taxation will proceed on these lines.'" 36 Part 52, r 28A has had no operation since 30 June 1994 (SCR Pt 52, r 52.1). No equivalent is contained in the assessment provisions presently in force. 37 The rule which was before Bryson J was significantly different to the legislation before me. I am unpersuaded that, as a matter of construction, the legislation with which this claim is concerned raises any question of onus, and I would adopt, with respect, the view of the Vice Chancellor referred to in the abovementioned passage from Bouras. I reject Macquarie's submission on the onus point. 38 I have not overlooked Macquarie's submissions that if an indemnity costs order is made it should not apply to costs incurred prior to the date of the pleading in which it was claimed, namely 2 March 2007, the 58th day of the trial. By par 44 further amended defence to third further amended summons the claim for a discretionary order for indemnity costs with regard to the provisions of the 96 agreements was pleaded. In my opinion, the pleading complied with the requirement under UCPR Pt 14, r 14.14(2)(a) for a party to plead specifically in a defence any matter which if not pleaded may take the opposing party by surprise. In any event, as far as I am aware, there is no requirement for a party to indicate prior to verdict that, if successful, a discretionary order for indemnity costs will be sought. During the hearing, Macquarie made no attempt to show that the failure to plead earlier had caused surprise or had in any way prejudiced the conduct of its case at any time. In the circumstances, the complaint provides no justification for limiting the scope of an order, and I reject it. 39 I hold that an order for indemnity costs would correspond with Area Health's contractual entitlements. In the exercise of discretion the court should ordinarily give effect to that entitlement. The remaining question is whether in the circumstances, Macquarie has demonstrated that the discretion should be exercised differently. 40 It is true that Area Health failed to prove an event of default under cl 2.2 car park lease, and failed in its claims under pars 7(b) and 7(c) of the cross-claim. However, as these issues occupied an insignificant part of the trial, in my opinion it is inappropriate to apportion costs as between particular issues in these proceedings. 41 No basis has been established to decline an order which gives effect to Area Health's contractual entitlements. Macquarie accepted that if Area Health's submissions on the indemnity provisions were accepted, the provisions would cover the costs of the cross-claim. Accordingly, I propose to order that Macquarie pay Area Health's costs of these proceedings, including the cross-claim, on an indemnity basis. The SUPH and collocation issues 42 Area Health relied on additional and alternative grounds for an indemnity costs order. It claimed that Macquarie's conduct in maintaining and prosecuting the issues concerning the SUPH proposal and the collocation misrepresentations was so delinquent as to justify an indemnity costs order for the entire proceedings. 43 The competing oral and written submissions under this head were extensive. Inclusion in these reasons of a comprehensive summary would require much time and would be of little purpose. A substantial part of these submissions consisted of analyses of the various lines of cross-examination of Dr Horvath and Mr Wallace, and matter going to the issue whether or not there was support, or any reasonable support, for the categories of questions put. Area Health sought to show that in many instances the cross-examination of these witnesses, including the trenchant attack on their credit, was unjustified. Macquarie's response was to argue, with detailed reference to the material relied upon by the cross-examiner, that the allegations made were neither untenable nor hopeless. Taken overall, Macquarie sought to demonstrate the existence of evidentiary support, either direct or by inference, which entitled it to prosecute the claim in respect of the SUPH proposal and the collocation misrepresentations. 44 At my request, on 30 August 2010, each party provided a written summary of argument fit for inclusion in these reasons. They will remain with the court file. However, on the approach I have taken in deciding whether an indemnity costs order should be made under this ground, I have found it unnecessary to set out these summaries. This is because I have taken the view that, for the purpose of deciding whether or not the issues had any prospects of success or forensic purpose, it may be assumed, without deciding, that there was arguable support for a particular question or line of questions. In other words, I consider the true contest to be whether the prosecution of the issues was relevantly delinquent, not whether any particular question or questions had some basis. 45 Area Health's general submission was that the allegations as to secret support for SUPH, and as to non-disclosure of redevelopment plans for Royal Prince Alfred Hospital (RPAH) were pursued without sufficient evidentiary support, and in circumstances where documentary evidence which negated them was available to Macquarie and its advisers before the allegations were raised, and of which they knew or ought to have known. 46 It was also put that had a reasonable and proper evaluation of Macquarie's case been undertaken by those advancing it, it would have been seen that the allegations raised only irrelevant issues. It was said that the evidence to hand demonstrated the hopelessness of Macquarie's case on reliance and causation based on grounds of concealment of involvement with SUPH, and on the redevelopment of RPAH. This evidence extended to the knowledge of Dr Wenkart and Mr Block of the truth, namely that at the time the 96 agreements were signed, they knew of the SUPH proposal and of the planned redevelopment of the site, and consciously accepted the associated risks, facts which, if considered, should have demonstrated the irrelevance of these issues. 47 Area Health also submitted that the allegations of misconduct against Dr Horvath and Mr Wallace, and the prolonged attack in cross-examination upon their veracity, were without justification, particularly as Macquarie lacked evidence capable of contradicting their denials and/or of proving a case of deceit and impropriety in relation to SUPH or the discovery process. 48 Area Health contended that, as the substantial part of the proceedings and related preparation had been taken up with issues which should never have been maintained, the indemnity costs order should extend to the entire proceedings. 49 The claim requires consideration of the well-known principles that a party should pay costs on an indemnity basis when it appears that an action has been commenced or continued in circumstances where the moving party, properly advised, should have known that it had no chance of success (Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Ltd (1988) 81 ALR 397, p 401; Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd (No 2) [2009] NSWCA 12, par 4); or where, for whatever reason, a party persists in what should on proper consideration have been seen to be a hopeless case (J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers (No 2) (1993) 46 IR 301; Chaina v Alvaro Homes Pty Ltd [2008] NSWCA 353, par 108); or by making allegations which ought never to have been made, or where the case has been unduly prolonged by groundless contentions (Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225, p 232-234). 50 Area Health's claim necessitates reference to the parts of the judgment delivered 23 July 2008 (the judgment) which dealt with the SUPH and collocation issues. The core of Macquarie's challenge to the validity of the default notices and the notices of termination was that they were issued in breach of the contractual requirements of utmost good faith. That aspect of the proceedings was dealt with in the judgment at pars 561-602. A summary of Macquarie's submissions at trial are at pars 563-567. They were to the effect that: "11. … by reason of the conduct of Area Health in breach of the requirement to act in utmost good faith, Area Health impeded and undermined Macquarie in its performance with the consequence that Area Health is precluded from asserting any rights to terminate the leases and the construction deed at the time the notices were issued." 51 Its case was based upon Area Health's conduct, principally through Dr Horvath and Mr Wallace, during the period of operation of the HOA until 2 December 1996, and thereafter during the period of operation of the 96 agreements under which the notices were issued. I summarised its case in the judgment as follows: "16. In short, Macquarie's case was that in the period from 1994 to 2000 Area Health's conduct was in breach of the condition under the Heads of Agreement (HOA) and the 96 agreements to act in utmost good faith, and caused or contributed to its defaults and difficulties. In essence, it was put that Area Health wrongfully failed to disclose information which would have affected important decisions to be made by Macquarie in performance of the agreements. It was alleged that Area Health failed to disclose the decision it made in December 1994 to locate all clinical services at RPAH on the eastern side of Missenden Road. It is also alleged that Area Health failed to disclose its knowledge from about mid-1994 of discussions as to the possibility of the construction of a private hospital on University land adjacent to RPAH, and its encouragement and support for such proposal.

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Macquarie also claimed that, over many years, Area Health's chief executive officer, Dr Diana Horvath deliberately concealed this information for the purpose of undermining Macquarie's capacity to perform its contractual obligations, and thereby contrived the circumstances in which Area Health exercised its powers to issue the default notices and termination notices." 52 I held (pars 589, 594) that the evidence provided no support for the proposition that Area Health contributed to the situation in which Macquarie found itself on 30 June 1999, or otherwise acted in breach of its utmost good faith obligations. Relevant to that conclusion were the findings (par 579) that Macquarie was made aware of the proposal to redevelop the RPAH campus and of the SUPH proposal, and was in no doubt, to the extent it wanted to know, of the significance to it of that information. 53 With regard to the circumstances of the making of the 96 agreements I found: "254. There is ample evidence which established that, during the negotiations, Macquarie knew that Area Health proposed a major redevelopment of the RPAH campus, and a car park on a site behind by KGV. Dr Wenkart and Mr Block accepted as much. It is unnecessary to determine precisely when either first became aware of it, or the extent of the information each had. Nevertheless, its relevance had been drawn to Macquarie's attention early on. The Dresdner letter of 29 July sought details of government plans for RPAH; at the meeting on 30 September Mr Block and others were told of the amount to be spent on capital works on the RPAH campus, and of the need for a car park site behind KGV; in the Coopers & Lybrand report of 3 October Mr Anderson gave details of information from Dr Horvath and Mr Wallace of the proposal to rebuild and modernise facilities. Mr Block recognised the situation in his letter of 12 November to Mr Puplick and, thereafter, it was referred to in the memorandum of understanding of 18 November, and related correspondence, including Dr Horvath's letter to Dr Wenkart of 27 November. In his letter of 20 December to Area Health's solicitors, Dr Wenkart noted that master plan requirements for the car park site and the "PAPH relationship" were still unresolved. … 258 In my opinion, had Macquarie given reasonable consideration to the information which it accepted it had at the time, it would have been left in no doubt of the high probability of significant change to previous planning proposals … I find that in signing the agreements Dr Wenkart and Mr Block acted on their own appreciation of the situation and the commercial gains to come rather than on the faith of representations (if any) made by Area Health about the campus. 259 With regard to the SUPH proposal, I find that Mr Block and Mr Klinger were told of it by Mr Puplick on 8 November. There is ample evidence that Macquarie perceived it to be a threat to its commercial viability. However, there was no evidence of enquiry made to ascertain details of the proposal from Area Health, the University or anyone else. It was not suggested that any such enquiry would not have been answered. Mr Block's concern to protect Macquarie under the agreements is demonstrated by his letter to Mr Puplick of 30 November, in which he explained the deletion of the word "Rent" from cl 23.5 hospital lease in an attempt to have the restraint operate from 1 December 1996, being the "Commencement Date" as defined. His letter reflects careful consideration and understanding of the terms of the documents, as well as an appreciation that the SUPH proposal posed a risk of competition, and a risk to obtaining finance for the project. … 261 Claims made by Macquarie that it was forced into agreements which were not understood, or were made in circumstances which were unconscionable, were negated by the evidence, and must be rejected. There can be no doubt that Dr Wenkart and Mr Block signed the documents relying upon their judgment that it was in Macquarie's best commercial interests that they should do so, and in preference to proceeding with the arbitration. In their evidence earlier referred to each acknowledged that they signed the documents fully aware of, and willing to accept, the risks which might occur including those arising from the redevelopment of the RPAH campus and the SUPH proposal." 54 With regard to Macquarie's financial arrangements and SUPH I said: "390 It was Macquarie's submission that whilst the SUPH proposal remained alive, Macquarie was impeded in obtaining finance for its project. This, of course, was the very risk identified by Mr Block in his letter to Mr Puplick of 30 November 1996, and which Macquarie accepted when the 96 agreements were signed. … 394 Mr Block, in cross-examination, said that during 1998 he approached Macquarie Bank without success. He gave no reason for this result, although he indicated that it may have been due to the reputation of MHC in the financial markets. He gave no evidence that funding had been refused by reason of the SUPH project. I was unable to find any evidentiary support for the claims in his letter of 23 January. They appear to be inconsistent with the views expressed in the feasibility study about the project. … 397 Dr Wenkart's evidence in cross-examination was that, until about August 1998 when settlement with the Australian Tax Office was achieved, funding was neither needed nor sought, and no financier would have dealt with Macquarie in order to fund the project. Mr Morrison gave similar evidence. … 399 Macquarie called no evidence from anyone who declined to provide, or to arrange for the provision of, funds for the MPH project.

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400 Analysis of the evidence, in my opinion, provides no support for a finding that the existence of the SUPH proposal impeded Macquarie in its search for, and obtaining, finance for its project at any time." 55 With regard to the scope of the SUPH issue advanced by Macquarie I observed: "600 It was a substantial part of Macquarie's case that from about March 1994 Area Health, through Dr Horvath and Mr Wallace, promoted and supported the SUPH in disregard of Macquarie's contractual rights, endeavoured to keep those activities secret from Macquarie, and sought to undermine Macquarie's performance under the agreements. In advancing this case Macquarie attempted to establish that the evidence of Dr Horvath and Mr Wallace that they did not learn of a proposal by the University to build a private hospital before early October 1996 was false, and that they should not be accepted as truthful witnesses. Much time was spent cross-examining each of them with reference to documents including Dr Horvath's diaries and opinions received from Mr Heydon QC as to the scope of Area Health's obligations under the HOA. Subsequently it was put that Dr Horvath gave false evidence in order to hide what was claimed to be her encouragement and support for the SUPH which she knew at the time to be wrongful. 601 With regard to the reasons for which I have held that Macquarie failed to prove that Area Health did not act with utmost good faith under the 96 agreements I consider there is no purpose in recording an analysis of the evidence and submissions on these questions. The extent of the awareness, if any, of either Dr Horvath or Mr Wallace of a possible proposal for a University private hospital prior to October 1996 has been shown to be irrelevant to the outcome of the utmost good faith issue. Accordingly, I consider it inappropriate to pursue this, and the related issues described as the "conspiracy to promote the Sydney University private hospital", and "the concealment of documents" issues.

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602 … The correspondence and other documents concerning the negotiations from September 1996 which preceded the 96 agreements, and thereafter concerning the performance by the parties of them provided ample corroboration for their denials that they were engaged in deceiving Macquarie or in some other improper conduct against Macquarie's interests under the agreements. Macquarie's challenge to them as witnesses of credit is rejected." 56 The crucial question is whether Macquarie, properly advised, should have known that the prosecution of the issues concerning the SUPH proposal and the collocation misrepresentations had no chance of success and/or whether the proceedings were unduly prolonged by groundless contentions. 57 Before ventilating these issues Macquarie was obliged to properly evaluate their relevance, and prospects of success or failure. Macquarie, and its numerous advisers, were well positioned to make those assessments with regard to the vast body of documentary material available (particularly from January 1996 to the date of termination) and to the knowledge of the truth of persons such as Dr Wenkart and Mr Block who were involved in the project before and after the making of the 96 agreements. Elementary preparation for the commencement of the proceedings would have inevitably revealed the circumstances in which the agreements were signed and knowledge of the SUPH and RPAH redevelopment proposals. It is likely that such preparation would have demonstrated the absence of evidence necessary to make good Macquarie's charge that Area Health's conduct hindered the raising of finance and/or its performance under the agreements. 58 The documentary and oral evidence identified in the abovementioned passages from the judgment provide ample support for the conclusion that from the outset these issues had no prospects of success whatsoever. In my view had there been a reasonable evaluation of prospects with regard to the whole of the relevant material prior to commencement of the proceedings or, at least, during pre-trial preparation it should have become clear that the prospects of failure so outweighed those of success that the allegations should not have been made or, once made, should not have been maintained to the end. The allegations were grave and required cogent, not speculative, evidence to establish them. Charges of deceit and improper concealment of information were at the core of these issues. Mounting a case of this kind obliged Macquarie and its advisers to carefully evaluate the probative quality of the evidence proposed to be led, including the documentary evidence. Between them, Dr Wenkart and Mr Block had considerable involvement in all aspects of the project. Dr Wenkart was involved throughout, and must be taken to have been well aware of the true position as between Macquarie, himself, and Area Health from the time the HOA was signed until after Macquarie vacated the site on 17 March 2000. Had the documents been given due consideration it would have been seen that none corroborated, and many contradicted, the allegations. The available information was always sufficient to show that Macquarie was not a victim of the conduct alleged, either in entering the 96 agreements or in performance of its obligations under them. It is also reasonable to conclude that at all relevant times Macquarie was aware that it lacked evidence to show that Area Health's conduct contributed to its inability to finance the project. 59 The inability to demonstrate that the conduct, if established, induced entry into the 96 agreements and was detrimental to Macquarie, deprived pursuit of the allegations of any forensic purpose. I find that had there been due consideration of the documents and truthful information from Dr Wenkart and Mr Block, Macquarie and its advisers should have concluded that ventilation of these issues and the numerous sub-issues which they spawned could not assist it in its challenge to the validity of the notices of default and termination. In the result the contentions unduly prolonged the proceedings, increased their complexity and ought not to have been made. In short, even if established, they could go nowhere. 60 The substantial part of the hearing was taken up with Macquarie's case that Area Health had acted in breach of its utmost good faith obligations. Their prosecution gave rise to numerous procedural matters during the hearing, including amendments to pleadings and compliance with subpoenae. In my opinion, Macquarie's conduct in maintaining these issues would justify an indemnity costs order for the proceedings under the fifth further amended statement of claim, although I am unpersuaded that such an order should extend to the proceedings under the cross-claim. 61 Accordingly, if the order to be made with regard to Area Health's contractual entitlements were to be found wrong, I would propose an order that Macquarie pay Area Health's costs of these proceedings, excluding the costs of the proceedings under the cross-claim, on an indemnity basis. As for the costs of the cross-claim, I would propose an order that Macquarie pay Area Health's costs of the cross-claim on the ordinary basis. Macquarie's procedural conduct 62 In the event that it failed to obtain an indemnity costs order on the other grounds, Area Health sought such an order in respect of various procedural matters. Under this head orders were sought that Macquarie pay on the indemnity basis:

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(D) all costs expended by the defendant in preparation and hearing taken up with the issues abandoned or deferred by the plaintiff during submissions, being: deferral of the claims for damages for repudiation/loss of bargain; abandonment of the claim in unjust enrichment; abandonment of the claim in misleading or deceptive conduct; abandonment of the claim in negligence; abandonment of the claim for relief against forfeiture in respect of the hospital lease unless the change of use issue was resolved in the plaintiff's favour (which it was not)." 63 I have held that, with regard to its contractual entitlement, Area Health should be paid the costs of the proceedings, including the cross-claim, on an indemnity basis. Alternatively, with regard to the case referable to the SUPH proposal and the collocation misrepresentations, I have held that Macquarie should pay the costs of the proceedings, but not those of the proceedings under the cross-claim, on an indemnity basis. It follows that Area Health's costs incurred in relation to the procedural matters would be covered by the indemnity costs order contemplated by my findings. 64 In these circumstances I consider it unnecessary to record and analyse the evidence and submissions in respect of the separate and discrete procedural claims, or to embark upon the determination of them. However, in deference to the competing arguments it is appropriate that, without deciding, I express my tentative conclusion that Area Health's claims should be rejected. 65 It is well recognised that costs are awarded to compensate, not to punish. Absent demonstrable delinquency, a party's conduct of its case at trial would not attract an award of indemnity costs. It follows that the bona fide use by a party of court procedure in the conduct of litigation for the purpose of advancing or defending a claim would not attract such an order. For example in Lahoud v Lahoud [2006] NSWSC 126, Campbell J held (pars 38-40) that abandonment of a claim is not sufficient ground in itself to justify such an order unless shown to amount to an admission that the issue was hopeless. Also, in rejecting a claim for indemnity costs for the issuing of numerous subpoenae, his Honour (par 74) held that there was no satisfactory basis other than abuse of process for making any order for indemnity costs concerning any interlocutory procedures. 66 An overview of the evidence of the circumstances in which the procedures now complained of took place leaves me unpersuaded that in any particular instance Macquarie was guilty of the kind of conduct which would justify the making of an indemnity costs order. The claims against Dr Wenkart and MHC 67 Area Health sought orders that the costs ordered against Macquarie be paid by Dr Wenkart and/or by MHC, alternatively be paid by them to the extent they are not paid by Macquarie. 68 The court's jurisdiction is found in s 98(1) of the Civil Procedure Act 2005 which provides: "98 Courts powers as to costs (1) Subject to rules of court and to this or any other Act: (a) costs are in the discretion of the court, and (b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and (c) the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis." 69 The relevant rule which limited jurisdiction to order costs against a non-party was UCPR r 42.3. It provided: "42.3 Powers of the court generally

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(1) Subject to rule 42.27, the court may not, in the exercise of its powers and discretions under section 98 of the Civil Procedure Act 2005, make any order for costs against a person who is not a party. (2) This rule does not limit the power of the court: … (c) to make an order for payment, by a person who has committed contempt of court or an abuse of process of the court, of the whole or any part of the costs of a party to proceedings occasioned by the contempt or abuse of process, or (d) to make an order for costs against a person who purports, without authority, to conduct proceedings in the name of another person, or (e) to make an order for costs against a person who commences or carries on proceedings, or purports to do so, as an authorised director of a corporation, or (e1) in the case of proceedings in the Land and Environment Court, to make an order for costs against a person who carries on proceedings as a party's agent, or (f) to make an order of the kind referred to in rule 42.27, or (g) to make an order for costs in exercise of its supervisory jurisdiction over its own officers, including solicitors, barristers and court appointed liquidators." 70 Rule 42.3 was repealed on 7 May 2010. As a result the court is left with a wide discretion under s 98(1) to order costs not limited to parties on the record, a discretion which must be exercised judicially. 71 In its written submissions of 28 July 2010 Macquarie submitted that the repeal of r 42.3 did not operate retrospectively. It relied on s 30(1) Interpretation Act 1987 which includes: "30 Effect of amendment or repeal of Acts and statutory rules (1) The amendment or repeal of an Act or statutory rule does not: (a) revive anything not in force or existing at the time at which the amendment or repeal takes effect, or … (c) affect any right, privilege, obligation or liability acquired, accrued or incurred under the Act or statutory rule, or … (e) affect any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability or penalty, and any such penalty may be imposed and enforced, and any such investigation, legal proceeding or remedy may be instituted, continued or enforced, as if the Act or statutory rule had not been amended or repealed." 72 Macquarie submitted that Area Health's right to seek a costs order against Dr Wenkart and MHC, and the corresponding obligation or liability under any such order, was a substantive right, obligation, or liability which related to events which had occurred prior to the repeal on 7 May 2010. It was put that in these circumstances s 30(1) Interpretation Act 1987 operated to require determination of the costs question as if the rule had not been repealed. 73 The principles are well known. There is a presumption against retrospectivity to which statutes affecting procedure are an exception. A procedural statute is to be construed retrospectively, i.e. its application may relate to past events (Maxwell v Murphy (1957) 96 CLR 261, pp 267, 268, 285, 286; Rodway v The Queen [1990] HCA 19; (1990) 169 CLR 515, pp 518, 519; Habib v Nationwide News Pty Ltd [2006] NSWCA 14; (2006) 65 NSWLR 264, par 7). Changes to the power of a court to award costs have consistently been held to be changes in procedure and to operate retrospectively, in that it affects not substantive rights but merely procedure (Sykes v Queensland Gas Co [2009] QCA 163, pars 78-82). In Jackman v Dandenong Sewerage Authority (No 2) (1967) 20 LGRA 413, Barber J said (p 415): "… Where the general rule is that a statute changing the law will not be given retrospective effect in the absence of the clearest language demanding such an interpretation, there is a well-recognised exception in regard to statutes affecting procedure or costs merely, which are always retrospective unless the opposite effect is clearly stated. There is no vested right in procedure or costs … The weight of authority is so great that it is impossible at this date to question the rule". 74 Rule 42.3 regulated the manner in which the court was to exercise its powers and discretions under s 98 of the Civil Procedure Act 2005 in making any order for costs against a non-party. The effect of the repeal was to remove this regulation. No vested right of any party was affected. No right, obligation or liability arises until such time as an order has been made under the Act and applicable rules. Section 30(1) Interpretation Act 1987 does not assist Macquarie. "[The section] is clearly concerned with substantive rights or liabilities and says nothing about changes to procedure which do not, as the cases explain, give rise to such rights as are protected by the section" (Sykes par 83). 75 Accordingly, I conclude that the repeal was a purely procedural step, and nothing in s 30 Interpretation Act 1987 entitles Macquarie to require the court to proceed as if r 42.3 was still in force. Macquarie's submission on this question is rejected.

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Instructions by Dr Wenkart generally 14. Dr Wenkart was the officer of the plaintiff primarily responsible for giving instructions to the plaintiff's legal representatives on behalf of the plaintiff at all times after 12 June 2002. In doing so, Dr Wenkart gave instructions - personally or communicated by another person at Dr Wenkart's direction - to the Plaintiff's legal representatives on behalf of the Plaintiff after 12 June 2002 Instructions by Dr Wenkart during periods without solicitors 15. From 8 December 2006 to 5 January 2007 and again from 1 December 2007 to 7 March 2008, the Plaintiff did not appear in the proceedings by a solicitor. At all other times, the Plaintiff was represented in the proceedings by a solicitor. 16. Since the commencement of the proceedings in March 2000, the plaintiff's directors, and the respective periods during which they held office, were: (a) Dr Thomas Richard Wenkart - 13 September 1989 to 26 October 1999 and 12 June 2002 to date; (b) Geoffrey Albert Holden - 13 September 1989 to 22 August 2005; (c) David Mark Wenkart - 1 March 1999 to date; (d) William Kurt Wenkart - 12 June 2002 to date; (e) Edweana Kim Wenkart - 22 August 2005 to date; (f) Scott Thomas Wenkart - 22 August 2005 to date; (g) Alisten Joseph - 22 August 2005 to 3 October 2008; and (h) Sinnathambu Rajakumar - 10 October 2008 to date. 17. At no time did Dr Wenkart swear the affidavit provided for in UCPR 7.2. 18. From 8 December 2006 to 5 January 2007 and again from 1 December 2007 to 7 March 2008, Dr Wenkart, personally or communicated by another person at Dr Wenkart's direction, gave some instructions to the plaintiff's legal representatives. 19. On 8 December 2006, the plaintiff's solicitor filed and served a notice under UCPR 7.27 that the plaintiff had terminated his authority to act: A5/6. The notice provided that the plaintiff's address for service was thereafter 301 Catherine Street, Leichhardt, which was the plaintiff's registered office. The correspondence 8 Dec 06 4.33pm serving the notice on the defendant advised, similarly: "All future contact and correspondence should be directed to Macquarie International Health Clinic Pty Ltd at Level 1, 301 Catherine Street, Leichhardt, NSW, 2061." 20. Between 13 December and 19 December 2006, the following occurred: (a) On 13.xii.06, the plaintiff's junior counsel appeared before Nicholas J for directions. (b) On 14.xii.06, the plaintiff filed a Reply to Amended Defence to Third Further Amended Statement of Claim. Dr Wenkart signed the pleading as director. (c) On 18.xii.06 there was communication with the plaintiff's junior counsel to arrange an appearance before the Duty Registrar regarding a subpoena issue. (d) On 19.xii.06, the defendant's solicitor and plaintiff's junior counsel attended on the Duty Registrar. (e) On 19.xii.06, the plaintiff's junior counsel wrote to the defendant's solicitors regarding action being taken with respect to documents produced on subpoena. 21. A notice of change of address was filed on 4 January 2007. The next day, on 5 January 2007, Mr Hensley, solicitor, advised the defendant's solicitors that he was now acting for the plaintiff. 22. On 5 December 2007, MJ Lawyers served a Notice of Ceasing to Act dated 1 December 2007 for the plaintiff. 23. On 29 February 2008 the plaintiff's directors resolved (A5/213) that Dr Wenkart "is to be appointed to act and exercise power on behalf of the company relating to the legal matter of Macquarie International Health Clinic Pty Limited against Sydney South West Area Health Service." 24. Between 5 March and 10 March 2008, the following occurred: (a) On 5.iii.08, an unfiled Notice of Motion and affidavit of Dr Wenkart sworn 5 March 2008 was received by the defendant's lawyers. The address for service on the draft Notice of Motion was 301 Catherine Street and provision was made for it to be signed by Dr Wenkart in his capacity as director of the plaintiff. Dr Wenkart swore the affidavit before a Justice of the Peace, noting the plaintiff's address for service as 301 Catherine Street. (b) On 6.iii.08, Shane Moran of S Moran & Co signed a Notice of Change of Solicitor noting that he had been appointed as the solicitor for the plaintiff in the proceedings, which Notice was filed on 7 March 2008. (c) On 7.iii.08, the defendant's solicitors wrote to the plaintiff in relation to the Notice of Motion. (d) On 7.iii.08, Moran & Co filed a Notice of Motion on behalf of plaintiff, noting its Milsons Point address as the address for service. (e) On 10.iii.08, Moran & Co served the Notice of Change of Solicitor dated 6 March 2008 and filed 7.iii.08. The Plaintiff's assets 25. Excluding any interest in the leases which were the subject of these proceedings, the amount by which the assets of the plaintiff (in its own capacity) exceed its liabilities, is less than $1m. 26. Excluding any interest in the leases which were the subject of these proceedings, the amount by which the assets of the plaintiff (in a trustee capacity) exceed its liabilities, is less than $1m. 27. At all material times since 17 September 1989 the assets of the plaintiff have consisted solely of: (a) its rights as lessee or otherwise under the Project Instruments as defined in para 8 of the Fifth Further Amended Statement of Claim; (b) any rights to compensation pursuant to cl 16.9/17.9 of the car park and hospital leases." 77 On 31 August 2010 Area Health provided the document entitled "Statement of Further Facts in the Evidence" which included facts relating to payment of project costs by MHC and other related corporations, and to payment of legal costs of these proceedings. (The statement will remain in the court file.) Over Macquarie's objection I am satisfied these further facts could not be matters bona fide in dispute and, in any event, are either established on the evidence or should be taken to be admitted with regard to the references included in the statement. Those relevant to the present issue are the following: "13C. MHC assumed responsibility for payment of counsel's fees in the proceedings in mid-2006, and the requirement for monies in trust in advance was then waived by counsel: A5/97-103. 13D. Communications concerning termination of solicitor's retainer and payment of final invoice were with MHC: V5/109, 113, 116, 119, 127, 128. 13E. The plaintiff (but not Dr Wenkart or MHC) formally admits (no dispute of Notice to Admit Facts 5.viii.09 paras 6,7: A5/63, 69, 74) that from 12 June 2002 any legal fees of the plaintiff in the proceedings which were paid were paid by persons or entities other than the plaintiff, at the direction of Dr Wenkart and that Dr Wenkart sourced such payments. 14. (continued) The plaintiff (but not Dr Wenkart or MHC) formally admits (no dispute of Notice to Admit Facts 5.viii.09 para 3: A5/63, 69, 74) that at all times after 12 June 2002 no officer of the plaintiff other than Dr Wenkart gave instructions - personally or communicated by another person as directed - to the plaintiff's legal representatives on behalf of the plaintiff. The plaintiff (but not Dr Wenkart or MHC) formally admits (no dispute of Notice to Admit Facts 5.viii.09 para 4: A5/63, 69, 74) that, at all times after 12 June 2002, no officer of the plaintiff other than Dr Wenkart had authority to decide what instructions to give to the plaintiff's legal representatives on behalf of the plaintiff. 18. (continued) The plaintiff (but not Dr Wenkart or MHC) formally admits (no dispute of Notice to Admit Facts 5.viii.09 paras 10, 14: A5/63, 69, 74) that during these periods no officer of the plaintiff other than Dr Wenkart gave instructions - personally or communicated by another person as directed - to the plaintiff's legal representatives on behalf of the plaintiff. The chronology and steps taken during these periods is as follows. 19A. The letter of termination, produced on notice to produce, was on letterhead of MHC rather than the plaintiff, was signed by Dr Wenkart as MHC's chief executive and dated 5.xii.06, and it directed all files for the proceedings and another matter to be available to be released to Macquarie: A5/113. 19B. The plaintiff was then not represented by a solicitor but continued to brief existing junior counsel directly: A5/132, 133." 78 The judgment included the following general summary of the relationship between Macquarie, MHC, and Dr Wenkart: "18. Macquarie, at all relevant times, was a member of the Macquarie public group of companies of which the ultimate holding company was MHC which, as guarantor, was a party to the transaction documents. Through its subsidiaries, MHC developed and operated numerous private hospitals and health care facilities on a large scale, which included the provision of a wide range of clinical and related services. The majority shareholder in MHC was Traknew Holdings Pty Ltd as trustee for Traknew Holdings Trust, the family company and trust of Dr Thomas Wenkart and his family.

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Dr Wenkart, at all relevant times, was the chief executive and a director of Macquarie and related companies which, effectively, were his alter ego …" 79 From the agreed facts a further summary may be made. Traknew Holdings Pty Ltd is the holding company of MHC which, in turn, is the ultimate holding company of Macquarie. The A-D class shares in Traknew Holdings Pty Ltd are jointly held by Dr Wenkart and his wife as trustee for the Traknew Holdings Trust. Dr Wenkart is not a beneficiary of the trust. He holds the single X class share in Traknew Holdings Pty Ltd which allows him control of the company. It allows Dr Wenkart ultimate control of, but no beneficial interest in Macquarie, its shares (held by Brookicrest Pty Ltd) or its assets. 80 Macquarie was purchased as a shelf company and operated as a special purpose project vehicle for the RPAH project. Its financial liabilities were met by MHC and related companies. No payments were made by Macquarie or by Dr Wenkart personally. 81 Dr Wenkart was one of several directors of Macquarie, and was primarily responsible for giving instructions for the litigation. MHC paid Macquarie's legal costs. 82 On 28 March 2000 Windeyer J dismissed Macquarie's application for an interlocutory order for the return of the car park site to its possession. The present proceedings were commenced by statement of claim filed 10 April 2000 which claimed an order for possession, and damages. The fifth further amended statement of claim filed 2 May 2007 contained claims for possession, declarations that the default notices and termination notices were invalid and orders that they be set aside, relief against forfeiture, possession of the car park, and damages. 83 The proceedings included Area Health's cross-claim against Macquarie for the recovery of amounts payable under the construction deed and the car park lease, and for damages for loss and expense incurred in completing work which should have been carried out by Macquarie under the 96 agreements. Macquarie also claimed against Area Health for the recovery of monies spent in improving sites under the hospital lease. 84 Under the 96 agreements MHC guaranteed Macquarie's performance, and indemnified Area Health against all liability or loss arising from any breach by Macquarie. Doubtless these were benefits which Area Health at the time considered it prudent to require. The relevant provisions are cl 17 co-ownership deed, cl 8 construction deed, cl 20 car park lease, cl 7 car park sub-lease, and cl 21 hospital lease. Their terms are substantially similar. It is sufficient to refer to the following provisions in the construction deed: "Consideration 8.1 The Guarantor gives this guarantee and indemnity in consideration of the Landlord agreeing to enter into this deed. The Guarantor acknowledges the receipt of valuable consideration from the Landlord for the Guarantor incurring obligations and giving rights under this guarantee and indemnity. Guarantee 8.2 The Guarantor unconditionally and irrevocably guarantees to the Landlord the due and punctual performance and observance by the Tenant of its obligations: (a) under this deed; and (b) in connection with its construction of the hospital including the obligations to pay money.

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Indemnity 8.3 As a separate undertaking, the Guarantor unconditionally and irrevocably indemnifies the Landlord against all liability or loss arising from, and any reasonable costs, charges or expenses incurred in connection with, a breach by the Tenant of this deed, including a breach of the obligations to pay money. It is not necessary for the Landlord to incur expense or make payment before enforcing that right of indemnity." 85 By letter of 29 May 2003 Area Health's solicitors informed Macquarie's solicitors that they were seeking instructions to apply for substantial security for costs of the proceedings. However, no application was made. 86 Area Health submitted that Dr Wenkart and MHC were the real and effective parties to the litigation in that they played an active part in the institution, conduct, and/or funding of the proceedings. It was put that at all times Macquarie was a shell with no liquid assets available to meet a costs order, and should be seen as merely a nominal plaintiff and a "man of straw". 87 As to the case for an order against Dr Wenkart, it was submitted that throughout the proceedings he was the driving force behind MHC and Macquarie. It was put that it should be found he had a special personal interest in, or stood to benefit from, Macquarie's success in these proceedings by reason of (i) the shareholding of himself and his family in Traknew Holdings Pty Ltd, and (ii) the interrelationship of the financial and operational affairs of himself, MHC, and Macquarie. It was put that as he had the sole right to vote at general meetings Dr Wenkart had control of the constitution of the board which was empowered to declare dividends. He also had the sole power of removal and appointment of trustees, and of appointment of eligible beneficiaries, although the primary beneficiary was the Wenkart Foundation, a charitable organisation. 88 It was put that the measure of Dr Wenkart's dominance in relation to the affairs of the companies and, particularly, in the conduct of the litigation, was consistent with the history that from the outset in 1988 the project was his concept or "vision", and was carried out under his supervision, and funded from time to time at his direction. Extensive and detailed submissions referred to evidence which demonstrated Dr Wenkart's comprehensive involvement in all aspects of the project, including design and funding, to make the point that the Wenkart group of companies was operated in the interests of Dr Wenkart through Traknew Holdings Pty Ltd. Reference was made to payments of project costs by members of the group other than Macquarie e.g. by MHC, and sometimes by its subsidiary Macquarie Pathology Pty Ltd, and by Hapday Pty Ltd and Throvena Pty Ltd, subsidiaries of Traknew Holdings Pty Ltd. 89 It was put that at all relevant times Dr Wenkart was the person primarily responsible for instructing Macquarie's solicitors either personally or through others at his direction. Furthermore, reliance was placed on the fact that at times between December 2006 and January 2007 and December 2007 to March 2008 whilst Macquarie was without a solicitor Dr Wenkart instructed counsel, and otherwise acted as an authorised director of Macquarie (e.g. signing pleadings). 90 As for the case against MHC it was put that as Macquarie was (and remains), an under funded shell company it was reliant upon MHC for resources and funding. It was submitted that in reality Macquarie was established and operated as a project vehicle driven, controlled, and funded by, and the performance of which was guaranteed by, MHC. It was argued that, in these circumstances, Macquarie was MHC's agent as tenant, alternatively they were co-venturers in the project sharing a common purpose. Reliance was placed on the fact that Macquarie paid no costs for the project, such being paid by MHC and related companies earlier referred to. MHC's involvement in these proceedings was said to be demonstrated by the payments by it of Macquarie's legal costs and expenses, and acceptance of liability for them, and also the fact that Dr Wenkart's communications with legal representatives was usually on MHC's letterhead. 91 With reference to the guarantees provided by MHC it was submitted that they support a finding that MHC was a real party in that it necessarily had an interest in obtaining for Macquarie a successful outcome in these proceedings, thereby protecting itself against an adverse outcome. Furthermore, although Area Health allowed that the guarantees covered costs orders against Macquarie, it said that as liability had not been admitted, its prospects of a successful claim under the guarantees were uncertain and, accordingly, the existence of the guarantees should not tell against the making of the orders sought. 92 Area Health also submitted that the fact that no application was made for security for costs should not tell against it. As I understood the submission, an application was thought to be unnecessary because Area Health had the benefit of MHC's guarantees. Principles 93 I now turn to the principles which guide the court in the exercise of the discretion under s 98(1) Civil Procedure Act 2005. In Knight v FP Special Assets Ltd (1992) 174 CLR 178, Mason CJ and Deane J said (p 192, 193): "Obviously, the prima facie general principle is that an order for costs is only made against a party to the litigation. As our discussion of the earlier authorities indicates, there are, however, a variety of circumstances in which considerations of justice may, in accordance with general principles relating to awards of costs, support an order for costs against a non-party ... … For our part, we consider it appropriate to recognize a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made."

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and (p 203): "…True it is that in general costs are not awarded against non-parties, but that is because it is generally inappropriate to do so. But I see nothing in the rule to prevent it being done in the exceptional case where it is appropriate to do so." 94 In Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613 the Court of Appeal considered the question whether an order for costs should be made against a liquidator personally where he had commenced proceedings on behalf of a company in liquidation. Millett LJ said (p 1619, 1620): "It is not an abuse of the process of the court or in any way improper or unreasonable for an impecunious plaintiff to bring proceedings which are otherwise proper and bona fide while lacking the means to pay the defendant's costs if they should fail. Litigants do it every day, with or without legal aid. If the plaintiff is an individual, the defendant's only recourse is to threaten the plaintiff with bankruptcy. If the plaintiff is a limited company, the defendant may apply for security for costs and have the proceedings dismissed if the plaintiff fails to provide whatever security is ordered. The court has a discretion to make a costs order against a non-party. Such an order is, however, exceptional, since it is rarely appropriate. It may be made in a wide variety of circumstances where the third party is considered to be the real party interested in the outcome of the suit. It may also be made where the third party has been responsible for bringing the proceedings and they have been brought in bad faith or for an ulterior purpose or there is some other conduct on his part which makes it just and reasonable to make the order against him. It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified." 95 In Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39 a summary of the principles governing the proper exercise of the discretion included the following passage: "25. … (1) Although costs orders against non-parties are to be regarded as 'exceptional', exceptional in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. The ultimate question in any such 'exceptional' case is whether in all the circumstances it is just to make the order. It must be recognised that this is inevitably to some extent a fact-specific jurisdiction and that there will often be a number of different considerations in play, some militating in favour of an order, some against. … (3) Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party's costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is 'the real party' to the litigation, a concept repeatedly invoked throughout the jurisprudence (see, for example, the judgments of the High Court of Australia in Knight v FP Special Assets Ltd (1992) 107 ALR 585, (1992) 174 CLR 178 and Millett LJ's judgment in Metalloy Supplies Ltd ( in liq ) v MA ( UK ) Ltd [1997] 1 All ER 418 , [1997] 1 WLR 1613)." 96 Their Lordships referred with approval to the following passage from Arklow Investments Ltd v MacLean (High Court of New Zealand, Unreported, 19 May 2000): "[19] The guiding principle here is that costs orders against third parties are exceptional but that they are warranted in cases where there would otherwise be a situation in which a person could fund litigation in order to pursue his or her own interests and without risk to himself or herself should the proceedings fail or be discontinued.

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[21] … [T]he overall rationale [is] that it is wrong to allow someone to fund litigation in the hope of gaining a benefit without a corresponding risk that that person will share in the costs of the proceedings if they ultimately fail." 97 In FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 Basten JA (Beazley, Giles JJA agreeing) held: "210 … It is clear that the categories of case which may attract the exercise of the power are by no means closed, nor should they be. Nevertheless, the requirements of justice should not be allowed to expand an exception to the general rule, so as to undermine the rule itself. What is significant from a survey of the cases in which orders have been made against non-parties is that they tend to satisfy at least some, if not a majority, of the following criteria: (a) the unsuccessful party to the proceedings was the moving party and not the defendant; (b) the source of funds for the litigation was the non-party or its principal; (c) the conduct of the litigation was unreasonable or improper; (d) the non-party, or its principal, had an interest (not necessarily financial) which was equal to or greater than that of the party or, if financial, was a substantial interest, and (e) the unsuccessful party was insolvent or could otherwise be described as a person of straw… … 214 The criteria identified in Knight v FP Special Assets should not ultimately be treated as separate and independent factors. Each requires an evaluative assessment of factors which will clearly tend to interact. Nor should it be forgotten that the power is only to be exercised in exceptional cases. In many cases involving individuals in the superior courts the parties may lack the resources to meet the costs of the litigation if unsuccessful. Similarly, there will frequently be a non-party, be it a company officer or solicitor, who will be active in the conduct of the litigation and who will obtain some direct or indirect financial benefit from its success. The fact that it is entirely proper for legal practitioners to runs cases on a speculative basis [sic], so long as satisfied that they have reasonable prospects of success, demonstrates that care must be taken not to apply the criteria mechanically. Careful attention is required to the conduct of the party said to be involved in the litigation and the nature of the 'interest' in its outcome or subject-matter." 98 In Jeffery & Katauskas Pty Ltd v SST Consulting Pty Ltd [2009] HCA 43; (2009) 239 CLR 75 the High Court of Australia said: "43. The proposition that those who fund another's litigation must put the party funded in a position to meet any adverse costs order is too broad a proposition to be accepted. As stated, the proposition would apply to shareholders who support a company's claim, relatives who support an individual plaintiff's claim and banks who extend overdraft accommodation to a corporate plaintiff. But not only is the proposition too broad, it has a more fundamental difficulty. It has no doctrinal root." 99 A relevant consideration in the exercise of the discretion in the case where a plaintiff is an insolvent or impecunious corporation is that ordinarily an order for security for costs would be the appropriate remedy (Knight per Dawson J, p 204, McHugh J, p 217). Although not decisive, a failure to make an application for security for costs is a factor to be taken into account in determining whether it would later be just to make an order that a non-party to the proceedings pay the costs of a successful party (Vestris v Cashman (1998) 72 SASR 449, par 100). In Knight, it was said (Mason CJ, Deane J, p 191): "…The availability of an order for security for costs at an earlier stage of the litigation would, in many situations, be a strong argument for refusing to exercise a discretion to order costs against a nonparty …" Determination 100 The authorities show that although the categories of cases in which a non-party will be ordered to pay costs are not closed, the power is to be exercised in exceptional cases, that is to say, where the interests of justice requires departure from the prima facie general principle that an order for costs is only made against a party to the litigation. It is necessary to show that non-parties have a sufficient connection with the litigation which provides a proper basis upon which to award costs against them (Knight p 199). "… Careful attention is required to the conduct of the party said to be involved in the litigation and the nature of the 'interest' in its outcome or subject-matter" (FPM Constructions par 214). 101 The principles direct the enquiry towards the nature and extent of the non-party's involvement in the litigation. Although the impecuniosity of the plaintiff might explain such involvement, it is relevant to keep in mind that its inability to pay costs goes only to questions of security, there being no general rule that to prosecute proceedings without reasonable prospects of being able to meet an adverse costs order is an abuse of process (Jeffery, par 42). Accordingly, without discarding it as irrelevant, I have given little weight to the evidence of the conduct of Dr Wenkart and MHC, including the payment of Macquarie's liabilities, in relation to the carrying out of the project under the 96 agreements. 102 I turn first to the claim against Dr Wenkart. It cannot be disputed that he was the driving force behind Macquarie, and was its representative for the purpose of the litigation. I have earlier found that he was the chief executive and a director of Macquarie and related companies which, effectively, were his alter ego. He played a vigorous and active part throughout the litigation. Doubtless it was at his direction that MHC paid Macquarie's legal costs. He was an important witness. He effectively controlled Traknew Holdings Pty Ltd, Macquarie's ultimate holding company. 103 However, in my opinion the evidence of Dr Wenkart's involvement in the proceedings does not establish that he was, in substance, a real and effective party standing behind Macquarie. His conduct was consistent with the discharge of his duty as a director. Merely because, as a director, he was active, not supine, cannot be determinative, there being no scale of participation by which liability to a costs order may be ascertained. In my opinion, Dr Wenkart's involvement is properly described as of the kind commonly experienced in cases in which the litigation of a company with a sole director and shareholder is controlled by that person, who is ordinarily accepted as its alter ego. 104 Furthermore, it cannot be said that Macquarie was a nominal party to the claim and cross-claim. Had Macquarie been successful it would have been restored to possession of the sites under the leases. Had it obtained an award of damages or succeeded in its claim for payment under the cross-claim, the proceeds of judgment would have been the property of Macquarie. The proceedings overall concern disputed issues confined to the rights and obligations of Area Health and Macquarie under the 96 agreements. The benefit of a successful outcome for Macquarie would not, in law, flow to anyone else. The evidence did not support a finding that Dr Wenkart was using the litigation for his own purposes. In my assessment, the nature of the interest or benefit which he would have had in a successful outcome for Macquarie may reasonably be seen to be that of a director of Macquarie and of the other members of the group. 105 Accordingly, Area Health has failed to show that the involvement of Dr Wenkart in the litigation and the nature of his interest in its outcome were of such a kind as to justify the making of an exceptional order that the costs ordered against Macquarie be paid by him. Area Health's claim against Dr Wenkart is rejected. 106 With regard to the claim against MHC, the evidence was that MHC was Macquarie's parent, was a party to the 96 agreements as the guarantor of Macquarie's performance, paid the substantial part of Macquarie's costs and expenses incurred under the agreement, and paid Macquarie's legal costs in these proceedings. MHC and Macquarie operated as separate entities. A proposition that Macquarie entered into the 96 agreements, not on its own behalf, but on behalf of its parent MHC, would be untenable. As explained in e.g. Briggs v James Hardy & Co Pty Ltd (1989) 16 NSWLR 549, pp 556, 573-577; Al-Shennag v Statewide Roads Ltd [2008] NSWCA 300, pars 37-44, the fact that MHC was Macquarie's parent could not of itself create any relationship of agency, and the mere potential for, or fact of, the exercise of control by the parent over its subsidiary is insufficient. Also, in my opinion, the fact that its parent paid off Macquarie's liabilities from time to time does not support the conclusion that Macquarie operated as MHC's agent, and on MHC's account. It follows that, in my opinion, the relationship between MHC and Macquarie was not one of principal and agent. Area Health's submission to that effect is rejected. 107 I now turn to Area Health's submission that MHC was a real party by reason of an association with Macquarie akin to a co-venturer. It is undisputed that the relationship was close, and the driving force behind each was Dr Wenkart. Doubtless they had a common purpose in ensuring a successful outcome for Macquarie under the 96 agreements, and in these proceedings. 108 However these considerations, in my opinion, do not establish that MHC was the effective party in the conduct of these proceedings, and Macquarie was merely its nominee. The fact that Macquarie relied upon its parent to pay its legal costs does not alter that conclusion. As observed in Jeffery (par 42) a plaintiff's inability to pay costs goes only to questions of security. 109 MHC's involvement in the proceedings was dictated by Dr Wenkart, and extended to the payment of its subsidiaries' costs. It involved no impropriety. It could derive no benefit from the successful prosecution by Macquarie of its claims, or from any amounts recovered under the cross-claim. The prospect that, if Macquarie was unsuccessful, MHC may have been at risk under the guarantees is, in my opinion, not a reason for concluding that Macquarie was not the real party bringing the action. 110 It follows, in my opinion, that in the circumstances of this case it would not be appropriate to make an order that the costs ordered against Macquarie be paid by MHC. Area health's claim against MHC is rejected. 111 Additional considerations weigh heavily against a favourable decision for Area Health. 112 On 29 May 2003, three years after commencement of the proceedings, the making of an application for an order for security for costs was foreshadowed. However, no application was ever made. Area Health explained (T p 250, 251) that this was because it took the view that, under the guarantees and indemnities, MHC would be liable for any costs ordered against Macquarie, and thus it was questionable whether an order for security would provide additional comfort. 113 Of course, it was open to Area Health to seek an order for security for costs at any time during the running of the proceedings. The fact is that, at a relatively early stage, Area Health made a commercial and forensic decision to allow Macquarie to proceed with the litigation without provision of security on the basis that it was sufficiently protected under MHC's guarantees and indemnities should it obtain a costs order against Macquarie. So be it. In my opinion, there is no unfairness in leaving Area Health to make its claim against MHC under the guarantees and indemnities should Macquarie fail to pay the costs awarded against it. In these circumstances the interests of justice do not require that costs be ordered against the non-parties. Conclusion 114 As for the costs of these proceedings, in my opinion they are recoverable by Area Health under the contractual indemnities, and the discretion should be exercised to give effect to that entitlement. I propose to order that Macquarie pay Area Health's costs of these costs proceedings on an indemnity basis. 115 Area Health's claim for interest payable on costs and disbursements in terms of par 4 of the further amended notice of motion was not disputed. 116 Accordingly, it is ordered that:

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