Muscat v Qin

Supreme Court of NSW|2024-02-29|Before: McGrath J

INTRODUCTION

This judgment addresses the issue of costs following my judgment in Muscat v Qin [2024] NSWSC 113 (Principal Judgment). In the Principal Judgment, I dismissed an application for preliminary discovery brought under r 5.3 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) by the prospective plaintiff, Andrew Muscat, against the prospective defendants, Yuxin ("Bill") Qin and TA Tools Pty Ltd.
On the publication of my reasons in the Principal Judgment at the hearing on 15 February 2024, the defendants indicated that they wished to seek a special costs order to be determined by me on the papers. At that time, the parties agreed to provide written submissions on the question of costs to my Associate in accordance with an agreed timetable, which was then the subject of case management orders made by me on 20 February 2024.
This judgment determines the application of Mr Qin and TA Tools for an order that Mr Muscat pay their costs of the proceedings on an indemnity basis. I have undertaken that determination based on the parties' written submissions and the documents which were attached to those submissions.
This judgment assumes familiarity with and adopts the shorthand expressions and defined terms used in the Principal Judgment.

PRINCIPAL JUDGMENT

In the Principal Judgment, I declined to grant Mr Muscat an order for preliminary discovery of four categories of documents (out of the six categories originally sought in the summons, two of which were abandoned) said to be within the possession, custody or power of Mr Qin and TA Tools, being (Principal Judgment at [3]): (1) all bank accounts in which were recorded transactions to do with [TA Tools] recording all withdrawals, deposits, loans or records of interest between 1 January 2021 and 31 August 2022, although only the production of bank statements in print or soft copy were sought in answer to this category (amended category 2); (2) all records to do with [TA Tools] made in the "GALFIN" software program between 1 January 2017 and 31 August 2022 (category 3); (3) all communications which refer to [TA Tools] with the Australian Tax Office (ATO) between 1 January 2017 and 31 August 2022 (category 5); and (4) all records of payments by or on behalf of [TA Tools] to any superannuation fund between 1 January 2017 and 31 August 2022 (category 6).
Having regard to r 5.3 of the UCPR, and the five elements that an applicant must establish in order to enliven the court's discretion to make an order for preliminary discovery under that rule (Principal Judgment at [20] and [444]-[460]), I determined that Mr Muscat had comprehensively failed to demonstrate an entitlement to the order sought. In summary, my findings in respect of each of the five elements, the demonstration of all of which was crucial to the success of Mr Muscat's application, were as follows: 1. Mr Muscat failed to identify any claim for court-ordered relief against either Mr Qin or TA Tools that he may have been entitled to bring (Principal Judgment at [446]-[452]); 2. Mr Muscat failed to show that he had made reasonable enquiries to obtain sufficient information to decide whether to commence proceedings against Mr Qin and/or TA Tools (Principal Judgment at [453]); 3. Mr Muscat failed to demonstrate that, having made reasonable enquiries, he was unable to obtain sufficient information upon which to base a decision to litigate (Principal Judgment at [454]); 4. Mr Muscat, having brought an application in the nature of a 'wide-ranging "fishing expedition"', failed to show, positively or with any particularity, that Mr Qin or TA Tools may have had in their possession a document or thing that could assist in determining whether Mr Muscat had a viable claim for relief (Principal Judgment at [455]-[456]); and 5. Mr Muscat failed to demonstrate that the inspection of any such document or thing would assist him in deciding whether or not to commence proceedings against Mr Qin and/or TA Tools, in circumstances where it was evident that Mr Muscat had already in fact formed the impression (albeit mistakenly) that he had grounds to "su[e]" Mr Qin (Principal Judgment at [457]).
I determined, moreover, that even if these five elements were satisfied, the circumstances were such that I would refuse to make the order for preliminary discovery sought by Mr Muscat, there being a clear extraneous purpose underlying Mr Muscat's application: "getting Mr Qin to pay Mr Muscat more money" than he had received in the settlement of the Previous Proceedings (Principal Judgment at [459]).
That being so, I ordered that the summons filed by Mr Muscat be dismissed and that Mr Muscat pay the costs of Mr Qin and TA Tools (Principal Judgment at [461]).

Submissions of Mr Qin and TA Tools

Mr Qin and TA Tools advanced three arguments in support of their application for an indemnity costs order. Each of these arguments converge around their central contention: that the commencement and continuation of the proceedings by Mr Muscat amounted to unreasonable conduct of the kind justifying a departure from the usual position of costs being awarded on the ordinary basis and in turn an order for indemnity costs in their favour.
In summary, Mr Qin and TA Tools submit that: 1. Mr Muscat brought proceedings notwithstanding he had no chance of success and ought properly to have been aware of that fact (referring to Colgate Palmolive Co & Anor v Cussons Pty Ltd (1993) 46 FCR 225; (1993) 118 ALR 248 at 254), in circumstances where the deficiencies in his claim were fundamental, fatal, and the result of matters (such as a lack of precision in framing the categories of documents sought and that Mr Muscat already had access to the majority of the material described in the summons) of which he was aware, his attention having been drawn to those matters repeatedly by the defendants' solicitors in correspondence between the respective solicitors. 2. Mr Muscat commenced proceedings in pursuit of an ulterior motive, being the extraction of a greater sum of money from Mr Qin, and this was not merely an available inference (which, they observed, suffices to justify an order of indemnity costs: Colgate at 254 and 257) but a positive finding by the court (Principal Judgment at [457] and [459]). 3. Mr Muscat engaged in "impudent conduct" (which appears to be a mistaken reference to an "imprudent refusal of an offer to compromise" in Colgate at 257), consisting of his refusal of the defendants' "implicit invitation" to compromise and to avoid "costs consequences" (citing Mautray Pty Ltd v Pillemer Pty Ltd [2022] NSWSC 1315 at [19] per Williams J as authority for the proposition that the foregoing of legal expenditure already incurred is capable of constituting an offer of compromise, especially where the offer emanates from the defendant). In this, Mr Qin and TA Tools refer to letters dated 2, 10 and 28 November 2022 from their solicitors, DINA Lawyers, to Mr Muscat's solicitor, Mr McArdle, which they contend contained a "genuine compromise" (notwithstanding the absence of any explicit reference to Calderbank v Calderbank [1975] 3 All ER 333; [1975] 3 WLR 586) insofar as those letters raised the very bases upon which Mr Muscat's application was ultimately refused by the court; invited Mr Muscat not to commence proceedings; and communicated an intention to rely on this correspondence in connection with the question of costs should Mr Muscat decline that invitation.
Mr Qin and TA Tools argue that for these reasons, the present case involves exceptional circumstances such that the court's discretion to award indemnity costs is activated and an order of that kind is justified.
In the alternative, Mr Qin and TA Tools seek costs on the ordinary basis as proposed in the Principal Judgment (at 461).

Submissions of Mr Muscat

Mr Muscat has indicated that he does not oppose the order sought by the defendants "in the alternative", being an order that he pay their costs on the ordinary basis, but otherwise opposes their application for indemnity costs.
Referring to the court's power to make capped costs orders under s 98(4)(d) of the Civil Procedure Act 2005 (NSW) (CPA) and r 42.4 of the UCPR, Mr Muscat asks that the court: 1. if minded to award costs on the ordinary basis: make a special costs order limiting the costs recoverable by Mr Qin and TA Tools to $100,000; or 2. if minded to award costs on an indemnity basis: make a special costs order limiting the costs recoverable by Mr Qin and TA Tools to $185,000.
In opposing the application for an indemnity costs order, Mr Muscat directly refutes two of the three arguments raised by Mr Qin and TA Tools. Mr Muscat submits that: 1. It is not open to the court to find that he would or should have been aware that he had no chance of success on the summons, since my findings as to the extensive defects and deficiencies of the claim brought by Mr Muscat rested on oral evidence which either arose only at the time of the hearing or, in the case of affidavit and documentary evidence, to which I had the benefit of attending with "judicious concentration"; and 2. There was no relevant delinquency or imprudent conduct on the part of Mr Muscat consisting of a refusal of an offer of compromise of the kind alleged by Mr Qin and TA Tools, given that there was no valid Calderbank offer made by them. In particular, none of the correspondence upon which the defendants rely discloses such an offer.
I note that Mr Muscat's written submissions provide no direct answer to the remaining point made by Mr Qin and TA Tools in their submissions, which is that Mr Muscat's preliminary discovery application was brought in service of an ulterior motive.
In support of Mr Muscat's request for a special costs order capping the costs recoverable by Mr Qin and TA Tools, he directs me to the weight to be placed, in the exercise by the court of its discretion to award costs, on the furtherance of the overriding purpose of the CPA - to 'facilitate the just, quick and cheap resolution of the real issues in the proceedings' (s 56(1) of the CPA) - and on the objective to 'resolv[e] the issues between the parties in such a way that the cost to the parties is proportionate to the importance and complexity of the subject-matter in dispute' (s 60 of the CPA).
Mr Muscat refers to extracts of correspondence between the respective solicitors (annexed to the submissions), which, it is suggested, shed some light on how and why the proposed monetary limits ($100,000 for costs assessed on the ordinary basis and $185,000 for costs assessed on an indemnity basis) are appropriate, having regard to the respective efforts of the parties' legal representatives to negotiate an agreement on costs.

Submissions in reply of Mr Qin and TA Tools

Mr Qin and TA Tools provided submissions in reply to what was characterised as Mr Muscat's "seeming[] [request for] a gross sum costs order".
Those submissions have been crafted on the misapprehension that what was being sought by Mr Muscat is a gross sum costs order pursuant to s 98(4)(c) of the CPA. For that reason, I consider that they are largely irrelevant. I have not considered them further.

LEGAL PRINCIPLES

The principal statutory provision containing the court's powers as to costs is s 98 of the CPA, which relevantly states: (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. (2) Subject to rules of court and to this or any other Act, a party to proceedings may not recover costs from any other party otherwise than pursuant to an order of the court. (3) An order as to costs may be made by the court at any stage of the proceedings or after the conclusion of the proceedings. (4) In particular, at any time before costs are referred for assessment, the court may make an order to the effect that the party to whom costs are to be paid is to be entitled to - (a) costs up to, or from, a specified stage of the proceedings, or (b) a specified proportion of the assessed costs, or (c) a specified gross sum instead of assessed costs, or (d) such proportion of the assessed costs as does not exceed a specified amount. …
The discretion to award costs under s 98 of the CPA is broad and the section itself is to be construed liberally: Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11, Gaudron and Gummow JJ at [21]. The discretion is, however, subject to the rules of court, including the UCPR.
Rules 42.1, 42.2 and 42.4 of the UCPR relevantly provide: 42.1 General rule that costs follow the event Subject to this Part, if the court makes any order as to costs, the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs. 42.2 General rule as to assessment of costs Unless the court orders otherwise or these rules otherwise provide, costs payable to a person under an order of the court or these rules are to be assessed on the ordinary basis. … 42.4 Power to order maximum costs (1) The court may by order, of its own motion or on the application of a party, specify the maximum costs that may be recovered by one party from another. …
A number of observations regarding the exercise of the discretion to award costs made by McHugh J in Oshlack at [67]-[68] should be kept in mind, as summarised below: 1. An award of costs rests on fairness between the parties, with the unsuccessful party bearing the liability for the costs of the proceedings. 2. The primary purpose of an award of costs is to indemnify the successful party, not to punish an unsuccessful party because, had the proceedings not been brought, the successful party would not have incurred the expense of them. 3. As a matter of policy, one beneficial by-product of the compensatory purpose may well be to instil in a party contemplating commencing the proceedings a sober realisation of the potential financial expense involved.

Indemnity costs

A summary of the relevant principles relating to the discretion to award costs on an indemnity basis can be found in Cappello v HomeBuilding Pty Ltd [2023] NSWCA 109, a recent decision of the Court of Appeal of this court, in which Mitchelmore JA (with whom Simpson AJA and Meagher JA agreed) at [46]-[48] stated: 46 The Court has a discretion to award costs on an ordinary or indemnity basis. Usually costs will follow the event, unless the Court considers that some other order ought to be made: Civil Procedure Act 2005 (NSW), s 98; Uniform Civil Procedure Rules 2005 (NSW), r 42.1; Collier v Country Women's Association of New South Wales [2018] NSWCA 36 at [116] ("Collier"). 47 For an order of indemnity costs to be made, the conduct of the party against whom such costs are sought must usually exhibit some special or unusual feature: Collier at [117]. The focus is on the way the litigation was conducted: Mead v Watson [2005] NSWCA 133 at [8]-[9]. For example, the discretion may be enlivened where a party persists in what should have been seen to be a hopeless case, such as where the case was unduly prolonged by groundless contentions: Ferella at [36]; Liverpool City Council v Estephan (Executor and Administrator of the Estate of the late Jocelyn Estephan and Ors) [2009] NSWCA 161 at [93] ("Liverpool City Council"). It has also been said that indemnity costs may be awarded where the unsuccessful party's conduct was unreasonable or delinquent: Amirbeaggi v Matrix Group Co Pty Ltd [2021] NSWCA 21 at [18]. 48 The categories of circumstances in which the discretion may be exercised are not closed: Liverpool City Council at [93]. Ultimately, the question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on the ordinary basis: Liverpool City Council at [93].
As to the type of factors that favour the making of an indemnity costs order, the submissions of Mr Qin and TA Tools refer extensively to Colgate, a decision of Sheppard J of the Federal Court of Australia that was applied by Black J of this court in Re North Coast Transit Pty Ltd [2014] NSWSC 268 (at [5]). In Colgate, Sheppard J considered the circumstances in which the court may, in the proper exercise of its discretion, depart from the usual position that costs are awarded on a party/party basis (which is the same as the ordinary basis). Having canvassed the authorities (at 230-232 of the FCR version), his Honour proceeded to distil the applicable principles as follows (at 232-234): 1. … 2. The ordinary rule is that, where the Court orders the costs of one party to litigation to be paid by another party, the order is for payment of those costs on the party and party basis. […] In many cases the result will be that the amount recovered by the successful party under the Order will fall short of (in many cases well short of) a complete indemnity. 3. This has been the settled practice for centuries in England. It is a practice which is entrenched in Australia. Either legislation (perhaps in the form of an amendment to rules of Court) or a decision of an intermediate court of appeal or of the High Court would be required to alter it. […] 4. In consequence of the settled practice which exists, the Court ought not usually make an order for the payment of costs on some basis other than the party and party basis. The circumstances of the case must be such as to warrant the Court in departing from the usual course. That has been the view of all judges dealing with applications for payment of costs on the indemnity or some other basis whether here or in England. The tests have been variously put. The Court of Appeal in Andrews v Barnes (supra) at 141 said the Court had a general and discretionary power to award costs as between solicitor and client "as and when the justice of the case might so require". Woodward J in Fountain Selected Meats appears to have adopted what was said by Brandon LJ (as he was) in Preston v Preston (supra) at 637; namely, there should be some special or unusual feature in the case to justify the Court in departing from the ordinary practice. Most judges dealing with the problem have resolved the particular case before them by dealing with the circumstances of that case and finding in it the presence or absence of factors which would be capable, if they existed, of warranting a departure from the usual rule. But as French J said (at p 8) in Tetijo, "The categories in which the discretion may be exercised are not closed". Davies J expressed (at p 6) similar views in Ragata (supra). 5. Notwithstanding the fact that that is so, it is useful to note some of the circumstances which have been thought to warrant the exercise of the discretion. I instance the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud (both referred to by Woodward J in Fountain and also by Gummow J in Thors v Weekes (1989) 92 ALR 131 at 152); evidence of particular misconduct that causes loss of time to the Court and to other parties (French J in Tetijo); the fact that the proceedings were commenced or continued for some ulterior motive (Davies J in Ragata) or in wilful disregard of known facts or clearly established law (Woodward J in Fountain and French J in J-Corp (supra)); the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions (Davies J in Ragata); an imprudent refusal of an offer to compromise (eg Messiter v Hutchinson (1987) 10 NSWLR 525; Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724 (Court of Appeal); Crisp v Keng (unreported, Court of Appeal, NSW, Kirby P, Priestley JA, Cripps JA, No 40744/1992, 27 September 1993)) and an award of costs on an indemnity basis against a contemnor (eg Megarry V-C in EMI Records (supra)). Other categories of cases are to be found in the reports. Yet others to arise in the future will have different features about them which may justify an order for costs on the indemnity basis. The question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis. 6. It remains to say that the existence of particular facts and circumstances capable of warranting the making of an order for payment of costs, for instance, on the indemnity basis, does not mean that judges are necessarily obliged to exercise their discretion to make such an order. The costs are always in the discretion of the trial judge. Provided that discretion is exercised having regard to the applicable principles and the particular circumstances of the instant case its exercise will not be found to have miscarried unless it appears that the order which has been made involves a manifest error or injustice.
The authorities refer to the presence of some ulterior motive, and the fact that a party had no prospects of success in the proceedings (and ought to have been aware of that) yet persisted with the relevant claim regardless, as circumstances weighing in favour of an indemnity costs order. Some accounts explicitly yoke these two factors together, as in Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 where Woodward J, at 401, said: I believe that it is appropriate to consider awarding "solicitor and client" or "indemnity" costs, whenever it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law. …
On the relevance of a party's ulterior motive in prosecuting proceedings, Davies J's remarks in Ragata Developments Pty Ltd v Westpac Banking Corporation (1993) 217 ALR 175; [1993] FCA 115 are instructive. At [8], his Honour observed that (citations omitted): The very nature of the award of costs on an indemnity basis gives a guide to the type of case in which such an award is appropriate. Thus, indemnity costs may be awarded where unsuccessful proceedings have been brought and prosecuted, not for the bona fide purpose of protecting and enforcing a legal right, but to achieve an ulterior or extraneous purpose.
Along similar lines, in Liverpool City Council v Estephan Estephan (Executor and Administrator of the Estate of the late Jocelyn Estephan & Ors) [2009] NSWCA 161, Giles JA at [94] said: Where the proceedings were brought or continued for an ulterior motive or as an abuse of process, as in cases such as Baillieu Knight Frank (NSW) Pty Ltd v Ted Manny Real Estate Pty Ltd (1992) 10 ACSR 537, Ragata Developments Pty Ltd v Westpac Banking Corporation (Davies J, Fed C of A, 5 March 1993, unreported) and re Wilcox; ex parte Venture Industries Pty Ltd (1996) 141 ALR 727, or were brought when doomed to fail, as envisaged in Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 and found in many cases, the order can be expected to be as to the whole of the costs.
In the passage quoted above, Giles JA went so far as to suggest that those factors beget an expectation that costs will be awarded on an indemnity basis, as opposed to those matters only being relevant to the discretion to make such an award in the circumstances of each case (such as expressed in Ragata Developments by Davies J at [8]). In any event, the cardinal principle is that costs are in the discretion of the court and, in determining whether costs should be assessed on an indemnity basis, much will depend on the particular facts and circumstances of the case in question (Cappello at [48]).

Capped costs

In terms of the principles conditioning the court's power to make capped costs orders under s 98(4)(d) of the CPA, the authorities and available commentary focus on the operation of the other subsections of s 98(4). To the extent that it is possible to isolate the relevant principles which bear on the exercise of the power under s 98(4)(d) specifically, I have attempted to do so below.
The following general observations provide a useful starting point: 1. Firstly, the courts have not had a practice of capping the quantum of costs recoverable in proceedings, a capped costs order will be very rare and will not be made lightly: Jvancich v Kennedy (No 2) [2004] NSWCA 397 per Giles JA at [6]; Re Sherborne Estate (No 2) [2005] NSWSC 1003 per Palmer J at [42]; Friend v Brien (No 2) [2014] NSWSC 614 per White JA at [22]-[24]; McGrath v Mestousis (No 2) [2018] NSWSC 32 per Darke J at [25]-[26]; Ritchie's Uniform Civil Procedure NSW at [s. 98.55]. 2. Secondly, there needs to be a legal and evidentiary basis for the exercise of the court's power under ss 98(4)(d) to impose a limit on recoverable costs: Ritchie's at [s. 98.55]. At the very least, the court must be able to make an informed assessment as to the appropriateness and extent of any cap in contemplation, in light of the costs actually incurred and their reasonableness and proportionality vis-à-vis the subject matter of the proceedings: Jvancich at [6]; Sherborne at [41]-[42]; Friend v Brien at [24]-[26]. 3. Thirdly, and relatedly, the evidence and material before the court must enable the court to determine that costs have in fact been improperly or unnecessarily incurred. The bulk of the authorities indicates that capped costs will generally only be ordered where the costs actually incurred by the successful party are disproportionate, excessive and/or extravagant: Sherborne at [41]-[42]; Nudd v Mannix [2009] NSWCA 327 per Handley AJA (with whom McColl and Macfarlan JJA agreed) at [23]-[27]; Baychek v Baychek [2010] NSWSC 987 per Ball J at [25].
On the purposes to be served by a capped costs order, Ball J in Baychek said at [25]: … Where the court makes an order capping costs, the effect of the order, if it is to have any effect at all, will be to limit the amount that the costs applicant can recover on assessment to the amount of the cap. To put the point another way, the cap will normally be fixed at an amount that is less than the amount that it might reasonably be expected that the costs applicant will recover on assessment. Were it otherwise, there would be no point in fixing the cap in the first place. If the court makes an order fixing costs at the cap - and the cap is a true cap - the effect of that order is to permit the costs applicant to recover costs without the need for assessment but still to limit the amount that the costs applicant might otherwise expect to recover on assessment. The advantage, then, of fixing costs in this way is that the amount fixed still operates as a cap but it does so in a way that makes assessment unnecessary. In doing so, it gives effect to the overriding purpose identified by the CPA s 56 - that is, to facilitate the just, quick and cheap resolution of the proceedings. In fixing costs as a cap rather than as a substitute for an assessment, it seems to me that the court should take into account the same matters that it takes into account in determining an appropriate cap. That is, what the court must be satisfied of is that the costs are excessive having regard to matters such as the nature of the case, […] and the amount that the costs applicant has recovered and could reasonably be expected to have recovered at the time proceedings were commenced. If the court is satisfied that the costs are excessive, then it will need to determine what amount to fix. But, as I have said, the nature of that enquiry seems to me to be no different from an enquiry concerning what amount to fix as a cap. …

No chance of success and ulterior motive

In all the circumstances, I am satisfied that Mr Qin and TA Tools are entitled to have their costs paid on an indemnity basis. This determination is based on my view that Mr Muscat's conduct in pursuing these proceedings was "unreasonable" and "delinquent" in the relevant sense, justifying an award of costs against him on an indemnity basis (Capello at [47]).
The following factors, to my mind, compel this conclusion: 1. The proceedings brought by Mr Muscat were hopeless in a very real sense. The reasons for their dismissal as expressed in the Principal Judgment at [444]-[460] demonstrate why they should be characterised in this way. Paraphrasing what was said by Woodward J in Fountain Selected Meats, I think that it is appropriate to describe Mr Muscat's application as having been commenced and continued in circumstances where he, properly advised, should have known that he had no chance of success. It does not matter that the conclusions in the Principal Judgment were reached after cross-examination of Mr Muscat at the hearing and arise from my consideration of the affidavit and documentary evidence for the purposes of preparing the Principal Judgment. My conclusion is that Mr Muscat's application was hopeless from the outset. It does not involve any application of hindsight on my part to make that finding. 2. In the letters dated 2, 10 and 28 November 2022 from DINA Lawyers to McArdle Legal, Mr Qin and TA Tools repeatedly told Mr Muscat multiple reasons why his proposed preliminary discovery application was bound to fail, stated that they were incurring costs dealing with his pre-application requests and said that if the preliminary discovery application did fail, they would rely on those letters on the question of costs. Mr Muscat proceeded with his preliminary discovery application regardless of these warnings. This was unreasonable conduct on his part. 3. In the Principal Judgment at [459] I found that even if Mr Muscat had satisfied the five elements required under r 5.3 of the UCPR, as a matter of discretion under that provision I would refuse the application for preliminary discovery because it had been brought for the extraneous purpose of getting Mr Qin to pay Mr Muscat more money than he had received in settlement of the Previous Proceedings. I consider that this amounts to the bringing of the application for an ulterior motive in the sense expressed in Fountain Selected Meats, Ragata and Liverpool City Council (as stated above).
As stated in Oshlack by McHugh J, the purpose of an award of costs is to compensate the successful party (in this case Mr Qin and TA Tools), not to punish the losing party (in this case Mr Muscat). In that regard, in exercising my discretion to make an order for costs on an indemnity basis in favour of Mr Qin and TA Tools, I am conscious that they should never had been troubled by the application for preliminary discovery and therefore they should never have had to incur any costs defending it. An award of costs on an indemnity basis will appropriately compensate them for those unnecessary costs.

Imprudent conduct

In exercising the discretion to award costs on an indemnity basis, I wish to emphasise that my reasoning in no way depends on or entails an acceptance of the defendants' third argument, namely that Mr Muscat unreasonably refused an offer of compromise from the defendants and in doing so engaged in imprudent conduct justifying an indemnity costs order.
On the contrary, I reject that argument. That is because the purported offer - variously described by Mr Qin and TA Tools as "an effective invitation to not commence proceedings", an implicit "offer of compromise, in terms of foregoing legal expenditure already incurred", and an offer "contain[ing] [a] genuine compromise", albeit without the customary reference to Calderbank - was not an offer of compromise but more in the nature of a proposal to capitulate or "walk away". The latter is distinct from and incapable of amounting to a genuine offer of compromise which it is unreasonable for the offeree to reject (Bignell Pty Ltd v Edenden Pty Ltd t/as Everdry Waterproofing and Coatings [2004] NSWSC 288 per Shaw J at [9]; Mega-top Cargo Pty Ltd v Moneytech Services Pty Ltd [2016] NSWCA 3 per Gleeson and Leeming JJA and Emmett AJA at [5], applied in Mendonca v Tonna (No 3) [2020] NSWCA 332 by Bell P, Meagher and Payne JJA at [24]) unless the offering party is truly giving something away (see Gideon Rathner as trustee for Garland Lot 4 Unit Trust v Bartlett (No 2) [2023] NSWSC 1166, Ball J at [4]-[6], referring to Leichhardt Municipal Council v Green [2004] NSWCA 341, Santow JA at [31]ff).
At the time those letters were written, Mr Qin and TA Tools were not offering to give away anything because the proceedings had not been commenced and they had no entitlement to claim their costs.
In this connection, I note the reliance by Mr Qin and TA Tools on Mautray to support this argument. In that case, Williams J held that an offer by the defendants to the plaintiff (the unsuccessful party) to "extricate itself" from the proceedings in return for each party bearing its own costs (in circumstances where the defendants' costs, by that point, were said to amount to $180,000), did represent a genuine compromise (at [19]). Her Honour stated at [19]: … Although the offer invited the plaintiff to capitulate with respect to the outcome of its claims, the defendants offered to give away the entitlement that they would otherwise have to seek an order for their costs of the proceedings. Given that the defendants' costs actually incurred at that time were $180,000 and the plaintiff could not have unilaterally discontinued the proceedings without incurring liability for the defendants' costs, that was an offer by the defendants to give something away in a real sense.
Williams J went on to find that the plaintiff's failure to accept the defendants' offer was unreasonable (at [20]), and that the plaintiffs should pay the defendants' costs of the proceedings on an indemnity basis from the date of the offer of compromise (at [23]).
I am of the view that Mautray does not assist the third argument of Mr Qin and TA Tools. In Mautray, the relevant proceedings were on foot at the time the offer to forfeit legal costs was made. Costs in the proceedings had actually been incurred, and the offering party would, in the event its offer was refused, have been entitled to seek an order for their costs of the proceedings. The defendants' offer in that case did constitute an offer to surrender something of value and to that extent represented a genuine compromise.
By contrast, the purported offer of compromise in the letters of November 2022 preceded the filing of the summons by Mr Muscat on 3 February 2023. At the time the offer was made, any entitlement to seek a costs order against Mr Muscat was, at best, a mere speculative contingency.
In those circumstances, the purported offer did not involve giving anything away in any real sense; it was, rather, merely a directive to Mr Muscat to cease threatening proceedings (in other words, to "give up"), backed by the prospect of adverse costs consequences if he did not.
That being so, the primary basis on which Mr Muscat is said to have engaged in "imprudent conduct" falls away.

Capping costs

I am not minded to cap the award of indemnity costs at $185,000 as submitted by Mr Muscat because he has failed to provide any principled or evidential basis for me to exercise the power in s 98(4)(d) of the CPA.
As in Friend v Brien, the court in the present case has not been furnished with material sufficient to enable any view to be formed of the reasonableness of the costs incurred by Mr Qin and TA Tools. All that is before me is an assertion, contained in emails exchanged between the parties in the course of an attempt to negotiate an agreement about costs, that the defendants' costs of the proceedings, at the time of the correspondence, were in the amount of $185,000.
The oblique suggestion on the part of Mr Muscat that anything above this amount is unreasonable or out of proportion to the issues and subject matter of the application is not supported by any evidence or any submissions.

ORDER

I propose to order that the plaintiff pay the costs of the defendants on an indemnity basis.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 12 April 2024

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