Nicholas Richard Whitlam v Insurance Australia Group Limited

DECISION : Judgment to be entered for the plaintiff in the sum of $349,775.24. IAG to pay Mr Whitlam's costs of the proceedings from commencement until 23 December 2004 assessed on a party-party basis. IAG to pay Mr Whitlam's costs of the proceedings after 23 December 2004 assessed on an indemnity basis.

CATCHWORDS : Practice and Procedure - Costs - Indemnity costs - Orders - Proper approach to taxation issues in terms of judgment sum to be entered

Corporations Act 2001 (Cth) Income Tax Assessment Act 1936 (Cth) LEGISLATION CITED : Supreme Court Rules 1970 (NSW) Taxation Administration Act 1953 (Cth)

Cretazzo v Lombardi (1975) 13 SASR 4 Daniels (formerly practising as Deloitte Haskins & Sells) & Ors v Anderson & Ors (1995) 37 NSWLR 438 Dodds Family Investments Pty Ltd v Lane Industries Pty Ltd (1993) 26 IPR 261 CASES CITED : Hughes v Western Australian Cricket Association Inc (1986) ATPR 40-748 NRMA Ltd & Ors v Morgan & Ors (No 3) [1999] NSWSC 768 Oshlack v Richmond River Council [1998] HCA 11 Waters v PC Henderson (Australia) Pty Ltd (Kirby, Mahoney and Priestley JJA, New South Wales Ccourt of Appeal, unreported, 6 July 1994, BC9404952)

Nicholas Richard Whitlam (Plaintiff) PARTIES : Insurance Australia Group Limited (Defendant)

Mr A Bannon SC (Plaintiff) COUNSEL : Mr A Leopold (Defendant)

Watson Mangioni (Plaintiff) SOLICITORS : Mallesons Stephen Jaques (Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST Einstein J

Friday 11 March 2005 ex tempore Revised 14 March 2005

50035/04 Nicholas Richard Whitlam v Insurance Australia Group Ltd JUDGMENT The matters presently before the Court 1 These proceedings are presently before the Court for the purpose of dealing with the appropriate orders to be made and costs [see the judgment [2005] NSWSC 83 at 304]. 2 There was one typographic error which has been pointed out: the date given in the penultimate line on page 133 [paragraph 300] of the judgment reading "1 May 2001" should have read "17 May 2001". That is corrected by way of a corrigendum. Costs Calderbank letter 3 By Calderbank letter dated 23 December 2004, the solicitors for Mr Whitlam offered to settle the proceedings on the basis of a judgment for the plaintiff in the sum of $190,000 and an order that the defendant pay the plaintiff's costs of the proceedings as assessed or agreed. That offer was open to be accepted for a 28-day period. The letter made plain that in the event that the offer was not accepted and Mr Whitlam obtained a judgment in the proceedings more favourable to him then the offer, he reserved the right to rely on the offer on the question of costs including an application that IAG pay his costs of the proceedings on an indemnity basis. 4 IAG has submitted that its failure to accept the Calderbank offer was not unreasonable. 5 The first reason put forward concerned amendments made by the further amended summons. In dealing with this contention it is to be observed that litigation of the type presently being dealt with, including many and overlapping complexities of analysis, should be regarded as throwing up multiple issues. The pleadings were replete with abundant references to the failure to pay the retirement benefit to Mr Whitlam forthwith upon his retirement. It was clear from the pleaded case, the claim for interest and the evidence filed in support that Mr Whitlam contended that he should have been paid the retirement benefit shortly after his retirement. Further, the ordinary implication of a "reasonable time" in the circumstances would have produced exactly the same outcome. IAG's submission effectively amounts to saying that it could have admitted the existence of a contract absent the addition of "timely" and properly defended the proceedings on the basis that there was no obligation to pay the amount because of the absence of a time condition. The statements included representations to the effect that if Mr Whitlam resigned he believed that he would be paid promptly after retirement and that this did not occur. In that context the submission that the amendment [which ultimately injected into the pleading words to the effect that Mr Whitlam would be paid the Retirement Benefit promptly upon his retirement] came from left field, or could not be reasonably regarded as being raised by the anterior pleading, is rejected. 6 There is no substance in the further contention that it was reasonable not to accept the offer by reason that the ultimate success of the alternative contract claim depended upon the acceptance by the Court of particular evidence. It is to be expected that evidence will come forward in contested litigation. Parties faced with Calderbank letters of offer who determine not to accept such offers must take the litigation as they find it in terms of the evidence which comes forward. 7 Nor is there any substance in the contention that it was reasonable to reject the Calderbank offer because the whole retirement benefit issue proved to be an extremely complex question which was finely balanced. 8 By far the most important factor which courts have viewed as guiding the exercise of the costs discretion is the result of the litigation. The parties take their chances upon the result. A finely balanced question is nonetheless a question. There are numerous occasions where litigation is finely balanced. That is not a reason for moving away from a principled approach to dealing with costs. As McHugh J put the matter in Oshlack v Richmond River Council [1998] HCA 11 (25 February 1998):

"The expression the "usual order as to costs" embodies the important principle that, subject to certain limited exceptions, a successful party in litigation is entitled to an award of costs in its favour. The principle is grounded in reasons of fairness and policy and operates whether the successful party is the plaintiff or the defendant. Costs are not awarded to punish an unsuccessful party. The primary purpose of an award of costs is to indemnify the successful party. If the litigation had not been brought, or defended, by the unsuccessful party the successful party would not have incurred the expense which it did. As between the parties, fairness dictates that the unsuccessful party typically bears the liability for the costs of the unsuccessful litigation.

As a matter of policy, one beneficial by-product of this compensatory purpose may well be to instil in a party contemplating commencing, or defending, litigation a sober realisation of the potential financial expense involved. Large scale disregard of the principle of the usual order as to costs would inevitably lead to an increase in litigation with an increased, and often unnecessary, burden on the scarce resources of the publicly funded system of justice." 9 A further sophisticated argument based upon the effect of Part 52A rule 33 of the Supreme Court Rules has been advanced by IAG. Part 52A rule 33(4) provides that, subject to sub-rule (5), where the plaintiff is entitled to his or her costs of any proceedings, the amount of costs payable to him or her, shall, in respect of proceedings (other than proceedings that include a motor accident claim) commenced after 1 October 1997, where he or she recovers a sum more than $225,000 but not more than $450,000, be only half of the whole amount.

10 Sub-rule 33(5) provides that, if it appears to the Court that the plaintiff "had sufficient reason for commencing or continuing proceedings in the Court", the Court may order that the amount of costs payable to the plaintiff be some greater part of the whole of the amount which would be payable to him or her apart from sub-rule (4).

11 Sub-rule 33(6) provides that it shall be taken to be a sufficient reason if the plaintiff had reasonable grounds at the relevant time for expecting to recover an amount in excess of the amount prescribed by that sub-rule. 12 The submission which IAG advances is as follows: · it is arguable that until 18 September 2003 Mr Whitlam had reasonable grounds for expecting to recover an amount in excess of $450,000; · however, after receiving that amount on 18 September 2003, Mr Whitlam "continued" proceedings in the Court (see sub-rule (5)), but had no reasonable grounds for expecting to recover an amount in excess of $450,000; · in order to have a reasonable expectation of obtaining a judgment in excess of $450,000, Mr Whitlam would have had to have reasonably expected to have succeeded on the Project Outlook committee fees point and/or the Association directors' fees point. The case propounded by Mr Whitlam on those quantification issues was never reasonably sustainable. The points were shortly and simply dealt with. As your Honour said in [294] of your Honour's reasons, the Court cannot under the guise of construing the Retirement Policy engage in what would amount to a speculative re-writing of the Policy. The question of Association directors' fees was equally shortly dealt with at [296]-[297];

· rather than apply to have the proceedings transferred to the District Court, which he ought to have done, Mr Whitlam chose to apply to have the proceedings transferred from the Common Law Division to the Commercial List of the Equity Division. At that time counsel for IAG appeared on behalf of IAG before Bergin J and submitted to her Honour in substance that the amount in issue may not justify the proceedings being dealt with in the Commercial List. At least from that time the limitation in rule 33(4) should apply; · accordingly Mr Whitlam should at most have half of his costs from 18 September 2003. Alternatively, he should have only half of his costs from the time the proceedings were transferred into the Commercial List. 13 Nothing in sub-rule 33(6) constrains the Court in terms of its determination as to what will constitute sufficient reasons to commence or to continue proceedings in the Supreme Court. All that is made plain is that it is to be taken to be a sufficient reason for commencing or continuing proceedings in the Court if the plaintiff had reasonable grounds at the relevant time for expecting to recover an amount in excess of the amount prescribed by the material sub-rule. What other grounds may constitute sufficient reason will clearly vary according to the circumstances of any particular case. 14 In the appropriate exercise of the discretion it is clearly relevant to consider the existence of complex questions of law and fact raised in the proceedings as well as whether there are legitimate procedural advantages in conducting the proceedings in the Supreme Court. 15 Further whilst there may be some cases where it is appropriate for a plaintiff [having commenced proceedings in the Supreme Court who thereafter receives a part payment of a claim from the defendant] to seek to have the proceedings transferred to the District Court, this will not always be a reasonable approach. Plainly one parameter may well be the then state of the proceedings. Another may be the costs involved in the exercise of transfer. 16 This was clearly a case where at the time when the proceedings were commenced in the Supreme Court they were appropriate. My own view is that even after Mr Whitlam received the sum of $312,769 on 18 September 2003, it was clearly reasonable for him to continue the proceedings in this Court. The many complex questions of law and fact raised by the proceedings eminently justify that finding. 17 Essential to any relief was the finding of a legal entitlement to payment of the retirement benefit as of May 2001. As Mr Whitlam has submitted, that was the issue which occupied the vast bulk of the time and all but a tiny portion of the oral evidence. In other words, it was the evidence of conversations and reliance and evidence relating to unconscionability which I accept was by far the costly aspect of the hearing. Mr Whitlam succeeded on the basis of that evidence in contract and would have succeeded on estoppel. Having regard to the directors' evidence about promises to pay and feeling obliged to pay, in circumstances where IAG chose to defend the case on all issues including the issue of legal entitlement, it is not unreasonable that it should be exposed to an order for indemnity costs in failing to accept the Calderbank letter. 18 The proceedings in any event had to be commenced and continued in the Supreme Court having regard to the oppression claim (see section 233 and 58AA of the Corporations Act) and hence there was for that reason as well "sufficient reason" within sub-rule 33(5). 19 Mr Whitlam pursued a panoply of claims under a variety of causes of action. Had the claims all been successful in full he would have received an amount well above $750,000 before the Supreme Court. 20 In my view the sending of the Calderbank letter, in the context of the ultimate findings, entitles Mr Whitlam to an order that IAG pay his costs of the proceedings in the period after 23 December 2004 assessed on an indemnity basis. It seems to me that the proper exercise of the broad discretion given to the Court is to order indemnity costs from the date of the letter. 21 Mr Whitlam however presses for a general order that IAG pay his costs of the proceedings on an indemnity basis from the date of commencement. The submission in support of this claim is based upon the following propositions: · that it was only after the proceedings had been commenced on 14 March 2003 that IAG on 18 September 2003 (following the handing down of the Court of Appeal's judgement in the proceedings commenced by ASIC) made a partial payment of the retirement benefit that was owing; · that IAG took every point in the case and ran the case at all levels as hard as possible raising every conceivable argument that could legitimately be put on its behalf. 22 This submission is misconceived. The Court's discretion to order indemnity costs is not engaged by these considerations. Indemnity costs orders are normally made in circumstances where the conduct of a party against whom such an order has been made in connection with the litigation has been deserving of criticism - in the sense that some relevant delinquency requires to be shown. No such delinquency has here been demonstrated in terms of the conduct by IAG of the litigation. It had the same right as any other litigant to contest the proceedings. Whilst it clearly fought the litigation tooth and nail, it is not shown to have descended into any conduct proven to warrant a suggestion of delinquency in its approach to the litigation. 23 IAG further submitted that the proper exercise to the discretion should take into account that it was unreasonable for Mr Whitlam to press the issues on which he had failed: these being the Project Outlook Committee Fees paid by Association and base directors' fees paid by Association. 24 As Mr Whitlam has submitted, the following either severally or together constituted additional sufficient reason for commencing or continuing the proceedings in this court: (a) the factual and legal complexity of IAG's defence to the claims in contract but particularly estoppel in seeking to rely, in effect, on a defence that the directors were acting conformably with their duties as directors and in accordance with legal advice;

(b) the complexity and wide importance of analysis of the retirement benefit provisions in the Corporations Act;

(c) the fact that notwithstanding failure on the issues, there was a reasonable expectation for success on the project committee fees and directors fees issues. 25 Where there is a mixed outcome in proceedings the question of apportionment is very much a matter of discretion, the exercise of which will often depend on matters of impression and evaluation. 26 Unless a particular issue or group of issues is clearly dominant or separable it will ordinarily be appropriate to award the costs of the proceedings to the successful party without attempting to differentiate between those particular issues on which it was successful and those in which it failed: Waters v PC Henderson (Aust) Pty Ltd (unreported, CA (NSW), Kirby, Mahoney and Priestley JJA, 40678/91, 6 July 1994) (per Mahoney JA). 27 In NRMA Ltd & Ors v Morgan & Ors (No 3) [1999] NSWSC 768 Giles J put the matter as follows :

"[I]t must be remembered that parties should not be dissuaded by the risk of costs from canvassing all issues which might be material to the decision in the case, and unless a particular issue or group of issues is clearly dominant or separable from the balance of the proceedings it will ordinarily be appropriate to award the costs of the proceedings to the successful party without attempting to differentiate between the issues on which he was successful and those on which he failed. It is sufficient to refer to Cretazzo v Lombardi (1975) 13 SASR 4 at 12; Hughes v Western Australian Cricket Association (1986) ATPR 40-748 at 48,136; Dodds Family Investments Pty Ltd v Lane Industries Pty Ltd (1993) 26 IPR 261 at 271-2; and Waters v P C Henderson (Australia) Pty Ltd (NSWCA, 6 July 1994, unreported)." 28 In my view the present cannot be suggested as a set of circumstances where it was unreasonable for Mr Whitlam to press the issues on which he failed. This is not the type of proceeding where the Court is fairly able to regard the contest as no more than comprising a separable set of discrete/disparate issues. There were a number of matters which were common to more than one issue. Appropriate costs orders 29 The proper and principled exercise of the Court's discretion is to order that IAG pay Mr Whitlam's costs of the proceedings in the period from their commencement until 22 December 2004 assessed on a party - party basis and that IAG pay Mr Whitlam's costs of the proceedings in the period after 23 December 2004 assessed on an indemnity basis. Proper tax treatment 30 The subject requires attention to be given to the proper tax treatment of the additional amount payable to Mr Whitlam and as to interest thereon. The submissions advanced by IAG 31 IAG advanced the following submissions on this issue:

· the effect of the reasons for judgment is that Mr Whitlam's retirement benefit ought to have been paid on 17 May 2001 and ought to have included an additional amount of $207,006.97 ("Additional Amount"); · had the Additional Amount been paid on 17 May 2001 it would have comprised an "eligible termination payment" within the meaning of the Income Tax Assessment Act 1936 (Cth) ("ITAA"). Section 27A(1) of the ITAA defines "eligible termination payment", in relation to a taxpayer, to mean, relevantly (in paragraph (a) of the definition), any payment made in respect of the taxpayer "in consequence of the termination of any employment of the taxpayer". Section 27A(1) defines "employment" to include "the holding of an office"; · in paragraph (a) of the definition of "eligible termination payment" there are certain exceptions, but none applies here. For example, had the payment been made on 17 May 2001 it would not have been made from a superannuation fund. To the contrary, the judgment is to the effect that, for the very reason that no superannuation benefit was as at 17 May 2001 paid or payable to Mr Whitlam, he was entitled to a larger retirement benefit than that ultimately paid. A payment by way of a retirement benefit does not fall within any of subparagraphs (i) to (v) of paragraph (a) of the definition of "eligible termination payment"; · plainly the Additional Amount, if paid on 17 May 2001, would have been paid "in consequence of the termination of" the holding by Mr Whitlam of the office of director of IAG; · payment now, pursuant to the judgment, of the Additional Amount will retain its character as an eligible termination payment. Although IAG will have been ordered to pay the Additional Amount, there is no doubt that it will remain a payment in consequence of the termination of Mr Whitlam's holding of the office of director of IAG, within in the meaning of the definition of "eligible termination payment" in section 27A(1) of the ITAA; · eligible termination payments fall within item 8 of the "Summary of withholding payments" in section 10-5 of Schedule 1 to the Taxation Administration Act 1953 (Cth). Thus eligible termination payments are covered by the PAYG system; · section 12-85 of Schedule 1 to the Taxation Administration Act then provides that an entity must withhold an amount from an eligible termination payment it makes to an individual. Section 16-5 of Schedule 1 then provides that, if Division 12 requires an entity to withhold an amount from a payment (as to which see paragraphs 7 to 8 above), the entity must do so when making the payment. Section 16-70 of Schedule 1 provides that an entity that withholds an amount under Division 12 of Schedule 1 must pay the amount to the Commissioner of Taxation; · accordingly, the combination of sections 10-5, 12-85, 16-5 and 16-70 requires that tax be withheld from an eligible termination payment and paid to the Commissioner; · had the payment of the Additional Amount been made on 17 May 2001, as Mr Whitlam has successfully argued it should have been, tax would have been withheld, and it follows that it must also be withheld now. The rate of tax for an eligible termination payment is 31.5%. · it follows that the amount payable by IAG to Mr Whitlam will be $207,006.97 less 31.5%, i.e., $141,799.78, although on the basis that IAG must pay the Commissioner of Taxation the sum of $65,207.19 pursuant to sections 16-5 and 16-70 of Schedule 1 to the Taxation Administration Act; · this is the same tax treatment and same tax rate as would have been applicable had the Additional Amount been paid on 17 May 2001. It puts Mr Whitlam in an identical position to the position he would have been in if the contract, found the Court, had been performed. 32 It became clear at the Bar table today that notwithstanding IAG's above submissions the parties are agreed that there should be judgment for Mr Whitlam in the sum of $207,006.97. 33 The issue which separates the parties concerns whether interest should be calculated against the gross amount or the amount net of tax. IAG ' s submissions 34 IAG submitted as follows: · because PAYG tax was required to be withheld at the rate of 31.5% on the Additional Amount before it was paid to Mr Whitlam, Mr Whitlam would have received only $141,799.78 had the Additional Amount been paid on 17 May 2001 (see above). Accordingly, the interest payable to Mr Whitlam in respect of the delay in payment of the Additional Amount should be calculated on the amount of $141,799.78, not the pre-tax amount of $207,006.97. To do otherwise would overcompensate Mr Whitlam, by giving him interest on an amount that he would and could never have received and thus has not been deprived of, since it had to be and would have been withheld by IAG and paid directly to the Australian Tax Office; · the Payment of an after tax amount of $141,799.78 plus interest (from 17 May 2001 until judgment) on that amount will place Mr Whitlam in precisely the same position as he would have been in had the Additional Amount been paid (less the required tax withholding) on 17 May 2001. 35 Those submissions to my mind require to be rejected. Decision on appropriate deduction for taxation 36 In this regard the contradictor submissions which came forward from Mr Whitlam are correct. They are adopted in what follows. 37 As the Court of Appeal said in Daniels v Anderson (1995) 37 NSWLR 438 at 586:

"In most cases if damages to be awarded to a plaintiff are taxable, taxation should not be taken into account in their assessment. There may be exceptions, but this case is not one." 38 Mr Whitlam's submission highlights the importance inhering in the fact that what was claimed was a legal obligation to pay a certain amount. 39 I accept that the obligation to withhold tax is not occasioned by the creation of an obligation to pay the Eligible Termination Payment but is only occasioned upon its actual payment. 40 In truth the money is and always was owed to Mr Whitlam in the amount of $207,006.97 and hence Mr Whitlam is entitled to interest on that amount. That amount was withheld by IAG. 41 The entry of judgment for the full amount recognises Mr Whitlam's entitlement to elect to roll over the ETP part of the judgment into a super fund. If the roll-over option is taken, no deduction is required under the TAA because there will not have been a payment to Mr Whitlam at that time. Different withholding provisions would apply to the payment out of the fund at a later date. 42 In short, IAG's suggested form of orders on the interest issue gives rise to taxation issues which may be insuperable at worst and at best involve complex analysis of provisions and potentially debate with the Commissioner. 43 By reason of the intensity with which the parties addressed questions as to deduction, tax treatment and the like, it is in the circumstances, appropriate for the court to mark as exhibits on the issue the IAG submissions of 4 March 2005 [which will be exhibit C1] and Mr Whitlam's submissions of 10 March 2005 [which will be exhibit C2]. The appropriate order to be made is therefore as follows:

Judgment for the plaintiff in the sum of $349,775.24.

Note [18.1 The amount of $349,775.24 referred to in the preceding paragraph is calculated as follows: (a) the amount of $207,006.97 wrongfully deducted by the defendant ("IAG") as Mr Whitlam's superannuation entitlements under the NRMA Superannuation Plan;

(b) interest on the sum of $312,769.00 from 17 May 2001 to 18 September 2003 being $69,323,32; and

(c) interest on the sum of $207,006.97 in the period from 17 May 2001 to 11 March 2005 being the amount of $73,444.95. [18.2 The amount of $69,323.32 referred to in sub-paragraph 18.1(b) above, being interest on the sum of $312,769.00 for the period 17 May 2001 to 18 September 2003, is calculated as follows: (i) 17 May 2001 to 31 August 2001 - 107 days at 11% pa = $10,085.73;

(ii) 1 September 2001 to 28 February 2002 - 181 days at 10% pa = $15,509.91; and

(iii) 1 March 2002 to 18 September 2003 - 567 days at 9% pa = $43,727.68] [18.3 The amount of $73,444.95 referred to in sub-paragraph 18.1(c) above, being interest on the sum of $207,006.97 for the period 17 May 2001 to 11 March 2005, is calculated as follows:

(i) 17 May 2001 to 31 August 2001 - 123 days at 11% pa = $6,675.27;

(ii) 1 September 2001 to 28 February 2002 - 181 days at 10% pa = $10,265.28; and

(iii) 1 March 2002 to 11 March 2005 - 1,107 days at 9% pa = $56,504.40] The court makes the following orders in these proceedings:

1 Judgment is to be entered for the plaintiff in the sum of $349,775.24. 2 IAG is ordered to pay Mr Whitlam's costs of the proceedings in the period from their commencement until 23 December 2004 assessed on a party-party basis. 3 IAG is ordered to pay Mr Whitlam's costs of the proceedings in the period after 23 December 2004 assessed on an indemnity basis. I certify that paragraphs 1 - 43 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on 11 March 2005 ex tempore and revised on 14 March 2005

      Susan Piggott
      Associate

14 March 2005

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.