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[2012] FCA 765
Federal Court of Australia
2012-07-18
Gordon J
Original judgment source is linked above.
IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 356 of 2012
JUDGE: GORDON J DATE: 18 JULY 2012 PLACE: MELBOURNE
REASONS FOR JUDGMENT 1 This proceeding principally concerns allegations by the Applicant, Norcast S.ár.L (Norcast), that the Respondents, Bradken Limited and two individuals, have engaged in bid rigging and/or misleading or deceptive conduct contrary to the Competition and Consumer Act 2010 (Cth). Norcast is a limited company incorporated in Luxembourg. Norcast's principal place of business is Luxembourg. The parties have attempted to agree on the provision of security for costs. The parties agree that some security is payable, but they are unable to agree on the quantum of that security. For the reasons that follow, $227,500 is payable by Norcast as security for the Respondents' costs up to and including the preparation of evidence.
THE PARTIES' RESPECTIVE POSITIONS 2 The Respondents' application is supported by an affidavit of Patricia Anne Henry sworn on 22 June 2012 and written submissions dated 25 June 2012. The Respondents have also filed reply submissions dated 4 July 2012. By their submissions, the Respondents seek orders that, inter alia: the Applicant give security for the Respondents' costs pursuant to section 56 of the FCA and/or Rule 19.01 of the Federal Court Rules (Cth) 2011 [sic] (FCR) in the amount of $345,000 or such other amount as the Court deems appropriate, such security to be in a form agreed between the parties or, failing such agreement, in a form acceptable to the Court[.] 3 Ms Henry deposes to some of the matters required by r 19.02 of the Federal Court Rules 2011 (Cth) (the Rules), namely, that: 1. Norcast is ordinarily resident outside Australia and, further, that Norcast's parent company (Pala Investment Holdings Limited) is also ordinarily resident outside Australia; 2. Luxembourg is a foreign jurisdiction with which Australia has no treaty or reciprocal arrangement in relation to the recognition or enforcement of judgments in civil matters; and 3. to the best of her knowledge, information and belief, neither Norcast nor Pala Investment Holdings Limited have any assets or business present in Australia. 4 Ms Henry does not address whether Norcast is suing for someone else's benefit or whether Norcast is impecunious: see rr 19.02(c) and (d) of the Rules. For present purposes, I will assume that those factors do not assist the Respondents. In any event, they are irrelevant. 5 Ms Henry further deposes that, following correspondence which began on 18 May 2012, the parties "reached agreement in relation to the principle and form [sic] providing security". That is not surprising. Norcast is a foreign company conducting business in foreign jurisdictions with no assets in Australia. In related preliminary discovery proceedings, VID 978 of 2011, the parties were able to agree as to principle, form and quantum of security. Given that quantum remains in dispute in this proceeding, Ms Henry deposes to: 1. the likely issues and evidence in the proceeding, including the necessity of voluminous discovery, preparation of witness statements and issue of subpoenas; 2. the charge-out rates of the solicitors and counsel engaged by the Respondents; and 3. an estimate of the actual costs likely to be incurred in conducting the proceeding to final hearing. 6 Ms Henry estimates costs of between $685,000 and $795,000 will be incurred if the matter proceeds to final hearing. That amount includes $160,000 for costs already incurred and an estimate of the costs of the further steps in the proceeding, summarised as follows: Step Respondents' estimate of actual costs Costs of steps up to and until preparation for trial
7 The Respondents do not seek an order for security for their costs calculated on an actual or indemnity basis. Instead, Ms Henry applies what is referred to as the "two-thirds rule" to the sum of: 1. $160,000, for costs already incurred; and 2. $360,000, being the mid-point of the estimated further costs up to and until preparation for trial (ie, steps 1 to 8 identified in the table above), in order to generate a figure of $345,000. 8 The Respondents do not seek an order for security for their costs of preparation and attendance at trial or disbursements and fees (ie, steps 9 and 10 identified in the table above). Instead, the Respondents seek liberty to apply for further security at a later date. 9 Norcast relies upon an affidavit of Michael Thomas von Schoenberg affirmed on 2 July 2012 and written submissions dated 2 July 2012. Norcast does not dispute its liability to provide security for the Respondents' costs. Rather, Norcast disputes the estimate arrived at by Ms Henry. Mr Schoenberg's affidavit says no more on the subject other than: 20. In my experience, if a party is successful in a proceeding in this Court, and is awarded its costs on a party-party basis, the amount that it receives after its costs have been taxed in accordance with the Rules is only a portion of its actual costs. 21. Where the relevant party is represented by a large law firm such as King & Wood Mallesons, with hourly rates comparable to those set out in the affidavit of Ms Henry, in my experience, its party-party costs determined on taxation are usually 40% to 50% of the actual fees incurred. 10 Norcast's submissions identify two perceived errors in Ms Henry's approach, which arrived at the quantum of $345,000 (see [7] above). First, Norcast submits that it is not permissible to use actual or indemnity costs as the basis for calculating security. By applying the "two-thirds rule" to actual costs already incurred and to future costs calculated on an indemnity basis, Norcast submits that the Respondents have arrived at an unduly high figure. Based on Mr Schoenberg's experience that the party-party costs of a party represented by a large law firm such as King & Wood Mallesons usually equate to between 40% and 50% of the costs actually incurred, Norcast submits that the party-party costs of each step in the proceeding equate to 45% of the Respondents' actual costs as follows: Step Respondents' estimate of actual costs Norcast's party-party estimate (based on 45% of actual costs) Costs of steps up to and until preparation for trial
11 Second, Norcast submits that the Respondents have inflated the figure by including all likely steps up to and until preparation for trial, ignoring the possibility of early settlement. Norcast's position is that security ought to include only those steps up to and including the preparation of evidence (ie, steps 1 to 6 identified in the table above). 12 Accordingly, assuming the party-party costs of the Respondents up to and including the preparation of evidence amount to $132,750, and 45% of the costs already incurred amounts to $72,000, Norcast submits that the Respondents' party-party costs up to that point would be $204,750. Norcast then further discounts the party-party costs by applying the "two-thirds rule" to produce a figure of $136,500, which it submits is the amount of security which should be ordered.
ANALYSIS 13 The power to order security for costs is set out in s 56 of the Federal Court of Australia Act 1976 (Cth) and Part 19 of the Rules: Federal Court of Australia Act 1976 (Cth) 56. Security (1) The Court or a Judge may order an applicant in a proceeding in the Court, or an appellant in an appeal under Division 2 of Part III, to give security for the payment of costs that may be awarded against him or her. (2) The security shall be of such amount, and given at such time and in such manner and form, as the Court or Judge directs. … Federal Court Rules 2011 (Cth) 19.01 Application for an order for security for costs (1) A respondent may apply to the Court for an order: (a) that an applicant give security for costs and for the manner, time and terms for the giving of the security; and (b) that the applicant's proceeding be stayed until security is given; and (c) that if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed. (2) An application under subrule (1) must be accompanied by an affidavit stating the facts on which the order for security for costs is sought. 19.02 Matters to be addressed by the respondent The respondent's affidavit should state the following: (a) whether there is reason to believe that the applicant will be unable to pay the respondent's costs if so ordered; (b) whether the applicant is ordinarily resident outside Australia; (c) whether the applicant is suing for someone else's benefit; (d) whether the applicant is impecunious; (e) any other relevant matter. 14 As Lindgren J noted in Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (No 19) (1995) 134 ALR 187 at 197 (referring to the predecessor provisions in O 28 r 3(1) of the Federal Court Rules 1979 (Cth)): The terms of these provisions do not, apart from the use of the word "security" itself, give any guidance as to the amount of security that should be ordered. The amount is in the discretion of the court and should be such sum as the court thinks just, having regard to all the circumstances of the case. Obviously, a factor of prime importance will be the amount of a respondent's costs which an applicant, if unsuccessful, will be ordered to pay to the respondent if the proceeding continues to a determination by the court. But the estimation of that amount involves many factors, some of them imponderable. … (Emphasis added.) 15 It is the matter emphasised above which is the focus of this application. 16 Norcast's submissions raise three issues which relate to the quantum of the security: 1. whether it is appropriate to commence the quantification of costs payable as security with an estimate of actual or indemnity costs, discounted by some factor, or whether a calculation of party-party costs is the appropriate starting point; 2. if actual or indemnity costs are permissible, what is the appropriate discount to be applied, and, as a related issue, what the is the function of the "two-thirds rule"; and 3. what steps in the proceeding are included in the security to be provided.
Party-party costs or actual or indemnity costs 17 As to the first issue, broadly speaking, there are two available approaches to determining the quantum of the security to be provided in a security for costs application. The traditional approach is for the respondent to engage what is known as a "costs consultant" to prepare an affidavit setting out the steps likely to occur up to and including the first day of trial with an estimate of the party-party costs of each step which would be recoverable by the respondent were it to succeed and obtain an order for its costs. That approach avoids any dispute as to whether a party's actual or indemnity costs are an appropriate starting point and, if so, what discount must be applied to arrive at an estimate of party-party costs. 18 An alternative approach is for the respondent's own solicitor to give evidence as to the likely steps and the costs to be incurred in completing each step. Because the respondent's solicitor is unlikely to also be a specialist in the field of costs consulting, such evidence usually relies upon a calculation of "actual costs" (ie, costs which would be payable on an indemnity basis) discounted by some factor. 19 Both of the available approaches have been considered and applied by this Court: as to the former, see, eg, Digital Cinema Network Pty Ltd v Omnilab Media Pty Ltd [2010] FCA 1242; Farmitalia Carlo Erba SrL v Delta West Pty Ltd (1994) 28 IPR 336; as to the latter, see, eg, Nysan Asia Pacific Pty Ltd trading as Horiso v R & D Automation Technology Corp [2012] FCA 193; Winning Form Pty Ltd v Giddy Up Ratings Pty Ltd [2011] FCA 1140; Austin, Nichols & Co Inc v Lodestar Anstalt [2009] FCA 1228; Australian Equity Investors, An Arizona Limited Partnership v Colliers International (NSW) Pty Limited (No 2) [2010] FCA 1209. The approaches are not inconsistent. Whether one begins with party-party costs or discounted actual or indemnity costs does not matter, provided the end result is the same - a reasonable estimate of the respondent's costs which the applicant, if unsuccessful at trial, would be ordered to pay to the respondent. 20 The authorities referred to by Norcast in its written submissions do not exclude the use of actual or indemnity costs as a starting point. In Qaudrant Constructions Pty Ltd v Morgan Smith Barney Australia Pty Ltd [2009] VSC 455, the applicant for security provided an estimate of $939,000 based on its likely solicitor-client costs of defending the claim. Forrest J held at [50] that "[t]he estimate of costs should have been on a party/party basis". Forrest J's judgment does not indicate that the figure of $939,000 was in any way discounted so as to enable the estimate of solicitor-client costs to more closely approximate the party-party costs which would have been allowed on taxation. Accordingly, Quadrant Constructions is not authority for the proposition that an estimate of actual or indemnity costs can never form the basis of an application for security for costs, provided an appropriate discount is applied. 21 In Pathway Investments Pty Ltd v National Australia Bank Limited [2012] VSC 97, Davies J held at [15] that "there must be some substantiation of the likely party/party costs to enable the court to determine an appropriate amount of security based on estimated probable costs, insofar as those costs can be ascertained." To say that a party must substantiate the likely party-party costs is to say nothing about how that party should do so. The application of an appropriate discount to actual or indemnity costs is not precluded by Davies J's comments. Similarly, Edmonds J's reference to Allstate in Federal Treasury Enterprise (FKP) Sojuzplodoimport v Spirits International BV (No 2) [2012] FCA 23 at [76] does not preclude the use of actual or indemnity costs, appropriately discounted, to estimate party-party costs. 22 Finally, by suggesting a discount of 45%, Norcast implicitly accepts that actual or indemnity costs can form the basis of an application for security for costs, provided an appropriate discount is applied.
The discount to be applied 23 In relation to the second issue, where actual or indemnity costs are adopted as a basis for estimating costs, the discount factor becomes central. Previous decisions which apply various discounts are of little use. The discount must vary to ensure that the estimate of actual or indemnity costs is appropriately reduced to such a level that it bears some relationship to the party-party costs which would be recoverable on taxation. To put it bluntly, the more expensive the lawyers, the larger the discount. The Respondents submit that the appropriate discount is two-thirds. Norcast submits that it is 45% (Norcast further discounts its 45% figure by two-thirds, that issue is dealt with below). 24 It is not the purpose of security to give a full indemnity to the Respondents: see, eg, Brundza v Robbie & Co (No 2) (1952) 88 CLR 171 at 175 per Fullagar J. Further, in Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497, French J stated at 515 that "the process of estimation embodies to a considerable extent, necessary reliance on the 'feel' of the case after considering relevant factors" (citations omitted). In Save the Ridge Inc v Commonwealth of Australia [2004] FCA 1289, Emmett J was of the view at [24] that "[i]n assessing quantum of an order for costs, a broad brush approach needs to be taken". Bearing Fullagar J's comments in mind, after consideration of the "feel" of the case and adopting a broad brush approach, I consider that the Respondents' are entitled to 50% of their estimated actual or indemnity costs as an estimate of their party-party costs allowable on taxation. 25 Related to the second issue is the function of the so called "two-thirds rule". The nomenclature is perhaps confusing. The Respondents have used two-thirds as their discounting factor. Norcast submits that, whatever figure is arrived at as the appropriate estimate of party-party costs, that figure must be further discounted by two-thirds. In support of that proposition, Norcast relies upon the comments of Lindgren J in Allstate at 197 that the "two-thirds rule" is the "generally observed practice in England of ordering security in an amount equal to two-thirds of the amount of party/party costs". Allstate is not an endorsement of the blanket application of the "two-thirds rule" in this jurisdiction. Indeed, Heerey J in Farmitalia at 345 considered that such a rule had "no justification in law or logic". In Allstate, Lindgren J ultimately applied the two-thirds rule to some applicants, but not to others. His Honour did refer, however, to Quad Consulting Pty Ltd v David R Bleakley and Associates Pty Ltd [1991] FCA 288 as "a helpful review of the conventional fixing of the amount of security at two-thirds of the estimated amount of party/party costs". 26 In Quad Consulting Burchett J considered an application for security for costs which followed an earlier application which was dismissed by Beaumont J. His Honour considered the origins and application of the "two-thirds rule" in Australia. His Honour was referred to Procon (Great Britain) Ltd v Provincial Building Co Ltd (1984) 2 All ER 368 in which Cumming-Bruce LJ considered at 376 that: the principle is this: the security should be such as the court thinks in all the circumstances of the case is just. If security is sought, as it often is, at a very early stage in the proceedings, the court ordering security will be faced with a situation in which a solicitor or his clerk has made an estimate of the costs likely in the future to be incurred; and probably the costs already incurred, or paid, will be a very small fraction of the security that the applicant is seeking. At that stage one of the features of the future of the action which is relevant is the possibility that the action may be settled, perhaps quite soon. In such a situation it may well be sensible to make an arbitrary discount of costs estimated as the probable future costs, but whether one-third is likely in any given case to be a sensible discount, and whether any discount at all should be made, will depend on the view of the court on consideration of all the circumstances. 27 Having considered Procon, and other authorities, Burchett J held at [10] that: it remains open to the court to apply a discount of about two-thirds, not because it is a conventional figure to deduct, but because in all the circumstances of the particular case such a discount seems appropriate. In many cases, judges have done so, and this is the origin of the practice which was held in Procon to have been too rigidly stated. The discount may be seen to be appropriate particularly in cases where the chances of settlement, or the possibility that substantial amounts may be taxed off the bill, or the prospect or actuality of off-setting costs orders, may provide a tangible basis for reducing the amount proposed. In making a reduction, apart from some specific matter, the court will bear in mind the view accepted by Fullagar J that the object is not to set out to give a complete and certain indemnity, but to order security to be given "of a reasonable amount". In Menhaden, Toohey J, expressly basing himself on what Fullagar J had said in Brundza, ordered security in the sum of $12,000 in respect of costs estimated at $20,000. That, of course, was less than two-thirds, but Toohey J commented that the estimate had seemed high. (Emphasis added.) 28 In summary, the "two-thirds rule" may be applied where there are factors present which suggest that the quantum of the security ought to be further discounted. Those factors include the chances of settlement, the merits of the case, whether an order of security would effectively deny the applicant from pursuing the claim, the strength of the evidence regarding the quantification of the security, the possibility that substantial amounts may be taxed off the bill and the prospect or actuality of off-setting costs orders: Quad Consulting at [10]; Farmitalia at 345. Subsequent cases have indicated that the discount to be applied is not fixed at two-thirds, but may vary as circumstances dictate: see, eg, Pathway Investments at [55]. 29 Norcast, in seeking to apply the "two-thirds rule", does not refer to any of those factors. While Norcast does refer to the prospects of settlement, it does so as a justification for restricting the steps included in the security to only those costs incurred up to and including the preparation of evidence (see [30] to [33] below). Accordingly, there is no basis for a further discount of two-thirds (or some other fraction) in this case to account for the prospects of settlement.
Steps in the proceeding which are included in security 30 In relation to the third issue, the steps in the proceeding which are covered by the security is also a matter the subject of the Court's discretion. 31 The Respondents submit that the security ought to include their costs up to and until preparation for trial (ie, steps 1 to 8 identified in the table above), with liberty to apply to the Court closer to trial for an order that Norcast provide security for the balance of the Respondents' costs associated with the trial. Norcast contends that, because of the possibility that the proceeding might settle prior to trial, security ought only to extend up to and including the preparation of evidence (ie, steps 1 to 6 identified in the table above). Alternatively, Norcast submits that the security should include all categories of work but subject to a further discount factor to reflect the possibility of settlement at an earlier stage (see the discussion of the "two-thirds rule" above). 32 There is thus an element of double discounting in Norcast's proposal to restrict the Respondents' security to only those costs incurred up to and including the preparation of evidence and to apply the "two-thirds rule". It is appropriate to reduce the amount of security having regard to the prospects of early settlement: Bryan E Fencott at 515. That can be achieved either by restricting the steps in the proceeding included in the security or by applying a discount (two-thirds or otherwise), not both. 33 I have determined not to apply the "two-thirds rule" on the basis that the security shall include only those costs incurred up to and including the preparation of evidence. Once the evidence has been prepared, the parties will be in a position to properly assess the risks of their respective positions. This will likely facilitate an attempt at settling the dispute. If any such attempt at settlement is unsuccessful and the proceeding looks likely to proceed to trial, the Respondents shall have liberty to seek a further provision of security. 34 Related to the third issue is the Respondents' proposal that the security should include a component for costs already incurred. An order for the provision of security for costs may extend not only to future costs but also to costs already incurred: Bryan E Fencott at 515. However, in some cases, delay on the part of the respondent in bringing an application for security for costs may disentitle the respondent from obtaining security in respect of already incurred costs: Robertson v Knott Investments Pty Ltd (No 2) [2010] FCA 796 at [14]. The evidence discloses that there has been no delay by the Respondents in this case. The proceeding was commenced on 10 May 2012. Ms Henry deposes that: 1. on 18 May 2012, she caused a letter to be sent to Norcast's representatives seeking Norcast's consent to the provision of security in the amount of $300,000; 2. on 30 May 2012, Norcast's representatives provided a response, agreeing to the provision of security but only in the amount of $125,000; 3. on 7 June 2012, she suggested that the parties' representatives "meet and confer" in respect of, among other matters, the question of the quantum of security; and 4. on 12 June 2012, the parties' representatives conducted a telephone conference but were unable to agree on the amount of security to be provided. 35 In the circumstances, it is appropriate that the security include a component for costs already incurred by the Respondents.
CONCLUSION 36 Norcast shall provide $227,500 as security for the Respondents' costs, which figure comprises 50% of: 1. the Respondents' actual costs incurred to date ($160,000); and 2. the mid-point of the Respondents' estimated actual costs incurred up to and including the preparation of evidence ($295,000). I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.
Norcast S.ár.L
Bradken Limited & Ors
[2009] VSC 455
[1991] FCA 288
(1995) 134 ALR 187
(1952) 88 CLR 171
(1987) 16 FCR 497
(1994) 28 IPR 336