Plaintiff v Defendant

2 It is not disputed that there should be judgment for Melbourne Water. For reasons which relate to the arguments as to costs, counsel for Ipex asked that I include in the formal judgment under the head Other Matters a reference to the fact that there was a counterclaim in the proceeding and that this had been disposed of when Melbourne Water on 27 February 2008 paid the full amount of the claim plus interest and submitted to an order that it pay the costs of the counterclaim. This I decline to do. On 21 November 2008 I struck out the counterclaim with an order as to costs. It is no longer before the court.

3 Counsel for Melbourne Water seeks costs of the proceeding to be taxed on an indemnity basis. Ipex resisted a special costs order.

4 The case for the special costs order depended upon an offer of compromise made by Melbourne Water on 17 June 2003. The offer was expressed as a defendant's offer made in accordance with Order 26 to pay $1.5m in satisfaction of the Ipex claim and its own counterclaim. Having regard to its success as to liability, the costs consequences pursuant to Rule 26.08(3) of the failure of Ipex to accept the offer have no effect. The plaintiff, Ipex, cannot expect an order for costs prior to the offer; an order in favour of the defendant, Melbourne Water, for costs on a party and party basis from the date of the offer is nothing more than a successful defendant might expect.

5 In Foster v Galea (No2),[3] I held that an offer of compromise under the rules might be treated as a Calderbank offer, so that the offeror might claim a special order if the offeree's non-acceptance was unreasonable. For the reasons there stated I approach the present case on that basis.

6 The offeror must establish the offeree's unreasonableness at the time of the offer. Unlike an offer made in accordance with Order 26, there is no automatic application of a special order where the result of the litigation is not more favourable than the offer. There is not even a rebuttable presumption to that effect. That may seem a surprising result given that the burden which falls on the offeror may require it to prove unreasonableness when the facts bearing upon such a conclusion may be known only to the offeree who is not obliged to disclose them and, indeed, may resist the offeror's efforts by asserting legal professional privilege. But this is the law which I am obliged to apply.

7 In the leading case of Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No2)[4] the Court of Appeal set out six matters which the court should ordinarily have regard to in exercising its discretion as to costs in a Calderbank case.

(a) The stage of the proceeding at which the offer was received;

(b) The time allowed to the offeree to consider the offer;

(d) The offeree's prospects of success, assessed as at the date of the offer;

(e) The clarity with which the terms of the offer were expressed; and

(f) Whether the offer foreshadowed an application for an indemnity costs order in the event of the offeree's rejecting it.

These are, of course, merely a check list for the ordinary case.[5]

8 It was said that the offer was made at an early stage of the proceeding. The proceeding had been commenced in the Federal Court on 17 February 2003. In April of that year it was adjudged more suitable for this court and it was received by this court pursuant to the cross-vesting legislation.

9 At the time the proceeding was commenced the contract entered into between the parties on 27 July 2000 was still on foot; it did not expire until 31 July 2003. The obligations which underlay the Ipex claim were then and have always been that the number of help desk calls which it was required to service and the consequent financial burden of the contract was greater than it had been led to expect in the pre-contract period.

10 The contract made provision for an adjustment of the price where the scope of the contract works enlarged and Ipex had in 2002 sought such an adjustment but this was refused.

11 The correspondence in late 2001 and early 2002 which is exhibited to the affidavit of Jesse Sol Gleeson affirmed on 30 September 2009 shows that Ipex was in November 2001 asserting a loss for the first 15 months of the three year contract at approximately $75,000 to $80,000 per month or about $2.8m for the whole contract term. In February 2002 this was said to have been about $107,399 per month for the first 18 months, a total of $3.86m for the term. These figures represent a substantial increase over the fixed contract price of $5.218m.

12 It appears that the position adopted by Melbourne Water at this stage and in the litigation was that the help desk call information provided to tenderers was accurate and that it was for the tenderers, including Ipex, to make their own assessment of the work and cost required to provide the services set out in the Request For Proposal 'RFP'.

13 As required in the contract, the parties in November 2002 referred their dispute to mediation, but without success. Following this, on 19 November 2002, Ipex made a Calderbank offer to accept $2.2m all in, in settlement of its claim.

14 Soon after its arrival in this court, there broke out in this proceeding the first of a series of pleading skirmishes which characterised it until December 2007 when the fourth amended statement of claim was filed.

15 In June 2003 when the Melbourne Water offer of compromise was made, the original Federal Court statement of claim filed in February 2003 set out the Ipex claim. It was primarily a claim for extra payment under the contract:

(a) For the period from the commencement of the contract to January 2002 the monthly average number of help desk calls was 645 instead of 433 as appeared in the RFP. This represented a change in the nature, extent or content of the contract works within the meaning of cl 15 of the contract, entitling Ipex to an increase in the contract price. Ipex was required to spend more work hours and to incur extra costs for this in the sum of $3,268,310.38.

(b) For the period February 2002 to January 2003, extra work was required to comply with a variation instruction [direction]. This entitled Ipex to extra payment pursuant to cl 15. The claim for this was $1,893,654.13.

There were alternative non-contractual claims for unspecified damages for misleading and deceptive conduct relating to the stated number of calls of 433 per month, and a claim for restitutionary relief.

16 Given the terms of cl 15 and the limited rights to vary the contract price conferred under it, the contractual claim has always faced considerable difficulties. Moreover, the Ipex statement of claim attracted a substantial defence and a counterclaim, which filed on 6 June 2003, for damages for defective performance of its contractual obligations. The amount of damages claimed by Melbourne Water was about $870,000. This is how things stood at the time of the offer of compromise by Melbourne Water of 17 June 2003.

17 Counsel for Melbourne Water subjected the claim of Ipex as it stood at this early stage of the proceeding to an analysis based upon the fundamental assertion, made at the time by Ipex, that the actual number of help desk calls was 645 per month, an increase of 212 over the suggested 433 calls per month appearing in the HD Calls Table. This is an increase of 49%. The application of this increase to the whole of the contract sum produces an extra cost of $2.557m. The evidence before me showed that most, but not all, of the contract sum was affected by such an increase in the number of help desk calls so that this extra cost should be reduced. It was put on behalf of Melbourne Water that, if the extra 212 calls per month were extended to the whole 36 month contract period, it would produce an extra 7,632 calls to be dealt with. Counsel then pointed to the costing sheets for the G8 contract upon which the Melbourne Water tender was built. These showed a cost of $23.71 for each non-MAC call and $112.36 for each MAC call. If all the 7,632 extra calls were MAC calls, which is more than any witness contended, the extra cost would be only $857,532.

18 Other, less favourable, calculations were offered by Melbourne Water based upon the suggested excess of 212 calls per month. The point made on behalf of Melbourne Water was that, even on Ipex's own figuring, its claim with no allowance made for risk was not greater than $2m. If the value of the counterclaim was included in the assessment, the Melbourne Water offer was even more attractive. It was certainly one to be considered seriously.

19 The response on behalf of Ipex was to say that, at the time of the offer, it had not had time to consider the strength of the case against it; to address this risk. I am not persuaded that this is so. I infer from the history of this matter that Ipex had a very good idea of the value of its claim, which was very much overstated in the pleading, and of its chances of success. It was well aware of the position taken by Melbourne Water. Its contractual claim had to address the difficulties raised by the terms of the clauses upon which it depended. It must have been well aware of these difficulties because it had already had its contractual claim rejected by Melbourne Water for reasons which it must have seen and understood. Notwithstanding this, it sought, unsuccessfully, to formulate this contract claim for some time thereafter until it was abandoned in December 2007.

20 Next, it was said that, at the time Ipex was called upon to consider the June 2003 offer, it did not have the Unisys reports for the months prior to the time of tender except one. These, it was said, would have confirmed its belief that the help desk calls history prior to that provided in the RFP showed that calls were running at a very much greater rate than 433 per month. Furthermore, nothing had been said about the impact of the Standard Operating Environment ('SOE') on the earlier help desk call numbers. These matters are interrelated, as appears from my trial judgment. The SOE provided an explanation for the decision of Melbourne Water not to provide the earlier statistics. Until the earlier and higher numbers of help desk calls had been provided, there was no cause to consider whether they were an indication of the inaccuracy of the 433 per month figure which was provided in the RFP, or an indication of the number of calls likely to be encountered in the future.

21 I am satisfied that the Ipex rejection of the offer was, in all the circumstances, unreasonable. Although in its terms, the offer did not contain a warning that it would be relied upon in support of a special costs order, there can be no doubt that a litigant such as Ipex, supported as it was by a team of experienced commercial lawyers, would have understood this to be the case. I will therefore make a special costs order.

22 The order sought by Melbourne Water is that its costs be taxed on an indemnity basis. I will not adopt this course. The objective of encouraging a plaintiff to give serious consideration to an offer is achieved by moving the basis of taxation up one notch, rather than two, that is, to a solicitor client basis. The essential difference between this basis and an indemnity basis appears to be the imposition of the burden of satisfying the taxing officer that a particular cost item is reasonable. Given the history of this matter, it is appropriate to cast this onus on the party supporting the bill, in this case, Melbourne Water.

23 As I have mentioned, I have ordered that the costs of the counterclaim be paid by Melbourne Water. I ordered a stay of that order and it is common ground that this stay should now be lifted. I will also order that these costs ordered to be paid by Melbourne Water be set off against the costs orders which I make in favour of Melbourne Water with respect to the proceeding generally.

24 In their written submission[7], counsel for Ipex argue that their costs of the counterclaim should include all or part of costs which were reserved on 22 September 2003, 15 December 2003, 3 June 2004, 11 June 2004 and 25 June 2004. I have examined the court file and my notes of the hearings which I conducted. The costs of the appeal were dealt with on 15 December 2003, and I will not disturb that order. None of the costs reserved on 25 June 2004 should be treated as costs of the counterclaim. I know nothing of the costs reserved on 22 September 2003, 3 June 2004 or 11 June 2004, if indeed there were costs reserved on those dates. These, therefore, I leave to the taxing officer.

Costs of successful Ipex Instalment Claim[8]

25 In August 2004 Ipex included in its second amended statement of claim a claim for $241,635.53, being the monthly instalment for November 2002 payable under the contract. This claim was resisted in the defences which were filed in response and Melbourne Water, in any event, sought to set off against this claim its counterclaim for damages.

26 As the case moved through its interlocutory stages, the claim for the instalment money did not attract very much attention. On 27 February 2008 Melbourne Water paid to Ipex the full amount of this claim and interest. Notwithstanding this, the claim remained in the statement of claim because, I was told, it would be relevant to the question of costs.

27 What is now sought on behalf of Ipex is that its success in this claim should be reflected in my assessment of the outcome of the proceeding generally. This is not, counsel said, a case where Ipex failed entirely. I confess myself unsure of what precisely Ipex seeks to make of this. At the time of the Melbourne Water offer of compromise, this claim was not part of this litigation. The claim, when it appeared, had to be addressed in the defences filed. Otherwise it was of no significance. I will, therefore, order that Melbourne Water pay the costs of this claim.

28 Counsel for Melbourne Water sought that I make a large number of orders or make statements for the guidance of the taxing officer regarding a series of miscellaneous matters. I shall deal with these as they appear in the draft orders offered on behalf of the parties.

(a) Costs reserved.[9] Except insofar as they are otherwise dealt with, costs reserved will be awarded to Melbourne Water.

(b) Mediations.[10] It was agreed that the costs of the two mediations should be included in Melbourne Water's costs of the proceeding.

(c) Transcript.[11] It was reasonable for there to have been transcript at the interlocutory hearings and at trial and in the post trial hearings. They will be part of Melbourne Water's costs of the proceeding.

(i) Application of 10 September 2003[12] The Master dealt with the costs on this date. The order was that there be no order as to costs. I would not disturb this order if, indeed, I had the power to do so.

(ii) Application of 21 August 2007[13] regarding Unisys reports. The costs of the application made on that day were dealt with. The question of the Unisys reports arose merely in passing. I will not make any separate order with respect to the costs of this Unisys order.

(iii) Application of 2 June 2008.[14] This was an order made on the papers extending the report back date for the mediation. The consent order sought by the parties included no order as to costs. I decline to make any order.

(iv) The Ipex application to add Takepana as plaintiff made in August 2008.[15] This application was not pursued. Melbourne Water's costs of this application will be included in its costs of the proceeding.

(v) Melbourne Water's summons dated 16 September 2009.[16] This summons was required for the purpose of seeking costs orders against the non-parties and I will deal with them when I consider that application. Otherwise, it represented an unnecessary step in the proceeding. The costs of the applications heard on 6 October 2009 and 14 October 2009 dealing with the other respects of the costs orders will be included in Melbourne Water's costs of the proceeding.

(vi) Melbourne Water application for summary judgment based on want of authority of Ipex's lawyers.[17] On 21 November 2008 I refused this application and reserved the costs. Counsel for Ipex, as successful party, now seeks them. It seeks, too, the costs of Takepana. I will not make an order for or against Takepana inasmuch as it was not a party to this application.[18]

At the time, the application was dealt with on an interlocutory basis only, leaving to the parties the opportunity at trial to deal more fully with the factual and legal matters which the application raised. As things turned out, the evidence at trial was little different. The legal position, however, changed upon the winding up of Ipex. Nevertheless, the same result was obtained. The preliminary point failed.

In the circumstances, I will order that Ipex have its costs of the interlocutory application. I will not make an order in its favour for the costs of this issue at the trial. It was but one of many issues at trial, albeit a minor one in terms of the trial time. It was not sufficiently discrete to warrant a separate cost order. It will be included in Melbourne Water's costs of the trial.

(vii) Ipex's strike out application 11 April 2008.[19] This was a successful application by Ipex to strike out certain paragraphs of the Melbourne Water defence following which I gave leave to Melbourne Water to replead. No order was made as to costs in this matter leaving Rule 63.17 to operate as to the costs of the amendment. As indicated at the hearing, I will order that Ipex have its costs of this application.

(viii) Excessive discovery.[20] It was put on behalf of Ipex that Melbourne Water discovered a large number of irrelevant documents. I was told in response that this was not so; many of them concerned the impact of the SOE matter which Melbourne Water, but not Ipex, saw as relevant to the significance of the help desk call statistics for the period before October 1999. I accept that the SOE and its impact were matters relevant to the issues at trial. Whether discovery was excessive, I leave to the taxing officer.

(e) Melbourne Water's costs of the amendments to statement of claim.[21] The statement of claim was much amended prior to December 2007 when it was finally accepted. It was subsequently further amended, even at trial.

During the earlier period, the difficulties with the statement of claim were such that I directed that Ipex on each occasion deliver a draft for which leave to file should be sought. In this process, the draft was often itself amended before it was presented for argument. The costs of Melbourne Water dealing with these drafts are to be included in its costs of the proceeding. In my orders of 8 October 2004 and 22 July 2005 I included an order dealing with costs thrown away. For the assistance of the taxing officer I state that Melbourne Water's costs of the Ipex drafts which were delivered but not proceeded with should be included in the costs orders which I have made and which I now make dealing with these Ipex amendment applications. Whether there were drafts dated 19 February 2004, 19 October 2004 and 13 December 2007, I do not know. These will doubtless be placed before the taxing officer.

The statement of claim was further amended during trial. Insofar as drafts were produced and not proceeded with, Melbourne Water's costs of dealing with these drafts should be included in its costs of the proceeding.

I will therefore order that Melbourne Water's costs of the proceeding should include its costs of any draft amendment to the statement of claim, notwithstanding that the draft was not pursued.

(f) Costs of Melbourne Water's amended defences.[22] These costs are included in the costs occasioned by amendments to the statement of claim or those thrown away. I will not make any further orders.

(g) Electronic Discovery.[23] Much of the Melbourne Water documentation was in electronic form. In principle, the Melbourne Water costs of the proceeding should include its costs of the use of technology. I know nothing of the details of this. I understand that there were difficulties associated with the provision of inspection of these documents by the representatives of Ipex in Sydney. There was assertion and counter-assertion as to these difficulties and as to their cause. I am in no better position than the taxing officer to resolve this conflict. I will leave them for taxation.

Associated with this conflict was the contention[24] that Melbourne Water performed work contrary to my discovery orders of 21 November 2008 or failed to comply with those orders. These, too, are matters for the taxing officer.

(h) The witness Papanagotiou.[25] Melbourne Water called as a witness Costas Papanagotiou who was required to come from Greece to give evidence. Mr Papanagotiou was in 1999 employed by Unisys as a team leader in respect of Melbourne Water IT services which were then handled by Unisys. His password appeared on the document, Exhibit 28, an Excel spreadsheet prepared by Unisys containing help desk statistics for the Unisys monthly reports including the information in the HD call table which was prepared by Unisys for Melbourne Water when the RFP was being prepared in March 2003. It will be recalled that the Ipex case was that the information in this table was itself inaccurate and its significance misleading. When he was in the witness box Mr Papanagotiou said he had no recollection of who asked for the information, where the information came from, or what was done with it. Mr Papanagotiou's involvement with Melbourne Water ceased when the Unisys contract came to an end in July 2000 until he sought and obtained employment with Melbourne Water as its contracts officer between October 2000 and July 2003.

Mr Papanagotiou's evidence, which comprised 13 pages of transcript, did not advance the cause of either party.

In cross-examination Mr Papanagotiou said he had been involved with Melbourne Water's IT discovery but, when he was asked whether Exhibit 28 had been separately been brought to his attention, he replied "not necessarily, no". Counsel for Melbourne Water frankly conceded that the witness had been brought from Greece to tell the Court that he had no recollection of the document. When I inquired whether there had been any discussion between the lawyers about whether this evidence might be placed before the Court by affidavit or video link or otherwise, I was told by senior counsel for Melbourne Water that he was unaware of any discussions. When I characterised this as a wasteful extravagance, I was informed by senior counsel for Melbourne Water that consideration had been given to the cost and availability of evidence by video link and that there was little, if any, saving to be had. He said that the decision was made to call the witness to avoid a comment by Ipex.

I accept what counsel has told me and I respect their forensic judgment. The fact remains that this provides an example of the consequence of a want of communication and cooperation between practitioners which characterised this proceeding. The parties may be hostile and distrustful but they engage lawyers who are expected to retain a professional distance from this. It sometimes happens that the client's attitude infects the solicitor. This is another reason to engage counsel. It seems that in respect of this particular incident the expected cooperation and communication did not occur.

I will not include the costs of the witness Papanagotiou in Melbourne Water's costs of the proceeding.

(i) Melbourne Water's foreshadowed champerty application.[26] In the correspondence, the solicitors for Melbourne Water foreshadowed an application in late 2008 to have the Ipex claim dismissed as champertous. The application was not brought. I will not make any order as to the costs of this, which I treat as part of the give and take of the litigation. They will lie where they fall.

29 The difficulties with the Court Book exemplified many of the problems which beset this case from the outset. They arose from the apparent practice of the Ipex lawyers of doing as little and as late as possible and that of the Melbourne Water lawyers in doing as much as possible. These conflicting attitudes were reinforced by what seemed to me to be a complete inability of the lawyers to communicate and cooperate, even in routine matters. This had the consequence that an interlocutory matter, which would normally have been resolved without difficulty, became a major issue. Moreover, the parties appeared before me with multiple counsel and multiple solicitors on many occasions where only routine directions were sought. The regrettable consequence of this has doubtless been the very great increase in the costs charged to the respective clients and now in the costs sought against the unsuccessful party. This is to be deplored. I have in an earlier judgment been critical of the lawyers for Melbourne Water in this regard. If the manner of presentation of these applications for costs is any indication, my concerns appear to have gone unheeded by both parties. Doubtless the taxing officer will scrutinise the costs claims of the parties with particular care to ensure that these practices have not caused costs to be incurred needlessly.

30 On 21 November 2008, I made the trial order including a direction in usual form that Ipex prepare the Court Book. The timetable was tight; Ipex was to deliver its draft index by 16 January 2009 and Melbourne Water by 23 January to advise any further documents required. The Court Book was to be delivered by 9 February 2009 for trial to commence on 16 February.

31 The Court Book as printed comprised 1732 documents and 18,881 pages which, I was told on behalf of Ipex, was excessive and that, of these, Melbourne Water required the inclusion of 12,024 pages. In fact, of the 18,818 pages, in the Court Book, (excluding pleadings) the number of pages tendered in evidence was only 6,723.

32 Furthermore, the arrangement of the Court Book was unsatisfactory. Documents were not in date order; it was a very difficult Court Book to work with.

33 These deficiencies were accepted by both parties. Counsel for Melbourne Water protested that there were 4,031 pages which were duplicates and that the solicitors for Ipex ought to have removed them.

34 Ipex said that the Melbourne Water list of documents was delivered late, on 24 January, and that it had insufficient time to remove duplicates and to organise the two bundles together. The Court Book was, even so, delivered three days late.

35 The costs of the proceeding have been awarded to Melbourne Water. These will include those of the Court Book. These costs, I would suppose, will comprise principally the costs of copying the Court Book for use at trial.

36 From my perspective, the Court Book was a very unsatisfactory document, both in its size and in its organisation. This problem was contributed to by the readiness of Melbourne Water to load it with documents which were not tendered and by the reluctance of Ipex to perform its functions of collating and preparing it in proper form. In the circumstances, I will include in the costs of Melbourne Water of the proceeding only 70% of its costs with respect to the Court Book.

37 It is not at all customary for the parties to seek certifications as was done here. Nevertheless, I shall venture my views briefly upon each of the claims. In so doing, however, I would not like it to be thought to be in any way encouraging the practice.

38 The attendance of two counsel at trial was not in issue. I agree that it was appropriate. I have already mentioned the readiness of Melbourne Water to attend in such numbers upon routine interlocutory applications. I would encourage the taxing officer to scrutinise this aspect most carefully, notwithstanding that costs are to be taxed generally on a solicitor client basis.

40 This was a complex proceeding so that, in principle, written submissions were helpful and should be allowed. My general impression, however, was that the volume of written submissions and affidavits produced by Melbourne Water was often greater than the contest required. I do not include in this observation the written final submissions presented at trial, which I found very helpful.

41 I do not criticise Melbourne Water for retaining and calling Mr Rehkopf or Mr Rundell as expert witnesses. Their reasonable costs should be included in the Melbourne Water costs of the proceeding.

42 Pursuant to orders made for the provision by Ipex of security for costs, sums totalling $1,948,800 have been paid into court. From my general familiarity of this proceeding I have no doubt that the taxed costs of Melbourne Water will exceed this sum. I am mindful of the fact that certain costs of the proceeding have been ordered to be paid by Ipex and that some have been paid and that the others will be set off against the Melbourne Water costs.

43 Counsel for Ipex argued that an order releasing security was premature. I should leave the security in place until costs are determined. He offered, too, criticisms of the amount of $1,000,000 ordered by Efthim AsJ on 14 August 2009. I am, however, not here required to consider his Honour's determination. That is for appeal, if there be an appeal. In response, counsel for Melbourne Water offered an undertaking that if, upon taxation or otherwise, the costs of the parties should result in a net payment in favour of their client in a sum less than the amount of the security, Melbourne Water would pay the surplus back into court. It was not suggested that there should be any concern about the capacity of Melbourne Water to meet this undertaking if required to do so. In the circumstances, I will, with some modification, proceed on the basis proposed by Melbourne Water.

44 The modification which I have in mind concerns the payment of the surplus. There is no reason why it should not be returned to Ipex. Since this was not argued before me and since I require an undertaking, I will say nothing further about it at this stage save to indicate my disposition to order the money in court to be paid to Melbourne Water on account of their entitlement to costs to be determined and that this be subject to its giving of an appropriate undertaking.

45 Ipex is in liquidation and cannot meet any order for costs. Melbourne Water in its summons of 16 September 2009 seeks costs orders against its former parent company, Takepana, and against Joel Schwalb, a director of Takepana. This application falls into two parts. The costs sought against non-parties are those of the proceeding and also those which have already been made in the proceeding against Ipex. In the argument before me no distinction was drawn between these; argument focussed upon the question whether the order should be made against a non-party.

46 At the costs hearing the non-parties, who were represented by counsel for Ipex, accepted in each case that an order should be made against Takepana. Counsel resisted an order against Mr Schwalb personally. I should observe that, since each of Takepana and Mr Schwalb was named as respondent to the summons and served, they are, technically, parties.[34] Nevertheless, for the purpose of this application, I treat them as non-parties in the proceeding generally.

47 It is not necessary that I set out at any length the history of the proceeding and of the involvement of Takepana and Mr Schwalb prior to Ipex going into receivership. It will be recalled that the Ipex shares were owned by Takepana until they were sold to Volante in December 2003 and that Volante in 2006 became a wholly owned subsidiary of Commander Communications Ltd. In August 2008 Commander and its subsidiaries, including Volante and Ipex, went into administration and receivership. On 24 November 2008 the creditors of Ipex resolved pursuant to s 439C(c) of the Corporations Act that Ipex be wound up.

48 Takepana is, and at all material times since the commencement of this proceeding has been, the trustee of the Schwalb Family Trust No. 1. Its directors and secretaries are and were Joel Schwalb and Yoav Abraham Schwalb, both of 34 Otira Road, Caulfield. Under the 2003 share sale agreement it appears to have been the intent of Takepana and Volante that this litigation would be continued for the benefit of the Schwalb Family Trust.

49 The current ASIC search shows that Takepana has a paid up capital of $3. There is no evidence that it has any assets other than, I would suppose, a right of indemnity against the trust assets, if any. Efthim AsJ was in August 2009 not satisfied that Takepana had the means to support its undertaking to pay the costs of Melbourne Water of this proceeding and those of the State of Victoria in another proceeding. I proceed on that basis.

50 In the course of argument it was asserted, and I accept, that the Schwalb Family Trust No. 1 is a discretionary trust for certain members of the Schwalb family. No further details are in evidence. At the hearing before Efthim AsJ counsel for Takepana said that Mr J Schwalb stood behind Takepana and that "It's a trustee company and he's a beneficiary among others, I think".

51 The evidence showed that Mr J Schwalb was the motivating force behind the Melbourne Water contract and the litigation which it has produced. He interviewed Mr Keeble in Singapore and persuaded him to give evidence at the trial. It was he who provided instructions to the Ipex lawyers.

52 The sale price for the Ipex shares under the share sale agreement was paid by the issue by Volante of 50,854,700 new shares plus a contingent call option. It seems that these shares when issued were registered, not in the name of Takepana but in the name of Summit Nominees Pty Ltd, a company in which Mr J. Schwalb had, in September 2005, a relevant interest within the meaning of s.608 of the Corporations Act. The value of the consideration for the Ipex shares was given at $70 million. This gave Takepana a 46.75% interest in Volante and entitled it to three members on the board. Mr J Schwalb and Mr YA Schwalb and another Ipex director became directors of Volante in February 2004.

53 About this time, in March 2004, Volante, in response to pressure on behalf of Melbourne Water, agreed to provide a guarantee of the Ipex costs.

54 In June 2005 Mr Y Schwalb resigned as director of Volante and in September of that year so too did Mr J Schwalb. In the meantime, the Schwalb controlled shareholding in Volante was reduced to not more than 5%. It was in the following year that Volante became part of the Commander group. The Volante guarantee nevertheless remained in place.

55 The litigation continued thereafter under the direction of Takepana and Mr J Schwalb.

56 The burden lies on Melbourne Water to establish the factual basis for the non-party costs order which it seeks. No attempt was made on behalf of Mr J. Schwalb to offer any evidence as to the matters bearing on this issue. He swore a short affidavit on 25 September 2009 asserting only that his involvement was that of a director of Ipex and later of Takepana. This affidavit was not challenged. He was not cross-examined.

57 In the course of the hearing before Efthim AsJ, where one matter in issue was the ability of Takepana to support its proposed undertaking, his Honour put directly to counsel for Takepana the question whether their client had any assets. The exchange recorded in paragraph 35 of the affidavit of Jesse Sol Gleeson affirmed 16 September 2009 is disturbing. In response to the question, senior counsel for Takepana said this:

1. Your Honour knows a number of things. First, Your Honour knows it has the proceeds of the sale of its shares.
2. What are they worth?
3. $1.7 a share I'm told and over 50,000,000 shares.

In fact, passing over the fact that there were actually 25,520,692 Ipex shares sold, so that counsel must have been referring to the number of shares in Volante which were issued, it is not at all clear that Takepana ever owned these Volante shares. Most of them are not presently owned by Takepana or by any company in which Mr J. Schwalb holds a relevant interest. Finally, the present value of the shares in Volante (in liquidation) is not likely to be a cause for any confidence.

58 I accept the invitation of counsel for Melbourne Water to infer that any evidence that might have been given by Mr J. Schwalb upon these matters would not have been of assistance to his present cause.

59 I am mindful that the party in question is Mr J. Schwalb. Some of the evidence upon which I was invited to rely came from other sources, but no objection was taken, nor was I encouraged not to act upon it. The position taken on his behalf was that no facts were established to detract from his contention that everything he did during this litigation, he did, not on his own behalf, but as a director of Takepana which was the true beneficiary of the litigation if it were successful.

60 On behalf of Melbourne Water, reliance was placed upon the general proposition that costs may be awarded against "the real party" to litigation. Section 24 of the Supreme Court Act 1986 confers a broad discretion on the matter of costs.

(1) Unless otherwise expressly provided by this or any other Act or by the Rules, the costs of and incidental to all matters in the Court, including the administration of estates and trusts, is in the discretion of the Court and the Court has full power to determine by whom and to what extent the costs are to be paid.

(2) Nothing in this section alters the practice in any criminal proceeding.

The power and discretion of the Court as to costs under section 24 of the Act shall be exercised subject to and in accordance with this order.

61 It is well established that the Court under these provisions may order that costs be paid against a person who is not a party in the proceeding. This is, of course, an exceptional order; costs are usually ordered only against a party and there is some debate as to the circumstances in which this exceptional power might be exercised.[35]

62 One of these circumstances, however, is that where the non-party promotes and funds the proceeding brought by an insolvent company solely or substantially for his or her own benefit. In the recent case of Jeffery & Katauskas Pty Ltd v SST Consulting Pty Ltd[36] the majority of the High Court quoted with approval the following passage from Knight's case which identified the general category of cases presently under consideration:

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. [37]

63 It was put against the making of the order that Mr J. Schwalb was acting only as a director and that he should not by carrying out his directorial duties by exposed to personal liability.

64 So much cannot be doubted, but in the present case the nominal plaintiff had no real interest in the litigation. Under the share sale agreement, all the benefit and burden of this litigation was cast upon Takepana and this as a trustee company only. Mr J. Schwalb is one of the two directors of Takepana and, to that extent, a decision-maker with respect to the exercise of its discretionary powers. He is, as counsel conceded, a beneficiary of the trust and therefore a potential object of this discretion. All of this means that the fruits of the litigation were his or substantially within his gift.

65 His financial involvement in the litigation in terms of securing the Volante guarantee, meeting interlocutory costs orders and in offering personally "to provide appropriate security" for costs in September 2008, was not denied. Equally, his active involvement, inasmuch as he provided instructions to the Ipex lawyers, was not disputed.

66 I accept, too, that, as a company with a $3 paid up capital, Takepana has not and has never had the resources to meet an order for costs out of its own funds. It is, however, likely that it has access to funds since very substantial amounts have been paid to meet orders for costs and for security. Whether these were made from the trust assets to which Takepana might look for indemnity, I do not know. Given the manner of the dealing with the proceeds of the sale of the Ipex shares, I consider it likely that these funds were sourced elsewhere from funds available to Mr J. Schwalb. On the slender evidence, and absent any evidence to the contrary, I so find.

67 This being the case, the situation is somewhat removed from that of the conscientious company director fulfilling his or her directorial duties. If it is sufficient to activate a claim for personal liability in a director that a company incurs a debt when insolvent, it can come as little surprise that a similar fate might befall a director of such a company who embarks for his own benefit upon ultimately unsuccessful litigation in which the company incurs a costs liability to another party to the litigation.

68 This case has the further dimension that Ipex is in liquidation. The order for costs which I make against it is a debt provable in the winding up. As it happens, there are, I have been told, no assets, so that creditors are not to receive any distribution. If the result of this litigation had gone in favour of Ipex, it would be most unfair to the creditors if they found themselves having to apply assets to meet a Melbourne Water costs order. The arrangement which I found to exist in rejecting Melbourne Water's application that the lawyers on the record for Ipex were not authorised, is an arrangement which was put in place to avoid this possibility and also to ensure, so far as possible, that the fruits of litigation should not be shared with those Ipex creditors.

69 In the circumstances, I will make an order that Mr J. Schwalb pay any unsatisfied costs liability which Ipex has incurred to Melbourne Water after the costs payable have been determined and set off.

70 I will order that the costs orders as between Ipex and Melbourne Water be set off so that the balance only is payable. This will mean that the costs will not be payable until all the costs are resolved. I will, however, reserve liberty to apply with respect to payment in case payment of a substantial sum is held up pending resolution of some relatively minor contra costs orders.

71 I have already indicated that, save for the orders sought against the non-parties, the summons of 16 September 2009 was unnecessary. The costs applications were heard over two days. This was excessive in the sense that many of the matters were not appropriate to have been brought on before me. I will therefore include the costs of 6 October 2009 in Melbourne Water's costs of the proceeding. I will make no orders as to the costs of 14 October 2009.

72 I invite counsel for Melbourne Water to bring in a draft order dealing with the matters which have been debated before me and which I have resolved in this judgment.

[1] Melbourne Water draft order para 1; Ipex draft order para 1.

[3] [2008] VSC 331.

[4] [2005] VSCA 298; (2005) 13 VR 435, 442, [25] (Warren CJ, Maxwell P, Harper AJA).

[5] Luxmore Pty Ltd v Hydelade Pty Ltd [2008] VSCA 212; (2008) 20 VR 481, 484, [11] (Maxwell P, Kellam JA)

[7] Outline of Argument dated 25 September 2009, para 18.

[9] Melbourne Water draft order para 2(a).

[10] Melbourne Water draft order para 2(b); Ipex draft order para 17(b).

[11] Melbourne Water draft order para 2(c).

[12] Melbourne Water draft order para 2(d)(i).

[13] Melbourne Water draft order para 2(d)(ii).

[14] Melbourne Water draft order para 2(d)(iii).

[15] Melbourne Water draft order para 2(d)(iv).

[16] Melbourne Water draft order para 2(d)(v).

[18] I deal with Takepana's liability for costs generally below at [45]-[69].

[21] Melbourne Water draft order para 2(e).

[22] Melbourne Water draft order para 2(f).

[23] Melbourne Water draft order para 2(g), (h).

[24] Ipex draft order paras 10, 11, 12 and 13.

[28] Melbourne Water draft order para 3.

[29] Melbourne Water draft order para 4.

[30] Melbourne Water draft order para 5.

[31] Melbourne Water draft order para 6.

[32] Melbourne Water draft order para 7; Ipex draft order para 18.

[33] Melbourne Water draft order paras 2, 8.

[34] See Supreme Court Act 1986 s 3 and Rule 63.01.

[35] See Burns Philp & Co Ltd & Anor v Bhagat [1993] VicRp 13; [1993] 1 VR 203, 217 (Brooking J), cited with approval by Mason CJ and Deane J in Knight v FP Special Assets Ltd [1992] HCA 28; (1992) 174 CLR 178, 192 [25].

[36] [2009] HCA 43, [31]-[32].

[37] Knight v FP Special Assets Ltd [1992] HCA 28; (1992) 174 CLR 178, 192 [25].