Plaintiff v Defendant

Supreme Court of Victoria|2011-02-22|Before: SIFRIS J

PRACTICE AND PROCEDURE - COSTS - Plaintiff failed entirely - Calderbank offer - Whether non-acceptance unreasonable - Whether costs order should be made against non-party - Plaintiff insolvent - Litigation conducted for benefit of family trust - Non-party director of trustee and object of trust - Order not made against non-party - Whether indemnity costs should be awarded in relation to specific matters - Whether costs should be apportioned - Plaintiff successful on one issue.

1 On 29 October 2010, I published my reasons for decision. I dismissed the plaintiff's claim and indicated that I would hear from the parties in relation to costs.

2 The parties have filed detailed written submissions in relation to costs and oral submissions were made on 9 December 2010.

3 There are four issues in relation to costs. First, who should pay the costs. Secondly, whether all of the costs should be paid. Thirdly, the scale of costs. Fourthly, costs that were reserved.

4 The plaintiff ("Ipex") is in liquidation. On 14 August 2009, Efthim AsJ granted Takapana Pty Ltd ("Takapana") leave to continue the proceeding in the name of Ipex. The application was made pursuant to s 477(6) of the Corporations Act 2001 because Ipex was in liquidation.

5 In granting leave, Efthim AsJ noted that it was conditional on Takapana undertaking to be liable for the defendant's costs of the proceeding. Such undertaking was given. Further orders were made for security for costs.

6 Takapana is trustee of a discretionary trust for the benefit of certain members of the Schwalb family, including Mr Joel Schwalb. Takapana has a paid up share capital of $3.00. It is however, presumably entitled to a right of indemnity or exoneration from the assets of the trust. Although there is no evidence of the financial position of the trust or the trust deed itself, there is evidence that Takapana has made substantial payments in relation to costs and security for costs.

7 In the circumstances and consistent with its undertaking, it is entirely appropriate that Takapana be subject to a costs order and indeed such an order is not, as such, resisted. Accordingly, and subject to the remaining identified matters, I propose to order that Takapana pay the defendant's costs of the proceeding.

8 I am not prepared to make an order for costs against Mr Schwalb personally.

9 First, the proceeding was not for the benefit of Mr Schwalb personally, but Takapana (although indirectly Mr Schwalb, and no doubt others, may benefit). Takapana is therefore liable for the costs. It gave an undertaking to such effect. The fact that Mr Schwalb in a practical sense "stands behind" Takapana is not to the point and is not sufficient to render him personally liable. Something more is required.

10 Secondly, it has not been demonstrated that Takapana, despite its limited share capital, is unable to pay any costs order. It has paid substantial costs to date and paid into court all amounts ordered by way of security for costs. Further, it is presumably entitled to a right of indemnity out of the assets of the trust which, it may be assumed, exceed $3.00.[2]

11 Thirdly, the conduct of Mr Schwalb personally has not been such that he should be ordered to pay the costs personally. It is not to the point that he has been involved in providing instructions and taken an active role in the case. A director of a company is entitled, and perhaps even obliged, to be involved in the management and control of litigation - even to the extent of making tactical decisions - without necessarily being liable for any adverse costs order. Someone is required to give instructions on behalf of a corporate entity. Something more is required to render Mr Schwalb personally liable.

12 In IPEX ITG Pty Ltd v Melbourne Water Corporation (No 6)[3] ("Melbourne Water Corporation case") Byrne J made an order to the effect that Mr Schwalb pay any unsatisfied costs liability. Similar arguments were made to his Honour in similar circumstances. In both cases Ipex was the unsuccessful plaintiff. However, in the facts and circumstances of this case, and despite the similarity, I have reached a different decision to that of Byrne J. His Honour considered that Mr Schwalb's conduct went beyond that of a conscientious company director. Critically and relevantly, his Honour found that Mr Schwalb embarked on the litigation for his own benefit and was, as such, the real plaintiff. I respectfully disagree.

13 The real plaintiff in this case was Takapana. The real beneficiary of any fruits of the litigation was the discretionary trust of which Takapana was trustee. The fact that Mr Schwalb may have had the power (alone or with others) to direct distributions to discretionary beneficiaries (including himself) does not make him personally the exclusive substantial or part beneficiary of the fruits of the litigation.

14 In any event, there is insufficient evidence of these matters and I am not prepared to simply ignore the corporate and trust form and structures. Awarding costs personally against an individual non-party is an exceptional remedy and should only be used in the clearest of cases.[4] Simply put, the proceeding was not solely or substantially for Mr Schwalb's benefit and he was not, in a real sense, the true plaintiff.

15 Further and in the circumstances it is not, in my opinion, in the interests of justice that Mr Schwalb be personally liable for the costs or any unsatisfied costs liability. If he was an excluded beneficiary with no prospect of any fruits of the litigation he would not be liable simply because as a director of Takapana he pursued the litigation with vigour and stood behind the litigation in the sense of providing instructions. I am not convinced that being a potential beneficiary (or having the ability to determine any distributions if this be the case) makes any real difference or is sufficient to underpin the critical basis of liability, namely a sufficient personal financial interest in the litigation.

16 Finally, I should say that this aspect of the case has caused me some difficulty. However, in the end a close connection with the case - as Mr Schwalb undoubtedly had - is not sufficient. The close connection must be such that in a real, direct and material sense Mr Schwalb should be regarded as the real party.[5] For the reasons given the better view is that he is not.

C. Should the defendant recover all of its costs?

17 The plaintiff was successful in one of the issues in the case which, it contended, was a main issue and a discrete point. Accordingly, it contended that it should recover its costs in relation to that issue and not be liable for the defendant's costs relating to that issue.

18 The relevant issue concerns the existence of what the plaintiff called a "tender process agreement". I found that there was, contrary to the submissions of the defendant, a tender process agreement but, that there was no breach of such agreement.

19 The plaintiff contended that this was a significant finding that occupied a substantial amount of court time and that on the authorities[6] I am entitled to apportion the costs.

20 The defendant contended that this is not an appropriate case for the fragmentation or apportionment of costs in relation to discrete issues.

21 The parties are agreed on the authorities. The principle is clear. A court does have power to deny a successful party costs associated with an issue that it did not succeed on in the event that the circumstances call for such an order. It is usually the case that the issue is a discrete issue and one that occupied a substantial amount of court time.

22 In my opinion, this case does not call for such an apportionment. It is true that the plaintiff succeeded in a central allegation in its case. However, the case was more about breach than the existence of the tender process agreement, particularly in light of the admission by the defendant that it was subject to some duty or obligation (although not arising ex contractu). The essence of the case and the evidence was the alleged breach of obligation however arising. Further, as pointed out by the defendant, the issue as to the tender process agreement was resolved by reference to the documents and not any evidence given by the parties.

23 Accordingly, and in the exercise of my discretion, I will not deny the defendant its costs associated with the limited argument in relation to the tender process agreement on the basis submitted by the plaintiff.

24 The defendant submitted that it should have its costs on an indemnity basis because of two calderbank letters that it served on the plaintiff.

25 Both calderbank letters made an offer that the proceeding be compromised by the plaintiff withdrawing its case, each party to bear its own costs.

26 The first calderbank offer was made on 27 August 2007, a time prior to the court striking out the plaintiff's initial claims relating to corruption.

27 The second calderbank offer was made on 31 March 2009. At the time of the second offer, the defendant had costs orders in its favour. In the calderbank offer of 31 March 2009 the defendant offered to forego costs orders in its favour and offered, in effect, to walk away. As at the date of the letter, the defendant had prepared a bill of costs in the sum of $94,201.28.

28 It is necessary to assess whether, in all of the circumstances of the case, it was unreasonable for the plaintiff to reject the various offers made by the defendant.[7]

29 In determining whether it was unreasonable for the plaintiff not to have accepted the offers made by the defendant, there is authority to the effect that where the offer does not involve a genuine compromise, but is in fact an invitation to capitulate, it is not unreasonable for the losing party to have rejected it.

30 In Berrigan Shire Council v Ballerini & Anor (No. 2)[8] ("Berrigan Shire Council Case"), Callaway JA observed that the treatment of calderbank offers comes down to the question of whether the rejection was unreasonable in the circumstances. In that case, the offer was an offer to walk away. Callaway JA characterised the offer as a demand to capitulate that could reasonably be rejected.[9]

31 The plaintiff has further referred to a recent decision of Cavanough J in Truenergy Pty Ltd v Dispute Resolution Panel (No. 2).[10] In that case, Cavanough J considered that a meaningful calderbank offer should involve "a real and genuine offer of compromise".[11] His Honour considered that in order for a calderbank offer to be taken into account by the court, it should be attractive in all the circumstances and not merely comprise, in effect, a demand to capitulate. His Honour referred to the decision of the Court of Appeal in the Berrigan Shire Council Case.[12]

32 In my opinion, and in the circumstances of this case, it was not unreasonable for the plaintiff to reject the defendant's calderbank offers. In the context of this case, the letters do, in effect, amount to a demand to capitulate. I do not consider that the offer to abandon or forego any costs order is, in the circumstances of this case, a sufficient compromise of the plaintiff's claim. Further, it is not without some relevance that the plaintiff has succeeded in establishing that there was a tender process agreement as contended for.

33 In the event that it did not succeed in obtaining an award for indemnity costs based on the calderbank offers, the defendant put forward a further basis for the recovery of indemnity costs in relation to a number of particular issues. As a matter of principle, indemnity costs orders may be made in relation to specific issues, particularly if they are discrete issues. However, this is often undesirable and may cause very difficult issues of assessment where the issue is a common or overlapping issue or where a hopeless cause of action involves an unjustified inference from facts that are, in any event, relevant to other issues.

34 The defendant submitted that whatever the fate of the application based on the calderbank offers, it should be awarded costs on an indemnity basis in relation to four discrete issues.

35 The first claim relates to the costs thrown away by reason of the plaintiff pursuing the claims that were struck out by Daly AsJ on 3 March 2008. The defendant submitted that those initial claims were wholly speculative and without merit. The initial claims were serious allegations of corruption without, it was submitted, adequate foundation. Indemnity costs were not ordered at the time the initial claims were struck out. The defendant obtained the usual costs order in relation to the application and costs thrown away were reserved. Although there is some merit in the application, in the exercise of my discretion I decline to order indemnity costs in relation to this claim.

36 The second claim relates to the allegation by the plaintiff that there was a particular supply policy. This claim was ultimately abandoned at trial. The claim was without merit. Despite the pleading, the issue was never a major question in the case and again in the exercise of my discretion, I decline to order indemnity costs.

37 The third claim relates to the late application by the plaintiff to amend its Further Amended Statement of Claim and rely on the evidence of Mr Warr. The application was not successful and costs were reserved. Although the application was unsuccessful, I am not prepared to order indemnity costs.

38 The fourth claim for indemnity costs relates to the plaintiff's claim for loss of profit. The defendant submitted that the plaintiff led no evidence in support of this claim and such failure was not explained. Again, although there is some merit in the application, I decline to order indemnity costs.

39 The final costs issue relates to a number of orders where costs were reserved.

Master Daly (as her Honour then was). The order related to the plaintiff's summons dated 19 March 2008. The plaintiff sought discovery and leave to amend its statement of claim. Given the way matters unfolded on the day (and in the case) the most appropriate order is that each party bear its own costs.

Daly AsJ. The order related to the defendant's summons dated 8 December 2009 seeking to set the matter down for trial. For the same reasons as set out in (a) above, I am of the opinion that the most appropriate order is that each party bear its own costs.

Sifris J. The order related to the defendant's application for security for costs. In my opinion, the most appropriate order is that the costs be costs in the proceeding.

41 For the reasons given I propose to order that Takapana pay the defendant's costs of the proceeding on a party and party basis, such costs to be taxed in the absence of agreement. Such costs will obviously include the costs of the four specific claims in respect of which indemnity costs were sought (paragraphs 32-38) and the costs referred to in paragraph 37(c) above.

42 In relation to the costs associated with the costs argument itself, I propose in the exercise of my discretion to make no order as to costs.

43 I have previously ordered the release of the funds held in court provided by way of security for costs pursuant to the various orders made in this proceeding.

44 The remaining issue in relation to Exhibit P 1 (the Court Book) is whether the score sheets of Mr Raciti form part of the exhibit.

45 I have read the submissions of the parties and agree with the plaintiff that the score sheets of Mr Raciti are properly part of the evidence. Although the score sheets of Mr Raciti were not specifically referred to, the scoring sheets all of which were in the Court Book were compendiously referred to on many occasions throughout the trial and are properly part of the evidence.

46 Accordingly, the orders of the Court are as follows:

2. Takapana Pty Ltd pay the defendant's costs of the proceeding, including costs reserved and the costs of the transcript, such costs to be taxed as between party and party in the absence of agreement. These costs are not to include the defendant's costs reserved on 11 April 2008 and 16 December 2009 and the costs of the argument in relation to costs.

[1] Ipex ITG Pty Ltd v State of Victoria (No 1) [2010] VSC 480.

[2] The fact that Takapana may not have the means to support the undertaking (as noted by Efthim AsJ on 14 August 2009) is and was indeed relevant to any security for costs application but is of much less relevance to the present argument. It is also not without relevance that Takapana has provided security for costs in the sum of $366,485. A further $1,948,800 has been provided by Takapana in the case referred to in paragraph 12.

[4] Flinn v Flinn & Anor [1999] VSCA 109; [1999] 3 VR 712 ("Flinn") is a much clearer case. The non-party not only financed and conducted the appeal but had a most substantial direct interest in the outcome of the appeal. The Court (Brooking, Charles and Batt JJA) emphasised at [159] the exceptional nature of the remedy. Further in Flinn the evidence of the financial contribution and direct interest of the non-party was clear. Despite the named plaintiff it was clearly on the evidence the case of the non-party. The same cannot be said in the case of Mr Schwalb.

[5] Kebaro Pty Ltd v Saunders [2003] FCAFC 5 at [103], [116].

[6] Ruddock v Vadarlis & Ors (No 2) (2001) 115 FCR 229, Orrong Strategies Pty Ltd v Village Roadshow (No 2) [2007] VSC 205, Nolan v Nolan (No 2) [2004] VSCA 134, GT Corporation Pty Ltd v Amare Saftely Pty Ltd (No 3) [2008] VSC 296.

[7] Hazeldene's Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2) [2005] VSCA 298; (2005) 13 VR 435 at 441.

[9] Chernov JA and Nettle JA in effect agreed with the observations made by Callaway JA.

[12] See also the recent decision of Almond J in Pepe v Platypus Asset Management Pty Ltd (No. 2) [2011] VSC 21 at [15]- [16] where his Honour held that offers of $65,000 and $90,000 were properly rejected in circumstances where the claim was in excess of $1 million.

At a glance

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Judgment (64 paragraphs)

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Cases Cited (2)