Plaintiffs v Defendant

PRACTICE AND PROCEDURE - Judgment in a foreign currency - Equitable compensation based on value of properties located overseas and net rental earned from those properties.

1 On 24 November 2009, I delivered reasons for judgment ('Substantive Judgment')[1] in which I found that the defendant is liable to pay to the plaintiffs equitable compensation comprising:

(a) €8,839,244, representing two-thirds of the value of the interests in various properties in Europe that were restituted to him ('Restituted Properties') prior to the execution of the terms of settlement dated 23 February 2001 ('Terms');

(b) $881,017, representing two-thirds of the net rental earned by the defendant from the Restituted Properties since 1993 ('award of net rental'); and

(c) €115,772, representing an allowance for the rent-free use by the defendant of an apartment in Haštalská 12, Prague, since 1992 ('Haštalská 12 rent allowance').

2 The plaintiffs have now applied for interest and costs, and for an order that judgment be expressed in euros rather than in Australian dollars.

3 For the reasons that follow, I have decided that judgment be expressed in euros and that the plaintiffs be awarded:

(a) simple interest at the rates prescribed from time to time under the Penalty Interest Rates Act 1983 (Vic) ('PIRA') in respect of the award of net rental and the Haštalská 12 rent allowance; and

(b) their costs of the proceeding since it was reinstated in July 2005 on an indemnity basis, with a set-off for costs already awarded and paid pursuant to orders made by this Court since July 2005.

4 The Court has inherent jurisdiction to give judgment in an amount expressed in a foreign currency.[2]

5 Mr Howells, who appeared for the plaintiffs, submitted that judgment should be expressed in euros because that was the currency in which the Restituted Properties were valued and in which the sale of any property to satisfy the judgment is likely to be made. Mr Williams, who appeared for the defendant, did not seriously resist the course proposed by Mr Howells. Accordingly, judgment will be expressed in euros.

6 The Supreme Court Act 1986 (Vic) ('Act') contains three sections which authorise the Court to award interest, namely ss 58, 59 and 60.

7 Section 58(1) provides that where 'a debt or sum certain is recovered', the Court must, on application, allow interest at a rate not exceeding the rate for the time being fixed under s 2 of the PIRA, unless good cause is shown to the contrary. This section does not apply to this case because, until the Court assessed the equitable compensation payable by the defendant, that amount was neither a debt nor a sum certain.[3]

8 Section 59 relates to particular types of proceedings and is not applicable to the present case.

9 Section 60(1) provides that the Court, on application, in 'any proceeding for the recovery of debt or damages' must, unless good cause is shown to the contrary, give damages in the nature of interest at such rate not exceeding the rate for the time being fixed under s 2 of the PIRA as it thinks fit from the commencement of the proceeding to the date of the judgment. This section applies to this case, as equitable compensation, which is sometimes referred to as equitable damages, is a form of 'damages' for the purposes of the Act.[4] Section 60(2) provides that nothing in s 60 authorises the granting of interest on interest or limits the operation of any rule of law which provides for the award of interest.

10 The Court has inherent equitable jurisdiction to award interest when the interests of justice so demand, including in circumstances where money has been withheld or misappropriated by a fiduciary.[5] The right to interest in equity exists independently of statute.[6]

11 Traditionally, in fixing the rate of interest, equity broadly distinguished between two classes of case. In cases involving a breach of trust or misconduct, the fiduciary was charged interest at the mercantile rate of five per cent per annum. In all other cases, the defaulting fiduciary was charged interest at a rate of four per cent per annum.[7]

12 More recently, however, the courts have departed from the fixed interest rates of four and five per cent. In Hagan v Waterhouse,[8] McKearney J said:

I think that the volatile range of fluctuations in interest rates in recent times ought to be taken into account in applying to these changed conditions the policy of the Court which was settled in times of greater monetary stability. Since then a fundamental change has resulted from financial deregulation and its consequential uncertainties. I consider that it is no longer appropriate to apply a policy fixing a settled mean rate of interest, but rather that the mercantile rate should reflect the reality of the market place as it exists under a regime not in contemplation at the time of the foregoing pronouncement of judicial attitudes.[9]

13 An example of this more flexible approach is provided by Murdocca v Murdocca (No 2).[10] In that case, Campbell J decided that the appropriate rate to be paid in respect of the late performance of a personal equitable obligation to transfer money was the standard rate specified in the relevant court rules for interest upon judgments.[11]

14 Equity does not award interest in order to punish the defaulting fiduciary. Rather, interest is awarded in order to restore to the innocent party the benefit derived by the defaulting fiduciary from his or her use of the property.[12]

15 In some circumstances, it will be appropriate for the Court to award compound interest. As stated by Boehm AM in Southern Cross Commodities Pty Ltd (in liq) v Ewing, the principle is that a defaulting fiduciary 'may, and normally will, be charged with compound interest with yearly rests not only where he has used the money for his own commercial purposes, but also where he has been guilty of fraud or serious misconduct.'[13] Compound interest is awarded in order to ensure that no profit remains in the hands of the defaulting fiduciary.[14]

16 In Fico v O'Leary,[15] EM Heenan J said that an award of compound interest should ordinarily be considered only in cases where the defaulting fiduciary is being compelled to disgorge a gain. His Honour said that, in cases where equitable compensation is assessed by reference to the innocent party's loss, it is appropriate to award only simple interest:

When it comes to interest on money compensation awarded in a case of breach of fiduciary duty I consider that the cases in which interest is invariably allowed, at commercial rates, and sometimes a[t] compound interest are those in which the fiduciary has made a gain, or is presumed to have made a gain, from his improper use of property or opportunities derived from his fiduciary position. On the other hand, where the remedy which is being awarded by the court is not to strip the fiduciary of any gain made at his beneficiaries' expense, or to account for profits which he should have earned for his beneficiary, different considerations apply. Where, as in the present case, equitable compensation is being awarded to restore the beneficiary to the position in which he would have been had the loss not occurred, the principle is, as already described, to restore the plaintiff as far as possible to his original situation. In my view, in these circumstances this requires no more than an award of simple interest at or near market rates to compensate the plaintiff for the loss of the opportunity to apply the moneys which he had lost in other income producing endeavours. For this reason I consider that the interest which should be allowed on each of the components of the equitable claim for compensation ... should be the ordinary judgment rate prescribed by the Rules of the Court ...[16]

How the amounts of $881,017 and €115,772 have been calculated

17 The calculations for the award of net rental of $881,017 are set out in Table 9 at [200] of the Substantive Judgment. That table is as follows:

Table 9: Component of equitable compensation based on 2**/3 of net income**

Adjustment for 23/2/01 restituted ownership interest

18 The calculations for the Haštalská 12 rent allowance of €115,772 are set out in Table 10 at [202] of the Substantive Judgment. That table is as follows:

Table 10: Allowance for defendant's rent-free use of an apartment

19 It was common ground before me that the plaintiffs were not entitled to interest in relation to the value of the Restituted Properties. This is because the award of equitable compensation of €8,839,244 incorporates the plaintiffs' share of the capital appreciation of the Restituted Properties to the date of the Substantive Judgment.

20 In relation to the award of net rental and the Haštalská 12 rent allowance, Mr Williams submitted that the only applicable source of power to award interest was s 60 of the Act. He contended that, under that section, simple interest should be awarded from 8 July 2005, the date on which the proceeding was reinstated. It was said that the Court's inherent jurisdiction to award interest was not engaged in this case because the plaintiffs' claim was contractual, rather than equitable, in nature.

21 I reject Mr Williams' submission. Although the plaintiffs' claim was based on cl 6 of the Terms, that clause entitled the plaintiffs to enter judgment for equitable compensation for a breach of fiduciary duty which the defendant was taken to have admitted. The award of equitable compensation was assessed by the application of equitable principles. That award included recurring rental income which the defendant was obliged to pay to the plaintiffs and which, in breach of his fiduciary duty, he failed to pay. In my opinion, these circumstances are sufficient to engage the Court's equitable jurisdiction to award interest on amounts the defendant has withheld from the plaintiffs in breach of his fiduciary duty. The Court's equitable jurisdiction is not subject to s 60 of the Act, which limits the time from which interest may accrue and the maximum rate of interest payable under the section, and does not authorise the payment of interest on a compound basis.

22 In his written submissions, Mr Williams contended that, as I had found in the Substantive Judgment that it was highly probable that the defendant had used part of the net rental income from the Restituted Properties to purchase further interests in those properties, there would be double compensation if interest were allowed on the net rental income. Mr Williams did not develop this submission orally. I reject the submission. In the Substantive Judgment, I was not able to quantify how much of the net rental income the defendant had used in purchasing further interests in the Restituted Properties. In any event, the value of the additional interests in the Restituted Properties that were purchased by the defendant was disregarded for the purpose of assessing the equitable compensation payable to the plaintiffs.

23 Mr Howells submitted that the Court should award compound interest in this case because the defendant had concealed from the plaintiffs and the Court information about how he used the money which he was obliged to pay to the plaintiffs. He contended that, in those circumstances, the Court was entitled to make adverse assumptions against the defendant. In particular, it was submitted that the Court should assume that the defendant put the money to its best use and made the best return, and that he should pay compound interest on that basis.

24 Mr Howells relied on the 'Robust Assessment Principle' that I discussed in the Substantive Judgment[19] and a number of English cases, including Wallersteiner v Moir (No 2),[20] Westdeutsche Landesbank Girozentrale v Islington London Borough Council[21] and Sempra Metals Ltd v Inland Revenue Commissioners.[22]

25 Although the Court's equitable power to award compound interest is not confined to particular classes of case and may be exercised when appropriate in the interests of justice, the power is not at large. There must be features in each case which justify a departure from the normal rule that simple interest is awarded. All of the cases to which Mr Howells referred have involved interest being awarded as part of a claim for restitution in respect of an actual or assumed gain made by a fiduciary at the expense of a beneficiary. Furthermore, where a gain has been assumed, there has been some evidentiary foundation for the assumption. For example, in Wallersteiner v Moir (No 2),[23] the defendant was a financier and this fact enabled the Court to presume that he used the relevant funds as working capital in his business.[24]

26 In the present case, there is neither evidence of an actual gain made by the defendant nor an evidentiary foundation upon which any gain may be assumed. There is no evidence that the defendant carried on any business other than improving and managing the Restituted Properties. His age and the fact that he has spent, on average, six months in Melbourne in each year since 1990 support an inference that he did not carry on any other business.[25] If he did do so, it is likely that the plaintiffs - who have given evidence about various aspects of the defendant's personal and professional life - would have known about it. The Robust Assessment Principle and the principle in Jones v Dunkel[26] do not permit the Court to make assumptions which would be inconsistent with the logical inferences to be drawn from the known facts.

27 The special referee's report stated that the Restituted Properties located in Prague 1 were in a state of disrepair in 1992 and that significant work has been performed since then to restore them. The report referred to the existence of a regular maintenance program for the Restituted Properties and also to major repairs that were undertaken as recently as 2004. It follows that the defendant has devoted some of his financial resources to improving the Restituted Properties, which has benefited both him and the plaintiffs.[27]

28 Additionally, the special referee's report set out details of significant sums that were spent by the defendant in purchasing the remaining interests in the Restituted Properties that had not been restituted to him. In the Substantive Judgment, I found that it was highly probable that these purchases were funded in part by rental income that the defendant had earned from the Restituted Properties.[28] These purchases also benefited the plaintiffs because they gave the defendant, as sole owner, the power and incentive to improve the properties.

29 It follows that this is not a case involving a claim for restitution in respect of a gain made by the defendant at the expense of the plaintiffs. Rather, it is a case involving the defendant retaining money that he should have paid to the plaintiffs and thereby depriving them of the use of that money. The plaintiffs are entitled in equity to receive interest for their loss of use of the money that they should have received in each relevant year since 1992. Given that Tables 9 and 10 identify the precise amounts for each relevant year, the plaintiffs' loss is the opportunity cost of using the amounts in income-producing activities. As such, for the reasons set out in Fico v O'Leary,[29] an award of simple interest rather than compound interest is appropriate.

30 As for the rate of interest, the most appropriate course is to award interest at the rate prescribed from time to time since 1992 under the PIRA. This is because the defendant is a defaulting fiduciary and the rates prescribed under that Act have been adjusted from time to time in response to movements in market rates.

31 All the amounts in respect of which interest is to be paid should be treated as being payable on 1 July of each relevant year and should carry interest from that day until 10 December 2009.

32 For the purposes of calculating interest on the award of net rental, an adjustment will have to be made for the years 1999 and 2001 because the rental amounts received by the defendant in those years were insufficient to cover the expenses incurred in respect of the Restituted Properties. For those years, the plaintiffs should notionally allow interest to the defendant on the amount of the deficiency and this interest should be set-off against the interest payable by the defendant on the net rental income for the other years. The notional interest payable by the plaintiffs should be calculated on the same basis as the interest payable by the defendant.

33 At the conclusion of the hearing on 8 December 2009, I informed the parties that I would award interest in accordance with the principles I have set out above. I then adjourned the proceeding to 11 December 2009 to enable the plaintiffs' solicitors:

(ii) separate schedules of interest for the award of net rental and the Haštalská 12 rent allowance, calculated in accordance with the principles set out above; and

(b) to consult with the defendant's solicitors in relation to those documents.

34 I requested the parties to file, by 4.00pm on 10 December 2009, an agreed revised Table 9 and schedules of interest or, if they could not reach agreement on those documents, to file their own separate documents with brief written submissions explaining the documents and why they should be accepted in preference to the other party's documents. The parties subsequently informed the Court that they had reached agreement on a revised Table 9 and on the amount of interest to be awarded.

35 Section 24(1) of the Act provides that, subject to the provisions of any other Act or the Supreme Court (General Civil Procedure) Rules 2005 (Vic) ('Rules'), 'the costs of and incidental to all matters in the Court ... is in the discretion of the Court and the Court has full power to determine by whom and to what extent costs are to be paid.'

36 The power and discretion of the Court under s 24 of the Act must be exercised subject to, and in accordance with, O 63 of the Rules.[30]

37 A party to a proceeding is not entitled to recover any costs of the proceeding except by order of the Court.[31]

38 The Rules provide that the costs of a proceeding may be taxed on:

(d) such other basis as the Court may direct.[32]

39 Unless the Court orders otherwise, the costs of the proceeding are to be taxed on a party and party basis.[33] This means that the party whose costs are being taxed will be allowed to recover 'all costs necessary or proper for the attainment of justice or for enforcing or defending the rights' of that party.[34]

40 If costs are taxed on a solicitor and client basis, 'all costs reasonably incurred and of reasonable amount shall be allowed.'[35] Without limiting the discretion of the Court, the Rules provide that costs may be taxed on a solicitor and client basis where the Court makes an order for:

(a) the payment to a party of costs out of a fund; and

(b) the payment of costs to a party who sues or is sued as a trustee.[36]

41 If costs are taxed on an indemnity basis, 'all costs shall be allowed except in so far as they are of an unreasonable amount or have been unreasonably incurred.' Any doubt as to whether the costs were unreasonably incurred or were unreasonable in amount is to be resolved in favour of the party in whose favour the costs order was made.[37]

When will the Court depart from the usual costs order?

42 Although costs are usually taxed on a party and party basis, the Court has a discretion to order that the costs be taxed on a different basis.[38] In Bass Coast Shire Council v King, a case decided before the Rules were amended to distinguish expressly between solicitor and client costs and indemnity costs,[39] Winneke P said:

The discretion to award costs on a solicitor and client basis is ... an unlimited one although it must be exercised judicially and not unreasonably. The circumstances in which a court might be moved to award costs on the solicitor and client scale should be described as 'special' if only to set them apart from the usual basis upon which costs are awarded.[40]

43 The Court can make a special order as to costs in cases where the unsuccessful party has engaged in improper or high-handed conduct that is deserving of criticism.[41] Examples of such conduct include where the unsuccessful party has brought the proceeding for an ulterior purpose,[42] has demonstrated a lack of good faith in the conduct of the proceeding, has endeavoured to exploit a superior financial position or power to 'burn off' another party, or has deliberately delayed the proceeding by taking unnecessary points.[43]

44 The exercise of the Court's discretion to award costs on a solicitor and client or indemnity basis will be influenced by an agreement between the parties to that effect.[44] Indeed, the general principle is that '[w]here there is a contractual right to the costs, the discretion should ordinarily be exercised so as to reflect that contractual right.'[45] The Court's discretion remains, however, even where the parties have agreed that costs should be ordered to be taxed on a special basis. As Vickery J stated in Taree Pty Ltd v Bob Jane Corporation Pty Ltd:

even where a contractual term for the payment of costs on a basis other than the usual party and party basis exists and is expressed in plain and unambiguous language, the Court continues to have a discretion in relation to making orders for the payment of such costs.[46]

45 In Ugly Tribe Co Pty Ltd v Sikola,[47] Harper J noted that 'special circumstances' must exist before the Court will award costs on an indemnity basis. According to his Honour, these circumstances include:

(i) The making of an allegation, known to be false, that the opposite party is guilty of fraud ...

(ii) The making of an irrelevant allegation of fraud ...

(iii) Conduct which causes loss of time to the Court and to other parties ...

(iv) The commencement or continuation of proceedings for an ulterior motive ...

(v) Conduct which amounts to a contempt of court ...

(vi) The commencement or continuation of proceedings in wilful disregard of known facts or clearly established law ...

(vii) The failure until after the commencement of the trial, and without explanation, to discover documents the timely discovery of which would have considerably shortened, and possibly avoided, the trial ...[48]

46 The categories of case in which 'special circumstances' may be found to exist are not closed.[49] The Court's discretion should not be fettered by reading the cases 'in an endeavour to establish a set of inflexible guidelines which should thereafter be determinative of the manner in which the [C]ourt's discretion is to be exercised.'[50]

At the same time, the courts should ... be astute to avoid a wilderness of single instances. Even worse would be the creation of different regimes in different courts, especially as between the Federal Court and a State Supreme Court. This would encourage the undesirable practice of forum shopping, as well as the almost equally undesirable spectre of frequent post-trial applications for costs to be awarded on some special basis ...[51]

48 The categories of case identified by Harper J in Ugly Tribe all relate to the conduct of the proceeding by the unsuccessful party. There is authority for the proposition that, in deciding whether to make an order for costs on an indemnity basis, it is the unsuccessful party's conduct of the proceeding alone that is relevant, rather than any ethical or moral delinquency in the antecedent facts that gave rise to the proceeding.[52] In Harrison v Schipp,[53] the New South Wales Court of Appeal held that the trial judge had fallen into error by exercising his discretion to award indemnity costs to the plaintiff by reference to the defendants' unconscionable conduct and breaches of fiduciary duty. Giles JA, with whom Handley and Fitzgerald JJA agreed, stated:

The unconscionable conduct or breach of fiduciary duty leads to compensatory or other relief and costs on the normal basis, and more must be established for a special order as to costs. In my opinion his Honour's exercise of his discretion was on a wrong principle.[54]

49 Harrison v Schipp was followed by Lindgren J in NMFM Property Pty Ltd v Citibank Ltd (No 2).[55] In the latter case, his Honour stated:

Even in a proved case of fraud, for example, ... the presumption is that a costs order against the fraudulent party will be on the party and party basis. The conduct of a party that is relevant to the issue of indemnity costs is the party's conduct as litigant. But ... the knowledge that a party has, including knowledge of his or her past conduct, may be relevant to an assessment of his or her conduct as a litigant.

...

... [T]he presumption which prevails in favour of party and party costs requires the Court to accept the underlying or background facts of a case as 'a given' and to consider how the parties have conducted themselves subsequently as litigants, while taking into account their knowledge of past events which they carry into that role.[56]

50 Reference was made to this statement by Maxwell P, with whom Mandie AJA agreed, in Velissaris v Fitzgerald[57] and by Smith J in Ali v Hartley Poynton Pty Ltd.[58]

51 Velissaris was an application for leave to appeal against an order for indemnity costs made by a judge sitting in the Practice Court. The original proceeding was brought by the liquidator of the applicant's company and related to a caveat that had been lodged by the applicant in respect of property owned by the company. After quoting Lindgren J's statement in NMFM Property, Maxwell P said the following:

With respect, I would accept that, as a matter of principle, judges should look to the parties' conduct of the litigation to inform the exercise of the costs discretion. But I do not think that the judge's discretion miscarried because it was based upon action taken by [the applicant] before the proceeding commenced. [The applicant] knew that his action was bound to provoke the liquidator - which it did - to commence legal proceedings for the removal of the caveat. To that extent, whilst not a step in the proceeding, the lodgment of the caveat was conduct calculated to lead to litigation and which could be the subject of scrutiny by a judge in the exercise of the costs discretion. Further, it was conduct that had to be viewed in the context of the earlier proceeding for removal of a caveat and the ... orders which restrained [the applicant] in very specific terms from lodging further caveats.[59]

52 To the extent that Lindgren J's statement would limit the Court's discretion, it was doubted in Ali by Smith J, who observed that it was contrary to several judicial statements to the opposite effect.[60] His Honour went on to consider both the antecedent and litigious conduct of the unsuccessful defendant before concluding that a departure from the ordinary rule as to costs was not justified in the circumstances.[61] His Honour did so on the basis that

[o]n any view, ... the wrongs done to the successful party will provide the context within which to judge the subsequent conduct leading up to and during any subsequent litigation. It may make the subsequent conduct more difficult to justify and appear more high handed.[62]

53 Mr Howells submitted that the Court should order the defendant to pay the plaintiffs' costs on an indemnity basis because the defendant's conduct had been egregious. He relied on conduct forming part of the plaintiffs' cause of action - including the breach of fiduciary duty and the breach of the Terms - as well as conduct in the litigation which delayed and obstructed the proceeding and added to the costs. He also submitted that the reference to 'the costs of entering ... judgment' in cl 6 of the Terms was a reference to indemnity costs.

54 Mr Williams submitted that there were no valid grounds in this case for departing from the usual rule that costs should be awarded on a party and party basis. He contended that, if the experienced counsel who negotiated the Terms had intended that the costs referred to in cl 6 of the Terms be indemnity costs, the clause would have described them as such. He said that, in so far as the defendant's conduct in relation to discovery warranted criticism, the Court could award indemnity costs for any additional costs that were incurred as a result of that conduct. There was no warrant, so it was said, for an award of indemnity costs for the entire proceeding.

55 In my opinion, the defendant should pay to the plaintiffs their costs of the proceeding since its reinstatement on an indemnity basis. This is because cl 6 of the Terms requires him to do so.

In the event that the Defendant breaches any term, condition or warranty in this agreement, then the Plaintiffs shall be entitled to enter judgment for an order that the [D]efendant pay equitable compensation for breach of fiduciary duty in respect of each of the Properties and interests in the Properties (as defined in the amended statement of claim) recovered or obtained by him, together with the costs of entering such judgment, and the production of these terms of settlement shall be conclusive evidence of the [D]efendant's irrevocable consent to the entry of such judgment.

57 Clause 6 clearly states that the defendant irrevocably consents to the plaintiffs obtaining judgment for equitable compensation 'together with the costs of entering such judgment'. The clear intention of the parties, as evinced by the words they have used, is that the judgment should be obtained as of right and that the plaintiffs should not be required to pay any of the costs of obtaining judgment. If the parties had simply meant that the plaintiffs would be entitled to costs on a party and party basis, there would have been no need for them to refer to the costs of entering judgment because the plaintiffs would have been entitled to those costs pursuant to the usual practice of this Court.

58 Although the Court is not bound to enforce a contractual provision requiring that costs be awarded on a particular basis, there are cogent reasons for doing so in this case. After resisting the plaintiffs' claims in the proceeding since 1998, the defendant executed the Terms. By doing so, the defendant agreed that, if he breached the Terms, he was to be taken to have admitted that he breached the fiduciary duty alleged in the amended statement of claim dated 18 May 2000 ('2000 ASC') and he agreed that the plaintiffs were entitled to enter judgment against him for equitable compensation for that breach of fiduciary duty. The breach of fiduciary duty alleged in the 2000 ASC was serious and persisted since 1992. The parties agreed that, if that breach was followed by a breach of the Terms, the defendant would not oppose - and, indeed, would consent to - judgment for the plaintiffs including the costs of obtaining judgment. It is in the interests of justice to award costs on an indemnity basis so that the plaintiffs are shielded from liability in relation to these costs, as required by cl 6 of the Terms.

59 Even if my interpretation of cl 6 is wrong, I would still order the defendant to pay the costs of the proceeding since it was reinstated on an indemnity basis because, in my opinion, the defendant's conduct since the proceeding was reinstated constitutes 'special circumstances'.

60 Once the defendant breached the Terms, he was obliged to act consistently with the irrevocable consent given in cl 6 to the entry of judgment against him. The defendant, however, did everything in his power to prevent the entry of judgment. He denied breaching the Terms when it was obvious on the evidence that he refused to sign the transfer documents to effect a transfer of his interest in the properties located in Dresden to the plaintiffs. He then made unmeritorious interlocutory applications - some of which had been rejected earlier by the Court[63] - and pursued legal defences aimed at avoiding cl 6, even though this Court had previously indicated that they lacked substance.[64] The defendant also sought to obstruct the Court's efforts to obtain a valuation of the Restituted Properties, which he knew to be an essential step in the resolution of the proceeding. He did so by refusing to comply with my order of 23 June 2009 that he pay into a trust account $50,000 to cover half of the estimated costs of the special referee and then failing to co-operate with the special referee.[65]

61 There are many instances of obstruction, delay or other inappropriate conduct by the defendant which are set out in various interlocutory judgments and rulings of this Court. They include the following:

(a) The defendant gave evasive evidence at the preliminary hearing before Osborn J in November 2007.[66]

(b) The defendant filed a statement dated 4 April 2008 with the City Court of Prague which gave a false impression about, among other things, the legitimacy and efficacy of this proceeding.[67]

(c) The defendant did not comply with Osborn J's order of 22 August 2008 that he give discovery and file and serve any expert valuation opinion he proposed to rely upon by 6 November 2008. Moreover, the defendant did not inform the plaintiffs until 6 November 2008 that he would not comply with the order.[68]

(d) On 9 September 2008, in opposing an application for a Mareva order, the defendant swore an affidavit stating that he had no intention of disposing of the Restituted Properties. Despite this deposition, he transferred the Restituted Properties located in the Czech Republic to his Prague-based sons on 12 May 2009 without any notice to the plaintiffs or any explanation to the Court.[69] These transfers resulted in a multiplicity of applications to the Court which added significantly to the costs of the proceeding.[70]

(e) The defendant did not comply with my order of 25 March 2009 that he give discovery by 14 May 2009. He swore an affidavit on 12 May 2009 in support of an application for an extension of time. The efforts that he had undertaken to comply with the order between 25 March 2009 and 12 May 2009 were found to be inadequate and unacceptable.[71]

(f) On 13 July 2009, while the plaintiffs were in the process of filing an application for a committal order against the defendant, he visited the Qantas international departure inquiries desk at Tullamarine Airport in circumstances which were capable of giving rise to an inference that he was seeking to flee the jurisdiction. He has not, at any stage, explained his behaviour on oath. His explanation through his counsel, that he visited the airport to meet friends who did not arrive, cannot be reconciled with the evidence adduced by the plaintiffs that he visited the Qantas international departure inquiries desk and was carrying a medium-sized suitcase. An arrest warrant was issued and, in compliance with that warrant, the defendant attended Court before Bongiorno J on 13 July 2009. He misled the Court as to whether he had in his possession a Czech passport in addition to an Australian passport. He was remanded in custody overnight.[72]

(g) As mentioned in [60], the defendant failed to comply with my order of 23 June 2009 requiring him to pay $50,000 towards the estimated costs of the special referee. He made the payment only after an order was made on 17 July 2009 for the amount to be paid into Court, in circumstances where non-compliance with the order would have enabled the plaintiffs to apply for his committal for contempt of court. In my ruling of 17 July 2009, I said the following:

1. The defendant has given an explanation of why he has not complied with paragraph 8 of my Order of 23 June 2009 in paragraph 5(a) of his affidavit of 15 July 2009. I have considered that paragraph only to the extent necessary for, and solely for the purpose of, forming a view as to whether the defendant has provided a sufficient explanation for his failure to pay. I am not satisfied that he has done so.
2. It became clear at yesterday's directions hearing that if the defendant does not pay the $50,000 in accordance with my order of 23 June 2009, the mechanism of a special referee, which the Court has taken great care over a lengthy period to establish to assist it in determining the assessment issues in this proceeding, would be frustrated. Time is now of the essence, given the period of 60 days for the provision of the special referee's report set out in my order of 23 June 2009.
3. In order to protect the integrity of the Court's processes, the only course left open to me is to make an order that the defendant pay $50,000 into court by 4.00pm on Thursday, 23 July 2009, recognising that such an order carries with it the risk of sanction for non-compliance.
4. I have reached my conclusion solely based on what I consider to be necessary for the purpose of protecting the integrity of the Court's processes and furthering the administration of justice. I have not reached my conclusion based on the plaintiffs' submissions that an order for payment into court should be made for the purpose of creating a mechanism to punish the defendant.

(h) In my ruling of 23 June 2009, I decided that the defendant's defence should be struck out at 4.30pm on 7 July 2009 unless he paid to the plaintiffs before that time an amount that had been taxed in their favour. I said:

there has been a pattern of non-compliance or late compliance with the [C]ourt's orders by the defendant over a lengthy period, including, in particular, orders for discovery and an order for expert valuation evidence. On a number of occasions the defendant has not given notice of his inability to meet a deadline in a [C]ourt order until very close to that deadline or after it has expired, necessitating wasteful correspondence and attendances in court.

(i) The defendant failed to comply with paragraph 11 of my order of 23 June 2009 which required him to provide to the plaintiffs copies of his taxation returns by 7 July 2009. On 30 July 2009, Byrne J found that the breach of the order was contumelious.[73]

(j) In my ruling of 21 August 2009, I reviewed the steps that the defendant had taken to comply with my order of 23 June 2009 that required him to provide copies of his taxation returns to the plaintiffs. I referred to inconsistencies in the statements that had been made to the Court by or on behalf of the defendant about his taxation returns and noted:

The stark reality is that the hearing is now just over six weeks away. The defendant's tax returns are crucial evidence for the hearing and the defendant has been aware of that for at least a year. The number of tax returns is not significant in the context of this proceeding.

Since the defendant has been required to remain in Victoria, he has taken active steps to provide copies of the tax returns to the plaintiffs and to comply with Court orders generally. Various things which were previously said by him not to be available or possible have become available or possible. He has given explanations for the various changes in position.[74]

(k) The defendant's efforts in complying with various Mareva orders were half-hearted.[75]

(l) The defendant gave unconvincing explanations to the Court as to the reasons for not complying with various orders and his inability to fund the defence of the litigation. He terminated his lawyers' retainer and subsequently reinstated it, without any adequate explanation.[76]

(m) As mentioned in [60], the defendant failed to co-operate with the special referee. In particular, he prevented the special referee from inspecting the Restituted Properties located in Prague 1. This non-co-operation prevented the special referee from using his preferred valuation methodology in valuing the Restituted Properties. The incomplete and unreliable income and expenditure information that the defendant gave to the special referee prevented the Court from accurately calculating the net income the defendant earned from the Restituted[77]roperties.77

(n) The defendant misled the Court about whether he had taken any steps to transfer the Suchá land to his Prague-based sons. He also gave evidence to the Court about the transfer of the Restituted Properties located in the Czech Republic to two out of his four children and about whether he would return to Australia if he was permitted to leave, which Habersberger J described as '[p]revarication, dissembling and evasion'.[78]

62 The above examples[79] clearly indicate that the defendant adopted an unprincipled, calculating and dogged approach to achieving his apparent aim of defeating the plaintiffs' rights.[80] In pursuit of this aim, the defendant was prepared to mislead the Court and to disobey its orders. His conduct warrants an order for indemnity costs to record the Court's strong disapproval and to enable the plaintiffs to recover a greater proportion of their costs.

63 Mr Howells sought costs for three distinct periods. The first was the costs of the proceeding from its commencement in 1998 until the execution of the Terms in February 2001, with a set-off for the amount of $150,000 that the defendant paid pursuant to the Terms. The second period was the period between the execution of the Terms and the reinstatement of the proceeding in July 2005, and included costs incurred by the plaintiffs in seeking the transfer of the properties referred to in cl 1 of the Terms. The third period was the period following the reinstatement of the proceeding.

64 In my opinion, costs are payable only in respect of the third period. The proceeding, as originally constituted, was settled on 23 February 2001 and the parties' rights and obligations after that time were governed by the Terms. Pursuant to the Terms, the plaintiffs accepted $150,000 for their legal costs. That was part of the consideration for the plaintiffs' rights under cl 6. Once the Terms were breached and the plaintiffs elected to pursue their rights under cl 6, that clause entitled them to the costs of entering judgment and to no other costs.

65 Since the proceeding was reinstated, the plaintiffs have obtained various interlocutory costs orders on a party and party basis. These orders have included the costs of the preliminary judgment of Osborn J dated 24 April 2008 which dealt with the preliminary question of whether the defendant had breached the Terms.[81]

66 In his ruling on costs dated 22 August 2008,[82] Osborn J said:

I ... accept that costs should be awarded only on a party/party basis. The plaintiffs' claim was for breach of the terms of a contract. It was not a claim founded in equity. It is true, as Mr Howells submitted, that the relief provided for by the contract is equitable compensation with respect to the subject matter of the original claim. But the properties comprising the subject of the terms differed from those the subject of the original claim. The defendant has breached an agreement to give the plaintiffs entire interests in some specific properties only. In my view the basis of the plaintiffs' claim does not provide a consequential reason for the award of costs on a solicitor/client or indemnity basis. No other basis for such an award was suggested. In particular, it was not submitted that the conduct of the defence was so unreasonable as to justify such an award.

Insofar as the plaintiffs seek to leave open a further claim for equitable compensation for such costs in the event that they are successful in recovering costs on a party/party basis only at this stage of the proceeding:

(a) I can presently see no basis on which such a claim could sensibly be made hereafter; and

(b) if it were made, it would necessarily have to take into account costs thrown away on any party/party taxation pursuant to the order I propose to make at this point in time.[83]

67 In my opinion, Osborn J's comments do not preclude me, as the trial judge making final orders in this proceeding, from determining that the plaintiffs are entitled to indemnity costs pursuant to cl 6 of the Terms or by reference to the defendant's overall conduct in the proceeding.[84] His Honour was dealing only with the question of whether the defendant had breached the Terms. The questions of whether cl 6 was enforceable and, if it was enforceable, the costs to which the plaintiffs were thereby entitled were not before his Honour.

68 Osborn J's statement that he could see no basis on which a claim for indemnity costs could sensibly be made was no doubt influenced by the limited nature of the issues before his Honour. Those issues did not include the meaning of the expression 'together with the costs of entering such judgment' in cl 6 of the Terms. In addition, his Honour was only able to consider the defendant's conduct up to 22 August 2008. Since that time, for the reasons I have given, the defendant's conduct has been egregious. Not only has it prejudiced the plaintiffs, it has also defied the Court's authority and struck at the integrity of its processes. This is an archetypal case for indemnity costs.

69 The order I propose to make will provide for a set-off of costs already taxed and paid on a party and party basis and costs thrown away in respect of any taxations pursuant to any orders for costs on a party and party basis.

70 The plaintiffs applied for an order that the defendant pay all reserved costs. Mr Williams resisted this order only in relation to three orders which had reserved costs, being those orders that dealt with Mareva-type relief. He said that these costs should continue to be reserved because the Mareva relief remained at an interlocutory stage and would not be finally resolved until the hearing and determination of a related proceeding between the parties. In my opinion, it is appropriate that an order be made requiring the defendant to pay all reserved costs so that there can be finality to this litigation. I note also that the three orders in question were made at directions hearings which dealt with other matters relating to the management of the proceeding.

71 The plaintiffs have requested that the amount of equitable compensation and interest be divided into two and that separate orders be made for each equal half in favour of the first plaintiff and the other plaintiffs respectively. Mr Williams did not oppose this course.

(b) The defendant pay to the second to fifth plaintiffs:

(c) The defendant pay the plaintiffs' costs of the proceeding since it was reinstated on 8 July 2005, including reserved costs, on an indemnity basis. Any payments already made pursuant to previous costs orders are to be treated as payments on account of the costs due under this judgment and are to be set-off accordingly. Any costs incurred by the defendant in any taxation of costs on a party and party basis that are thrown away by reason of costs being awarded on an indemnity basis must also be set-off against any amount assessed on an indemnity basis.

[1] Talacko v Talacko [2009] VSC 533.

[2] See Vlasons Shipping Inc v Neuchatel Swiss General Insurance Co Ltd (No 2) [1998] VSC 135 and the authorities referred to in that case.

[3] Giller v Procopets (No 2) [2009] VSCA 72, [36].

[4] See Mario Piraino Pty Ltd v Roads Corporation [1991] VicRp 90; [1991] 2 VR 534, 536; Victorian Workcover Authority v Esso Australia Ltd [1998] VSC 198, [7]; BP Exploration Co (Libya) Ltd v Hunt (No 2) [1983] 2 AC 352, 373.

[5] Hungerfords v Walker [1989] HCA 8; (1989) 171 CLR 125, 148.

[6] Hungerfords v Walker [1989] HCA 8; (1989) 171 CLR 125, 148; Wallersteiner v Moir (No 2) [1975] QB 373, 388, 397, 406.

[7] See Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211, 218-19; Re Tennant; Mortlock v Hawker [1942] HCA 3; (1942) 65 CLR 473, 507-8.

[8] (1991) 34 NSWLR 308.

[9] Hagan v Waterhouse (1991) 34 NSWLR 308, 393.

[10] [2002] NSWSC 505.

[11] Murdocca v Murdocca (No 2) [2002] NSWSC 505, [24]. The same conclusion was reached by Hamilton J in Lewis v Nortex Pty Ltd (in liq) [2006] NSWSC 480, [13], which was affirmed in relevant respects on appeal: Kation Pty Ltd v Lamru Pty Ltd [2009] NSWCA 145; (2009) 257 ALR 336.

[12] Wallersteiner v Moir (No 2) [1975] QB 373, 388.

[13] (1987) 11 ACLR 818, 843. This statement was applied by Kearney J in Hagan v Waterhouse (1991) 34 NSWLR 308, 393.

[14] Hagan v Waterhouse (1991) 34 NSWLR 308, 393.

[15] [2004] WASC 215.

[16] Fico v O'Leary [2004] WASC 215, [280].