HIS HONOUR:
Nature of proceedings
The principal judgment was handed down on 19 April 2016 (Richtoll Pty Ltd v WW Lawyers Pty Ltd (in Liquidation) [2016] NSWSC 438). Judgment was entered for the defendant with an order that the plaintiffs pay the defendant's costs.
The defendants subsequently made an application for part of those costs to be paid on an indemnity basis. That application was dealt with on the papers and judgment was handed down on 9 May 2016 (Richtoll Pty Ltd v WW Lawyers Pty Ltd (in Liquidation) (No 2) [2016] NSWSC 578). The effect of that judgment was to set aside the costs order made on 19 April 2016 and replace it with the following order:
"The plaintiffs are to pay the defendant's costs on an ordinary basis up to and including 2 September 2015 and on an indemnity basis from 3 September 2015."
By motion, filed 23 May 2016, the defendant sought the following orders:
"1 In addition to the order made on 9 May 2016 order the plaintiffs to pay to the defendant interest on costs and disbursements at the rate set out in Schedule 5 Uniform Civil Procedure Rules on the allowed percentage of each amount of costs and disbursements actually paid by the defendant from the date of payment by the defendant of each such amount of costs and disbursements until the first to occur of:
1.1 Such time as the plaintiffs pay the costs due to the defendant under any order made in these proceedings; or
1.2 The assessment of the costs to which the defendant is entitled pursuant to the costs order in its favour.
In this order x = the total amount of costs and disbursements which the defendant has paid or is liable to pay to its legal advisors in connection with these proceedings, y = the total amount of costs and disbursements allowed on assessment to the defendant in connection with these proceedings. The allowed percentage equals ((y/x) x 100%).
2 Grant liberty to the defendant to apply upon three days notice to the plaintiffs for an order for payment of a specific amount in respect of the interest awarded upon costs pursuant to Order (1)."
The motion was heard on 18 July 2016. The defendant relied upon an affidavit of Robert Crittenden, sworn 14 July 2016, which set out the dates when invoices were rendered by its lawyers to the defendant and the dates upon which those invoices were paid. The first invoice was dated 23 September 2010 and the last invoice was dated 23 April 2016. The total legal fees paid by the defendant to its lawyers over that period was $332,900.83. A further breakup of the contents of those invoices was annexed to the affidavit. The plaintiffs were represented by counsel but did not place any evidence before the Court.
Submissions
The defendant relied upon the decisions of Joseph Lahoud & Anor v Victor Lahoud & Ors [2006] NSWSC 126 (Campbell J) at [82] - [83], Drummond and Rosen Pty Limited v Easey & Ors [No 2] [2009] NSWCA 331 (Tobias and Macfarlan JJA and Handley AJA) at [4] and Grace v Grace [No 9] [2014] NSWSC 1239 (Brereton J) at [57] - [72].
The defendant submitted that the relevant section was s 101 of the Civil Procedure Act 2005 (NSW) (CPA) which relevantly provided:
"101 …
(4) Unless the court orders otherwise, interest is payable on an amount payable under an order for the payment of costs.
(5) Interest under subsection (4) is to be calculated, at the prescribed rate or at any other rate that the court may order as from:
(a) the date or dates on which the costs concerned were paid, or;
(b) such later date as the court may order.
…"
The defendant submitted that the position in relation to ss 101(4) and (5) CPA was appropriately set out by Campbell J and adopted his approach as follows:
"79 The plaintiffs seek, under those subsections, an order that they be paid interest on such amounts as they have paid for costs and disbursements from time to time, from the date of making each such payment, at the rates prescribed under Schedule 5 of the Uniform Civil Procedure Rules.
80 The evidence in support of that application is quite parsimonious. The plaintiffs provide no evidence of having actually made payments to their lawyers from time to time on account of costs and disbursements, and no evidence of any special arrangements between themselves and their lawyers which might bear upon the exercise of the discretion to award interest on costs.
81 Mr Gyles submits that this lack of evidence means that there is an insufficient evidentiary foundation for the making of the order. I do not agree. The various proceedings which were determined by Palmer J are ones which, now, were commenced over five years ago. The plaintiffs have been represented by various firms of solicitors, and various counsel, in that time. There has been extensive preparation, including by making interlocutory applications to the Court. The litigation is commercial litigation, a species of litigation concerning which there is no regular practice of lawyers accepting work on a speculative basis. In my view it is more likely than not that the plaintiffs have had to pay some amounts of costs and disbursements as the litigation has progressed. Further, even if I were wrong in drawing this inference, the form of order which the plaintiffs seek is one which makes interest on a particular amount of costs run only from the date when an actual payment of that amount is made. If an order in that form were to be made, it would contain its own safeguard against the plaintiffs being able to recover interest concerning amounts of costs and disbursements which they had not actually paid.
82 In my view it is appropriate to make an order for the payment of interest on costs. There is no requirement, before an order for payment of interest on costs is made, for the Court to be satisfied that the circumstances of the case are out of the ordinary …
83 To the extent to which the plaintiffs have been out of pocket as a result of having to pay their lawyers' costs and disbursements, it is appropriate that the compensation which is recognised in the Court's order for costs take into account the fact that the plaintiffs have been out of pocket in that way: … Given the length of time the proceedings have been on foot and the extensive preparation, the amount by which the plaintiffs have been out of pocket could be large. It is relevant that the plaintiffs, and the defendants, each conduct businesses and so the amounts which the plaintiffs have had to pay to finance the litigation is likely to be money which otherwise could have been put to a productive use. Conversely, the defendants, by not being required to pay costs until some time in the future when the costs are agreed or assessed, are likely to have been able to retain, for their own productive use, the amount of those costs."
The defendant also relied upon the following statement of principle by Macfarlan JA in Drummond and Rosen Pty Ltd v Easey & Ors (No 2) as follows:
"4 In the absence of any countervailing discretionary factor (of which there appear to be none in the present case), it is appropriate that an order for interest on costs be made to compensate the party having the benefit of a costs order for being out of pocket in respect of relevant costs which it has paid (Lahoud v Lahoud [2006] NSWSC 126 at [82-3] per Campbell J)."
The plaintiffs oppose the orders sought in the motion. In doing so they rely upon the following decisions: Illawarra Hotel Company Pty Ltd v Walton Construction Pty Ltd (No 2) [2013] NSWCA 211 (Meagher, Barrett and Ward JJA) at [33] - [39] and The Owners - Strata Plan No 61162 v Lipman; The Owners Strata Plan No 61162 v Building Insurer's Guarantee Corporation [2014] NSWSC 622 (McDougall J) at [253] - [270].
The position of the plaintiffs is succinctly set out in the observations of the Court in Illawarra Hotel Company Pty Ltd as follows:
"Interest on costs
33 Illawarra seeks an order pursuant to s 101(4) of the Civil Procedure Act for interest on the costs and disbursements it has outlaid since commencement of the litigation in 2008. Illawarra thus contends that this Court should order the payment of interest on costs awarded to it in the Equity Division.
34 That contention is misconceived and must be rejected. The amended notice of appeal contains no such claim and no ground of appeal raises the matter. Nor (unlike the s 100(4) question just discussed) does the issue arise as a consequence of the outcome on appeal. Illawarra seems to say simply that it should have from the Court of Appeal an order in respect of costs at first instance that, so far as the record shows, was not sought in the court below and does not flow from the decision on appeal. That is a quite unsupportable proposition.
35 It is desirable nevertheless to deal briefly with the merits of the matter. Illawarra quotes from the judgment of Campbell JA in Lahoud v Lahoud [2006] NSWSC 126 and the observation (at [82]) that "[t]here is no requirement, before an order for payment of interest on costs is made, for the Court to be satisfied that the circumstances of the case are out of the ordinary".
36 Illawarra nevertheless recognises that the power to award interest on costs is discretionary and that some positive case must be made in support of the application. It says, in that regard, that Illawarra has paid out a very large sum since the commencement of the litigation in 2008 and that that money could otherwise have been put to profitable use. Reference is made to an affidavit of Illawarra's solicitor referring to sums paid by Illawarra to his firm. Illawarra further says that Walton has effectively had the benefit of not having paid that money.
37 Walton submits that the question of interest on costs cannot be determined without an exhaustive consideration of the circumstances that caused the proceedings to be protracted by the serving of evidence on unsuccessful issues, futile amendments to pleadings, issues not pursued at trial and matters relevant to McDougall J's observation concerning "the evident animosity between the parties and the lengths to which each has gone to buttress its case".
38 That submission must be accepted. A party who contends that there should be an order for interest on costs must do more than point to the fact that the proceedings were protracted and that it had to outlay moneys on its own costs over a long period. The reasons for the protracted nature of the proceedings are of obvious relevance. To take a hypothetical example, one can imagine a case in which one party deliberately seeks to prolong proceedings with an eye to some collateral benefit of its own for which it is quite happy to pay the price of being out of the money it progressively outlays for costs. That hypothetical case can be contrasted with another in which a party has made strenuous effort to expedite matters and to avoid all delay with a view to the earliest possible trial but has been frustrated in those efforts by actions of the other party. A middle course is where each party acts with reasonable diligence and dispatch but the nature of the proceedings and their subject matter is such as to prolong them. A court might well take different attitudes to applications for interest on costs in these hypothetical cases."
The plaintiffs submit that in the absence of evidence dealing with the circumstances that caused the proceedings to be protracted in accordance with the statement of principle in Illawarra Hotel at [38], the defendant should not have interest on its costs.
Consideration
There is a clear conflict of approach between the court in Drummond and Rosen and that in Illawarra Hotel. Although Handley AJA dissented on an aspect of the decision in Drummond and Rosen Pty Ltd, I do not read his judgment as being in conflict with the matter of principle relied upon by Macfarlan and Tobias JJA. Where his Honour dissented was in relation to whether evidence of payment of fees needed to be adduced by the party seeking the order for the payment of interest.
There are some further matters which are of relevance. It is clear that the court in Illawarra Hotel did not have the earlier decision of Drummond and Rosen brought to its attention. It is also clear that the statement by the court in Illawarra Hotel as to the evidence required, was obiter in that the court was not prepared to deal with the question in the absence of any such claim having been made in the court below or in the Court of Appeal.
The conflict between the two decisions has been identified in later decisions of the Court of Appeal, but has not been resolved. There are, however, two subsequent single judge decisions upon which the parties sought to rely which post-date both Court of Appeal decisions. In the first of those, McDougall J regarded himself as bound by Illawarra Hotel and in the absence of evidence as to why proceedings were protracted, was not prepared to make an order for interest. This was despite the fact that were the matter free of authority, he would have followed the approach in Drummond and Rosen.
The most comprehensive analysis of the position following the two apparently conflicting decisions of the Court of Appeal is that of Brereton J in Grace v Grace (No 9). His Honour identified the apparent conflict and sought to resolve it as follows:
"61 In The Owners - Strata Plan No 61162 v Lipman [2014] NSWSC 622, McDougall J did not think it open to deal with the matter on the basis that there was no binding authority and concluded that he was bound by Illawarra Hotel, although his Honour observed that if the matter were to be decided on the basis articulated by Macfarlan JA in Drummond and Rosen (and, his Honour added, similar views had been expressed on numerous prior occasions), the particular case was one in which it would still have been appropriate for there to be some explanation of what appeared to be extraordinary delay (at [266]-[270]).
62 Unlike McDougall J, I do not consider that I should regard myself as bound by the decision in Illawarra Hotel. First, the Court of Appeal's observations on this issue were obiter, the ratio of the decision being (at [33]-[34]) that interest on costs was not part of the appeal. Secondly, their persuasive force as obiter is diminished by the circumstance that they conflict with an earlier decision of the Court of Appeal which has been applied on many occasions, never expressly overruled, and not referred to in Illawarra Hotel. Thirdly, the Court of Appeal has had at least three opportunities to resolve the issue but has deliberately left it open. Fourthly, the observations of Gleeson JA in Doppstadt Australia Pty Ltd v Lovick (at [403]), which post-date the judgment of McDougall J, tend to support the approach of Macfarlan JA in Drummond and Rosen. Fifthly, as White J has observed, the Court of Appeal's observations in Illawarra Hotel were made in the context that no application for interest had been made to the primary judge [Wardy v Wardy, [10]].
…
66 For those reasons, in my view, conformably with what Macfarlan JA said in Drummond and Rosen, a party who obtains a costs order will ordinarily - in the absence of any countervailing discretionary factor - also obtain an order for interest on those costs, if it seeks one, and evidence of payment of the costs is not required; nor is evidence explaining the course of the proceedings [see also Lahoud v Lahoud, at [82]-[83] (Campbell J); Hexiva Pty Ltd v Lederer (Costs) [2006] NSWSC 1259, at [21]; Wood v Inglis [2010] NSWSC 749, at [9]-[13]; Lucantonio v Kleinert, at [25]].
Discretionary considerations
67 The foregoing discussion about the supposed requirement for evidence largely also addresses the argument that an order for interest on costs should be refused on discretionary grounds. Interest on costs, like prejudgment interest, is compensatory, not punitive. It compensates the party entitled for being out of money for the time it was held out of that money, and deprives the party liable of the benefit of having held the funds when it ought not have done so: absent such an order, the sum of money in question fructifies in the wrong pocket. In the absence of countervailing factors, it is ordinarily appropriate that an order for interest on costs be made, so as to compensate the party entitled for being out of pocket in respect of the costs that party has paid [Drummond and Rosen, [4]; Gilfillan v ASIC, [33]; Simmons v Colly Cotton, [15]; Lucantonio v Kleinert, [25]; Wood v Inglis, [9]-[14]; Tomasetti v Brailey [2012] NSWCA 399; (2012) 275 FLR 248, [164]; Lahoud v Lahoud, [83]].
…
76 A party who obtains a costs order will ordinarily - in the absence of any countervailing discretionary factor - also obtain an order for interest on those costs, if it seeks one, and evidence of payment of the costs, and/or explaining the course of the proceedings, is not a pre-requisite. While the power to make an interest on costs order is discretionary and interest may be declined if there are "countervailing factors", as with prejudgment interest under CPA, s 100(1), the circumstances in which a claim for interest can be refused are rare. In this case, the compensatory purpose of the power warrants making an interest on costs order, and there are no sufficient countervailing factors."
On the facts of this case there is an added element. The claim for interest is made not by the plaintiffs but by the defendant. It goes without saying that in adversary litigation, it is the plaintiff which often has greater control over the course of litigation and the speed at which it is likely to proceed. While that is not true in every case, it is apparent from some of the material which emerged in the course of the principal proceedings that it was the plaintiffs rather than the defendant in this case which caused the matter to be so protracted with the joinder and release of various parties to the proceedings from time to time.
I am of the opinion that the approach followed by Brereton J is the correct approach on the current state of authority, and I gratefully adopt his Honour's reasons as set out above. In those circumstances, there being no sufficient countervailing factors, I propose to make the order sought by the defendant and to order interest on costs.
Conclusion
I make orders in accordance with the orders sought by the defendant in its notice of motion, filed 23 May 2016, and set out at par [3] hereof. I order the plaintiffs to pay the costs of this application and the hearing before me on 18 July 2016.
[3]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 25 July 2016